Case ID: ny-super-ct_38/html/0506-01.html
Source: Caselaw Access Project
Author: {"author": "By the Court.—Monell, Ch. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

EDWARD C. GRAHAM, Plaintiff and Appellant, v. ELLA N. HOY, Executrix, &c., Impleaded, &c., Defendant and Respondent.
    I. CORPORATIONS.
    J. StoOK-HOLDEBS, WHEN TBUSTEBS EOB CBEDITOBS OB COMPANY.
    
      a. When they are in the actual possession, and have under their immediate control the property of the corporation, they are-trustees of its creditors in respect to such property.
    
      a. Therefore, they are liable for any act done by them in disposing of such property to the injury of the creditors.
    
    1. That the disposition of the property, e. g., a sale as-between the stockholders and the vendee, was perfectly valid, and passed to the vendee a good title, not only as-against such stockholders and the company, but also-as against the creditors of the company, does not affect such liability of the stockholders.
    H. PARTIES DEPENDENT TO ACTION IN EQUITY.
    1. TbUST, BBEACH OB-ACTION BOB, BY CESTUI- QUE-TBUST.
    The trustees who have committed the breach are jointly and severally liable.
    
      Before Mobell, Ch. J., and Cubtis, J.
    
      Decided January 11, 1875.
    The plaintiff may join all as defendants, or may proceed against one only, or against as many of them as he sees fit, and may join the representatives of a deceased trustee, or of deceased trustees, with such of che surviving co-trustees as he proceeds against.
    
      a. Bulb at law stated.
    Appeal from judgment sustaining a demurrer to the complaint.
    The complaint alleges that the defendant, Ella 1ST. Hoy, is the executrix of James Hoy, deceased.
    That the Frostburgh Coal Company was a corporation created by the State of Maryland.
    That one Frost recovered a judgment in the courts of Maryland, against said company, upon which an -execution was issued and returned unsatisfied, and which judgment has been assigned to the plaintiff.
    It is then alleged that the defendants (except Ella M. Hoy), and James Hoy, now deceased, made an instrument in writing under their hands and seals, as follows:
    “ Whereas, the whole capital stock of the Frost-burgh Coal Company is now owned by the several persons following in the number -¡ May'íefw6í". } of shares set opposite to their respective names, viz. :
    Mames. Mo. of Shabes.
    Livermore, Clews & Co....... ..... 2,373
    Moses B. Bramhall........... ...... 1,500
    do. ........... ...... 275
    David Stewart............... ...... 302
    James Hoy................. ...... 300
    Henry Delafield.............. ..... 200
    4,950
    Stamp 25 cts. May 16, 1864.
    
