Case ID: nys_13/html/0851-01.html
Source: Caselaw Access Project
Author: {"author": "Pratt, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Cole v. Millerton Iron Co. et al.
    
    
      (Supreme Court, General Term, Second Department.
    
    March 10, 1891.)
    1. Fraudulent Conveyances—Insolvent Corporation.
    Pending an action by plaintiff, in which he afterwards recovered judgment, against the N. company, that company, being insolvent, conveyed all its property to the M. company, in consideration chiefly of the assumption by the M. company of certain of its debts. The executive officers of both companies were the same persons. The object of the transfer was a consolidation of the N. company with other corporations into the M. company, and the N. company never did any business thereafter. On the same day on which such transfer was made the M. company made a mortgage to a trust company of property including that transferred to it by the N. company, to secure bonds issued by the M. company for its existing debts, or for money to be used in its business, the trust company advancing no money thereon, but acting as trustee for the holders of the bonds. The greater part of the bonds were delivered to a bank as collateral security for a note made by the M. company, and indorsed by two of the officers of both the N. company and the M. company, who were chief actors in the transfer of the property of the former to the latter; and thereafter such bonds were purchased from the bank by B., one of said indorsers. Held, that the transfer of the property of the N. company was void as to plaintiff, because ultra vires as to creditors of that corporation, and also because of the insolvency of the company, and because the officers acting for both companies were the same persons.
    
      2. Same—Knowledge oe Grantee.
    As the names of those persons appeared in the conveyance as officers of and acting for both buyer and seller, and also appeared in the mortgage to the trust company as executing that instrument, the record thereof was notice to the trust company, sufficient to put it on inquiry as to the character of the transaction.
    A. Same.
    Such notice was to be imputed to the holders of the bonds who took security through the mortgage; and therefore none of them could enforce the mortgage as against plaintiff, on property which came from the N. company.
    ■4. Same—Rights op Purchasers.
    That B., having notice of plaintiff’s equity, could not claim, for the bonds coming to him from the bank, the benefit of the bank’s lien under the mortgage, as against plaintiff.
    •5. Same—Remedies op Creditors.
    The trust company should be restrained, at the suit of plaintiff as a judgment creditor of the N. company, from any recourse to the property which the M. company obtained from the N. company until it had exhausted its remedy against other parts of the mortgaged premises, and against the M. company itself, and from enforcing the mortgage, as against plaintiff’s equity, for the benefit of B., on the bonds held by B.
    Appeal from special term, Dutchess county.
    Action by Emory Cole against the Millerton Iron Company and others. Plaintiff appeals from a judgment for defendants entered on the dismissal of the complaint on trial by the court without a jury.
    Argued before Dykman, Pratt, and Cullen, JJ.
    
      William Downing, (Herrick & Losey, of counsel,) for appellant. Simpson, Thacher cB Barnum, Alexander & Green, and Horace D. Hufcut, for respondents.
   Pratt, J.

