Case Name: Robert Rossman and Others, Respondents, v. Lewis M. Seaver and Others, Appellants
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1899-06
Citations: 41 A.D. 603
Docket Number: 
Parties: Robert Rossman and Others, Respondents, v. Lewis M. Seaver and Others, Appellants.
Judges: 
Reporter: Appellate Division Reports
Volume: 41
Pages: 603–610

Head Matter:
Robert Rossman and Others, Respondents, v. Lewis M. Seaver and Others, Appellants.
Insolvent corporation—facts establishing a preference to one creditor over the others.
In an action brought under section 48 of the Stock Corporation Law (Laws of 1890, chap. 564, as amd. by Laws of 1893, chap. 688), to set aside certain judgments and the executions issued thereon against the defendant corporation, upon the ground that they were suffered with intent to give a preference to such judgment creditor over other creditors of the corporation, it appeared that the officers of the corporation, at a time when they were aware of its insolvency, in consideration of a further advance of §1,300 in cash from the judgment creditor, agreed to give him demand notes for the entire amount of his claim, $7,700, and to transfer certain accounts to him as security; that the president of the corporation, for the purpose of enabling the creditor to obtain judgment upon the notes speedily, procured five notes, aggregating $7,700, to be made for such amounts as would enable the creditor to obtain judgment in the City Court of New York city; that after the president had been advised that the contemplated assignment of accounts would be invalid, the creditor (such assignment not being in fact consummated) brought actions in the City Court of New York city upon the notes, and obtained an order allowing short service of the summons upon the corporation; that when the summons and complaints in these actions were served upon the secretary of the corporation, the president took them away and refused to return them, and that he told the secretary not to mention the matter to the vice-president of the corporation, who was one of the two largest stockholders;"that, although the president of the corporation was advised, upon the day the corporation was served with process, that the proper course was to have a receiver appointed, the petition for his appointment was not verified until the day after judgments were entered against the corporation by default, and a levy had been made on its property; that after the receiver was appointed an order was made directing the sheriff to transfer the property levied upon to the receiver, and directing the latter to hold it subject to the levy.
Held, that the court was justified in finding that the judgments were suffered in violation of the provisions of section 48 of the Stock Corporation Law;
That the order, of which the plaintiff in the present action had no notice, directing the sheriff to turn over the property to the receiver, was not an adjudication, binding upon the plaintiff, that the j udgments were valid.
Appeal by the defendants, Lewis M. Sea ver and others, from, a judgment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of Mew York on the 25th day of March, 1898, upon the decision of the court rendered after atrial at the Mew York Special Term.
Abram Kling, for the appellants.
Chas. E. Rushmore, for the respondents.

Opinion:
Ingraham, J.:
The action was brought to set aside five judgments and executions issued thereon, entered in actions brought by the defendant Seaver on five promissory notes executed by the defendant Kirkland, Andrews & Co., a corporation.
The action was based upon section 48 of chapter 688 of the Laws of 1892, amending Laws of 1890, chapter 564 (The Stock Corporation Law), and the court below found that the judgments sought to be set aside were prohibited by that section. The appellants based their right to reverse these judgments upon the ground that the evidence did not justify the finding of the court that the judgments were within the prohibition of this statute. Section 48 of the Stock Corporation Law in question provides that "No 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." The evidence established that this corporation, against whom these judgments were recovered, was, at the time these judgments were obtained, and for at least two years prior thereto had been, insolvent; and that these judgments thus obtained resulted in giving a preference to the judgment creditor over other creditors of the corporation. The only question is whether the judgments were " suffered " by the corporation or any officer, director or stockholder thereof, with the intent of giving a preference to this particular creditor. The notes upon which these judgments were obtained were given by the corporation to one Hermon L. Ensign, and were transferred by Ensign to the judgment creditor, who resided in New Jersey, for the purpose of securing a short summons in the City Court of New York city. Hermon L. Ensign, the holder of these notes, was a relative of Charles E. Ensign, the president of the corporation. This corporation had three directors: Charles E. Ensign, Edson Ii. Andrews and Daniel Forster. Homer F. Andrews was the secretary. Some time in January, 1897, an examination of the affairs of the company was made, and at that time the secretary reported to the president that the affairs of the company wTere looking very badly and that he could not see how the corporation could pull through, as it owed about $15,000 more than it could pay. At that time the corporation was indebted to Mr. II. L. Ensign upon a certain promissory note for over $5,000 for money loaned. After