Gullege v. Woods

Reed, J., delivered the opinion of the court. Appellant, trustee in bankruptcy of the estate of Durant Commercial Company, filed a bill in the chancery court to recover from appellee an amount,paid hy the commercial company in taking up a promissory note upon which the company was an indorser. The recovery in this ease is not based upon the payment being a preference under the bankruptcy law. The note was paid on February 23, 1911, and the adjudication in bankruptcy was not until October 4, 1911. It is averred in the bill that the commercial company “was a corporation chartered for the purpose of carrying on a mercantile*business, and without the necessary corporate authority to authorize it to hind itself either as an accommodation indorser, or as an indorser for pay of bills of exchange, or promissory notes or other evidence of debt.” The company’s charter was made an exhibit to the bill. Therein it was authorized “to buy and sell real estate and personal property, to conduct a general mercantile business, . . . to borrow and lend money, and to receive and execute securties therefor, . . . and generally to do everything necessary or incident to the purpose for which it is created, not inconsistent with the laws of the state of Mississippi.” To show the averments in the bill to the [240] effect that the' company was an accommodation indorser and did not have any interest in the note or its proceeds, and did not profit thereby, and that the act of the secretary in making the indorsement was ultra vires, we quote the second paragraph of the bill as follows: “That'on, to wit, January 2, 1906, defendant, W. O. Glines, became and was indebted to the defendant, M. T. Woods, in the sum of one thousand dollars, and thereupon executed his promissory note for one thousand dollars, payable to said M. T. Woods, payable one (1) year after date with interest at ten per cent, per annum from date'; and Wm. Schild, secretary of said Durant Commercial Company, without any authority so to do either from the directors or stockholders of said corporation, and without any corporate power in said corporation to so do even if it had authorized his said act, indorsed said note in the name of Durant Commercial Company .as. .an accommodation indorser purely, without said Durqnt Commercial Company in any wise profiting by, or having any interest in said note or the proceeds thereof; and complainant avers that said act of said Wm. Schild was and is ultra vires, and that it created no obligation on said Durant Commercial Company whatever.” It is further charged in the bill that the company became insolvent after the making of the note, and that it was so insolvent when the note was paid; that such payment “was a fraud on the rights of the creditors of said corporation, and was void as an illeg-al diversion of its funds, and rendered the defendant, M. T. Woods, a trustee thereof for the benefit of the creditors of said Durant Commercial Company.” .The note was made an exhibit to the bill. It is a simple promise of the maker to pay appellee the amount named with interest, and has on it the indorsement of the commercial company. It-also contains entries showing the payment of five annual installments of interest. A demurrer to the bill was interposed by appellee, and from the decree of the chan [241] cellor sustaining the the demurrer this appeal was granted to settle the principles of the case. The Durant Commercial Company was engaged in a mercantile business, with full authority under it charter to conduct such business and to borrow and lend money and receive and execute securities therefor. As a necessary incident to the carrying on of its business the company could execute and become a party to negotiable paper. This includes the indorsement of a note. The right to recover in this case is based upon the ultra vires act of the officer of the company in making the company an accommodation indorser on the note in favor of M. T. Woods. It is a general rule that a corporation cannot become an accommodation indorser. It is charged in the bill that the company became a party to the paper as an accommodation indorser. It will be noted that the contract in this case, which it is claimed is ineffective because ultra vires, has been fully executed by the payment of the note. This is not a suit to enforce the contract, to collect the note. It is not a suit by or between the original parties to the paper. In the usual course of business the amount of the note has been paid the holder thereof by one of the parties on the paper. This suit now is brought by, quoting from the bill, “the representative of the creditors.” Appellant is therefore acting for the creditors. It has been held: “That a creditor cannot attack a corporate transaction as ultra vires merely; he can assail the act only on the ground that its intent or effect is to fraudulently divert the corporate assets from his debt; he must charge fraud.” Thompson on Corporations (2d Ed.), par 2850; Force v. Age-Herald Co., 136 Ala. 271, 33 So. 866. The bill does not charge any fraud on the part of the company or fraudulent misapplication of the funds by its officers, other than the averment that the payment of the note by the company while insolvent was a fraud onothe [242] right of its creditors and an illegal diversion of its funds. The bill wholly fails to charge that M. T. Woods, the payee, had any knowledge at the time when he received the money in payment of the note that the company was insolvent. • This is not an action against the Durant Commercial Company, the party charged with practicing fraud. It is an action to collect back from the holder o± a note the amount paid him by one of the parties thereto in taking up the paper. It is not charged that Mr. Woods was'a party in the practicing of the fraud, or that he was actively engaged in the commission of such fraud. So far as the bill discloses, when the money was paid him and the contract became fully executed, he had no knowledge of the insolvency of the company. There is no charge that he knew of any act on the part of the company which “was a fraud on the rights of the creditors . . . and was void as an illegal diversion of its funds.” In this consideration we deem it sufficient to decide only that the bill in its averments is inadequate to show that Mr. Wood had knowledge of the facts which it is alleged by appellant constituted a fraud or a fraudulent diversion of the corporate assets. Affirmed.