Court Opinion

ID: 7134685
Source: CourtListenerOpinion
Date Created: 2022-07-24 15:22:40.923041+00
Date Added: 2024-06-11T16:14:35.128062
License: Public Domain

Judge O’Rear
dissenting.
The Southern Land Improvement Company was a corporation owning certain coal and timber lands in Bell county, Ky., including an industrial plant, and buildings and lots in- the city of Pineville. The total issue 'of its capital stock was $330,590, of what value is not shown. Of this stock, appellant, John I). Blake, owned $230,000. The company at this time owed a bonded indebtedness of over $500,000, and a floating indebtedness of over $200,000, not including a liability of $10,000 to appellee, James S. Ray. . This was in 1893, at which time appellant was vice-president and general manager of the corporation. The $200,000 indebtedness had all been bought up by appellant with his own means, at 50 cents on the dollar. The corporation, known as the “Southern Land Improvement Company,” hereinafter called the “Company,” had defaulted on flwo of its installments of interest due on the-bonded debt, and Blake had taken up the interest coupons, amounting to some $30,000. The company had leased all of its industrial or active properties to a foreign syndicate, styled the ’Central Appalachian Company, Limited, and had realized on the lease some $55,000. This money was evidently applied in discharge of the interest obligations above mentioned. That is the inference we gather from the testimony of Blake. The company being unable, because of lack of money or credit, to construct a spur ■of five miles of railroad required by the contract of lease with the Appalachian Company, the lease was suffered, from necessity, to lapse. This was the last struggling hope, it seems, upon, which the company depended to weather the financial storms then upon it. It was in a state of insolvency, known to its general manager. It leased its hotel in this time (on March 27, 1893) to one *712Toogood1 for a term and for a rental not discdosed in the record. Simultaneously with the lease, and manifestly as part of the transaction, the company s-old to Toogood all the furniture in the hotel, at the recited eonsideration of $1,476.68, evidenced by his note, payable $50 per month, and secured by a lien on the furniture mentioned. It is not shown nor claimed that the company had any other personal property, save a few horses and wagons, also transferred to Blake. On the 29th -April, 1893 (two days before the first $50 payment on Toogood’s note would become due), Blake, as vice-president and general manager, assigned, or caused the secretary of the company to assign, to him (Blake) the Toogood note, carrying-with it, of course, the lien on the furniture. The consideration of" this assignment is said to have been on account of “part payment” to Blake of his salary o-f $5,000 per year as vice-president and general manager, and expense account advanced by him. Thirty-five days after this transaction, Blake, as vice-president of the company, rescinded or canceled the lease of the hotel to Toogood, paying him $100 in cash, and $100 in “stock of the Southern Land Improvement Company, paid to A. L. Toogood in full settlement of his services and that of his wife. The lease and agreements made between A. L. Toogood and the Southern Land Improvement Company- dated March 27, 1893, commencing April 1, 1893, are hereby canceled, and the property and supplies are hereby turned over to J. D. Blake, the owner of the notes given -therefor, and the ownership and possession of the property relinquished to him. And all accounts, collections, and assets of the hotel are hereby turned over, assigned and sold to the Southern Land Improvement Company, with which to pay the bills incurred in running the said hotel, and for-*713the supplies and furnishing supplies therefor.” Blake testified that the furniture alone (not including supplies) was worth much more than the sum for which they were sold to Toogood. He gives as the reason for such a transaction the importance to the company of having the hotel operated, and “boarding the agents and employes of the company.” The agents and employes seem, by later developments, to have been Blake, his daughter, as stenographer, and Chichester, the bookkeeper. In his testimony Blake says the furniture was worth $2,282.75, even some months after Toogood; had given it up. In August, after the attempted transfer of hotel, and the rescission of the contracts with Toogood, Blake alleges that the transfer to him was ratified by the board of directors of the company. At that meeting of the board there were present appellant, J. I). Blake,- William Low and Charles R. Chichester, as directors. The board then consisted of five members. Low was the attorney of the company, holding $100 of its stock, evidently to nominally qualify him for the position of director; Chichester was the secretary and bookkeeper — both holding their positions at the favor of Blake. The following resolutions were adopted, which Blake says was a ratification of the note, transaction above mentioned-: “rineville, Ky., August 8, 1895. Meeting convened as per adjournment, at 3 o’clock p. m. Present: J. P. Blake, Wm. Low and R. Chichester. President J. D. Blake in the chair. At said meeting the following resolutions were offered: 'Resolved that the action in reference to lease of the hotel, April 1, 1893, to A. L. Too-good, and final settlement with him upon his surrendering same, be ratified and confirmed.’ Motion was made, seconded, and the resolution was unanimously adopted. The following resolution was then offered: 'Resolved, *714that the sale of personal property to J. D. Blake and L. C. Barnett for advances made by each to this company be ratified and confirmed, and also the transfer to J. D. Blake of accounts due from the Central Appalachian Company, Ld., to amount of $3,852.50, upon advances made by him, be also ratified, and. that a proper consideration for the use of the personal property should be made while it remains in possession of the, same company.’ Motion was made, seconded, and the resolution was unanimously adopted.” Although Blake says the above was a ratification of the transfer to him of the company’s property in the note and lien upon the furniture, his witness Chichester testifies as follows on that point: “Q. That resolution of August 8, 1893, ratifying the sale of personal property to J. D. Blake, included the transfer of the Toogood note to him, did it not? A. I did not so understand it. 2. What persona] property did it cover, if it did not cover the Toogood note? A. It covered the electric light plant here, and included the stable, and live stock, two horses, wagons, etc. 3. And also the notes that had been transferred to him, did it not? A. I can not say. 4. Why do you say that it does not cover that? It says ‘personal property.’ A. The personal property, as I understand it, was the stable, horses and electric light plant. 5. The note is personal property, is it not? A. Yes, sir. 6. Does it not come within the language of that resolution? A. It comes within the description, but I do not think it was intended to cover that. 7. Are you sure it was not intended to cover that? A. I am not sure.” During these transactions appellee had a debt against the company for $10,000, upon which he was compelled to sue, resulting finally in a judgment in his favor for the amount named. The furniture had never been re*715moved during this time, nor had its possession changed, so far as could' be noticed by observation.
The company being unable to pay appellee his judgment, and, indeed, being unable to meet its current and ordinary expenses, salaries of officers, interest on its debt, or any of its floating indebtedness, appellee, Ray, caused his execution to be levied on the furniture in question ¡as the property of the company. Blake claimed the furniture as his, and the sheriff required of appellee, Ray, a bond indemnity, which was executed, whereupon the sheriff sold the property. This execution was levied November 22, 1893. On January 8. 1891, forty days thereafter, a receiver was appointed for the company as an insolvent. No other judgment debt is shown to have existed, save this one of Ray’s. The sheriff had levied the execution before the receivership, and the bond was executed and sale made afterwards. Blake then 'sued Ray and Ms surety upon the bond of indemnity. Defendants pleaded, denying that Blake was the owner of the property. At the close of appellant’s evidence, showing substantially the foregoing facts, the court gave the jury a peremptory instruction to find for appellee.
Upon these admitted facts, and the necessary and proper inferences deducible from them, h'ad the title to this furniture passed to appellant, or was it subject to appellee’s execution? To answer the foregoing query, we should determine the legal relationship of appellant, Blake, to the property in question, and to appellee, Ray, and the policy of the law governing that relationship. Blake was not only a director of the corporation owning the property and owing the debt, but he was its vice-president and general manager, paid a large salary for the faithful performanee of the duties devolved upon him by virtue of his of*716fice. From a very early (late the law lias held directors accountable as quasi trustees of the corporate property. Cook, Stock & S. secs. 648, 649, and notes; Thomp. Corp. sec. 4021; Gratz v. Redd, 4 B. Mon. 194. Therefore they have not been allowed to acquire a title to, or any interest in, it hostile to the corporation (note to section 649, Cook, Stock & S.) in dealing with the corporation, even when the transaction was with a majority of the board of directors (Duncan v. Stanton, 30 Barb. 533). Their action is subject to the closest scrutiny by the law, and liable to repudiation by the corporation at the instance of any stockholder. Thomp. Corp. secs. 4032-4091; Gratz v. Redd, supra. If the transaction is detrimental to the corporation, the director will be required to make good the loss, or disgorge profits he may have realized. Cook, Stock & S. sec 649, and note; Currier v. New York W. S. & R. R. Co., 35 Hun. 355. No presumption of fairness or advantage to the corporation is indulged; tlie director must affirmatively show it. But in transactions concerning the corporation’s property, where the director or officer is both seller and buyer, tlie transaction is per so fraudulent as to the corporation, and will be void or voidable, according to the circumstances.