Court Opinion

ID: 5262680
Source: CourtListenerOpinion
Date Created: 2022-01-06 18:47:55.32809+00
Date Added: 2024-06-11T08:28:06.314032
License: Public Domain

John M. Kellogg, P. J. (dissenting):
The individual defendants have been held liable for the New York corporation’s debts, under subdivision 2 of section 90 of the General Corporation Law, on the theory that “ they have acquired to themselves, or transferred to others, or lost, or wasted, by or through any neglect of or failure to perform or by other violation of their duties,” its property, as officers of the defendant corporation. By the unanimous vote of the stockholders of the New York corporation, October 26, 1918, at a meeting duly held for that purpose, they authorized its officers, pursuant to section 16 of the Stock Corporation Law, to sell and transfer to a Pennsylvania corporation, to be formed, the assets of the New York corporation in the State of Pennsylvania, in consideration of which the transferee was to pay all the liabilities of the transferor. The same resolution *576of the stockholders provided that each stockholder should turn over to the Pennsylvania corporation, when formed, his stock in the New York corporation and receive stock in the Pennsylvania corporation therefor. All of the property of the New York corporation was situated in the State of Pennsylvania, and its business was transacted there. It was found that a New York corporation could not hold title to real estate in Pennsylvania, and that in other respects it was inconvenient to have the business done by a New York corporation, and for those • reasons only the business was changed from the New York to the Pennsylvania corporation. The management, the officers and the business were the same. That statute does not require that the consent of creditors be obtained to the transfer, or that assets must be brought from the adjoining State into the State of New York to meet the claims of creditors here. It proceeds upon the theory that the property being in an adjoining State, the parties interested, including creditors, can suffer no harm by the transfer, and it expressly provides that the property sold shall be vested in the purchasing corporation “ subject to the provisions and restrictions applicable to the corporation conveying them.” In other words, the sale is absolutely valid, but the title as held by the purchasing corporation is still subject to the provisions of law applicable to the conveying corporation; that is the property remains liable for the just claims of the creditors of the New York corporation. But here the conveyance was expressly made upon the condition that all debts are assumed. There is no basis for concluding that the individual defendants have violated their duty when the acts done were strictly pursuant to this statute. It is true that the transaction assumed a double aspect in that the stockholders of the New York corporation exchanged their stock for stock in the Pennsylvania corporation and at the same time the property of the New York corporation, situated in Pennsylvania, was transferred to the Pennsylvania corporation upon its assuming the payment of all liabilities. The agreement to pay the debts was an ample consideration for the conveyance; it was such a consideration as the plaintiff cannot question. There is no evidence as to the value of the property transferred or the amount of liabilities assumed. The issuing of stock *577by the Pennsylvania corporation for the New York stock was not a consideration for the transfer of the physical property, because the stock of the New York corporation was the property of the stockholders and not of the corporation, and the corporation had nothing to sell in that respect. The same is true of the stock of the Pennsylvania corporation; it was not an asset for the payment of its debts. It purchased the stock in the New York corporation and issued its stock in place of it. The stock is the mere equity remaining after the debts are paid, and, as we have said, was not an asset to which the creditors could have recourse, except the Pennsylvania corporation, by purchasing the stock of the New York corporation, held it, and now holds it, as an asset, if it has any value. The property in Pennsylvania was, therefore, dedicated, by the agreement itself, as a trust fund for the payment of the debts. The record can be read from end to end and there is not a scintilla of evidence tending to show that the defendants acted fraudulently or in bad faith or in any other way than for the best interests of the corporations they represented. The fact that each stockholder received more stock in the Pennsylvania corporation than he had in the New York corporation, all sharing pro rata, did not prejudice the plaintiff nor benefit the defendants. The stockholders owned the New York corporation in certain proportions, and, after the transaction was consummated, they owned the Pennsylvania corporation in the same proportions. No gain could come to them, and it was immaterial whether the proportionate share of a stockholder in the corporation was represented by one share of stock or by one share and a fraction, so long as they shared pro rata in the excess. (Towne v. Eisner, 245 U. S. 418.) No individual defendant could, under any circumstances, have gained anything by the transaction for himself, except so far as the change in the manner of doing business, and in the charter of the corporation, advanced the interests of the corporation itself. No officer received anything of value for or on account of the corporate assets. There being no tangible property of the New York corporation in this State, if the sale had not taken place it would have been necessary for the plaintiff to go to Pennsylvania and collect its debts at th *578place where the only assets of the corporation were found. The change in the charter has not prejudiced it, but by the assumption .of its debts the consolidation and perfection of the title of the corporation to its assets have improved its condition, and it has no possible grievance. The plaintiff, therefore, has suffered no possible wrong and there is no basis in the evidence for the damages awarded.
