Hazelhurst Lumber Co. v. Carlisle Mfg. Co.

Opinion of the Court by Judge Hobson — Reversing. The Carlisle Manufacturing Company was in debt to the Hazelhurst Lumber Company in the sum of $814.67,'for which the lumber company held its note, dated November 3, 1906, and due one day after date. On the 30th day of September the plant of the Carlisle Manufacturing Company was destroyed by fire. The plant was insured in the sum of $2,600. The insurance was paid, and the money was deposited in the People’s Bank of Bardwell. On February 5, 1907, this suit was brought by the lumber company against the Carlisle Manufacturing Company and the bank, in which it was charged that the manufacturing company, in contemplation • of insolvency and with the design of preferring the bank to its other creditors, had in October, 1906, paid the bank out of the insurance, money a debt of $1,600 which it owed it; that the manufacturing company was insolvent; and that the payment operated as an assignment for the benefit of all its creditors. The appointment of a receiver was asked, and a settlement of the affairs of the Carlisle Manufacturing Company. The defendants — 5 — filed an answer, which traversed the allegations of the petition. On June 12, 1907, the plaintiff tendered an amended petition, which was filed on June 13th. In this amended petition it alleged that the bank held three notes for borrowed money executed by J. IL Lovelace, W. B. Vaughn, and S. P. Vaughn, that the money had been used in the business of the Carlisle Manufacturing Company, and that the debt was in fact its débt to the bank; the three notes aggregating $1,600 and being the same debt referred to in the original petition. The plaintiff further averred that if the debt was the individual debt of J. H. Lovelace and the two Vaughns, and not the debt of the Carlisle Manufacturing Company, that Lovelace and the two Vaughns were the sole owners of the stock in the company and in sole charge of the business, and that, if they had used the funds of the company in paying their own debt to the bank, it was a misapplication of the company’s funds, made with the knowledge of the bank when the company was insolvent and was known to be so, and was a wrongful conversion of the company’s funds. Lovelace and the two' Vaughns were made defendants to the petition, and filed a demurrer to it, which was not acted on. The bank filed an answer, in which it traversed the allegations of the amended petition, and, the case being submitted, the court entered a judgment dismissing the action. The plaintiff appeals. The proof shows that the three notes referred to were executed for money borrowed for the Carlisle Manufacturing Company by Lovelace and the two Vaughns, who were its sole stockholders and managing agents; that the bank declined to take the note of the corporation for the money, and required Lovelace and the two Vaughns to execute their individual — 6 — notes for it, and to give security, which they did. The notes were renewed several times, and were unpaid when the plant burned. When the first installment of the insurance money was paid, it was deposited in the bank to the credit of the manufacturing company, and one of the notes was then charged to the account; and when the other installment of the insurance money was collected it was deposited in like manner,- and the other note was then charged to the account. The manufacturing company was at this time undoubtedly insolvent, and this was known, or should have been known, to Lovelace and the two Vaughns. The bank had sufficient security to secure the notes. It then gave up the notes to Lovelace and the two Vaughns, and so far as the proof shows had no notice that the corporation was insolvent. It is earnestly insisted that the plaintiff’s petition states no cause of action because it does not state that the plaintiff does not know which of the two states of ease alleged in the amended petiton is true, and that it discloses no cause of action against Lovelace and the two Vaughns because it does not show positively that they paid their own debt with the corporation’s money, but only shows alternatively that they may have done so. This court has held that a petition is bad unless it states a cause of action against the defendant, and that the plaintiff can not allege in his petition two states of case, in onenf which the defendant is liable and the other he is not. But that is not this case. If the debt was the debt of the manufacturing company, and the $1,600 was paid upon the debt when it was insolvent to prefer the bank to its other creditors, a cause of action exists; and although the debt was not the debt of the corporation to the bank, still, if the funds of the corporation were transferred — 7 — by it, when insolvent, to tbe bank to pay the debt, and to prefer thus'some creditors to others, the statute applies. If the debt was the debt of Lovelace and the two Vaughns, and not the debt