Court Opinion

ID: 8813270
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:10:08.815223+00
Date Added: 2024-06-11T17:04:22.283747
License: Public Domain

On Rehearing.
Before. HOOK and CARRAND, Circuit Judges, and YOUMANS, District Judge.
YOUMANS, District Judge.
A rehearing in this case was granted upon the petition of appellee and the case has been resubmitted. Confusion has resulted by reason of a change of theory on the part of counsel for appellee since the decision of this court on the former submission. They have taken certain expressions in the former opinion which were made with regard to the position then maintained by them, and now make those expressions the basis for an entirely different position.
The amended bill of complaint was framed on the trust fund theory. That theory was adhered to by counsel for appellee on the former submission. Their contention was stated on pages 63 and 64 of their original brief as follows:
“The liability of the Okmulgee Company arises in the following way: The stockholders, directors, officers, and owners of the two corporations being identical, on the dissolution of the CofCeyville Company, became trustees for the creditors of that corporation and as such held its property in trust; and when this property was turned over by them to the Okmulgee Company, which they had organized to take and hold the property for their benefit, the Okmul-gee Company, having full knowledge and notice of the trust imposed upon, the property and the former trustees, and of the contract with Mr. Frink, became the successory trustee for the creditors of the CofCeyville Company.
“Furthermore, the property having been so taken without the payment of anything therefor to the CofCeyville Company, and without the payment of all claims of creditors of the CofCeyville Company, and having been so taken, impressed with a trust and with full knowledge and notice thereof, then, at such time as it repudiated Mr. Frink’s claim and prior right to have his claim satisfied out of the CofCeyville property, the Okmulgee Company, as such suc-cessory trustee, committed a breach of trust and became liable to be called to account for such trust property, at least to the extent of the value of the property so taken.
“Furthermore, the Okmulgee Company, as such successory trustee, having commingled trust property so taken with property of its own, and all now a constituent of and used by it as one entire plant and property, so that the original CofCeyville property has lost its separate identity, it has thereupon become liable to satisfy Mr. Frink’s claim, arising out of his contract with the CofCeyville Company, in a direct personal judgment. Furthermore, the Ok-mulgee Company, having so taken the CofCeyville property with full notice and knowledge of its trust character, and with full notice and knowledge that* the persons from whom the property was so received held it as trustees, thereupon stepped into the shoes of the former trustees and became the successory trustee for the creditors of the CofCeyville Company, with plenary notice that the interest of Mr. Frink in the property, as a creditor of the CofCeyville Company, was at least as much as the value of the stock of the Okmulgee Company, or the interest claimed therein by its stockholders, plus the indebtedness which the Okmulgee Company had assumed in taking over the property.”
*165With regard to the amount of the recovery by appellee the contention of his counsel on the former submission is indicated by the following quotations from their original brief. On page 68 they say:
“The measure ol Mr. Frink’s recovery against the Okmulgee Company, under the circumstances of this case, is the value of his equity as a creditor of the Coffeyville Company, which was diverted from him as such creditor hy the Okmulgee Company as successory trustee; and this would be so even as under the circumstances of this case, where it is claimed that the Okmulgee Company paid debts of the Coffeyville Company, to an amount alleged to be in' excess of the value of property so taken, particularly where such alleged value as in this case was arrived at or determined arbitrarily by the parties who have benefited by the arrangement, and a long time after the property has been so transferred.”
On page 69 they say:
“As a general proposition Mr. Frink probably would be limited to the subjection of the property transferred, and the Okmulgee Company would be liable only to the extent of the value of the property taken. However, where, as in the circumstances of this case, in moving the property from Coffeyville to Ok-mulgee, the Coffeyville Company’s property got mixed up with the individual property of Dr. Skelton and into the plant that he was constructing, and where, in reconstructing the original Coffeyville plant at Okmulgee new material was added, and the reconstructed plant was enlarged by one-third over the old Coffeyville plant at Coffeyville, such mixing and intermingling of property having been brought about by the stockholders as trustees and the Okmulgee Company, which took over the property for their benefit as successory trustee, and where thereafter the Okmulgee Company took over the property of the Skelton plant and thereupon increased its capital stock to $200,000, and at the time this action was begun all of this property, including the original Coffeyville property, was a constituent part of one entire plant, and so used by the Okmulgee Company as one entire plant and property, then under such circumstances Mr. Frink is not limited to the subjection of the property so taken, but this court sitting in equity has plenary power to so conduct its proceedings and mold its decrees that full relief may be secured to Mr. Frink.”
