Case ID: ad_138/html/0441-01.html
Source: Caselaw Access Project
Author: {"author": "McLennan, P. J.: Spring, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Frederick H. Hazard, as Trustee in Bankruptcy of Utica Crockery Company, Appellant, v. Rosell E. Wight, Respondent.
    Fourth Department,
    May 4, 1910.
    Bankruptcy — action to recover sums paid by bankrupt corporation to creditor — facts not justifying recovery.
    On the bankruptcy of a member of a partnership persons interested in the business induced the defendant, to whom two of the members of the firm, including the bankrupt, were indebted, to purchase the assets of the business, which lie did on condition that be should be paid the amount owed to him and $1,000 in addition. The defendant paid $5,250 for the assets of the firm and a corporation having a capital of $10,000 was organized, to which he turned over the goods purchased in consideration of an agreement by the corporation to pay .him the sum due, the payment being secured by the transfer to him of a large majority of the stock. Thereafter the defendant surrendered his claim for the $1,000, thereby reducing the indebtedness, which was subsequently paid partly from the assets of the corporation and partly from outside resources.
    
      Thereupon the defendant transferred the stock held as collateral and his interest in the corporation ceased. In an action by the trustee in bankruptcy of such - corporation to recover the sum paid by it to the defendant,
    
      Held, that as the defendant had received no moneys not owing to him, and there was no concealment, or pretense that any creditor of the corporation became such relying upon concealed facts, a judgment dismissing the complaint upon the merits was proper.
    Spuing and Eobson,'JJ., dissented, with'opinion.
    Appeal by the plaintiff, Frederick H. Hazard, as trustee, etc., from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of'Oneida on the 26th day of July, 1909, upon the report of a referee, dismissing the complaint upon the merits.
    The action was commenced on the 27th day of March, 1908, to recover the sum of $4,296.96, with interest, alleged to have been received by the defendant, but'which belonged to the Utica Crockery ■Company, of which the plaintiff is trustee in bankruptcy.
    
      Edmund J. Wager, for the appellant.
    
      Vaseo P. Abbott, for the respondent.
   McLennan, P. J.:

One Madoc, prior to June 21, 1906, was conducting a crockery business in the city of Utica, N. Y., and went into bankruptcy owing the defendant $350, and one Pike, who had formerly been associated with Madoc in such business, owed defendant $400. One Wilcox had been employed by Madoc as bookkeeper. Prior t-o J une 21,1906, the bankrupt stock of Madoc had been appraised at upwards of $17,000. Pike and Wilcox applied to the defendant to induce him to purchase said stock and turn it over to them so that they might continue the business of Madoc. The defendant agreed to make such purchase upon condition that he should be paid the amount owed him by Madoc and Pike and $1,000 in addition to such amount as he might pay for the stock of goods, and he subsequently bid and paid for such stock of goods and fixtures the sum .of $5,250. .Soon thereafter the plaintiff corporation was" organized at a capital stock of $10,000,.and the goods purchased by the defendant, being the bankrupt stock of Madoc, was turned o.ver to it. It was agreed at the time of the incorporation of the plaintiff company that the payments should be made to the defendant until he was fully paid, and as a part of such agreement or transaction ninety-eight shares, of stock of the plaintiff corporation were transferred to the defendant as collateral for the payment of his said indebtedness,, upon the payment of which indebtedness said stock was to be transferred at' the direction of Wilcox. The defendant thereafter surrendered his claim for $.1,000 for services and expenses, thus reducing the indebtedness to $5,750. Such indebtedness was paid from sources outside of the assets of the company and also from the assets of the company. When the full amount of such indebtedness to the defendant was paid he transferred his ninety-eight shares of stock which he had as collateral, .and his interest in the corporation ceased. There is no suggestion in the evidence that the defendant had at any time received any money from said corporation which it did not actually owe him for the goods which he had actually transferred to it and the finding of the referee is to that effect. There was no concealment of the transaction. There is no pretense that any creditor of the plaintiff corporation became such relying upon .any facts which were concealed or undisclosed by the defendant so far as his transactions with the corporation were concerned. .

The statement in appellant’s brief that the defendant sold the aforesaid merchandise and .fixtures to the corporation for $10,000 and took in exchange for them ninety-eight shares of the capital stock is not borne out by the evidence. Such ninety-eight shares of stock were transferred to him as collateral to the indebtedness which the corporation owed him for goods actually paid for by him and delivered to it. He did not make a cent out of the transactions and no one was deceived by any transaction which he had with it.

