Merchants National Bank of Richmond v. Newton Cotton Mills

MacRae, J.: Let us examine first the case presented by the appeal as to the right of an insolvent corporation to make a preference. It is contended, with great learning and research by the counsel for the appellees that when a corpo *513 ration becomes insolvent, it is thenceforward unlawful for its directors to make any preference in the payment of its debts, but that all its property must be kept and administered for the common benefit of all its creditors, in the same manner as if the receiver had taken charge thereof under section 379 and 668 of The Code. The late cases of Hill v. Lumber Co., 113 N. C., 173, and Foundry Co. v. Killian, 99 N. C., 501, are cited as direct authority for such contention. If it has been adjudged by this Court that such is the law, every consideration in favor of the stability of judicial decision demands, except in the face of manifest error, that we should abide by it. This leads us to enquire what was decided in Hill v. Lumber Co. The question there was as to the validity of a preference made in favor of a director of an insolvent corporation. His duties and liabilities, as one occupying a fiduciary relation to the stockholders and creditors, were there discussed, and the language of the opinion delivered is to be understood in its application to the facts of that case. In the examination and decision of appeals we are confined to the questions at issue; whatever is written must be taken with reference to its environment, and that which, isolated, would be a broad proposition when considered in connection with the subject matter under discussion, may be and generally is restricted in its meaning. It is the tendency to give further effect than was intended to words used in reference to a particular state of facts, which sometimes confuses the interpretation of the lawr and makes that broader and more comprehensive, which in its application to the case at bar is simple and plain. Could a director of an insolvent incorporation, who was also a creditor, take advantage of the means of information at his hands, and so protect himself to the injury of other creditors who were debarred from the same opportunities ? *514 Herein was invoked the principles of equity, the relation of trust and confidence borne by the director to all the stockholders and extended in case of danger of loss to all the creditors, and the broad proposition, so often stated and so often explained in cases like the present, where it was thought to extend its meaning beyond the purposes for which it was used, was laid down that a director is a trustee, first for the stockholders and then for the creditors. The present question was in that case not necessary to be and was not decided, and if it had been in express terms decided, such decision would have been simply a dictum, binding no one further than in its application to the question then before the Court. Understood as used and applied in Hill v. Lumber Co., in case of the insolvency of a corporation, and as against the fiduciary in charge of its assets, those assets are a trust fund, and the general creditors are at least entitled to be secured out of the assets upon equal terms with the directors, who are also creditors. But after diligent examination we find that by the laws of this State corporations have never been restrained from the exercise of preference in favor of creditors, not corporators, further than individual persons are, subject, of course, in both instances to the controlling principles of the statute of frauds that these - preferences must not be made with a purpose to defeat, delay or hinder other creditors or parties in interest. We may here say that the expression used in Hill v. Lumber Co., that creditors have a lien upon the assets, was a quotation from 2 Story Eq. Jurisprudence, section 1252, where the word lien is explained to mean simply a right of priority of payment in preference to any of the stockholders in the corporation. The case of Foundry Co. v. Killian, 99 N. C., 501, presented one single question — the liability to creditors of corporations, of the stockholders thereof to the extent of their unpaid subscriptions, and the decision there was founded upon the prin *515 ciple that the property, including the capital stock, paid and unpaid, constitutes a fund for the benefit of creditors, “ that the capital stock of a corporation is a trust fund to be preserved for the benefit of corporate creditors.” Our laws provide for the appointment of a receiver of an insolvent corporation, or one in imminent danger of insolvency. This appointment is to be made on appplication of any creditor, stockholder or member of such corporation. 