Folsom v. Detrick Fertilizer & Chemical Co.

Bryan, J., delivered the opinion of the Court. The appellees were severally creditors of the Wooldridge Fertilizer Company, a body politic and corporate. They filed a bill in equity containing allegations which impeached the validity of certain transactions between said corporation, — 65 — Robert A. Wooldridge and the partnership of B. F. Folsom & Co. In due course the Court issued an injunction prohibiting the selling or disposition of the property of the corporation, appointed receivers, and passed a decree annulling and setting aside a deed made by the corporation, and declaring certain notes of the corporation invalid as against the complainants. The facts as they appear to us are as follows : In the year eighteen hundred and ninety-one the Wooldridge Fertilizer Company was incorporated in the State of West Virginia. The incorporators were Edmund J. Folsom, Robert A. Woolridge, Edwin G. Mclnnes, William H. Edmunds and James Thurston; Folsom and Mclnnes being residents of Boston, and the others residents of Baltimore. The article of incorporation stated that the company should keep its principal office or place of business in the city of Baltimore, and that the corporators had subscribed the sum of five hundred dollars to the capital stock, and had paid in on said subscription fifty dollars, and that they desired to increase the capital to one hundred thousand dollars. As stated in the instrument of incorporation the corporate body was formed “ for the purpose of importing, buying, manufacturing and selling fertilizers, dealing in mining and working all kinds of fertilizing materials, and doing any and everything pertaining to the fertilizer business.” It appears to have done no business until January the ninth, eighteen hundred and ninety-three, when, according to the minutes of a meeting held on that day, it purchased from Robert A. Wooldridge, for the sum of two hundred and two thousand six hundred and nine dollars and four cents, all of his assets (with an exception of no consequence), together with the good will of his business, formulas, trademarks, &c., &c. This price was payable as follows: One hundred thousand dollars in stock of the company (which was the entire amount of its stock), seventy-eight thousand dollars in notes of the company bearing interest at six per cent, per annum, payable semi-annually, and the remainder by — 66 — assuming the debts of R. A. Wooldridge and Company to the amount of twenty-four thousand six hundred and nine dollars and four cents. The Fertilizer Company was at this time without any property whatsoever. The property transferred to it in addition to the good will, formulas, trademarks, and about two thousand dollars in money consisted of bills receivable, open accounts, certain warehouses and their fixtures, merchandise, &c., See., and a number of stocks aggregately of small value. The sum mentioned was largely in excess of the value of the property. The valuation put on the good will and trademarks was sixty thousand eight hundred and twenty-eight dollars and forty-six cents. The other property, exclusive of certain property on Smith’s wharf, was estimated by Wooldridge in his testimony as worth about ninety-two thousand dollars. At the time of this transaction Wooldridge was heavily burdened with debt. In his testimony he stated that he owed one hundred and thirty-two thousand dollars; of this sum about ninety-eight thousand dollars were due to B. F. Folsom & Co. He stated that he could not have paid fifty cents on the dollar. B. F. Folsom & Co. abated thirty thousand dollars from the debt due the firm; thus reducing it to sixty-eight thousand dollars, which included eight thousand dollars of acumulated interest. On the day that Wooldridge transferred the property to the fertilizer property, he delivered to Folsom & Co. sixty-eight thousand dollars of the notes. He also on the same day iriade an agreement in writing with B. F. Folsom & Co., and certain trustees representing their interest, whereby he transferred to the said trustees six hundred shares of the stock of the Fertilizer Company for the purpose of securing the payment of the notes, declaring in the instrument of agreement that all voting rights belonging to the stock should be vested in the trustees, and that they should comply with such instructions in regard to voting as might be given from time to time by Folsom & Co.; and that they should take such action as they should deem necessary or proper for the se — 67 — curity of the notes and the good management of the company; and that so long as the company should pay the principal and interest of the notes, as the same became due, the presidency and general management of the business of the company should be in the hands of Wooldridge, or in case of his death in the nominee of his executor or administrator (unless in the opinion of the trustees, or a majority of them, the security