Court Opinion

ID: 9639552
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:23:01.269839+00
Date Added: 2024-06-11T18:10:19.811631
License: Public Domain

SAWTELLE, Circuit Judge.
This appeal comes from a suit in equity brought in the United States District Court of the Eastern District of Washington, by J. D. Meikle, a eitizen of Oregon, trustee in bankruptcy of the Fred Herrick Lumber Company, an Oregon corporation, against the Exchange National Bank of Spokane, Wash., and J. A. Drain, receiver of said bank, both citizens of Washington, for recovery of $49,446.56, with interest, alleged to be due the bankrupt lumber company from the bank.
Fred Herrick for many years had extensive holdings in the lumber business in the south and in the northwest, and owned all but the qualifying shares of stock in the Milwaukee Lumber Company, the Coeur d’Alene Mill Company, and the Export Lumber Company, all Idaho corporations; also, 50 per cent, of the stock of the Scotch Lumber Company.
In 1923 Herrick organized the Fred Herrick Lumber Company, an Oregon corporation with its principal office in Burns, Or., to open up valuable timber holdings. Of this company he was president and owned all the stock except about 102 shares. The capital stock of the company was $500,000, and Herrick furnished the money and subscribed for the original stock issue. The company began the construction of a lumber mill and railroad in connection therewith, and as the size of the undertaking grew more money was needed. The capital stock'was increased from $500,000 to $2,000,000, the money for which came chiefly from other companies owned by Herrick personally. In this connection Mr. Herrick said: “The capital stock was increased from $500,000 to two million dollars because I had put in more money than the $500,000. The arrangement from the inception was that I ivas to take stock for the money I put into the concern and that continued until the company was finally sold.”
This testimony was corroborated by that of J. W. Girard, vice president and general manager of the Fred Herrick Lumber Company. However, there was no formal agreement to that effect entered into between the corporation and Herrick, and only share certificates in blank were actually issued to Herrick.
The Herrick Lumber Company received money from both the Export Company and the Milwaukee Company, hut the greater amount from the latter. During the period of time in question the advances from the Milwaukee Company to the Herrick Company amounted to $506,445.02, which were handled in the following manner: Mr. Herrick used the Milwaukee Company much as he would have used a bank, and had therein an account called “The Fred Herrick Advance Aeeount.” On the credit side of this account went such items as Mr. Herrick’s monthly salary, payments to Mr. Herrick from the Export Lumber Company, the Coeur d’Alene Mill Company, the Scotch Lumber Company, proceeds from the sale of the Interior Lumber Company; in short, any money received by Mr. Herrick from his many and various enterprises. On the debit side appeared the items for Mr. Herrick’s ordinary living expenses, his food and clothing and telephone bilis, his investments. The account was carried by the Milwaukee Lumber Company in much the same manner as a bank would have carried it. Mr. Herrick also had a personal bank account at a hank in St. Maries, but any overdrafts were taken care of by cheeks from the Milwaukee Company, which cheeks were debited to the “Fred Herrick Advance Account.” During the period from May 14, 1923, to October 30, .1928, which covers the time when the advances wore being made to the Fred Herrick Lumber Company, there was deposited in the “Fred Herrick Advance Aeeount” of the Milwaukee Company the sum of $2,953,725.50, and the amount of disbursements during the same period was $2,-217,216.44, showing a credit balance of over $736,000.
All the money received from Mr. Herrick was also kept in a “Fred Herrick Advance Account” on the books of the Fred Herrick Lumber Company. Of the moneys obtained from the Milwaukee Company some $109,000 was evidenced by cheeks drawn by the Milwaukee Lumber Company to the order of the Fred Herrick Lumber Company, and $318,-622.50 was obtained from the Milwaukee Company in the following manner: Fred Herrick gave his individual check to the Fred Herrick Lumber Company drawn on the First National Bank of St. Maries, Idaho. Generally these checks were issued in blank, the amount not being filled in, and they were left with Mr. Girard to he filled out and deposited when needed. They were filled out *178by Mr. Girard from time to time and deposited with the Fred Herrick Lumber Company in its bank at Bums, and by that bank sent for clearance or collection to the First National Bank at St. Maries. Generally there would not be sufficient funds in the latter bank to honor the same and the bank would call upon the Milwaukee Company to make these checks good, and the Milwaukee Company would cover such cheeks by depositing forthwith almost identical sums.
