Case Name: HEINEMAN, Respondent, v. MARSHALL et al., Appellants
Court: St. Louis Court of Appeals
Jurisdiction: Missouri
Decision Date: 1905-12-12
Citations: 117 Mo. App. 546
Docket Number: 
Parties: HEINEMAN, Respondent, v. MARSHALL et al., Appellants.
Judges: Bland, J., concurs, and Norloni, J., dissents.
Reporter: Missouri Appeal Reports
Volume: 117
Pages: 546–563

Head Matter:
HEINEMAN, Respondent, v. MARSHALL et al., Appellants.
St. Louis Court of Appeals,
December 12, 1905.
(Opinion by Goode, J.)
1. FRAUDULENT CONVEYANCES: Trustees of Corporate Funds: Fraudulent Purchase of Corporate Offices. Where the officers of a corporation resigned their offices and the control of the corporation, and turned the same over to other persons for a valuable consideration paid by such other persons, who purchased the control to use for their own benefit, the transaction was a flagrant breach of trust and the resigning officers were liable to account for the proceeds they received at-the suit of the corporation itself, or a receiver of it, or any other party having a right to sue.
2. -: Creditor of Innocent Grantor: Prior Creditor. A creditor cannot proceed to set aside a transaction by which his debtor, who is innocent, is defrauded of his property, but whether that rule would apply to a prior creditor under the facts in the present case is not decided.
3. -: -= — : Subsequent Creditor. A creditor of a corporation, whose debt was incurred long subsequent to a fraudulent transaction whereby the officers of the corporation for a valuable consideration sold the offices and the control of the corporation to other persons, could not maintain an action to recover from such officers the proceeds of the sale.
(Dissenting Opinion by Nortoni, J.)
4. TRUSTEES: Secret Profits. Whatever the directors of a corporation acquire in the management of the corporate assets by way of secret profits to themselves belongs not to them but to the company.
5. -: -: Fraudulent Transaction. Where the officers of a corporation, for a valuable consideration paid to them, transferred the offices and the control of the corporation to other persons, the transaction was void and the proceeds were assets in the hands of such resigning officers, the legal title to which remained in the corporation.
6. -: Fraudulent Conveyances: Void Transaction: Subsequent Creditors. Such transaction being void and incapable of ratification, the consideration paid the officers, as assets of such corporation, could be subjected by equitable garnishment to the payment of a judgment obtained by a subsequent creditor.
Appeal from St. Louis City Circuit Court. — Eon. Moses N. Bale, Judge.
Reversed.
Edioin B. Puller and Barclay, BMelds & Fauntleroy for appellants.
(1) An officer of such a corporation has the absolute right to resign. Having that absolute right, his motive or inducement to exercise that right cannot be a breach of trust, since he is not bound to continue in office. Briggs v. Spaulding, 141 U. S. 132; Fearing v. Glenn, 73 Fed. 116. The first of these cases holds that the relation of creditors to directors of a corporation is “that of contract and not of trust.” No liability arises where a director merely exercises his legal rights. Craig v. Phillips, 3 Ch. Div. 722; Attaway v. Bank, 15 M'o. App. 578. (2) An agreement to utilize or to exercise an absolute right is no breach of trust. Where stockholders made a close agreement to elect directors and to control a company it was held to be neither illegal nor immoral, as they had the legal right so to do. Faulds v. Yates, 57 111. 416; 4 Thomp. Corp., sec. 4447; Craig v. Phillips, 3 Oh. Div. 722. (3) Plaintiff was not a creditor in 1899, but became so by her judgment four years later. So she has no standing to maintain this suit. There has been no “money or property wrongfully abstracted or withdrawn by officers of stockholders.” Priest v. White, 89 Mo. 609, 1 S. W. 361; Farrar v. Walker, 3 Dill. .506, (4) A creditor (even if existing at the time) has no right to assert an equity existing in the corporation because of a breach of trust, without first invoking unsuccessfully the regular action of the corporation. There is neither allegation or proof thereof in this case. And an action b.ased on a fraud upon the corporation cannot be the basis of suit by a creditor except by virtue of some statute not shown in this case. Haseltine v. Messmore, 184 Mo. 298, 82 g. W. 115; Atwood y. Merry weather, 37 L. J. Oh. 35. (5) Official mismanagement is an offense against the corporation hut not against creditors unless by statute. And no cause of action can arise thereon at law or in equity at the suit of a judgment creditor. 3 Thomp. Corps., sec. 4302. (6) A judgment creditor has no standing to enforce a .liability of a person to the corporation unless the corporation (by its directors) has acted or a statute creates a right of action which is not pretended here. Simpson v. Reynolds, 71 Mo. 594; Water Co. y. San Diego, 89 Fed. 273'; Smith v. Hurd, 12 Mete. 371; Wheeler v. Thayer, 121 Ind. 64, 22 N. E. 972; Hawes v. Oakland, 104 U. S. 460; Mealey v. Nickerson, 44 Minn. 430.
