Baker Motor Vehicle Co. v. Hunter , 238 F. 894 ( 1916 )

ROGERS, Circuit Judge

(after stating the facts as above). This is an action at common law to recover on a bond given on November 25, 1908, by the Ohio Company as principal and the American Bonding Company of Baltimore as surety. The bond recites that Hunter claims to be a creditor of the New York Company in the sum of $7,-500, that the company is in bankruptcy, and then continues as follows:

“That if the Baker Motor Vehicle Company (of Ohio) shall pay or cause to be paid to the said Louis R. Hunter such sum or sums as he, the said Louis E. Hunter may be entitled in law to receive, out of the amount received by James N. Rosenberg, receiver in bankruptcy of the Baker Motor Vehicle Company of New York for distribution to creditors of said Baker Motor Vehicle Company of New York, upon the said Louis E. Hunter’s claim as it is set up in a certain suit now pending in the Supreme Court of the state of New York, county of Oswego, wherein the said Louis E. Hunter is plaintiff and Clarence B. Eice and the C. D. Eice Company are defendants, then this obligation to be null and void, otherwise to remain in full force and effect.”

It appears in the record that after the plaintiff obtained his judgment in the New York court the attorney for the defendants the Ohio Company offered to tender to the plaintiff and his attorney the sum of $1,299.44. In making this offer it was stated that the assets of the New York Company had been sold for $18,000, and that the plaintiff's proportion of that sum was such an. amount as his claims for $8,329.15 bore to the whole amount of claims against the company. The proposed tender was refused on the ground that under the bond plaintiff was entitled to recover'the amount of his judgment in full. The court below has allowed him the full amount, and whether he is entitled to the full amount or. only to a proportionate amount is the real question which this court has to determine. There are, however, 14 assignments of error. There were 62 propositions of fact found by the trial court, and the defendants contend that 41 of these are without evidence to support them. In a number of instances the findings are not relevant to the issues involved. But it is not necessary to review the findings in detail. Upon the essential facts we think the evidence is sufficient to support them.

The plaintiff sued in the state court upon a note made by C. B. Rice. The note was dated June-22, 1907, and was a promise to pay to the Rice Company or its order, three months from date, $9,500, with interest. It purported to be for value received, and was indorsed by the Rice Company and delivered to the plaintiff, who indorsed it, as he claimed, for the accommodation of the Rice Company. The note was then delivered to Rice, and was for value transferred to the First National Bank of Oswego, N. Y. The note was not paid when due, except that $2,000 was paid thereon, and the plaintiff as indorser paid the balance of it. The judgment against the Rice Company clearly establishes the fact that the plaintiff was a creditor of the Rice Company at the time that that company turned over its assets to the New York Company.

When the Rice Company transferred all its assets to the New York Company without any consideration other than that the latter would pay the liabilities of the former, the New York Company took the assets subject to the plaintiff's claim and quite irrespective of its express promise to pay the liabilities of the transferrer company. And as the assets received were greater than the liabilities, it was bound to pay the claim in full, irrespective of its promise. Such a transfer of the assets was a fraud upon the rights of any creditor who did not assent to it, and the plaintiff herein at no time assented to it. The transfer as against the plaintiff could not be sustained, either at law or in equity. The famous statute 13 Eliz. c. 5, declaring transfers made to hinder, delay, or defraud creditors utterly void, was, as Chancellor Kent declared in Sands v. Codwise, 4 Johns. 536, 596 (4 Am. Dec. 305), “only in affirmance of the principles of the common law.” It is elementary that a corporation cannot give away its assets to the prejudice of its creditors, nor can it, as against its creditors who have not assented to it, transfer all of its assets to another corporation which guarantees the'payment of the debts of the former. The express agreement to pay the debts does not constitute a novation, and the corporation, taking the property, holds it subject to a lien in favor of the creditors of the transferrer. Blair v. St. Luis, etc., R. Co. (C. C.) 24 Fed. 148; Fogg v. St. Louis, etc., R. Co. (C. C.) 17 Fed. 871, 5 McCrary, 441; Brum v. Merchants’ Mutual Insurance Co. (C. C.) 16 Fed. 140, 4 Woods, 156; Heman v. Britton, 88 Mo. 549; Jefferson National Bank v. Texas Investment Co., 74 Tex. 421, 12 S. W. 101. And if the transferee corporation has agreed to assume the debts, under the principles of equity and under modern Codes of Procedure, the creditors of the transferring corporation may maintain a direct action against the transferee corporation upon the contract. 10 Cyc. 1268. There can be no question but that the plainr tifi had a valid claim which he could enforce against the assets of the Rice Company while in its possession, and against the New York Company when they were transferred to the latter.