Money was obtained from the Export Lumber Company as follows: the Export Lumber Company borrowed $100,000 from the First National Bank of Portland for which it gave its note. The $100,000 thus obtained was transmitted at the request of the Export Lumber Company to the Exchange National Bank of Spokane. This latter bank thereupon at the request of the Export Lumber Company distributed for the account and on behalf of the Fred Herrick Lumber Company out of said moneys the sum of $50,000 by transmitting the same to the First National Bank at Burns, Or., for deposit to the credit of the account of the Fred Herrick Lumber Company, which $50,000 was so deposited; $10,066.67 was transmitted to the Washington National Bank of El-lensburg for the purpose of taking up two notes of the Fred Herrick Lumber Company held by that bank, and said two notes were so paid.
These advances by the Milwaukee Lumber Company and by the Export Company to the Herrick Company constituted the consideration for claims filed and allowed in the bankruptcy proceedings.
The Milwaukee Company never paid a dividend on its stock nor was there any corporate authorization for the withdrawals of money from that company by or on behalf of Fred Herrick.
In September, 1928, Fred Herrick and two officers and directors of the Fred Herrick Lumber Company reached an agreement with the Edward Hines Western Pine Company whereby the latter agreed to purchase practically all the assets of the former for $750,000. On October 4th the sale was consummated and the assets transferred to the Hines Company. At the time of the transfer the Fred Herrick Company gave an order to the Hines Company to pay, from the $750,-000, certain specified sums to enumerated creditors of the Herrick Company. The sums owed aggregated the full amount of the purchase priee and none of it was turned over to the Herrick Company except $10,264.02 ■for distribution in satisfaction of local current bills. On the list of creditors among others was that of appellant here in the sum of $49,446.56.
At the time the payment to the Exchange National Bank was made, Fabian B. Dodds, representing Fred Herrick’s personal creditors to whom Herrick had assigned his shares of stock in the Fred Herrick Lumber Company, protested by word of mouth and by letter that, if this money was accepted by the bank, it would be a preference and that he would attempt to recover same on behalf of creditors.
The Fred Herrick Lumber Company was adjudicated bankrupt upon a voluntary petition on January 15, 1929, by the District Court of the United States for the District of Oregon, and thereafter J. D. Meikle, ap-pellee herein, was elected trustee and duly qualified.
On August 5, 1929, a suit was instituted against the Exchange National Bank of Spokane and James A. Drain, receiver thereof, to recover from said bank the payment of $49,446.56 as an unlawful preference, and, on May 20, 1931, after trial, a decree was entered in favor of the trustee and against the Exchange National Bank, setting aside said preferential payment and giving judgment for the amount prayed in said complaint with interest from the date of filing said suit.
Petition for appeal was not filed until July-27, 1931, more than thirty but less than ninety days after the entry of the decree, and the order granting the appeal was not made until July 30, 1931.
Appellee has filed a motion in this court to dismiss the appeal herein because the appeal was not filed within thirty days after the entry of the decree as provided for in section 24c of the Bankruptcy Act, as amended (11 USCA § 47(e). We think this section inapplicable in a plenary suit like the one before us.
The same question, namely, the time within which an appeal must be taken in cases of this character, has recently been considered by the Second Circuit Court of Appeals in the ease of Lowenstein v. Reikes et al., 54 F.(2d) 481, certiorari denied February 23, 1932, 285 U. S. 539, 52 S. Ct. 311, 76 L. Ed. 932. With the conclusion therein reached we are in full accord.
The motion to dismiss is denied.
The record shows that the testimony was all taken in open court. As this court has *179previously said in two eases: “On tlie foregoing facte, tlie appellant is confronted by two well-established principles of law, from which there is little or no dissent: First, 1he findings of the chancellor, based on testimony taken in open court, are presumptively correct and will not be disturbed on appeal, save for obvious error of law or serious mistake of fact. * * * ” Easton v. Brant (C. C. A.) 19 F. (2d) 857, 859; Gila Water Company v. International Finance Corporation (C. C. A.) 13 F.(2d) 1, 2.
We are concerned, therefore, chiefly with tho conclusions of law, the correctness of which may be determined, as appellant concedes, by the answer to one question, namely: Was the Herrick Lumber Company solvent or insolvent on October 9, 1928, the date on which Hie payment of $49,446.56 was made to the Exchange National Bank of Spokane? If the company was solvent, the payment to the bank was valid; if the company was insolvent, then the payment to the bank constituted a preference against creditors within the meaning of the Bankruptcy Act (11 IJSCA) and is voidable.
