Case Name: John Cullen, Appellant, v. Joseph Friedland and Others, Respondents, Impleaded with the Friedland-Nelson Company and Albert J. Atohlnson, Defendants
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1912-07-11
Citations: 152 A.D. 124
Docket Number: 
Parties: John Cullen, Appellant, v. Joseph Friedland and Others, Respondents, Impleaded with the Friedland-Nelson Company and Albert J. Atohlnson, Defendants.
Judges: 
Reporter: Appellate Division Reports
Volume: 152
Pages: 124–127

Head Matter:
John Cullen, Appellant, v. Joseph Friedland and Others, Respondents, Impleaded with the Friedland-Nelson Company and Albert J. Atohlnson, Defendants.
First Department,
July 11, 1912.
Corporations—corporate assets—trust fund for payment of debts — wrongful transfer of property — liability of directors to creditors.
Corporate assets constitute a trust fund for the payment of corporate debts, and when two directors of a stock corporation transfer all the corporate property to a third director for a nominal consideration they commit a breach of duty toward creditors, and become personally liable for existing claims.
The third director is also liable on the additional ground that he received, with notice and without consideration, property of the corporation which was impressed with a trust for the payment of the corporate debts.
Where two of the three directors of a stock.corporation transferred all of them stock to the third director to be paid for from the funds of the corporation, but such payment did not impair the capital stock and the assets remained more than sufficient to pay all of its liabilities, the transaction was proper and legitimate, and did not render the two directors personally liable to creditors, although the corporation was subsequently dissolved.
Appeal by the plaintiff, John Cullen, from á judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on the 4th day of January, 1912, upon a dismissal of the complaint by direction of the court at the close of the plaintiff’s case on a trial at the New York Special Term.
Charles E. Thorn, for the appellant.
J. A, Seidman, for the respondents Nelson.

Opinion:
McLaughlin, J.:
Action by a judgment creditor of the defendant corporation to compel its directors to account for official misconduct and pay plaintiff's judgment, or so much of it as equals the assets of the corporation which have been illegally diverted by them. The defendants, the Friedland-Nelson Company and Albert J. Atchinson, did not answer. The other defendants answered separately, and at the trial the complaint was dismissed, and plaintiff appeals.
The corporation, the Friedland-Nelson Company, was organized in September, 1903, for the purpose of manufacturing store fixtures. Its authorized capital stock was $6,000, divided into sixty shares of the par value of $100 each, of which thirty were issued to defendant Friedland and fifteen to each of the defendants Nelson. Those three defendants, from the time of the organization until after July 11, 1906, constituted all of the directors, officers and stockholders of the corporation. On the 20th of March, 1906, there accrued to the plaintiff a cause of action against the corporation for personal injuries, to enforce which, a few days thereafter, he commenced an action which resulted, on the 18th of May, 1908, in a judgment in his favor of $882.66. Execution was issued upon the judgment and the same was returned wholly unsatisfied. On July 11, 1906, four months after the cause of action for personal injuries had accrued, Friedland and the two Nelsons, who were at the time the directors and owners of all of the capital stock of the corporation, entered into a contract, in writing, by which Friedland agreed to purchase of the Nelsons all of their stock, and to pay therefor $40,000. The contract provided ' that $20,000 should be paid immediately and the balance by Fried-land's giving his promissory notes, payable on the 13th of August, 1906; that the Nelsons should 'immediately execute assignments of their stock to him and resign as officers and directors; that the stock was to be held in escrow by a third party until the notes were paid; and that at the end of six months the corporation should be dissolved, or its name changed from the Friedland-Nelson Company to some name not having the word "Nelson" in it. The contract was carried out by Friedland paying the amount stipulated and the notes when they matured, and the Nelsons assigning their stock to him and resigning as directors. As soon as this was done Friedland immediately transferred one share to each of the defendants Atchinson and Levine, and they were thereupon elected directors and officers in place of the Nelsons. Sometime thereafter Friedland and his dummy directors caused the corporation to assign to him all its assets, which were at least of the value of $11,500, for a nominal. consideration, and the corporation thereupon ceased to do any business. On December 13, 1906, Friedland and his two dummy directors filed a certificate pursuant to the General Corporation Law (Gen. Laws, chap. 35 [Laws of 1892, chap. 687], § 57, as added by Laws of 1896, chap. 932, and amd. by Laws of 1900, chap. 760; revised by Consol. Laws, chap. 23 [Laws of 1909, chap. 28], § 221) in the office, of the Secretary of State for a dissolution of the corporation, and it was thereupon formally dissolved. No provision, however, was made for the payment of debts.
