Case ID: ad_145/html/0342-01.html
Source: Caselaw Access Project
Author: {"author": "Ingraham, P. J.: Laughlin, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Atlantic Dredging Company, Respondent, v. William Beard and Others, as Directors of the W. H. Beard Dredging Company, and William Beard and Lavinia Beard, Composing the Firm of William Beard and Company, Defendants, Impleaded with William Beard, Appellant.
    First Department,
    June 23, 1911.
    Debtor and creditor — corporation — dissolution — transfer of property — creditor’s bill — liability of transferees — joinder of actions — party.
    As between a dissolved corporation and its creditors tbe property of the corporation constitutes a trust fund for the payment of its debts, and a creditor can, by a creditor’s bill, follow such property into the hands of any person who has received it with notice of the trust and of the fact that the claims of creditors have not been paid therefrom.
    Ordinarily a creditor must exhaust his remedy at law against the corporation by obtaining a judgment and having execution thereon returned unsatisfied before he can follow its assets in equity; but where it is impossible for him to do this, he may maintain his suit notwithstanding.
    
      Where a foreign corporation doing business in this State dissolves and the directors transfer all the property to certain individuals residing here, without setting aside any fund for the payment of creditors as required by the laws of the State in which the corporation was organized, and where by the laws of that State there is no authority granted a simple creditor to sue a corporation after its dissolution, it is not necessary for a creditor to obtain a judgment against the corporation before commencing a suit to compel those to whom the corporation’s property has been transferred to account and to satisfy his claim.
    A complaint against the directors and the transferees of the corporation’s property, which sets forth the facts of plaintiff’s claim, the dissolution of the corporation and the transfer of its property to the defendants, and also the statutes of the State where it was organized requiring the payment1 of the debts of a dissolved corporation, and stating in what cases it might sue or be sued, and regulating the dissolution, states, a cause of action.
    A plaintiff who alleges that 'the assets of the dissolved corporation consist of property transferred to certain of the defendants and of money due the corporation from its directors may unite in one action all the claims of the corporation which are applicable to the payment of its debts to him.
    Where it appears that the corporation has forfeited its charter, that there is no receiver of its property, and that plaintiff under the laws of the State in which it was incorporated has no right to maintain a suit against said corporation since its dissolution, it is not a necessary party defendant to the action.
    This State has always protected its citizens by enforcing- the obligations due them from foreign corporations, especially where the cause of action arose here and property applicable to the payment of said obligations is within this State.
    Laugiilin and McLaughlin, JJ., dissented, with opinion.
    Appeal by the defendant, William Beard, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 24th day of March, 1911, as resettled, granting the plaintiff’s motion for judgment on the pleadings.
    
      Ralph James M. Bullowa, for the appellant.
    
      Walter L. McCorhle, for the respondent.
   Ingraham, P. J.:

The plaintiff brings this action as a creditor of a corporation organized under the laws of the State of West Virginia, known as the W. H. Beard'Dredging Company, to recover from the defendants the amount of its claim against the dredging company, the individual defendants being members of a copartnership known as William Beard <& Co., and the directors of the West Virginia corporation. The defendant William Beard demurred to this .complaint upon the ground that there was a defect of parties defendant because the corporation, the dredging company, was not a party defendant, and the stockholders of the dredging company were not parties defendants that causes of action have been improperly united; and that the complaint does not state facts sufficient to constitute cause; of action. The- plaintiff thereupon made a motion to the Special Term upon, the pleadings, which motion was granted, allowing, however, the demurring defendant to serve an answer within twenty days,.upon payment of costs; and from that order the defendant Beard appeals.

