Case ID: ohio-st_47/html/0581-01.html
Source: Caselaw Access Project
Author: {"author": "By the Court.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Damarin & Co. et al. v. Huron Iron Co. et al.
    
      Corporations — Mortgage executed by, when insolvent — Not necessarily invalid.
    
    A mortgage executed by a corporation to secure a pre-existing debt, is not, necessarily, invalid for the reason that the company was known to be insolvent, where the company is at the time in the possession of its property, and in the active prosecution of its business, and intends to ■ continue therein, unless prevented by other creditors; and the object of the mortgage is, on its-part, not to give a preference to one creditor over another, but simply to obtain an extension of credit.
    (Decided December 9, 1890.)
    Error to the Circuit Court of Jackson county.
    The action below was commenced in the court of common pleas by John D. Jones, a creditor of The Huron Iron Company, asking a judgment upon his claim and the appoint- - ment of a receiver on the ground that the company was insolvent and selling its iron at ruinous prices in order to raise money. All the creditors as well as stockholders were made parties, and a receiver was appointed. Among those who answered were The Portsmouth National Bank, The First National Bank of Jackson, and The Iron Bank of the same place, to each of which companies The Huron Iron Company had executed a mortgage on the day previous to the commencement of the suit. Damarin & Compay, together with the other unsecured creditors of the company, contested the validity of these mortgages as against themselves. The case, after its determination in the common pleas, was appealed to the circuit court, which found the facts as to the execution of these mortgages as follows:
    
      First — That on the 27th day of September, 1882, The Huron Iron Company was in debt to The Portsmouth National Bank, The Iron Bank and The First National Batik of Jackson, in the amounts and in the manner claimed by said banks in their respective cross-petitions. And the said William Yaughn, Lot Davies, John J. C. Evans, Adam Bauer and C. F. Bertsch, who, while in form parties as makers or indorsers to some of the paper held by said banks evidencing their said claims, yet were in fact mere accommodation sureties for The Huron Iron Company.
    
      Second — That The Huron Iron Company for about a year prior to the appointment of the receiver as hereinafter mentioned, was much embarrassed pecuniarily, and although its general commercial credit remained good, it endeavored to borrow money to reduce its indebtedness .to the banks, but failed to do so. The banks were pressing for security for' their claims, and at the instance of the The First National Bank of Jackson and The Iron Bank, a meeting of the directors of The Huron Iron Company was called for the 27th day of September, 1882, to consider the request of said banks for mortgage security. Pursuant to this call, five of the seven directors of The Huron Iron Company met on said 27th day of September, 1882, at Jackson; those present being William Yaughn, J. D. Clare, Lot Davies, John J. C. Evans and Robert G. Hunter, and at once proceeded to consider the financial condition of the company and the propriety of giving mortgage security to the banks, and ascertained its financial condition to be bad, and that its indebtedness was about $85,000. After considering, it was resolved to give mortgages upon the company’s real estate to secure the claims of all three of the banks, and a resolution was duty adopted by the aforesaid five directors for that purpose, and to continue business under the management of Lot Davies if they could do so. The mortgages mentioned in the cross-petition of said banks were thereupon prepared by the attorneys of the banks and duty executed by the officers of the company and placed on record.
    At the same time, in view of the contingency of the unsecured creditors moving against the cdmpany upon learning of its action in securing the banks, it was determined in such event to place the business and property of the company in the hands of a receiver, and the person was then agreed upon who, in such cases, should .institute the necessary suit, and also the person who should act as receiver. Mr. E. T. Jones, who was afterwards appointed receiver, being the person then agreed upon for that place, and Mr. Linn Bentley as the person to bring the suit, and who, in fact, was applied to for that purpose, but declined to act.
    
      Third — The said mortgages conveyed all the real estate belonging to The Huron Iron Company, and were made and executed upon no other consideration than the pre-existing indebtedness of the company to said banks set forth in their cross-petition; but the said mortgages by their terms were made to secure the gross indebtedness, and not the notes evi- . dencing the same.
    
      Fourth — At the time said mortgages were executed the said J. D. Clare was not only a stockholder and director of The Huron Iron Company, but was also a stockholder and director, and was vice president of The First National Bank of Jackson; and the said Lot Davies was also a stockholder and director in both The Huron Iron Company and The First-National Bank.
    
