Wilkinson v. Bauerle

• Citation: 41 N.J.E. 635,7 A. 514
• Parties: WILKINSON and others v. BAUERLE and another.
• Decision Date: 30 June 1886
• Court: United States State Supreme Court (New Jersey)

7 A. 514

41 N.J.E. 635

WILKINSON and others

v. BAUERLE and another.

Court of Errors and Appeals of New Jersey.

June Term, 1886.

(Syllabus by the Court.)

J. R. Emery, for appellants, Wilkinson and others.

P. Woodruff, for respondents, Bauerle and another.

MAGIE, J. The bill of complaint in this cause was filed by Michael Bauerle and Frank B. Stark against Elias A. "Wilkinson, Thomas C. Woodward, William Titus, Frank A. Wilkinson, Abram V. Sargoant, and Richard W. Lundy. The complainants therein (who are respondents here) based their claim for equitable relief on these allegations, viz.: That they had recovered judgment in the supreme court against the New York Sewing-machine Company, a corporation of tliis state; that said company had no assets subject to execution, and no assets at all, except some uncollectible book accounts; that the defendants (who are appellants here) were the only stockholders and officers of the company, and, as such, had made sale of all the property, except some book-accounts and bills receivable, to Elias A. Wilkinson, one of their number, who was president of the company, for the consideration of $50,000; that out of said consideration, and the remaining assets of the company, all its debts had been paid, excepting respondent's judgment, and some small claims amounting to less than $100; that the sale passed to Wilkinson valuable property, and was in fact made to him and others, who thereafter organized a new company, called the "New York Sewing-machine & Manufacturing Company," and issued the stock of that company for said property, of which stock Wilkinson acquired $200,000 worth, which, it is charged, he distributed among the other stockholders of the New York Sewing-machine Company; and that Wilkinson was liable, as indorser, upon notes of the latter company, which were paid off by said sale.

The bill claimed that Wilkinson had thus obtained a fraudulent preference over the unpaid creditors of the company, and that appellants' conduct was, as to such creditors, fraudulent, in that it not only deprived them of the power to enforce their debts by execution, but stripped the company of all ability to pay them, and that they had thereby become personally liable for the unpaid debts. The bill prayed that appellants should be decreed to pay respondents, and such other creditors as should come in, their debts due from the company, that the sale of the property should be declared invalid and fraudulent, and for further relief.

The answer of Wilkinson (which was called for, and put in under oath) admitted the judgment of respondents, the ownership of the stock of the New York Sewing-machine Company, and the sale to him of its property, which he averred was made under the following circumstances, viz.: That in June, 1883, the whole capital of the company had been lost; that by his direction the superintendent made an appraisement of its property, whereby it appeared to be worth less than $47,000, "as a going concern," but, on a discontinuance of the business, not exceeding one-half that sum; that he made great efforts to sell the property, without success, until finally one Graham agreed to give $25,000 for an undivided three-fifths of it if Wilkinson would take the remaining two-fifths; that Wilkinson thereupon submitted an offer of $50,000, which was considered by the stockholders as a "beneficial sale," and unanimously accepted; that he and others organized the new company, as charged in the bill, and he had received $200,000 of its capital stock, but had not transferred any of it to any stockholder or officer of the old company, except one share to one person to qualify him to hold office in the new company. The answer admitted that the proceeds of the sale and the remaining assets had been applied as charged, and claimed that the transfer of the property was made in good faith, and for a consideration exceeding its full and fair value.

The other answers made the same admissions, and presented the same facts. Each answer disclaimed the acquisition of any interest in the new company in consideration of the sale of the property of the old company, and averred the sale to have been made in the belief of its good faith, and that the consideration was full and fair. A replication was filed, and the cause was referred to a vice-chancellor. If any evidence was presented to him, it has not been printed or brought to our notice.

Upon the vice-chancellor's advice, it was decreed that the sale of the property was fraudulent and invalid, and that the directors and stockholders should pay to respondents the amount due on their judgment, with interest and costs. From this decree all those affected by it have appealed. Upon the case before us, the decree must be considered to have been made, and must be here sustained (if at all) upon the bill, answers, and replication.

