Powers-Taylor Drug Co. v. Faulconer

POEEENBARGER, JUDGE 1 J. H. Jordan appeals from a decree of the circuit court of Summers County, bolding Mm liable to tbe creditors of E. F. Eaulconer in the sum of two thousand five hundred dollars, on the theory that he obtained the property of Eaulconer by a sale made to him by Eaulconer, with intent to hinder, delay and defraud the creditors of the latter. Eaulconer was the owner — 582 — of a drug store in Hinton, and Raving Recome indebted to the extent of insolvency, he sold his stock of goods and accounts to Jordan for the sum of one thousand and two hundred dollars in cash. In the store there was a soda fountain on which there was a lien for one hundred and fifty-six dollars and ten cents, and this was assumed by Jordan in addition to the one thousand and two hundred dollars. At the time of this sale, some of Faul-coner’s creditors had obtained judgments against him, amounting to about four hundred dollars, and acquired some execution liens upon the property. Jordan was the cashier of the Bank of Summers, and, at the time of Iris purchase, that institution held a note of seven hundred and fifty dollars, made by Faulconer and endorsed for his accommodation, it seems, by John W. Flanagan, J. M! Ayers, W.'II. Sawyers, II. Ewart and-James H. Miller, who are amply good for the amount. It was in part renewal of the one thousand dollar note which had been given some time before and reduced by payment. 'Out of the purchase money of the drug store, Jordan, by direction of Faul-coner, paid said note and the judgments and, after paying some other small amounts, gave Faulconer the balance, amounting to twenty-five dollars and ninety-two cents, part of which Faul-coner says he paid out on other debts. Immediately after this transaction, Jordan sold a one-lialf interest in the drug store to Harrison Gwinn and Wade Gwinn for one thousand and two' hundred and fifty dollars, who have, since early in March, 1900, conducted the business under the firm name of Gwinn Drug Store, that being the date of the alleged second sale. It is further shown that Jordan borrowed the money with, which he bought the store from the bank, and that in the second transaction Gwinn gave Jordan his note which was also discounted. Some time afterwards, the Powers-Taylor Drug Company and the Owens Minor Drug Company, corporations, brought a suit in the circuit court, under section 2 of chapter 74 of the Code, to have the sale and transactions had by Faul-coner, Jordan, the bank and the Gwinns declared a charge and' transfer within the meaning of said statute. The bill also attacked the sale as fraudulent in fact, and prayed that it he set aside as to; plaintiff’s debts; that the preference given to the hank be set aside; that the proceeds of sale he distributed pro rafa among the creditors who should unite in the suit and con — 583 — tribute to its cost; that a decree be entered against Jordan and the bank for the full amount of the goods, fixtures, etc., and that general relief be granted. The bill was answered by all the parties to the transaction, denying all charges of fraud and intent to hinder and delay the creditors of Paulconer as well as any attempt to create a preference, and also that Jordan, the bank and the‘Gwinns had any knowledge of any fraudulent intent on the part of Paulconer or of any of the parties, or intent on his part to prefer any of his eerditors. The answers were separate and Jordan averred that he purchased in good faith and without any notice of Paulconerb insolvency or of any fraudulent intent on his part. The decree held Jordan liable to- the creditors in the sum of twn 'thousand five hundred dollars, required him to pay to the Powers-Taylor Drug Company two hundred and four dollars and forty-five cents and to the Owens Minor Drug Company three hundred and forty-one dollars and seventy-two cents, with interest on both sums from the date of the decree, and the costs, and awarded executions against him, and referred the cause to a commissioner to ascertain the further indebtedness of Paulconer existent at the time of sale. In the appeal from the decree, Paulconer and the Gwinns joined. As stated in the opening sentence, the decree is predicated upon the finding of actual fraud upon creditors, perpetrated by the appellants or one of them, Paulconer, and knowingly participated in by the others. This finding is based upon evidence tending to show that Jordan and the Gwinns knew of the insolvency of Paulconer, and of his intent to defraud, hinder and delay his creditors, and that the inadequacy of the price paid by Jordan was such as to indicate fraud in the transaction. As strengthening this view, it is pointed out that he disposed of one-half of the property for almost as much as he paid for the whole of it. Another circumstance is that he purchased without having taken an invoice or ascertained, in any other way, just what he was buying. Another is that the accounts due and owing to Paulconer, the amount of which does not appear, were not examined and considered in the negotiation for the purchase, and nothing was said about them except that Jordan made a casual inquiry as to their probable amount, to which Pauldoner replied that they might amount — 584 — to one thousand dollars, one thousand five hundred dollars or two thousand dollars. Jordan says he inferred' from the response