Court Opinion

ID: 3402265
Source: CourtListenerOpinion
Date Created: 2016-07-05 19:14:12.433197+00
Date Added: 2024-06-11T14:03:06.394692
License: Public Domain

1. For a payment to be voidable as a preference under the 1938 bankruptcy act it must appear that (a) it was in settlement of an antecedent unsecured claim; (b) it was made within four months of the bankruptcy; (c) there was reasonable cause to believe that the debtor was insolvent; and (d) it caused a depletion of the bankrupt's estate. There being no evidence to establish these essentials, a verdict sustaining the claim against the attack that it was a voidable preference was demanded.
2. While a president of a corporation may be personally liable for loss sustained by it as a result of his negligence, where as here there is no evidence of any loss whatsoever, the officer is not liable to the corporation for a deficit in one account resulting from the use of funds belonging to that account to discharge other legal obligations of the corporation.
                      No. 15714. FEBRUARY 6, 1947.
Moore Incorporated and Fulton National Bank of Atlanta brought against K.  L. Transportation Company Inc., A. V. Kennedy, and J. B. Lewis an action to foreclose a loan deed securing an indebtedness of $90,033.59, the security being subject to a prior loan deed in favor of Kennedy. The prayer was for a receiver, an adjudication of the priority of claims, and a judgment in favor of the petitioners for the amount of their claim and payment thereof from the proceeds of the sale by the receiver. Kennedy filed an answer and cross-action, exhibiting his loan deed and setting forth the instalment indebtedness secured thereby of $29,250 and another note for $22,000, dated October 22, 1945. He prayed that all of his claim set forth be given priority in the liquidation. At the same time or the following day after the suit was filed, K.  L. Transportation Company Inc. filed its voluntary petition in bankruptcy, and Paul E. Johnson was appointed trustee by the bankruptcy court. The trustee filed an intervention, contending that the Kennedy loan of $22,000, dated October 22, 1945, was a preference made within four months of the filing of the bankruptcy petition, and that under the bankruptcy law it was void and should not be allowed. It was alleged in substance that Kennedy, while being a stockholder, director, and president of the defendant corporation, either illegally or negligently had allowed a shortage in the corporation's c. o. d. account of more than $50,000, and was personally liable therefor, that the $22,000 claim of Kennedy represented a payment by him of this personal liability of his to the corporation; and it was further contended that the corporation was insolvent at the time, and that Kennedy knew or by the exercise of ordinary diligence could have known that it was insolvent. The issue made by the answer and the cross-action of the defendant Kennedy and the intervention of the trustee was tried by a special jury, and at the conclusion of the evidence the court directed a verdict in favor of Kennedy. The trustee excepts to the overruling of his amended motion for new trial, all of the grounds of which made the contention that there was an issue of fact for the jury, and that the court erred in directing the verdict.
Upon the trial of the case the following stipulation of facts was put in evidence: "A. V. Kennedy was president and a director of K.  L. Transportation Company Inc., and owned thirty-three and one-third percent of the stock. On the 5th day of April, 1944, he *Page 840 
and J. B. Lewis Jr., who also owned thirty-three and one-third percent of the stock, sold all of their stock to C. L. Shaw, who became sole owner, and Mr. Kennedy severed his connection with the company. At the time of the sale, the audit of the company, dated March 31, 1944, showed a shortage in the c. o. d. account of $25,913.38, and that the regular account was due the c. o. d account $29,017.22, making a total shortage in the c. o. d. account of $54,931.20. On or about October 19, 1945, A. V. Kennedy was in Atlanta on business and conferred with C. L. Shaw, William V. Crowley, vice president of the Fulton National Bank, and Edgar Watkins Jr. relative to a proposed sale of the K.  L. property and franchise rights to a purchaser represented by Edgar Watkins Jr. In the course of the discussion and negotiations, it appeared that the c. o. d. account was at that time short $22,000. On October 20, 1945, A. V. Kennedy gave K.  L. a check for $22,000, which was deposited in the c. o. d. account, the proceeds to be used to pay all c. o. d. obligations, At the time said check was given and received, K.  L. gave A. V. Kennedy a note for $22,000, due sixty days from date. The company drew checks to pay all c. o. d. obligations immediately. At the time of the bankruptcy, all of the checks had cleared except checks totaling $6526.98. These checks were not paid when presented to the Fulton National Bank, but the amount of $6526.98 is in the c. o. d. account in the Fulton National Bank. The company filed a voluntary petition in bankruptcy on October 25, 1945. In addition to the foregoing stipulation of facts agreed upon by the parties, it is further agreed that either party has the right to introduce evidence, oral or documentary, supplemental to and in addition to the facts above stipulated, and that either party has the right to introduce parts or all of the testimony taken in the bankruptcy case and stenographically reported, with the same force and effect as if the same had been offered in this court, the relevancy and materiality, if objected to, to be passed upon by this court when offered."
