Williams v. Jackson County Patrons of Husbandry

Philips, P. J.

The question to be answered on this record is, can a managing director and stockholder in an insolvent corporation, after it is ascertained and officially declared by its managing board to be insolvent, and they resolve to wind up its affairs with a view of discharging its debts, as far as they may, be preferred as a creditor to the exclusion of other creditors of the concern? The trial court answered this question in the affirmative.

It may be conceded that the recognized doctrine is, that a stockholder and director may contract with; and make loans to, the corporation, of which he is a constituent member, and the courts are open to him for the enforcement of such contracts as to a stranger to the corporation. But, on account of his relation to the cor *140 porate body, where the rights of third parties. are concerned, courts of equity will narrowly scan and closely scrutinize such transactions. They will so far look upon them with suspicion as to cast upon such creditor the onus of proving the tona jides of his debt. Patrick v. Boonmlle Gas Light Co., 17 Mo. App. 462 , and cases cited.

It may be further conceded that such stockholder and director may, also, loan money to, and take security therefor from, an embarrassed corporation, which will be upheld both in the courts of law and equity. This should be so, as such officers often come to the aid of embarrassed corporations and lend them money to keep them going.

It may be further conceded that for civil purposes, corporations are deemed persons, and may make an assignment for the benefit of creditors, pursuant to statutory regulation. Nor do we purpose, by anything said in this discussion, to deny the right of an embarrassed corporation, in good faith, to prefer one creditor to another, as the result of securities given him under proper circumstances.

It will be found, generally, that when courts have spoken thus, it is in respect of what is sometimes termed, “a going concern;” a corporation doing business, though crippled and embarrassed, yet has vitality and hope in it. But, after a careful review of the multitude of authorities bearing on this question, and looking to the reason and justice of the matter, I am unable to recognize the right or policy of directors, after they have voted their concern to be insolvent, and determined to wind up its affairs with a view to the payment of its debts, to turn over its assets to one of its number in payment of his debt, to the exclusion of the other creditors of equal right.

At common law, the dissolution of a corporation operated an extinguishment of its debts. Such an outrage upon common right called into action the inter- . position of the courts of equity, which declared the- *141 assets of such corporations to be a trust fund for the benefit of all the creditors, and it would follow the funds into whosesoever hands they passed, unless impressed with some superior equity in the hands of such third party.

This doctrine grew up out of the very necessities of the anomalous character of these artificial beings, these legal entities. While possessing many attributes in common with natural persons, their constituent members are not liable for the corporation debts and undertakings. They act and move through their agents, their officers, who must be regarded as trustees for the stockholders, and for the creditors, su.b modo.

The courts early held that the assets of such corporations were so far impressed with the character of a trust fund that the board of directors could not give them away, nor distribute them among the stockholders, to the prejudice of the corporation creditors. And, while recognizing the existence of the legal title to such property to be and remain in the corporation, as such, and without trenching upon the right of management of the funds by the directory, or in any degree breaking in upon and striking down its autonomy, the rule of equity has become paramount, in most of the courts of this country, and in the higher courts of England, that where such corporation has been declared insolvent by its own board of directors, and it' ceases to further prosecute the object of its creation, except for the purpose of administering its assets, the directors take upon themselves, or are clothed with, the office of trustees for the assets, with the stockholders and creditors of the concern as cestuis que trust.

I know there are authorities of high character, which, in effect, hold that such corporations, through its directors, have the same right as natural persons to make preferences among their creditors, “ of particular creditors or classes of creditors.” Ringo v. Brisco, 13 Ark. 563 ; Catlin v. Eagle Bank, 6 Conn. 232 ; Buell *142 v. Buckingham & Co., 16 Ia. 284 ; Whitwell v. Warren, 20 Vt. 452 ; Sargent v. Webster, 13 Met. 497 ; and, perhaps, others.

Morawetz, in his admirable treatise on Private Corporations ^section 582), says: 11 It is submitted that this doctrine is wholly indefensible upon principle. It seems to have been first started in Catlin v. Eagle Bank ( 6 Conn. 232 ), a case in which, the fundamental rule that the assets of an insolvent corporation constitute a trust fund, pledged for the security of creditors was denied. It is a doctrine which is at variance with the whole theory of the law' concerning the rights of creditors of insolvent corporations, and it is contrary to the plainest principles of justice.”

