Nappanee Canning Co. v. Reid, Murdoch & Co.

Dowling, C. J. — Action by the appellee Reid, Murdoch & Co. against the appellants, to recover from the Nappanee Canning Company damages for the breach of an alleged contract of said company to deliver to the said Reid, Murdoch & Co. 2,000 cases of tomatoes, and also to set aside, as fraudulent, a mortgage or deed of trust executed by the said Nappanee Canning Company to one Samuel Mosiman to secure the payment of divers debts owing by the said Nappanee Canning Company to its directors and to other persons and corporations, for all of which its directors were liable. A demurrer to the complaint was overruled. The appellants answered in denial, and filed a plea of non est factum as to the contract in writing set out in the complaint. The record does not show any submission or trial of the cause, but a special finding of facts, with conclusions of law thereon, is set out, to each of which conclusions the appellants separately excepted. Motions for a .venire de novo and for a new trial were overruled, and judgment was rendered against the Nappanee Canning Company for $1,100, and against all the appellants, vacating and setting aside the mortgage or deed of trust as to each director of the company, and sustaining it as to the other creditors, whose debts were secured by it. Various errors are assigned, but it will be necessary to consider only the second, which questions the correctness of each conclusion of law, and the fourth, which challenges the ruling of the court on the motion for a new trial. The facts found by the court which are material to the determination of the cause on this appeal are substantially as follows: On the 7th day of April, 1897, the Nappanee Canning Company was a manufacturing corporation organized under the laws of the State of Indiana, having its principal office at the town of Nappanee, in this State; and the appellee Reid, Murdoch & Co. was a corporation organized under the laws of Illinois, and doing business in Chicago. On said day the appellant the Nappanee Canning — 616 — Company sold and agreed to deliver to the appellee Reid, Murdoch & Co. 2,000 cases of tomatoes, such delivery to take place in lots of 1,000 cases, not later than September 15th and October 1, 1897, to be paid for in cash at sixty days, at the rate of sixty-two and one-half cents per dozen, delivered in Chicago, Illinois, less one and one-half per cent, on prompt delivery. The ETappanee Canning Company did not deliver the tomatoes. The market price advanced, and in consequence of the failure of the ETappanee Oanning Company to perform its agreement, the appellee Reid, Murdoch & Co. was compelled to purchase tomatoes elsewhere at prices exceeding the contract price by $1,100. On October 5, 1897, the ETappanee Canning Company was insolvent, and that fact was known to its directors, its assets amounting to $9,000, and its liabilities to $19,000, all of which were then past due. The directors of the ETappanee Canning Company were its co-appellants, Berlin, Uline, Coppes, Ilartman, Wysong, Whisler, Armey, Albin, and Emmert; Berlin being the president, and Uline the secretary, .treasurer, and general manager of the company. The directors were sureties, or were otherwise legally liable for all of the debts of the canning company, and, to protect themselves against loss, they caused a mortgage or deed of trust of all the property of the canning company, real and personal, to be executed by that corporation, by its president and secretary, to one Mosiman, as trustee, to secure (1) the expenses of the trust; (2) all debts due from the corporation for tomatoes bought in 1897; (3) the debts due to the Farmers & Traders Bank, of ETappanee, Indiana, evidenced by notes executed by the directors for moneys used for said company, amounting to* $1,712.10; (1) an account owing to Coppes Bros. & Zook; (5) - a note for $1,100 due to one Barber, and certain other debts due to divers persons and corporations,' aggregating $5,000; the claims classified as numbers one, two, and three, to be first paid in full. The trustee was to continue the business — 617 — until he could effect a sale of the property of the corporation. Samuel D. Ooppes and Iiarry E. Ooppes were partners trading under the name of Farmers & Traders Bank, and Ooppes' Bros. & Zook were stockholders of the Nappanee Canning Company. The corporation continued to do business for about two weeks after the mortgage or deed of trust was made, and was managed by Uline, its secretary, treasurer, and general manager. None of the beneficiaries of said mortgage or deed of trust, excepting Ooppes Bros. & Zook, and the directors of the corporation, knew that the said mortgage or deed of trust was to be made until after it was executed, and none of the creditors of