Creteau v. Foote & Thorne Glass Co.

Ingraham, J.: The plaintiff in this action -seeks to have set aside an assignment made by the Foote & Thorne Glass Company, a domestic corporation, for the benefit of creditors. The complaint alleges the recov — 169 — •ery by the plaintiff of a judgment against the corporation; that an execution was issued, thereon and returned unsatisfied, and that at the time the execution was issued the corporation would have had within the county of New York sufficient property to pay and satisfy said execution, except for the wrongful and fraudulent acts interposed by it to prevent such or any payment or satisfaction of said judgment. The wrongful acts alleged were the payment of various sums of money to the president and vice-president of the company and the payment of $1,000 to each of the other defendants, who were relatives of the president and vice-president. The court found that on the 10th of December, 1897, a resolution of the directors was passed declaring that the corporation was unable to meet its debts and obligations, and that the said corporation was at that date, and at all subsequent times, insolvent; that at a meeting of the creditors of the corporation, held on the 21st of December, 1897, at which the defendants Hislop and Colby, president and vice-president of the corporation, were represented by counsel, it was stated that if an extension of time was granted to the corporation they would secure additional capital with which to carry on the business of the company, and that payment of all moneys due from the company to them would be deferred until such time as the creditors of said company who consented to said extension should be paid in full; that the said representations were relied upon and believed by a large number of the creditors of said company, including the plaintiff’s assignor, and that in consideration thereof the said creditors accepted in payment of the moneys due them notes of said company, indorsed by the defendants Hislop and Colby; that between the 8th of January, 1898, and the 18th of March, 1898, the corporation paid to the defendant Hislop various sums of money aggregating $3,296.62, and to the defendant Colby various sums of money aggregating $1,978.91, and that the said payments were made in violation of the said agreement; that the said ¿ompany also paid to the defendant Elizabeth Hislop $1,000, and to the defendant Mary J. Colby $1,000, and that all of said payments were made at a time when the said corporation was insolvent, when it refused and was unable to jiay its notes and other obligations when due, and were made with intent to hinder, delay and defraud the just cred — 170 — itors, including this plaintiff; that on the 18th day of March, 1898,.-said corporation executed an instrument in writing purporting to be.' a general assignment of all its property to the defendant Clarkson for the benefit of its creditors j that the said , assignment was made by the corporation with intent to hinder, delay and defraud certain of its creditors, • including the plaintiff, and that the said payments-made by the said corporation to the defendants Thomas W. Hislop,. John D. Colby, Elizabeth Hislop and Mary J. Colby constituted a, collusive and fraudulent scheme or plan to so delay, defeat and defraud the just" creditors, of the said corporation, including the plaintiff; that the action was not brought under the provisions of the Code of Civil Procedure relating to judgment creditors’ actions, but under “the established rules of courts of equity,” and judgment "was entered declaring the assignment- void, requiring the assignee to account for and deliver to a receiver therein appointed all property and proceeds of property and money received by him as assignee, and adjudging that the assignee account before a referee appointed by the judgment; that the defendants to, whom the various sums of money had been paid repay the same to a receiver, and that the receiver pay the plaintiff’s judgment in full, and hold the balance of the property coming in his hands subject to the further order of the court. It appeared from the evidence, and was not contradicted, that the corporation was indebted to the various persons named in the sums that were paid, to them ; that as to the defendants Elizabeth Hislop and Mary J. Colby such indebtedness arose from loans made, to the company after the meeting of the creditors, before referred to. The assignment was without preference, and the assignee was required to distribute the property’ of the corporation coming into his hands among, the creditors of the corporation equally. We will assume that the payments made to the various creditors of this corporation were void under section 48 of the Stock Corporation Law (Laws of 1890, chap. 564). The question is then presented whether a payment made by the officers of a corporation in violation of this statute •invalidates an "assignment without preferences subsequently made by the corporation for the benefit of its creditors. By this action the plaintiff attempts to obtain a preference in the payment of his debt over that of the other creditors of the corporation. By section 48 of — 171 — the Stock Corporation Law a corporation and its officers are expressly prohibited from suffering a judgment to be obtained against it or from giving a lien or