1 he Code, § 668, as in Killian’s case. And when the receiver shall have collected the assets he is required to pay all the debts if the funds shall be sufficient, and, if not sufficient, to distribute the same ratably among all the creditors who shall prove their claims. When once the Court of Equity, through its receiver, takes charge of the assets, they are to be distributed pro rata among the creditors, subject to such priorities as have already accrued. It is provided in section 685 that corporations may convey by deed, but that such conveyance shall be void as to existing creditors, etc., provided proceedings to enforce such claims be commenced within sixty days after the registration of said deed. The converse of this provision is, if no creditor or party injured brings his action within sixty days his remedy fails and the conveyance is good. Thus, a conveyance by an insolvent corporation, not forbidden by the statute of frauds, is good unless some creditor or party injured objects within sixty days. These corporations, creatures of the statute, artificial persons, under the direction of the Legislature, have all the rights and liabilities, generally speaking, of individual persons. Before the passage of the amendment to the act of 1798, we think by the act of 1872, now section 685 of The Code, a corporation might convey land, etc., by deed executed according to the statute or common law. The amendment added the provision that any such conveyance should be void as to pre-existing debts and torts, “ provided such *516 creditors or persons injured shall commence proceedings, etc., within sixty days after the registration of said deed as required by law.” The effect of this amendment is not to make void such deeds as against creditors and persons injured unless proceedings are begun in sixty days. This has been expressly decided in Blalock v. Manufacturing Co., 110 N. C., 99, which was cited with approval in Hill v. Lumber Co. This question, then, is settled in North Carolina against the contention of the appellees and the judgment of his Honor below. The meaning of the words, “ trust fund,” as used in this connection, is to be explained, as it has been many times in other Courts, not strictly a trust to be administered in the first instance upon the insolvency of the corporation for the benefit of all the creditors pro rata, but whenever proceedings under the statute are had, and the Court takes charge of the assets through its receiver, it will make equitable distribution among all the creditors of all the assets not subject to prior liens or rights. Until such jurisdiction takes hold of the assets they are subject to the action of the individual creditors, and such preferences may be made by the corporation as a natural person might make under the same circumstances of insolvency. The present exigency will not permit- us to notice the many authorities adduced by the learned counsel in support of the contrary doctrine. We must content ourselves with a reference to the language used in Hollers v. Brierfield, 150 U. S., 371, in reference to the ordinary meaning of these words (trust fund) in the present connection : “ While it is true language has been frequently used to the effect that the assets of a corporation are a trust fund held by the corporation for the benefit of oreditors, this has not been to convey the idea that there is a direct and express trust attached to the property. As said in 2 Pom. Eq. Jur., section 1046, they *517 are not in any true and complete sense trusts, and can only be called so by way of analogy or metaphor.” After reviewing many cases in that Court where these words are used or explained, the Court proceeds: “A party may deal with a corporation in respect to its property in the same manner as with an individual owner, and with no greater danger of being held to have received into its possession property burdened with a trust or lien. The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to an account for fraud or sometimes even mere mismanagement in respect thereto. As between itself and its creditors the corporation is simply a debtor and does not hold its property in trust or subject to a lien in their favor in any other sense than does an individual debtor. “The assets of such a corporation (an insolvent bank) are a fund for the payment of its debts. If they are held by the corporation itself, and so invested as to be subject to legal process, they may be levied on by such process.” Curram v. Arkansas, 15 How., 304. The text-writers, while criticising the doctrine with singular unanimity, admit its existence. In2Morawilz on Private Corporations, section 802: “ In the absence of statutory prohibition a corporation has the same power of making preferences amongst its creditors in the distribution of its assets as an individual.” This is stated as collected from the repeated decisions of the Courts, although the author in the next section in giving his own views, strongly combats the principle. To the same efleet is 2 Shelly on Corporations, section 99. However unjust it may appear in principle, it seems to be settled by the decisions that a corporation may, prior to any interference with the conduct and management of its agents on account of its insolvency, and in the absence of different provisions in bankrupt or insolvent laws, give a preference in payment or security to one creditor or class of creditors over another.” And 2 Waterman on