The seemingly broad doctrine announced in Catlin v. Eagle Bank, has been explained away to some extent in the later case of Crandall v. Lincoln ( 52 Conn. 108 -9). O. the case of Sargent v. Webster (13 Met.) it is enough, for the purposes, of this discussion, to say, it is notin conflict, necessarily, with the conclusion we shall reach in this opinion; for the preferred creditor there ivas not a director, and did not sustain the relation of trustee of the assets for the benefit of all the creditors. We concur in the justice of the criticism made of the case of Buell v. Buckingham & Co., so much relied on by defendant, made by Mr. Justice Woods, of the supreme court of the United States, in Lippincott v. Shaw Car Co., reported in the twenty-fifth Federal Report, 577: “It may be said of the first (case, supra), in the language of one of the justices who joined in the decision, ‘that there is no evidence that the corporation is insolvent, nor is there any evidence that all of the property of the corporation was taken.’ ” And this judge, in the same connection, speaking of other cases, says: “The preferences were given in fulfillment of agreements to indemnify the directors, who,'upon the faith of such agreements, had assumed liabilities for, or given credit to, their respective corpora *143 tions. In other cases the preferences were, given to stockholders who were not. directors or managers.”

It. is now a conspicuous fact, in the history of the progress of equity jurisprudence, throughout England and America, that the court's are generally yielding to the principle, that the directors and officers of an insolvent corporation are trustees of the assets for the benefit of all the creditors, and must manage and distribute such assets, after the ascertained and confessed insolvency, as any other trustees and agents of a trust fund; and, therefore, they cannot secure to themselves any advantage, by way of preference, over other creditors of equal right. Morawetz Priv. Corp. 579 ; Marr v. Bank, 4 Cold. 471 ; Koehler v. Iron Co., 2 Black 715; Curran v. Arkansas, 15 How. 306 ; Richards v. Insurance Co., 43 N. H. 263 ; Bradley v. Harwell, 1 Holmes, 433 ; Drury v. Cross, 7 Wall. 299 ; Gas Light Co. v. Terrell, L. R. 10 Eq. 168; Robbins v. Embry, I. S. M. & M. Ch. 207, 258, 264; Haywood v. Lincoln Lumber Co. (Sup. Crt. Wis.) 26 N. W. Rep. 184 ; Lippincott v. Shaw Car Co., supra; Hopkins et al. Appeal, 90 Pa. St. 60; Lamb, Trustee, v. Laughlin, 25 W. Va. 300 .

The principle upon which this doctrine rests is admirably stated by Milligan, J., in Marr v. Bank, supra: “By the insolvency of the bank the corporation is rendered incapable of pursuing the objects for which it is created, without defrauding the public and existing creditors. Its officers or agents properly ceased to use its franchise after the insolvency was ascertained; but their responsibility as to assets did not cease. They continued to hold them as before; not for themselves ox. for the use and benefit of the stockholders, but for the creditors of the coi’poration. After the insolvency of the corporation, although the legal ownership of the assets may continue as before, the beneficial interest of the stockholders clearly no longer exists, • as a state of insolvency presupposes that the capital, and assets are insufficient, to meet its liabilities. . The stockholders. *144 having incurred no personal liability for the debts of the corporation, have, in point of fact, no interest in the disposition of the assets of the bank after its insolvency. In equity, as well as at law, the beneficial interest therein belongs to the creditors. The capital is the fund they trusted, and to which, with the after acquired property or assets of the corporation, they can alone look for indemnity. Both stand pledged for the payment of the corporation debts, and a court of equity will follow them into the hands of stockholders or other persons receiving them with notice, for the benefit of the creditors.”

Even those judges who do not go to the extent above indicated, are forced to admit that upon the insolvency of such a corporation, and its cessation from business, its assets become á trust fund in the hands of the directors for the benefit of the creditors. When it is conceded that equity thus affixes to them the character and office of trustees of a trust fund, I am unable, on principle, to distinguish their trusteeship and agency from that of any other trustee or agent. The well recognized rule is, that when a trustee or agent receives money, generally for various creditors of equal dignity and right, to each of whom he is under the same legal and equitable obligation, he must apply the fund ratably, among all the creditors. And it is equally clear law, that if such trustee or agent be himself a creditor he cannot apply the trust fund to the payment of his own claim to the exclusion of the other creditors. He must pay all pari passu. Colby v. Copp, 35 N. H. 434; Richards v. Insurance Co., 43 N. H. supra.

It is a recognized rule of the doctrine of trusts, that while a creditor, as one of the cestuis qioe trust, may be a trustee, yet he has no power to prefer his own claim, “but must take equally with the others.” 2 Perry on Trusts, sect. 596; Downy v. Cross, 7 Wall. 299.

