W.P. Noble Mercantile Co. v. Mt. Pleasant Equitable Co.-op. Inst.

• Decision Date: 09 December 1895
• Docket Number: 558
• Citation: 42 P. 869,12 Utah 213
• Parties: W. P. NOBLE MERCANTILE COMPANY, A CORPORATION, AND ARTHUR PARSONS, INTERVENER, APPELLANTS, v. MOUNT PLEASANT EQUITABLE CO-OPERATIVE INSTITUTION, PETER MATSON, ASSIGNEE, MOUNT PLEASANT COMMERCIAL & SAVINGS BANK AND GEORGE CHRISTENSEN, RESPONDENTS. [1]
• Court: Utah Supreme Court

42 P. 869

12 Utah 213

W. P. NOBLE MERCANTILE COMPANY, A CORPORATION, AND ARTHUR PARSONS, INTERVENER, APPELLANTS, v. MOUNT PLEASANT EQUITABLE CO-OPERATIVE INSTITUTION, PETER MATSON, ASSIGNEE, MOUNT PLEASANT COMMERCIAL & SAVINGS BANK AND GEORGE CHRISTENSEN, RESPONDENTS. ^[1]

No. 558

Supreme Court of Utah

December 9, 1895

APPEAL from the District Court of the First Judicial District. Hon H. W. Smith, Judge.

Action by W. P. Noble Mercantile Company, a corporation, against Mount Pleasant Equitable Co-operative Institution, Peter Matson, Assignee, Mount Pleasant Commercial & Savings Bank and George Christensen, to set aside a deed of assignment. Arthur Parsons intervener. From the decree rendered plaintiff and intervener appeal.

Reversed and remanded.

Mr. F B. Stephens, and Mr. Benner X. Smith, for appellants.

Messrs Bennett, Marshall & Bradley, for respondents.

Appellants rest their appeal on five contentions, which will be considered in their order.

First--Can an insolvent corporation assign with preferences?

Appellant's contention that it cannot is based on the so-called "trust fund" view of the property and capital stock of a corporation. And to support that contention the trust must be considered a true trust as distinguished from a trust sub modo. When the American "trust fund" doctrine was originated by Judge Story in 1824 it was first adopted by federal courts, and it was many years before it found substantial lodgment in the state courts. When it did, however, some state courts, misled by the term trust, ignored the limitations placed on the doctrine by the federal courts, and assuming it a true trust held every creditor of an insolvent corporation an equitable owner in the assets of the debtor. In this way the debtor, being turned into a trustee, could not prefer one cestui que trust to another. This is a striking example of the danger of using a broad term to express an idea which is not commensurate with the term.

The Supreme Court of the United States, while adhering to the "trust fund" doctrine as it was originally declared, has frequently taken pains to define its limits. In Wabash & C. Ry. Co. v. Ham, 114 U.S. 594, the court, speaking by Mr. Justice Gray, say: "The property of a corporation is doubtless a trust fund for the payment of its debts, in the sense that when the corporation is lawfully dissolved and all its business wound up, or when it is insolvent, all its creditors are entitled in equity to have their debts paid out of the corporate property before any distribution thereof among the stockholders. It is also true in the case of a corporation, as in that of a natural person, that any conveyance of property of a debtor, without authority of law, and in fraud of existing creditors, is void as against them."

In Peters v. Bain, 133 U.S. 691, the court says: "Undoubtedly unpaid subscriptions to stock are assets and have frequently been treated by courts of equity as if impressed with a trust sub modo, in the sense that neither the stockholders nor the corporation can misappropriate such subscriptions so far as creditors are concerned."

But the question as to the nature of this trust, seems to have been directly raised in Fogg v. Blair, 133 U.S. 534. In that case it appeared that the St. Louis & Keokuk Railroad Co., being indebted among other persons to Fogg, transferred all of its property to the St. Paul, Hannibal & Keokuk Railroad Co., the new company agreeing among other things to assume, pay and satisfy all of the debts of the vendor. Thereafter the new company executed to Blair a deed of trust of all of its property, including the property so received from the old company, to secure bondholders. Fogg, claiming that the property of the old company was held in trust for its creditors, that this trust followed it into the hands of the new company and that the trustee of the bondholders took with notice, brought suit to enforce his claim on the property so transferred and sought priority over the deed of trust. And this contention would have been unanswerable if it were a true trust.

The court said on page 538:

"The property of a railroad company is not held under any such trust to apply it to the payment of its debts as to restrict its use for any other lawful purpose it matters not how meritorious the demand of the creditor may be. He must obtain a lien upon the property of the company, or security in some other form, or he will have to take his chances with all other creditors to obtain payment in the ordinary course of legal proceedings for the collection of debts."

