Case Name: Frederick B. Irvine, Appellant, v. The New York Edison Company, Respondent
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1913-02-25
Citations: 207 N.Y. 425
Docket Number: 
Parties: Frederick B. Irvine, Appellant, v. The New York Edison Company, Respondent.
Judges: 
Reporter: New York Reports
Volume: 207
Pages: 425–446

Head Matter:
Frederick B. Irvine, Appellant, v. The New York Edison Company, Respondent.
Corporations — merger of two corporations under section 15 of Stock Corporation Law — when possessor corporation not liable for debts of the merged corporation — rights of creditor of merged corporation.
1. In construing and applying a statute, it is the duty of the courts to enforce the provisions of the statute without reading into it affirmative provisions.
2. Where one corporation is acquired by and merged into another corporation under section 15 of the Stock Corporation Law (Cons. Laws, ch. 59) and the latter has not contracted to pay the debts of the former, a- creditor of the merged corporation cannot maintain against the possessor corporation an action to collect a debt due to him from the merged corporation, since there is no provision in such statute making the possessor corporation liable for the debts of the merged corporation.
3. When a corporation merged into another, under section 15 of the Stock Corporation Law, is indebted to a creditor, such creditor, under the provision that the merging of corporations shall be without prejudice to any liabilities of the merged corporation or the rights of any creditors thereof, is entitled to sue the debtor corporation and take the property which was of the debtor corporation by execution issued upon a judgment against such debtor. Such right rests upon the express terms of the statute and does not necessarily depend upon the existence, and a finding, of a fraudulent transfer.
4. If the property of the merged debtor corporation is not of such a nature that it can be reached directly by execution or otherwise, it constitutes a trust fund for the benefit of its creditors and can be reached as such precisely as if a merger of the debtor company had never taken place. When the creditor has exhausted his legal remedies he may invoke the aid of a court of equity and therein follow the equitable assets of the debtor corporation and appropriate its property by due process of law, including any property which has been changed or altered in its nature or character, provided the trust fund can be clearly ascertained, traced and identified.
Irvine v. New York Edison Co., 143 App. Div. 344, affirmed.
(Argued January 31, 1913;
decided February 25, 1913.)
Appeal from a judgment of the Appellate Division of the Supreme Court in the first judicial department, entered March 25, 1911, affirming a judgment in favor of defendant entered upon a dismissal of the complaint by the court at a Trial Term.
The nature of the action and the facts, so far as material, are stated in the opinion.
Martin S. Lynch for appellant.
The New York Edison Company is the successor of the Block Lighting and Power Company No. 1 and is liable for this indebtedness. (Miner v. N. Y. C. & H. R. R. R. Co., 128 N. Y. 242; Bell v. C. C. & I. Co., 29 Misc. Rep. 109; Klein v. E. R. E. L. Co., 37 Misc. Rep. 490; Matter of Utica Nat. Brewing Co., 154 N. Y. 268.) At the time the cause of action of the plaintiff arose and became enforceable the Block Lighting and Power Company No. 1, the Manhattan Lighting Company and the New York Gas, Electric Light, Heat and Power Company had ceased to exist. (Miner v. N. Y. C. & H. R. R. R. Co., 123 N. Y. 242; Bell v. C. C. & I. Co., 29 Misc. Rep. 109.)
Edward R. Hatch for respondent.
The evidence does not establish any liability on the part cf the defendant for the debts of the Block Lighting and Power Company, and, therefore, the plaintiff failed to prove his cause of action. (Cook on Corp. [6th ed.] § 673; Fernschild v. Yuengling Brewing Company, 15 App. Div. 29; 154 N. Y. 667; Klein v. East River El. Light Co., 182 N. Y. 27; Kent v. Quicksilver Mining Co., 78 N. Y. 159, 183; Swarthout v. Ranier, 143 N. Y. 499; Dunlevy v. Talmadge, 32 N. Y. 457; Adee v. Bigler, 81 N. Y. 349; Rocky Mountain Nat. Bank v. Bliss, 89 N. Y. 338; McNeil v. Hayes Machine Co., 118 App. Div. 130; Trotter v. Lisman, 199 N. Y. 497; Hurd v. Steam Laundry Co., 167 N. Y. 89; Darcy v. Brooklyn & N. Y. Ferry Co., 196 N. Y. 99; Hollins v. Brierfield Coal & Iron Co., 150 U. S. 371.)