that Faulconer did not consider his accounts worth much. It also appears that, at the time of the sale, the Owens Minor Drug Company, and probably other creditors, were pressing Faulconer for payment and had been doing so for some days, and that Sawyers, one of the endorsers of-the note held-by the hank was aware of it, and there is evidence tending to show that he took part in the sale as an adviser of Faulconer, he being an attorney. James II. Miller, another one of the endorsers, at the instance of Jordan, ascertained the liens and judgments against Faulconer and had something to do- with the sale made by Jordan to'the Gwinns. Jordan testified that he proposed his purchase to Faulconer, who first declined to sell at the price offered and finally paid, hut afterwards returned .and said he had concluded to sell at that price and, as a reason therefor, stated that there were some judgments against him. According to the testimony of Faulconer and Jordan, this proposition was made with the view and purpose of buying and then reselling to Gwinn.; who had, before that time, asked Jordan to notify him if he found an opening for a drug business, Gwinn then having a son at Richmond engaged in the drug business. On the morning of the day before the proposition was made by Jordan to Faulconer, or by Faul-coner to Jordan, for they differ as to who made it, Sawyer had asked Jordan if he knew of anybody who wanted to buy a drug store. Jordan then telephoned inquiry to Gwinn, who- replied that he still wanted to- locate his son in the drug business. Then Jordan made his proposition and Faulconer accepted, as has been stated. Before reselling to Gwinn, Jordan invoiced the goods and it does not appear just what the invoice showed. Some time after the sale of the interest to: Gwinn, he consolidated his own drug store with the one owned by him and Jordan, and it appears that Faulconer remained in the store for a time as 'a clerk. Unless the alleged inadequacy of price is accepted as a controlling circumstance in the case, the evidence undoubtedly establishes that Jordan had no intent or purpose other than to prefer his creditors. What was done by Sawyer, Miller and the bank, conceding all that is claimed against them in the — 585 — way of participation, imports nothing more than a purpose and design to obtain payment of the note held by the bank and •endorsed by .some of the alleged actors. This could not be done by a purchase of the property to the exclusion of those creditors who held execution liens. Hence, it was necessary to its accomplishment that these creditors should be paid. It does not appear that, in attempting to do this, these endorsers and the bank endeavored to give Faulconer any personal advantage, nor that he endeavored to obtain such advantage. All of the purchase money, according to the evidence, with the possible exception of four or five dollars, went to the creditors and nothing was left to Faulconer. In its most unfavorable light, therefore, it was a conversion of the property into money by sale, and payment of the whole proceeds upon certain debts, leaving others unpaid and leaving the debtor entirely stripped of his property. At the very root and basis of the law of fraudulent conveyances lies a secret trust or advantage secured to the grantor by the conveyance, which puts upon the transaction the character of fraud, and conclusively establishes the intent on the part of the grantor to hinder and delay his creditors and prevent them from reaching his property, while he, in a secret manner and upon a secret trust, contrary to the purpose of Ms conveyance, holds on to his property or a part of it. All of this is clearly and effectually negatived and precluded by the evidence in this case. In thus disposing of his property at private sale and preferring certain of his creditors, contrary to the statute, though it be, Faulconer says he obtained more money for it than it would have brought at public sale. If so, he thereby obtained the advantage of reducing his indebtedness by sale of his property to a sum less than would have existed, after the sale of his property under executions and the application of its proceeds, but by so doing he whithheld no part of the property or its proceeds from his creditors. Granting that it was Ms purpose to obtain the highest price possible for his property and thus reduce his indebtedness as much as possible, it does not make the transaction fraudulent, although in effectuating tliis purpose he violated the statute against preference. Ho discussion of this proposition is necessary, for the principle is clearly announced in the well written opinion in Herold v. Barlow, 47 W. Va. 750, 755. — 586 — ' The alleged inadequacy of price is not sufficient to overthrow the intent and purpose which so clearly appears from all the evidence and circumstances. On the assumption that the value . of the-store and accounts was two thousand five hundred dollars, Jordan paid a little more than one-half of that value, hut it would he unsafe to stand upon that valuation, for it is by no means established by the evidence. ■ All that appears in support of that is Jordan’s claim that he sold a half interest for one thousand two hundred and fifty dollars, and that the invoice taken at that time is said to have amounted to two thous- and five hundred dollars. This is entitled to but little