The complaint alleges that the dredging company was incorporated tmder the laws of the State of West Virginia; that chapter 53 of the Code of that State provided (§ 56) that the stockholders could at any time in general meeting resolve to discontinue the business of the corporation.; that, upon giving notice of such dissolution to the Secretary of State, the Secretary of State should file the same in his office, and should issue a certificate-under his hand and the great seal of the State, reciting such resolution and certifying that the said notice was duly published as required by the statute, and should certify to the clerk of the house of delegates the name of every such dissolved corporation, stating the date of the dissolution thereof, to be printed and bound with the acts of the Legislature; that, as soon as practicable after such resplution is passed, the stockholders should cause ample funds and assets to be set apart, either in the hands of trustees or otherwise, to secure the payment of all debts and liabilities of the corporation, and any creditor who supposes' his claim not to be sufficiently secured thereby might obtain an . injunction to prevent the distribution of the capital and a decree against, any stockholder for the amount of the capital received by him; and the court might appoint a receiver to take charge of and administer the" property and assets of the corporation; that (§ 59) when a corporation should expire, or be dissolved, its property and assets should, under the order and direction of the board of directors then in office, or the receiver or receivers appointed for the purpose, he subject to the payment of the liabilities of the corporation, and the expenses of winding up its affairs; and the surplus, if any, then remaining should he distributed among the stockholders according to their respective interests. “And suits maybe brought, continued or defended, the property, real or personal of. the corporation, he conveyed or transferred under the common seal or otherwise, and all lawful acts he done, in the corporate name, in like manner and with like effect as before such dissolution or expiration; hut so far only as shall he necessary or proper for collecting the debts and claims due to the corporation, converting its property and assets into money, prosecuting and protecting its rights, enforcing its liabilities, and paying over and distributing its property and assets, or the proceeds thereof to those entitled thereto.” The complaint further alleges that the dredging company, in violation of said statutes of the State of West Virginia, thereafter transferred and set overall of the property of the said corporation to William Beard and Lavinia Beard, composing the firm of William Beard & Co., and that the plaintiff is and was at the time of the aforesaid acts a creditor of the said corporation in that, in the State of New York, the said corporation, the dredging company, hired from the plaintiff, and the plaintiff rented to it, on the 30th day of March, 1904, a certain scow containing a capacity of 495 cubic yards, known as No. “ A 17 ” for a period of eight days, to wit, from March 30, 1904, to April 7, 1904, inclusive, at the agreed price of two cents per cubic yard per day, thereby aggregating the total sum of seventy-nine dollars and twenty cents, and which is reasonably worth said sum and is justly due and owing by the said corporation to the plaintiff, no part of which has been paid, although duly demanded.

There is a second cause of action based upon another indebtedness of the dredging company to the plaintiff amounting to $582.30; a third cause of action upon another indebtedness to the dredging -company amounting to $2,037.45, and a fourth cause of action based upon another debt of the dredging company to the plaintiff of $100; and the plaintiff demands judgment that the defendants account for the property of the dredg-mg company transferred to them; that it be adjudged that the plaintiff have a lien on said property for the amount of its indebtedness, or that the said property be adjudged to be subject to said indebtedness of the plaintiff; and that the same be sold to satisfy the said indebtedness of the plaintiff, or that the said plaintiff have. judgment against the defendants for the amount claimed therein.