There was also introduced in evidence a contract, dated — day of September, 1944, signed by A. V. Kennedy, J. B. Lewis, C. L. Shaw, K.  L. Transportation Company Inc., by C. L. Shaw, president, and Moore Incorporated, by James C. Moore, president. The contract in substance recited: that on or about April 5, 1944, C. L. Shaw purchased the interest of A. V. Kennedy and J. B. *Page 841 
Lewis in the corporation and secured a loan from Moore Incorporated of $150,000; that it subsequently developed that the financial statement relied upon at the time the transaction was consummated was not accurate; that among other things it failed to disclose a deficit in the corporation's c. o. d. account of approximately $65,000, and this deficit must now be met; that it was agreed between the parties that the former owners, Lewis and Kennedy, would pay to the corporation $20,000, which would be immediately applied as a credit on the c. o. d. account; that the stockholder, the corporation, and the lender would immediately make additional deposits, or cause the same to be made, sufficient to eliminate the deficit in the c. o. d. account. It was further agreed that, upon the payment of $20,000 as aforesaid, the former owners, and each of them, their heirs and assigns, were released and discharged from liability of any nature whatsoever to either of the other parties to the contract, their successors and assigns.
A. V. Kennedy testified: That on April 5, 1945, when he sold his stock to C. L. Shaw, he was paid $10,000 in cash, the same being a check drawn on K.  L. Transportation Company Inc. He knew that this payment was made with the corporation's funds. He knew that Mr. Shaw was buying all the stock of the corporation. He did not know that the shortage in the c. o. d. account was $54,931.20, but he understood that there was a shortage. He knew that there was a shortage in the amount just stated, which arose during the time he was president, director, and stockholder. He did not know at the time that it was improper or illegal for Shaw to use the corporate funds to buy his stock. He thought it was all right. He was later advised that it was wrong. He paid the purchase-money back to the corporation, but he did not get his stock back. Shaw kept the stock but has not paid for it. There was a tentative agreement that he would pay for it. He was not aware, when he paid the $22,000 to K.  L. Transportation Company Inc., of the fact that the c. o. d. creditors were taking a criminal prosecution. Just before he made the $22,000 payment, he heard that some of the c. o. d. creditors were demanding of the corporation that the c. o. d. shortage should be made up. They were calling on the corporation for it. He did not know whether he was liable for it, but did not believe that he was. When he sold his stock the corporation had plenty of funds with which to pay this *Page 842 
c. o. d. account shortage and current bills. If it had been properly handled at all times it could have paid all bills down to the end, that is, if it had been liquidated in an orderly manner it would have paid all obligations — "In other words, I swear that it was solvent." He testified that the last financial statement showed that, and that every statement showed it. It was solvent all the time, and was solvent when he sold his stock to Shaw. When he returned the $10,000 to the corporation, it was solvent. There was not a shortage that he ever knew anything about or ever heard anything about. Before he made the $22,000 payment he saw financial statements of the company, but he did not have a new inventory made or check the old inventory, and took no steps to find out whether there was a shortage in the inventory. Before he advanced the $22,000 he made no examination of the receivables and did not know that they were inflated. If the c. o. d. funds were used to pay the general bills of the corporation, it was done without his consent. He made no effort to find out if such funds were used to pay current obligations of the corporation. He did not know about the use of these funds for other purposes. The transportation company was not his main business. He was engaged in other endeavor, including naval stores and real estate, devoting most of his time to the naval-stores operation, trading