Duryee v. Gray

1. The receiver of an insolvent corporation may recover its assets withdrawn after it has become insolvent in order to secure some of its directors against a liability incurred for the corporation. A preference of that character cannot stand, although at the time it is given there is no statutory prohibition against it. 2. Directors of a corporation who have become- its sureties to creditors will, on insolvency, be subrogated to the rights of the creditors. 3. Certain creditors of a New Jersey corporation brought suit against it in New York. Some of its directors became its sureties in order to relieve its property in that state from attachment. After adjudication of insolvency a part of the property came to the hands of its receiver. Order was duly taken forfeiting the corporation’s charter. The receiver represented to the chancellor that the attorneys who had been defending the New York suit for the corporation would not proceed with the defence in his behalf unless their fees for past services should be paid, but that if such fees should be paid they would attempt to procure a dismissal of the complaint, on the ground of forfeiture of charter, for a specified fee, and if unsuccessful would try the cause for a specified fee. On this representation the receiver was authorized to pay, and did pay, such fees in arrear. Shortly thereafter, on petition of the creditors and on notice to the receiver, the order for forfeiture was modified so as to permit the New York suit to proceed. The creditors laid before the receiver their claim on the same basis as in the New York suit, and he informed them that he had adjusted it for a less sum. The receiver afterwards decided not to defend the New York suit and so notified one of the directors. Judgment was recovered for the full amount of the claim. The directors compromised with the creditors for a sum less than their recovery, but exceeding the receiver’s adjustment of the claim, and took an assignment of the judgment. —Held, (1) that the directors had a lien on so much of the New York property as came to the hands of the receiver; (2) that the directors should be allowed to prove the claim of the judgment creditors on the basis of the compromise and need not relitigate the matter with the receiver; (31 that such relief could be afforded under an answer by way of cross-bill in a suit brought by the receiver to recover assets of the corporation which had been withdrawn after insolvency and had been placed in trust for the indemnity of the directors. 4. The provision of the General Corporation act, authorizing an appeal to the court of chancery from any determination of the receiver of an insolvent corporation, is not technical. Belief may be.given under an original bill or by way of cross-bill, or in any proceeding by which jurisdiction may be secured. If, after the receiver’s determination, a new element comes into the controversy, it is not necessary to present the same to the receiver before appealing to the court for adjudication.

On appeal of Jerome Taylor et al. from decree advised by Vice-Chancellor Eeed. The cause was heard on bill, answer and stipulation. The following is a chronological statement of the facts: 1890. The United States Credit System Company, organized under the Mar. .27. General .Corporation act of this state, filed its amended certifi- • cate, stating its object to be to sell and furnish a system of credits and to limit and guarantee wholesale dealers, manufacturers and jobbers against loss arising by reason of bad debts; and that its business, with the principal office in Newark, N. X, would be carried on in all the states and territories of the United States of America and in other countries specified. April 9. The company issued to the firm of S. Bawitzer & Co., of New York City, its policy, insuring them against a specified excess of loss through insolvency of purchasers of merchandise sold between April 1st, 1890, and April 1st, 1891. 1893. Bawitzer & Co., having made a claim, under and within the limit of their policy, for §6,912.26 and interest from November 28th, 1891, which was disputed, began suit thereon in the Supreme Court of the State of New York, and either issued or were about to issue a warrant of attachment against property in that state belonging to the company, exceeding in value the amount of their claim, which process the laws of that state allow against a foreign corporation. July 24. Henry Untermeyer and Adolph Hellenberg, two of the fifteen directors of the company, at its request gave bond to Bawitzer & Co. in §12,000, conditioned to pay any recovery in the action, and the attachment was discharged or not executed. The company, however, entered appearance and filed answer in the cause. Sept. 25. The board of directors of the company passed a resolution requesting its members to “re-bond” Messrs. Untermeyer and Hellenberg, and on the same day twelve of the other directors, of whom Jerome Taylor was one, gave to those gentlemen their written obligation to bear pro rata with them the payment of any sum they should be called on to pay by reason of said bond in case the corporation should be unable, by reason of insolvency or otherwise, to reimburse them. 1894. July 81. A report from the company’s books, made to the New Jersey commissioners- of banking and insurance, by examiners appointed by him, showed on July 1st an impairment in value of $85,766.13 in the capital stock of the company, then $288,550. Aug. 17. The executive committee of the board of directors of the company adopted the following resolution, viz.: “ Moved that we make a deposit of $6,000 with Jerome Taylor, for him to hold in trust, to cover any liability on the bond given by Messrs. Untermeyer and Hellenberg in the Rawitzer case.” The sum named was paid to Mr. Taylor, who, on August 21st, deposited it with the Fidelity Title and Deposit Company. Aug. 20. At a meeting of the board of directors the president reported that the result of an examination of the company’s affairs by such commissioner showed an impairment of capital of about $60,000. - The feasibility of procuring