Case ID: ad_4/html/0348-01.html
Source: Caselaw Access Project
Author: {"author": "Merwin, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Frederick I. Baker, as Receiver of The Fort Ann Woolen Company, Appellant, v. Louis W. Emerson and James A. Emerson, Respondents.
    
      Preference by an insolvent corporation -^-expectation of financial assistance, imma- : terial on the question of an intent to prefer— test of the validity of a payment to a,, creditor.
    
    In. an action brought by the receiver of a manufacturing corporation to recover from the defendants a sum of money alleged to. have been paid them as a preference, in violation of section 48 of chapter 688 of the Laws of 1893, it appeared that about the time of the payment the insolvency of the corporation was imminent. Upon the further question as to whether the payment , Was made with the intent to give a preference, the president Of the corporation testified that there was' no intent to give a preference to the defendants; and that he considered that the company could pay all its debts if he could have time to bring it around. The secretary testified that he did not intend to give the defendants a preference “if all the agreements were carried out.” What these agreements were did not appear.
    It was shown that $17,000 worth,of debts to other persons were due when the indebtedness to the. defendants (which was paid a few days before it fell due) would have matured, and that the company did not have available assets from which to pay tho other debts, although the managers of the corporation expected to get help through other persons. Within two days after the payment to the defendants two suits were brought by other creditors with the intention of obtaining a preference if possible.
    
      Held, that, the corporation was insolvent when it could not pay its debts in the due course Of business;
    That the defendants received an advantage; that the company meant they should receive an advantage, and that this constituted an intent to make a preference;:
    "That an, intent to prefer could not be rebutted by showing that the debtor -had . also another motive, in that he expected help by means, of future loans of money by the aid of which he hoped to be enabled to continue his business;
    
      That the statute did not make the validity of the payment depend on whether it was made in the ordinary course of business or on the question whether.the creditor had any reasonable grounds to believe the debtor to be insolvent, but simply on whether there was insolvency actual and imminent and an intent to prefer.
    Appeal by the plaintiff, Frederick I. Baker, as receiver of the Fort Ann Woolen Company, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of Washington on the 6th day of August, 1895, upon the decision of the court, rendered aftér a trial, at the Washington Special Term, dismissing the plaintiff’s complaint upon the merits.
    
      Potter & Lillie, for the appellant.
    
      T. D. Trumbull, Jr., for the respondents.
   Merwin, J.:

The Fort Ann Woolen Company is a domestic manufacturing corporation, incorporated in 1883, and was engaged in the business of manufacturing woolen goods until June 5,1893, when it stopped, doing business. Upon that day attachments to a large amount were levied upon, its' property.- The plaintiff was afterwards duly appointed receiver, and on the 34th of May, 1894, brought this action to recover of the defendants, the srun of $3,000, which was paid by the company to the defendants on the 29th of May, 1893, in payment of a note of the company of that amount held by the defendants.. The note was dated February 2, 1893, had been dis.counted by the defendants for the company and'it became due on June 5, 1893.

The .claim of-the plaintiff is that the payment to defendants was in violation of ■ the provisions of section 48 of chapter 688 of the Laws of 189.2. That section, so ■ far as it is important here, is as follows: . ' .

“No corporation which shall have refused to pay any of its notes or other obligations when due, in lawful money of the United States, nor any of its officers or directors, shall transfer any of its property to any of its, officers, directors or stockholders, directly or indirectly, for the payment of any debt, or upon any other consideration than the full value of the property paid in cash, lío conveyanc'e, assignment or transfer of any property, of any such corporation by it or by any officer, director or stockholder thereof, nor any. payment made, judgment suffered, lien created or security given by it or by any officer, director or stockholder when the corporation is insolvent or its insolvency is imminent, with the- intent of giving a preference to any particular creditor over other creditors of the corporation, shall be valid.
“ Every person receiving by means of any such prohibited act or deed any property of the corporation shall be bound to account therefor to its creditors or stockholders or other trustees.”

It was found by the Special Term that the payment was not made' with the intent of giving a preference to the defendants. The plaintiff claims that this finding is not warranted by the evidence.

On the 29th of May, 1893, the company was in debt to the amount of about $60,000 mainly for bank discounts. Of this there was then past due $8,500, of which $7,000 became due May nineteenth and $1,500 on May twentieth. Protest thereof had been waived. There was also about $8,500 that became due prior to June fifth. The entire indebtedness became due on or prior to' September 6, 1893. ! '

A few days before the twenty-ninth of May, Mr. Barnett,-the-, president of the company, was informed that the defendants were not willing to renew the note. He then proposed to give them a draft on Hull & Co., at four months, saying to them that-they must get along with that" as he couldn’t pay them money. Ho arrangement was then concluded. Hull & Go. were dealers in woolen goods at Poughkeepsie and the company had sent them their goods for sale under a contract brought about by . one of the defendants: On this deal Hull & Co. owed the company -on the ■ twenty-nintli of May about $4,700.-

On the twenty-eighth of May one of the defendants and Mr. Hull appeared at Fort Ann, and on the twenty-ninth the note held by the defendants was paid by a draft on Hull & Co. of $3,075 due Hovember fourth, which Hull then and there accepted. Upon the same occasion Hull & Co. advanced to the company $500 Used to pay the pay roll of the week, and a draft of $370 was turned over- to Mr. Barnett, for -what purpose does not appear. The balance of the.claim of -the company against Hull & Co. was settled by allowance for imperfect goods. The other property of the company consisted of its mill and machinery, stock of goods in the mill, and accounts with commission merchants. The mill and machinery, according to the estimate of Mr. Barnett, was of the value of about $50,000, and the stock in the mill $25,000. A witness for plaintiff estimated the value of the mill and machinery at about $10,000, and that is about what it sold for afterwards on a public sale under the order of the court. The stock was sold at public sale for $5,600. Of the accounts with commission merchants, there were two. representing goods of the company to the amount of about $1,500, and goods had been consigned to Whitman & Phelps, unaccounted for, to the amount of about $14,000. Whitman ■& Phelps had a large claim against' the company and some of the goods were defective.

