Rockford Wholesale Grocery Co. v. Standard Grocery & Meat Co.

Mr. Justice Phillips delivered the opinion of the court:

The question of law raised by this record arises from this state of facts: A. corporation, while solvent and a going concern, borrowed money of a bank, which indebtedness was guaranteed by the directors. Thereafter it became indebted to the appellant. By authority of the directors a judgment note was afterwards given the bank in lieu of the original note, on which judgment was at once taken and the corporation property sold. Appellant recovered judgment thereafter, and, on return of execution nulla bona, filed a bill against said directors seeking to hold them personally liable for a breach of trust, setting up the foregoing facts, and alleging fraud in giving said judgment note while said corporation was known to them to be insolvent, for the purpose of the sale of said property under legal process. A demurrer thereto was sustained, and a decree entered dismissing the bill, which was affirmed by the Appellate Court on the authority of Blair v. Illinois Steel Co. 159 Ill. 350 .

The corporation being insolvent and the directors being guarantors of said debt, were they at such time legally authorized to give such preference? The principle is firmly established, that in the absence of statutory prohibition an insolvent corporation can prefer its creditors the same as any individual, which preference, of course, is given by the action of the officers of the corporation. (Burch v. West, 134 Ill. 258 ; Gottlieb v. Miller, 154 id. 44.) The law is, however, that an insolvent corporation can not prefer a creditor who at the time is a director therein. (Beach v. Miller, 130 Ill. 162 .) Is the creditor deprived of the leg'al right to this preference by reason of the fact that such debt of the corporation is guaranteed by one or all of the directors?—for if the directors, in such case, have no legal right to give, the creditor has no legal right to receive, such preference. One proposition is necessarily the corollary of the other, for the element of fraud is involved in such preference, if illegal.

Mere insolvency does not dissolve the corporation or ordinarily abridge the statutory or common law power of the directors. It does, however, prohibit them from giving a creditor director a preference. In such case, he, as an individual, alone received the benefit. The law will not allow him, in such case, to take advantage of his official position, as it would not be equitable to the other creditors. That equitable principle should not apply to a bona fide creditor where a debt is created and guaranteed by the director during solvency. Such guaranty, at least at such time, does not render such debt fraudulent. No law has been violated, and no reason exists why such a debt should be tainted with even the suspicion of illegality. His relation as a creditor is created by his contract with the corporation, and not with the guarantors. He is just as clearly, by law, a creditor with such guaranty as without it. His rig'hts as such creditor remain, to the end, unimpaired, during solvency and through insolvency.

The relation which the directors occupy is primarily that of trustees of the stockholders. (Cook on Stock and Stockholders, sec. 648.) So long as the corporation is doing business there is no priority between the directors or other officers and its creditors. It is a mere equitable principle that directors shall not prefer themselves as creditors.- (Clark on Corporations, p. 608.) When the corporation becomes insolvent, then, it is said, in equity the officials become trustees for the creditors; but the rule of law is fixed that after insolvency the authority to give a preference, in the absence of statutory prohibition, is as complete and absolute as that of an individual, for, as stated in Fogg v. Blair, 133 U. S. 534 , “the doctrine that the property of the corporation is a trust fund, 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,” and before any of it can be distributed to the directors, as creditors, by way of preference. This court has not enlarged upon this rule, in the way of enforcing such trust in favor of creditors, by holding, as some courts have, that a relative of a corporate official who is a creditor, or a creditor who has the guaranty of the directors, cannot secure such preference. (Blair v. Illinois Steel Co. supra.) In fact, many courts hold that where directors are guarantors or creditors in good faith, they, as creditors, are entitled to a preference. See Gould v. Little Rock Railroad Co. 52 Fed. Rep. 680, for a review of authorities.

The directors were not the creditors of the corporation and were not primarily standing in that relation to it. The creditor loaned this money to the corporation in good faith, while solvent and a going concern, and the money so obtained was used for its benefit. On no principle of law or reason can such creditor be deprived of its right to a preference merely because the directors guaranteed the debt. The act of obtaining such guaranty on the part of the creditor, or of giving it on the part of the directors, was neither illegal nor improper. It i's not uncommon for the directors to be compelled to lend their personal credit, by way of surety or guaranty, in order to secure means to carry on the business. If this is done during solvency, for the benefit of the corporation, neither the right of such creditor so loaning on such guaranty, nor the power of the directors, is in any way affected or abridged as to a preference of such a debt.

It necessarily follows that fraud could not be predicated bn the act of the directors in giving this judgment note to the bank, which resulted in a preference to it, as a creditor, in the distribution of the assets of said corporation. The demurrer was therefore properly sustained, and it was not error in the Appellate Court to affirm the decree.

The judgment is affirmed.

T 7 . „ , Judgment affirmed.