Pearce & Davis for respondents.
(1) Property received by a director of a corporation from a sale of his office as director, is, in equity, the property of the corporation, and the director must account to the corporation therefor! McClure v. Law, 161 N. Y. 78; Bent v. Priest, 10 M'o. App. 565; Bent v. Priest, 86 Mo. 475; Bent v. Lewis, 88 Mo. 467; Ward v. Davidson, 89 Mo. 445, 1 S. W. 846; Packet Co. v. Davidson, 95 Mo. 467; Sugden v. Crossland, 3 Smale & Gifford (Eng.) ; Gaskell v. Chambers, 26 Beav. 360; Rutland v. Bates, 68 Yt. 579; Coal & Iron Co. v. Humes, 157 Pa. St. 278. (2) A judgment creditor may, by bill in equity in the nature of an equitable garnishment, reach equitable assets the property of his debtor and held by third parties. Iron Co. v. McDonald, 61 Mo. App. 559; Ault v. Elier, 38 Mo. App. 608; Harmon v. Menke, 73 Mo. App. 639; Nichols v. Hubert, 150 Mo. 624, 51 S. W. 1031; Bank v. Barnett, 98 Mo. App. 477, 72 S. W. 727; Colesman v. Ins. Co., 74 M'o. App. 675; 1 Thompson on Private Corporations, sec. 1076. (3) In equitable garnishment proceedings, the creditors first moving secures thereby a priority over other creditors, as a regard for his diligence. Pullis v. Eobinson, 5 Mo. App. 552; Pullis v. Eobinson, 73 Mo. 212; Jackson v. Eobinson, 64 Mo. 292; Iron Co. v. McDonald, 61 Mo. App. 571; Eozelle v. Harmon, 29 Mo. 585.
See note on page 503.

Opinion:
GOODE, J.
Plaintiff is a judgment creditor of the Supreme Coucil, Knights of Equity of the World, an incorporated society organized, according to the avowal of its charter, to disseminate good principles, alleviate suffering and furnish fraternal insurance. Its active existence ceased in 1903 and since then it has had no meetings and done no business. Judgment was rendered against it in plaintiff's favor on December 21, 1903, for over twelve hundred dollars, including the costs of the action. There was a payment on the judgment of one hundred and twenty-three dollars, but the balance still remains unpaid. An execution was issued for this balance and returned nulla bona, February 1, 1904, thus proving that the association is insolvent. After the return was made, the plaintiff instituted this action to enforce payment of her judgment out of assets of the association alleged to be in the hands of the defendants, who were in 1899, trustees of the association and its principal officers. At that time, the defendant Marshall held the chief office of supreme commander and the defendant Cunningham the second office of supreme vice commander. The two defendants dominated the board of trustees and, according to their own admissions, completely controlled the affairs of the society. On May 23, 1899, pursuant to an arrangement entered into previously, and for a pecuniary consideration received and retained by them, they turned over the control of the order to L. Dow Moore and his associates. That result was accomplished in this manner: The members of the board of trustees, at the instigation of the defendants, resigned in succession, and as soon as a vacancy was created by the resignation of one member, it was filled by the remaining members electing some person selected by Moore in his stead. This course was followed until M'oore and his associates had been given all the places on the board. Thereupon Marshall and Cunningham resigned their executive offices and Moore was chosen supreme commander and some dummy of his supreme vice commander. The association had practically no assets at the time and was more than one thousand dollars in debt. Moore's purpose was to use the business of the order for his own benefit, and the purpose of the defendants was to make a profit by selling the control to Moore. They obtained sixteen hundred dollars or more of notes and real property in the transaction. Marshall was the active party in the negotiation with Moore leading to the sale, and in testifying, both he and Cunningham, who is his father-in-law and solvent, as he is not, endeavored to exonerate Cunningham from complicity in the affair, but in our opinion failed to do so. However, it is not necessary to recite the facts which implicate Cunningham, because we hold that the plaintiff has no. standing in court to compel either defendant to account for the proceeds of the transaction. The grounds on which