Ballin v. Merchants' Exchange Bank

WiNslow, J. A creditor of an insolvent corporation, knowing its insolvency, attaches its property, without collusion with the officers of the corporation. Afterwards, and while the attached property is in the hands of the officer, another creditor obtains judgment and commences an action under sec. 3216, R. S., to close up its affairs and sequestrate its property, making the attaching creditor and the officer parties to the suit. Can the attaching creditor be deprived of his lien upon the property attached, and be compelled to share equally with all other creditors in the property of the •corporation? This is the single question which is sharply presented in this case. The complaint charged a fraudulent and collusive attachment by the first class of creditors; and a preliminary order, based on this complaint, requiring the sheriff to surrender the ■ attached property to the receiver, was affirmed by this court. Ballin v. Loeb, 18 Wis. 404. The ultimate rights of the attaching creditors were not determined on that appeal, how- ■ ever; but it was held that they must come into this action for any share of the proceeds of the property, or for any remedy against it. The effect of that decision was simply ■to hold that the receiver was entitled to the possession of the property for the purpose of winding up the affairs of the corporation, and that all claims of liens upon the property must be litigated in this action. On the trial the plaintiffs abandoned all charges of collusion and fraud, and rested solely on the ground of the corporation being insolvent and that the attaching creditors had knowledge of such insolvency when they attached. And thus the question presents itself, [286] as first above stated. Upon this question, the plaintiffs rest-their case upon the so-called “trust-fund” doctrine, and take a broad ground that from the moment a trading corporation becomes insolvent its assets become a trust fund for the-benefit of its creditors, and that no creditor, knowing of its-insolvency, can obtain a valid lien by attachment of any of the property; and they argue that this doctrine has received the express or implied sanction of this court. It must be admitted that there are authorities in other-jurisdictions holding this doctrine to its full extent, but it certainly has not yet been held by this court that a creditor of an insolvent corporation may not obtain a valid lien by attaching its property in a bona fide attempt to collect his debt. The cases which are principally relied upon by the-plaintiffs as having sanctioned the trust-fund doctrine in this, court are First Nat. Bank v. Knowles, 67 Wis. 373; Haywood v. Lincoln L. Co. 64 Vis. 639; Ballin v. Loeb, 78 Wis. 404; Ford v. Plankinton Bank, 87 Vis. 363. A brief review of the questions actually decided in these cases will be useful. In Haywood v. Lincoln L. Co., it was held that directors of an insolvent corporation could not lawfully convey or mortgage the corporate property to themselves to secure their own claims against the corporation. In First Nat. Bank v. Knowles, it was held that a trust deed of an insolvent manufacturing corporation to secure bonds given to-certain creditors, some of whom were directors of the corporation, was void because made with the intent to kinder,, delay, and defraud other creditors and because it had the effect of a fraudulent preference of certain creditors to the exclusion of all others. In Ballin v. Loeb, it was held (as previously stated in this opinion) that an attaching creditor of an insolvent corporation, whose attachment was charged to have been fraudulent and collusive, must come into this-action and assert his rights to a lien upon the attached property. The same, in principle, was the holding in Ford v. [287] Plankinton Bank. In tbe last-named case it was charged that judgments by confession had been collusively and fraudulently obtained and levies made thereunder; and it was held that the property levied upon must go into the hands of the receiver, and that a creditor must seek and enforce-his lien, if any, in the sequestration action. On the other hand, in Garden City B. & T. Co. v. Geilfuss, 86 Wis. 612, it was distinctly held that where an insolvent corporation had made a valid assignment for the benefit of its creditors under the statute, such assignment was not superseded or affected by the appointment of a receiver in an action against the corporation under sec. 3216, R. S. We believe-the foregoing is a fair statement of the questions actually presented and decided in the cases named, and from this statement it seems very certain that the question here presented has not been foreclosed or decided by this court. The intangible body known to the law as a corporation must necessarily act by its agents, and these agents are its-managing officers. An agent who is handling the funds or property of his principal acts in a trust capacity, and is in a sense a trustee. The managing officers of the corporation are therefore at all times trustees for the corporation and its stockholders. It may also be correctly said that the corporate property in the hands of the receiver is a trust fund for the benefit of creditors, in the sense that it is to be-applied to the payment of the corporate creditors before it can be applied for the use or benefit of the stockholders. The plaintiff’s