of the notes would probably be materially impaired thereby); and that in case one or more of the trustees should die or wish to be relieved from their duties, or become incapacitated to act, Wooldridge, or his legal representatives, Folsom & Co., and the remaining trustee or trustees, or a majority of them, might fill the vacancy or vacancies. On the twenty-eighth of December, eighteen hundred and ninety-three, the directors voted that the company should sell and convey to B. F. Folsom & Co., for fifteen thousand dollars, the warehouse and property at 217 and 219 Smith’s wharf (which it had acquired from Wooldridge), and that the purchase money should be applied to the notes becoming due from July 1st, eighteen hundred and ninety-eight, to January 1st, nineteen hundred and three, inclusive, and to the coupons due January 1st, nineteen hundred and four. These notes were held by Folsom & Co. On the same day, at a special meeting of the stockholders, this action of the directors was unanimously ratified and confirmed. The directors present at the meeting when the sale was ordered were Wooldridge, Rhodes and Mclnnes; the stockholders present at the special meeting of stockholders when the action of the directors was unanimously ratified were the same persons and no others. Three of the five original corporators were Wooldridge, Folsom, the appellant, and Mclnnes, his son-in-law. The directors of the company were Wooldridge, Rhodes, his counsel, Mclnnes (the appellant’s son-in-law), E. F. Folsom (his son), and Hoffman (his bookkeeper). At some time not particularly stated, Wooldridge delivered to T. Jelke, his father-in-law, ten thousand dollars of the — 68 — notes which he had received from the Fertilizer Company. The Fertilizer Company paid the debt of twenty-four thousand dollars and upwards, and several of the notes mentioned in the agreement for the purchase of the assets from Wooldridge; but was insolvent when the bill was filed in this case. It is very apparent that this corporation was chartered in pursuance of a scheme to relieve Wooldridge of an indebtedness which he was unable to pay, and to procure the payment to Folsom and Company of a debt which they were unable to collect from the person who owed it. All the proceedings from the inception of its existence were designed to accomplish this result. In August, eighteen hundred and ninety-one, it came into existence as a legal body with the capacities conferred on it by its charter. But it had no property whatever, and therefore no means of exercising its franchises. On the ninth day of January, eighteen hundred and ninety-three, the directors heretofore mentioned were elected, and on the same day the contract was made with Wooldridge for the purchase of his assets. The corporation had nothing with which to make payment except its unissued stock. The contract required it to pay more than two hundred thousand dollars for property, a considerable portion of which was of no use whatever in the prosecution of its business, and which in the aggregate was far less in value than the price stipulated to be paid for it. There may be and there probably is some inaccuracy in the estimate of values made in the testimony, and also in Wooldridge’s statement that he was unable to pay more than fifty per cent, of his indebtedness. But making due allowance for mistake in these particulars, it is still evident to us that there was great excess in the valuation of the property, and that Wooldridge was insolvent. We metion the exaggerated price and the insolvency because they illustrate the working of the scheme, which the incorporators of this company were endeavoring to carry out. The excessive price furnished the occasion and opportunity for the assumption of — 69 — more than a hundred thousand dollars of debts due to Folsom & Co. and others by Wooldridge. We speak of a purchase by the corporation, and its agreement to pay this large price. These transactions were technically and legally corporate acts ; but in reality and substance they were the acts of Wooldridge and Folsom & Co. bearing corporate form and having the corporate authority. They had entire control of the corporation, and managed it according to their own wishes. They necessarily knew that in the course of its business of buying, selling and manufacturing, it would contract debts ; and that when it obtained credit, it would be on the faith of its apparent resources, and with the belief and expectation on the part of creditors that its earnings would be applied to the payment of debts contracted in the course of its business. But by the purchase which they made for it in the corporate name and the debts which they caused it to assume they sought to devote these resources and earnings to the payment of debts due by one of themselves to the other, and to third persons. Now, any one may readily see that if this purpose had been made known to persons dealing with the corporation, it