      Fifth — At the time of the execution of said mortgages, said banks, and each of them, knew that The. Huron Iron Company was financially embarrassed.
    
      Sixth — On the 28th day of September, 1882, the next day after the mortgages were executed, the said John J. C. Evans and David Davis, who was the secretary of said company and attorney of The Iron Bank, in view of the insolvency of said company, and on the ground that Lot Davies had left the furnace and refused to manage it, procured the plaintiff, John D. Jones, to bring this suit, the said Linn Bentley having refused to do so; and on the morning of the 29th day of September, 1882, procured the appointment of E. T. Jones as receiver, who at once took charge of the. business and property of said company, and afterwards converted all the assets of the company into money, which was brought into court and is now here for distribution.
    
      Seventh — The said mortgages were executed on the 27th day of September, A. t>. 1882, and were delivered and recorded as stated in the pleadings, all three of the mortgages being delivered for record at the same time. That the mortgage to The Portsmouth National Bank was executed by The Huron Iron Company and delivered by it to the recorder of Jackson county without the knowledge of said bank or any of its officers or agents; but that at the time it was so executed W. A. Hutchins, although without any authority to do so, assumed to represent the bank, and on its behalf accepted said mortgage and authorized the recording thereof, and on the next day submitted his action to Samuel Reed, then the cashier of said bank, by whom it was fully ratified and confirmed. That Reed acted for the bank in his capacity of cashier.
    That neither the action of Hutchins nor the matter of the acceptance of said mortgage was ever submitted to the directors of said bank at any meeting of the board, nor did they as a board ever take action upon it in any’ way; but after Reed was so informed by Hutchins that the mortgage had been taken, Reed, in his capacity as cashier, informed John G. Pebbles, the president of the bank, of the fact, who was. entirely satisfied therewith; and that he also informed M. R. Tewksbury, one of the directors of the bank, of the fact, who, although not very well satisfied therewith, acquiesced therein ; the said Reed, Pebbles and Tewksbury constituting at the time three of the five directors of the bank; and in addition thereto the teller of the bank, W. C. Silcox, was sent by Reed, the cashier, to Jackson, Ohio, to examine and see that the mortgage' had heen left for record, and he accordingly made the examination and ascertained that it had been so left.
    
      Eighth — At the time of the execution of said mortgages The Huron Iron Company was in fact actually insolvent, but the fact of such actual insolvency was not known to said bank. The property of the company was in the hands and under the control of its officers and agents. Its furnace was in blast, its business was being carried on as a going business, and was in active operation under the exclusive management and control of its officers, as it had previously been. The company had not taken action to abandon or discontinué business, but expected to continue the same as before.
    
      Ninth — In giving and taking said mortgages, all parties acted in good faith, aiming to give and accept security for a bona fide indebtedness. The said Lot Davies and J. D. Clare, though stockholders and directors of The First National Bank, yet acted in good faith as regarded their duty as stockholders and directors of The Huron Iron Company.
    And as its conclusions of law upon the above found facts the court find, that by the execution and delivery of said mortgages the said banks each acquired a lien upon the real estate of The Huron Iron Company to secure the amount of their respective claims, next in order of priority after the mechanics’ lien of Benoni Gray and The Portsmouth Foundry & Machine Works, and that there is now due them thereon from The Huron Iron Company, from which they have a lien, the sums following, being the principal of each claim with interest to the 23d day of May, 1883, being the day of the sale of said real estate, to wit:
    
