Case ID: wis_101/html/0242-01.html
Source: Caselaw Access Project
Author: {"author": "Cassoday, C. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Rowe, Assignee, Respondent, vs. Leuthold and another, Appellants.
    
      November 2
    
    November 22, 1898.
    
    
      Corporations: Insolvency: Preference to officers: Fraudulent conveyance.
    
    An officer of a corporation which was never in a condition to pay all its debts in full cannot lawfully obtain a preference as a creditor over the general creditors, by giving to his wife a mortgage on the property of the corporation.
    Appeal from a judgment of the circuit court for Waupaca county: Chas. 1L Webb, Circuit Judge.
    
      Affirmed.
    
    The facts in the case appear in the opinion.
    Ror the appellants there was a brief by Gate, Sanbornt lamoreuos dc Parle, and oral argument by B. B. Parle.
    
    Ror the respondent there was a brief by Goodrich db Good-' ride, and -oral argument by F. J. Goodrich.
    
   Cassoday, C. J.

This action was commenced November 12, 1896, to set aside and cancel a certain mortgage for $6,000 executed by the Leuthold & Holman Granite Company, Limited, to Emma Leuthold, July 16, 1892, on the ground that the same was given in fraud of the creditors of the corporation. The complaint seems to state facts sufficient to authorize a recovery. The answer consists of admissions, denials,. and counter allegations. After the hearing of the case the court found, as matters of fact, in effect:

(1) That the Leuthold & Holman Granite Company, Limited, filed articles of incorporation and began doing business June 17, 1890; that the purpose of the corporation was to operate a granite quarry for the manufacture and sale of paving, building, dimension, and ornamental stones from the granite quarry known as the Leuthold & Holman Granite Quarry; that the corporation continued to do business to August 25, 1893, when it made a voluntary assignment to one David Parish, as assignee, for the benefit of creditors.

(2) That the corporation was so organized with a nominal capital stock of $100,000, divided into 2,500 shares of $50-each; that the defendant J. H. Leuthold subscribed for 500 shares, and C. E. Holman for 500 shares, which shares of stock were issued by the corporation to them, respectively, in payment of the granite quarry and premises described; that two shares were given to J. H. Leuthold, Jr., and two shares to Wilfred Leuthold, sons of J. IT. Leuthold, and two shares to L. Holman, and two shares to H. B. Holman, sons of C. E. Holman; that afterwards forty-six shares of stock were issued'to one James Chevne in part payment for services performed by him for the corporation; that no money was paid into the corporation for any of the shares of stock so issued, and no money was ever received by the corpora-' tion upon subscriptions for capital stock; .that the corporation at the time it began business had no cash capital or money with which to carry on and conduct its business.

(3) That June 27,1892, C. E. Holman was president, L. Holman vice president, and L. H. Leuthold secretary and treasurer, of the corporation, and they constituted its board of directors; that on that day, at a meeting of the stockholders of the corporation, a resolution was passed by the votes of J. H. Leuthold, Sr., and his two sons, and James Chevne, representing a majority of the stock of the corporation, removing C. E. Holman as president and director, and L. Holman as director, and, by a like resolution of the same day, electing J. H. Leuthold as president and director, and James Chevne director and vice president, and W. Leuthold director and secretary.

(4) That David Parish, so appointed assignee of the corporation, duly qualified and entered upon the discharge of his trust, and continued to do so until March 7,1896, when he was duly removed by the order of the circuit court, and the plaintiff herein was duly appointed by the court as such assignee; that the plaintiff thereupon duly qualified as such, and entered upon the discharge of his duties as such assignee of such corporation.

(5) That J uly 16, 1892, J. H. Leuthold, acting as president and director of the corporation, and James Chevne, acting as vice president and director thereof, and W. Leut-hold, acting "as secretary and director thereof, in’ behalf of the corporation, executed the mortgage of $6,000 to Emma Leuthold upon the granite quarry described, and the same was recorded J uly 19, 1892.

(6) That the corporation was not at the time of the execution of the mortgage, or at any other time, indebted to the defendant Emma Leuthold, but the same was given, as aforesaid, to J. LL. Leuthold, to. secure a claim then held by him against the corporation.

(7) That up to the time of the execution of the mortgage the corporation had been continuously run and operated at a loss, and had'been and was at that time unable to pay, from its own resources, its debts and obligations as they matured in the ordinary course of business, or within any reasonable time thereafter; that the corporation was kept in operation by advances and loans from time to time made to it by J. H. Leuthold and C. E. Holman.

(8) That at the time of the execution of the mortgage the corporation was in failing circumstances, and was largely indebted to J. LL. Leuthold, and divers other parties, which indebtedness it was nnable to pay, and that said indebtedness still remained unpaid and undischarged, and that the corporation was then insolvent.

(9) That J. LI. Leuthold knew, at the time of the execution of the mortgage, that the corporation was largely indebted to divers parties, and that it was in failing circumstances and was insolvent.

(10) That J. LL. Leuthold caused the mortgage to be executed by himself as president, and by James Ohevne as vice president, and by W. Leuthold as secretary, to his wife, Emma, as aforesaid, for the purpose and with the intent thereby to wrongfully secure to himself an unlawful preference over the demands and claims of other creditors, and in violation of his duties, as president and an officer of the corporation, to protect the interests of other creditors thereof.

(11) That it was necessary that the plaintiff, as such as-signee, should sell and dispose of the property and real estate of the corporation covered by the mortgage, in order to pay and discharge the lawful claims and demands existing against the corporation.

(12) That all the material allegations of the complaint had been proven and were true, and that the allegations of the answer had not been proven.

And as conclusions of law the court found, in effect, that the mortgage so executed to Emma, and given to secure a claim of J. LL. Leuthold, was fraudulent and void as to the creditors of the corporation; that the plaintiff was entitled to the relief demanded in the complaint, and to judgment canceling and setting aside the mortgage, and the lien by virtue thereof, as against the plaintiff, with his costs and disbursements. Erom the judgment entered thereon accordingly the defendants bring this appeal.

The finding that the nominal capital stock was $100,000, divided into 2,500 shares of $50 each, is obviously a clerical error, as it would only take 2,000 shares of $50 each to make the $100,000. The error, however, is without significance, since there was never issued any more than 1,066 shares, and the granite quarry appears to have been-the only consideration for almost all of such shares so issued. No money appears to have been paid on subscriptions or received for stock so issued. The moneys for operating expenses appear to have been largely,borrowed on indorsements of J. LL. Leuthold and O. E. ITolman, or one of them, or advanced by them, respectively, to the corporation. Erom the evidence as well as the findings it is quite apparent that after the corporation started in business it was never in a condition to pay all its debts in full. The deposing of C. E. Holman and his son as directors and officers of the corporation was, manifestly, done for the very purpose of enabling J. H. Leuthold to obtain an unlawful preference over other creditors by giving the mortgage in question to his wife, without any consideration from her. The case seems to be fully covered by recent decisions of this court, and therefore the question involved requires no new discussion. While it is true that the mere fact of the insolvency of a corporation does not convert its property into a trust fund for the benefit of all its creditors, so as to prevent one of them, without fraud, from obtaining a preference by ordinary adversary proceedings, yet the officers and directors of an insolvent corporation cannot lawfully prefer themselves over its general creditors. Ballin v. Merchants’ Exch. Bank, 89 Wis. 278; Ford v. Hill, 92 Wis. 188, 194; Hinz v. Van Dusen, 95 Wis. 503, 507, 508. That is just what J. H. Leuthold attempted to do by giving the mortgage in question to his wife.

By the BovH.— The judgment of the circuit court is affirmed.