Corporations, section 208: “A *518 corporation, unless restrained by its charter or by statute, has the same right to prefer one creditor to another in the distribution of its property as an individual, and it may execute a mortgage or give a lien which shall operate as a preference.” The author, after admitting that this doctrine is recognized both at law and in equity, proceeds to question its justice. Seeing, then, that it has already been settled in this State, and is recognized as the law by the Supreme Court of the United States, and admitted by the text-writers, we must declare that his Honor was in error in holding these preferences void as against the other creditors. It is contended by Mitchell & Company and the Potter & Atherton Machine Company, appellees, that although they did not appeal from the judgment of the Court below, the judgments confessed in favor of the Merchants Bank of Richmond and others, were in conformity to the statute, sections 570, 571 and 572 of The Code, they are entitled to have their exceptions to this ruling considered here, in order that if this Court shall be of the opinion that for any reason the conclusion reached by his Plonor that said judgment creditors are not entitled to preference or priority over other creditors, the judgment below ought to be affirmed. Conceding this last proposition, under the authority of Bell v. Cunningham, 81 N. C., 83, we proceed to consider the question whether said judgments were confessed in conformity to the statute. We reproduce here a copy of the proceedings on the judgment confessed in favor of the Merchants Bank of Richmond, as all the others except one are substantially similar . “ $5,371.60. NewtoN, N.'C., March 16, 1893. “ Four months after date we, the Newton Cotton Mills, promise to pay to the order of Heath, Springs & Co., five thousand three hundred and seventy-one and sixty one- *519 hundredths dollars, at Mercantile National Bank', New York. Value received. NewtoN Cotton Mills, " No._ By W. H. Williams, President. “ Due July 16-19, 1893.” “ North Carolina — Newton Township, “Catawba County, July 31, 1893. “ At a meeting of the stockholders of the Newton Cotton Mills, this day duly called, all the stock being represented at such meeting, it was unanimously resolved that the President, W. EL Williams, be and he is hereby authorized to confess judgment against the Newton Cotton Mills, and in favor of The Merchants National bank of Richmond, Va., for the sum of five thousand three hundred and seventy-one and sixty one-hundredths dollars, for money due the said bank by the corporation. Also, to confess judgment against the corporation in favor of The Exchange Bank Qf Chester, S. C., for the sum of forty-eight hundred and thirty-two and thirty-eight one-hundredths dollars, for money due the said bank by note made to Heath, Springs & Co, and endorsed to it, which said note will become due August 4,1893. Also, to confess judgment against the corporation in favor of The Bank of Lancaster, S. 0., for the sum of forty-seven hundred and fifty- six dollars and ten cents, due by the corporation to said bank upon two notes made by it to Heath, Springs & Co., the one to become due on August 20, 1893, for twenty-four hundred ($2,400) dollars, and the other to become due on August 27, 1893, for twenty-three hundred and fifty-six and ten one-hundredths dollars, which said notes have been endorsed to the said bank by Heath, Springs & Co. All of the said judgments are authorized to be entered in the Superior Court of Catawba County, North Carolina. I certify that the foregoing is a full, true and perfect copy *520 of the resolution passed this day at a meeting of stockholders of the Newton Cotton Mills. “ W. H. Williams, President, “ G. A. Warlick, Secretary. Newton Cotton Mills.” “ State oe North CaroliNA — County of Catawba. “ In the Superior Court. “The Merchants National Bank oe Richmond, Va., v. The Newton Cotton Mills. “The Newton Cotton Mills by W. H. Williams, President, being thereunto duly authorized by the Newton Cotton Mills, hereby confesses judgment in favor of The Merchants National Bank of Richmond, Ya., the plaintiff above named, for the sum of five thousand three hundred and seventy-one dollars and sixty cents, with interest at 8 per cent, from July 19,1898. This confession of judgment is to secure the plaintiff the sum above named, which is due by a certain promissory note made by the Newton Cotton Mills to the firm of Heath, Springs & Co., and the said Heath, Springs & Co. endorsed to the plaintiff for value, which said note became due and payable on the 19th day of July, 1893. That the consideration of this note was for cotton sold and delivered to the Newton Cotton Mills by Heath, Springs & Co. “ Newton Cotton Mills, “By W. H. Williams, President.” “North Carolina — Catawba County. “ Before me, J. F. Herman, Clerk of the Superior Court of Catawba County, personally appeared W. H. Williams, President of the Newton Cotton Mills, who, being duly sworn, maketh oath that the statement above signed by him is true. W. H. Williams.” “ Subscribed and