The assets of the Rice Company at the time of their transfer to the New York Company were in excess of $100,000. All the creditors of the Rice Company assented to the transfer except the plaintiff, and took the notes of the New York Company payable in ■ one year in payment of their claims against the Rice Company. The result of that agreement was that the New York Company took the assets of the Rice Company free from any lien arising from the claims of the Rice Company’s creditors with the exception of that of the plaintiff’s. As to his claim the assets continued subject to his equitable lien, and constituted a trust fund for its payment. And at the time the assets of the New York Company were turned over to the Ohio Company, the claims of the‘creditors of the New York Company itself amounted to about $4,000 in addition. So that all the claims to be paid out of the $18,000 of assets which the Ohio Company received amounted to about $12,000. While it is not. material, the trial judge expressed the opinion that the assets which were sold to the Ohio Company for $18,000 were worth $40,000. In ascertaining the amount of claims these assets in the hands of the Ohio Company were subject to, claims due to the Ohio Company from the New York Company have not been included. The court below held that the claims of that company were only entitled to be paid out of what remained after the other claims were paid. That conclusion was reached upon the theory that the legal fiction of distinct corporate existence should be disregarded in a case where a corporation is so organized and controlled, and its affairs are so conducted, as to jnake it merely an instrumentality or adjunct of another corporation. The trial court had no doubt, and this court has none, that the New York Company was nothing more than an instrumentality or adjunct of the Ohio Company which acted through it. In such cases the controlling corporation may be held liable for the debts of the subordinate company. This court called attention to this principle in Re Watertown Paper Co., 169 Fed. 252, 94 C. C. A. 528 (1909). In such cases debts due from the subordinate company to the controlling corporation, and which that corporation would accordingly be liable for, are not entitled to be paid pari passu with the other debts; but the latter are entitled to be first paid in full.

When it suited the purposes of the Ohio Corporation, having wound up the Rice Company to adopt the same course as respects the New York Corporation, the Bankruptcy Court consented that the assets should be transferred to the Ohio Company, but only upon condition that that company should give the bond already referred to, and upon which this action was brought, and by which it became bound to pay to the plaintiff such sum as he might be entitled in law to receive. The bond was substituted for the assets to be transferred, and out of those assets this plaintiff was entitled to be paid in full. It is plain in the light of what has been said in this opinion that the plaintiff’s claim upon the assets turned over to the Ohio Company was one which he was entitled to have paid him in full. And it is not to be supposed that it was the intention of the court in substituting the bond for the assets to ‘deprive the plaintiff of the full payment of his claim. The language^of the bond is that the Ohio Company “shall pay or cause to be paid to the said Louis R. Hunter such sum or sums as he, the said Louis R. Hunter, may be entitled in law to receive’,’ and so forth. The amount which he is entitled in law to receive is the amount of the judgment which he has obtained at 'law in the action in the New York court. If that is not what the bond means, Hunter would have been better off without the bond than with it.

While this is an action at law upon a bond, it is quite within the right of the court to consider what the plaintiff’s right in these assets was either at law or in equity at the time the bond was given. As the intention was to substitute the bond for the assets, the purpose must have been to preserve whatever rights the plaintiff had in the assets without regard to whether his rights in them were legal or equitable.

In the argument in this court counsel insisted that the trust fund doctrine had no application to the facts of this case. They insist that that doctrine applies only to cases of insolvency, and they call our attention to our decision in Re Fechheimer Fishel Co., 212 Fed. 357, 129 C. C. A. 33 (1914), where we said :

“In saying that the assets of a corporation constitute a trust fund, we are to be understood as referring to the assets of an insolvent corporation. A solvent corporation, of course, holds its property as any individual holds his. But when a corporation becomes insolvent, a trust arises in respect to the administration of its assets for the benefit of its creditors.”

The statement quoted is in accordance with the law as expounded in the federal courts. But the fact that the Rice Company was a solvent company when its assets were transferred does not make the doctrine quoted inapplicable to the facts of that transfer. In saying that a solvent corporation holds its property as any individual holds his, we assumed that every one knows that if an individual, A., transfers all his property to B. without consideration, B. holds the property as a constructive trustee for the creditors of A. whether A. is solvent or insolvent at the time of the transfer.

Judgment affirmed.

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