plaintiff founds her claim to do so are that the profit the defendants procured by selling their offices and the control of the association, accrued to them as trustees consequently belongs of right to their cestui que trust, the association, and will be treated by a court of equity as an asset of it, which she may reach by this proceeding in the nature of an equitable garnishment, and have applied to satisfy her judgment. The general theory on which the plaintiff proceeds is sound, but not applicable to her case; because, so far as is shown, her debt arose four years after the fraud of which she complains. She is a subsequent creditor. Stress is laid in the briefs on several questions to which we will not attend; for we consider the fact just mentioned an insuperable obstacle to the relief invoked. As all emoluments received by trustees in dealing with the subject-matter of their trust, enure in equity to the benefit of the trust estate, the property delivered to defendants by Moore for transferring their offices to him, belong to the association. They were free to resign their offices, no doubt, but in doing so for pay, and pursuant to an agreement that they would use their influence with obsequious trustees to have a new set of. corporate officials installed, a flagrant breach of trust was committed, and they stood liable to account for the proceeds either to the order itself, a receiver of it, or any other party having the right to sue. [Bent v. Priest, 10 Mo. App. 543; s. c., 86 Mo. 475; McClure v. Law, 161 N. Y. 78; Gaskell v. Chambers, 26 Beav. 360.] Whether a creditor whose demand arose prior to the commission of the fraud, might call on the defendants to account for what they received as an asset of an insolvent company which the creditor was entitled to have applied on his debt, is a question we need not examine. Prior creditors may annul transfers of property made by their debtors without consideration, or with a general fraudulent purpose; whereas subsequent creditors can do so only when the transfer was executed with a view to incurring the subsequent debts and evading payment. . [Kinealy v. Macklin, 89 Mo. 433; Snyder v. Free, 114 Mo. 360, 21 S. W. 847; Krueger v. Vorhauer, 164 Mo. 156, 63 S. W. 1098.] This rule of law governs in transactions wherein the debtor acted fraudulently. A different doctrine prevails where a third person obtains by fraud, property belonging to a debtor who is innocent; and in such instances creditors, though the loss of the property lessened the estate to which they must look for payment, cannot recover the property. The right to recover it belongs exclusively to the debtor himself or some one who has succeeded to his right. [Parker v. Roberts, 116 Mo. 662.] In recognition of this rule, a plaintiff who sought to enforce a judgment against property in the hands of a trustee of a corporation, and alleged to have been received under circumstances which made it a corporate asset, was denied re lief. [Ready v. Smith, 170 Mo. 163, 175, 70 S. W. 484.] The facts of that case were quite similar to those before us. Oases may arise in which the enforcement of this rule against a prior creditor of an insolvent company Avould be unfair • — • instances wherein it appeared that the company itself could not sue to redress the fraud because it was prevented by recreant officials. The present case is such a one, as was also precedent in Avhich the Supreme Court of the United States refused to redress, at the suit of a subsequent creditor of a corporation, a fraud perpetrated by its directors. The new management composed of Moore and his satellites would do nothing, of course, to recover for the association what they themselves had paid to the defendants in fraud of the association, and if creditors are denied standing* in court, in such a predicament, they would have to ask the appointment of a receiver who could sue. But this would needlessly raise an impediment to the collection of their demands; and in the case of prior creditors, who enjoy an undeniable right to reach all the assets of the company for the satisfaction of their debts, an exception might be made Avhen corporate officers participated in or connived at the fraud. Procuring a receiver is, as we shall see, the remedy to which a subsequent creditor must resort.