security with intent to give such a preference, and the whole policy of the law relating to insolvent corporations is to prevent one creditor from obtaining any preference as against the other creditors. To sustain this judgment would thus violate this provision of law relating to domestic corporations. It has been settled that this statute does not prevent a general assignment for the benefit of creditors by a corporation without preferences (O'Brien v. East River Bridge Co., 161 N. Y. 549), and it cannot be said that such a general assignment, without preferences, made by a corporation is void because the officers of the corporation prior to the assignment have made payments in violation of the provision of the Stock Corporation Law to which attention has been called, but for which law the payments wrould have been valid. They were made to discharge existing obligations of the assignor, and there was nothing fraudulent in the corporation paying its debts. There is no allegation or finding that the corporation itself authorized these payments. To justify a court in setting aside a general assignment on the ground that it was fraudulent and void as against creditors, there must be proof that the intent with which the instrument was executed by the assignor was fraudulent. Where the assignor is a corporation such fraudulent intent cannot be predicated solely upon unauthorized and illegal acts of its officers where the act is not for its benefit, or in the transaction of its business, or under authority from the corporation, and where the act complained of is a direct violation of the duty of the officers and prohibited by law.. Here the corporation did no act which would indicate an intent to hinder, delay and defraud creditors; and there was nothing to show that the official act of the corporation in making an assignment had any relation to the unlawful appropriation by the officers of the corporate property. ' The Code of Civil Procedure expressly provides that the article in relation to judgment creditors’ actions shall not apply to a case where a judgment debtor is a corporation created by or under the laws of this State (§ 1879); and it would be, I think, a violation of the spirit of the law, if not its express provision, to allow a judgment creditor’s action to be maintained so as to appropriate all the property of the corporation to pay the indebtedness of one particular — 172 — creditor, and thus create the very preference that the statute expressly prohibits. The provision of section 48 of the Stock Corporation Law requiring every person receiving any property of the corporation by means of any act there prohibited to account therefor to its creditors or stockholders or other trustees, does not justify a particular creditor in commencing an action by which he can appropriate such payments to the discharge of his individual debt in preference to the other creditors. The evident intent of this statute was for the benefit of all the creditors and to be enforced by or on behalf of 'all. It is analogous to the liability of stockholders in moneyed corporations imposed by section 52 of chapter 689 of the Laws of 1892, where it is provided tjhat the stockholders of every banking corporation shall be individually responsible, equally and ratably, and not one for another, for all contracts, debts and engagements of such corporation to the extent of the amount of their stock therein; and it was held by the Court of Appeals that the object of this statute was undoubtedly to furnish additional security to . creditors, and it is for the benefit of them all, and should be enforced by or on behalf of all. (Hirshfeld v. Fitzgerald, 157 N. Y. 179.) A distinction must be made between an action of this kind, which is a judgment creditor’s action, and an action brought by a judgment creditor in aid of an execution then outstanding to remove some obstacle to its enforcement. Such an action, can be maintained where an execution is outstanding against a corporation and where the corporation by assignments or transfers of its property ■ has placed an obstacle in the way of the creditor enforcing the execution and is not- governed by .the provisions of the Code relating to judgment creditors’ actions. Such an action was Easton Nat. Bank v. Buffalo Chem. Works (48 Hun, 558). ' There the plaintiff sought to set aside a prior judgment against the judgment debtor which had been fraiidulently obtained in aid of an execution upon its judgment, and it was impliedly held in that case that such an action could be maintained: Home Bank v. Brewster & Co. (15 App. Div. 338) was also an action in aid of an execution to set aside transfers made by the corporation. Koechl v. Leibinger & Oehm Brewing Co. (26 App. Div. 573) was an appeal from an order refusing to grant a temporary injunction to restrain an assignee from paying out the moneys in his hands until the trial of the action. ' The complaint — 173 — alleged there that the corporation had entered into a conspiracy with others to defraud the plaintiff, one of the overt acts, the result thereof, being a general assignment, and that the assignee had sold the property received under the general assignment and had the proceeds in his hands. The court held that the action could be maintained and the assignee should be restrained from paying out. the money