On page 70 they say:
“However, assuming for the sake of argument that Mr. 10-ink should be limited in his right to proceed against the property taken over by the Okmulgee Company, this would be of no material benefit to it, as the property was worth very much more than Mr. Frink’s claim.”
Curiously enough counsel for appellee cite in support of their contentions, so carefully and elaborately set forth, the very same authorities which they now,construe to sustain a theory of personal and direct liability on the part of the Okmulgee Company.
On the former submission this court accepted the trust fund theory on which appellee based his claim, as indicated by the foregoing quotations, but did not take the same view of the testimony as was taken by counsel for appellee, nor did it accept the interpretation of the law urged by them for the determination of the amount of his recovery.
On this submission counsel for appellee seek to hold the judgment recovered by him in the court below upon the theory of direct liability. They now say that they might have brought this suit at law, and that the decision of this case should rest on principles applicable *166in cases of personal liability. On page 2 of their petition for rehearing they say:
“On the facts in this case, the decision does not rest on the trust fund doctrine, but is bottomed on principles of direct liability as effectively as though the Olcmulgee Company had itself signed the contract with Mr. Frinlc.”
This is a complete change of front. The time of the change appears on page 4 of the petition for rehearing. Counsel there say:
“.We have diligently studied these cases and the record for over four years, and have only come to appreciate the full force and effect thereof since reading the opinion of this court.” \
On page 8 of the petition for rehearing they say:
“On the facts of our case, we might have sued at lau>, and the decision should rest on principles applicable in cases of personal and direct liability.”
The fact is that they did not sue at law, and if they had based this suit on the theory of personal and direct liability they would have had no standing in equity. Counsel for appellee now say that the authorities sustain the direct liability theory in cases similar to the case at bar. We do not so read the cases. It is true that personal judgments have been rendered in such cases, but such judgments are based on the existence of a trust fund and on the disposition, misapplication, or conversion of such fund. Moreover, such judgment cannot exceed the amount of the fund.
That was the conclusion of this court upon the former submission. After reciting the facts Judge Stone,«speaking for the court, said:
“Tbe legal result of such transactions is to impose upon appellant liability, up to tbe value of sucb assets, to tbe creditors of tbe Coffeyville Company.”
Counsel for appellee now contend that the cases cited in support of that conclusion sustain the theory of direct liability, without regard to the value of the property received. That contention makes a reexamination of the controlling decisions necessary.
In the case of Hibnernia Ins. Co. v. Transportation Co. (C. C.) 10 Fed. 596, 599, the court said:
“A corporation, having incurred liabilities, is dissolved, practically, by transferring all its property to another corporation, formed possibly for the very purpose of leaving tbe creditors of tbe former (creditors at large) without any adequate means of realizing their just dues. * * * If the new corporation knew, as charged, that the demands against the old were outstanding, and with that knowledge received all tbe property of the old" corporation without consideration, why should it not be held to have acquired that property cum onere? * * * Here it is charged that the new corporation took all of the property of the old without consideration, charged with full notice of plaintiff’s demands, and therefore, as to. this plaintiff, fraudulently. It may be that serious embarrassments will ensue, pending the litigation, if the lis pendens is to hang over the new corporation concerning its rights in the transferred property. Of course, it is answerable to plaintiff’s demands only to the extent of the property received; and if any serious detriment as to the use or disposal of the same should arise, the court is open for such orders as may preserve the rights of the parties pending the litigation.”
*167In the case of Harrison v. Union Pacific Railway Co. (C. C.) 13 Fed. 522, 525, the court said:
“The cross-bill alleges and the demurrer admits that the Consolidated Company has received from the Kansas Pacific Company all its property, amounting to more than $10,000,000, and that the original corporation has practically ceased to be, and is merged in the Consolidated Company, having now no officers upon whom service can be made, and no property out of which an execution can be satisfied. We are of the opinion that, under such circumstances, the Consolidated Corporation is liable in equity for the debts of the original corporation, at least to the extent of the value of the property received from it.”