this investigation it ivas considered that the company might pull through if they could obtain a loan of $3,000. C. E. Ensign suggested that if the two Andrews would each contribute $500, he would also contribute that sum, and would secure from his cousin, H. L. Ensign, $1,500, making $3,000, the desired amount. This arrangement was agreed to, and an application was made to II. L. Ensign to advance to the corporation $1,500, which he agreed to do if the company would give him demand paper for his claims, and would assign accounts to him, to secure him; and it was in furtherance of this understanding that H. ,L. Ensign advanced $1,200, which, with $300 interest due him, made $1,500, and at the same time received for the money thus advanced and for the note of the company held by him, five notes in the aggregation of $7,700, four of which were drawn for $1,625 each, and the other for $1,200, payable on demand. These notes were all dated February 16, 1897. At a meeting of the directors of the company in February, 1897, a resolution assigning and transferring to H. L. Ensign, as collateral security for the payment of the company's indebtedness to him, certain claims and demands due to the company, aggregating the sum of $5,199.66, was passed. There was evidence offered on the part of the plaintiff tending to show that C. E". Ensign, the president of the company, insisted upon splitting up these notes into small amounts so as to protect H. L. Ensign for the loan he had made to the company; and that the secretary of the company protested against giving him a preference on account of these old notes, as the other creditors of the corporation had put in their money in good faith. The president said, " that does not make any difference, I am going to protect my cousin." The secretary told the president that to transfer these accounts to protect H. L. Ensign would be taking an undue advantage of the other creditors. The resolution passed by the board of directors to transfer these accounts does not seem to have been carried out. The president, in the meantime, had been advised that such a transfer would be invalid, and he subsequently told the secretary that H. L. Ensign had to be protected, but that he doubted if that other thing, meaning the transfer of the accounts, would hold good anyhow. The new loan to the company by H. L. Ensign appears to have been made about the 1st of March, 1897, and the demand notes dated February 19, 1897, were delivered to Ensign about that time. Soon after that H. L. Ensign transferred those notes to the defendant, Sea ver, who, on the 30th day of March, 1897, obtained an order in the City Court authorizing the issuance of short summons upon these notes, and on that day commenced five actions to recover from the corporation the amount of the several demand notes given. The summons and couqulaints in these five actions were on Saturday, the 20th day of March, 1897, served upon the defendant corporation, and the plaintiffs would be entitled to enter judgment on Wednesday, March twenty-fourth. On that day judgment in each of the five actions was entered against the corporation and executions duly issued and levy made upon its property. On the day on which the secretary was served with the summons and complaints in these actions, C. E. Ensign, the president of the corporation, took the summons and complaints away with him. On the same day, in a conversation between O. E. Ensign and a lawyer, who had been sent for by Andrews, the lawyer said that the proper thing would be to have a receiver appointed and get the thing straightened out so that everything would be in proper form and right. 0. E. Ensign then said to the secretary, " Don't say one word about this to anybody; don't say a word about it to our vice-president, E. H. Andrews; it will ruin our credit and everything; don't say a word about it. We'll have it all fixed up Monday or Tuesday." E. II. Andrews and 0. E. Ensign owned almost all the stock of the company. Subsequently, Andrews, the secretary of the corporation, asked Ensign for the papers he had taken away from him, and he answered that he did not know where they were. Proceedings were taken to have a receiver appointed and the corporation dissolved. The petition and schedule"for the appointment of the receiver for the corporation were verified on the 25th of March, 1897, the day after the judgments were entered, and on the 26tli of March,. 1897, an order was made appointing a receiver of the property of the corporation. On the 28th of April, 1897, an order was entered, upon consent of the attorneys in the actions in which the judgments were obtained, and on motion of the attorney for the receiver, directing the sheriff of the city and county of Hew York to surrender the possession of the -said property, levied upon by him pursuant to the five executions issued to him on the 24th day of March, 1897, to the receiver appointed on the 26tli day of March, 1897; the said receiver to hold said property so levied upon, subject to the said levies and the liens of the said Lewis M. Seaver, with the same force and effect as if the said sheriff was still in possession of the said property. It further directed that the receiver should within sixty days from its entry pay to the said sheriff, out of the said property levied upon, his fees due him by virtue of said executions. The result of this transaction was that H. L. Ensign obtained a lien upon the property of the corporation thus levied upon, and that property went into the hands of the receiver subject to that lien, and he thus obtained a preference over the other creditors of the corporation.