The views which I have taken of this case require a reversal •of the judgment appealed from. It is an action by a creditor of a corporation to set aside an alienation of its property in fraud of bis rights, as he alleges. He had no judgment when the transfer was made, but I think it sufficiently Appears that the.company was indebted to him in fact; and the fact is that he subsequently obtained a judgment for his debt, and now stands in the position of, and brings this action as, a judgment creditor. The defense is that the alleged fraudulent grantee mortgaged the property in question, with other lands, to the Mercantile Trust Company, in trust to secure the payment of its bonds, which are now held by innocent holders; and, therefore, as it is said, the plaintiff’s right to follow the property of his debtor has been cut off in the interest of these alleged innocent bondholders. The plaintiff alleged substantially that a large number of these bonds are not now held by persons in good faith. Hence, if that be the fact, or if it shall appear that the right of those who do hold bonds in good faith may be worked out without interfering with plaintiff’s alleged right in the land fraudulently transferred, the court ought to provide means for the attainment of that result. It is thus apparent that the merits of the plaintiff’s claim shall be investigated from the beginning. The case does not show the date of the origin of plaintiff’s claim, but it does show that on October 1, 1887, he sued the National Mining Company of Paulding to recover $5,000 damages, and that he recovered a judgment for $2,775 damages, with $288.74 costs, upon that claim, besides other suitable relief, July 14, 1888. It also shows that an execution was issued upon that judgment, which was returned wholly unsatisfied. It must therefore be assumed that this judgment debtor, the National Mining Company, owed this debt ($2,775) October 1, 1887. It also appears that on the 20th of February, 1888, this debtor corporation owned a large amount of land, which is included in the mortgage to the trust company, and valuable leases for mining rights on other lands, and that on that day, being wholly insolvent, and unable to pay its debts, it sold, assigned, and conveyed all its property to the Millerton Mining Company in consideration of one dollar and the assumption by the latter of certain debts. It does not appear whether or not the plaintiff’s claim was among those items assumed, and I think it is immaterial, since there is no suggestion that there has been any offer by anybody to pay the plaintiff’s claim. This sale to the Millerton Company was made under peculiar circumstances, which render it, in my judgment, utterly indefensible as against plaintiff’s claim. . The executive officers of this grantor company were the same as those of the grantee co'mpany,—Mr. Barnum being one of them, indeed the chief actor in the business. The undisguised object of this transfer, as found by the learned trial-judge, was that the National Mining Company should cease and never resume its business, and sell out all its property to the Millerton Company. The scheme seems to have been a sort of consolidation of the property of several mining corporations into the Millerton Company. ' For example: On the same day as this transfer by the National Mining Company the Biga Mining Company conveyed all its property to the Dutchess Mining Company, who then conveyed it, and all its other property, to this Millerton Company, the same persons participating in,.and, as I assume, directing, the business scheme. The National Mining Company never did any business after this transfer. There are several obvious reasons why the transfer by the- National Mining Company cannot be upheld as against the plaintiff. In the first place, it was ultra vires, within well-established rules, not only as against judgment creditors, but as against every person interested in that company, and the plaintiff, as an existing creditor of the company, was interested in it, and in the lawful discharge of its duties. Its property—the whole of it—was a trust fund, held by it in trust, primarily for its creditors; and it, like every other debtor, was bound to see to it that that implied trust was performed. So, too, its officers were bound, as trustees, for the plaintiff and all other persons interested in that company, to perform those duties. Unlike the case of an individual debtor, it was unlawful for this corporation to sell out its property, under these circumstances, for the purpose of committing suicide, no matter whether it acted in good faith or not, and utterly independent of the question of its solvency. Again, being insolvent, its transfers were void. Its officers knew,' or were bound to know, all this; and I cannot conceive how they could have acted in what the law calls good faith in view of all these facts. They must have known of the pendency of plaintiff’s suit. It was their duty to wind up that company, and apply its property to the payment of its debts, the plaintiff’s among the rest. It is no answer to say that the Millerton Company owned all its stock. That fact rather aggravates than palliates or excuses the transaction. The rights of stockholders were subordinate to the plaintiff’s rights as a creditor, irrespective of whether he liad a judgment or not. Indeed, it was only because he had no judgment that the wrong was possible; and these officers who thus owed these duties to the plaintiff were also officers—and the managing officers —of the Millerton Company, the grantee, thus disclosing another and independent reason why the sale should not stand, and quite aside from the question of notice of the illegality of the sale itself on grounds above stated. They were the actors for both the seller and the buyer, and, besides that, the buyer thus had full notice of the other infirmities of the transaction as against plaintiff and his claim. This transfer must therefore be regarded as indefensible, and we must treat it as void as against the plaintiff, and let him follow and obtain satisfaction of his claim out -of the property thus fraudulently transferred, unless some insurmountable obstacle has intervened to prevent us from discharging that plain duty.