the company, excepting those just named, was demanding payment of the claims against it. The financial condition of the canning company was better on October 5, 1897, than on April 7, 1897. The company had other contracts for tomatoes to the amount of at least 2,000 cases, which it refused to fill. The claims mentioned in said mortgage or deed of trust, and secured thereby, were just and bona 'fide debts of the said canning company, and said mortgage or deed of trust was executed by the authority of the entire board of directors of said corporation. The canning company immediately put Mosiman in possession of the property described in the mortgage or deed of trust, but without any expectation or intention that the factory would run, or business be done, more than two weeks. The acts of the directors in so securing to themselves, as indemnity, the property of the canning company were intended to make it impossible, and did make it impossible for the appellee Reid, Murdoch & Co. ever to enforce its contract, or to recover damages for the nonperformance thereof, and they meant, thereby to shield themselves from further liability. Samuel Mosiman paid nothing for the property mentioned in the mortgage or deed of trust. The- Nappanee Canning Company executed the said mortgage or deed of trust on October 5, 1897, for the express purpose of en-abling said — 618 — directors to indemnify themselves against all liability incurred by either of them in its behalf, and with the further intention of leaving no property out of which the appellee Reid, Murdoch & Co. could make any part of- its claim, if it had a claim, and for the further reason that after the making of the contract with the appellee Reid, Murdoch & Co., the price of tomatoes had advanced about thirty cents per dozen. The said contract with the appellee Reid, Murdoch & Co. was broken, and the mortgage or deed of trust was executed for the purpose of enabling the canning company an'd its directors to reap the benefit of the advance in the price of tomatoes. The execution of the mortgage or deed of trust was a fraud upon the appellee Reid, Murdoch & Co., and as to the said appellee it is void. Said mortgage or deed of trust is valid as to the mortgagees, Barber, Mittenthal, guardian, Blumberg, Searer, and the City Rational Bank of Goshen. Mosiman is not entitled to any compensation for his services as trustee under said mortgage or deed of trust. The Rappanee Canning Company is indebted to the appellee Reid, Murdoch & Co. in the sum of $1,100. The conclusions of law on the foregoing finding of facts are thus stated: “(1) That plaintiff is entitled to recover from the defendant, the Rappanee Canning Company, $1,100. (2) That the trust deed is void as to the following persons, namely: Francis E. Berlin, Barney Uline, Frank Coppes, Tobias Hartman, Henry Wysong, Jacob S. Whisler, Joseph S. Armey, John W. Albin, Ephraim Emmert, Coppes Bros. & Zook, and Farmers & Traders Bank. (3) That as to the City Rational Bank of Goshen, Indiana, Isaac Blumberg, and George Searer, and George Barber, M. II. Mittenthal, as guardian, said trust deed is valid, and plaintiff’s rights are subject thereto.” The important questions in the case are presented by the exception to the second conclusion of law, and by the motion for a :iew trial. Was the mortgage or deed of trust — 619 — invalid as to the appellants, who were directors of the Nappanee Canning Company? Does the evidence sustain the finding that the appellee Reid, Murdoch & Co. is entitled to recover $1,100 from the canning company ? In this State it is settled by a long course of decision that an embarrassed or insolvent debtor may lawfully prefer one or more of his creditors, by payment, mortgage, pledge, or deed to the exclusion of the others. No statute forbids such preferences; no rule of law is understood to prevent them. Ball v. Barnelt, 39 Ind. 53, and cases cited; Lowry v. Howard, 35 Ind. 170, 9 Am. Rep. 676; McCormick v. Smith, 127 Ind. 230; Carnahan v. Schwab, 127 Ind. 507; John Shillito Co. v. McConnell, 130 Ind. 41; Peed v. Elliott, 134 Ind. 536; Rockland Co. v. Summerville, 139 Ind. 695 ; Heiney v. Lontz, 147 Ind. 417; Snyder v. Jetton, 137 Ind. 449. The fact that the person whose debt is so preferred is a wife or other near relative does not affect the validity of such preference. Schaeffer v. Fithian, 17 Ind. 463; Kyger v. F. Hull Skirt Co., 34 Ind. 249; Sims v. Rickets, 35 Ind. 181, 9 Am. Rep. 679; Goff v. Rogers, 7l Ind. 459; Hogan v. Robinson, 94 Ind. 138; Hoes v. Boyer, 108 Ind. 494; Jones v. Snyder, 117 Ind. 229 ; Laird v. Davidson, 124 Ind. 412; Dillen v. Johnson, 132 Ind. 75 ; Fulp v. Beaver, 136 Ind. 319 ; Adams v. Curtis, 137 Ind. 175. In these cases the court seems to have proceeded upon the principle that if the debt was just and the transaction honest the preference would stand. So, too, it has been uniformly held that where a partnership exists, and the partners have possession of the partnership property, it may, notwithstanding the insolvency of the partnership, be applied by the partners to the payment or securing of the debts of the individuals composing the firm. M’Donald v. Beach, 2 Blackf. 