      To the Portsmouth National Bank . $30,365 00
    To The Iron Bank......2,619 90
    To The First National Bank of Jackson . 20,850 60 And that they are entitled to a pro rata distribution of the balance of the proceeds of the sale of said real estate remaining after paying therefrom a proportionate share of th.e costs of the action and the prior liens upon said real estate as herein determined.
    And the court coming now to distribute the moneys now in the hands of the sheriff, do find and order that the costs of this action, taxed to $........be paid out of the personal property and the real estate of The Huron Iron Company in the proportions following, viz.:
    Out of the proceeds of the personal property $........
    And out of the proceeds of real estate $........
    And it is further ordered and adjudged that the proceeds of said real estate now in the hands of said sheriff, amounting to $30,666, be paid and distributed as follows, viz.:
    1st. Upon costs of this action . . . $........
    2d. To Benoni Gray . . . . $........
    3d. To The Portsmouth Foundry & Machine Works......$ 744.25
    4th. To The Portsmouth National Bank $........
    5th. To The Iron Bank . . . . $........
    6th. To The First National Bank of Jackson $........
    And it is further ordered and adjudged that the proceeds of the personal property now in the hands of the sheriff, amounting to $19,436.22, be paid and distributed as follows, to wit:
    1st. Upon the costs of this action . . $........
    2d. To John D. Davis ... $ 5,459.20
    3d. To the following named creditors of The Huron Iron Company, equally in proportion to their respective claims as heretofore and herein found by the court, or allowed bjr the receiver; and as to them and all the other creditors, that the residue of such fund, after the payments hereinbefore provided for, be distributed to the general creditors upon the basis of tbe amounts due them on tbe first day of this term as follows, to wit:
    The Portsmouth National Bank . . $.......
    The Iron Bank of Jackson . . . $.......
    The First National Bank of Jackson . $.......
    E. L. Harper & Co.....$ 19,512.57
    John D. Jones ...... 2,104.30
    To these findings, both of fact and of law, Damarin & Company and other unsecured creditors excepted at the time, and asked that they should be set aside and a new trial granted, which was overruled and judgment entered on the findings.
    
      A. C. Thompson, of counsel for Damarin & Company,
    cited the following authorities. Morawetz on Corporations, section 540c; Stoddard’s Case, 4 Court Claims Reports, 511; Rouse v. Bank, 46 Ohio St. 493; Ford v. Osborn, 45 Ohio St. 1; Rolling Stock Co. v. Railroad, 34 Ohio St. 450; 37 Ohio St. 400.
    
      F. W. Strong, and Moore Moore, for E. L. Harper & Co.
    cited the following authorities. Rouse v. Bank, 46 Ohio St. 493; Robbins v. Embry, 1 Sm. & M. 207, 258: Williams v. Jones, 23 Mo. App. 132; White Mf’g. Co. v. Pettes, 3 Ry. & Cor. L. J. 22; Beach v. Miller, Id. 335; Bank v. Falls, 19 Law Bull. 253; Ford v. Osborn, 45 Ohio St. 1; Mor. on Corp., sec. 540c; 2 Pom. Eq. Jur., secs. 666, 667; Railway v. McCoy, 42 Ohio St. 251; Mor. on Corp., sec. 787; Taylor on Corporations, secs. 634, 637, 759; Koehler v. Black River Co., 1 Black, 715; Bradley v. Farwell, 1 Holmes, 433; Coons v. Braine, 9 Fed. Rep. 532; Drury v. Cross, 7 Wall. 302; Lippincott v. Carriage Co., 25 Fed. Rep. 577; Richards v. Insurance Co., 43 N. H. 263; Hopkins & Johnson’s Appeal, 90 Pa. St. 69; 1 Morawetz Private Corporations, see. 517-531; Goodin v. Canal Co., 18 Ohio St. 169; Rolling Stock Co. v. A. & G. W. Ry., 34 Ohio St. 463; Cook on Stock and Stockholders, secs. 648, 649, 658; Wardell v. U. Pac. Rd., 4 Dillon, 330; 103 U. S. 651; Thomas v. Brownsville, etc., Ry., 1 McCreary, 392; 109 U. S. 522; Cook v. Sherman, 20 Fed. Rep. 167, 175; Aberdeen Ry. v. Blakie, 1 Macq. Sc. App. 461, 471; Flanagan v. G. W. Ry., L. R. 7, Eq. Cas. 116; Gardner v. Butler, 30 N. Jersey Eq. 702, 721; Guild, v. Parker, 48 N. Jersey Law, 430, 435; Cumberland Coal, etc., v. Parish, 42 Maryland, 598, 604-607; Covington, etc., Rd. v. Bowler, 9 Bush (Ky.) 468; Ryan v. Leavenworth, etc., Ry., 21 Kansas, 365, 397-399; Jones v. Morrison, 31 Minn. 140, 147-149; European, etc., Ry. v. Poor, 59 Maine, 277; Butts v. Wood, 37 N. Y. 317; Hoyle v. Plattsburgh Ry., 54 N. Y. 314; Metropolitan Ry. v. Manhattan Ry., 15 Am. & Eng. Ry. Cas. 1; Flint, etc., Ry. v. Dewey, 14 Mich. 477, 487, 488; 2 Pom. Eq. Jur., secs. 748, 749; Lewis v. Anderson, 20 Ohio St. 281; Copeland v. Manton, 22 Ohio St. 402; Casey v. Cavaroc, 96 U. S. 467; Section 4150 Revised Statutes of Ohio.
    