sworn to before me July 31, 1893. “ J. F. Herman, “ Clerk Superior Court.” *521 “ Upon filing the foregoing statement and confession, it is ordered and adjudged by the Court that the plaintiff, The Merchants National Bank of Richmond, Va., do recover of the defendant, The Newton Cotton Mills, the sum of five thousand three hundred and seventy-one dollars and sixty cents, with interest at 8 per cent, from July 19, 1893, and costs of action. J. F. HermaN, “July 31, 1893. Clerk Superior Court” “I agree that no execution issue on this judgment until after six months from date. H. C. JoNes, “ Attorney for Plaintiff.” The first objection is, that there is no authority for entering the judgments stated in the confession. The Code, § 571, provides that “ a statement in writing must be made, signed by the defendant and verified by his oath, to the following effect: 1. “ It must state the amount for which judgment may be entered, and authorize the entry of judgment therefor.” It will be noted that there are no words in the confession expressly authorizing the Clerk to enter the same upon the records, but the record does show that the said confession was sworn to and filed, and judgment thereupon entered. The necessary result of the proceedings was to authorize the Clerk to enter the same upon the record. The filing with him could be for no other purpose, and we think that the confession itself, with the filing thereof, was express authority for its entry. 2. “ That it is not shown in the confession that the sums for which judgments are confessed are justly due, or to become due.” It will be observed that it states the amount for which the judgment is confessed, that the same is due by a certain promissory note described therein, which said note became due and payable on a day named, and that the consideration for the same was cotton sold and delivered. The requirement of the statute (the same section last named in subsec *522 tion 2) is not that it shall state, but “ and must show that the sum confessed therefor is justly due, or to become due.” If the statement is true, it follows that it is shown to be justly due. 3. “ That the evidences of indebtedness, or copies of the same, were not filed with, attached to or described in the confessions.” We do not understand that the failure to file the specialty, when a judgment is rendered, has the effect to invalidate the judgment. Frequently, in practice, when the complaint is upon a promissory note, and there is an answer filed admitting the debt, or where the complaint is verified and no answer filed, judgment is entered and the attorney permitted to bring in the note at a subsequent time. The note is not strictly part of the record, though it should be produced, that it may be cancelled when required. In this respect there is no difference between a judgment rendered according to the ordinary course of the Court and one by confession. “Among the matters which are not (unless made so by bills of exceptions, or by consent, or by order of Court) matters of record, are all matters of evidence, written or oral, including note, bond or mortgage filed in the case, and upon which suit is brought.” Freeman on Judgments, 79. The note upon which the judgment is confessed is thus described in the statement: “A certain promissory note made by the Newton Cotton Mills to the firm of Heath, Springs & Co., and the said Heath, Springs & Co. endorsed to the plaintiff for value, which said note became due and payable on the 19th day of July, 1893.” We think this is sufficient description to enable a party to make inquiry and ascertain the truth of the matter. 2 Freeman, supra, 549. 4. “ That the said judgments were confessed for goods sold and delivered, and the time of the sale, quantity, price, value of the goods and ‘ the exact consideration ’ of the indebtedness are not stated in the confessions." It is required by the statute that “ it must state concisely the facts, out of which *523 it arose,.” Recently, in considering similar objections to a confessed judgment, to those now taken, where the affidavit stated that the amount was due “ on a bond under seal for borrowed money, due and payable November 2, 1876,” we held the statement sufficient. Uzzle v. Vinson, 111 N. C., 138. See also 1 Black on Judgments, 63. 5. “That said judgments, except that confessed to J. B. Gaither, were confessed for a greater rate of interest (to wit, eight per cent.) than was allowed by the notes or contracts upon which the said judgments are alleged to have been based, which notes and contracts when filed, not with the confessions, but before the referee, showed that they carried only six per cent, interest.” It appears in the case that upon the hearing before the referee, these judgment creditors remitted all claim for interest over six per cent. The question is, whether the confession of judgment for a greater amount of interest than was justly due was rendered void thereby, or could the judgments stand for the true amount, interest at six instead of eight per cent. As we have indicated, the object of the statute in requiring