Whittaker v. Amwell Nat. Bank

• Decision Date: 28 April 1894
• Citation: 62 N.J.E. 400,29 A. 203
• Parties: WHITTAKER v. AMWELL NAT. BANK et al.
• Court: New Jersey Court of Chancery

29 A. 203

62 N.J.E. 400

WHITTAKER

v. AMWELL NAT. BANK et al.

Court of Chancery of New Jersey.

April 28, 1894.

(Syllabus by the Court.)

Bill by George R. Whittaker, assignee of Jonathan Steward, against the Amwell National Bank, the receiver of the Star Rubber Company, and others, to determine claims of said Steward against said rubber company.

Geo. W. Macpherson and G. D. W. Vroora, for complainant. James Buchanan and Wm. M. Lanning, for defendants.

BIRD, V. C. The Star Rubber Company, one of the defendants in this suit, became insolvent, and a receiver was appointed to wind up its affairs. Subsequently, Jonathan Steward, who was one of the directors of the Star Rubber Company, made an assignment for the benefit of his creditors. Mr. Steward, at the time of making his assignment, held large claims against the Star Rubber Company, and, in order to ascertain their character and value, his assignee filed a bill against the receiver of the Star Rubber Company and numerous other creditors of the Star Rubber Company, including 25 national banks. This bill also aimed at a complete administration of the claims of the creditors against Mr. Steward, and to a large extent necessarily involved the rights of the creditors of the Star Rubber Company. The receiver of the Star Rubber Company filed an answer and an answer by way of cross bill against the claim of the assignee of Mr. Steward, as one of the directors of the Star Rubber Company, as well as against the other directors of said company, alleging that Mr. Steward and the other directors were personally liable, under the seventh section of the act respecting corporations, for the declaring and payment of dividends contrary to the provisions of the seventh section of said act This section provides that "it shall not be lawful for the directors of such corporation to make dividends except from the surplus of net profits arising from the business of the corporation, nor to divide, withdraw, or in any way pay to the stockholders or any of them any part of the capital stock of the said corporation, or to reduce the said capital stock, except according to this act, without the consent of the legislature; and in case of any violation of the provisions of this section, the directors under whose administration the same may happen, shall, in their individual and private capacities, jointly and severally be liable at any time within the period of six years after paying any such dividend to the said corporation, and to the creditors thereof, in the event of its dissolution or insolvency, to the full amount of the dividend made or capital stock so divided." Semiannual dividends were declared during the years 1887, 1888, and 1889, and one in 1890, amounting, in all, to over $68,000. The allegation is that all of these were in violation of the statute referred to. It is perhaps just to remark that there are many circumstances connected with this transaction which necessarily arouse very grave suspicion, and perhaps made it incumbent upon the receiver to make a most diligent investigation. For example, it appears that in the year 1881 the real estate and machinery, according to the books of the company, were valued at $62,000 and $67,000, respectively. At the close of the year 1886 they had been increased, according to the books, to $101,000 and $110,000, respectively, making, it will be seen, over $211,000. At the period of the declaration of insolvency the real estate had been advanced in value, by resolution of the board, $50,000. From time to time between the years 1887 and 1890, these accounts had been credited with various sums besides the $50,000, so that, when the affairs of the Star Rubber Company came to the hands of the receiver, its books exhibited a valuation of these two principal items of capital of over $286,000. After what appears to me to be a very careful and elaborate inventory made by the receiver with the aid of a very intelligent, cautious, and experienced expert, these two items are placed at $169,783.34, making a difference between the book value as given, and the two items of real estate and machinery, of over $116,000. Besides these observations, which it is but fair to say must necessarily have attracted the attention of the receiver and all creditors of the Star Rubber Company, it is due to all concerned to add that when the real estate and machinery were sold, and sold as a plant, the highest bid which the receiver could get for them was $65,000, and this, too, after unusual efforts made, and very extraordinary opportunities given to all persons in any wise interested, to increase that bid, or to show cause why it should not be accepted, and the sale for that consideration confirmed by the court. These observations make it quite apparent that the receiver had strong reasons for diligent inquiry as to the real basis upon which the directors made their dividends, while the market, value of the plant during that period should depreciate so enormously in value. It is alleged that Mr. Steward and seven others, directors of the said corporation, just upon the eve of dissolution of the Star Rubber Company, and with the view of an application to the court to have a receiver appointed, procured to be made to themselves mortgages upon the assets of said corporation to a very large amount, contrary to law, and consequently injurious to other creditors and fraudulent. It is further alleged that if the execution of these mortgages were not in violation of well-settled rules of law, under the circumstances in which they were executed and delivered, yet they are illegal as to creditors, because they are not properly executed. The defect in this respect, it is alleged, consists in the fact that the meeting at which they were executed was a special meeting, and that only the directors who were interested in procuring the execution of these mortgages to themselves, respectively, attended the meeting, and that two other members of the board had no notice whatsoever of such meeting, and were not present.