      “And whereas the said Frostburgh Coal Company, by the direction of the said stockholders, have subscribed for twelve thousand shares of the capital stock of the-Consolidation Coal Company of Maryland, and in payment therefor, have by an indenture of conveyance, bearing even date herewith, granted and conveyed to-the Consolidation Coal Company, all the estate, real and personal, of the Frostburgh Coal Company, excepting the cash and cash assets, and debts belonging to said company, owned prior to May 1,1864, and the coal received prior to that day :
    “And whereas, for the purpose of collecting and securing the property and assets so reserved, and for the winding up of the affairs of the said company, for the benefit of the stockholders and creditors thereof, it is deemed advisable to continue the rights and interests of the present stockholders in the several proportions above specified :
    “And whereas it has been agreed between said stockholders and the said Consolidation Coal Company,, that all the stock of the said Frostburgh Coal Company shall be assigned and transferred to the Consolidation Coal Company, when the present stockholders shall have realized the assets of the Frostburgh Coal Company, and the debts of said company shall have been fully paid and satisfied :
    “Now, therefore, we, the undersigned, being the-several stockholders of the Frostburgh Coal Company, above named, in consideration of the premises, and of' the sum of one dollar to each of us in hand paid, doll ereby covenant and -agree to and with the Consolidation Coal Company, that we will transfer and assign, unto the said Consolidation Coal Company, the whole-capital stock of the Frostburgh Coal Company, whenever and as soon as the assets and property of such last, named company, and the stock of the Consolidation Coal Company, which the Frostburgh Coal Company is entitled to receive by virtue of their subscription, as-aforesaid, shall have been distributed among the stockholders of the Frostburgh Coal Company, and the debts-of said company shall have been paid in full.
    “ Witness our hands and seals, this day of May,, one thousand eight hundred and sixty-four.
    “LIVERMORE, CLEWS & CO.,.[l. s.]
    “M. B. BRAMHALL, [l. s.]
    “D. STEWART, [l. s.]
    “ JAMES HOT, [l. s.]
    “ HEFTRY DEL AFIELD, [l. s.j ”
    It is then alleged that said defendants (except Ella FT. Hoy) and James Hoy, did become possessed, in the city of Hew York, of all the personal estate, all the cash, and cash assets and debts belonging to said Frost-burgh Coal Company, to a large amount, and more than was required to pay all the debts of the company, for the benefit of the creditors of the company, and became trustees of such funds, assets, and property, for the benefit of the creditors of the company, but that, in violation of their duty, they transferred a portion of said property, money, and assets to the Consolidation Coal Company, and converted á portion of them to their own uses, without paying the debts of the said Frostburgh Coal Company. And that since such transfer of the property, the said company has suspended its ordinary business, and is dissolved ; and the said defendants (except Ella H. Hoy), and James Hoy, had the management and direction of its affairs at the time of such dissolution.
    The relief prayed for, is,
    I. That the defendants account, under direction of the court, for the property received by them, as aforenamed.
    II. For the payment to him of nine thousand four hundred and sixty-eight dollars, and two cents, and. eight dollars and twenty-five cents costs, with interest thereon from the 30th day of April, 1867, and costs, out of said funds, or out of any funds which they have, ■or may collect.
    III. That the defendants proceed without delay to discharge the trusts devolved upon them in the premises.
    IV. That the plaintiff may have such further and other relief, both by final judgment and interlocutory order, as he may in equity be entitled to, and as to the court shall seem just.
    The defendant, Ella N. Hoy, who, as executrix of the last will of James Hoy, deceased, was made a party, demurred to the complaint, assigning the following objections to it:
    1. It does not state the facts sufficient to constitute a cause of action.
    2. It does not show that the defendant joined in or executed the covenant of May, 1864, therein mentioned.
    3. It shows that the other defendants are the surviving covenanters in said covenant.
    4. It shows that the covenanters were joint contractors and sureties.
    5. This defendant, as executrix of James Hoy, is not liable to be sued in this action jointly with the other defendants on or by reason of said covenant.
    6. The death of James Hoy, one of the joint sureties in said covenant, took away all cause of action ■thereon.
    7. The complaint does not state that this defendant became possessed of the personal estate, cash, cash assets or debts therein mentioned, or became trustee thereof, or came under any duty to pay debts, or the plaintiff’s claim, or violated any duty, or committed any fraud, or transferred any portion of said property, ■money, or assets, or converted any part thereof to her own use.
    
      8. The complaint shows that the other defendants -charged with the matters last above referred to, have survived said James Hoy.
    9. This defendant, as executrix of James Hoy, is not liable to be sued in this action jointly with the other defendants for or by reason of any of said matters last above mentioned, and that the said other defendants are the surviving trustees.
    10. The complaint shows that others than the plaintiff are creditors of the Frostburgh Coal Company, and interested in said covenant and paid trust, and it shows no reason why they are not joined as plaintiff.
    11. Said other creditors are necessary parties to an action brought upon or for the matter sued upon in this action, and there is a defect of parties in this,—that said other creditors are not made plaintiffs or defendants.
    The demurrer was sustained at special term, and judgment entered in favor of the defendant, Ella H. Hoy.
    The plaintiff appealed.
    