In the case of Brum v. Merchants’ Mutual Insurance Co. (C. C.) 16 Fed. 140, 143, the court said:
“As the Home [Insurance Company] took all the property of the old company, leaving nothing to pay the amounts due libelants, and as it took them, not as creditors, but as owner, it seems clear to me that it must pay the debts of the old company, at least to the amount of the assets converted.”
The point involved here was fully discussed in three opinions in the case of Boyd v. Northern Pacific Railway Co. A very painstaking opinion was written by District Judge Whitson, who tried the case. It is reported in 170 Fed. 779. On page 794 he said:
“Complainant’s counsel invoke the doctrine of equity that the assets of a corporation constitute a trust fund for the payment of its creditors. This, of course, is not* disputed, but a distinction is pointed out between the personal liability of a transferee in such a case and the right of a creditor to follow the property transferred. Thus the defendants’ position is stated:
“ ‘When, on October 1, 1888, the Coeur d’Alene Company leased its property for 990 years to the railroad company, the rights of the creditors of the former company as against that property remained just what they were before. The Coeur d’Alene Company could not diminish or impair those rights by making the transfer, and the property remained subject to the claims of creditors upon it; and if at any time prior to 1893 the plaintiff had pressed his claim to judgment the property could have been sold (subject to mortgages upon it, but freed from the lease) to satisfy that judgment.’
“If counsel have appeared to dispute concerning the rule, it may be gathered from the briefs that there is no substantial controversy between them. Defendants’ counsel admit that the transferee of the property of a corporation is liable to account to the creditors of the transferring company, but limits the remedy to the property transferred, while complainant’s counsel apparently have not intended to be understood as claiming a liability for the payment of indebtedness beyond the assets taken over. But, if they have been misunderstood in that regard, it must be hold that there is no personal liability, except where property has been disposed of, misapplied, or converted. The general trust doctrine would not permit of a more extended application, but the personal liability of one who fails to observe the duty imposed, when the assets of a corporation come into his hands, is abundantly sustained by authority.”
In the same case in the Circuit Court of Appeals for the Ninth Circuit, 177 Fed. 804, 820, 101 C. C. A. 18, 34, Circuit Judge Gilbert, speaking for that court, said:
“The purpose of the present suit is to deprive one of the parties to the foreclosure suit of a benefit which it derived under the decree therein. It is to require the railway company, which obtained the property as a result of the decree and the agreement and understanding of the parties whereon it was based, to devote a portion of the-property so obtained to the payment of the *168claim of one who was equitably entitled to receive the same out of the prop* erty so transferred.”
Upon one branch of the same case (228 U. S. 482, 500, 33 Sup. Ct. 554, 559 [57 L. Ed. 931]) Mr. Justice Lamar, speaking for the Supreme Court, said:
“Being liable for this diversion of $465,000, the Northern Pacific Railroad remained so liable until the funds were restored to the true owner.”
Upon another branch of the case (228 U. S. on page 508, 33 Sup. Ct. 561 [57 L. Ed. 931]) he said:
“If the value of the road justified the issuance of stock in exchange for old shares, the‘creditors were entitled to the benefit of that value, whether it was present or prospective, for dividends or only for purposes of control. In either event it was a right of property out of which the creditors were entitled to be paid before the stockholders could retain it for any purpose whatever.”
In the case of Central Improvement Co. v. Cambria Steel Co., 201 Fed. 811, 822, 120 C. C. A. 121, 132, this court said:
“But a sale or transfer by stockholders of the property of their corporation in which they preserve an interest, whether that sale or transfer be by deed, by mortgage, by judgment, by foreclosure sale, or by any other means, is fraudulent and voidable against the unsecured creditors of their old corporation, and a purchaser who takes and converts such property to its own use with knowledge of the facts becomes legally liable to pay the unsecured debts of the old corporation, at least to the extent of the value of the property so taken and converted.”
In the same case (210 Fed. 696, 703, 127 C. C. A. 184, 191) this court said:
“Moreover, the property of the Belt Company was a trust fund. The stockholders of that company were trustees charged with a duty to apply that property to the payment of the claims of the Trust Company and of the other creditors of the Belt Company before they took to themselves any share in or. benefit therefrom. When the Southern Company took their stock and gave them $4,750,000 par value of its stocks and bonds for their interest in the property of the Belt Company,- it stepped into their shoes and became a trustee for the creditors of the Belt Company, with plenary notice that the interest of those creditors in the property was at least as much as the value of the stocks and bonds it was giving for the interest of the stockholders, for the rights of the creditors in the Belt property were prior and superior to those of the stockholders.”