Opinion:
Chase, J.
The Block Lighting and Power Company, No. 1, transferred its property, real and personal, including its franchises, by bill of sale to the Manhattan Lighting Company on December 13, 1898. The consideration of such transfer does not appear. The Block Company and the Manhattan Company were merged into and with the New York Gas and Electric Light, Heat and Power Company on February 1, 1900. The gas company and the Edison Electric Illuminating Company of New York were consolidated and became the defendant, The New York Edison Company, on May 20, 1901. The transactions mentioned were each independent acts, not having so far as appears any relation to one another. The plaintiff's claim is against the Block Company. The assets, if any, of the Block Company are in the possession of the defendant, expressly subject, as will hereinafter appear, to the rights of the creditors of the Block Company.
The question in this case is reduced to a consideration of the plaintiff's remedy. Can the plaintiff maintain this action as one of debt against the defendant ? I think not, and I concur in the opinion written by Justice McLaughlin in the court below.
The legislature has provided two ways of uniting two or more corporations by transfer of their property to a single corporation. One statute provides that "Any two or more corporations organized under the laws of this state for the purpose of carrying on any kind of business of the same or of a similar nature " which a corporation organized under the Business Corporations Law might carry on, may consolidate such corporations into a single corporation. (Business Corporations Law, § 7 [Cons. Laws, ch. 4]. See, also, § 7 to 11 inclusive; former Business Corporations Law [Laws of 1890, chap. 567], § 8 to 12 inclusive, as amended prior to 1909.)
Another statute provides that "Any domestic stock corporation and any foreign stock corporation authorized to do business in this state lawfully owning all the stock of any other stock corporation organized for, or engaged in business similar or incidental to that "of the possessor corporation may file in the office of the secretary of state, under its common seal, a certificate of such ownership, and of the resolution of its board of directors to merge such other corporation, and thereupon it shall acquire and become, and be possessed of all the estate, property, rights, privileges and franchises of such other corporation, and they shall vest in and be held and enjoyed by it as fully and entirely and without change or diminution as the same were before held and enjoyed by such other corporation, and be manged and controlled by the board of directors of such possessor corporation, and in its name, but without prejudice to any liabilities of such other corporation or the rights of any creditors thereof. " (Stock Corporation Law, § 15 [Cons. Laws, ch. 59]; former Stock Corporation Law [Laws of. 1890, chap. 564], § 58, as amended prior to 1909.)
It is also provided in the Transportation Corporations Law (Laws of 1909, chap. 219, § 61, subd. 3 [Cons. Laws, ch. 63]) that "subject to the permission and approval of the proper public service commission, any two or more corporations organized under this article or under any general or special law of the state for the purpose of carrying on any business which a corporation organized under this article might carry on, may consolidate such corporations into a single corporation, and any such corporation may with the like permission and approval be merged with any other such corporation, upon complying with the provisions of the Business Corporations Law relating to the consolidation of business corporations and the Stock Corporation Law relating to the merger of stock corporations."
The Transportation Corporations Law thus expressly recognizes the right of corporations to consolidate under, the Business Corporations Law, and also to merge under the Stock Corporation Law. Each form of procedure is independent of the other. Where a consolidation is consummated pursuant to the statute it is expressly provided that the rights of creditors of any corporation that shall be so consolidated shall not in any manner be impaired,! and also "such new corporation shall succeed to and be held liable to pay and discharge all such debts and liabilities of each of the corporations consolidated in the same manner as if such new corporation had itself incurred the obligation or liability to pay such debt or damages." (Cons. Laws, ch. 4, § 11.)