      John Hewitt, attorney, and of counsel for appellant,
    urged:—
    I. This is an equitable action to charge the defendants, as trustees of the stock and assets of the Frost-burgh Coal Company, with the payment of a debt of that company (Tinkham v. Borst, 31 Barb., 407; Thornton v. St Paul & Ch. R. R. Co., 45 How., 416 ; Laws of 1873, ch. 239).
    II. The capital stock and assets of a corporation ■are a trust fund for the security of its creditors and the payment of its debts. (Man v. Pentz, 3 Comstock, 415; Tinkham v. Borst, 31 Barb., 407 ; Nathan v. Whitlock, 9 Paige, 152; Wood v. Duemmeo, 3 Mason, 308 ; Spear v. Grant, 16 Mss. 92 ; Case v. Grant, 15 Id., 
      505; 2 Story Eq., (9) sec. 1252; 6 Paige, 304; 4 Id.,, 127, 134).
    III. Defendant Hoy’s testator was liable, antecedent to, and independent of the contract set out in the complaint, and his liability was joint and several in. equity, and having received the benefit of the company’s property, his estate is liable for its debt (York v. Peck, 14 Barb., 644; Lane v. Williams, 2 Vern., 292 ; Underhill v. Howard, 10 Ves., 209, 227; ex parte Kendall, 17 Id. 520 ; Story Eq. Jur., secs. 162, 164). Whenever a Court of Equity sees that by a contract joint in form, the real intent of the parties was that'it should be joint and several, it will give effect to such intention (2 Williams on Ex’rs., 5 Eng. Ed. 1580 ; Lane v. Williams,, Vern., 277, 292). The alleged assignment of the contract could transfer no covenant to the plaintiff on. which to base an action at law, aud his only remedy is. by a suit in equity (Pope v. Cole, 55 N. Y. R., 125).
    IV. The executrix of James Hoy, deceased, is a necessary party defendant to enable the court to make a complete and final judgment in this action. Should the other defendants be compelled to pay this claim, she would be liable to a contribution (Sherman v. Parish, 53 N. Y. R., 483 ; Code, secs. 118, 119, 122).
    V. Defendant Hoy’s testator was a wrong-doer, and therefore his liability several.
    Tracy, Olmstead, & Tracy, attorneys, and Charles Tracy, of counsel for respondent,
    urged:
    I. The instrument sued on is a joint obligation of all who signed it (Platt on Covenants, 117, 118). If the instrument had been, in form, joint and several, this action is based on it as joint only, and the plaintiff has elected to treat it as joint for the purposes of this, suit.
    II. James Hoy, the testator having died before this action was brought, the action will lie only against the' survivors. The executors can not be joined without the plaintiff showing in his complaint that all the survivors are insolvent (Voorhis v. Childs Ex., 17 N. Y., 354; Platt on Covenants, 133 ; Voorhis’ Code, 106, Notes, § 118).
    III. The testator, James Hoy, was only a surety; and therefore neither his estate nor his executrix is liable (Gretty v. Binsse, 49 N. Y., 385, 388, and cases therein cited ; Fielden v. Pickersgill, 6 Blatchford, 524; Pickersgill v. Lahens, 15 Wallace, 140).
   By the Court.—Monell, Ch. J.

I think the learned judge below was in error in supposing that this action is upon the instrument or agreement set out in the complaint.

That is an agreement between the stockholders of the Frostburgh Coal Company, in which they agreed, among themselves with the Consolidated Coal Company, to transfer the property of the former company to the latter company. It contains no covenant or obligation which can be enforced by the creditors, and therefore no cause of action can be predicated upon it. The parties to it, comprising all the stockholders, had a right, probably, to make such an agreement, and to transfer to the other company all the property owned by them. They not only represented, but actually owned the company, and were not bound to consult the-wishes or obtain the consent of any one. And, doubtless, by such transfer the new company obtained a good title, not only as against the old company, but, also as against the creditors of the old company.

But while the stockholders could lawfully make the-transfer, it by no means follows that they are exempt from liability to the creditors of the old company, if by reason of this act, the creditors were deprived of the means of collecting their debts,

The stockholders of a corporation, who are in the actual possession of, and have under their immediate control, the property of the corporation, are trustees, in respect to such property, of the creditors of the corporation ; and any act of theirs, in disposing of such property, to the prejudice and injury of the creditors, will render them liable to the creditors.

Mr. Justice Story, among the implied trusts mentions (2 Story Eq. § 1252), the case where the property of a private corporation is deemed a trust fund for the payment of the debts of the corporation. He says, creditors have a lien or right of priority of payment on it; and if the corporation is dissolved, the creditors may enforce their claims against any property of the corporation which has not passed into the hands of a tona fide purchaser, “ for such property will be held affected with a trust primarily, for the creditors of the company.” And see Mumma v. The Potomac Co. (8 Peters, 286).

