McCullam v. Buckingham Hotel Co.

ALLEN, J.

This is an action prosecuted by the trustee in bankruptcy of the Masters Lumber Company, a corporation, to recover the proceeds of forty-nine checks executed in the name of that company, as maker, by S. M. Masters, its president, payable to the order of defendant corporation, which were received and cashed by defendant in payment to it of the individual indebtedness of S. M. Masters and of Marcus Masters, the secretary of the Masters Lumber Company. The petition is in forty-nine counts, and seeks a recovery of the separate amounts so received by defendant, as for money had and received; the total amount sought to be recovered, exclusive of interest, being $5321.31.

The trial, upon an agreed statement of facts, before the court without a jury, a jury having been waived, resulted in a judgment for plaintiff in the sum of $5830.30 —being the aggregated amount claimed in the forty-nine counts of the petition, with interest — and the case is here on defendant’s appeal.

A summary of the facts appearing in the agreed statement may be stated as follows:

The Masters Lumber Company was incorporated under the laws of this State on May 18, 1909, with a capital stock of $10,000. At the outset there were but three stockholders who were the three directors. S. M. Masters and one Tewell Rice held all of the stock, with the exception of one share which was transferred to Rice soon after the date of the incorporation. Masters became president and Rice secretary. Later, in January, 1910, the two directors other than S. M. Masters were *113 replaced by Marcus S. Masters and one Corrington who were nominal stockholders only; and Marcus S. Masters became secretary. Later, on October 13, 1911, the capital stock was increased to $18,000, and one Johnson acquired a stock interest and was chosen a director in lieu of Corrington who ceased to be a stockholder. Thereafter the board of directors consisted of S. M. Masters, Marcus S. Masters and Johnson.

It is recited that Rice “held various amounts of stock from the date of incorporation until October 13, 1911, and there appears- in the stock certificate book two stubs showing that there was issued to him an aggregate of forty-nine shares of which there is no record of transfer or cancellation.” •

No resolution was ever -adopted by the stockholders or directors of the company allowing any salaries to officers, but with the knowledge of all the stockholders and directors, and without objection on their part, S. M. Masters claimed and took credit for a salary of $175 per month to and including the month of April, 1913. In May, 1913, without authority from any-source, and without the knowledge of Johnson, S. M. Masters credited himself on the books of the company with $1200 as “twelve months back salary;” and thereafter he credited his account monthly with the sum of $275.

Marcus S. Masters, with the knowledge of the stockholders and directors, took credit for a salary ranging from $90 to $110 per month. .

From DecemberT, 1909, until April 12,1913, defendant furnished S. M. Masters and Marcus S. Masters board and lodging at the “Buckingham Club,” a hotel operated by defendant; and beginning January 1, 1910, defendant was paid therefor monthly by cheeks of the Masters Lumber Company, accepted and cashed by defendaat, drawn upon funds of the lumber company in bank, and executed by S. M. Masters as its president; each check being in a sum sufficient to cover the monthly bills for the board and lodging of both of the persons named. On April 12, 1913, S. M. Masters left defend *114 ant’s'hotel, but Marcus S. Masters continued to lodge and board there, until March 11, 1914;' and during that period defendant was paid for such board and lodging monthly by like checks of the lumber company, executed by S. M. Masters as president, and which were accepted and cashed by defendant. It is the proceeds of these checks, forty-nine in all, that plaintiff trustee seeks to ■recover in this action.

At the time of the issuance" of each of the above mentioned checks the Masters Lumber Company was not indebted to either S. M. Masters or Marcus S. Masters, but the account of each with the company was overdrawn; that of S. M. Masters being largely overdrawn. Crediting S. M. Masters with a salary of $175 per month, his account appears to have been overdrawn $1559.95 on January 1, 1910, when the first of these checks was received by defendant. During 1910 the overdraft increased to more than $11,000, and it continued to increase until May 11, 1914, when it was $24,743.73.

