Case Name: Walter N. Gill, as Trustee, etc., of Henry H. Bell's Sons' Company, Bankrupt, Respondent, v. Bell's Knitting Mills, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1908-11-25
Citations: 128 A.D. 691
Docket Number: 
Parties: Walter N. Gill, as Trustee, etc., of Henry H. Bell’s Sons’ Company, Bankrupt, Respondent, v. Bell’s Knitting Mills, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 128
Pages: 691–693

Head Matter:
Walter N. Gill, as Trustee, etc., of Henry H. Bell’s Sons’ Company, Bankrupt, Respondent, v. Bell’s Knitting Mills, Appellant.
Third Department,
November 25, 1908.
Bankruptcy — conveyance to secure creditors — when not] fraudulent.
Where the chief stockholders of-a corporation, believed to be solvent, having sole charge and management of its affairs, by agreement with its creditors made a transfer of all its personal property and a lease of its real estate to another corporation, organized for the purpose of conducting the business for the benefit of the creditors and extricating the corporation from its financial embarrassment, and agreed that no part of the profits should be.paid to them, or to secured creditors who were amply protected, the conveyance is not void as giving an unlawful preference in violation of section 48 of the Stock Corporation Law.
The profits realized are held by the grantee as trustee for the creditors, and belong to them and not to the bankrupt corporation or its trustee.
Chester, J., dissented.
Appeal by the defendant, Bell’s Knitting Mills, from an interlocutory judgment of the Supreme Court in favor of the plaintiff,' entered- in the office of the clerk of the county of Ulster on the 14th day of February, 1908, upon the decision- of the court rendered after a trial at the Ulster Special Term, declaring the agreement under which the defendant holds the property of the bankrupt fraudulent and illegal, as giving a preference to some particular, creditors over other creditors in violation of section 48 of the Stock-Corporation Law (Laws of 1892, chap. 688; as amd. by Laws of 1901, chap. 354), and for the recovery of the property so illegally held and the profits therefrom, and appointing a referee to take and state the account.
Einstein, ,Townsend & Guitermam [M. S. Guiterman of counsel], for-the appellant.
Linson & Van Burén [John J. Linsón of counsel], for the respondent.

Opinion:
Kellogg, J.:
The evidence shows that Arthur E. Bell and Winslow M. Bell had sole charge, of the affairs and management of the Henry H. Bell's Sons' Company. The company having, as they believed and as the principal creditors believed, assets more than enough to pay its liabilities, its only need being financial assistance to tide over a lack of present money or time to dispose of the business as a going concern, by agreement with the creditors and in order to protect themselves and their family as the larger stockholders of the company, they made a transfer of its personal property and a-lease of its real estate to the Bell's Knitting Mills, a corporation formed for the sole purpose of conducting the business for the benefit of creditors and extricating it from its embarrassment. In order to induce the other creditors to assent to the arrangement, the said Bells agreed in writing that the business should be con- ducted by said corporation for the benefit of the creditors, but that no part of the profits of the business of the corporation so to be organized should be paid to either of them or the secured creditors on account of their claims. The evidence shows conclusively that the secured creditors had ample security, and were in fact paid from such security, the secured property realizing a surplus to the trustee in bankruptcy. This agreement was, therefore, made for the benefit of all the creditors except those who were amply and fully secured, and the two Bells, who were parties to the agreement, and agreed that their claims should be deferred. • The agreement, therefore, cannot by any stretch of the imagination he said to be fraudulent, or with the intent to give one creditor an undue preference over another. It was made for the benefit of the creditors and no creditor could be prejudiced by it except the two who actually caused the agreement to be made and who assented to its terms.. If the trustee in bankruptcy should succeed in having this agreement declared void, it confers no benefit upon the creditors except the two Bells, who would then perhaps receive a greater per cent upon their claims than they would if the agreement stands. Any, profits realized by the defendant from the business belonged to the creditors, other than the Bells, under the agreement, and never was the property of the bankrupt or the plaintiff.
At the close of all the evidence the defendant moved for a non-suit upon the ground that the plaintiff had failed to establish a cause of action, which motion was denied and it excepted. This motion should have been granted, unless the plaintiff had been allowed by the trial court to change his position and seek an accounting by the defendant as a holder of the corpus of the property. Perhaps this course was open to him, but we need not now determine it. The transfer of the property to the defendant was made for the benefit of the creditors, and the defendant company was formed for a like purpose. It carried on the business for some time, and, perhaps, may have accounts outstanding against it. If the transfer to it is declared fraudulent, it might prejudice the claims of its creditors and be detrimental to the interests of all concerned. The defendant clearly holds the property as trustee for the creditors, and in a proper proceeding must account therefor.
It is unnecessary now to consider whether upon the present pleadings or upon amended pleadings in this action or in what manner the defendant may properly be called to an account for the assets .of the bankrupt. The judgment should be reversed and a new trial granted, with costs to the appellant to abide the event.
All concurred, except Chester, J., dissenting.
Interlocutory judgment reversed and new trial granted, with costs to appellant to abide event,