until the trial of the action; and the injunction seems to have been allowed as the protection of the plaintiff required it, and as only sufficient of the funds in the hands of the assignee was to be retained to meet the contingencies of the suit which could be speedily tried, and little hardship would be worked upon any one. In so far as the relief to which the plaintiff would be entitled in such an action was discussed, the language used by the court in each case is to be construed as having reference solely to a case where the judgment creditor had obtained a lien or a right to a lien which, but for the alleged wrongful acts, he could enforce. Munson v. Genesee Iron & Brass Works (37 App. Div. 204) was an action brought to set aside certain mortgages on the judgment debtor’s property, and the object of the action was to reach the proceeds of the property which had been sold under these mortgages in the hands of the mortgagees ; and the case does not apply to a general assignment made for the benefit of creditors. But this question seems to have been determined by this court in the case of Lodi Chemical Co. v. National Lead Co. (41 App. Div. 535). That action was brought by the plaintiff as a creditor of the Charles H. Pleasants Company to set aside certain transactions in judicial proceedings which resulted in the National Lead, Company’s obtaining .a preference over all other creditors of the Charles H. Pleas-' ants Company, and placing the assets of that company beyond the reach of such creditors, * including the plaintiff. The action was based upon a violation of section 48 of the Stock Corporation Law, and by the judgment entered in the action the' acts and transactions which resulted in the defendant the National Lead Company acquiring a preference were declared to be invalid, and all the instrumentalities by which that preference was effected were adjudged void. In that judgment was inserted a provision that the receiver therein appointed should apply'the property, goods and chattels of the Charles H. Pleasants Company that should come into — 174 — his hands, first, to the payment to the plaintiff of the amount of a certain judgment obtained by the plaintiff against the Charles H. Pleasants Company, and the defendant company appealed only from so much of the judgment as was contained in that direction to pay. In reversing that judgment the court expressly held that the Pleas-ants Company being a domestic corporation, the plaintiff could not procure a judgment for tlie preferential payment of its debts under the provisions of the Code of Civil Procedure; that the action being founded directly upon the permission of the 48th section' of the Stock Corporation Law, and as the object to be accomplished by that statute is to secure equality among creditors, that purpose should be effectuated and not destroyed, and the judgment was modified by striking out the provision directing the receiver to pay the plaintiff’s judgment. And, although the learned counsel for the respondent in this case seems to think that the court, in that case, in its construction of the Stock Corporation Law, had “ fallen into an error,” it was the deliberate judgment of the court as to the construction to be given - to section 48 of the Stock Corporation Law and the relief to which a creditor seeking to enforce its .provisions was entitled. ■ In that case, as there was no general assignment under which the property of -the corporation had been transferred to an assignee for the benefit of all the creditors, who was in a position, to enforce the provisions of the Stock Corporation Law and -secure to the creditors the amount that had been illegally transferred by the corporation and its officers, a receiver was necessary. In this case, the corporation having made a general assignment for the benefit of creditors, the right to enforce all claims of the corporation or its creditors had vested in the assignee by virtue of the assignment, and it was his duty to recover from those to whom property of the corporation had been illegally conveyed. The fraud, if any, was a fraud, not in the assignment,, but upon the assignment, and this did not tend to avoid the assignment itself. It is quite possible that a creditor would have a right to maintain an action to enforce the liability created by section 48 of the Stock Corporation Law,in case the assignee should refuse or neglect to properly enforce it. In such a case the recovery would inure to the benefit of all the creditors of the corporation. If the assignee does not properly perform this duty, a creditor would have the right to take proceed — 175 — ings to have him removed and a new assignee appointed. It is not intended to intimate that such a remedy would be exclusive, and in a case where there was a conspiracy to cheat and defraud the ■creditors of the corporation, and the assignee was a party to the fraud, equity would protect the rights of the creditors of the corporation, but in that event the relief granted would not inure to the "benefit of any one creditor, but would be for the benefit of all. The judgment should, therefore, be reversed and a new trial ordered, with costs to the appellants to abide the event. Van Brunt, P. J., O’Brien, McLaughlin and Hatch, JJ., ■concurred. Judgment reversed, new trial ordered, costs to appellants to abide event.