Bowman v. Melnick

Mr. Justice Holland delivered the opinion of the court. A demurrer was sustained by the district court to plaintiff’s amended complaint, on which he elected to stand, and judgment of dismissal and for costs was entered against him. He appears here as plaintiff in error asking to have the judgment reversed. We will herein refer to him as plaintiff, and to defendants in error as defendants. The amended complaint in substance alleges that plaintiff was, by the referee in bankruptcy, appointed trustee of the bankrupt estate of the California Meat Company which had been adjudged bankrupt December 20, 1933, upon an involuntary petition; that on and before November 23, 1931, the bankrupt owned and controlled a stock of meats and the fixtures and equipment necessary in its business; that these constituted the entire corporate assets, except the stock in trade; that on the last mentioned date the entire capital stock was owned by defendants, who were the board of directors, and they as such stockholders and directors, in a formal meeting, accepted in behalf of the corporation, a proposition by one Gross-man to buy all the assets of the corporation as well as its stock of merchandise. This proposition was for the consideration of $3,000, $1,000 cash, and $2,000 payable $100 monthly, to be secured by a chattel mortgage on the fixtures and equipment — exclusive of the stock in trade— and further secured by a pledge of the capital stock of which Grossman was to become the owner. On the same [313] day, the defendants resigned as officers and directors, transferred all their stock to Grossman and his associates who thereupon were elected officers and directors. November 23, the new board authorized its officers to execute the note and mortgage of the company to the order of the defendants, and on the same day the corporation executed and delivered the note of the company and chattel mortgage securing payment of the same to the defendants; that January 3, 1933, payments were in arrears, and the new officers, acting for the corporation, executed and delivered to defendants a new chattel mortgage securing payment of $1,783.43, and covering some additional equipment; that a second chattel mortgage in the sum of $1,200 was executed and delivered to defendants covering all of the property last mentioned, to secure defendants on account of delinquent taxes and insurance premiums, unpaid by the corporation; that the reasonable value of the property is $3,000; that the bankrupt corporation received no consideration for the notes and mortgages described, and the sole consideration was the transfer of the capital stock by defendants to Grossman; that the notes and mortgages were made while the company was indebted in large sums of money, and was contemplating the incurrence of other large liabilities, and for that reason, the conveyances were fraudulent and void as to the creditors of the bankrupt company, as well as to plaintiff, its trustee; that at the time of the purchase by Grossman of the capital stock, the company was obligated on a five year lease to pay rent thereafter to fall due, although at that time no rent was due; that in November, 1933, acting under the mortgages, defendants took possession of the property and converted it to their own use; that all of the property, or the money equivalent, passed to plaintiff as trustee and the title remains in him; that the same is, and has been at all times since the taking and conversion, assets belonging to the bankrupt estate; that plaintiff is in constructive possession and entitled to actual possession of such assets as trustee, [314] and that defendants have no right, title or interest therein. The prayer is for possession of the property or for $3,000, its value. The demurrer was general upon the ground that the complaint as amended did not state sufficient facts to constitute a cause of action, and was argued on the ground that it does not allege that the plaintiff represents creditors who were such at the time of the execution of the chattel mortgages or prior thereto, who were creditors at the time of the commencement of this action; also that it does not allege that the defendants and the bankrupt conspired or agreed to do the things of which complaint is made for the purpose of hindering, delaying or defrauding subsequent creditors, alleged to have been defrauded; and further because there is no allegation that the bankrupt became insolvent at the time of the making of the chattel mortgages on account thereof. The same argument is here presented to support the judgment of the trial court in sustaining the demurrer. This action purports to attack the validity of the chattel mortgages, and even though it is by a trustee in bankruptcy, the bankruptcy act is not applicable. The solution of the question of whether or not the mortgages are valid, depends upon, and is controlled by, the laws of the state where they were executed. The question here presented by the amended complaint, is not one of fraudulent intent. It is not a question of whether the trustee of all the bankrupt’s creditors represents a particular creditor who was such at the time of the conveyance in question or subsequent thereto; neither is the question of failure to allege that the bankrupt was or became insolvent at the time, and on account, of the transaction important. The real question presented upon the face of the complaint, is: Was the transaction, ipso facto, a fraud upon the then existing creditors and an increase of the liability of the corporation from which it received no benefit? After historical recital of the transaction, we find the [315] following pertinent allegation in the amended complaint: * * and said chattel mortgages were made while the said bankrupt was indebted in large sums of money and in contemplation of the incurring of other, large liabilities, by reason whereof said conveyances were, and each of them is fraudulent and void as to the creditors of said bankrupt, and the plaintiff, as trustee of the bankrupt estate.” If the allegation as to the then existing indebtedness is true, the defendants as directors and sole stockholders, are chargeable with knowledge of the existing financial condition of the company. By the transaction, they added nothing to the assets of the indebted corporation, but did increase its liabilities to the amount of the questioned chattel mortgages, and by the transaction they shifted their position from that of stockholders of an involved corporation to that of preferred creditors with a first lien upon the assets of a burdened corporation from which they severed their connections. If the corporation was already burdened with debt, this transaction added to its insolvency so far as general credit, then or thereafter, was concerned. The transaction may have been, and probably was, free of any dishonest intention, but it operated in law as an injury and fraud upon creditors. It is true the chattel mortgages were placed of record and prospective creditors had notice of this indebtedness, but they had no notice that the corporation had not received any benefit from the added indebtedness, and were entitled to believe that it had received a benefit. In Re Haas Co. (Taylor v. Ziegenhagen), 131 Fed. 232. The capital stock investment of defendants in the indebted corporation might have proven to be in jeopardy, but equity and good conscience forbid that they further encumber the assets, rightfully belonging to creditors, for their own individual gain as here disclosed. The complaint as amended is not subject to the objections raised by the demurrer and urged by defendants, and they should have been overruled. The judgment [316] therefore is reversed with instructions to reinstate the amended complaint. Further proceedings, if any, should be in accordance with the views herein expressed. Me. Justice Butlee concurs in the reversal of judgment for reasons stated in Me. Justice Young's concurring opinion filed herein. Mr. Justice Young specially concurs. Mr. Justice Hilliard and Mr. Justice Bouck dissent.