55; Frank v. Peters, 9 Ind. 343; Schaeffer v. Fithian, 17 Ind. 463; Johnson v. McClary, 131 Ind. 105; Old Nat. Bank v. Heckman, 148 Ind. 490. — 620 — Manufacturing corporations, in this State, are governed by the same rules as individuals, and, although embarrassed or insolvent, may secure one or more creditors by mortgage, or otherwise, to the exclusion of all others, though equally meritorious. Smith v. Wells Mfg. Co., 148 Ind. 333; Henderson v. Indiana Trust Co., 143 Ind. 561; Levering v. Bimel, 146 Ind. 545, and authorities cited; Sanford, etc., Co. v. Howe, etc., Co., 157 U. S. 312, 15 Sup. Ct. 621, 39 L. Ed. 713. It is important to note at this point that this court is fully committed to the doctrine that an insolvent manufacturing corporation does not hold its property in trust for its creditors, or subject to any lien, legal or equitable, in their favor, in any other manner than such property is held by an insolvent individual debtor. First Nat. Bank v. Dovetail, etc., Co., 143 Ind. 534, 543; Henderson v. Indiana Trust Co., supra; Levering v. Bimel, supra; Smith v. Wells Mfg. Co., supra. It has also been held that an insolvent foreign corporation may mortgage its lands in this State to secure a tona fide antecedent debt, where such action is not prohibited by the statutes of the foreign state. Nathan v. Lee, 152 Ind. 232, 43 L. R. A. 820. And this court has expressly decided that the fact that the debt is due to a director, or other officer, or that such director or officer is surety for its payment, does not deprive the corporation, although insolvent, of the right to prefer it. Levering v. Bimel, 146 Ind. 545, 554, 555, 556. The rules which have been applied in such cases are exhaustively examined in Levering v. Bimel, supra, and the conclusions announced in that case are fortified by very full and satisfactory references to the leading text-books, and to the previous decisions of this court. That case covers the entire ground of the present controversy, excepting only the validity of a preference given to a director where the vote of the director himself is necessary to authorize the — 621 — execution of the mortgage or other instrument securing the debt. Counsel for appellees do not deny the soundness of the principles laid down in the foregoing cases. They say: “We are aware of the fact that our court is in line with the federal courts, and the better considered cases in the state courts, in not adhering to the doctrine of the so-called-trust-fund theory respecting the assets of insolvent corporations; and we admit that it is the settled law of Indiana that until the court, by its officers, takes charge of the property of an insolvent corporation, it has-the same power and control over its property as an individual would have over his property, under like circumstances.” But counsel say that “The sum and substance of our contention on this branch of the case is that the law will never permit a body of directors of an insolvent corporation to act as grantors for the corporation, in parceling out to themselves, as grantees, the assets of the corporation upon their unsecured claims, to the exclusion of other unsecured creditors. To permit this would he to violate the very spirit of equity. It is right that the directors of an insolvent corporation should have the power, so long as they retain dominion, to dispose of the assets, and prefer creditors to the same extent that ■a partnership or an individual can.” In deciding the question before us, it is to he borne in mind that a manufacturing corporation, under the statutes-of this State, is strictly a private association, organized and conducted for private purposes only, enjoying no special privileges, and owing no duty to the publid or to its creditors except such as is imposed by the terms of the statute under which it is formed, and by those general rules which apply to individuals engaged in business. Until its property passes into the custody of the law by seizure under proceedings in attachment, or by the appointment of an assignee, trustee, or receiver, the corporation may sell,.transfer, pledge, or mortgage its property in the same manner — 622 — and subject to the same restrictions only as apply to the case of a private person. Such property is in no respect held in trust for the creditors of the association. The law of this State gives them no lien or claim upon such property. They have