' It seems to me that the judgment is right and should be affirmed, with costs.

All concurred, except Spring and Bobson, JJ.., who dissented in a memorandum by Spring, J.

Spring, J.

(dissenting):

It seems to me that this judgment ought not to stand. The stock and fixtures of Madoc, who had 'gone into bankruptcy, were appraised on the 21st of June, -1906, at the value of about $17,000. On that very day the defendant purchased them from the trustee in bankruptcy for $5,250. He turned the stock over to Wilcox and Pike, and they agreed to pay him $6,750 for the stock, which purchase, price included $1,000 bonus that the defendant was to. receive above his indebtedness.- The defendant took their notes for $5,250 and another note for $1,000... He was to retain title in the stock and fixtures sold until his notes were paid. Apparently he did not believe the security was adequate for his indebtedness, as he took collateral security for a considerable amount, including life insurance policies transferred to him.

On the fourth of August of that year the parties decided to incorporate. The defendant was one of the original subscribers, agreeing to take ninety-eight shares, par value, of the capital stock of $10,000. Wilcox took one share and his wife one share. The defendant was president and one of the directors, and Wilcox and his wife were respectively secretary and treasurer of the company. The ninety-eight shares of stock were issued directly to the defendant, although by a contract between the parties they were to be transferred to' Wilcox when the indebtedness to the plaintiff was paid. The original, notes were not taken up . or the collateral security retransferred to Wilcox.

The corporation commenced business promptly, and out of the gross receipts of the business payments were made from time to time on the indebtedness which the defendant had against Wilcox. A considerable part of the avails of the business were so used, although part, of his indebtedness was paid from other sources than these gross receipts.

' In January,'1907, another contract was made whereby Wilcox agreed to purchase the ninety-eight shares of the capital stock of the company held by the defendant and to pay the balance of his indebtedness, about $3,800, in the manner stipulated in the agree-, inent. This agreement was not fully consummated until June following.

During all the time of the life' of the corporation there was no meeting of the stockholders or directors until the 15th of, June, 1907, when the defendant, on the'assumption that his claim had been paid in'full, resigned the office of president and transferred all his stock in said corporation to Wilcox, claiming to act in compliance with the agreements heretofore mentioned. A week later an involuntary petition in bankruptcy was filed against said corporation, and it was finally adjudicated a bankrupt by the United States District Court for the northern district of New York. The trustee took possession of the property, reduced it to possession and realized therefrom only $3,561.43. During the life of the corporation, and while the defendant was president and director, goods were purchased on credit, obligations were incurred, and remain unpaid for the reason, to some extent at least, that the gross receipts were applied in payment of the defendant's original claim.

It seems plain, therefore, that the defendant made this transfer on the twenty-first of June in anticipation of the insolvency of the corporation of which he was then holding ninety-eight shares of the capital stock. He then for the first time claimed that his. indebtedness had been paid in full. As president of the corporation and one of its directors he was chargeable with knowledge of its condition. He must have known, therefore, that the capital stock was being constantly depleted by applying the gross receipts of the business in payment of his .obligations given by Wilcox to him. The stock and fixtures which he sold to the corporation constituted its entire assets. How, the transaction may have been honest enough between the defendant and Wilcox, but the rights of creditors intervened. A president and director of a corporation which has sold a considerable part of the property which constitutes its entire capital ought not to be permitted to have the proceeds of the sale of that property applied toward his own indebtedness, which is not, in form at least, against the corporation, but is against an individual. This appropriation of the avails of the sales of the goods was more pernicious than paying dividends out of the gross receipts of a corporation with inadequate assets to meet its existing obligations.

The referee has found that the assets were worth $17,000. I think this finding is against the weight of the evidence. I do not care so much what witnesses say in fixing the value, but there are a few facts which show the incorrectness of this finding. In the first place, as already adverted to, the defendant purchased the stock for $5,250, and when he sold it to Wilcox and Pike exacted security in addition to holding the title to this stock of goods. Again, the referee in bankruptcy has only received a little more than $3,500 from the sale of this property. While this only represented a part of the- original corporate property, for sales had been made and ■ the avails applied in payment of the defendant’s obligations, yet the stock of goods had been replenished from time to time, to some extent, by purchases on credit and not yet paid for.

I think the judgment should be reversed.

Robson, J., concurred.

Judgment affirmed', with costs.