Case ID: wash_18/html/0114-01.html
Source: Caselaw Access Project
Author: {"author": "Scott, C. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

[No. 2743.
    Decided November 12, 1897.]
    Nevada Cook, Respondent, v. C. S. Moody, Appellant.
    
    INSOLVENT CORPORATION — ILLEGAL PREFERENCE.
    Although a mortgage Is given by an insolvent corporation to a creditor, who has knowledge of its insolvency, with the intention and expectation that the corporation will, by means of an extension of time of payment thus secured, be enabled to continue business and eventually pay off its indebtedness, the mortgage constitutes a preference voidable at the instance of either existing or subsequent creditors, under the rule that the property of an insolvent corporation is a trust fund for the benefit of all creditors. (Gordon, J., dissents).
    Appeal from Superior Court, Skagit County.—Hon. Henry MoBride, Judge.
    Affirmed.
    
      
      E. C. Million, for appellant.
    
      J. K. Chambers, for respondent.
   The opinion of the court was delivered by

Scott, C. J.

This action was brought in the nature of a creditor’s bill to wind up the affairs of the Belfast Shingle Company, a corporation, and cancel a mortgage on its property held by appellant, on the ground that an illegal preference had been given over the other creditors of the company, and resulted in a decree adjudging it insolvent, appointing a receiver therefor and setting aside the mortgage and sale thereunder. The appeal is taken from that part of the decree holding the appellant’s mortgage invalid. The evidence is not brought here and the contention is that the decree is not supported by the findings.

It appears from the facts found that in April, 1896, said company was indebted to various creditors in about $9,100, including a $1,200 purchase price mortgage on its machinery. At that time the mortgage in question was given to secure the payment of $1,800 of its indebtedness, which amount of claims appellant held as trustee for the owners thereof, the officers of the company representing at the time to appellant that the company was indebted (outside of said $1,200 mortgage and the claims secured by the mortgage then given) in only the sum of $1,000, when in fact such indebtedness was much more than that as stated, and the known liabilities of the company then exceeded its assets, of which fact appellant had notice; but the officers of the company and appellant believed that by extending the time of payment of said $1,800 for one year the company could pay its other debts and be able to operate its mill and carry on its business. The court found that no fraud was intended by appellant or the company, but also found that at the time of the executi.on of said mortgage said company was unable to pay its debts in tbe ordinary course of business affairs and was insolvent and would have been compelled to sbut down its mill and cease doing business bad it not been for tbe execution of said mortgage and tbe obtaining of tbe extension of time of payment of tbe indebtedness thereby attempted to be secured, all of wbicb was well known to tbe said O. S. Moody. The company continued to operate its mill until November IS following, when it sbut down and bas not done business since. On December 14, 1896, appellant began an action to foreclose bis mortgage, and, there being no defense interposed, be by default took a decree of foreclosure, and bad an order of sale issued and tbe property sold at public auction, be being tbe purchaser. Tbe mortgage covered all tbe property tbe company owned. Tbe company was indebted to tbe respondent at tbe time tbe mortgage was given, and she continued in its employ for some months thereafter. Payments were made to her from time to time, but at no time did tbe aggregate of such payments equal tbe amount of her claim.

Appellant contends that, there being no fraud in fact attending tbe giving of tbe mortgage, and as be bad foreclosed it and purchased tbe property before tbe respondent’s suit was instituted, tbe decree should bave been in bis favor. But tbe claims secured by bis mortgage were of no higher standing than respondent’s, nor, for aught that appears, than that of tbe other unsecured indebtedness. Appellant then knew that tbe company was insolvent, and its property was a trust fund for tbe benefit of its creditors. Tbe mere belief that tbe company might be able to continue its business and pay off its other indebtedness could not alter tbe legal status of tbe property and entitle these antecedent debts attempted to be secured by tbe mortgage to a preference payment, in view of tbe fact that tbe respondent’s action was promptly commenced after the foreclosure. Had there been an unreasonable delay in this, another question might be presented. As it is, there is nothing in the ease to take it out of the general rule, holding snch property a trust fund for the benefit of all the creditors, adopted in the numerous cases heretofore decided by us.

A further contention is made to the effect that the decree should at least be modified to the extent of providing that only those claims in existence at the time the mortgage was executed should be entitled to be placed upon the same basis as those secured by the mortgage. But there is no just reason for making any such distinction here. The appellant was willing that the company should continue its business, knowing its insolvent condition, and the further indebtedness incurred in so continuing it is in equity as much entitled to payment as the prior claims. While the subsequent claimants were charged with notice of the mortgage after it was recorded, they had as much right to presume that the company could eventually pay its indebtedness as appellant had.

Affirmed.

Reavis and Dunbar, JJ., concur.

Gordon, J"., dissents.