It is quite clear, I think, that the only cause of action set forth in the complaint, grows out of the act of the defendants, as trustees of an implied trust, in disposing of the company’s property, and the only reason or purpose for setting out the agreement was, to furnish the evidence of the breach of the trust with which the defendants were charged ; and not as laying a foundation for the action. So that, had it been left out, and the allegation had merely been, that having possession of the company’s property, the defendants had transferred a portion, and converted another portion, the complaint would have sufficiently stated what I regard as the only cause of action. And for such a cause, an action is maintainable (Tinkham v. Borst, 31 Barb. 407; Bangs v. Blue Ridge R. Co. 45 How. Pr. R. 169 ; Mann v. Pentz, 3 N. Y. R. 415).

In Mann v. Pentz, it was held that the creditors of a dissolved corporation had a remedy against the stockholders to recover their unpaid subscriptions, on the ground that “ the capital stock of a corporation is a trust fund for the security of its creditors.” Referring to some cases in Massachusetts, and to Nathan v. Whitlock (9 Paige, 152), Judge Pratt says (p. 433) “In these cases, the corporations had attempted to distribute their stock among their stockholders, leaving debts against the corporation unpaid, and it was held, that creditors in proper suits might compel such stockholders to refund sufficient to pay these debts.”

The case of Tinkham v. Borst was very much like this case. The defendant, the principal, if not indeed the only stockholder of a corporation, appropriated its assets to his own use, leaving debts of the corporation unpaid, and it was held the creditors had a lien on its assets for the payment of their debts, and could maintain the action. And, although in that case the defendant was charged with a fraudulent conversion of the assets, Judge Mullir says (p. 411) it is not material how they came into his hands, unless the holder has acquired a higher or better equity to such assets than the creditors. Nor is it material whether the person holding them, came by them fairly, or by force or fraud.

Having ascertained the nature of the stockholder’s liability, let us see whom the creditor’s must, or may, pursue to enforce it.

The disposition of the assets of the corporation by the stockholders, was alleged to have been their joint act. They all united in the transfer, and for such act they rendered themselves liable for a breach of the trust which, in respect to such property, had been raised in favor of creditors.

At law it is probable that a joint action only could be maintained, and in that case, only the survivors could be sued. But the rule is otherwise in equity, where obligations and liabilities, joint at law, are frequently treated as joint and several (1 Story Eq. §§ 162, 168, 164).

The rule at law is definitely settled against uniting the representatives of a deceased joint debtor with the survivors, unless upon allegations of insolvency (Pope v. Cole, 55 N. Y. 124). And that is so irrespective of the question, whether there was at the time of the death of the joint debtor any joint property, owned by the debtors, which vested in the survivors.

The liability of trustees for a breach of their trust, where they all unite in the breach, is several as well as joint, and the cestui que trust, seeking relief against the breach of trust, may proceed against all or either of the trustees (Gilchrist v. Stevenson, 9 Barb. 9, 16), and the rule which requires the remedies at law to be exhausted against the surviving joint debtor, has no application.

The stockholders in this, case having’ made themselves severally liable as trustees, the right to pursue the representatives of a deceased trustee in an action in equity is fully recognized in Pope v. Cole (ubi sup.), and in such an action it is proper to unite the surviving co-trustees (Bailey v. Inglee, 2 Paige, 278 ; Story Eq. Pl. § 169).

The cause of action stated in the complaint, being upon the liability of the defendants as stockholders, and therefore as trustees for the creditors, it was merely necessary to aver that they had wrongfully—wrongfully in respect to the trust—disposed of the company’s property; the insolvency of the corporation, and a deficiency of assets to meet its liability. All this is sufficiently alleged, and the action being to recover a ■debt for which the stockholders had made themselves liable, it was proper to unite in the action the representative of the deceased stockholder.

If these views of the nature of the defendant’s liabilily are correct, the complaint, as a pleading, is sufficient, and the facts stated therein constitute a cause of action against the several persons who are made parties defendants therein.

The judgment in favor of the defendant Ella Nora Hoy, sustaining the demurrer to the complaint, should be reversed, with costs.

The defendant should be allowed to withdraw her ■demurrer, and answer on payment of all costs since the demurrer was served.

Curtis, J., concurred.