weight. While. Jordan says he retained an interest, he did so for only a short time. The G winns took all the property, and there is no intimation that Jordan received any thing but the note. On the whole, about one thousand two hundred dollars seems to have been the real amount of money involved in each transaction. There is no evidence directly indicating what the actual cash value of the stock of goods and accounts was, or what they would have brought at a sale. The notes and accounts are spoken of disparagingly and there is no evidence tending to show that they were of anjr considerable value. But the question here is not what the property was worth. It is whether Jordan or Gwinn was a bona* fide purchaser and the inadequacy of price is only a circumstance indicating maleo, fiches. It must be such inadequacy as makes it a badge of fraud, and that requires such inadequacy as to make the transaction unreasonable and unconscionable, not merely such as indicates that a good bargain was made by the purchaser. The latter is all that can be said of the inadequacy in this case. Hence, it is wholly insufficient to brand the sale as fraudulent. Having thus determined that tire sale is not infected with fraud in fact, so as to make it void as against creditors, it remains to inquire whether the transaction falls under the ban of the statute against preferences. For the appellants, it is insisted that the case is within the principle announced in Merchants & Co. v. Whitescarver, 47 W. Va. 361, where it is held that an insolvent debtor may sell his stock of merchandise to a disinterested party, take his notes in payment therefor, and assign the notes in payment of a debt, due to a homo fide creditor. If the facts disclosed by the evidence placed tbiR case — 587 — on the footing of the one just referred to, and made it necessary to pass upon the soundness of that decision, I should be inclined to question it. It enables an insolvent debtor to do indirectly what ho is forbidden to do directly by the plain and express language of the statute, namely, to turn his property over to a paid of his ccxditoxs to the exclusion of others. It is claimed that warrant for this is found in the last clause of section 2-of chapter 14 of the Code, which enables the insolvent debtor to transfer bonds, notes, securities or other evidences of debt 'in payment of, or as collateral security for, the payment of a bona fide debt, or to secure any indorser or surety, whether such a transfer is. made at the time such debt is contracted or endorsement made, or for the payment or security of a pre-existing debt. This cause neither expressly authorizes the sale or transfer of any property to be so applied nor the conversion of property into notes or money for such application. It deals with evidences of debt only. The first part of the section says that every transfer, which includes a sale, or charge made by an insolvent debtor attempting to prefer any creditor of such insolvent debtor or to secure such a creditor or any surety or endorser for a debt, to the exclusion or prejudice of any other creditor, shall be void as to such preference or security, but shall be taken to be for the benefit of all creditors of such debtor, and all the property so attempted to be transferred or charged shall be applied and paid pro raía upon all the debts owed by such debtor at the time such transfer or charge is made. This part of the section forbids the gift, sale, conveyance or assignment by an insolvent debtor of any of his property, whatever its form, so as to create a preference. But for the proviso at the end of the section, nothing could be so disposed of by him. How far does it qualify the general inhibition of acts by an insolvent debtor? Only to the extent that he may so dispose of paper representing indebtedness due to him. To hold that he may convert his property into money or notes and turn them over to his creditors, simply undermines the statute and virtually destroys it and defeats its whole purpose. It is no answer to this to say that the staute permits the. owner of property, although insolvent, to dispose of it by sale to a bona fide purchaser and pay the proceeds on his indebtedness in the ordinary course of business. A mercantile house, — 588 — open and running in the usual way, although the owner is insolvent, differs widely from such a house closed, with its owner insolvent, and having passed the title to some one else, and the proceeds of the sale of the entire business and property handed over to a part of the creditors to the exclusion of the others. Such a transaction is an act of insolvency. It is such a sale as the statute contemplates shall be taken for the benefit of all the creditors, and fixes upon the properly, or its proceeds, the character of a trust fund which may be followed up by the injured creditors in the manner prescribed by statute. If the purchaser has not paid all the purchase money, it is liable in his hands. Such creditors as have been paid- ought to be compelled to refund a proper proportion to tire end that tire purpose of the statute may be effectuated. The distinction adverted to between-sales made by an insolvent debtor in the ordinary course of business, and the sale of all his propertjq or such a portion of it as clearly shows a purpose to quit business, is plainly stated in the great case of Curtis