And on page 540 the court said:

"There is no evidence in the record before us that the parties who took the bonds issued by the St. Louis, Hannibal & Keokuk Railroad Company had any notice, actual or constructive, of the demand of the complainant. But if they had it would not have affected their rights. That demand was not then reduced to judgment and created no lien upon the property of the company, nor any restriction upon the company's right to use it for any lawful purpose."

And on page 541 with reference to the "trust fund" doctrine, the court said:

"That doctrine only means that the property must first be appropriated to the payment of the debts of the company before any portion of it can be distributed to the stockholders; it does not mean that the property is so affected by the indebtedness of the company that it cannot be sold, transferred or mortgaged to bona fide purchasers for a valuable consideration, except subject to the liability of being appropriated to pay that indebtedness. Such a doctrine has no existence." See, also, Hollins v. Coal Co., 150 U.S. 381.

If this doctrine only means, as stated by the court, that the property of the corporation must be appropriated to satisfy its creditors before it can be distributed to its stockholders; it needs no new principle of law to arrive at that result. It is true as to an individual as well as a corporation that the creditors have the first claim on the assets and that no disposition of such assets for the benefit of an insolvent debtor at the expense of his creditors is permitted. But as to such debtor it is also held that in the absence of statutory restrictions he can lawfully pay one creditor to the exclusion of another, provided his property is exhausted in paying the one. That one creditor may attach his property by process of law and exhaust it all to the exclusion of the other; and that the debtor may do voluntarily what the law does for him involuntarily, namely, assign his property with preferences.

In doing this he uses his property for a lawful purpose. The corporation doing the same thing uses its property for a like lawful purpose and does not impinge on the "trust fund" doctrine, because it does not stipulate for any advantage to its stockholders until its creditors are paid in full. And this is the current of authority. In appellant's brief, Morawitz is quoted as to what he thinks the law ought to be. But the same text writer states that the law is as claimed by respondents.

In section 802 he says:

"In the absence of a statutory prohibition, a corporation has the same power of making preferences among its creditors, in the distribution of its assets, as an individual" 2 Mor. on Corp., § 802; see, also, Cook on Stock, etc., § 691.

The opinion of the Supreme Court of the United States is clearly shown in commenting on the case of Rouse v. Merchants' Bank, 46 Ohio St. 493 (a case much relied on by the appellants).

The court, by Mr. Justice Gray, said:

"In the recent case of Rouse v. Merchants' Bank, 46 Ohio 493, that court, upon a similar state of facts, adjudged that mortgages made by a trading corporation after it had become insolvent, and had ceased to do business, to prefer some of its creditors, were invalid and ineffectual against its creditors generally, without regard to the question whether the mortgages were or were not parts of the same transaction as an assignment under the statute.

That decision it is true, proceeded in part upon a theory that the property of an insolvent corporation is a trust fund for its creditors in a wider and more general sense than could be maintained upon general principles of equity jurisprudence." Smith Purifier Co. v. McGroarty, 136 U.S. 241.

The ruling of the trial court on this proposition is supported by the current of authority. Gould v. Ry. Co., 52 F. 682; Allis v. Jones, 45 F. 148; Covert v. Rogers, 38 Mich. 363; Coats v. Donnell, 94 N.Y. 168-178, 2 Kent's Com. 315 note; In re File Co. v. Banking Co., L. R. 6 Ch. Ap. 83; Whitewell v. Warner, 20 Vt. 426; Wilkinson v. Bauerle, 41 N. J. Eq. 635; Paper Co. v. Robbins, 151 Ill. 588; Ap. Keystone Watch Co., 161 Pa. St. 17; Worthen v. Griffith, 59 Ark. 562; Duncombe v. Ry. Co., 84 N.Y. 190 (88 N.Y. 1); Harts v. Brown, 77 Ill. 226; Buell v. Buckingham, 16 Ia. 284; Garrett v. Plow Co., 70 Ia. 697; Smith v. Skeary, 47 Conn. 47; Bank v. Whittle, 78 Va. 737; Ashhurst's Appeal, 60 Pa. St. 314; Sargent v. Webster, 13 Metc. (Mass.) 497; Hollins v. Coal Co., 150 U.S. 381; Warren v. Bank, 149 Ill. 9.

Indeed, the appellants do not seem to be in a position to raise the question. The intervenor is proceeding on the theory that his writ of attachment gave him a lien on the property of the insolvent corporation to the exclusion of other creditors and is asking this court to decree him a first preferred creditor by process of law, while contending that the corporation could not voluntarily do what the law would do for it. Walker v. Miller, 59 F. 869.

Second--Can an insolvent corporation in making an assignment prefer its directors?

We are at a disadvantage in discussing this proposition, because the trial court held it against us and for that...