      Wells A. Hutchins and A. T. Holcomb, for defendants in error,
    cited and commented on the following authorities. Rouse v. Bank, 46 Ohio St., 493; Mor. on Corp., vol, 2, sec. 809; Barrich v. Gifford, 47 Ohio St.—; Hawkins v. Furnace Company, 40 Ohio St. 507; Mora. on Corp., vol. 2, sec. 787; Garrett v. Plow Co., 70 Iowa 697; Buell v. Buckingham, 16 Iowa, 284; Bank v. Watson, 48 Iowa, 336; Hallam v. Hotel Co., 56 Iowa, 178; County Court v. Railway Co., 35 Fed. Rep. 161; Bank v. Whittle, 78 Va. 737; St. Louis v. Alexander, 23 Mo. 483; Bank v. Flour Co., 41 Ohio St. 552; Rolling Stock Co. v. Ry. Co., 34 Ohio St. 450; Mor. on Corp., vol. 1, secs. 522, 524; Id. vol. 2, secs. 618, 625, 626, 629, and cases there cited.
    
      Tripp § Davis, for defendants in error, also filed elaborate briefs, making substantially the same points and citing the same authorities as other counsel for defendants in error.
   By the Court.

There is some question as to what this suit should be regarded, whether as in the nature of an assignment, or as a suit to ‘dissolve a corporation on the ground of insolvency, or for the appointment of a receiver in aid of a creditor only. We shall treat it, however, as a suit to dissolve a corporation, because upon the facts as found, such proceeding might have been instituted, and a dissolution must necessarily result from awarding the relief to which the creditors are entitled: The company, being indebted largely in excess of all its corporate property and assets of every kind,* cannot, for the want of capital, continue business after its creditors have been satisfied.

The question then arises whether, under the provisions of § 5661 Revised Statutes, these mortgages, executed at the time and under the circumstances that they were, are valid or not. The section reads as follows:

“ All sales, assignments, transfers, mortgages, and conveyances, of any part of the estate, real or personal, including things in action, of every description, made after the petition for dissolution of the corporation is filed, in payment of or as security for any existing or prior debt, or for any other consideration, and all judgments confessed by such corporation after that time, shall be absolutely void as against the receiver appointed on such petition, and as against the creditors of the corporation.”

The petition in this case was filed on the day following the execution and record of the mortgages to the banks; but, upon the principle of Rouse, Trustee, v. The Bank, 46 Ohio St. 498, there can be no question but that, if at the time of the execution of these mortgages, the intention were to procure the institution of a suit on the next day for the dissolution of the corporation and the appointment of a receiver, the execution of the mortgages and the commencement of the suit should be regarded as one transaction; and to give effect to the mortgages would, under such circumstances, amount to a plain fraud on the law. This, however, is a question of fact upon which the court below, after hearing the evidence, found differently. It, in substance, found that, though the corporation was insolvent to the knowledge of its officers, “ its general commercial credit remained good,” and that it was in the control of its property, actively prosecuting its business, and expected to continue to do so as before; and that all parties acted in good faith.

There can be no doubt that all such transactions between a company and a part of its creditors, after insolvency is known to exist, should be closely scrutinized by a court, and the adoption of no mere device or form of proceeding, should be permitted to frustrate the equitable provisions of the statute, applicable to the dissolution and winding up of insolvent corporations. Still the right of a company, though embarrassed, to continue its business and to retrieve its fortunes, if possible, must be conceded to it as well as to natural persons, and this right necessarily carries with it the power to obtain an extension of credit by giving a mortgage upon its property to such of its creditors as are unwilling to give further time unless so secured. When this power is fairly and honestly exercised, with no purpose at the time of immediately abandoning business or making an assignment, the validity of a security so obtained cannot well be questioned.

We might, upon the evidence in this case, have arrived'at a different conclusion from the court below as to whether there was any actual intention on the part of the company or its officers to continue business after the execution of these mortgages. There are a number of things in the evidence that might be regarded as casting a doubt upon this question. Still it is not the practice of this court to weigh the evidence, but to accept the facts as they have been found by the court in which the evidence was heard. And, for this reason, the judgment is

Affirmed.