Carton v. West Virginia Bridge & Const. Co.

DAYTON, District Judge (after stating the facts as above). Dong and earnest study of this record and! of the comprehensive and able briefs submitted by counsel upon both sides has compelled me to.the conclusions: First. That the agreements of April 25 and May 7, 1908, seeking to effectuate a re-exchange of the stocks, so that the West Virginia company might be freed from its union with the New Jersey-West Virginia one and have its property restored to its original stockholders, while enforceable as between the companies themselves, cannot be so enforced to the injury and loss of creditors of the New Jersey-West Virginia company, existing at the time these contracts were executed. Second. That the original stockholders of the West Virginia company, claiming to have gotten back their stock under such agreements, were not justified or authorized to convert such $160,700 of stock into $50,000 of bonds to be issued to themselves and secured by mortgage upon all the property of the company, either to the detriment of the company’s own creditors, or those of the New Jersey-West Virginia company, incurred while the two companies were joined to7 gether. It is true that the union of these companies was not such as to effect a legal consolidation, and that the separate organizations were maintained and the work undertaken, and the obligations, receipts, and disbursements of these companies were kept sepárate and apart upon their respective books, and it is for these reasons that I am of opinion that free from debt and as between themselves there existed no legal reason why they could not dissolve the union as contemplated by the agreements of April and May, 1907. On the other hand, it seems to me clear that creditors had no knowledge of the methods resorted to and of the internal management of these companies; that the New Jersey-West Virginia one was held out to the world as the owner of the properties of both; that it was in fact, so far as creditors could know, a consolidation of the two old companies, the operating, purchasing, ■ and contracting one for both plants; and that under such circumstances they had right to extend credit to this New Jersey-West [1013] Virginia company with the full expectation that the property of both companies would be held bound for the payment of debts. It is well settled that both stockholders and officers of corporations are in a sense trustees of the corporate effects, and must fulfill these quasi fiduciary obligations to creditors before they can look to their individual interests as such stockholders and officers. To permit, in the first place, the stockholders of these two companies to. effect what was to all appearances a legal consolidation through the increase of stock of one with which the stock of the other was purchased, the same man to become president and the controlling force, large and disastrous contracts to be taken, whereby the operating company is rendered insolvent and then allow the apparently absorbed company to resume its identity, take back its stock, pay only such debts as it saw fit to assume, and leave the other company bankrupt, would not, in my judgment, meet the obligation required by law of corporate stockholders. And, in the second place, to allow the stockholders of any corporation, so long as it has debts outstanding, to convert their stockholdings into bonds secured by mortgage- upon the property of the company, whereby its creditors would be excluded from payment of their debts, or hindered of delayed in their collection, cannot be justified by any principle of equity. AYhile this union of these companies wras not a legal consolidation, it was in effect like a partnership between individuals, and much the same rules should govern in the application of equity principles in adjusting here the rights of parties, especially those of creditors. The bankrupt act (Act July 1, 1898, c. 541, 30 Stat. 514 fU. S. Comp. St. 1901, p. 3418]) provides that in cases of partnerships, where bankruptcy ensues, that the net proceeds of the individual estate of each partner shall be applied to the payment of his personal debts, and only the surplus remaining can be applied to partnership debts, and, on the other hand, the net proceeds of partnership property shall be applied first to partnership debts and only the surplus to the individual debts of the partners. See In re Henderson (D. C.) 142 Fed. 588; Euclid Nat. Bk. v. Union Deposit Co., 149 Fed. 975, 79 C. C. A. 485. In this case, it may be a novel application of these principles governing partnerships between individuals to this union between these corporations, yet, I have not been able to see why they should not under general principles of equity be in effect made applicable. At the date of the union both corporations were indebted, large indebtedness was incurred by the two companies so united, for which, as I have herein set forth, in my judgment, both were liable. The New Jersey-West Virginia company is now in bankruptcy. It is true that when the union was to be dissolved by agreements of April-May, 1907, it was provided that the debts owing by the AVest Virginia company should be paid out of its “quick” assets by Peet, but at least one of these debts as set up in the petition of the Citizens’ Trust & Guaranty Company of AVest' AGrginia, alleged to be represented by judgment and execution lien, has not been paid, and perhaps others exist. Touching this judgment of the Citizens’ Trust & Guaranty Company of West Virginia, it is true its validity is denied by plaintiff in his answer to this company's petition and, that while ab [1014] stracts from the lien docket and copies of the execution and the levy are filed, no copy of the judgment itself, which alone can verify its existence, is filed. This is so clearly an oversight that it will he in the interest of justice allowed to be corrected, for the debt in the evidence filed in the main cause is recognized and admitted. Its existence was admitted in the re-exchange agreements. It s.eems to me under all the circumstances that the plaintiff Carton, trustee, is entitled to relief, and that this relief shall in effect be (a) the holding of the agreements of April-May, 1907, void as to creditors of the ■ New Jersey-West Virginia company now existing, incurred while the two companies were joined; (b) to the holding that the execution of the $50,000 bonds and of the deed of trust to secure the'same was null and void as to creditors of the West Virginia company itself and as to creditors of the New Jersey-West Virginia company, whose debts were incurred while the companies were joined; (c) to having the debts of the West Virginia company itself ascertained and also an ascertainment of the debts of thg New Jersey-West Virginia company, incurred while the two companies were joined; and (d) to having a sale made of the property of the West Virginia company, and out of the proteeds arising therefrom, payment, first, of the costs of this suit and of the expenses of sale, second, of the costs of' the receivership, including the certificates hereinbefore authorized, third, of the debts of the West Virginia company itself, and, fourth, of the application of surplus to debts of the New Jersey-West Virginia company, incurred while the two companies were united. If counsel can agree as to the several items of these debts and payments to be made, decree of sale can at once be. entered, otherwise reference to a master will be necessary.