Apparently the decision was based, in great part, upon a misunderstanding of Darcy v. Brooklyn & N. Y. Ferry Co. (196 N. Y. 99). There all the tangible property of the corporation was transferred' to another corporation, the directors receiving in payment therefor the bonds of that corporation, which they divided among themselves, leaving the creditors to shift for themselves. The directors had taken the very property which the creditors were entitled to, and it needs no argument to say that they were liable to respond for the bonds they received. That case proceeds upon the theory that by the sale of all the property of the corporation they practically put the corporation out of business, not winding it up in the manner contemplated by law, and they held without consideration the property of the corporation which should go to its creditors. ' It was a clear violation of their duty to dispose of all the assets of the corporation, taking the proceeds of the sale to themselves and leaving the creditors unprotected, and the case fell squarely within the statute which is now represented by section 90 of the General Corporation Law. There was no attempt to comply with section 16 of the Stock Corporation Law, or any like provision;, it was a bold attempt to appropriate the property of the corporation to the directors to the prejudice of the creditors. Here the proceeding was strictly according to the terms of the statute, and, therefore, cannot be held unlawful, and was for the best interests of all concerned.
If we should assume, however, that the transaction did not take place pursuant to section 16 of the statute, the position of the plaintiff is not improved. Upon the facts it is plain hat the plaintiff had full knowledge, and assented ■ to the transfer, accepted the new corporation as its debtor and did 'usiness with it pursuant to its contract with the New York •°poration. The plaintiff duly assigned its patents, a part of *579the consideration of the notes in question, to the Pennsylvania corporation, and forwarded them to it pursuant to the agreement it had made with the New York corporation, and, after the receivership, it presented its claim to the receiver, and filed a formal appearance in the receivership proceedings.
After the transfer the corporation carried on its business in the same manner and by the same officers as theretofore, the only change being that the corporation was doing business under a Pennsylvania charter instead of a New York charter. It, however, acquired new property and enlarged its business. It was found, however, that the war was having an unfavorable effect upon the business. The corporation could not get material for the manufacture of its machines, and sales fell off, and it sought to serve the country and make a profit by manufacturing certain things for the government. The expense of preparation for such manufacture was very great, and when the armistice came the market for the things it was manufacturing suddenly ceased, with the result that it had not the ready cash with which to pay all of its debts at once, and took proceedings which many other solvent corporations were taking at the time, and on March 14, 1918, the United States District Court appointed a receiver of its property, to conserve its property and business. The proceedings were based upon the allegation that the corporation was entirely solvent and that the proceeding was instituted to save its assets and business, and on December 15, 1919, by order of the said court, the receivership was vacated and the property restored to the corporation, and it has since been carrying on its usual business, and there is no suggestion that it is insolvent or unable to pay its debts. We have seen that the same business was carried on, and by the same officers, after the change in the corporate character- was brought about. If there had been no change in its corporate character, undoubtedly the conditions existing would have caused a temporary receivership in the Federal courts, of the New York corporation, and its property would have been preserved by the order of the court and the plaintiff would have been delayed in enforcing its claim, so that the receivership, and its incidents, were not caused by the change in the charter, but by the general business conditions of the country. This action was brought *580November 4, 1919, and its pendency is the only reason suggested why the plaintiff’s claims have not been presented to the corporation for payment and payment made. There is no suggestion that it co-uld not enforce payment in the Pennsylvania courts.
I favor reversal and dismissal of the complaint.