I shall first consider whether or not the dividends so declared and paid were paid out of the surplus or net earnings of the company. This proposition is to be determined by ascertaining the actual value of all the live assets of the company at the termination of six months, during which the supposed surplus or net earnings are said to have accrued. This can only truly be done by taking into the account the cost of repairs, and also a reasonable allowance for depreciation for wear and tear or constant use, giving credit for all actual permanent improvements. The statute not only warrants, but compels, this course. The capital invested by corporations is all that creditors have for their protection. The legislature, which creates them, and gives them favors which individuals do not have, imposes upon them the necessity of maintaining their capital to its maximum value before they can reap any benefit from the venture. In view of these statements, but against the protest of counsel for the assignee of Mr. Steward, testimony was admitted showing that, as above stated, in 1881 and 1882 the real estate and machinery accounts were valued at $62,000 and $67,000, respectively, and that at the end of the period of six months, during which the first dividend of $6,000 was declared, the real estate and machinery accounts had been advanced to $101,000 and $110,000, respectively. From this large increase in value, according to the books of the company, it was urged that a fraud had been perpetrated upon the creditors. It was thought at the time that such testimony was relevant; however, as will be seen, by no means controlling. I still think it was properly received, and, in the view I find myself compelled to take of the case, of the highest importance. To aid in a proper understanding of the case, besides the books of the company in which its accounts were kept, there is the testimony of expert witnesses. One of these witnesses, Mr. Ridgway, who had been with the company for 15 years, and for several years prior to 1882, as a mechanical engineer, says that during that year the entire plant was reconstructed, and that all of the old machinery except the grinders and calenders was cast aside, and new machinery put in its place. The account books of the company make no mention of this significant and far-reaching fact. This statement suffices to show that it is impossible for me to rely entirely upon the books of account of the company as a guide, and do justice to the parties interested. According to the testimony of Mr. Ridgway, the old machinery that was cast aside was inventoried at over $47,104. If it be said that this is an enormously large amount of old machinery to have been cast aside, the reply is that that is only an inference, and that I cannot set at naught the positive statements of the witnesses by a mere inference. Nor is it necessary that I should be guided by an inference, rather than by direct and unimpeached evidence Neither am I required to place implicit confidence in the books. The new machinery that was placed in the mill, and the old machinery that was used therein after the 31st day of December, 1881, was nearly all, if not all, there at the time of the appointment of the receiver, and the price paid for it was known to Mr. Ridgway. He not only knew the cost price of it, but approximately the value added thereto when it was located ready for use in the plant. Of these things he testifies. There is much more certainty, therefore, of coming to a just conclusion by following his statements under oath, than by adhering implicitly to the books, which were in no sense verified, but which have been most seriously impeached. The other experts who were called by the directors to speak with reference to the value of the machinery, in the main, as will be seen hereafter, sustain Mr. Ridgway, or at least do not seriously conflict with him. I shall therefore...