It seems to me that but one inference could be drawn from these facts ; that when this new loan was obtained for the corporation it was obtained with the intent of giving to the creditor security,, not only for the loan he then made, but to secure him for loans previously made, and at a time when the corporation was insolvent and known to its officers so to be. The obligations given by the corporation to this creditor were split up in amounts that would enable the creditor to obtain a judgment in the City Court of New York city without waiting the time' required by an action brought in the Supreme Court, and would thus enable the creditor to enforce his claim against the company at any time and obtain a judgment. When it was ascertained that the transfer of the book accounts would be illegal and in violation of the statute an attempt was then made to give to this creditor a preference in another way, which was to obtain judgment in the City Court for the amounts loaned, to issue execution upon this judgment and to levy upon the property of the corporation before proceedings should be taken to have a receiver of the corporation appointed and the corporation dissolved. The president of this corporation acted with the intent of aiding this particular creditor in obtaining these judgments. He got possession of the summonses and complaints and refused to return them to the secretary of the company so that legal assistance could be procured to prevent this creditor from getting a preference. Proceedings were at once taken to procure the appointment of a receiver, but these proceedings were intended to be subject to the levy upon the executions issued upon the judgments, so that the title of the receiver would be subject to the lien upon the executions issued upon the judgment. The parties to this proceeding were not acting at arm's length, the creditor simply seeking to obtain a judgment against the property of the corporation which he was entitled to obtain, and the corporation or its officers doing nothing to assist him in obtaining that judgment.
The conclusion is irresistible that if the officers of this corporation really wished to prevent this creditor from obtaining a prefer ence, proceedings for the appointment of a receiver should have been sooner taken so as to obtain such appointment before a levy could be made under the execution. It was this active co-operation of the president of the company which enabled this creditor to obtain the judgments which gave him a preference; and it was just such action of the officers of a company that this provision of the statute before cited was designed to prevent and render void and ineffectual. As was said by Judge Rumsey in Matter of Muehlfeld & Haynes Piano Co. (12 App. Div. 492), "Where the corporation merely fails to put in a defense to a just debt it is not to be inferred from that fact alone that the judgment was suffered with intent to give a preference, and the judgment thus entered is not invalid." But here, the officers of the corporation did much more. The president of the corporation assisted the creditors in obtaining the judgments, and it was through such assistance that they were obtained so as to give him a preference. Ror does the case of Spellman v. Looschen (31 App. Div. 96) aid the defendants. In that case there was no evidence of any act of any officer of the company which assisted the judgment creditor in obtaining a judgment which would give him a preference. So far as it appears, the parties were at arm's length; the creditor endeavoring to obtain a judgment, and the only neglect or act of the officers of the company being that no answer was putin in the action brought to obtain a judgment for an honest claim against the company. There was no avowed attempt to protect or to give to this particular creditor a preference. There was no act of the officers of the corporation to "protect the creditor by splitting up the indebtedness of the corporation to the creditor into small amounts so that judgment could be obtained against the corporation in three days ; and no refusal of the president of the company to allow the secretary to obtain legal advice, or to institute such proceedings as could be taken so as to secure the distribution of the assets of the company among all its creditors equally. In this case, when the secretary proposed a proceeding of that kind, the president stated that the matter would be arranged on Monday or Tuesday. The whole evidence makes it clear that the proceeding was with the intent of giving to this particular creditor a judgment upon which a levy could be made, so .that when a receiver was appointed, as was contemplated by the parties, such receiver would hold the property subject to the levy .and execution. We think the facts proved upon the trial justified the inference that these judgments were " suffered " by an officer of this corporation for the sole purpose of giving to this particular creditor a preference.
There are no other questions presented upon this appeal. The order directing the sheriff to turn the property over to the receiver was made without notice to these plaintiffs, and was not an adjudication that the judgment was valid.
It follows that the judgment below was right' and should be affirmed, with costs.
Patterson, O'Brien and McLaughlin, JJ.. concurred.
Judgment affirmed, with costs.
Note.—The rest of the cases of this term will he found in the next volume, 42 App. Div.— [Rep.