a surrender and cancellation of stock in proportion was discussed, and the executive committee were authorized to consult counsel, and if then they should be satisfied that' it was for the best interests of the company, to make application for a receiver. Aug. 21. Mr. Knight, one of the directors and also one of the counsel of the company, notified the deputy commissioner of banking and insurance that the company had that morning stopped issuing policies because of its insolvency, and the next day a new examination was made. The directors and officers of the company then told the deputy commissioner that the company was insolvent, and expressed a wish that a receiver should be appointed as soon as possible, as a great many claims were pressing, and they did not wish to prefer one creditor over another. Aug. 22. The examiners reported to the commissioner that further investigation showed that the amount charged for liabilities on claims in process of adjustment was insufficient, and the impairment of capital on July 1st was $195,766.13. Aug. 23. The commissioner filed his bill against the company for an adjudication of insolvency and appointment of receiver, and the chancellor made order to show cause thereon, returnable September 4th, and appointed George R. Gray temporary receiver. Sept. 4 . The receiver made his sworn report, showing an excess of liabilities over assets of §280,841.25. This included as a liability the sum of §101,299.16 as return-premiums on cancellation of policies and did not include capital stock. On the same day the chancellor adjudged that the company was insolvent and appointed Mr. Gray permanent receiver. Sept. 6 . Order was made requiring creditors to present their claims within four months and directing notice of the order to be mailed each creditor. Oot. 2. Order was made declaring the company’s charter forfeited and void except for collecting and distributing assets. ' Nov. 7. The receiver filed petition representing that before his appointment two suits had been begun in New York against the company, one by Douglas L. White for §4,000 and one by S. Bawitzer & Co. for §3,000; that in the latter case, in order to dissolve an attachment, the company gave a bond in §6,000, with a surety, and to secure the surety deposited §6,000 with Jerome Taylor; that the defence of both suits was entrusted to the firm of Bose & Putzel, lawyers, of New York City, in whose hands all papers and documents were placed; that said firm had sent a bill to the company before its insolvency, for §500, retaining fee and for preparation of the cases; that it would be impossible for the receiver to defend the suits successfully without such papers and documents; that Bose & Putzel refused to deliver up the papers and documents or go on with the cases unless their bill of §500 should be paid; that in the receiver’s opinion it would be advisable to have Bose & Putzel continue in charge of the cases, and that they had agreed with the receiver to attempt to have the cases dismissed on account of the forfeiture of the company’s charter, and if they succeeded would make only a further charge of §200, and if unsuccessful and should try the cases they would make only a further charge of §500, which charges, in the opinion of the receiver, were fair and reasonable. The receiver prayed permission to pay Bose & Putzel §500 out of the assets of the company and for such other relief as might be equitable, and on the same day order was made for payment to Bose & Putzel of §500 for their services mentioned in said petition. 1895. Mar. 8. The receiver reported inter alia that he had mailed on postal cards notice of the order to limit to 1,100 creditors ; that when the company came into his hands he found §75,034 of contested claims, and that legal proceedings had already been commenced in New York City and other places named; that a large majority of those cases had been discontinued and claims filed with him as receiver, but that some of them were yet in court. 1896. Mar. 5. The receiver reported inter alia that three suits, begun before his appointment — one in each of the states of Massachusetts, New York and Michigan — were still pending. June 29. The sworn claim of Rawitzer & Co. was presented to the receiver for §6,912.16 and interest from November 28th, 1891. Sept. 5. The receiver reported inter alia, “ Of the three eases which were pending before my appointment, in foreign jurisdictions, one pending in Massachusetts has been decided; the other two in New York are still pending. * * * Amount of claims pending in court of New York State and unsettled, §11,534.67.” Oct. 23. The receiver sent to Rawitzer & Co.-a letter as follows: “Dear Sirs — I have taken up your claim against the United States Credit System Company, and from the facts presented by you to me, and on examination of your books, I adjust it as follows : [Here are stated various items, aggregrating]......§5,128 99 Interest from December 1st, 1891, to August 23d, 1894, the date of insolvency of the company....... 837 56 I therefore allow your claim for...........................§5,966 55 I have deducted from the Schofield claim the amount you might have realized during the six months succeeding the examination of your certificate. I hold that in such a case* where the insured has been offered a settlement, and refuses it, the company must have the benefit of the offer.” 