In the Matter of Harmony F. M. Ins. Co.

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 312 [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 313 Section 56 (2 R.S., 466), among other things, provides that the court may, whenever it shall appear necessary or proper, order notice to be published in such manner as the court shall direct, requiring all the creditors of such corporation to exhibit their claims and become parties to the suit within a reasonable time, not less than six months from *Page 314 the first publication of such order, and in default thereof to be precluded from all benefit of the decree which shall be made in such suit, and from any distribution which shall be made under such decree. Upon the hearing of the petition of the appellant by the Special Term it was shown that an order pursuant to the preceding section, requiring creditors of the corporation to exhibit their claims, had been made by the court and published in the manner required, and that the time thereby fixed for creditors to present their claims to the receiver had expired before the petitioner presented his demand. This requires a determination whether by the act it was intended to exclude such creditors of the corporation as failed to present their claims within the time fixed by the order from all claim upon the assets in the hands of the receiver and distribute such assets among those creditors only who presented their claims within the time limited by the order. Upon this question there can be but little doubt. It would be absurd to suppose that the legislature intend to confer power upon the court to make an order in these proceedings excluding creditors who failed to comply therewith from all participation in the assets, and that such order should not have such effect upon creditors so failing. It is quite as manifest that the intention was to exclude those not complying, as though the statute had in express terms declared that such creditors should be excluded. Were the section under consideration the only statutory provision having a bearing upon the question, the only conclusion must be that the appellant was excluded, and his petition therefore properly denied. But it is insisted that the provisions of article 3, for the distribution of the assets, are applicable, although the proceedings in the present case were instituted under article 2. In this position I think the counsel is correct. Section 37 of the act provides that upon a final decree the court shall cause a just and fair distribution of the property of the corporation and of its proceeds to be made among its creditors, etc., who shall be paid in the same order as provided in the case of a voluntary dissolution of a corporation. The latter is provided for in article *Page 315 3 of the title. Section 42 provides that the receiver shall possess all the powers and authority conferred, and be subject to all the obligations and duties imposed by article 3 upon receivers appointed under the latter article. These sections show that the distribution of the assets are to be regulated by the provisions of article 3 taken in connection with those of article 2 upon the same subject. It is further insisted by the counsel for the appellants that he was entitled to the relief prayed for under section 81 of article 3. That section, among other things, provides that every creditor who shall have neglected to exhibit his demand before the first dividend, and who shall deliver his account to the receivers before such second dividend, shall receive the sum he would have been entitled to on the first dividend before any distribution be made to the other creditors. It is insisted by the counsel that this qualifies section 56, article 2, and secures to creditors who present their claims before the second dividend is declared the right to share in the distribution of the assets, although he may not have complied with an order made pursuant to the latter section. I cannot concur in this position. Such construction would render section 56, article 2, entirely nugatory, as it will be seen that by the subsequent sections of article 3 all creditors failing to present their claims before the making of the second dividend are excluded. By this construction it will be seen that no effect whatever can be given to section 56, article 2, as under the construction contended for, no creditor can be excluded who presents his demand before the making of the second dividend, and all who do not are excluded by the subsequent sections of article 3. The true meaning of the latter clause of section 81, article 3, is that all creditors neglecting to present their demands before the first dividend is made and who are not precluded from presenting them by section 56, article 2, may, upon presenting them before a second dividend is made, share in the distribution upon an equality with those who participated in the first dividend. By this construction full effect is given to both sections of the statute without any conflict. It is further *Page 316 insisted by the counsel that although he may have been excluded by section 56 from receiving a pro rata share of the assets, yet that the court had power in its discretion to relieve him therefrom by extending the order, and that as it appears that the court did not exercise its discretion upon the subject, holding that his rights were fixed by the statute, over which the court had no discretion, and that therefore he is entitled to a reversal of the order, so that upon a rehearing the discretion of the court may be exercised. The legal inference is correct. Whenever the court of original jurisdiction is vested with discretion and refuses to exercise it, it is an error which it is the duty of the Appellate Court to correct, and if not corrected by the General Term, it will be by this court. But the rights of all parties were fixed by section 56, article 2. The appellant was thereby excluded from participation in the assets. The creditors who presented their demands acquired a vested right to have the assets distributed among them to the extent of their demands, and the court had no discretion to deprive them either partially or wholly of these rights. If wrong in this, there is nothing showing but that the General Term did exercise its discretion upon this matter in the affirmance of the order. If the Special Term erred in refusing to exercise discretion in a case where it was required so to do, it was the duty of the General Term to correct the error by making such order as the Special Term ought to have made, and this court can only interfere with the order where it appears that the General Term have failed to discharge this duty. There is nothing in the present case showing such failure by the General Term. Section 83 provides that if, after making the second dividend, any surplus shall remain, the same shall be distributed among the stockholders. This surplus obviously is a remainder after the creditors are paid in full, and as it conclusively appears in the present case that there will be no surplus, the question whether the appellant has any right to share therein does not arise. The counsel further insists that he is entitled to share in the distribution of any of the fund reserved by the receiver to satisfy *Page 317 litigated claims against the corporation which shall remain after the satisfaction of such claims. Sections 82 and 84 of article 3 show that he has no such right. It may be said that the appellant's is a hard case. This is true, but it is impossible to distribute the assets of an insolvent corporation among its creditors in the absence of rules excluding such creditors as neglect to present their demands within such time as shall be prescribed for that purpose. The statute has established such rules, and all that is left to the courts is to administer them. They have no discretionary power of dispensation in cases of hardship. The order appealed from must be affirmed with costs.