Case ID: ad_41/html/0535-01.html
Source: Caselaw Access Project
Author: {"author": "Patterson, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Lodi Chemical Company, Respondent, v. National Lead Company, Appellant, Impleaded with Others.
    
      Insolvent corporation — proper form of judgment in a creditor’s action under section 48 of the Stock Corporation Law — the plaintiff is not entitled to a preference over other creditors 'who do not appear in the action.
    
    Where a judgment creditor of an insolvent corporation brings an action under section 48 of the Stock Corporation Law (Laws of 1892, chap. 688) on behalf of himself and all other creditors similarly situated, to set. aside certain transactions and judicial proceedings undertaken with intent to enable a defendant, also a creditor of the corporation, to secure a preference, the fact that no other creditor of the corporation appears in the action does not entitle the plaintiff, upon obtaining an adjudication that the transfers and the proceedings by which they were -secured are invalid, to priority over the other creditors in the payment of its judgment from the assets of the corporation recovered in the action.
    Appeal by the defendant, the National Lead Company, from so much of a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 8th day of December, 1898, upon the decision of the court rendered after a trial at the New York Special Term, as provides “ That said receiver apply such property so received or its proceeds : First. To the payment of the amount of a certain judgment obtained by said Lodi Chemical Company against the Charles H. Pleasants Company in the City Court of New York, on the 6th day of May, 1897, for the sum of $1,219.23, with interest thereon since May 6th, 1897 ; ” and also from so much of said judgment as provides that the receiver shall deposit the balance of the funds which may come into his hands with the United States Trust Company, instead of providing that said receiver shall deposit the whole of said funds which may come into his hands with said trust company.
    
      William Cowper Prime, for the appellant.
    
      P. Q. Eckerson, for the respondent.
   Patterson, J.:

This is an appeal by the defendant, the National Lead Company, from part of a judgment entered against it, upon the decision of the cause at Special Term. The action was brought by a judgment creditor of the Charles H. Pleasants Company, to set aside certain transactions and judicial proceedings which resulted in the National Lead Company obtaining a preference over all the other creditors of the Charles H. Pleasants Company, and placing the assets of that company beyond the reach of such other creditors, including the plaintiff.. In the complaint herein it is alleged that the action is brought on behalf of the plaintiff and all other creditors of the Charles H. Pleasants Company, and that there are a great many creditors of that company who stand in the same position as the plaintiff and who are entitled to the same relief as that demanded in this action, and that they are so numerous that they cannot be joined as plaintiffs or defendants, and that some of their names are unknown to the plaintiff and cannot with diligence be obtained.

The action is based upon section 48 of the Stock Corporation Law of 1892 (Chap. 688), which, after declaring that certain preferential conveyances, assignments and transfers of property or payments of money or allowance of judgment or the giving of liens or securities, when a corporation is insolvent or its insolvency is imminent, shall be invalid as against creditors, enacts that every person receiving by means of any prohibited act or deed any property of a corporation shall be bound to account therefor to its creditors or stockholders or other trustees. By the judgment entered in this case, the acts and transactions which resulted in the defendant,- the National Lead Company, acquiring a preference were declared tobe invalid, and all the instrumentalities by which that preference was effected were adjudged void. A receiver was appointed to take into his possession the assets of the company and the moneys or property acquired by the National Lead Company through the transactions adjudged invalid, and from that much of the judgment no appeal is taken. In the judgment, however, is inserted a provision that the receiver therein and thereby appointed shall apply the property, goods and chattels of the Charles H. Pleasants Company that may come into his hands, first, to the payment to the plaintiff of -the amount of a certain judgment obtained by the said Lodi Chemical Company against the Charles H. Pleasants Company in the City Court of New York on the sixth day of May, 1897, for the sum of twelve hundred and nineteen 23/100 dollars, with interest thereon since May sixth, 1897.” The defendant company appeals only from so much of the judgment as is contained in that direction to pay.

This provision of the judgment does not follow the decision made and filed by the justice at Special Term. There is no adjudication in that decision that the plaintiff is entitled to the payment of its judgment in priority to any other creditor. In the filed decision, the learned judge decides only that the preference to the National Lead Company is void, and that all the judicial and other ymoceedings through and by means of which that preference was furthered or secured are invalid; and he directs that a receiver of the property he appointed, to whom those in possession of that property shall be required to account. In that decision no direction whatever is given for distribution of the moneys in the hands of the receiver.