1897. Jan. 26. The receiver sent to Jerome Taylor a letter as follows: “Dear Sir — Some days ago I received a letter from Messrs. Rose & Putzel, stating that the Rawitzer case would soon be tried, and asking me if I wished them to defend it for me. I answered, saying that I would not do anything in the matter and didn’t wish them to appear for me. I notify you of this, as I consider it only right that the sureties, who may be liable for any judgment recovered in this case, should know about its condition. My counsel is now preparing a bill to test the right to the §6,000 now on deposit with the Fidelity Title and Deposit Company.” Mar. 8. Rawitzer & Co. recovered in their New York action the sum of about §9,600, and shortly afterwards brought suit against the sureties on their bond. Mar. 10. The receiver filed the bill in this cause, seeking to recover the §6,000 deposit, as illegally withdrawn from the assets of the company after knowledge of its insolvency, in violation of the duty of the directors. Apr. 26. Twelve of the directors contributed §750 each, and therewith compromised the New York judgment for §9,000, and at their request ftawitzer & Co. assigned to Uzal H. McCarter, in trust for them, the judgment, the claim presented to the receiver and whatever interest the firm had in the Taylor deposit. June 11. The defendants filed their answer, denying knowledge by the directors, on August 17th, 1894, of the company’s insolvency and denying insolvency in fact and setting up the recovery, payment and assignment above stated and praying subrogation to all rights of Bawitzer & Co. and the sureties, and that the claim presented to the receiver might be amended so as to embrace the amount as recovered in New York. The vice-chancellor advised a decree that the trust futid of $6,000 should be paid to the receiver; that the twelve directors who paid Rawitzer & Company should have a lien on so much of the property of the company upon which an attachment issued in New York as came into the hands of the receiver, to be ascertained by a master, and that further equity should be reserved. In support of this decree he filed the following memorandum opinion, viz.: “I am of the opinion that the $6,000 paid to the defendant Taylor in trust, to cover any liabilities of the sureties on the bond given by Messrs. Untermeyer and others cannot be retained by the trustee for that purpose. The condition of the company at the time when the resolution was passed to make such disposition was such as prevented the directors from putting any of its assets in pledge for the special benefit of any director. So far there must be a decree for the complainant, but I am of the opinion that those who paid the claim of the plaintiffs in attachment in New York and who had secured the discharge of the company’s property in New York from the lien of the attachment, are entitled to be subrogated to the position of the plaintiffs in attachment, having the lien upon this property. The value of the property, so covered by the attachment lien and so discharged from the lien as such value was ascertained by the sale of said property by the receiver, belongs to the paying sureties in so far as it is necessary to repay them. This relief is prayed for in the answer, which answer can be, by consent, regarded in this particular as a cross-bill, as I understand the receiver wishes to settle all equities, if possible, in this suit. I am unable to see how the doctrine of subrogation can give the sureties a lien upon sucli property, subject to the lien of the attachment, which was not in existence at the time of the company’s insolvency. The sureties, having paid the attaching creditors, are of course subrogated to the position of those creditors and can prove against the insolvent corporation as such and receive their dividend. But when the question arises, how far the right of the attaching creditors, to which the sureties are subrogated, is good in rem, namely, as a specific lien upon the company’s property, then it is apparent that the property must have existed at the time of the insolvency in specie. A lien could not follow property converted into money by the company previous to its insolvency; nor can it follow the money arising from such conversion; nor can it reach the general assets of the company. I will advise a decree for subrogation to the extent indicated.” The parties having agreed that all of the property upon which an attachment issued in New York became a lien that came to the receiver’s hands had been sold for $107.50, the cause was heard on the equity reserved, and decree "was advised that the sum last named should be paid to the twelve directors and that the other relief prayed in the answer should be denied. In support of this decree the vice-chancellor filed the following opinion, viz.: “The language of the former opinion, namely, ‘The sureties, having paid the attaching creditors [the amount due such creditors from the credit system company] are of course subrogated to the position of those creditors,’ &c., leaves open the question how the amount due the attaching creditors is to be determined. As to the liability of the sureties, it was to be determined by a judgment, because this was the term of their obligation. But the question in hand is, how is it to be determined in respect of the receiver? The language used in the former memorandum referred to the payment of such debts as could be proved against the receiver, not proved against the sureties, although it was to be presumed that the same amount could be proved against both, although the respective claims were assertable in different forums. It is entirely clear that, inasmuch as those paying the claim of the attaching creditors stood in the steps of such creditors, the rights of the former can be no greater than of the latter against the receiver. The creditors could only prove against the receiver in this court. They could not draw the settlement of the amount of their claim against the corporation into the courts of New York, so as to bind the receiver. It would have been improper for the receiver to submit the question to the court of New York. He therefore very properly took no notice of the New York action, which was litigated expressly and entirely for the purpose of fixing the liability of the sureties under the condition of the bond which they had given. The sum found due by the judgment in that suit has no force whatever against the receiver and can receive no recognition in this court. The amount of the debt due to the attaching creditors is fixed by the only method which can be recognized at $5,966.55. As they had the right to prove for this sum only, and as the right of the paying sureties stands in the stead of the attaching creditors, I am constrained to the conclusion that the sureties can prove for no more.”