Sprague-Brimmer Manuf'g Co. v. M. J. Murphy Furnishing Goods Co.

Teeat, J., (orally.) Certain propositions have been argued in this case on demurrers as to the respective obligations of parties under the circumstances set forth in the bill, to-wit: The M. J. Murphy Furnishing Goods Company is one of those corporations tolerated by the laws of Missouri, whereby a man, in order to escape his obligations as a private individual, incorporates himself by bringing in just a [574] sufficient' number of others to comply numerically with the requirements of the statute, so that if the business is successful all will be well; but if it is unsuccessful, those dealing with the concern may have no remedies against the only real party who is transacting the business. That class of corporations has been characterized by Brothers Miller, McCrary, and Brewer very emphatically; but as long as it is the law, every man who deals with such a corporation does so with a full knowledge of the opportunities thereby presented to effect a result which may be thought inequitable. It appears in the case set forth in the bill that the M. J. Murphy Furnishing Goods Company was such an incorporation. Mr. Murphy’s father-in-law was Jesse Arnot, and his brother-in-law, Mr. Bradford. They became indorsers on the corporate paper. Mr. Gill held some of the paper of the company on which Mr. Murphy himself was indorser. Finding that the concern was, as alleged, “hopelessly insolvent,” Mr. Murphy, the president of the company, proceeded to the proper court, and confessed judgment in favor of certain banks that held paper on which his father-in-law, brother-in-law, and himself were indorsers, and execution was ordered by him forthwith. The property was sold, and, under the judicial proceedings in the state court, the sheriff was ordered to distribute the proceeds pro rata, which he did. Upon that condition of affairs, this bill is filed, by creditors at large, requiring all these banks that held the paper having-indorsers thereon, which received pro tanto on their claims, to refund the same, and also that the indorsers cause the same to be refunded in order that an equal and pro rata distribution may be made. Now, the first proposition which occurs to the court (but not argued) is this : If an indorser, not being a party to any fraud or fraudulent scheme, being entirely ignorant of it, if there was such, finds the paper on which he is indorser has been paid pro tanto, can he be made liable for the fund or any portion thereof so paid ? Ilis liability is only contingent. It is the duty of the maker to pay the debt. Suppose, for instance, as in this ease, one of, the parties, the Continental Bank, was tendered, as part payment on a note of $10,000, $6,000, and refused to accept it, what relationship would it occupy to the indorser? Could it refuse to accept that part payment, and hold the indorser for the whole amount? Those matters were not presented. Taking the allegations of the bill as true, which the court must do on demurrers, it is evident that this is one of those peculiar corporations which, in law, exist under the statutes of the state of Missouri, and the court has to treat it as the supreme court of the state treats it. When the president and directors of a company know that the corporation is hopelessly insolvent, and dispose of the assets not in accordance with the statutes, as trustees, whereby every one could pro rata share therein, each director becomes liable — in the language of the statutes, “jointly and severally liable to the parties thereto”— [575] for misappropriated assets. But how as to those who have taken payment on demands justly due them? This court cannot order those to be refunded, and charge the whole amount hack on the in-dorsers, who are only contingently liable, when the indorsers knew nothing about the transaction. That seems to be the theory of this bill, and it goes further than any case I can discover, and further than the ordinary rules of law permit. These parties who held the paper — -this corporation being the maker — have a right to what they have received. They have nothing to do with the alleged fraudulent scheme. But the underlying thought of the bill seems to be that they should refund, and make the indorsers pay the whole of the obligations. It is a novel theory. If I am an indorser on a gentleman’s paper, and the maker pays pro tanto, any of his schemes of fraud as to others is nothing to me. Suppose he paid it in entirety, whereby I am relieved as indorser. The primary obligation was the maker’s obligation, and mine contingent; and I cannot understand how it is that I, as indorsor, am hold liable, not only for my indorsement, but for the payment by the maker of his obligation. There are matters disclosed hero which might justify comment upon the manner in which the state law permits such corporations to operate, but the law of the state controls. In this case there seems to have been a sort of family arrangement, by which parties should indorse each other, and then at last confess judgment for everything on which they were indorsers, and leave the creditors at large unpaid. It so happens that the president of the company, Mr. Murphy, lias filed no demurrer. The condition of the case at this time is such that the bill stands as against him. Jesse Arnot, the father-in-law, was an indorsor and at the same time a director, thus falling under the provisions of the statute. He is personally liable for all misappropriated assets. Mr. Bradford, the brother-in-law, was an indorser on some of this paper, and it appears, suggestively, paid the balance due out of his own pocket, but he was not a director. His wife was a stockholder. The stock, however, is all gone, of course. Mr. Gill was a stockholder, and Mr. Murphy was indorser on his paper, and if was a contrivance by which Murphy, a son-in-law, might run a concern, and leave the creditors without any means of compensation except from corporate assets. If a man is guilty of the folly of dealing with such a concern he must take the consequences. The opinion of the court is simply this. The demurrer interposed by Mr. Gill, who held some of bhis paper indorsed by Murphy, is sustained. He is not bound to refund, as lie knew nothing about any fraudulent device, but simply received about 60 per cent, of what was due him. Obviously, ho is remitted to Murphy, as indorsor, for the balance, who appears from the allegations here to be utterly insolvent, and that is Mr. Gill’s loss. Mr. Bradford is an unfortunate in-dorser. About 60 per cent, was paid on his claim, and lie has paid the balance. The Continental Bank held some of this paper, and re [576] ceived only 60 per cent, pro tanto, and Mr. Bradford paid the other 40. Those three demurrers are sustained, viz., the demurrers of Gill, the Continental Bank, and Bradford. The demurrer of Jesse Arnot, the-only one remaining, is overruled, because, under the corporate law of this state, as he chose to lend himself to this sort of arrangement, he has to take his liabilities, under the law, for a misappropriation of assets. The supreme court of this state, and of a great many other states whose decisions I have examined, have reached this conclusion: that where like statutes prevail concerning dissolved corporations, the insolvency of the concern, known to the president and directors, works a practical dissolution, and they must take the statutory consequences, and that is the only safety'there is in regard to this peculiar class of corporations under the Missouri law.