v. Leavit, 15 N. Y., the opinions in which cover nearly three hundred pages. It was not the case of a sale to a bona fid& purchaser, but an encumbrance, in respect to which the question arose whether it was within the RFew York statute against fraudulent conveyances and preferences by moneyed corporations. One point of tire syllabus reads as follows: “But where an insolvent or failing debtor proposes to stop business and wind up his affairs, and for that purpose assigns the whole or the mass of his property, ho must devote it unconditionally to the payment of his debts. He can make no reservation in his own favor, until all ■his creditors are satisfied. The adjudged cases on the subject go upon this principle; but the principle has no application to transactions like those now in question.” The principle which Avas held to apply and govern that case was that where, “There is no evidence of any intent to delay or defraud creditors, but on the contrary the evidence proves a design and expectation of going on in business, and paying all debts as fast as they matured; and the trust deeds were made to raise money in order to enable the company thus to go on and pay its debts; * * *. The reservation in the deeds, for the benefit of the company, were appropriate to such a transaction, and in themselves were innocent and lawful.” Our statute is not so liberal in respect — 589 — to the charges upon the property of an insolvent debtor. On the fact of his insolvency, everything turns, and intent of the parties to the transaction by which a preference is given, is not taken into account. The word sale, as used in this statute, is not expressly limited to a stale to the creditor. Whether it is to he so limited, is matter of construction, and the construction of the statute ought to be such as to give it the effect intended by the legislature, so1 far as that intent is made plainly manifest by the statute. The force and effect of the statute ought not to be frittered away by refinement and technicality. Certainly not, by a mere play upon words. This statute is in derogation of the common law, it is true, and ought not to be so construed as to be carried beyond the purpose for which it was passed. But it ought to be liberally expounded for the accomplishment of that salutary purpose, the ratable distribution of the assets of an insolvent person among his creditors. That is nothing more than equity, equality. In this view, however, the majority of the court do not concur. But we hold that where the insolvent debtor, the purchaser and the preferred creditors all join in the design to give preference and execute that purpose by a sale of the property and payment of the proceeds thereof to certain creditors, to the exclusion of others, the preference so1 given is within the statute and will be set aside and the fund thus diverted will be apportioned among the preferred creditors and the unsecured creditors who attack the transaction within the time and in the manner prescribed by the statute. In the first case decided by this Court under the present statute, Wolf v. McGugin, 37 W. Va. 552, Judge Brannon, speaking for the Court, said: “Ho matter is it if Armstrong were not a creditor. The debts are preferred. As indicated above, my opinion is that, if a person purchase property of an insolvent debtor, not for cash, but agree as a part of the transaction to devote the consideration to pay certain creditors of the seller to the exclusion of others, that is an act falling under the bar of the statute, though such purchaser be not a creditor. He is a party to the very act prohibited —that of applying the insolvent’s estate to certain preferred creditors.” In point three of the syllabus, it is held that, “The form of the instrument or act, by which the preference forbid — 590 — den by the statute, whether by deed of trust, assignment or sale is accomplished, is not material, so that it results in such a preference, it being the design of the statute to prevent an insolvent debtor from devoting his property to work a preference among his creditors.” It may be said that this case does not fall within the express terms used in Wolf v. McGugin, but it is undoubtedly within the spirit of that decision as well as the design and spirit of the statute^ if the evidence establishes that the Bank of Summers, the preferred creditor, Jordan, the purchaser, and Faulconer, the insolvent debtor, performed their respective parts in this transaction with the purpose and design to give the preference. This is denied by all these parties. But what rule of evidence shall be applied ? May not the real character of the transaction be established by the relation and conduct of the parties and the surrounding circumstances, as in the case of fraudulent conveyances, despite the protestation of the parties to the contrary. I-Iere, the purchaser was the cashier of the bank. He says he resold to Gwinn who was the president of the bank. The purchase money was borrowed by Jordan from the bank and then he took Gwinn’s note for one thousand two hundred and fifty dollars and discounted that in the bank. It is to1 be noted here that the fifty dollars added in the Gwinn noté was only two dollars more than the discount on the two notes for four months at the rate of six per cent, which strongly indicates that Jordan was a mere instrument or agent in the transaction, Gwinn