Interstate Distributing Co. v. Connell

Opinion by Head, J., The plaintiff's case was the ordinary one to recover the price of goods sold and delivered. There was no denial of — 557 — the receipt of the goods; no contention as to the correctness of the prices charged. The plaintiff’s case prima facie was therefore complete. The defendants had subscribed and paid for ten shares of the capital stock of The Interstate Distributing Company, the legal plaintiff, and one of them, C. D. Connell, was elected one of its directors and occupied that position at the time of the alleged transaction or arrangement on which the defense to this action is based. It appears that as early as April 21, 1908, the situation of the corporation was such that at a meeting of its directors, held on that day, a resolution was adopted to put the corporation into liquidation. The motion to that effect was made by Director Connell, one of the defendants. It was there further agreed “to put Mr. Schmidt (the president and general manager) in complete charge of the affairs and manage the same until the affairs of the company are fully settled.” A meeting of the stockholders of the company was called for April 28, and the minutes thereof show that there was presented to the meeting the resolution passed by the directors “to liquidate the affairs of this company and empower Mr. Max Schmidt, president, to do the liquidating.” A motion to ratify that action of the board was unanimously adopted. It further appears that prior to the board meeting of April 21 just referred to, the defendants had purchased a bill of goods from the corporation and were indebted to it for the price thereof, about $260. Director Connell had with him a memorandum of this indebtedness, and after the meeting he testifies to a conversation with Schmidt in which the latter agreed that if the defendants would purchase additional goods sufficient to bring their indebtedness up to $500, the company would take up the ten shares of the stock owned by the defendants, satisfy the indebtedness of $500 and pay to the defendants a like am on ct in cash. In other words, the liquidating officer of the corporation there undertook, with one of its directors, to take up his shares of stock at their full par — 558 — value even though there were still creditors of the corporation to be paid and it could not then be told what proportion of the corporate assets, if any, would remain for distribution among the stockholders. The corporation was organized under the laws of the state of New York. It was pressed upon us.in the argument at bar and in the printed brief of the appellee that such a transaction was forbidden by the laws of the state of New York, but it does not appear in the record that such laws were pleaded or offered in evidence. It has often been held that our courts cannot take judicial cognizance of the laws of other states, and that it is incumbent on a party litigant, who asserts that the rights or obligations of the parties are to be determined according to the laws of another state, to make affirmative proof of such laws. Otherwise they will be presumed to be the same as the law of Pennsylvania. We must therefore view the transaction in the light of our own legislation and decisions. Whilst our state law provides a method for the dissolution of a corporation and the winding up of its affairs, we may concede that it is not, in all cases, absolutely necessary that such method be followed. We may even go so far as to assume, as contended by the appellee, under the authority of Pottsville Bank v. Minersville Water Co., 211 Pa. 566, that, under the facts appearing in this record, Schmidt was invested with the powers of a liquidating trustee to wind up the company’s affairs, or, in the language of the minutes of the stockholders’ meeting, “to do the liquidating.” In no aspect of the case, as we view it, could his informal appointment as such trustee confer upon him other or greater powers than if the proceeding, to dissolve had been formally begun in the manner provided by the statute and he had been regularly appointed the liquidating trustee of the corporation. It is true that the capital stock of a corporation is a part of its liabilities and that, in a sense, the owners of that stock are creditors of the corporation with the right — 559 — to take its assets and divide them among themselves in extinguishment of the liability evidenced by the stock. It is but to state elementary law, however, to say that this right is neither absolute nor unqualified, and that it cannot be asserted until the process of liquidation has advanced to a certain stage. The rights of creditors, using that word in its ordinary and general sense, are first of all paramount, and their obligations must be discharged in full before the right of any stockholder to any portion of the corporate assets can be considered. Both Schmidt and Connell, the parties to the alleged arrangement of April 21, upon which the defense rests, were acting in a fiduciary capacity. They had both taken part in the action which started the process of liquidation. They were both bound to see first of all that the corporate assets were applied to the payment of the debts of the corporation and that thereafter what was left was to be divided equally among all of the stockholders without giving to one any preference over the others. It must follow, therefore, that any attempt on the part of a director and the liquidating trustee to agree, on the very day on which it was determined to put the corporation into liquidation, that the stock of a particular stockholder should be paid for in full by the use of the money or property of the corporation, was