Byrne & Hammer Dry Goods Co. v. Willis-Dunn Co.

WHITING, J. This case is before us upon appeal from an order sustaining defendant’s demurrer to the complaint. The complaint is quite lengthy, and may be briefly summarized as follows: It ¡is alleged that the plaintiff is a corporation; that the defendant Willis-Dunn Company is., and has been since the month of October, 1901, a corporation, said corporation having been incorporated in October, 1901, as the Fitch-Willis Company, and having, on January, 1903, by .amendment of its articles of incorporation, changed its name to the Willis-Dunn Company; that during the year 1901, and prior thereto, the plaintiff sold and delivered to the defendants Fitch & Willis, then doing business as copartners, certain goods, wares and merchandise, to- the value exceeding $863; that on or about April 10, 1902, the said defendants Fitch & Willis' executed to the plaintiff their promissory note for the balance, due, one day after this date, and drawing interest at 6 per cent, per annum from date, until paid; that thereafter, pn about April 3, 1905, the plaintiff recovered judgment, against the said Fitch & Willis upon .said notes; that thereafter, and before the commencement .of this action, an execution was duly issued against the said defendants, and duly returned unsatisfied; that during the latter part of September, 1901, the s-aid copartnership of Fitch & Willis, .and the individual members thereof, became, and ever since fhave been, insolvent; that while so- insolvent, in October, 1901, the said defendant Fitch & Willis caused to be organized a corporation known as the Fitch-Willis Company, of which corporation the said Fitch was chosen as president, and said Willis as treasurer, and- one Frank D. Dunn, the brother-in-law of said Willis, as secretary, and to which corporation the defendants Fitch & Willis transferred the proceeds of certain policies of insurance against fire, written upon the property of said firm of Fitch '& Willis, and upon which losses had accrued,- and which said insurance só received was the amount of $2,000; that said Fitch-Willis — 225 — Company received the proceeds of said insurance fire policy, to wit, $2,000, and mingled the same .with its assets, and used the same in its business; that said corporation did not pay to the said Fitch & Willis any consideration for the transfer to it of such insurance, but in October, 1901, issued in exchange therefor, to said Fitch & Willis, one-ithi'rd each, being 167 shares to each, of the capital stock of said .corporation — said capital stock being fixed at $5,000, consisting of 500 shares of the par value of $10 each share — that the only remaining stockholder of said corporation was said Dunn, as secretary, who contributed to the capital of the said corporation the sum of $1,000, and received in exchange therefor thje remaining capital stock of said corporation, 167 shares; that the only assets of said firm of Fitch & Willis existing aft the time of the organization of said Fitch-Willis Company, aside from the said proceeds of insurance, .was certain book accounts of which about $500 had been collected by the defendant Fitch, and applied to-his individual use, and about $200 collected by the defendant Willis, and applied tp his individual use; that there still remains of said accounts uncollected about $140; that shortly after the incorporation of said Fitch-Willis Company, the defendant Fitch pledged his stock therein, to wit, 167 shares, to his wife as security for the payment of an alleged indebtedness due to her from the said firm of Fitch & Willis in the amount of $750, and -she subsequently paid to said corporation upon said stock the further sum of about $450; that some time after the incorporation of said Fitch-Willis Company, the defendant Willis transferred his stock therein, 167 shares, to his wife in payment of an alleged indebtedness due her from the firm of Fitch & Willis in the amount of $750, and for an alleged additional indebtedness of $100 due her individually from him, and she subsequently paid, to the said corporation upon said stock, the further sum of $450; that said alleged indebtedness from the firm of Fitch & Willis to their wives was fraudulent and void; that thereafter, op. or about the month of May, 1902, said Helen Fitch, the wife, sold and assigned to the said Adelia Willis, wife of said Willis, and to said Fred D. Dunn her said stock in the Fitch-Willis Company for the sum of — 226 — $2,000 in cash received by her therefor; that said Fitch-Willis Company ’ (now known as the Willis-Dunn Company) took the asset's’ of the said firm of Fitch & Willis, including the proceeds of said fire insurance policy belonging to the firm of Fitch & Willis, with full notice and knowledge of the insolvency of said partnership, and of the unpaid indebtedness due the plaintiff and other creditors of said partnership, all of which was received by said corporation without a valuable consideration, except the issuance of the stock, as aforesaid; and that the said defendant Willis-Dunn Company has converted to its own use the proceeds of said insurance policies belonging to.the partnership of Fitch & Willis. Wherefore the plaintiff prays that the defendant Willis-Dunn Company be adjudged to apply to the payment of the amount of the judgment rendered in favor of the plaintiff and against the defendant Fitch & Willis, together with the costs of this action, the property, assets, dioses in action, and equitable interests, belonging to said firm of Fitch & Willis and assigned to said defendant, or held in trust by it for said firm, or in which said firm is in any manner benefited, and for judgment against the defendant Willis-Dunn Company for the ,sum of $1,033. Fo this complaint the defendant