The question regarding the right of a creditor of a corporation to sue a party for the recovery of corporate property fraudulently obtained by said party, is altogether distinct from the question of the creditor's right to sue without first demanding of the company officials that they take action in the name of the company. As to the latter point, which .is dAvelt on in the briefs of counsel, we will say nothing; for it is not essential to our decision. Nor are Ave bound to ascertain whether the rule that creditors cannot expose a fraud practiced on their debtors, is applicable to the present cause. The decisive fact is that the plaintiff's debt accrued after the occurrence of the breach of trust which constitutes the basis of her proceeding against the defendants. We have been cited to adjudications which merely enforced the firmly established remedy of equitable garnishment, and to others wherein corporate directors and trustees were made to account to their company or to a shareholder, receiver or assignee thereof, for profits made by means, of their fiduciary positions; but we have been cited to no precedent, nor have we found one, wherein a director or trustee was compelled to account at the suit oí a subsequent creditor. Precedents of high authority are to be found denying the relief to that class of complainants, and those precedents are in accord with the general rules of equity governing the rights of subsequent creditors. The most apposite discussion of this subject is Graham v. Railroad Co., 102 U. S. 148, a case which furnishes the rule of decision in the cause at bar; for, in relation to the point of law involved, its facts are not materially unlike those we are considering, and the doctrine of the opinion was cited and approved by the Supreme Court of Missouri in Ready v. Smith, supra. It was averred in the bill, and the averment was supported by evidence, that the directors of the railroad company had sold land belonging to the company to an ostensible buyer, the directors themselves being the real buyers, or interested in the purchase. Three years afterwards the complainants recovered judgments against the railroad company on debts which arose after the sale, and had executions levied on the land as still belonging to the company. Complainants then sued in equity to have the deed made in consummation of the alleged fraudulent sale set aside, the land made subject to the lien of the executions and the railroad directors, who had acquired title through the sale made by themselves as directors, enjoined from asserting their title. The position taken for the complainants was, that as the railroad company had been defrauded of its property and might have proceeded to. recover it, so any judgment creditor of the company might proceed for the same purpose. The opinion con ceded for the argument, that existing creditors could do so, but said no authority except dicta of judges could be found for allowing a subsequent creditor to interfere. The points adjudged were that subsequent creditors can neither assail a fraudulent conveyance of property by their debtor, unless the fraud was directed against them, nor question a transaction by which, before their debts arose, the debtor was defrauded. The first proposition has been decided frequently; the second has been presented for decision rarely, and we know of no judgments maintaining a doctrine contrary to the one declared by the Supreme Court of the United States.
One perceives that permitting a creditor to pursue property out of which a debtor has been cheated, would facilitate the collection of the debt. So would permitting a subsequent creditor to challenge previous transfers fraudulently made by the debtor. But this consideration has not induced the courts to accord the right of interference to such creditors; presumably because they did not extend credit in reliance on the property fraudulently parted with by, or withdrawn from, the debtor.
It is true that a better reason can be brought forward why a creditor of a corporation should be allowed to pursue property belonging to it in the hands of a party who procured the property by fraud, than can be given for allowing the creditor of an individual to do so; for an individual can always exercise his right to seek redress against a fraud; whereas a corporation may be under the control of directors or trustees, who are interested in taking no step to redress the wrong. This was the situation in the Graham case, and in the present one. That argument was pressed and overruled in the Graham case; and in disposing of it, the court said, among other things, that when a corporation becomes insolvent, a court of equity will take charge of it and collect its assets for the benefit of creditors.
The judgment is reversed.
Bland, J., concurs, and Norloni, J., dissents.