Let us now go to that question. The facts found by the learned trial judge, or otherwise apparent from the undisputed evidence, are that it was a part of the scheme of these managing officers to increase the capital of the Millerton Company, in which they were personally interested, predicating that increase in part, at least, upon the property acquired at this time. No doubt it was partly predicated upon the property thus fraudulently and unlawfully diverted from plaintiff’s claim. They also intended that the- Millerton Company should issue bonds to the extent of $250,000, to be secured by mortgage to the trust company; and, either to secure old debts therewith, or raise money for use in its business, the Millerton Company did issue such bonds, and on the same day when this fraudulent and unlawful transfer was made against plaintiff’s rights, executed and delivered a mortgage to the trust company to secure the payment of these bonds, covering the property out of which plaintiff was entitled to the satisfaction of his debt. I take it to be plain that if the trust company had either actual notice of this infirmity in the title of the Millerton Company, or notice sufficient to put it on inquiry, that notice is to be imputed to the persons who took and claim to hold security through the mortgage for the payment of the bonds. So, too, since the trust company advanced no money itself, but simply acted as a trustee for the bondholders, I suppose that it can have no greater rights under the mortgage than the bondholders themselves; and if these bondholders, or any of them, could not themselves enforce their lien, then the trust company cannot enforce it for them. This must be true of each separate bondholder who had notice, or notice sufficient to put him on inquiry, or who otherwise stood in such relation to the original transaction that he ought not, in equity, to obtain anything for himself as against the plaintiff. Keeping these propositions in mind, how stands the case as to the trust company? If the date of the record of its mortgage appears in the case, I have overlooked the fact. I assume that it was promptly recorded, and must treat that transaction as completed on the day of -its date, February 20, 1888. Did it examine the title? If not, why not? Assuming that it did examine the title, it must have found the common officers of the National Mining Company as the active agents and officers of the Millerton Company in that transaction by which plaintiff, on the very day of the date of this mortgage, was defrauded. The same persons who conveyed-the property of the National Company to the Millerton Company executed the mortgage by the latter to the trust company; and since that conveyance swept out all the property of the grantor corporation, and since it must have seen that the other mortgaged property-had fallen into this consolidation scheme, it is scarcely reasonable to presume that it did not have notice of, or sufficient notice to put it on inquiry, with respect to the real character of the transaction between the National Company and the Millerton Company. It is certain that it must have seen that the same persons were officers who acted for the buyer and seller, for their names appearing in the conveyance, including its own mortgage, must have suggested the fact. It seems to me that this suggestion did not receive due weight on the trial. But, again, how stands the case with the bondholders, for whose benefit alone the trust company may enforce this mortgage if it is to be enforced at all. It is found that $25,000 of the bonds were sold to a Mr. Turner, of Chicago, and $25,000-were delivered to a Mr. Warren, of Troy, as security for notes of the Miilerton Company, amounting to $20,000. It does not appear whether or not that $20,000 note was for a new or old debt; but no-matter. The remaining $200,000 of bonds were delivered to the Western National Bank as collateral to a note made by the Miilerton Company for $75,-000, which note was indorsed by Mr. Barnum and Mr. Frink, the chief actors in the original unlawful transfer by which plaintiff was defrauded. How, it may well be that these bondholders could hold and enforce their bonds against the Miilerton Company, but their right to a lien under this mortgage as against plaintiff is quite another affair. If the trust company is chargeable with notice of plaintiff’s equity, I take it that none of the bondholders could enforce the lien of this mortgage as against plaintiff on the property which came from the national Company. And why are they not chargeable themselves with notice of anything appearing of record or in the line of the title to the lands and property against which they claim a lien? In respect to the $200,000 of bonds held by the Western Bank, it appears that they came back to Mr. Barnum, the chief actor in the transfer between the national and the Miilerton Companies,—the man who was an officer and trustee of both, and who was, therefore, a trustee charged with trust duties to see to it that the property of the national Company was applied to plaintiff’s debt before it could be lawfully or honestly taken to a company in which he was personally interested,—in a sense taken partly for his own benefit. What, therefore, were Mr. Barnum’s legal rights respecting this lien under this mortgage on these $200,000 of bonds? He was an indorser on the note held by the Western Bank. In a sense he was a part of the bank's collateral. His and the bonds of Mr. Frink constituted the collateral. If Mr. Barnum shall be permitted to enforce the lien under this mortgage, it will transpire that he shall be permitted in this indirect way to utilize his own original breach of-trust towards plaintiff—his own illegal act—for his own advantage. In other words, he will get for himself what he was bound to save and apply to the payment of plaintiff’s claim. Going back to his relations to these notes and bonds held by the bank, suppose that the bank had taken this mortgage and these bonds directly as collateral to the Miilerton Company’s note indorsed by Mr. Barnum, and that the bank had attempted to foreclose, were not plaintiff’s equities such that he could have required the bank to resort to Mr. Barnum’s personal liability on his indorsement of the note before having recourse to the lien under the mortgage on the land which constituted a trust fund for the payment of plaintiff’s claim? I fail to see why equity would not have required precisely that, if it were necessary, in order to save his rights. If so, Mr. Barnum could not have been subrogated to the position of the bank, even if it had held the bonds without notice of plaintiff’s equity,—a position which I seriously doubt. But perhaps that question is not involved. Mr. Barnum bought the bonds, as it is said, from the bank. He therefore claimed to hold the benefit of the bank’s lien under the mortgage. But he had notice of the plaintiff’s equity; and it is answered that he bought the bank’s right under the mortgage, and may therefore enforce that new title even as against his own notice. But that is not the trouble. If his scheme should succeed, he would thus get plaintiff’s property flat in the face of his own wrong and breach of trust, and of his own personal liability for that breach of trust to plaintiff. If he were to get it in any way it would be impressed with the original trust, which he was bound to respect and perform, and I think that equity would convert him into a trustee, pro tanto, for plaintiff’s benefit. Equity will not recognize or tolerate any other method by which a trustee shall thus obtain the property of his beneficiary without just compensation. Without pursuing the subject further, I state on my own conclusion that upon the facts appearing by this case this mortgage is subject to the plaintiff’s right to enforce his judgment against that part of the mortgaged premises which came from the National Mining Company, and that the conveyance by it, and the trust company’s mortgage, is void as against that judgment. But since the facts may be changed on a new trial, 1 hold that a new trial shall be granted, with costs of this appeal to plaintiff to abide the event of the action. It is plain to my mind, in any event, that equity demands that the trust company should be required by injunction to abstain from any recourse to the property which the Milierton Company obtained from the National Company until it has exhausted its remedy against other parts of the mortgaged premises., and against the Milierton Company itself before interfering with the land on which plaintiff’s equity rests, and that the mortgage cannot be enforced, as against plaintiff’s equity, for Mr. Barnum’s benefit., on these $200,000 bonds.

All concur.