The several causes of action to recover, for which this action is brought were based upon an indebtedness of this foreign corporation doing business within this State to a domestic corporation, which causes of action arose within this- State. The foreign corporation was dissolved and it surrendered its charter to the State of West Virginia, the sovereignty which had incorporated it. Its directors transferred and set over to the Beards, composing the firm of William Beard & Co., the whole of the property belonging to the dredging company, thus leaving the corporation without property to pay its debts. The dissolution of the dredging company, which is alleged in the complaint and admitted by the demurrer, actually terminated its existence, except so far. as it was expressly continued by the statute of the State of West Virginia. Its creditors, however, had a right to have its property applied- to the payment of its debts, and the duty was charged upon the stockholders of the corporation to set apart a sufficient amount of the property for that purpose. As between the corporation and its creditors the property of the corporation was a fund held by the corporation and- its officers in trust for the payment of its debts, and a creditor can, by a creditor’s bill, follow such property in the hands of any person who receives it with notice of the trust and of a violation of the law providing for the distribution of the assets of a corporation among its creditors. Ordinarily, as in other creditors’ actions, a creditor must exhaust his remedy at law. by obtaining a judgment against the corporation and the-return of execution unsatisfied; but where, by the act of the corporation or for any other cause it is impossible for the creditor to obtain such a judgment the creditor can maintain the action notwithstanding that no judgment has been obtained. Under the allegations of this complaint the corporation itself is dissolved. It is true that an action -could be brought, continued or defended in lite manner and with like effect as before such dissolution or expiration, but only so far as it should be necessary or proper for collecting the debts and claims due to the corporation and converting its property and assets into money, prosecuting and protecting its rights, enforcing its liabilities and paying over and distributing its property and assets or, the proceeds thereof to those entitled thereto. Where the corporation has disposed of all its property without paying its debts and has discontinued its ordinary operations the right was not reserved to sue the corporation to recover for the amount of an indebtedness as that would be an idle and unmeaning ceremony. The debtor is a foreign corporation. Its creditor is a domestic corporation and is entitled to follow the property of the corporation into the hands of these defendants. This State has always protected its citizens in enforcing in then* favor the obligations of foreign corporations especially where the cause of action arose in this State. Obtaining a judgment in this State against this defendant corporation would be from- the fact alleged entirely useless if not impossible, and I do not think it should be held a prerequisite for a creditor to follow the assets of a corporation into the hands of those to whom they have been transferred.

Nor do I think causes of action have been improperly joined. The action is brought to reach assets of a corporation. These assets consist of property transferred by the corporation to the defendant Beard and to money due to the corporation by its directors. I see no objection to a plaintiff uniting in one action various claims of the corporation against its officers or others which are applicable to the payment of the debts of the corporation to the plaintiff. There is but one cause of action, and that is to reach property of the corporation which is applicable to the payment of the plaintiff’s claim against it.

Nor do I think the corporation is a necessary party defendant. The corporation has been dissolved and its charter forfeited. There is no receiver of its property or of the corporation, and it has no property except that ■ transferred by it to these defendants. By its dissolution it ceased to be an existing corporation, and, except in so far as its existence was continued by the laws of the State of West Virginia, no action could either be instituted by it or maintained against it. The provisions of the West Virginia statute only authorízé suit to^. he brought, continued or defended, so far as it should be neces- . sary or proper for collecting the debts aiid claims due to the corporation, converting its property and assets into money, prosecuting and protecting its rights, enforcing its liabilities and paying over and distributing its property and assets or the !. proceeds thereof to those entitled theréto. There is no author- ^ ity here granted for a simple contract creditor to sue the corporation merely to establish the validity of its claims. This provision is quite different from that contained in the statutes of this State affecting domestic corporations, and which were applied in Cunningham v. Glauber (133 App. Div. 10). The creditor in that case concededly had a fight to sue the corporation. The action was to recover for a tort alleged to have been committed by the corporation against the plaintiff during its existence, and the action, was brought to establish the liability of the corporation for the tort as against the trustees who had succeeded to the property of the corporation and not. against the corporation. The1 difference between the two cases, it seems to me, is unmistakable. That was not a. creditor’s bill to reach assets Of a dissolved corporation, but an action to establish ah independent liability for a tort alleged to have/ .been committed by the corporation before its dissolution^