Plaintiff offered evidence to establish prima facie all of the foregoing facts, and they were sufficient to entitle him to the relief asked against the directors Friedlahd and Levine. The corporate assets constituted a trust fund for the payment of the corporate debts and when those defendants, as directors, transferred all of the corporate property, exceeding $11,500 in value, to Friedland for a nominal consideration, they committed such a breach of duty to the plaintiff as to make themselves" personally liable for his claim. (Code Civ. Proc. § 1781, as amd. by Laws of 1907, chap. 157; revised by Gen. Corp. Law [Consol. Laws, chap. 23; Laws of 1909, chap. 28], § 90; Darcy v. Brooklyn & N. Y. Ferry Co., 196 N. Y. 99.)
The defendant Friedland is also liable on the additional ground that he received, with notice and without consideration, property of the corporation which was impressed with a trust for the payment of the plaintiff's claim. (Bartlett v. Drew, 57 N. Y. 587; Cole v. M. I. Co., 133 id. 164.) The complaint, therefore, as to Friedland and Levine, was improperly dismissed.
As to the defendants Neiáon a different situation is presented. At the time of the assignment of the corporate assets to Friedland they had ceased to be directors and had severed their connection with the corporation. The plaintiff offered evidence tending to show that the $40,000 which was paid to them by Friedland for their stock was. paid out of corporate funds and they not only acquiesced in the arrangement, but actually took part in obtaining the money from the. corporation. The plaintiff offered to show that prior to the payment by Fried-land he and one of the Nelsons, at least, as officers of the cor poration, had executed and delivered to Friedland without consideration corporate checks sufficient in amount to cover the payments made by Friedland to the Nelsons. The evidence was excluded, but assuming for the purposes of this appeal that such fact had been proved, it would not have aided the plaintiff. After the payment to the Nelsons, the capital stock of the corporation was not impaired and it still had more than sufficient assets, so far as appears, .to pay all of its debts. After such payment the corporation still had assets to the amount of at least $11,500 which was subsequently taken by . Friedland himself; indeed, the complaint alleges that at the time of the dissolution the assets of the corporation "amounted to a sum more than sufficient to pay all of its liabilities, including the claim and judgment of the plaintiff, with interest thereon.from the date of entry of said judgment." The plaintiff, therefore, was in no way injured by the payment to the Nelsons. That was á proper and legitimate transaction so far as appears, so long as all of the stockholders consented to it. (Stock Corp. Law [Gen. Laws, chap. 36; Laws of 1892, chap. 688], § 23, as amd. by Laws of 1901, chap. 35e; revised by Stock Corp. Law [Consol. Laws, chap. 59; Laws of 1909, chap. 61], §28; Williams v. Western Union Tel. Co., 93 N. Y. 162.)
The judgment appealed from, therefore, so far as the same affects the defendants Nelson, should be affirmed, with costs to them against the plaintiff, and reversed and a new trial ordered as to the defendants Joseph Friedland and Levine, with costs to plaintiff to abide event.
Ingraham, P. J., Laughlin, Clarke and Scott, JJ., concurred.
Judgment so far as same affects defendants Nelson affirmed, with costs to them against plaintiff; judgment reversed and new trial ordered as to defendants Joseph Friedland and Levine, with costs to plaintiff to abide event. Order to be settled on notice.