interposed a demurrer, on the ground that it did not state facts sufficient to constitute a cause of action in favor of the plaintiff and against the defendant Willi,s-Dunn Company, which demurrer was sustained by the court, and from which order sustaining such demurrer this appeal has been taken. This complaint must be sustained, if at all,, on one of two grounds: First, upon the theory that the original organization was fraudulent in fact; or, second, upon the theory that under the facts surrounding such organization the corporation was liable for the debts of the copartnership, entirely regardless of the question of fraudulent intent, even if all the parties acted in the best of g¡ood faith. On either theory any allegation of what was done by the ..stockholders with the corporate stock, subsequent to the organization of tfie corporation, is absolutely immaterial as a matter of pleading. I-t is true that, if .plaintiff should rely on the theory that the organization was with a fraudulent intent, and ,such fraudulent intent had been pleaded, undoubtedly upon trial plaintiff — 227 — would' be--allowed- to prove - fraudulent 'dea-lmgs-"betweOT'-th'ese'Tor-porátors ’ and their writes as- tending td support the Claim- 'of fráud-ulent intent in the original• transfer of-the $2,000' t&‘ the.corporation;' blit it'is clear that, if th'e- original incorporatio'h •’was ill every réspect bona’ fide, -nothing doné "thereafter in the way of transfer of stock, by stockholders,' could'be referred'to the .separate entitv, to wit, the corporation, arid render'it liable to'-the'creditors of the firm'; Therefore ahy allegation of what took place aftér the corporation was organized was'á-'mere pleadihg of evidence^ só Tal-as the issues of this casé are'concerned; while such allegations might' be very' material and essential in an action brought for the purpose of charging' the -shares of stock with 'the claims of 'creditors. Upon the theory that the situation at the time -.of organizing the corporation was such that, rfegar'dless of the intent of the parties, were they ever -so honest and upright; the creditors had an equitable right to (hold the corporation for 'this $2,000,' it seems perfectly clear that what-was'done by the stockholder’s after the Organization -of the -corporation is not- only immaterial and incompetent as a matter of pleading, but under no teircumstantes could become material'or competent as a matter of evidence upon trial, unless what happened after such organization should become material as matter of defense, as tending to show such-laches on the part of plaintiff, or such changed condition's in relation to the- corporation on the part of defendants, or some of them, as would deprive plaintiff of remedies -to which it would otherwise be entitled. The appellant in its brief contends for four propositions of law, the first one being that the transfer of the $2,000 insurance money to said corporation for shares of stock w-as fraudulent: First, because such transfer was accomplished with an actual intent to hinder and delay the creditors of .the copartnership of Fitch- & Willis Company; second, because made without consideration. The other three propositions contended for are all based upon the assumption that the first proposition can be established, so that, if it is wrong in the first proposition, the others need no consideration. It will be noted from a reading of the complaint that there is no allegation of .fraudulent intent on the part of any of the incorpo-rators of the .Fitch & Willis Company in incorporating said com — 228 — pany. There is no doubt but .thait, as 'a general proposition, it is absolutely necessary to allege the fraud when the same is relied upon, but there is a line ¡of authorities holding that an express allegation of fraud is unnecessary where the allegations of fact a're such that only one inference can be drawn .therefrom, namely, that the parties are inspired with an actual fraudulent intent ’in.doing the acts complained of. If then the proposition above stated, which is contended for by the appellant, is to be sustained on the first grounds stated, it must be because the facts alleged show conclusively the fraudulent intent of the organizers of the corporation. We think the following from .the case of Kingman & Co. v. Mowry, 182 Ill. 256, 55 N. E. 330, expresses the .correct view: “The contention of appehant is, the transfer by the debtor of his property to a 'Corporation necessarily hinders and delays the creditor in the-collection of his debts, and is in all instances a fraud. Adjudged cases are cited in support of this. We have examined these cases; and, while such -transfers are condemned 'in the instances then under consideration, we do not uniflerstan-d it to- be deduced from them that it is a fixed rule of-law .that the formation of such a corporation, and the .conveyance of all his property to- the corporation, though -made in actual good faith, is conclusively presumed to be fraudulent as a matter of law.” In the case of Albertoli v. Branham, 80 Cal. 631, 22 Pac. 404, is the following statement, which seems to us directly applicable to the pleading under consideration; “The 'only allegation of fact tending to show knowledge on the part of the plaintiff [Fitch & Willis] that the conveyance was for -the purpose of defrauding1 creditors was that he knew at the time that his grantor was insolvent. This was not sufficient, as there is no reason why an insolvent debtor may not sell his property for full value.” We think, therefore, that the mere .allegation that Fitch & Willis, while insolvent, each received $1,000 of the.