If the plaintiff is' denied this relief, it is difficult to; see how, it can ever obtain a-satisfaction of its claim' against this dissolved corporation, although these defendants may have in-their possession any amount of- money or property which had belonged to.the corporation and which was in effect a fund held in trust for the benefit of its creditors. It would be useless to send the plaintiff to the State of West Virginia, for all its property has been transferred to these individual defendants, who were citizens of this State, over whom the courts of' West Virginia could obtain no jurisdiction. No other action than the one now before us' could be brought in this State by which the property of the corporation could be reached. Certainly it is not the policy of this State to deny its citizens relief or refuse to enforce claims against a foreign corporation where property applicable to the payment of their claims is within this State. The principle established in the case of General Railway Signal Co. v. Cade (122 App. Div. 106), I think; justifies this action, and although in that case the object sought was to obtain the specific performance of a contract to convey personal property, and not a mere money demand, the judgment asked for in this case is to enforce an equitable lien against the property of the corporation in the hands of these defendants. I think, therefore, the complaint alleges a cause of action and it was not necessary to make the corporation a party.'

The order appealed from is, therefore, affirmed, with ten dollars costs and disbursements, with leave, however, to the defendant to withdraw the demurrer and to answer within twenty days on payment of costs in this court and in the court below.

Clarke and Scott, JJ., concurred; Laughlin and McLaughlin, JJ., dissented.

Laughlin, J.

(dissenting):

The appellant demurred to the complaint, and thereupon the motion for judgment against him on the pleadings was made1 and granted. The complaint contains four counts on separate causes of action, for work, • labor and services, consisting of dredging, performed by the plaintiff for the W. H. Beard Dredging Company, which was a corporation duly organized under the laws of West. Virginia, and for the rent of a scow. The judgment demanded is that the defendants account for the property of the corporation which was transferred to them, and that it be adjudged that plaintiff has a lien thereon for the amount of the indebtedness and that the property be sold to satisfy the same, or that plaintiff have judgment against the defendants for the amount of such indebtedness. The three individual defendants were directors of the W. H. Beard Dredging Company, and two of them compose the copartnership firm of William Beard & Co., and they are sued in both capacities. The plaintiff’s debtor is-not made a party defendant. Plaintiff seeks to hold appellant liable to account and for the indebtedness as' a director of the debtor corporation and as' a member of the copartnership firm to which all of the assets of the debtor corporation have been transferred. The grounds of the demurrer are that there is a defect of parties defendant in that the debtor corporation is hot joined, and in that the stockholders thereof are not joined, and also that causes of action have been improperly united in that causes of action against the directors of the debtor corporation have been united with causes of action against its assignees; and further that the complaint' does hot state facts sufficient to constitute causes of action.

I am of opinion that the debtor corporation is a necessary party defendant, and that the complaint does not state facts sufficient to constitute a cause of action against the-appellant, The theory upon which the learned counsel for the respondent attempts to sustain the action, Without joining the'-debtor corporation, is that it has been dissolved and that its assets there-. upon passed into the hands of the directors as trustees. I thirds, however, that this, does not dispense with the necessity] of suing the corporation and establishing the 'indebtedness! against it by an adjudication which would thus be binding, not • only on the corporation, but on its directors, stockholders and other creditors as well. The statute of West Virginia, with respect to the continuance of the corporate existence after dissolution for the purpose of suing and being sued in liquidating the business of the corporation, differs in, phraseology from that of our own State, but not, I think, in substance. Under Our statute it has been quite recently held by this court that an action for an indebtedness owing by the corporation cannot be maintained against the directors after dissolution without joining the corporation. (Cunningham v. Glauber, 133 App. Div. 10.) Subdivision 3 of section 221 of the General Corporation Law of New York (Consol. Laws, chap. 23; Laws of 1909, chap. 28), providing for the continuance in existence of a dissolved corporation for the purposes in question, is as follows: 'c Said corporation shall nevertheless continue in existence for the purpose of paying, satisfying and discharging any existing debts or obligations, collecting and distributing its assets and doing all other acts required in order.to adjust and wind up its business and affairs,, and may su§ and be sued for the purpose of enforcing such debts or obligations, until its business and affairs are fully adjusted and wound up.”

