Opinion ID: 1479374
Heading Depth: 1
Heading Rank: 3

Heading: State Judgments.

Text: This issue is the contention of petitioners that the Board was bound (under the full faith and credit provisions of the Constitution, Sec. 1 Art. 4) to accept the determination of a State trial court that they were creditors as to these payments. The situation is as follows: The last payments made to petitioners were in 1936 and left the company with assets which were then known to have no value. As to each of the petitioners, the payments did not equal the amounts which would have been due under the repurchase arrangement. Thus a balance was due each under such arrangement. In January, 1936, the deficiency letter was sent the company. An appeal to the Board was filed by the company. In October, 1938, a stipulation of deficiency was filed and the Board entered its order in accordance therewith. No appeal was taken and in November, 1938, the taxes were duly assessed with interest to that date. Notice and demand issued but no assets were found upon which to levy. In October, 1939, the company, by petitioner Otto C. Botz (its president), made an offer in compromise, alleging the company was defunct, insolvent, and unable to meet this obligation. In November, 1939, deficiency notices were issued to the petitioners. These notices charged petitioners as transferee of assets of the company  the Statement accompanying each notice specified the transferred assets to have been in the years the petitioner received the payment involved here. In February, 1940, each petitioner filed a petition for redetermination with the Board wherein the status of transferee was denied. The answers of the Commissioner and the replies of petitioners clearly raised the issue of the character of these payments claimed, by the Commissioner, to constitute the petitioners as transferees. Both were filed April 3, 1940. At this last date and before, petitioners knew the insolvent situation of the company and that the issue upon which their several liabilities as transferees depended was whether or not they had received these payments as creditors of the company. The hearing for the Board was before a member on April 5, 1941. Almost a year after the issues before the Board had been made up and only ten days before the hearing before the Board member, each of the petitioners (on March 27, 1941) filed a petition in the State trial court. Petitioners Otto C. and Frank C. Botz sought recovery of the balance (over the payments) under the alleged contract of repurchase  in a second count, recovery was sought for advances to the company and salaries (both subsequent to 1933). Renee O. Botz, Joseph C. Botz and William B. Malone sought the balance (over payments) under the alleged contract of repurchase. Katherine Botz and Ada G. Malone pleaded full payment on their stock but sought recovery of a dividend of 7% thereon from January 1, 1933 to September 1, 1933 (date of payment for their stock.) [3] Answers were filed, on the same day as the petitions, wherein the company admitted that there is a balance due plaintiff in the sum of [the amount sought in count one of each petition] under said contract, together with interest thereon at the rate of 6% per annum from the 1st day of August, 1933  the prayer of the answer was for judgment in its behalf and for its costs. The following day (March 28, 1941), the court entered judgment for such balance with interest from August 1, 1933. The respondent had no notice of these proceedings and, apparently, no knowledge of them until they were offered in evidence. The Board found these proceedings to be clearly collusive and not binding upon it. That this finding as to the collusive character of these proceedings is justified by the evidence is certain. The question remains as to whether such collusive judgments are binding upon the Board under Section 1, Article IV of the Constitution. This section of the Constitution requires that Full Faith and Credit shall be given in each State to the    Judicial Proceedings of every other State. This provision is applicable to proceedings in federal courts. 28 U.S.C.A. § 687; Davis v. Davis, 305 U.S. 32, 40, 59 S.Ct. 3, 83 L.Ed. 26, 118 A.L.R. 1518; Cooper v. Newell, 173 U.S. 555, 567, 19 S.Ct. 506, 43 L.Ed. 808; Mueller v. Mueller, 8 Cir., 124 F.2d 544, 548. Section 1 of Art. 4 of the Constitution prescribes that the Congress may by general Laws prescribe    the Effect thereof. Section 687, 28 U.S.C.A., provides that the said    judicial proceedings    shall have such faith and credit given to them in every court within the United States as they have by law or usage in the courts of the State from which they are taken. Therefore, our inquiry is as to what effect would be accorded to these judgments in Missouri courts. Badger Dome Oil Co. v. Hallam, 8 Cir., 99 F.2d 293, 296; In re Cherokee Public Service Co. (Dickinson v. Orr), 8 Cir., 94 F.2d 536, 538. The law of Missouri is as follows: First. One not a party to an action nor in privity is not bound by a judgment or decree (City of Springfield v. Ransdell, 305 Mo. 43, 264 S.W. 771, 773), and a judgment between a debtor and one creditor is not binding on another creditor (even for the same matter) who was not a party. Gillilan v. Schmidt, 131 Mo.App. 666, 111 S.W. 611, 612. Nor is a judgment against a garnishee by one creditor binding upon another creditor against the same garnishee. Strauss v. Ayres (Kinney), 87 Mo. 348, 350. Respondent was not a party to these suits in the State court and was not in privity with any of the parties to those suits. The situation here is stronger than that ruled in the Gillilan and Strauss cases. Full faith and credit does not require recognition of a judgment if the party against whom the judgment is thus urged was not a party or privy or appeared in the judgment suit. In Bagley v. General Fire Extinguisher Co., 212 U.S. 477, 480, 29 S.Ct. 341, 343, 53 L.Ed. 605, the Supreme Court stated: The defendant was no party to that judgment, and there is nothing in the Constitution to give it any force as against strangers. This is so because This requirement of full faith and credit is to be read and interpreted in the light of well-established principles of justice, protected by other constitutional provisions which it was never intended to modify or override  such as due process. Bigelow v. Old Dominion Copper Mining & Smelting Co., 225 U.S. 111, 134, 137-142, 32 S.Ct. 641, 645, 56 L.Ed. 1009, Ann. Cas.1913E, 875. Second. A consent judgment is binding only upon those parties consenting thereto. Robinson v. Seay, 175 Mo.App. 713, 158 S.W. 409, 412. There was no consent here or even knowledge. Third. Where the method of procurement of a judgment against a corporation by an officer and creditor of the corporation worked a fraud in law upon other creditors it may be collaterally attacked. Broussard v. Mason, 187 Mo.App. 281, 173 S.W. 698, 703. Also see Emerson-Brantingham Implement Co. v. Montgomery, 222 Mo.App. 12, 300 S.W. 538; Howey v. Howey, Mo.Sup., 240 S.W. 450; Lieber v. Lieber, 239 Mo. 1, 143 S.W. 458; and Consolidated Iron & Steel Co. v. Maumee Iron & Steel Co., 8 Cir., 284 F. 550, 553, 554. Obviously, these consent judgments were frauds in law  if not in fact  upon all other creditors of the Botz Company. If stockholders of a corporation can, through contracts void as against the law of the incorporating Estate, establish a creditor status, in direct violation of that law, through the easy device of judgments consented to by the corporation which they control, thus enabling them to abstract the assets (including capital stock) of the corporation, then a new high has been reached in defrauding innocent creditors. As said in Warrington v. Ball, 3 Cir., 90 F. 464, 466: To bind one by a judgment to which he is not a party, as provided for by the statute [of Kansas], is barely tolerable. To bind him by such a judgment obtained by fraudulent collusion    would be intolerable. While there is no direct decision cited to us, yet there are strong intimations  and in tax cases involving State decisions  that collusive State judgments will not be allowed to defeat National tax laws. Blair v. Commissioner, 300 U. S. 5, 10, 57 S.Ct. 330, 81 L.Ed. 465; and Freuler v. Helvering, 291 U.S. 35, 45, 54 S.Ct. 308, 78 L.Ed. 634. For any or all of the above reasons, the Board was correct in denying any effect to these judgments. The decision of the Board is, in all respects, affirmed.