Source: http://masscases.com/cases/sjc/287/287mass280.html
Timestamp: 2019-04-22 10:47:56+00:00

Document:
ALBERT RICHARDS CO. INC. vs. THE MAYFAIR, INC., & others.
Present: RUGG, C.J., PIERCE, FIELD, DONAHUE, & LUMMUS, JJ.
Equity Pleading and Practice, Appeal, Requests and rulings. Corporation, Officers and agents, Stockholder, Creditor. Mortgage, Of personal property: validity. Equity Jurisdiction, Conveyance in fraud of creditors. Fraud.
(4) In any view of the evidence, the final decree was warranted and must be affirmed.
Directors of a corporation which is insolvent or about to become so cannot obtain for themselves a preference over other creditors in respect to the assets by taking a mortgage or other security for preexisting debts owed to them.
BILL IN EQUITY, filed in the Superior Court on April 27, 1933, against The Mayfair, Inc., Mark Sherman, and Club Mayfair, Inc., and described in the opinion.
The suit was heard by Greenhalge, J., the evidence being reported. Material evidence and findings and rulings by the judge are described in the opinion. From a final decree establishing the debt due the plaintiff in the sum of $1,089.16 and granting the relief sought, the defendants Sherman and The Mayfair, Inc., appealed.
S. Sigilman, for the defendants Sherman and another.
L.G. Dennett & J.W. Gorman, for the plaintiff.
PIERCE, J. By this suit in equity the plaintiff seeks to establish a claim against the defendant, The Mayfair, Inc., and to have declared void a personal property mortgage, given by The Mayfair, Inc., to the defendant Mark Sherman, and to have set aside a foreclosure sale thereof, on the ground that these were a fraud upon the plaintiff as a creditor. A final decree was entered granting the relief prayed for, and the case is before this court upon the appeals of two of the defendants from the final decree and exceptions to the judge's refusal to rule as requested. The evidence is reported. The record also contains findings and rulings by the trial judge.
used by the Club Mayfair, Inc., but he still retains title and preserves it intact. One of the purposes of the incorporation was to preserve these assets from the landlord.
Upon these facts the trial judge found and ruled that the execution and delivery of the mortgage and note by the defendant The Mayfair, Inc., to the defendant Sherman, and the subsequent foreclosure sale, constituted a positive and actual fraud upon the creditors of the defendant corporation. A final decree was ordered, "substantially, in the form prayed for in the bill, with costs, and dismissing the bill as to the defendant Club Mayfair, Inc."
This being a suit in equity, with findings of fact and a full report of the evidence, on appeal to this court it is the duty of this court to decide the case upon its own judgment, giving due weight to the findings made and not reversing them unless plainly wrong. Moss v. Old Colony Trust Co. 246 Mass. 139, 144. In such a case the refusal of the trial judge to grant requests for rulings of law is considered as presenting the principles which the appealing party would have this court apply to the performance of its duty to order a correct decree upon the pleadings and evidence, whatever view of the law was entertained by the trial judge. See Graustein v. Dolan, 282 Mass. 579, 583-584.
It is not entirely clear upon what principle of law the trial judge made his final rulings, but presumably the facts were found in accordance with his understanding of the applicable principle of law. The evidence was conflicting and the credibility of the witnesses was important.
profits and losses were shared twenty-five per cent to Staviski, one three-hundredth to Mr. Dow, and the balance to Sherman; that after the purchase by Sherman of the interest of Kaufman, with the exception of the $5,000 of Staviski (the exact nature of the appearance of which in the account is somewhat disputed), Sherman had the principal share in The Mayfair, Inc.; that no one other than Sherman advanced any money to the corporation after it was formed.
have appeared in the statement of December, 1931, as a loan payable, and the $300 subscribed capital stock which appeared on that statement.
If the evidence and the findings by the trial judge justified a conclusion that only three shares of the defendant corporation were ever subscribed for and that with the exception of the $5,000 alleged to have been advanced by Staviski all advances which were made by Sherman were loans and intended as such by him, then he, being an officer of the corporation, could not compete with legitimate creditors of the corporation in the distribution of its assets. For this reason the decree of the court below was right.
This court adheres to the usual rule that ownership by a person of all the stock of a corporation does not warrant disregarding the corporate entity and does not fasten on such person liability for the obligations of the corporation. Berry v. Old South Engraving Co. 283 Mass. 441, 450-451, and cases cited. Circumstances sometimes exist which permit a sole stockholder to prove his claim against the corporation in competition with other creditors, Salomon v. A. Salomon & Co. Ltd.  A.C. 22, Wheeler v. Smith, 30 Fed. Rep. 2d 59, 61, H.E. Briggs & Co. v. Harper Clay Products Co. 150 Wn. 235, but here Sherman tried to run the business which required expenditures of well over $75,000 on a stock investment of $100 by himself and possibly $5,000 or $6,000 by another. He entirely controlled the affairs of the corporation, and was in no proper sense a creditor, but was an owner of a substantial part of it. See Luckenbach Steamship Co. Inc. v. W.R. Grace & Co. Inc. 267 Fed. Rep. 676, 681. Such stockholder furnishing the capital necessary to the size of the corporation as a loan cannot in the circumstances of this case gain a preference over creditors in the distribution of the assets. Clere Clothing Co. v. Union Trust & Savings Bank, 224 Fed. Rep. 363. New York Trust Co. v. Island Oil & Transport Corp. 56 Fed. Rep. 2d 580, 583. S.G.V. Co. v. S.G.V. Co. 264 Penn. St. 265.
of the corporation, manifestly the note and mortgage should be set aside. Sherman likewise would have no right to come in and prove his claims to the detriment of other creditors.
was owed Sherman. There was no doubt about insolvency then. It is clearly inferable, therefore, that the mortgage was given at least with insolvency in mind and with an intention of obtaining a preference in the assets when that event should occur.
Although Sherman testified that he advanced about $2,000 to the corporation after obtaining the mortgage, it was found by the trial judge that the only consideration was the preexisting debt as disclosed on the books. Certainly the giving of the mortgage was not part of a transaction putting new money into a corporation or part of any arrangement looking to the carrying on of the business in a rational expectation and hope of ultimate success. The case at bar is in this respect to be distinguished from Holt v. Bennett, 146 Mass. 437, where it was held that payments to directors of money borrowed from them made in the usual course of business, and not in view of the probable insolvency of the corporation, and while it expects in good faith to proceed with its business, are not frauds upon the other creditors and cannot be recovered by them from the directors to whom such payments were made. Sanford Fork & Tool Co. v. Howe, Brown & Co. Ltd. 157 U.S. 312, 318. See also Cosmopolitan Trust Co. v. S.L. Agoos Tanning Co. 245 Mass. 69, 73.
evidence the mortgage was void as against creditors of the corporation.
It is unnecessary to consider the exceptions in detail. They disclose no reversible error.

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