Section 59 of chapter 58 of the Code or Statutes of the State of "West Virginia, set forth in the complaint, provides as follows: “When a corporation shall expire or be dissolved, its property and assets shall, under the order and direction of the board of directors then in office, or the receiver or receivers appointed for the purpose by such circuit court as is mentioned in the fifty-seventh section of this chapter, be subject to the payment of the liabilities of the corporation, and the expenses of winding up its affairs; and the surplus, if any, then remaining, to distribution among the stockholders according to their respective interests. And suits may be brought, continued or defended, the property, real or personal of the corporation, be" conveyed or transferred under the common seal or otherwise, and all lawful acts be done, in the corporate name, in like manner°and with like effect as before such dissolution or expiration; but so far only as shall be necessary or proper for collecting the debts and claims due to the corporation, converting its property and assets into money, prosecuting and protecting its rights, enforcing its liabilities, and paying over and distributing its property and assets, or the proceeds thereof to those entitled thereto.”

These statutory provisions with respect to the point in question are not, I think, distinguishable, and the construction placed upon our statute should be applied to the statute of West Virginia.

The learned counsel for the appellant also contends, on the authority of Styles v. Laurel Fork Oil & Coal Company (47 W. Va. 838), that the stockholders are necessary parties, and that we should be governed by the construction placed upon the statute in this regard by the courts of West Virginia (O’Reilly, Skelly & Fogarty Co. v. Greene, 18 Misc. Rep. 423), but I do not deem it necessary to express an opinion on those questions.

Technically speaking, there is no cause of action stated against the members of the copartnership firm of William Beard & Oo. upon any possible theory, for while it is alleged that all of the assets of the corporation were transferred to that firm, it is not alleged that the assets had any value, or that there were in fact any assets. However, the point that the complaint fails to state a cause of action is well sustained on a broader ground. Each count of the complaint contains the allegation that “on or about the 14th day of March, 1910, the said W. H. Beard Dredging Company was duly authorized to be dissolved and discontinue business as a corporation, and surrendered to the said State of West Virginia its charter and corporate franchise and duly authorized its existing Board of Directors, who were William Beard, Lavinia Beard and John B. Summerfield, to proceed to pay off and discharge its debts, liabilities and’ obligations, and to transfer and set over to William Beard and Lavinia Beard, composing the- firm of William Beard and Company, the whole of the property belonging to the said corporation, the W. H. Beard Dredging Company, both real and personal, together with all choses in action and the good will of said corporation. ” It is thus expressly alleged that the trustees -were authorized to- transfer and set over the property of the corporation to the copartnership, and' it is further alleged- that this was done, but the allegation in which it is stated that the property was so transferred contains the averment that this was done “in- violation of ” the statutes of West Virginia.. That is an allegation of a legal conclusion. If, as alleged, the directors were authorized to pay off and discharge the debts, liabilities and obligations.of the corporation, and to transfer the assets to the copartnership, it is difficult to see, on the mere allegation that the transfer was made, how the transfer was in violation of the statutes. ’ It is not to be mferred that they were to discharge the obligations of the corporation by dividing up the assets as they existed among the creditors, and; if so, the allegation of the complaint that they were authorized to transfer the assets of the corporation to the copartnership could only be true on the theory that the copart-nership as a creditor was entitled thereto. It is to be presumed that they were authorized to sell and dispose of the assets of the corporation and to use the proceeds to discharge the obligations of the company.- The consideration for the transfer of the assets of the corporation to the copartnership is not stated. It is not to be presumed that such transfer was made at an inadequate consideration. The mere fact, therefore, that- the directors, on the dissolution of the corporation, received its assets as trustees for the- creditors, and that they transferred the same to the copartnership, does not establish a liability on the part of an individual director or member of the copartnership firm either to account or for a personal judgment.

I, therefore, vote for reversal.

McLaughlin, J., concurred.

Order affirmed, with ten dollars costs and disbursements, with leave to defendant to withdraw demurrer and to answer on payment of costs.