If the gas company was liable for the indebtedness to the plaintiff described in the complaint, the action will lie against the defendant therefor' because of the statute quoted. Whether the gas company became liable for the debts of the Block Company depends upon the statute, pursuant to which the merger took place. In the statute authorizing- a merger of corporations, there is no provision making the possessor corporation liable for the debts of the corporation merged. It is expressly provided in that statute that the merging of corporations shall be " without prejudice to any liabilities of such other corporation or the rights of any creditors thereof."
This reservation of the rights of creditors permits them to proceed against the debtor corporation, notwithstanding such corporation is merged into another. The rights of creditors include the right to sue the debtor corporation and to take the property which was of the debtor corporation by execution issued upon a judgment obtained against such debtor. Such right rests upon the express terms of the statute and does not necessarily depend, as has been suggested, upon the existence and a finding of a fraudulent transfer.
This court has recently considered the effect of a merger of banking -corporations. (Matter of Bergdorf, 206 N. Y. 309:) Upon a merger of banking corporations (Banking Law [Cons. Laws, ch. 2], § 36 to 40 inclusive) it is expressly provided that the corporation into which they are merged shall "be held liable to pay and discharge all such debts and liabilities, and to perform all such trusts of the merged corporation in the same manner as if such corporation into which the other shall become merged had itself incurred the obligation or liability." But it is provided by the statute that no " action or other proceeding then pending before any court or tribunal in which any corporation that may be merged is a party shall be deemed to have abated or discontinued by reason of any such merger, but the same may be prosecuted to final judgment in the same manner as if the said corporation had not entered into the said agreement."
This court, in considering the effect of a merger in the Bergdorf case, say: "It could not have taken place without statutory authority and the legislature fixed the indisputable and exclusive effects of it. (People v. N. Y., Chicago & St. Louis R. R. Co., 129 N. Y. 414.) "
Referring again to the statutory provisions under which the merger was consummated, the court further say: " Those statutory provisions state plainly the effects of the merger of the Morton Company into the Guaranty Company. The former company became (with the nominal exception hereinafter stated) rightless, propertyless and powerless; and the latter company was enlarged by the absorption of all that the former surrendered. But the Morton Company did not surrender its corporate existence. It was not dissolved. It remained a corporation, but for the single purpose and with the sole power of being sued or proceeded against upon and defending against causes of action alleged to exist against it at the time of the merger. All the other powers bestowed upon it and which were evidenced by its certificate of incorporation and the statute law relating to it were by the merger transferred to the Guaranty Company. A corporation may exist though it possesses no property. A corporation may have a partial as well as a total extinction, and a legislature may enact that the merged corporation shall be extinguished by the merger, except in so far as the statute shall keep it nominally alive for a specified purpose. Our conclusion is that the Morton Trust Company does not exist within or as a part of the Guaranty Company, and the two are not identical. As a legal being, a corporate entity, it retained the one activity and power, and otherwise is non-existent." (p.315.)
The language of the court in the Bergdorf case is applicable to this case. The Block Company never existed within the gas company, and does not exist within or as a part of the defendant. Although the Block Company has become extinct, its corporate existence is retained for the one purpose of carrying out in good faith the reservation in the statute of the rights of the creditors thereof. We repeat that for that purpose the Block Company can be sued. The plaintiff after obtaining judgment against the Block Company may, by execution or otherwise, reach the assets of such company as though the merger had never taken place.
The provisions of the merger statute and of the consolidation statute were considered together by the legislature in 1890, and they have since been considered by it from time to time. There would seem to be little or no objection and much reason for making a corporation which takes all of the assets of other corporations by consolidation or merger liable for the indebtedness of such consolidated or merged corporations. The acceptance of such property could be made an assent to such liability. The whole matter was, however, clearly before the legislature for its consideration, and it was considered by it, and it made a corporation accepting the assets of other corporations under the statute authorizing the consolidation of corporations liable for the indebtedness of the corporations so consolidated. It declined so to do in the case of corporations transferring assets under the merger statute. The rights of creditors were not overlooked, as the legislature expressly provided that the rights of such creditors should be preserved and that the merger should be without prejudice as to them.
