Savage v. Miller

The opinion of the court was delivered by Garrison, J. The question to be decided upon this appeal is, whether the claims of certain creditors of the Johnson Railway Signal Company were lawfully preferred by a mortgage given by its directors to George W. Miller, trustee, in the month of January, 1895, at which time the corporation was insolvent. The bill, [438] which is filed by Edward I. Savage, receiver, attacks the mortgage as a preference upon the ground that George "W". Miller, to-whom it was made, was a director of the insolvent company. It may be well to note here that the statute of this state that, prior to the Revision of 1875, rendered void as against creditors the transfer of its property by any insolvent corporation, or by a corporation in contemplation of insolvency, was dropped by the legislature from the- Revision of that year (1875), but was re-enacted on the 5th day of March, 1895; which, it will be-observed, is after the giving of the present mortgage. During the twenty years this statute was off the books this court decided Wilkinson v. Bauerle, 14 Stew. Eq. 635 (1886); Vail v. Jameson, 14 Stew. Eq. 648 (1886); Bergen v. Porpoise Fishing Co., 15 Stew. Eq. 395 (1887), and Phillips v. Montgomery, 8 Dick. Ch. Rep. 203 (1895). The necessity for these decisions may, in the future, cause perplexity, unless the fact with respect to the statutory law be borne in mind. The mortgage in question having been given during this interval is to be tested by these authorities, especially by that last cited. The creditors preferred are five in number, whose claims may be thus epitomized: 1. Mrs. Georgina M. Johnson, a daughter of George W. Miller, to whom he had passed a note of the company for $2,500, made to its own order, and delivered to Miller for past services. 2. The Union County Bank, which had loaned to the corporation $5,000, for which it held its note, endorsed by George W. Miller and two other directors. 3. Georgina M. Johnson, who, as executrix of her husband, held the company’s note for $6,143, loaned to it by her husband. 4. A note for $29,205.53, -held by the same executrix for money due to her husband from the Hall Signal Company, that by an agreement between it and the present company before insolvency, was assumed by the latter upon a good consideration. 5. A note for $8,600 to Frederick. Kern ochan, administrator. Applying to these creditors the doctrine of Phillips v. Mont [439] gomery, the learned vice-chancellor who heard the cause set aside all of the claims with the single exception of that of Frederick Kernochan. In reaching this result in the case of the Union Bank, and of the two claims of Georgina M. Johnson, executrix, a meaning and an effect were given to the prior decision of this court that go beyond what it decided, and extend the doctrine of that case beyond the ground on which it rests. For clearly the decision of the lower court is, that any application of the property of an insolvent company to the payment of its debts made by its directors from personal motives, or the desire to benefit friends or kindred at the expense of the general creditors, is void. In effect and in terms the directors are treated as powerless to make a preference in favor of creditors to whom they are related by consanguinity, affection, or even professional relationship. This is practically to re-enact the statute against preferences. For every preference is the expression of a motive or desire on the part of the directors to favor some creditors over others — to put them, as the word implies, ahead in the race for assets. This the _ legislature may forbid, but this court may not. Vail v. Jameson, 14 Stew. Eq. 648. All that Phillips v. Montgomery decided was, that upon the insolvency of a corporation its directors became trustees for the creditors, and could not use their position of trust to obtain for their own debts an inordinate share of the assets. If a court of equity go further and place those whom the directors desire to prefer in the same category with themselves, the result would be that they may lawfully prefer those only whom they do not wish to benefit— which clearly was not the doctrine announced. Beyond what was held in Phillips v. Montgomery a purely judicial rule does not seem to admit of much extension, certainly not to the application made in the present case. Upon the same line of reasoning the contention is not tenable that the mortgage as a deed is void, because it secures, inter alia, a claim which the director is upon equitable consideration disentitled to have preferred. Applying what I conceive to be the correct rule to the several claims secured by this mortgage, the result is : [440] 1. The note of $2,500 given to Miller for his services, and by him passed to Mrs. Johnson, is set aside, not because she was his daughter, but because she was not in this regard a creditor of the company. The holding of the note did not make her one in equity. She knew that this note was to come into existence and for what purpose, and is thereby charged with knowing that it was invalid in the hands of the person from whom she got it; she gave no new consideration for it, and gave up no old security or right of action. She stands in the position of a volunteer, who knowingly seeks to take an inequitable share of the assets of an insolvent company. To the extent that the note entitles her to share with the unpreferred creditors it is unimpeachable. 2. The note of the Union Bank for money loaned to the company is sustained. Inasmuch, however, as the directors who are endorsers cannot obtain any benefit from this preference, the amount paid to the bank over and above what it would have received as a general creditor is recoverable from the endorsers in a suit to be brought by the receiver, if necessary. That is to say, the general creditors, through the receiver, are subrogated to the right of the bank against the endorsing directors to the extent that the bank profits by the preference. In Wilkinson v. Bauerle and Phillips v. Montgomery there were preferences sustained upon which directors were endorsers. It may be that the attention of the court was not called to that feature of those cases; but there is nothing that in principle defeats an otherwise lawful preference merely because it would be inequitable to extend the preference to all parties to the transaction. The cases were properly decided upon the idea that the equities work out as above indicated. 3. The note of $6,143 of Georgina M. Johnson, executrix, being a debt of the corporation, is sustained. 4. The note of the same for $29,205.53 is sustained for the same reason. 5. The claim of Frederick Kernochan, which was sustained by the opinion of the vice-chancellor, is in this awkward situation: The mortgage secured certain notes held by Frederick Kernochan as administrator of Walter O. Kernochan; the bill [441] alleged that Frederick Kernochan was not administrator and hence did not make him a party, but made Joseph H. Kernochan a party, as administrator, and took a decree pro confesso against him. Notwithstanding this, the final decree, after reciting that the vice-chancellor found that the Kernochan claim was good, sets aside the claims of all the defendants, which included Joseph H., and did not affect Frederick. The question of the proper trustee is one that may be cleared up in the court of chancery before its decree is finally settled. The record will be remitted to chancery with its present decree reversed. For reversal — The Chief-Justice, Depue, Dixon, Garrison, Gummere, Lippincott,Van Syckel, Adams, Bogert, Hendrickson, Nixon, Vredenburgh — 12. Far affirmance — Ludlow—1.