in land and leasing timber. He was not familiar with the trucking business and had very little to do with the corporation. He was not capable of operating the trucking lines without learning. He was largely a stockholder, and the active management was left to other parties. The bookkeeping was difficult, and he never could understand it. He depended upon the bookkeepers for that work. They were careful in selecting bookkeepers, and it was absolutely necessary for him to depend upon the bookkeepers. He usually looked at the regular reports of the operation. They were made monthly. He had no occasion to believe that any of them was not reliable, and he had no occasion to believe that any bookkeeper was incompetent. He examined a financial statement of March 31, 1944, which showed land and land rights listed at $20,000 and improvements at $38,000. This statement was in his hands when he traded with Shaw. The valuations placed on the real estate were about half the actual value. The franchise was valued at $592.50. A sale of the franchise by fair negotiation would have brought $50,000, *Page 843 
but even at the bankruptcy sale a bid of $22,000 was received therefor. The statement showed equipment valued at $210,000, and reserve for depreciation thereof $143,000. The net valuation was $67,000. It sold for about $180,000. The witness identified financial statements for January, 1945, showing a net worth of $45,139.45; for February, 1945, a net worth of $46,459.85; for March, 1945, $46,557.55; for April, 1945, $51,092.63; for August, 1945, $54,148.61; all of which were auditors' reports of net worth. The witness testified that at no time during his connection with the company had he diverted or taken or used for his own interest or benefit the c. o. d. items or authorized anyone else to do so. He never knew any item from that account to have been stolen by anyone, and there was no shortage that he knew of, and the deficit in that account was caused by using the funds for payment of the corporate debts. Cancellation of the insurance rendered the corporation unable to operate and thus unable to meet its obligations, but it was not insolvent. It just did not have ready cash. It had assets. He never thought that it was insolvent. Some time along about June, 1945, he agreed to make a loan of $100,000 and had his counsel draw the papers and examine titles. He was committed to make the loan, and was ready, willing, and able to make it, but the corporation decided not to borrow from him.
Mr. Watkins, who represented the prospective purchaser, testified that, as a going concern, he regarded the corporation as solvent, and recommended that his client pay $50,000 for the same, but the cancellation of the insurance prevented any operation and caused the withdrawal of his client's proposal to purchase.
1. We are required first to determine if there is sufficient evidence in this record to authorize a jury to find that the claim in controversy is a voidable preference. In order to fall as such, there must be evidence of all of the following elements: (a) payment to an unsecured creditor of an antecedent debt; (b) such payment was made within four months of the bankruptcy; (c) there was reasonable cause to believe that the debtor was insolvent at the time; (d) it caused a depletion of the bankrupt's estate. § 60-a, *Page 844 
bankruptcy act of 1938; 11 U.S.C.A. § 96. Kennedy's claim obviously does not represent payment of an antecedent debt owing to Kennedy. It was made within the four-months period, but there is no evidence in this record to authorize a finding that Kennedy had reasonable cause to believe that the debtor was insolvent at the time. It did not operate as a depletion of the bankrupt's estate, since at the time it was executed Kennedy delivered an equal amount of cash to the bankrupt. This brief observation at once makes it clear that, under the general provisions of the bankruptcy law, the claim here would not be voidable as a preference. But in view of the evidence, which shows that this debt was created with the understanding and for the purpose of enabling the debtor to pay the unsecured creditors for the c. o. d. claims against the debtor, it is contended here by the plaintiff in error that, under the principle ruled in Dean v.