On page 706 of 210 Fed., on page 194 of 127 C. C. A., in the same case, this court said:
“Moreover, where the property of a corporation is sold to a purchaser, and part or all of the purchase price thereof is paid or distributed to its stockholders, to the exclusion of its creditors from a collection of their debts from the property of the corporation, the latter may recover that part of its value from the purchaser with notice, on the ground that the conveyance is fraudulent in law.”
In the same case, on page 709 of 210 Fed., on page 197 of 127 C. C. A., that court quoted from the opinion in Clements v. Moore, 6 Wall. 299, 312, 18 L. Fd. 786, as follows:
“A sale may be void for bad faith, though the buyer pays the full value of the property bought. This is the consequence, where his purpose is to aid the seller in perpetrating a fraud upon his creditors, and where he buys reck*169lessly, with guilty knowledge. When the fact of fraud is established in a suit at law, 1he buyer loses the property without reference to the amount or application of what he has paid, and he can have no relief either at law or in equity. When the proceeding is in chancery, the jurisdiction exercised is more flexible and tolerant. The equity appealed to — while it scans the transaction with the severest scrutiny — looks at all the facts, and, giving to each one its due weight, deals with the subject before it according to its own ideas of right and justice. In some instances it visits the buyer with the same consequences which would have followed in an action at law. In others, it allows a security to stand for , the amount advanced upon it. In others, it compels the buyer to account only for the difference between the underprice which he paid and the value of the property. In others, although he may have paid the full value, and the property may have passed beyond the reach of the process of the court, it regards him as a trustee, and charges him accordingly. Where ho has honestly applied the property to the liabilities of the seller, it may hold him excused from further responsibility. The cardinal principle in all such cases is that the property of the debtor shall not be diverted from the payment of his debts to the injury of his creditors, by means of the fraud.”
In the case of Kansas City Railway v. Guardian Trust Co., 240 U. S. 166, 173, 36 Sup. Ct. 334, 335 (60 L. Ed. 579), the Supreme Court, speaking through Mr. Justice Holmes, says:
“The Court of Appeals thought it plain that the foreclosure was part of the original plan; and, as it also thought that the mortgaged property was worth enough above the mortgage to pay the unsecured creditors, it held that the stockholders when receiving pay for their stock were receiving it in substance as the proceeds of a transaction that removed all property of the Belt Company from its unsecured creditors’ reach.”
[5] These authorities fully sustain the view that all the property that came into the hands of appellant belonging to the Coffeyville Window Glass Company constituted a trust fund for the payment of the debts of the latter company.
[6] They also sustain the view that, the appellant having converted that property to its own use, personal judgments may be obtained against it by creditors of the Coffeyville Window Glass Company to the amount of the value of the property.
[7] The testimony does not warrant the finding that appellant is a continuation of, nor merged into, the Coffeyville Window Glass Company, in the sense that would make the latter identical with the former, and the former liable for the latter’s debts beyond the value of property received.
The Coffeyville Window Glass Company ceased to manufacture glass at Coffeyville on account of the failure of natural gas. It removed all of its property that could be removed advantageously to Okmulgee, Okl., where natural gas could be obtained. Its stockholders organized an Oklahoma corporation. The property of the Kansas corporation constituted the basis of capitalization for the Oklahoma corporation. The Kansas corporation was then dissolved. Some of the old stockholders sold all or a portion of their interest in the new corporation. Additional property was added which was made the basis for an increase of stock. The Oklahoma corporation became a distinct legal entity, charged with a limited liability to the creditors of the Kansas corporation.
*170There was no express assumption by the Oklahoma corporation of appellee’s debt, nor does the testimony warrant the finding that there was an implied assumption. On the contrary, the testimony of appel-lee himself is to the effect that appellant refused to recognize his contract, or to pay the amount that had accrued thereon.
Otherwise than as qualified herein, we are satisfied with the language of the former opinion, and after full consideration agree with the result there stated, except that we are now convinced that ap-pellee is entitled to a personal judgment only, and not that such judgment should be declared a lien on appellant’s property.
Therefore the case will be reversed, with instructions to enter a decree for appellee for the sum of $19,410.86 and costs. It is so ordered.