no right to look to the corporation or its directors to protect their interests. They deal with it at arm’s length, and their attitude is antagonistic to the association. When asked to extend credit to it, all persons dealing with the corporation know that if it is, or thereafter becomes, insolvent, the whole of its property may be applied to pay or secure debts due to favored creditors, including officers and directors, and that the claims of all other creditors may be excluded and consequently lost. If, with this knowledge, credit is given, it can not be said that preferences subsequently conferred upon other creditors have violated any right which the law gave to the creditor whose claim was left unpaid and unsecured. Eo statute gives to-a creditor the right to demand an equal distribution of the assets of an insolvent private manufacturing corporation among its creditors. The maxim that, in case of insolvency, equality is equity has not the force of a statute requiring such a distribution. It is applicable only when the principles of equity are brought to bear upon the distribution of property lawfully in the custody of a court, where such court possesses the authority to make distribution upon that basis. The directors of a manufacturing corporation are not the agents or trustees of the creditors, but are simply and solely the representatives of thie stockholders and of the corporation! There is no sufficient legal reason why they should be denied the right of preference in the event that the corporation becomes insolvent. And even if the vote of the director himself is necessary to authorize the execution of the instrument creating the preference, no legal wrong is done to the other creditors where su'ch preference is given. The association is a legal entity distinct from the stockholders — 623 — and from the directors. The action of the directors isvfcheir action, and not their individual act. The vote of a majority is required to pass any resolution or order, but the action of such majority is not necessarily vitiated by the fact that one or more of the persons composing it is interested in the passage of the resolution. The duty of the directors is to the corporation and its stockholders, not to the creditors. If the corporation or its stockholders acquiesce in the dis- ■ position of the corporate assets made by the directors, and if such disposition is the payment of a just debt owing by the corporation, no matter to whom, it is difficult to perceive upon what legal ground a creditor can call such act in question. When it is understood that no trust exists in favor of creditors, that the directors are the agents of the stockholders and of the corporation only, and that they owe no special duty to the creditors of the company, it seems plain that, where the right to give preferences is recognized, the directors of an insolvent corporation may secure a bona fide' debt owing to one of their own number. As we have stated, it is established law in this State that an insolvent corporation may give preferences to the same extent and in like manner as an individual. In such transactions the corporation and its stockholders are the principal, the directors are their agents. If the vote of the director whose debt is secured is necessary to pass the resolution creating the preference, the only persons sustaining such relations to him as authorize them to object to his act are the stockholders and the corporation itself. The general rules governing the rights and duties of principal and agent apply in cases of this kind. The agent of a private person authorized to sell property may sell and convey to himself. Such sale is voidable, but not void. If his principal does not object within a reasonable time, or with full knowledge ratifies the sale, it will stand. We have been referred to no case in which it has been held that where such sale is made in good faith, and for a fair and sufficient, — 624 — consideration, the creditors of the principal can avoid it on the ground of a violation of duty by the agent. Fountain Coal Co. v. Phelps, 95 Ind. 271; Marsh v. Whitmore, 21 Wall. (U. S.) 178, 22 L. Ed. 482; Eastern Bank v. Taylor, 41 Ala. 93, 100. The rule is that where the principal affirms the act of an agent a stranger will not be permitted to controvert it. Scott v. Detroit, etc., Soc., 1 Doug. (Mich.) 119. “As the principal or parties interested may confirm the sale, a £mere stranger’ can not make the objection that the trustee was the purchaser; or that the sale was irregular.” Dillon, J., in Buell v. Buckingham & Co., 16 Iowa 284, 85 Am. Dec. 516. Two of the special findings of fact are in these words: “That the said directors were sureties or otherwise legally bound on all the indebtedness of the said canning company, and, desiring