A careful study of the assets and liabilities of the Fred TTerrick Lumber Company on October 9,1928, as tabulated in the briefs, shows that the solvency or insolvency of the company on that date must be determined by the construction placed upon the “Fred Herrick Advance Account.” If that account, in the sum of $506,445.02, was evidence of tho liability of the Fred Herrick Lumber Company to tho Milwaukee Company for that amount, then the Fred Herrick Lumber Company was insolvent on October 9th.
The manner in which the officers of Mr. Herrick’s various companies regarded the “FVed Herrick Advanee Account” must be considered. It will be remembered that Herrick was the sole owner, except for a few shares of qualifying stock, of several large companies. In connection with his method of doing business, Mr. Herrick said:
“The Milwaukee Lumber Company was the resident company and all transactions went thru the Milwaukee Company. For instance, the proceeds of the sale of the Interior Lumber Company went thru the Milwaukee Company. The reason for' putting the money in in that way was that Mr. Palmer did the collecting for me in these accounts and the money came in there if I wanted it paid out to any individual company he paid it out. The money that went in was my money and I was given credit for it in my personal account and as it was spent I had Mr. Palmer issue cheeks for it and it was charged to me. During those years there were many hundreds of thousands of dollars handled that way, and during the latter part of the term I was sole owner of all of the stock of the Milwaukee Lumber Company and tho other companies except the qualifying shares. * •* *
“I only took out of these companies what was mine. It kept coming in from every direction. If a dividend came from the Alabama property, it went into the Milwaukee office; if a dividend eame in from the Interior Company, it went there. * * f' The Milwaukee Lumber Company was acting as distributing agent from its inception even tho the Scotch Lumber Company owned fifty per cent of the stock. * * * ”
Mr. J. W. Girard, vice president and general manager of the Fred Herrick Lumber Company, said: “Mr. Herrick was practically the whole Fred Herrick Lumber Company. The financing rested largely on him and when the company needed money we looked to him to furnish it. s * * The FVed Herrick advance account showed - all tho money we had received from FVed Herrick. I assumed that it was all coming from Fred Herrick or as a result of his activity or his interest, but whether or not it was all received direct from Mr. Herrick as an individual I could not tell. * * * ”
The manner in which Herrick’s business enterprises were carried on shows a complete disregard of corporate organization and identity, not only with regard to corporations chartered in the same state but also with regard to corporations chartered in different states. It is not difficult to see Herrick as tho prime mover of all the various companies, but the rule is well established that a corporation exists as an entity, and that courts of law will not go beyond the fact of corporate existence in order to examine the real ownership of a corporation. The New York Court of Appeals has laid down the general rule as follows:
“In no legal sense can the business of a corporation be said to be that of its individual stockholders. It is true that they have an interest in the business carried on, and an influence in controlling its conduct; but they have created a legal entity to prosecute such business, make its contracts, and be responsible for its obligations, and that entity is alone responsible to persons dealing with it for the conduct of such business.” People v. American Bell Telephone Company, 117 N. Y. 241, 255, 22 N. E. 1057, 1062. Quoted in *180Cook oil Corporations (Eighth Ed.) vol. III, §§ 663, 664, p. 2566. See, also, Eisner v. Macomber, 252 U. S. 189, 214, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Rhode Island Hospital Trust Co. v. Doughton, 270 U. S. 69, 82, 46 S. Ct. 256, 70 L. Ed. 475, 43 A. L. R. 1374; Flink v. Paladini, 279 U. S. 59, 63, 49 S. Ct. 255, 73 L. Ed. 613.
Moreover, this general rule is' observed even when all or practically all of the stock is owned, as here, by one person.
“A corporation can not act except through its proper agents and in the prescribed way, and in the operation of the principle it makes no difference that the stockholder owns all or practically all the stock of the corporation and controls it, still the property of the corporation does not belong to him, but to the corporation.” [Numerous cases cited.] Thompson on Corporations, vol. 6, § 4475, p. 350.
Again, “even when all the st.ock is owned by a sole shareholder, there seems no adequate reason to depart from the general rule that the corporation and its shareholders are to be treated as distinct legal persons.” Green v. Victor Talking Machine Co. (C. C. A. 2) 24 F. (2d) 378, 59 A. L. R. 1091.
The ease of Elenkrieg v. Siebrecht, 238 N. Y. 254, 144 N. E. 519, 521, 34 A. L. R. 592, presents a particularly close analogy. There the court said: “Merely because Siebreeht referred to the property as his property cannot overcome the undisputed fact of the corporation’s existence and ownership. His family owned all the stock of the corporation, and it is a fact that the corporation was a family affair. * * * However this may be, the corporation exists; it has title to the property; it maintains and operates the property through agents. The fact that it is a family corporation, so to speak, is nothing suspicious or illegal. Innumerable are the corporations wherein all the stock is owned by a few members of one family. The fact that one man may own all but a few shares of the stock, and be in fact the dominant and controlling factor or the only active manager of the corporation, is no evidence in and of itself that the corporation does not exist as a person in the eyes of the law actually owning, operating, and controlling property.”