In Brouwer v. Harbeck (9 N. Y. 589, 594) it is said “ a corporation, like an individual, is insolvent when it is not able to pay its debts. Insolvency means a general inability to answer in the. course of business the liabilities existing and capable of being enforced. ■(Cutten v. Sanger, 2 Younge & Jerv. 459; 2 Bouv. Inst. 157.) ” The term insolvency, as used in the Bankrupt Act, when applied to traders and merchants, has been "held to mean an inability of a party to pay his debts, as they become due, in the ordinary course of business. (Toof v. Martin, 13 Wall. 40.)

Very clearly in the present case, to say the least, the insolvency of the corporation was imminent. The further question then is under the statute, "was the payment made with .the intent of giving the defendants a preference %

The managers of the company were the president and secretary. Mr. Barnett, the president, testifies that there was no intent to prefer the defendants; that he at that time considered the company ■solvent with property enough to pay all its debts if he could have time to bring it around. Mr. Richmond, the secretary, testified that he did not intend to give the defendants a preference “if all agreements were carried out.’-’ It does not appear what the agreements were that-he referred to.

A preference was in fact made in the sense that the defendants received their pay and other creditors whose debts were due did not, nor did those whose debts became due afterwards and before the defendants’ note by its terms became due. These two classes of debts amounted to about $17,000, and -the defendants’ debt was by the act of the;officers-of the;company placed ahead. ' This was. purposely doné, and the officers knew-that, there were then no available! assets to provide for the other debts. ...

In Forbes v. Howe (102 Mass. 427, 436), under a statute that avoided a sale made with- a view to give a preference,, if the debtor at the time was in fact insolvent, although he may not have in fact contemplated insolvency, it was held that the phrase “ with' a view to give a preference,” should be construed to include/- an intent to give one creditor any advantage over others in respect of payment or. security of his debt.” ' The -same view was , taken Rasin v. Ammidown (15 Hun, 422).

There Would seem to be no doubt about defendants receiving an advantage, and that the company, through its officers, meant it should be so. They knew that- thecompany with the moneys it then had could not meet its obligations in the ordinary course of business as they became due. The company could pay one: debt. They could not then pay all that were due, and it was, to say the least, very doubtful whether they 'could ever pay rail. They gave the defendants the benefit of the certainty.

But the managers say in a qualified way that they expected to be able to pay all, and, therefore, there was no intent to prefer! Still, in two days after,, and.on the thirty-first of 'May, a suit in behalf of á friendly creditor was brought at the instigation of one or both of the. managers, and on the second of June a suit was brought against the company -by the secretary himself on a demand note' held by him of $3,00.0. Both .of these suits were brought in order to obtain, if possible, a preference, and there liad been no change in the affairs of the. company after the twenty-ninth. This would not look as if the managers on the twenty-ninth believed in their ability to pay all with the means the company then had.- It may 'be that' they expected to get help through Hull &'Oo. or the defendants and in some way go on. This, however, would not validate the transaction., Every person is to be presumed to.intend' the natural and probable .consequences- of his own acts. The intent to prefer is not rebutted by showing “ that the debtor has also another motive to the proceeding, namely, an expectation of pecuniary or other future benefit to himself by means of further loans of money, and being enabled thereby to continue his business.” (Denny v. Dana, 2 Cush. 172.) In Vennard v. McConnell (11 Allen [Mass.], 562) it is said : The proposition cannot be maintained * * * that the payment of a debt by a party who is insolvent cannot be regarded as a preference if made with the hope and expectation by the debtor that he will be- able eventually to pay all his debts in full.” (See, also, Rison v. Knapp, 1 Dill. 195; In re Silverman, 2 Abb. U. S. Rep. 243.)

An argument is based on the inconvenience of -dealing with a corporation where, without fault -of the creditor, payments may be recovered back. The trouble, if any, in that respect is with the statute. The validity of the payment is not made to depend on whether it is made in the ordinary course- of business, or on whether the creditor has any reasonable ground to believe the debtor insolvent, but simply on whether there is insolvency, actual or imminent, and. an intent to prefer. (Bish. on Insolv. Debt. [3d ed.] 183.) If the: statute is too severe, the remedy is not with the courts.

The undisputed facts in this case show, I think, in substance an. intent to prefer the defendants, and it is no answer to this.for the: managers to say that they did not mean to do it. They knowingly and purposely did do it. The judgment should, I think,-be reversed, on the ground that the evidence does not warrant the conclusion that there was not an intent to prefer.

All concurred.

Judgment reversed and new trial granted, costs to abide the event.