Williams v. Jones

• Decision Date: 10 July 1886
• Citation: 23 Mo.App. 132
• Parties: SARAH A. WILLIAMS ET AL., Plaintiffs in Error, v. THE JACKSON COUNTY PATRONS OF HUSBANDRY, AND JOHN P. JONES, Defendants in Error.
• Court: Kansas Court of Appeals

23 Mo.App. 132

SARAH A. WILLIAMS ET AL., Plaintiffs in Error, v. THE JACKSON COUNTY PATRONS OF HUSBANDRY, AND JOHN P. JONES, Defendants in Error.

Court of Appeals of Missouri, Kansas City.

July 10, 1886

ERROR to Jackson Circuit Court, HON. F. M. BLACK, Judge.

Reversed and remanded.

Statement of case by the court.

The petition in this case is as follows: " Plaintiffs state that they are now, and were, at and prior to the dates herein mentioned, husband and wife, and that the defendant, the Jackson County Co-operative Association of the Patrons of Husbandry is now, and was at and prior to the time herein stated, a private business corporation, duly created and organized under and by virtue of the laws of the state of Missouri, and engaged in the business of buying and selling goods, wares, merchandise, produce, and all articles pertaining to a general mercantile and commission business at the city of Independence, and county of Jackson. Heretofore, to-wit, on the twenty-fifth day of January, 1881 the defendant corporation was justly indebted to plaintiff Sarah A. Williams, in the sum of five hundred dollars, and on the twentiet day of November, 1883, the said Sarah A Williams and her said husband obtained a judgment for the full amount of said indebtedness, and for costs of suit. Said judgment was duly rendered by the circuit court of Jackson county, at the City of Kansas, in favor of said Sarah A Williams and Almeron C. Williams, and against said defendant corporation, for said sum of five hundred dollars, together with ____ dollars costs. Said judgment still subsists in full force and effect, and remains due and unpaid.

" Heretofore, to-wit, on the sixth day of June, 1881, while said indebtedness was still existing against said corporation and remained unpaid, the defendant, John P. Jones, was a stockholder in, and was duly elected a trustee and director of, said corporation, and it became his duty, with the other trustees and directors, to take charge of, manage and control the business of said corporation then being transacted, and he did, with the other trustees and directors, take charge of said business. At this time said corporation was indebted to said Jones for money loaned in the sum of five hundred dollars. While said Jones was such trustee and director, said corporation was insolvent, and on the twelfth day of August, 1882, said corporation by and through the act of its board of trustees, determined and resolved to close out the business of said corporation, and sell all of its stock and fixtures, collect accounts, and apply the proceeds to the payment of its debts. Accordingly, said corporation sold all of its goods then on hand for a large sum of money, viz., $2,000; and upon receiving the proceeds of such sale, said corporation, through its board of trustees and directors, paid out of such proceeds the sum of two hundred dollars to said trustee and director, J. P. Jones, in preference to the claims of other creditors, and to the exclusion of the debt and demand of this plaintiff then due and unpaid. The said Jones and the other directors and trustees then and there well knew that said corporation was insolvent and unable to pay all of its debts, and well knew that its assets and the money so paid to said Jones was a trust fund to be held by them for the benefit of this plaintiff as a creditor of said corporation.

And on the second day of December, 1882, said corporation, through its trustees and directors, while it was insolvent, as aforesaid, and while its directors and said Jones well knew of such insolvency, intending to prefer said Jones as its creditor, turned over and delivered to said Jones a large number of book accounts, and notes, and bills receivable, then outstanding and due said corporation, to the amount of five hundred dollars, to said Jones, as collateral security for the debt of said corporation to said Jones. Said sum of two hundred dollars and said notes, accounts and bills receivable, were, at the time aforesaid, a part of the assets of said corporation, and at and prior to the time the same were delivered to said Jones, said corporation was wholly insolvent, and all of the assets of said corporation were a trust fund in the hands of its trustees and directors, and the preference given to said Jones, as aforesaid, was fraudulent, and void in law as against the claim of this plaintiff, a creditor of said corporation. Said Jones still holds and retains said portion of the assets of said corporation, and has converted the same to his own use, under color of said pretended and fraudulent preference, and refuses to apply the same to the payment of the just debts of said corporation, wherefore plaintiffs ask that the said pretended preference be set aside and held for naught, and said Jones be compelled to account for all assets and moneys received by him while trustee and director of said corporation, as aforesaid, and that he be compelled to pay the same into court, to be applied to the satisfaction of plaintiff's judgment against said corporation, and for such other and further relief as to the court may seem just and equitable."

To this petition defendant Jones demurred, on the ground that it did not state facts sufficient to constitute a cause of action, in that it appears, from the petition, that at the time the said corporation turned over the money, notes, and accounts, to said Jones, it was justly indebted to him in such sums.