would never have obtained credit. The purpose contemplated great injustice to future creditors. It was nothing less than a defeat of their claims. It took from them a fund which, according to the regular course of business, they had a right to believe would be applied to the debts due them. And it took it to pay debts unjustly imposed on the corporation by persons who controlled its action and sacrificed the corporate interest for their own private benefit. In short, the plan of Wooldridge and Folsom & Co. was to use the property of the corporation to pay debts in which they themselves were interested, and to leave its future debts unpaid. The corporation is to be considered as a person sui juris having an independent existence, distinct from the individual stockholders. It becomes subject to legal responsibilities just as a natural person endued with judgment and volition. The stockholders are beneficially the owners of its property, and — 70 — they may control its action; but it is beyond their power to exempt it from any legal responsibility which it may incur. If a natural, person should enter into a combination such as we have described, the law would adjudge that the parties had associated together with intent to delay, hinder and defraud subsequent creditors. And such must be the judgment here. In the language of a learned Court, the Fertilizer Company might use the contract with Wooldridge “ to fence against (subsequent) creditors, and consequently it is fraudulent.” It cannot be questioned that a deed or contract made for the purpose of defeating future creditors is void as to them. Williams v. Banks, 11 Maryland, 251; Brinton v. Hook, 3 Maryland Chancery Decisions, 480; Moore v. Blondheim, 19 Maryland, 172. It may probably be (and we are not disposed to question it) that the persons who conducted these operations supposed that they had a right to deal with the corporate property as they did ; but if so they were badly advised. They inflicted a wrong on subsequent creditors and it must be redressed without any reference to any opinion which they had as to their rights. We agree with the Court below in setting aside the deed for the property on Smith’s wharf, and in holding that the notes must be postponed to the claims of subsequent creditors without notice. The Court had the same jurisdiction over the corporation which it would have had over a natural person under the circumstances. It did not deal in any way with its charter, or impair any of its rights thereunder, but pursued the ordinary course by issuing an injunction and appointing receivers, which is adopted when the rights of bona fide creditors are to be secured against fraudulent deeds or contracts. Wooldridge answers the bill of complaint in his official character as president of the Wooldridge Fertilizer Company. This could not be taken for anything else than the answer of the corporation. No exception was taken to it in the Court below; but it was treated .as the answer of the corporation, and the proceedings were conducted to a final de — 71 — cree without objection to it. If the answer had been excepted to, any objection to it might have been removed by amendment. (Decided January 6th, 1897). One of the partners of the firm of B. F. Folsom & Co. was dead when the bill was filed in this case, and the affairs of the partnership were conducted by the surviving partner. It has been urged that the heirs of the deceased partner ought to have been made parties to the suit, on the ground that they were interested in the real estate on Smith’s wharf. But it was acquired and held as partnership property and it must be treated as personalty in the view of a Court of Equity, as between the partners and parties prosecuting claims against the partnership. This was the opinion of Judge Story in Hoxie v. Carr, 1 Sumner, 183, and it was adopted by this Court in Goodburn v. Stevens, 5 Gill, 26. Edmund J. Folsom, the surviving partner, is administering the affairs of the partnership, and is the proper party against whom claims and demands adverse to it should be prosecuted. But even if the other partner were still alive a judgment or decree against one partner would bind the partnership property. Rhodes v. Amsink, 38 Maryland, 355; Johnston v. Mathews, 32 Maryland, 363. When the partnership is wound up and the assets are to be divided according to the rights of the partners and their representatives a different question will arise. We perceive no error in the decree of the Court below except in that portion of it which is made against Jelke, who was not a party to the suit. This is an error of which the appellant has no right to complain; but as the counsel for the appellees stated in open Court that it was inadvertently made, and consented that it should be corrected, we shall make the correction by striking out of the decree all reference to Jelke and affirm it as modified. Decree modijied and affirmed with costs.