to secure themselves from such liability, they caused said canning company, at a meeting called for that purpose, to execute the following instrument in writing, to wit: [Here follows the mortgage or deed of trust to Mosiman.] That the claims mentioned in said trust deed were just and bona fide débts of said canning company, and said trust deed was executed by authority of'the entire board 'of directors of the said canning company.” Did the fact that the directors were sureties, or otherwise legally bound for their payment, put it out of the power of the board of director's to secure the payment of these debts ? The later and better authorities require us to answer this question in the negative. It was said in Levering v. Bimel, 146 Ind. 545, that the effect of the decisions referred to in the opinion was that an insolvent corporation is not to be denied the right to prefer a creditor or creditors, even where such preference inures to the benefit of its officers who are sureties upon the claims of the creditors preferred. And the court further declared that the broad doctrine that the officers of a corporation can not contract with it in their — 625 — own names is unreasonable, and that the fact that the officer of the corporation would be enabled by reason of his position to outstrip the other creditors in the race of diligence in collecting or securing the claims upon which they were liable was not sufficient to deprive the corporation of the right to prefer such claims. The courts .holding that an interested director can not vote, or even be counted for the purpose of making a quorum, seem to have proceeded entirely upon the theory that the director was a trustee for or an agent of the creditors, and therefore could not be permitted to advance his own interests at the expense of his principal or the cestui que trust. The directors are the agents and trustees of the corporation and its stockholders. As a director of an insolvent corporation is not a trustee for its creditors, and owes them no duty, where the debt to which preference is given is an honest and just debt of the corporation, the circumstance that the director is incidentally benefited by such preference, does not, in our opinion, absolutely disqualify him to take part in the proceedings of the directors, or to vote upon the proposition to secure such debt. If the corporation and the stockholders acquiesce in the action of the director creditors, outside creditors, who are strangers to the corporation, and have no lien or claim upon its property, can not impeach the transaction. In Schufeldt v. Smith, 131 Mo. 280, 31 S. W. 1039, 29 L. R. A. 830, 52 Am. St. 628, creditors of a corporation brought suit to set aside a deed of trust securing certain debts for which the directors were personally liable, two of which, amounting to $14,000, were evidenced by the notes of James Walsh, the president of the corporation, which the corporation had assumed and agreed to pay. The resolution authorizing the execution of the deed of trust was passed by three directors, of whom Walsh was one. The trial court held the deed of trust void, but its decision was re — 626 — versed on appeal, the supreme court of Missouri holding that, as the debts were just, the preference was valid. The facts upon which Butler v. Harrison Mining Co., 139 Mo. 467, 41 S. W. 234, 61 Am. St. 464, was decided, were as follows: The corporation had but three stockholders, who were also its sole directors. The company owed them $100,000, and four years after it ceased to he a going concern they caused all the property belonging to it to be transferred to themselves in payment of their debt. Suit was brought by a creditor to set aside the transfer, and the lower court held the deed void. But on appeal the supreme court said: “Can 'an insolvent corporation prefer its director creditors, in the disposition of its property, to the exclusion of the general non-director creditors, so long as the property of the corporation remains in its custody and possession, and the preference is made in good faith, to pay off and discharge honest obligations ?” The court answered its question in the affirmative, and sustained the deed. In Garrett v. Burlington Plow Co., 70 Iowa 697, 29 N. W. 395, 59 Am. Rep. 461, the court said that counsel “insist that the directors of an insolvent corporation can not take| from it security, by mortgage or other conveyance creating a lien upon its property, even though given in good faith,1 and without fraud in the transaction. We are not prepared, to admit this proposition. A creditor may accept payment or security from an insolvent debtor free from any clairnj of other creditors. A corporation may make payment of its debts, or give its property in security therefor, just as a natural person may