The court sustained the demurrer, and plaintiffs declining to plead further, judgment was entered for defendant, from which plaintiffs prosecute this writ of error.

J. V. C. KARNES and WASH ADAMS, for the plaintiffs in error.

I. The directors are agents with power to carry on, not to wind up, the corporate business. When the corporation ceases to be a " going concern," the function of the directors is at an end. At the moment of hopeless insolvency the interest of the shareholder vanishes, and that of the creditor attaches. At this point the directors cease to be agents, and if they still retain possession of corporate assets, they are regarded, in equity, as trustees for the creditors. Morawetz on Priv. Corp., sects. 240, 581; Singley v. Insurance Co., 45 Mo. 110; Eppright v. Nickerson, 78 Mo. 484; Kochler v. Hubby, 2 Black (U. S.) 717; Rollins v. Clay, 33 Me. 132; Abbott v. Railroad, 33 Barb. (N. Y.) 580.

II. A corporation has no existence independent of its shareholders. The duties of the corporation are simply the duties of the persons who compose it. Defendant Jones was not only a director, but also a shareholder of the corporation. He was the corporation.

III. The officers of a corporation, even when it is a " going concern," can deal with it only sub modo. All business transactions between them are voidable, and are not upheld unless shown to be fair and free from suspicion. Chouteau v. Allen, 70 Mo. 338; Patrick v. Boonville G. L. Co., 17 Mo. 469; Lingle v. Hogan, 45 Mo. 109; Brewster v. Stratman, 4 Mo.App. 41; Smith v. Lansing, 22 N.Y. 523; McAllen v. Woodcock, 60 Mo. 174.

IV. The capital of a corporation constitutes a trust fund charged primarily with the payment of the corporate debts. Wood v. Dummer, 3 Mason C. C. (U. S.) 308; Eppright v. Nickerson, 78 Mo. 490; Powell v. Railroad, 42 Mo. 68; Howe v. Robinson, 20 Fla. 352; Adler v. Brick Co., 13 Wis. 57; Jones v. Mfg. Co., 38 Ark. 25; Sawyer v. Hoag, 17 Wall. (U. S.) 621; Haskell v. Sells, 14 Mo.App. 91; Turnbull v. Lumber Co., 8 Am. & Eng. Corp. Cases, 268; Railroad v. Howard, 74 U.S. 392.

V. Mere insolvency does not destroy the power of management; nor is a corporation prohibited from preferring one creditor to another. But the test is whether the acts done are intended to further corporate business, or with a view to corporate dissolution. The power of management ceases at the point of hopeless insolvency. Morawetz on Priv. Corp., sects. 559-579.

VI. The directors of a corporation which has become hopelessly insolvent, remaining in possession of corporate assets, are quasi trustees thereof for the equal benefit of all the creditors. Morawetz on Priv. Corp., sect. 581; Sawyer v. Hoag, 17 Wall. (U. S.) 610; Thomp. on Liability, Officers, etc., Corporations, sect. 23, p. 397. And they cannot lawfully appropriate the corporate assets in payment of their own debts, to the exclusion of other creditors of the corporation. Richards v. Insurance Co., 43 N.H. 263; Sawyer v. Hoag, 17 Wall. (U. S.) 610; Marr v. Bank W. Tenn., 4 Cold. (Tenn.) 484; Hopkins, etc., App., 90 Pa.St. 69; Lamb v. Laughlin, 25 W.Va. 300; Foster v. Mullanphy P. W. Co., 16 Mo.App. 157.

VII. " Where like statutes (such as those of Missouri) prevail concerning dissolved corporations, the insolvency of the concern known to the president and directors, works a practical dissolution, and they must take the statutory consequences, and that is the only safety there is in regard to this peculiar class of corporations under the Missouri law." Per Treat, J., District Judge United States, in Sprague Mfg. Co. v. Murphy Furnishing Goods Co., 26 F. 572; Savings Association v. Kellogg, 52 Mo. 590; Perry v. Turner, 55 Mo. 425; Moore v. Whitcomb, 48 Mo. 548; Chouteau v. Allen, 70 Mo. 336; Homer v. Carter, 17 F. 362.

A. COMINGO, and YATES & WALLACE, for the defendants in error.

I. A corporation, even when in a failing condition, can make an assignment or prefer any one or more of its creditors to the same extent as an individual can, under like circumstances. Shockley v. Fisher, 75 Mo. 501; St. Louis v Alexander, 23 Mo. 524; Dana v. Bank, 5 W. & S. 147; Catlin v. Eagle Bank, 6 Conn. 232; Warner v. Mower, 11 Vt. 390; State v. Bank, 6 Gill & J. (Md.) 219: Ringo v. Brisco, 13 Ark. 563; Goodwin v. McGehee, 15 Ala. 235; Cary v. Gilis, 10 Ga....