Opinion ID: 1732018
Heading Depth: 1
Heading Rank: 6

Heading: fraud and conspiracy

Text: Appellees (plaintiffs below) contend in their complaint that appellants, by giving themselves preferences over other creditors from the proceeds of the sale of the assets of View-All Products, Inc., converted funds which belonged to View-All, and that this amounted to fraud as regards the various appellees. The trial court agreed, finding that such a preference constituted a violation of the directors' fiduciary duty owing to the creditors as a class. We disagree. There can be no doubt that a cause of action for fraud will lie by a creditor against the directors of a corporation if such action is supported by the evidence. E.g., O'Connor Mining & Manufacturing Co. v. Coosa Furnace Co., 95 Ala. 614, 10 So. 290 (1891). The mere fact of the giving of preferences to themselves by the directors does not, however, in and of itself, constitute fraudulent conduct. At common law, the settled rule in this state allowed an insolvent corporation to make a transfer of its assets to one or more of its directors in payment of bona fide debts due from the corporation, thereby preferring such directors to other creditors in payment of its corporate debts. Corey v. Wadsworth, 118 Ala. 488, 25 So. 503 (1897). The trial court never found the debts to the directors not to be bona fide, and, on the contrary, referred to them in its order several times as personal loans. Any relief available to the plaintiff class/appellees exists in Ala.Code 1975, § 10-2-201, by which the legislature adopted the trust fund doctrine, which had been repudiated by this Court at common law. Section 10-2-201 provides: § 10-2-201. Assets of insolvent corporations. The assets of insolvent corporations constitute a trust fund for the payment of the creditors of such corporations which may be marshaled and administered in courts having jurisdiction in equitable matters in this state. (Acts 1959, No. 414, p. 1055, § 75.) Under the trust fund doctrine, the directors and officers of an insolvent corporation cannot give themselves a preference in the payment of corporate debts over other general creditors; however, as a creditor of the corporation, he is not subordinate to other creditors of the same class merely by virtue of being a director or stockholder. First National Bank of Birmingham v. Huddleston, 239 Ala. 528, 195 So. 755 (1940). In other words, the relief available to the plaintiff class/appellees is not a dollar-for-dollar recovery of the debts owed them by the corporation from the directors who gave themselves preferences. The relief in equity is a marshaling of all the assets of the insolvent corporation for a pro rata administration to all creditors, including the director/creditors. The relief is an equitable one and does not depend on the fraudulent conduct or lack of good faith on the part of the directors. To invoke the equity jurisdiction of the court under § 10-2-201, a complaint must allege the insolvency of the corporation and ask for the relief of marshaling and administering the assets. Cassells Mills v. First National Bank of Gadsden, 187 Ala. 325, 65 So. 820 (1914). This is no less true under our current Alabama Rules of Civil Procedure. The complaint in the instant case falls short in that regard. Whether such relief is still timely is a determination to be made by the trial court on remand. We emphasize that our determination of the instant case is made pursuant to Ala. Code 1975, § 10-2-201. This section was repealed and no comparable section was enacted by the new Alabama Business Corporation Act, Ala. Acts 80-633. We make no determination here how a similar question would be decided under the current statute. The instant case is, therefore, due to be reversed and remanded in accordance with the foregoing instructions. REVERSED AND REMANDED.