do. If, therefore, a director holds the indebtedness of an insolvent corporation, he may take payment or security in a good faith and honest transaction. Ho reason can be given why a director who holds a valid debt against his corporation may not, though it be insolvent, in a fair and honest way, take its property in security»” In Planters Bank v. Whittle, 78 Va. 737, an insolvent corporation against which suits were pending for the ap — 627 — pointment of a receiver, for the purpose of securing certain notes on which the directors were accommodation indorsers, assigned as collateral security sundry bonds, constituting a valuable part of its assets. It was held that the assignment was valid if made in good faith. The supreme court of Missouri, in Foster v. Mullanphy, etc., Co., 92 Mo. 79, 4 S. W. 260, sustained the validity of a deed of trust given to secure debts owing to four of the directors, who voted for the resolution of the board authorizing the execution of the deed. The right of a corporation in embarrassed or failing circumstances to prefer debts due to its directors, or for which they are liable as indorsers, sureties, or otherwise, has been upheld in many other cases, among which the following may be cited: Warfield, etc., Co. v. Marshall County, etc., Co., 72 Iowa 666, 34 N. W. 467, 2 Am. St. 263; Bank of Montreal v. Potts Salt, etc., Co., 90 Mich. 345, 51 N. W. 512; Farmers, etc., Bank v. Wasson, 48 Iowa 336, 30 Am. Rep. 398; Central R., etc., Co. v. Claghorn, 1 Speers’ Eq. (S. C.) 545; Garrett v. Burlington Plow Co., 70 Iowa 697, 29 N. W. 395, 59 Am. Rep. 461; Reichwald v. Commercial Hotel Co., 106 Ill. 439; Sargent v. Webster, 13 Met. (Mass.) 497, 46 Am. Dec. 743. In the latter case it was said by Shaw, O. J.: “In the first place, it is very clear that the plaintiff, Sargent, though a member of the corporation, had a right to deal with them as with a person and body politic. He could take security or attach property, or take any other measure that another creditor could; and though he might be liable, in a qualified way, for the debts of the corporation, it was a special liability created by statute, and one which can be enforced only in the mode provided by statute.” Our conclusion, therefore, upon the reasons and authorities herein set out, is that the deed of trust executed by the Rappanee Canning Company to Mosiman, as trustee, to secure, among others, debts for which the directors of that — 628 — company were liable, was valid, and enforceable against the property described in it. The findings of the court to the effect that the execution of the trust deed rendered it impossible for the appellee Reid, Murdoch & Co. to recover and collect damages for the breach of their contract with the canning company; that the directors intended to shield themselves from further liability, to indemnify themselves against loss, and to ob-' tain the benefit of the advance in the price of the goods sold to the appellee; and that the trust deed is fraudulent as to each of the directors beneficially interested therein, — are wholly unimportant. The directors had a right to cause the deed of trust to be made to secure themselves against loss. As it included all the property of the company, its necessary effect was to render it impossible for the appellee to collect any claim held by it out of the property of the corporation. And no facts are found which establish fraud. Peters v. Bain, 133 U. S. 670, 10 Sup. Ct. 354, 33 L. Ed. 696. It was not a fraud for the directors to do what they had a legal right to do, nor was the deed rendered fraudulent by the consequences of loss to the appellee Reid, Murdoch & Co. which may have resulted from it. The facts found sustain the conclusion of the court that the appellee Reid, Murdoch & Co. was entitled to recover from the Nappanee Canning Company $1,100 as damages, and there was evidence to support the finding. The judgment that the appellee Reid, Murdoch & Co. recover from the Nappanee Canning Company $1,100, and costs in that behalf only,' is affirmed. The judgment that the mortgage or deed of trust, executed-by the Nappanee Canning Company to Mosiman, as trustee, is void as to Francis E. Berlin, Barney Uline, Frank Coppes, Tobias Hartman, Henry Wysong, Jacob H. Whisler, Joseph S. Armey, John W. Albin, Ephraim Emmert, Coppes Bros. & Co., and the Farmers & Traders Bank, is reversed, with — 629 — directions to the court to restate its second conclusion of law in accordance with this opinion, and to render judgment- in favor of the said appellants, sustaining said mortgage or deed of trust; and the judgment in favor of the said City National Bank of Goshen, Isaac Blumberg, George Searer, George Barber, M. II. Mittenthal, as guardian, sustaining said mortgage or deed of trust, is hereby affirmed.