Davis, 242 U.S. 438 (37 Sup. Ct. 130, 61 L. ed. 419), the claim is a preference forbidden by the bankruptcy act. In the case relied upon, it was held that the evidence showed that the debtor knew that he was insolvent, and that he knew that he was making a preferential payment, and he must have known that by the execution of the mortgage there involved, encumbering all of his estate to secure a note already past due, suspension of his business and bankruptcy would follow. The facts in this record are so different that the ruling there made can not be here applied. This record shows that the debtor, instead of knowing that it was insolvent, had monthly statements showing a net worth of approximately $50,000. It was engaged at the very time of the execution of the instrument here involved in negotiations with a prospective purchaser whereby the corporate assets were to be sold for an amount far in excess of all liabilities. It was said in the Dean case, supra: "The mortgage may be made in the expectation that thereby the debtor will extricate himself from a particular difficulty and be enabled to promote the interest of all other creditors by continuing the business. The lender who makes an advance for that purpose with full knowledge of the facts may be acting in perfect `good faith.'" It is true, as ruled in the case referred to, that the question of good faith is a question of fact in each case, but where as here all the facts put in evidence show good faith and are irreconcilable with bad faith, no issue of fact is made, and the jury would not be authorized to find bad faith based *Page 845 
upon the evidence in this record. Booth v. Atlanta ClearingHouse Assn., 132 Ga. 100 (63 S.E. 907). Prolonged discussion of this element of the case is unnecessary. The evidence in so far as fraud or voidable preference is concerned demanded the verdict directed.
2. But it is further contended by the trustee that this claim should have been disallowed because Kennedy as president of the corporation was negligent in allowing a deficit in the c. o. d. account, and, hence, was personally liable for the amount of this claim which was devoted exclusively to the payment of c. o. d. claims. Among the authorities holding that officers of a corporation are liable to the corporation for fraud and misconduct in the affairs of the corporation whereby loss is sustained, the plaintiff in error cites Shannon v. Mobley,166 Ga. 430, 435 (143 S.E. 582), and various sections of volumes 3 and 13 of Fletcher's Cyclopedic Corporations. There can hardly be any dissent from the assertion that in the circumstances named the corporate officers are liable to the corporation for any loss or injury resulting to the corporation, but another and equally sound rule of law is that the extent of liability of such an officer is the amount of injury or damage suffered by the corporation. It is, therefore, obvious that Kennedy could not be held personally liable here, although he may have been ever so negligent, unless there is evidence that would authorize a finding that his negligence resulted in loss or injury to the corporation. McEwen v. Kelly, 140 Ga. 720
(79 S.E. 777); McEwen v. Kelly, 141 Ga. 137 (80 S.E. 633);Shannon v. Mobley, 166 Ga. 430 (143 S.E. 582); Greenwood
v. Greenblatt, 173 Ga. 551 (161 S.E. 135). The only evidence in this record bearing at all upon the question as to what use was made of the funds that were taken from the c. o. d. account, resulting in a deficit, is that such funds were used for the payment of other obligations of the corporation. Under this evidence a finding was demanded that the corporation sustained no loss or injury. Therefore Kennedy as its president had no liability on this account. Since the ruling just made disposes of this question, it is unnecessary to rule whether or not, underGeorgia Hussars v. Haar, 156 Ga. 21 (188 S.E. 563), andMathews v. Fort Valley Cotton Mills, 179 Ga. 580
(176 S.E. 505), the contract put in evidence, which recites that, for a consideration stated, Kennedy is released from any and all liability to the corporation, *Page 846 
would constitute a bar to the further claim by the corporation on account of negligence resulting in loss. The verdict as directed by the court was demanded by the evidence.
Judgment affirmed. All the Justices concur, except Atkinsonand Wyatt, JJ., who dissent.