In view of the history of the acts referred to it must be assumed that the omission to make the possessor company directly liable for the debts of the merged corporations was intentional. The courts should not attempt to supplement the legislative provision relating to the creditors of the merged corporations by making the possessor company liable as upon contract for the indebtedness of such companies, either wholly or to the extent of the property transferred to it, particularly in view of the fact that it appears that the subject has been fully considered and acted upon by the legislature itself.
The reservation by the legislature of the rights of creditors negatives the suggestion that a transfer in pursuance of the statute would be a crime. Such a transfer is not one made " with intent to defraud prior or subsequent purchasers, or to hinder, delay or defraud creditors or other persons " within the meaning of section 1170 of the Code of Criminal Procedure.
If the property of the Block Company is not of such a nature that it can be reached directly by execution or otherwise, it constitutes a trust fund for the benefit of such creditors and can be reached as such precisely as if a merger of the Block Company had never taken place.
The rule in equity is that as between cestui que trust and trustee, and all parties claiming under the trustee otherwise than by purchase for a valuable consideration, without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruit of such property, whether in its original or altered state, continues to be subject to or affected by the trust. (Matter of Hicks, 170 N. Y. 195.)
A creditor of a corporation has the right to follow the assets of a corporation and appropriate the property by due process of law, including any property which has been changed, provided the trust fund can be clearly ascertained, traced and identified. (Matter of Hicks, supra.)
In my view the objection to sustaining the action now before us may be summarized by stating that the defendant has never contracted directly or by inference to pay the debts of the Block Company; and the statute, which is the authority for the transfer of the property, if any, from the Block Company to the gas company, does not provide that the possessor company shall assume the indebtedness of the merged company, but expressly pro vides that the rights of creditors of the merged company are preserved. The statute was not carelessly drawn and the omission to make the possessor company liable for the debts of the merged company was not an oversight.
It is the duty of the court to enforce the provisions of the statute without reading into it affirmative provisions.
The plaintiff does not claim to recover in equity, but if he did he would be required to first take other steps preliminary thereto.
This court in Trotter v. Lisman (199 N. Y. 497) held that creditors seeking the aid of a court of equity to reach equitable assets of their debtor in satisfaction of their claims must first exhaust their legal remedies, according to the laws of this state, by the recovery of a judgment in one of its courts and the return of execution thereon unsatisfied, unless there are facts constituting a sufficient excuse for the failure so to do, which facts must he set forth in the complaint.
The statements of the courts of other states have hut little value in determining the question now before us because they are based upon the particular facts or statutes there under consideration. In Indianapolis, C. & L. R. R. Co. v. Jones (29 Ind. 465) the conclusion of the court was reached after holding that under the statutes then under consideration the consolidated companies had so passed out of existence that they could not be sued by the creditors of such corporations; and after the further holding that the consolidated companies continued to exist in the new company and that as a matter of necessity the old companies could be sued in the name of the new company. The reasons for the conclusion in that case do not exist in the case now before us.
There is nothing that was said by this court in Polhemus v. Fitchburg R. R. Co. (123 N. Y. 502, 508) that aids the appellant. The court there simply held that the words " except mortgages," in the statute therein referred to, did not include the bonded indebtedness of which the mortgage was a collateral security, and referring to the words quoted, said: "They are ill calculated to express anything in the legal sense, for mortgages mean the instruments which charge property with the liability to make good the debt its owner has contracted. They may be said to describe a property liability, but never to describe the principal debt or promise, which is evidenced by the promissory note, or bond of the property owner. They are collateral, or incident to the debt itself, and where made, as here, to secure the payment of bonds, they cannot properly be termed the debt or liability' of the obligor, but only the liability charged upon his property. "
The defendant has never contracted to pay the plaintiff's debt, and has never been made liable therefor by statute.
The judgment should be affirmed, with costs.