contention is broader than this, and is to the effect that when a corporation in fact becomes insolvent, though still doing business, the managing directors thereof become trustees of the corporate property, in the full and complete sense of the term, and can make no disposition of such property to one creditor to the exclusion of others, nor can a creditor acting in good faith acquire a valid lien upon the corporate property by attachment. As to the288 first branch of this proposition, to the effect that the directors cannot convey or mortgage the corporate property to a ■creditor, we are not now concerned, because that question does not arise in this case. The sole question here is whether .a diligent creditor, knowing of the corporate insolvency •and bringing his attachment proceedings in an honest effort to collect his debt, can acquire a valid lien upon the corporate property, which will be protected upon a subsequent sequestration action. Upon this question we have no hesitation in holding that such a creditor will acquire a valid lien. To hold otherwise is to hold, in effect, that a debt ■cannot be collected by ordinary processes of law from an insolvent corporation; that the corporation may buy and sell, make contracts, and transact its ordinary business, but that it enjoys a practical immunity from all the laws for the enforcement of its obligations, until some creditor sees fit to commence an action to wind up its affairs. In other words, it may buy property, but cannot be compelled by ordinary processes of law to pay for it; it may contract, but cannot be compelled to perform its contract; it is provided with a shield which becomes, to all intents and purposes, a .sword in its hands against the diligent creditor. Certainly no such immunity from the ordinary laws governing the rights of creditors is given it by statute. On the contrary, the statute provides (R. S. sec. 2729) that any creditor may proceed by attachment against the property of his debtor, M whether a natural person or corporation; ” and in vain do we look for any exception in the statute law, such as is claimed here. We shall not attempt to ingraft any such exception on the statute by decision. We see no good reason why a trading corporation, so long at least as it deals with others in its ordinary course of business, should not be subject to the ordinary remedies provided by the law for the collection of debts. Its property is certainly not trust property in the sense that it cannot be relied on by its [289] creditors to respond to the ordinary processes of the law-sued out in good faith. The following authorities fully bear out these views, and we cite them as sustaining the point now decided, without affirming or denying their correctness in other respects: White, P. & P. Mfg. Co. v. Henry B. Pettes Importing Co. 30 Fed. Rep. 864; Hospes v. N. W. Mfg. & C. Co. 48 Minn. 174; Fogg v. Blair, 133 U. S. 534; Hollins v. Brierfield C. & I. Co. 150 U. S. 371; Roseboom v. Whittaker, 132 Ill. 81. From these views it follows that the first' class of creditors Avere, upon the facts before the court, entitled to have their attachment liens adjudged valid, and to be first paid out of the proceeds of the attached property in the hands of the receiver, and hence that the order of the superior court must be reversed. Another question now arises, on the appeal of the third class of creditors. They claim, in the event of reversal, the case should be remanded for a new trial, in order that they may litigate the good faith of the attachments levied by the first class of creditors, which they allege in their answer Avere collusive and fraudulent. The difficulty is that they are not in a position to litigate the question. It is true they allege bad faith and collusion by the first class of creditors, but they only did so by way of answer to the plaintiffs’ complaint. They did not even allege the facts as a counterclaim, nor was the answer served on the defendants Avhose rights they seek to attack. They have neither formed nor attempted to form any issue with their codefendants. ■Such a question arising between defendants must undoubtedly be raised by an appropriate pleading which the eode-fendants whose rights are assailed have an opportunity to-answer. It would seem to be necessary to do this by cross-complaint, as under the old equity practice. Trester v. Sheboygan, 87 Wis. 496; 1 Van Santv. Eq. Prac. (2d ed.), 224. Certainly, no such issue having been tendered or raised by the third class of creditors, the first class of creditors are [290] not caEed upon to meet it. They are only required to meet; the plaintiffs’ claims, and the plaintiffs having abandoned all claims of fraud and collusion, as they had a perfect right, to do, that issue has disappeared from the ease so far as the-first class of creditors are concerned. As to preferences among creditors given by insolvent corporations, see note to Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co. 22 L. R. A. 802. — -Rep. By the Cowrt.— So much of the order appealed from as. provides for an equal distribution among creditors of aE. property in the hands of the receiver, and denies any preference, and enjoins further proceedings by the defendants,, is reversed, with costs, upon both appeals, and the remainder of the order is affirmed, and the action is remanded for further proceedings in accordance with law.