It appears that Johnson, then the only director of the Masters Lumber Company other than S. M. Masters and Marcus S. Masters, on several occasions saw checks of the company drawn by S. M. Masters payable to defendant, and knew that they were to be given in payment of the individual accounts of S. M. Masters and Marcus S. Masters, and made no objection thereto, believing it is said, that the checks were properly issued against credits for salaries. He did not know that the accounts of S. M. Masters and Marcus S. Masters were overdrawn, although he might have ascertained this by an examination of the company’s books.

On January 1, 1910, the liabilities of the Masters Lumber Company to creditors, as shown by its books, were $13,628.70 and its assets $20,063.64. On July 31, 1910, the company’s indebtedness exceeded its assets by more than $2000; and the deficit steadily increased until bankruptcy intervened, in June, 1914, when the company’s indebtedness, as shown by its books, amounted to $48,442.22, while its principal assets, aside from claims *115 of the character of that in suit, consisted, it is said, of office furniture and fixtures.

It is. recited in the agreed statement of facts that all of the accounts proved against the bankrupt estate were “opened or balanced not earlier than January 1, 1913,” and that the last items of all of the accounts so proved were of date “not earlier than June 1,1913,” with the exception of eight accounts, two of which began in 1909, and the others in 1911 or 1912. These eight claims aggregated $3856.04.

It is admitted, that defendant had no notice or knowledge of the insolvency of the Masters Lumber Company or of the state of the accounts of S. M. Masters and Marcus S. Masters with it; and had no actual notice that the checks received by it were issued without authority.

From the agreed statement of facts it appears that the trustee had brought ten other suits of this character, against various individuals, firms or corporations, seeking, presumably, to recover the proceeds of like cheeks of the lumber company issued by S. M. Masters in payment of his individual indebtedness. Eight of these suits, for claims aggregating $3160.36, were pending at the time of the trial of this cause below, one of which is now before us on appeal. In one plaintiff had recovered a judgment for $1000, which was paid. And one claim for $31.50 had been paid in full while in suit.-

Certain declarations of law requested by defendant were refused. They need not be here set out; the questions raised concerning their refusal, so far as here of consequence, will be noticed below.

In view of the agreed facts submitted we think that it was incumbent upon the trial court to enter the judgment appealed from. Under the decisions of our courts defendant must be held to have taken these checks charged with notice that funds of the Masters Lumber Company were being drawn upon to pay the private indebtedness of its officers. The rule of decision has long prevailed in this State to the effect that one accepting a check of a corporation, drawn by an officer thereof in payment of his private obligations, takes the risk of be *116 ing required to restore the proceeds thereof, in'an action as for money had and received, in the event that corporate funds were thereby misapplied. [See Kitchens v. Teasdale Com. Co., 105 Mo. App. 463 , 79 S. W. 1177 ; St. Louis Charcoal Co. v. Lewis, 154 Mo. App. 548 , 136 S. W. 716 ; Coleman v. Stocke, 159 Mo. App. 43, 139 . S. W. 216; Reynolds v. Gerdelman, 185 Mo. App. 176 , 170 S. W. 1153 ; Reynolds v. Title Guaranty Co., 189 S. W. 33 ; Blake v. Bank, 219 Mo. 644 , l. c. 666, 118 S. W. 641 ; St. Charles Savings Bank v. Edwards Brokerage Co., 243 Mo. 553 , 147 S. W. 978 ; Reynolds v. Whittemore, 190 S. W. 504 .]

Defendant, in its answer, and by the agreed statement of facts as well, admits that these checks, so drawn, were accepted and used by it under the circumstances set forth above; and consequently the burden was cast,, upon defendant to show that S. M. Masters was lawfully authorized and entitled to so draw upon the corporate funds for his private purposes. [See Reynolds v. Whittemore, supra; Bank v. Brokerage Co., supra.]