It is claimed, however, by the respondent that no other creditor of the Charles II. Pleasants Company having appeared in this action, it is entitled to the payment of its judgment; and that the only relief it needed was payment of its judgment, and that under a prayer for general relief in the complaint the court was warranted in granting it. It is claimed that such relief Avas authorized by vrliat Avas decided in Lopez v. Merchants & Farmers’ National Bank (18 App. Div. 427); but that case does not control. ' That was an action in aid of an attachment and to prevent the application of attached property to the payment of prior liens acquired in violation of the jirovisions of section 48 of the Stock Corporation Law. The court said that the plaintiffs were authorized to maintain the action with the vieAV of removing the fraudulent obstructions upon the property of the corporation which would prevent those plaintiffs from realizing upon their attachment. (Citing Home Bank v. Brewster, 15 App. Div. 342.) It is true that the court also says that the plaintiffs in the Lopez case occupied very much the situation they Avould have been in if the moneys had been paid over to the condemned defendants and their action had been for the recovery of the money; and that the plaintiffs were authorized to maintain the action in their own behalf and by their diligence to receive the fruit thereof without joining other creditors. Nevertheless, it was an action in aid of an attachment. There was a lien to he protected and enforced, and the plaintiffs could follow their lien. In the present action, all the transactions and all the proceedings of which the plaintiff complains were had and concluded before the recovery of the plaintiff’s judgment and the issuance of its execution. When this action was begun, the plaintiff stood in the attitude of a judgment creditor' having the right to call the defendant to account for what had been received under the void preference. If it stood in the relation of a judgment creditor, filing a creditor’s bill, the Charles H. Pleasants Company being a domestic corporation, as is stated in the complaint, the plaintiff could not procure a judgment for the preferential payment of its debt under the jn-o visions of the Code of Civil Procedure relating to judgment creditors’ actions, for, according to section 1819, the article of the Code relating to such actions does not apply to a case where the judgment debtor is a corporation created by or under the laws of the State of New York. But this action is founded directly upon the permission of the 48th section of the Stock Corporation Law. The fraudulent preference is alleged to have ■ been in contemplation of the insolvency of the Charles H. Pleasants Company, and the question is whether, under that act, a creditor suing, as this plaintiff does, is entitled, upon setting aside preferences void under that act, to secure to itself priority of payment over other creditors.

A diligent creditor pursuing his remedy, and for the enforcement only of his own right, may be ordinarily entitled to preference; but in an action based on this statute, where no individual lien has been acquired which would give priority, the purpose and object of the statute must be considered. In its present form, the 48tli section of the Stock Corporation Law is a re enactment, with some amplification and a. wider scope, of a provision of the Revised Statutes (1 R. S. 603, § 4). The policy underlying each statute is the same, viz.: “ The object to be accomplished by it is to secure equality among all creditors of a corporation, and to prevent fraudulent transfers in derogation otf in fraud of their rights.” (O’ Brien v. East River Bridge Co., 36 App. Div. 24.) In Hilton v. Ernst (38 id. 96) it is said, in the opinion of the referee, - adopted by the court as its own : “ The statute constitutes an assurance to all who deal with the corporation that, in case it becomes insolvent, no creditor will be permitted to acquire a preference over other creditors in the distribution of its assets. It distinctly notifies all the creditors that diligence will not be rewarded nor favor ratified.” Under the statute, as it read before the act of 1892, it was held that its general object is plain, namely, to secure equality among creditors and to prevent fraudulent transfers in fraud of their rights. (Throop v. Hatch L. Co., 125 N. Y. 533.) The underlying purpose of the statute, therefore, being to secure equality among creditors, that pui’pose should be effectuated and not destroyed. It is true that it is not the purpose and intention of this statute to prevent creditors pursuing the ordinary remedies open to them for the enforcement of their rights against debtors (Varnum v. Hart, 119 N. Y. 101); but as a judgment creditor, seeking to enforce its rights against the Pleasants Company, this plaintiff, in a judgment creditor’s action, would be limited by the provisions of the Code of Civil Procedure, above referred to. No right of action that it would have as such judgment creditor is interfered with by this construction of the statute. If the design and purpose of the 48th section is to secure equality among creditors, it would be inconsistent to allow one creditor, by means of tire right of action given by the statute, to gain that preference through the law which another creditor is prohibited from getting directly from the debtor by the same law. It would be inconsequent to hold that by means of a suit, brought by one creditor against another, upon a statute intended to secure equality of distribution, the creditor suing could secure preference to himself and defeat the purpose of the statute. The case is not one in which it a]3pears that no other creditors are interested, and that there are no other debts to be paid. We need not consider whether the National Lead Company is entitled to a dividend on its debt from this same fund. It does appear that there are numerous creditors who are entitled to participate in the property and assets of the Pleasants Company. It is so declared in the complaint, and although none of those creditors may have made themselves parties to the action before judgment, that is not sufficient to deprive them of their distributive shares in the assets of their debtor. The judgment will then be one under article 3, sections 1784-1796 of the Code, and under section 1793 of the Code the final judgment must provide for the equal distribution of the property among the creditors of the corporation.

We are, therefore, of the opinion that the judgment should be modified by striking out the provision directing the receiver to pay the plaintiff’s judgment; the question of costs and of compensation to the plaintiff to be reserved until final judgment.

O’Bbien, Ingraham and McLaughlin, JJ., concurred.

Judgment modified as directed in opinion; the question of costs and of compensation to the plaintiff to be reserved until final judgment.