The conclusions of the learned vice-chancellor who heard the cause were that the sale was made when the insolvency of the company was known to the parties; that upon such knowledge the directors were bound to follow the directions of the statute, and put the property in the way of equitable distribution among the creditors; that the sale made to one of their number, under such circumstances, was voidable; and that the directors, in making such a sale, incurred a personal liability to pay the debts of the company.

That the New York Sewing-machine Company was insolvent at the time of the sale in question is manifest from the admissions of the answers. Upon the admitted insolvency of the company it is contended that the transfer of its property, which was so made as to prefer some of its creditors, was absolutely void. The view thus presented seems to have been taken by the vice-chancellor. The correctness of this view, and the success of the contention now made, depend upon the legislation now in force respecting this subject; for if there be no legislative prohibition against the transfer of corporate property, or its use in preferring creditors after insolvency, no reasons can be given why such transactions should be invalidated which would not also invalidate the like transactions of individuals. Both reason and authority establish the proposition that a corporation may sell and transfer its property, and may prefer its creditors, although it is insolvent, unless such conduct is prohibited by law. Sargent v. Webster, 13 Mete. 497; Catlin v. Eagle Bank, 6 Conn. 233; Smith v. Skeary, 47 Conn. 47; Dana v. Bank of U. S., 5 Watts & S. 223; Arthur v. Commercial Bank, 9 Smedes & M. 394; Town v. Bank of River Raisin, 2 Doug. (Mich.) 530; Buell v. Buckingham, 16 Iowa, 284.

The "Act to prevent frauds by incorporated companies," which originally became law February 16, 1829, (Harr. 212,) contained, in section 2, an express prohibition against any sale or transfer of the property of an incorporated company, either after insolvency or suspension of the ordinary business of the company, or in contemplation of its insolvency. Such sales or transfers were expressly declared to be void as to creditors, except in case of a bona fide purchase for valuable consideration, before the company had suspended its ordinary business, by a person having no knowledge or notice of its insolvency or contemplated insolvency. This act was re-enacted with the same title on April 15, 1846, and included in the revision then made. Rev. St. 129. The second section of the revised act was identical with the second section of the previous act. These provisions were properly construed as requiring the affairs of any incorporated company becoming insolvent to be put in a train of proceedings (the form of which was prescribed) whereby its property was distributed among its creditors, and as forbidding the preference of any creditor after insolvency, known or contemplated. Holcomb v. New Hope Bridge Co., 9 N. J. Eq. 457; Van Wagenen v. Savings Bank, 10 N. J. Eq. 13; State Bank v. Receivers, etc., 3 N. J. Eq. 266; Receivers, etc., v. Paterson Gas Co., 23 N. J.Law, 291; Kinsela v. Cataract City Bank, 18 N. J. Eq. 158; Wells v. Rahway White Rubber Co., 19 N. J. Eq. 402.

If the present legislative scheme includes such provisions, the sale in question must, no doubt, be treated as invalid as against respondents. In the last revision of our laws, such of the provisions of the act to prevent fraud by incorporated companies as were re-enacted have been included in the act concerning corporations, as section 69 and the following sections. Revision 175. The reviser's draft of the new act is said to have contained the second section of the previous act, but, if so, that section was not re-enacted in the act concerning corporations, or elsewhere. The act to prevent frauds by incorporated companies was itself expressly repealed. Revision, p. 1395, § 411.

We are thus required to determine the effect produced by this change in our law. The omission to re-enact the second section of the act to prevent frauds by incorporated companies, and the repeal of that act, clearly indicate a legislative intent to no longer prohibit the conduct which that section had been construed to prohibit. The intent so indicated must prevail, unless the prohibitions of that section have been elsewhere re-enacted, or can be discovered in other existing legislation. The provisions of the omitted section have not been elsewhere expressly re-enacted.

But it is urged that the remaining sections of the "Act to prevent frauds by incorporated companies," which are included in the corporations act, indicate that the legislative scheme still includes the distinctive features of the old act, such as the equal distribution of the assets among creditors as of the time of insolvency, etc., and so practically excludes any disposition of the assets or preference of creditors after insolvency. In the face of a repeal of a section expressly prohibiting such acts, it would be a hazardous construction, which finds a...