paying all the expenses. On the face of the matter, there is another significant indication, and that is that Jordan was only nominally a co-owner with Gwinn after the alleged resale to him. Shortly after this transaction, Gwinn consolidated with the Faulconcr Drug Store another drug store, and then Jordan ceased to be an interested party, but it does not appear, and is not intimated, that he ever received anything from Gwinn by way of payment for the property except the one one thousand two hundred and fifty dollar note1. It is also admitted that two of the endorsers on that note were officers and stockholders of the bank. Whether they were Sawyer and Miller, who took part in this transaction as attorneys, the one representing Faulconer, and the other Jordan, is not shown by the testimony, but the fact remains that officers and stockholders of the bank were endorsers and were benefited by this — 591 — preference, a circumstance rendering it probable that the bank may have been induced to do just what it is charged it did do. It appears also that the transaction was consummated at the bank and that Jordan did not allow the purchase money to go out of his hands, but paid it directly to the bank and the justice, in whose court the judgment against Eaulconer had been recovered, all by direction of Eaulconer. Both he and Jordan protest that this was not by prior agreement; and that the direction was given after the sale was consummated, but the transactions were all so nearly contemporaneous and so related and intertwined with. one another that they may be viewed as a single occurrence, and that what was actually done was the thing agreed to be done. If the bank stands upon the same footing as an individual would stand upon in a like transaction, it would undoubtedly be charged with having obtained a preference. Ordinarily, the proof required to charge a corporation differs from what is required in the case of an individual. Corporations act only through their agents, and the power of an agent is alwaj^s limited. The governing power, under the charter and by-laws, is the board of directors, and the president and other managing officers, though clothed with great power and responsibility, do not bind the corporation unless acting within the scope of their authority. Eor this reason, there has been conflict of opinion both here and in England as to whether a-corporation is liable for the fraud and false representations of its officers and agents. But it is now well settled in this country that they are if the officer or agent, when perpetrating the fraud or making a false representation, is acting within the general scope of his authority. 7 Am. & Eng. Ene. Law, (2d ed.) 830, 831. Hero, it is not a question of the proof of fraud, but it is analagous, for it is the question of ,an agreement of a corporation to obtain a preference contrary to the statute and the consummation of that agreement, and the actual appropriation to its own use of money which the statute declares shall belong to all the creditors. It certainly requires, not more, but less, proof, in such a case, than in an effort' to charge the corporation with fraud. It is certainly within the general scope of the powers of the president and cashier of a bank, for it relates to the collection of a debt, a thing which falls peculiarly within the power of the officers of a hank. “By — 592 — the weight of authority, when an officer of a corporation does an act which constitutes a fraud upon a third person, or upon another corporation, of which he is also an officer, the first mentioned corporation is chargeable with notice of the nature of the transaction, although the fraud is perpetrated for his own benefit, where he also represents the corporation in the transaction.” Clark on Corp. 2195. “The position of defendant’s counsel, that one of its executive officers may have proper notice of a fact which should control its action and concealing it allows its other officers to> act adverse to the interests of the party for whose benefit the notice enures and that such adverse action is legal, is not sound. * * * It was the duty of the officer receiving such notice to advise all other employes of such fact, and the bank would be none the less concluded by it if he failed to do so.” Getman v. Second National Bank, 23 Hun. 498, 503; Ingalls v. Morgan, 10 N. Y. 178; Weisser v. Denison, Id. 68; Bank v. Canal Co., 4 Paige 127; Railroad Co. v. Schuyler, 34 N. Y. 30. Ho good reason can be assigned for holding that the purpose and design imputed to the Bank of Summers and its participation, by its officers, in the transfer by which it obtained a preference, cannot be established against it by circumstantial evidence, and the circumstantial evidence bearing upon that question is abundantly sufficient. Hence, the circuit court should have compelled said bank to pay the plaintiffs their pro rata share of the seven hundred and fifty dollars which it received. For the reasons given, the decree complained of must be wholly reversed, and the cause remanded with directions to enter a proper decree, requiring the Bank of Summers to pay, out of said sum of seven hundred and fifty dollars, to tire plaintiffs, their pro ratal shares of the residue thereof, allowing the bank, of course, to participate with them pro rata in the distribution of - said fund. Reversed and Remanded.