- Cook, Stock & S. secs.-652, 653. If the director claim the property as a gift to him, or if he has not ’actually paid a consideration for it, which has been received and converted by the corporation, or if the director perpetrated an actual fraud in the transaction,-such as personally misappropriating the corporation’s funds or property, tlie transaction will be void. Pearson’s Case, 25 Wkly. Rep. 618; Bank v. Horner, 39 Law J. Ch. 393. If itlie director, acting in good faith, actual^ pays a consideration for the transfer, and any advantage accrues to him, whether foreseen or not, it is voidable by the corpor*717ation, or at the instance of any stockholder; the director being' in that case first reimbursed for his outlay. Risley v. Railroad Co., 62 N. Y. 240. If the transaction in this case falls under the first head, then the transfer was void, and the property was the property of the company; if under the second, it was voidable at the instance of any person who had the legal right to avoid it. Here the director, who was the general manager, having 'sole custody and control of the property, transfers it to himself, paying nothing therefor, giving up nothing that lie had, yet taking a valuable asset of the company and appropriating it to his own use, without the knowledge or consent of his cestuis que trustent. He acted as both buyer and seller,-naming the price and terms upon which he should acquire the title to the property to his exclusive use, the possession and control of which was confided to his trust for the benefit of those who placed him in his position. “One can not faithfully serve two masters whose- interests are diverse” (Davis v. Mining Co., 55 Cal. 359) is a maxim of law and Scripture, equally true in each domain. “Constituted as humanity is, in the majority of cases duty would be overborne in the struggle.” Cook, Stock & S., note to section 649. In Munson v. Railway Co. (N. Y. App.) 8 N. E. 355, a director of an insolvent corporation attempted to deal with himself as an individual, and in the controversy subsequently growing out of the transaction the court said: “The director-stood in the attitude of selling as owner and purchasing as trustee. The law permits no one to act in su-ch inconsistent relations. It. does not stop to inquire wdiether the contract o<r transaction was fair or unfair. It stops the inquiry when the relation is disclosed, and sets aside the transaction, or refuses to inforce it, at the instance of *718the party whom the fiduciary undertook to represent, without undertaking to deal with the question of abstract justice in the particular case. It prevents frauds by making them, as far as may be, impossible, knowing that real motives often elude the most searching inquiry, and it leaves neither to judge nor jury the right to determine, upon a consideration of its advantages or disadvantages, whether a contract under such circumstances shall stand or fall.” In Railroad Co. v. Bowler’s Heirs, 9 Bush, 468, we held: “There is no doctrine better settled nor more universally recognized, than that an agent or trustee can not rightfully place himself in a position exciting in his own bosom ■a conflict between self-interest and the duty he owes to those for whom he acts.” In Bradley v. Farwell, 1 Holmes, 433, Fed. Cas. No. 1,779, it was held “that, where a corporation is insolvent, the directors can not turn into themselves its property for the purpose of paying a ¡debt due from the corporation to them.” But, it is argued, the director is only the trustee of the stockholders of the corporation, and unless they see proper to avoid his act no one else can complain. This was the original doctrine. To Mr. Justice Story, 'to whom the American people owe so much for the enrichment and enlargement of our equity jurisprudence, are we indebted for the extension of the principle of the trusteeship of the director to the interests of the creditor of the corporation as well as to its stockholders. Thomp. Corp. sec. 4150.
In one sense of the word, the assets of a corporation, especially of an insolvent one, are a trust fund, set apart, first, for the payment of its debts, and then for distribution of the surplus among its stockholders. Thoimp. Oorp. Id. The director must, of necessity, exercise the conscience, as it were, of the debtor, and conserve its prop*719erty to the end of the trust imposed upon it. Bent v. Priest, 86 Mo. 475. This doetriiie that the director is a trustee for the creditors as well as for the stockholders o £ the corporation has long been recognized and frequently applied in this State. Gratz v. Reed 4 B. Mon. 178; Widrig & Co. v. Newport St. Ry. Co., 82 Ky. 511; Coal Co. v. Lotspeich (Ky.) 20 S. W. 377; Railroad Co. v. Bowler’s Heirs, 9 Bush, 468.
