Court Opinion

ID: 6896481
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:50:19.332712+00
Date Added: 2024-06-11T16:06:01.115029
License: Public Domain

On Reheabing
[35 Pac. 864.]
Opinion by
Me. Justice Bean.
The opinion in this case is challenged by a petition for rehearing because it is held therein that if the mortgages were taken by the mortgagee in good faith to secure an honest debt, the motive or purpose of the debtor in giving them was immaterial. This question has been reexamined both on this petition and in The Durand Organ & Piano Co. v. Bowman, just decided, and the opinion of the chief justice in the latter case renders the further discussion of that subject unnecessary.
It is also challenged because it is substantially held that a corporation engaged in the conduct of the business for which it was organized, although embarrassed and unable to pay its debts at maturity, does not necessarily become insolvent within the meaning of the authorities holding that an insolvent corporation cannot prefer one creditor to another, and counsel say they “ are at an utter loss to imagine why the same rule should not be applied in such cases as in bankruptcy proceedings.” The reason is manifest. A corporation conducting a business of the magnitude and character of this depends for its very life upon credit. It could not run a single day without it. It must have credit in bank and with those with whom it deals, and to say that it is insolvent within the meaning of the rule invoked because it is unable, by reason of a *30dull market or other cause, to meet its obligations in the ordinary course of business at maturity, or because sufficient could not he realized from its property at forced sale to pay its debts, would be to deny to such a corporation the jus disponendi of its property, and the right to continue in business. In Corey v. Wadsworth, 11 South. 350, 23 L. R. A. 618, the court, in defining at what stage of a corporation’s affairs it must be pronounced insolvent so as to bring it within the rule prohibiting preferences, says: “It is not enough that its assets are insufficient to meet all its liabilities, if it be still prosecuting its line of business with the prospect and expectation of continuing to do so; in other words, if it he in good faith, what is sometimes called a ‘going’ business or establishment. Many successful corporate enterprises, it is believed, have passed through crises, when their property and effects, if brought to present sale, would not have discharged all their liabilities in full.”
Mr. Thompson, who is an able advocate of the “ trust-fund ” doctrine, says upon this subject: “The meaning of the doctrine is not that such assets (of a corporation) are in any strict or close sense a trust fund for the creditors of a corporation while it is a going concern. It does not, in any sense, disable the directors from dealing with the assets of the corporation, in the ordinary course of its business, as fully as an individual might under the same circumstances deal with his assets. But its meaning is that, when the line of insolvency is reached or approached, so that the directors can no longer deal with the assets of the corporation in the ordinary course of business, but must deal with them in the contemplation of insolvency and suspension, then the assets become, in the hands cf the directors, a trust fund for the creditors of the corporation, and the directors become the trustees of that fund.” And, illustrating the doctrine, he puts the case of a bank, *31which, after resisting a run, made by its depositors, by payment of their demands over its counters, is finally compelled to suspend,and says: “So long as it did that, it was acting in the regular course of its business; and, in the absence of a statutory prohibition, under all legal conceptions, the preferences obtained by those depositors were honest and lawful, and were made in good faith because they were made when the directors believed that they would be able to pay all in full.” But if, after closing its doors, the directors resolve to single out certain of its depositors and pay them in full, or divide among them what remains, such a transaction would come, he says, within the doctrine prohibiting an insolvent corporation from preferring one creditor to another: 27 Am. Law Rev. 846. It seem to us that the doctrine for which plaintiff contends can only apply, if at all, when that point in the affairs of the corporation is reached where its managers find themselves obliged to deal with its assets in view of a suspension by reason of its insolvency, but not while the corporation is in good faith engaged in the business for which it was organized, although in fact it may be insolvent. This principle is borne out by Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co. 24 S. W. R. 16, Duncomb v. N. Y. H. & N. R. R. Co. 88 N. Y. 1, and Currie v Bowman.
The decision of the lower court is affirmed.
Aeeikmeo.