a concise statement of the facts constituting the liability does not necessitate a full history of the whole transaction, does not require a bill of particulars, but does require such a statement as will enable one who desires to inquire into the transaction, to do so by reference to the statement made. It would not be contended that an ordinary judgment could be vacated for an overcharge of interest, unless the act was fraudulent. Here, by reference to the note which, if not filed with the confession, might be required to be produced by proper, proceeding, it would at once be ascertained that the interest confessed was too great. The remedy would be the correction of the judgment to that extent, but unless fraud was shown it would not vitiate the judgment. Hord v. Foster, 11 S. W. Rep., 763; 2 Freeman on Judgments, 545, 549. 6. “That plaintiffs in said judgments could not, after said *524 judgments had been confessed, and, before the referee after the hearing was begun, amend or change the same by filing the evidences of indebtedness or resolutions, or remitting interest, or in any other respect or particular.” If the proceeding were so defective in form and substance that it was void upon its face, no amendment could be- made to give it •life; but if there were irregularities which, in ordinary judgments might be cured by amendment, there is no reason why they could not be amended. 1 Freeman, supra, 66, 67. No liens had been acquired by the appellees by force of the filing of their complaint. Our statute, The Code, § 273, is liberal in the power granted the Court to allow amendments. The next objection is that to the three judgments confessed in favor of The Merchants Bank of Richmond, The Exchange Bank of Chester and The Bank of Lancaster, the stipulation at the foot that no execution should issue in six months, was a benefit reserved by the debtor for his ease and comfort, to the impairment of the rights of other creditors, and, therefore, a fraud which vitiated these confessions. The lien of the judgments began from the docketing of the same, as to the real estate of the judgment debtor. There is no requirement of law that a judgment creditor should at once proceed to have execution. There is no lien upon personal property, except from the levying. If there were any personal property to be subjected to the payment of the debts of the corporation, this stipulation was more for the benefit than to the detriment of other creditors. And the lien on real estate having been acquired by the docketing of the judgments, their rights could not be affected by the agreement on the part of the judgment creditors to a ccssat executio. . What we have written disposes of all the exceptions except the additional one as to the Gaither judgment, that he was permitted to amend by appending an itemized statement of his open account, and this before any liens had been acquired by the appellees. This amendment it was in the power of *525 the Court to permit. 2 Freeman, supra, 554; 1 Black, supra, 66. These matters connected with confessions of judgments have been quite fully considered by this Court, and the rule laid down in Davidson v. Alexander, 84 N. C., 621, has been upheld, that the confession must contain a concise, verified statement of the facts, circumstances, business transactions and considerations out of which the indebtedness arose. What constitutes such a concise statement has been considered in Davenport v. Leary, 95 N. C., 203; Nimocks v. Shingle Co., 110 N. C., 20, and in Uzzle v. Vinson, supra. In Nimocks’ case it was said : “ Ordinarily, a corporation should act through its properly constituted board of directors, or its officers or agents duly authorized to do particular acts, such as confessing a judgment. That the officer or agent was authorized to have the judgment confessed, as directed, should appear to the clerk in some way, as by a properly authenticated certificate of the proceedings of the directors of the company, and this should be filed with the statement in writing of the claim upon which the judgment is founded. This perhaps would be the better course.” In our last case, the affidavit set out the authority, but the authority itself, though presumably submitted to the Clerk when the judgment was confessed, was not filed until later. We are of the opinion that the failure to file the authority at the time of. the confession, does not vitiate the judgment. Having disposed of the exceptions of the appellees, as if the points had been made in an independent action to vacate for fraud or other cause making void the judgment, and not upon a motion to set aside for irregularities, it. follows that in our opinion there was error in the judgment of his Honor that these judgments were void as to the other creditors, for any reason. The judgment will be modified so as to direct the satisfaction of these judgments, after the payment of the mechanics’ and laborers’ liens, except that of the Foster *526 Machine Company, instead of placing them in the class with all the unpreferred claims proved before the referee. Modified.