In this connection appellant seeks to here invoke the provisions of an act of the Legislature of 1917, Laws 1917, p. 143; purporting to alter the law governing cases of this general character, as established by the decisions in this State. That statute is as follows:

“Section 1. Liability of corporation, firm- or co-partnership." — If any check, draft or order of any corporation, firm or copartnership shall be given in payment of the debt of any officer, agent or employee, of said corporation, firm or copartnership, the payee or other person collecting such check, draft or order shall not be liable to said corporation, firm or copartnership therefor, unless it shall be shown that such payee or other person, at the time of collecting same, had actual knowledge that said check, draft or order was issued without authority of said corporation, firm or copartnership. ’ ’

“Sec. 2. Conflicting acts repealed. — All laws and parts of laws in conflict or inconsistent, with this act are hereby repealed.”

*117 But it is quite manifest that the case before us, in which judgment was entered below, on July 14, 1916, is in no wise affected by this statute enacted in 1917. It is argued that the statute affects the remedy only — “relates to matters of practice and procedure,” and has a retrospective operation. In this connection many authorities are cited, but it is unnecessary to refer to them here. Putting aside all other questions which this contention suggests, it is entirely clear that we, sitting as an appellate court, cannot rule that the lower court fell into error in failing to apply or conform to a statute not then in existence. The court followed the last controlling decision of the Supreme Court, which is likewise binding upon us since this statute cannot affect the rights of the parties on appeal. [See Sec. 2083, Rev. Stat. 1909.]

That the Masters Lumber Company was not indebted to S. M. Masters and Marcus S. Masters at the time when these various checks were drawn stands admitted. On the contrary the accounts of both were overdrawn at all such times. The question as to the right of either S. M. Masters or Marcus S. Masters to draw any salary, none having been provided by resolution, is raised and discussed in the briefs, but we need not notice it. It is entirely clear that the entry made on the books by S. M. Masters attempting to increase his salary from $175 per month, which he had been drawing with the consent of the directors and stockholders, to $275 per month, and crediting himself with such increase for a prior period of one year, was wholly ineffective. He could not thus arbitrarily increase his compensation as an officer. Assuming that S. M. Masters was entitled to take credit for a salary of $175, and that Marcus S. Masters was entitled to be credited with the salary which he drew, both were constantly indebted to the company during the entire period in which these cheeks were issued monthly.

But it is argued that under the conceded facts plaintiff trustee is estopped to recover in this action; this being a defense interposed by the answer. It is- said that all of the directors and stockholders of the Masters Lumber Company permitted the course of dealing aforesaid, *118 i. e. permitted S. M. Masters to draw corporate checks, as he pleased, for his private purposes, charging the amounts thereof against 'hiinself on the company’s books; that under these circumstances the corporation will be held to have ratified such acts, and to be estopped to recover from one who had accepted any such check or checks; and that plaintiff trustee is in no better position in that respect than would the corporation were it suing.

The agreed facts, .stated above, do not make it clear that all of the directors and stockholders consented to the unlawful acts of S. M. Masters, so as to estop the corporation from prosecuting an action of this character. It does not appear that Johnson consented to these acts of S. M. Masters with full knowledge of the particular transactions in question. [See St. Charles Savings Bank v. Investment Co., 160 Mo. App. 369 , l. c. 379, 380, and cases cited. 140 S. W. 921 .] And there is enough in the agreed statement of facts from which to infer that Rice, whose consent does not appear, remained a stockholder of record. But, however this may be, the trustee in bankruptcy, this plaintiff, sues not merely in behalf of the corporation or its stockholders, but as the representative of the creditors of the corporation as well. And certainly the creditors of the Masters Lumber Company have done nothing whereby to estop their representative from prosecuting an action to recover the corporate funds which' were wrongfully diverted and misappropriated in the manner above set forth. In this connection see: Manufacturing Co. v. Carriage Co., 152 Mo. App. 401 , 133 S. W. 412 ; Tube Works Co. v. Machine Co., 118 Mo. 365 , 22 S. W. 947 . In the case last cited, l. c. 376, it is said:

“A corporation has no right as against its creditors to apply its assets in satisfaction of the debts of other persons which it is under no obligation to pay. It is said: ‘A corporation cannot give away its property or transfer it, unless in good faith for valué, if its creditors would thereby be left unsecured’ (2 Morawetz on Private Corporations, sec. 789). We are unable to make a distinction between directly giving away the property and *119 using it in payment of the private debts of its officers. Either would be fraudulent as to creditors (Morawetz on Corporations, sec. 792).”