It is argued that, if the act of Blake is to be avoided, it must be done in a direct proceeding for that purpose and by an action in equity. I have no doubt that a direct proceeding in equity would be available, but it need not be exclusive. The policy of'the law should the rather favor direct, prompt, and inexpensive methods in aiding the creditor in the collection of his debt. If the director who has sequestered the corporation’s assets is under legal obligation and duty to the corporation’s creditors not to do so, then it would appear that the creditor may, in electing to avoid the director’s conduct, either attack it in a direct action or ignore it. By- causing the levy of his execution upon the property, he disavows the act of the director in unequivocal manner, and asserts his legal right to treat the property as that of the corporation. In case a debtor •voluntarily transfers his property, it is void as to antecedent creditors. Formerly it-was thought necessary’for the creditor to have a return of “No property found” upon his execution against the debtor before he could proceed against the transferee to subject the property. Anderson v. Avery, 6 Ky. Law Rep., 363; Gilpin v. Davis, 2 Bibb, 418; Moffat v. Ingram, 7 Dana, 496; Worland v. Outten, 3 Dana, 478. Now, we hold that he can ignore the transfer, and cause his execution or attachment to be lev*720ied on the property in the first instance. Brown v. Brown, 91 Ky., 639, (11 S. W. 4); Wood v. Elliott (Ky.) 7 S. W. 624; Ky. St., sec. 1907.
In the case of an infant conveying his property during minority, it is said to be voidable. After his maturity he may avoid the transfer merely by ignoring it, and conveying to another. He may repossess himself of it without legal writ, if he can do so without a breach of the peace, or he may sue directly to cancel the conveyance. Utz v. Com., 3 Ky. Law Rep. 88; Moore v. Baker, 92 Ky. 518, (18 S. W. 363); 2 Greenl. Ev. sec. 367. If the doctrine be found that the director is a fiduciary to the creditor of the insolvent corporation with respect to corporate assets (and .it has been tod long held to be so to be now questioned), and that the director’s transaction with the corporation’s property, so -far as he has obtained any interest in or advantage over it, is either void or voidable, at the instance of the creditor, is it not a sufficent disavowal of the director’s unauthorized act to deny its validity, and treat the property as that of the corporation? And what more significant or effectual denial of the director’s acts could be made by the corporation’s creditor than by his electing to levy his execution on the chattel as the property of the corporation?
The growth of corporate interests has become so large, and deal so extensively with the property and business affairs of the country, that certainly no restrictions of directors’ liabilities and disabilities should be encouraged by the courts. When it is considered that the corporation’s records are- both made and kept by its directors; that its servants and employes are their creatures, and to some extent dependent upon them for place and pay; that these records are not open to the general *721public dealing -with the corporation, nor open to its cred ■ itons, — .it would be extremely dangerous to business interests, and manifestly unjust to those dealing with the corporation, to allow its directors to make such favorable and secret bargains with themselves as would destroy its solvency, gaining material advantage to themselves, and leave nothing for the creditor but an expensive suit in equity. The fact in this case will illustrate the dangers possible to such a rule. The corporation is hopelessly insolvent; all its assets incumbered beyond redemption save the ones now in question; its vice-president and general manager, on a salary of $5,000 per year, secretly, illegally, affects to contract with himself, as it were, as director, by which he takes all the unincumbered assets of the corporation in part payment of his salary; no risible change of possession or use of the assets follows; he manages to hold the status quo in appearances for more than six months (the statutory bar against actions for preferring 'One creditor to another in contemplation of insolvency); the successful director, then a nonresident, residing in a far distant state, asks to be allowed to say to the corporation creditor, whom he has delayed and betrayed, “Follow me with a suit in chancery.”
Tn my opinion, this corporation was conclusively shown by appellant's evidence to be insolvent. Insolvency and “going concerns” may not be incompatible conditions; for a corporation insolvent in fact may, by sufferance of its creditors by withholding suits, continue to exist as a “going concern.” Tn my opinion, when a corporation is in that financial condition that it owes more than it. owns; jthat it is unable in the ordinary course of its business, to meets its obligations as they mature; that its current expenses remain'unpaid for a protracted period from in*722ability to meet them; that its unsecured debts are selling-.at 50 cents on the dollar, indicating a total destruction of its credit; that it only requires a sheriff with an execution for less than 3 per cent, of the value of its holding of tbe property to throw it into a state of hopeless and permanent bankruptcy, — that corporation is insolvent, in contemplation of law and in solemn fact, and. in my opin> ion, its managing directors are so far charged with notice of its condition that they should not be allowed to contract for themselves, with themselves, as directors, to the disadvantage of the creditors, whom they, in the company’s condition perculiarlv, probably exclusively, represent. •Such, in effect, must have been the views of the judge below in giving the preemptory instruction to the jury; and notwithstanding- my profound respect for the judgments of my learned associates, I feel constrained to dissent from the majority opinion in this case.