-insurance money, and paid the same in with a like amount contributed by Dunn, and organized a corporation, each taking a one-third of the stock of such corporation, in n'o manner carries with it a necessary implication of a fraudulent intent upon their part to hinder and delay the creditors of Fitch & Willis, and we cannot see wherein such organization of the corporation need, as a matter — 229 — of fact, necessarily in the least hinder or delay creditors, except to the extent that an execution might not be as speedily satisfied through a levy on corporate stock as through a levy on cash; but there certainly is n'o rule of law forbidding a person to change his propeity from one kind to another, if done honestly, merely because 'it may he a little more inconvenient for purposes • of levy and sale. The appellant relies upon the cases of First National Bank v. Trebein Co., 59 Ohio St. 316, 52 N. E. 834, Benton v. Minneapolis Co., 73 Minn. 498, 76 N. W. 266, and Metcalf v. Arnold, 110 Ala. 180, 20 South. 301. It will be found, however, that in all of these cases there was an express allegation of fraudulent intent, and what .the courts say therein simply pertains to the weight of the facts given as going to establish a fraudulent intent alleged, and we think an examination of these cases will show that they really hinge upon another proposition, or at least largely so, namely, that the new -corporation organized was in' fact but a mere successor of the former corporation or firm. A long line of decisions will be found wherein it is held that, when a person, firm, or corporation shall have reorganized and continued its or their business under the form of a corppration, under such. circumstances as show-such corporation to be nothing more nor less than a continuation of the former business, either because there is absolutely no change-in the personnel of the ownership, nor in the kind of business carried on, or, if. there is any change in the personnel, it appears that the additional parties were such in name only, really deriving their interests from the prior concern, then, the new corporation is but a -successor of the former -concern, and liable, as such, for its debts. If will be found, however, in this class of oases that assets of the corporation were practically identical with those -of the concern it succeeded; but we have been unable to find a case at all parallel to this, where it has been held that a creditor could hold a corporation upon the theory that it was the successor of so-me prior concern.. Cases'"-analogous in some respects are to be found, but it must be remembered that, if we treaf this complaint as an attempt to plead a cause of action upon this theory, the most that it alleges is that the members of a partnership, holding cash derived from — 230 — the burning of .their partnership property, and being in faqt insolvent, without any bad faith or fraud on their part, put this money into an entirely, new and different enterprise,., by investing it in the organization of a corporation In which a third party, knowing the above facts, puts in a like amount.of cash;, each party taking his pro rata share therefor. As was well said in the case of Austin v. Tecumseh National Bank, 49 Neb. 412, 68 N. W. 628, 35 L. R. A. 444, 59 Am. St. Rep. 543: “In the absence of the special agreement a newly organized; corporation is not answerable for debts of an old corporation or firm to whose business and property it has succeeded, unless it, affirmatively appears from the pleadings and proofs that-the,.transfer of the property,and,franchise, amounts to a fraud, or the circumstances are such as to warrant a finding that it is a mere continuation of the old corporation under a different name.”. We. are,therefore satisfied that there is nothing in the complaint herein which- shows,- either ,the incorporation of a company with an actual intent to hinder and delay the creditors of the old copartnership, or the organization of a corporation which became the successor of such copartnership. The appellant contends that, the transfer of this, money for the stock was void, because made without consideration. In support thereof they pite several, authorities,, among them- being 2 Cook on Corporations, § 673, p. 1587, wherein it is held: “It is also .a principle of law that a corporation buying all the property of another corporation, and paying therefor in stock of the former corporation issued to the stockholders of .the latter corporation, must either pay the obligations of the latter- corporation, or have the property sold to pay such obligations.” This Is the proposition decided also in the cases.-cited by appellant, they all being cases where a.new corporation had .taken the property ,of an old one; and,, where the new cor-por.ation had either assumed the indebtedness of--the old corporation, or, knowing of the-debts of-the old corporation, yet, regardless of the rights of the creditors of such old corporation, the -new corporation, instead of issuing its stock to the -old corporation, issued the same directly to the stockholders of the old corporation, thus placing- the stock beyond the reach of the creditors of the old .corporation. It will readily be seen that — 231 — in these cases there was a lack of consideration going to the old corporation, but that in the case at bar there is nothing analogpus. There is no claim in the pleadings but that the 'stock of the Fitch & Willis Company was worth all that was given for it, and such .stock was issued directly to the persons paying the consideration therefor, so that there certainly is nothing in the contention that such stock was not a good consideration for the money paid into the corporation. We are therefore clearly of the opinion that the'learned trial court did nok err in sustaining the demurrer to the said.complaint, and the order sustaining such demurrer is affirmed.- CORSON, J., dissenting.