Whilst entertaining the highest respect for the learning and judicial mind of Judge Billon, I am constrained to dissent from his declaration, in Buell v. Buckingham *145 & Co., supra, that in the'race of diligence among creditors such a director of a bankrupt concern may avail himself of his superior knowledge derived from within to secure himself over other creditors, with the co-operation of his associates. In this announcement he loses sight, it seems to me, of the fundamental principle underlying the office of a trustee of a trust fund. The gluttonous idea, “firstcome, first served,” whatever be its merits elsewhere, certainly has no place in the forum of conscience in determining the legal ethics and duties by which a trustee is to be governed in the management and distribution of trust funds. He must act with absolute impartiality. All the beneficiaries of the trust fund must be served alike and at the same time.

As said by the English equity court, in Gas Light Co. v. Terrell, supra, in speaking of the right of such directors to avail themselves of their official information ; while a preference to a stranger might be only an undue preference, that of a director who was also a creditor, introduced the added element of a taint of fraud and a breach of trust. “ Equitable assets shall be distributed equally and pari passu among all the creditors, without any reference to the priority and dignity of the debts.” 1 Story Eq., sect. 544.

There may be dicta and adjudications of our supreme court recognizing, in general terms, the right of a failing corporation to prefer creditors, and one of its own officers under certain circumstances. City of St. Louis v. Alexander, 23 Mo., separate opinion of Ryland, J. ; Kitchen v. Railroad Co., 60 Mo. 222 -244, et seq. But that court has not held, under circumstances like these disclosed by the petition in this case; that such preference would be upheld. In the later case of Eppright v. Nickerson ( 78 Mo. 490 ), the court say : ‘ ‘ the capital stock of a corporation is a trust fund held by the corporation for the benefit of all its creditors.”

Conceding this, after the directors have officially an *146 nounced the insolvency of the corporation, and' a cessation of business, except for the purpose of collecting its assets, the court, when the proper case arises, must yield to the irresistible logic of the true office of such trustee, and ihold that he cannot thereafter secure to himself an ad-’ wantage over other beneficiaries of the trust estate.

This doctrine results almost necessarily from the rapid growth, pervasiveness, and anomalous character of these artificial agencies. The rules of law and equity must be adjusted so as to meet the exigencies of their being. The enlargement of equitable rules and principles, must be allowed in their application to new necessities and conditions-constantly springing out of the activities and developments of the arts and commerce of advancing ■civilization.

As said by Mr. Justice Miller, in Sawyer v. Hoag ( 17 Wall. 620 ): “ When we consider the rapid development of corporations, as instrumentalities of the commercial'and business world, in the last few years, with the corresponding necessity of adapting legal principles to the new and varying exigencies of this business, it is no solid objection to such a principle that it is modern; for the occasion for it is modern; for the occasion for it could not sooner have arisen.”

My conclusion is, that the payment of the money, and transfer of the notes and accounts by the directors to the defendant Jones was an invalid preference, and should be set aside.

II. The point is raised, on this hearing, by the defendant, that the demurrer was, at all events, properly sustained, because all the creditors of the corporation are not; made parties to this action. No such objection was raised by the demurrers. Where a • defect • of parties is apparent on the face of the petition objection therefor must be ra: sed by demurrer. If the defect does not so appear it should be raised by answer. But unless so raised the objection, on appeal or writ of error, will *147 be deemed to have been waived. Walker v. Deaver et al., 79 Mo. 672 ; State ex rel. v. True, 20 Mo. App. 176 .

But as this question will have to be met, perhaps, on a re-trial of the casé, we should now determine it. We can see no reason why a single judgment creditor should not be permitted to file a creditor’s bill without having to ascertain who all the other creditors are, and secure their co-operation, or make them parties, nolens molens. ■ ■ '

The law protects and encourages the vigilant. The •other creditors might, if they desire, intervene, and the proceeds of the fund, when restored hy the decree of the •court, would be distributed equally, pro rata, among all the creditors. But unless they come in, voluntarily, the plaintiff, by whose vigilance and diligence the misapplied fund is restored, is entitled to the fruit of his victory. Morawetz on Priv. Corp., sect. 584, and citation in notel. If, however, the defendant, be a bona fide • creditor, he being a party to the action, the court should •decree that the fund in his hand be ratably distributed between him and the plaintiff. Lippincott v. Shaw Car Co., supra; Rieper v. Rieper, 79 Mo. 360 -361.

Hall, J., concurring, the judgment of the circuit ■court is reversed, and the cause remanded. Ellison, J., absent. *