We are not unmindful of a long line of cases in which the courts, particularly courts of equity, have looked behind the technical fact of corporate organization to hold that the individual shareholders are the real persons in interest. See, for example, In re Rieger, Kapner & Altmark (D. C.) 157 F. 609; Minifie v. Rowley, 187 Cal. 481, 202 P. 673, 676; United States v. Milwaukee Refrigerator Transit Co. (C. C.) 142 F. 247; MeCaskill Co. v. United States, 216 U. S. 504, 514, 515, 30 S. Ct. 386, 54 L. Ed. 590. Minifie v. Rowley, supra, holds that the courts will disregard corporate identity when failure to do so would “sanction a fraud or promote injustice”; we are not convinced that the facts of the instant case meet either of the criteria.
We must give due weight to the uneontradieted testimony of Mr. Herrick that at all times he considered the “Fred Herrick Advance Account” on the books of the Milwaukee Company in the nature of a bank account, and that he felt at all times that any sums he put therein were his money. But the question of title to those funds is one of law and not of personal opinion. After the Milwaukee Company received money from Mr. Herrick or from any of his companies, the title thereto was in the corporation and not in Herrick personally. The transfer of large sums by the Milwaukee Company to the Fred Herrick Lumber Company without repayment was not an authorized corporate act, and consequently, in the absence of any showing that the sums were for materials or for value received in any form, created a liability of the Fred Herrick Lumber Company to the Milwaukee Company. The fact that Fred Herrick personally, owning all or substantially all the stock of the Milwaukee Company, authorized the transfers in a personal capacity through a mistaken conception of his own rights does not alter the situation.
Corporations exist as legal persons and the courts uphold them in the exercise of their independent rightá, as distinguished from the rights of the individual stockholders. It would be the greatest inconsistency to allow an individual to set’ up any number of corporations, to recognize the corporate existence when it might be to his interests to do .so, and to disregard entirely such organization and ignore completely the corporate fiction whenever he chose. If the position contended for by appellant here were upheld, the result would be Only confusion in the credit of all corporations and a growing feeling of distrust of all joint stock companies.
Appellant states that the Exchange National Bank was misled by the books of the Fred Herrick Lumber - Company and would not have loaned the money here involved if it had known that the “Fred Herrick Ad-*181vanee Account” represented a liability of the company. That may be so, but as the title to the money remained in the Milwaukee Lumber Company, and was not transferred by any corporate act, it is the creditors of the lumber company who must first be considered. The record gives us no facts concerning the creditors of the Milwaukee Lumber Company, but if there be any it is not right to destroy capriciously, whatever assets they may have considered security for their money and to leave them completely unprotected. The “Fred Herrick Advance Account” was adopted as a bookkeeper expedient by each of the companies considered; we cannot hold that the creditors of the Milwaukee Company will have their legal status determined solely by whatever bookkeeping methods that company chose to adopt. Such a holding would mean that the rights of creditors could be disregarded in any corporations in which one person owned a majority of the stock of each.
An individual who is allowed to incorporate a joint stock company is given many advantages that he would not enjoy if he owned the business personally without the guise of corporate organization; it is not too much to ask that such a person, in return for the rights that he has been granted, be required to respect the organization that he has created and to allow it to function through legally recognizable corporate acts.
We do not pass on the proposition as to whether any advances received by the Herrick Company directly from Fred Herrick, or the money which the Herrick Company received from cheeks signed in blank by Herrick on his personal account, which usually constituted overdrafts that were met by the Milwaukee Company, created a stock transaction and not a loan in the light of all the facts of the case. As the advances came not from Fred Herrick personally, but from the Milwaukee Company, we are constrained to hold that they created a liability of the Fred Herrick Lumber Company to the Milwaukee Lumber Company. That being so, the total sum of $506,445.02 of the “Fred Herrick Advance Account” on the books of the Fred Herrick Lumber Company was a liability on October 9, 1928, and it clearly follows that the Fred Herrick Lumber Company was insolvent on that date. The payment to the bank, therefore, constituted a preference over creditors.
We find no error in the record, and the judgment of the lower court must be affirmed.
Affirmed.