something they had neither the right nor the power to do. At the trial the defendants testified to the arrangement above indicated. They further testified to declarations made by Schmidt, at or about that time, that he believed the corporation to be solvent and that there would be money enough not only to pay its debts but to return to its stockholders the full amount of the capital they had respectively contributed. Although it was shown by an actual statement of the affairs of the company, taken from its books, that the corporation was insolvent, the whole matter was submitted by the learned trial court to the jury and they were permitted to render a verdict, upon which judgment was afterwards entered, not only — 560 — relieving the defendants from the payment of their conceded indebtedness but awarding to them a certificate of balance for the $500 in cash which, as they allege, the liquidating trustee promised to pay for the surrender of their stock. It is true the books themselves of the corporation were not produced by the plaintiff, nor were they demanded by the defendants. The accuracy of the statement furnished from them was in no way assailed, although, as stated, there was evidence of declarations made by Schmidt as to his belief that the company would prove to be solvent. We do not think the controlling question in this case turns upon the solvency or insolvency of the corporation on April 21, 1908. That was a question that could only be finally determined by the liquidation of the business of the company. The book assets of either an individual or corporation, at the moment when liquidation begins, often suffer from an unexpected and disappointing shrinkage in values, and it might gravely imperil the rights of creditors or other stockholders to permit a process of liquidation to begin by an arrangement of the character of that relied upon by the defendants. It is not necessary to affirm or deny the broad proposition urged upon us by the appellee that it is not unlawful for a corporation to buy its own stock. Certainly there is nothing in the case of Coleman v. The Columbia Oil Co., 51 Pa. 74, relied on by the appellee to support the conclusion that the liquidating trustee, under the conditions here present, was invested with any authority to make an arrangement like the one in question. If vigilant directors of a corporation in process of liquidation could by such an arrangement secure to themselves payment in full of the capital they had contributed, the creditors and remaining stockholders would be placed in a precarious situation. This action was brought by the Freiberg & Workum Company, to which company the claim against the defendants appears to have been assigned before suit brought. — 561 — There is not a line in the testimony attacking the validity or good faith of that assignment. If the judgment entered in this case can stand, the defendants have not only defeated any right of recovery against them, but have themselves obtained a judgment for a considerable sum of money against a party who was never indebted to them. In a word, the defendants have successfully asserted a right to set off against a bona fide assignee of a book account a debt due by or sum claimed from the assignor. In Henderson v. Lewis, 9 S. & R. 379, Mr. Justice Gibson said: “The object in permitting debts to be set off, being, as I have said, to prevent circuity of actions, it of course can be allowed only where the parties have a mutual right to sue each other.” In Everson v. Fry, 72 Pa. 326, Mr. Justice Sharswood said: “It is to be observed that a set-off is a counterclaim, and is to be regarded in all respects as if it was a separate action by the defendant against the plaintiff.” In Blair v. Mathiott, 46 Pa. 262, it was held that an obligor in a bond cannot defalcate against the assignee of an assignee of a bond, a claim or set-off, which he holds against the first assignee. In speaking of such an attempt, Mr. Justice Thompson said: “That cannot be done at law under the statute, for if it could, and the claim of the obligor against the first assignee should be greater than the assigned debt, he would be entitled to a certificate of balance against one who never owed him anything. This would not do.” This case was followed in Downey v. Tharp, 63 Pa. 322. It appears to us, therefore, that in both of the important respects already indicated the case was tried in the court below on an erroneous theory. Had a verdict been directed for the plaintiff liquidating the amount of its claim, subject to the right of the court to thereafter render judgment for the defendants, we could dispose of the entire question by directing a judgment to be entered on the verdict, but as we have nothing upon which our final judgment could rest, we must send the case back to be retried in accordance with the principles herein indicated. — 562 — Judgment reversed and a venire facias de novo awarded. SUR MOTION TO MODIFY JUDGMENT Although the plaintiff easily made out a prima facie case, yet its claim was for the price of goods sold and delivered, with interest thereon. The ascertainment of the exact amount due was not a question of law either for the learned trial court or for us, but necessarily required the verdict of a jury. Had the jury been instructed that the defense set up was unavailing and then been permitted to find for the plaintiff, liquidating the amount of its claim, we would have had the basis for a final judgment. This was what we meant to say in the concluding paragraph of the opinion. With the record as it is such judgment cannot be entered here, and the motion therefore must be denied. The motion for a reargument' is refused. Per Curiam.