Wesco Supply Co. v. El Dorado Light & Water Co.

Kjeby, J., (after stating the facts). If the formation of the new corporation and the taking over of the assets of the old upon the issuance of the $20,000 of the stock of the new corporation to John P. Holmes, the owner of all the stock in the old corporation, in payment therefor, be regarded a reorganization of the old corporation, the rights of creditors would not be prejudiced thereby. 10 Cyc. 286. “The assets of an incorporated company are a trust fund for the payment of its debts, which may be followed into the hands of any person acquiring them with notice of the trust.” Jones-McDowell Co. v. Arkansas M. & A. Co., 38 Ark. 17; 1 Beach on Private Corporations, 558; see also Note 11, L. R. A. (N. S.) 1119. It is undisputed that all the stock issued by the new company in payment for the assets of the old company was issued directly to John P. Holmes, who was the president and manager of the old company, and also the owner of all its stock and the transfer stripped the old company of all its assets, except the small amount of book accounts and deprived it of its power to continue the business for which it was formed and it was intended by both the seller and the buyer that it should do so. It is not disputed that the old company was in financial difficulties and unable to meet its obligations and while thus indebted it entered into this contract and agreement with the new concern, transferring substantially all its assets to the new company, which was thereafter to continue the business. The new corporation, in paying for the assets of the old, did not issue its stock to the old company, nor to a trustee for the benefit of its creditors and stockholders, but directly to the stockholder owning all the stock. This stockholder does not claim to have made any adjustment of the debts of the old concern, or an equitable distribution of these assets in satisfaction thereof, but does say that he spent practically the value of all the stock so received and the proceeds of the accounts collected in payment of its debts, he, himself, being the principal debtor, in the amount of something over $9,000. He was president, business manager and owner of all the stock of the old corporation at the time of the transfer complained of; he was also president, business manager, director and owner of, four-fifths of the stock of the new concern at the time of the sale and transfer and the delivery of the stock of the new corporation to him as an individual stockholder of the old corporation in payment of the property of the old corporation so transferred, He knew the indebtedness of the old company upon which judgment was obtained against it had not been paid, and he made no distribution of the proceeds realized from the sale of the assets of the old corporation to the payment of this indebtedness which should have been done and such proceeds ,pro rated among all the creditors of said old company, the law not permitting preferences among the creditors of insolvent corporations. Kirby’s Digest, § 949; Dozier v. Arkadelphia Cotton Mills, 67 Ark. 11. As against creditors, the transfer of the property to the new corporation was illegal and in fraud of their rights and they had the right to follow such trust fund for the payment of its debts into the hands of any person purchasing with notice of the trust. The president of the new company, its business manager, who was also a director and owner of four-fifths of its stock at the time of the transfer of the assets of the old company and the issue and delivery of the stock of the new company to him individually in payment therefor, knew of the insolvent condition of the old company; knew of the debt of appellant creditor and the new company can not be regarded as an innocent purchaser under the circumstances. Such being the case, the new corporation is bound to the payment of the creditors of the old concern to the extent of the value of the assets received therefrom without regard to whether there was any agreement to assume its obligations and the court below should have ascertained the amount of the indebtedness of the old corporation and have prorated the consideration paid by the new corporation among the creditors of the old, including appellant, if the amount of its debts were greater than the value of the assets received by the new corporation, and, under the circumstances of this case, the burden of proof devolved upon the new corporation to show such indebtedness' and the proper application of the money to the payment thereof, failing in which it should have been required to pay the full amount of appellant’s claim herein sued for. ' Because of the error in dismissing the complaint, the judgment will be reversed and the cause remanded, with instructions to ascertain the amount that should have been prorated and distributed to appellant upon its debt upon the application of the value of the entire assets of the old corporation to the payment of all its debts and render judgment therefor against appellee company, or for the whole amount of its claim in case it can not be definitely ascertained.