The argument is advanced that since each check received and cashed by defendant was for an amount less than the salary of S. M. Masters for the current month (i. e. $175), with the exception of two checks, he was lawfully entitled to draw the checks upon the corporate funds (with the exception of the two mentioned) and charge the same against his account for salary. But this argument we think is clearly without merit. Granting that S. M. Masters was entitled to draw such salary, and that neither the corporation nor its creditors would have been injured had he merely taken his salary by means of checks drawn and used as were the checks in controversy, it does not follow that there was no misappropriation of corporate funds in issuing checks for amounts within his monthly salary. As stated above, S. M. Masters was heavily overdrawn on the company’s books during all of the period in which the checks were issued. If he was entitled to a salary, he had so far overdrawn his account by January 1, 1910, that he was indebted to the company in a sum exceeding $1500, and thereafter his indebtedness greatly increased. Giving him full credit for his salary, he was at no time, during the period with which we are immediately concerned, entitled to draw checks upon the corporate funds in payment of his individual indebtedness.

It is further argued that in any event, the plaintiff cannot recover, as for a wrongful diversion of the corporate funds, for the benefit of creditors of the Masters Lumber Company whose present claims were not in existence, in whole or in part, when such diversion occurred. And it is contended also that if the trustee is entitled to recover for the benefit of creditors whose accounts against the lumber company were in existence when defendant received any of these checks, then a recovery of only a part of the total amount claimed by plaintiff may be had, for the reason that the amount sought to be recovered in this action, together with the amounts recov *120 ered or sought to be recovered in the ten other like actions, instituted by the trustee as above stated, exceeds, it is said, the claims.of creditors thus entitled to share in the benefit of any such recovery.

It is unnecessary to set forth the elaborate argument of counsel touching the matter, for we think- that it proceeds upon a fallacious theory. It is true that the Masters Lumber Company, under the active management of S. M. Masters, by creating new obligations, succeeded in paying off in large part — though not in whole — those who were creditors during the period of time in which these cheeks were given to defendant. But. the company was largely indebted when the first of these checks was issued to defendant, and its indebtedness rapidly increased during all of the period mentioned. From and after July 31, 1910, the corporation was insolvent, and its insolvency merely became more hopeless as time went on, until its bankruptcy in June, 1914, when, as said, it owed $48,442.22 and had on hand"no assets worth mentioning; a large part of its corporate assets, which constituted —in a well understood sense — a trust fund for the benefit of creditors, having in the meantime been diverted to pay the private debts of its officers. With these facts in view we,see no merit in the argument that “subsequent creditors ’ ’ were not prejudiced by these wrongful acts of S. M. Masters. And we are of the opinion that the case of Reynolds v. Faust, 179 Mo. 29 , 77 S. W. 855 , relied upon by appellant in this connection, has here no application..

It is urged that in equity and good conscience defendant should not be required to restore the proceeds of these checks, taken by it in good faith for the purposes and under the circumstances mentioned. The answer to this is that under the established rule of decision in this state, which is here unaffected by the statute, supra, such a check carries upon its face notice of its “irregular and illegal character” (St. Louis Charcoal Co. v. Lewis, supra), and the taker thereof incurs the risk of being required to respond to the corporation or its successor in law as for having wrongfully received *121 corporate assets. This doctrine we cannot depart from, were we disposed to do so, since onr duty is made plain by controlling decisions of the Supreme Court, binding upon us.

We perceive no reversible error in the record and it follows that the judgment should be affirmed. It is so ordered.

Reynolds, P. J., and Becker, J., concur.