of the corporation, they were without authority to use the funds of the corporation which they represented to pay their own debt; and if the bank was a party to the misapplication a cause of action exists against it. Therefore, in either of the states of case set out in the petition, a cause of action is shown against the bank; and if there was a formal defect in the petition, in that it did not show that the plaintiff did not know which of the two states of facts was true, this was ground for a motion to elect or to make the petition more certain ; but it is not ground for a dismissal of the action. The defect in the petition was waived by answer to the merits. The authorities are to the effect that if the creditor elects to give credit to the agent, and not to the principal, when he has all the facts before him, he will not be allowed to hold the principal liable for the debt, although the principal got the benefit of the money. 1 Am. & Eng. Cyc. of Law, 1138; Story on Agency, section 447; 1 Lawson on Rights and Remedies, section 107. Under the proof the bank clearly elected to make Lovelace and the two Vaughns its debtors, and it had no debt against the corporation. The sum of the ease is, then, that the bank had a debt of $1,600 against Lovelace and the two Vaughns, they had a like debt against the corporation for the money advanced to it, and the corporation had in the bank $2,600 of its own money deposited to its credit. In this situation of affairs Lovelace and the two Vaughns checked out to the bank $1,600 of the corporation’s money in payment of their debt to the — 8 — bank, and thus paid the debt which, the corporation owed to them for the money advanced to it. By this transaction they gave this debt of the corporation a preference over its other debts, and the purpose of the transaction was to prefer this debt to the other debts of the corporation. The officers of a corporation hold its funds as trustees for its stockholders and creditors. It is a breach of trust for a trustee to pay his own debt out of the trust fund and leave other debts unpaid. In other words, he is not allowed to get an advantage for himself out of his trust position, and pay his own debt to the prejudice of other cfeditors. The money in the bank was deposited to the credit of the corporation. If this were an action against Lovelace and the two Vaughns for preferring themselves to the other creditors of the corporation, manifestly the case would be made out. They clearly took the money of the corporation and paid the corporation’s debt to them in preference to other debts. The bank got the money from them, but the money was not in fact paid to them. It was paid by them to the bank; the payment by them to the bank operating to cancel at the same time both their debt to the bank and the debt of the corporation to them. To allow such a circumlocution to defeat the operation of the statute would be to regard the form of a transaction, rather than its substance. The bank had furnished the money to the corporation on the personal credit of .the directors. The directors, when the corporation was insolvent, undertook to prefer this debt to the other debts of the corporation. The money being in the custody of .the bank, and never leaving it, and being paid directly from the corporation’s account to the bank, the transaction falls within the purview of the statute, which, among other — 9 — things, includes any device resorted to in contemplaplation of insolvency and with the design to prefer one creditor to another. The corporation paid the money to the bank. The corporation was the transferror. The bank was the transferee. The transfer being within the statute, the bank and the corporation were the only necessary parties defendant; and it was not material that the bank had not notice of the intent of the transferror to prefer. Fogarty v. Pace, 4 Ky. Law Rep. 999; Nock’s Exr. v. Goodloe, 5 Ky. Law Rep. 247; Thompson v. Heffner’s Exrs., 11 Bush 359; Mt. Sterling National Bank v. Priest, 111 Ky. 886, 64 S. W. 972, 23 Ky. Law Rep. 1252, 1315. The- intent of the transferror controls the transaction, and the bank will be remitted to the notes and securities it then held. Northern Bank v. Farmers’ Bank, 111 Ky. 350, 63 S. W. 604, 23 Ky. Law Rep. 696. Lovelace and the two-Vaughns are proper parties defendant; but the fact that they were not brought in until after six months is not material. The thing assailed is the transfer of the corporation’s assets by it to the bank. As Lovelace and the Vaughns appeared to have an interest in the matter, they were properly joined and given an opportunity to defend; but, when the suit is brought in time against the transferror and transferee it will not be defeated if it afterwards transpires that others have an interest in the transfer, making it proper that they should be made defendants. Judgment reversed, and cause remanded for further proceedings consistent herewith.