Pangburn v. American Vault, Safe & Lock Co. , 205 Pa. 83 ( 1903 )

Opinion by

Mb. Justice Mestbezat,

The principal and important question in this appeal is raised by the second assignment of error wherein the appellant complains that the auditor and court below erred in finding that his judgment was not a preferred claim and was not entitled to preference in the distribution of the fund in the hands of the receiver. The position of the appellant is stated in the assignment as follows: “ The claim of the exceptant having been reduced to a judgment before the appointment of a receiver, and being a lien upon the real estate and part of the fund in the hands of the receiver being the proceeds of the sale of real estate upon which exceptant’s judgment was a first lien, the said judgment was entitled to be paid in full out of said fund; and an execution having been issued and in thé hands of the sheriff, and in force prior to the appointment of a receiver, and proceedings thereon being only suspended by order of the court appointing the receiver, was not, therefore, affected by said appointment, and became a first lien upon the said personal property.” The facts bearing upon this claim as found by the auditor may be briefly stated.

The American Vault, Safe & Lock Company was incorporated in 1891 and engaged in the manufacture and sale of vaults and safes in Allegheny county. In'August or September, 1892, the directors of the company borrowed $10,000 of the Central Bank of Pittsburg on a note of the company indorsed by them. The'amount of the note was subsequently reduced to $8,000. On a bill filed by an unsecured creditor the court, on October 11, 1893, appointed Josiah Speer, receiver, reciting in the order that “ upon consideration of said bill and answer (of defendant company) the court find that the defendant company is in an insolvent condition.” The receiver took possession of the property, real and personal, and continued to operate the plant until September 24, 1894, when, under an order of court, he sold it at public sale. The proceeds of this sale are in court for distribution and Lewis McMullen, trustee, the appellant, claims that his judgment given to secure the directors for the indorsement of the company’s note should be paid in full out of the fund. The board of directors adopted a resolution on June 12,1893, authorizing the execution of a judgment note to cover the claim of S. O. Rhodes, P. T. B. Shaffer, T. W. Martin, B. W. Applegate, C. H. Underwood, C. F. Sheriff and Josiah Speer, directors of the company, for money theretofore raised by them to pay a note of the company. At a directors’ meeting on September 4, 1893, the secretary of the company was directed to place in the hands of Mr. McMullen a judgment note for $8,000 for the use of the indorsers on a note of the Central Bank for that amount. Pursuant to the action of the board of directors the judgment note, the subject of this controversy, was given to the trustee. Judgment was entered on the note on October 9, 1893, and a fi. fa. was issued thereon October 10, 1893. The auditor found, and no exception was taken thereto, “ that at the dates of the authorization of the judgment note, June 12, 1893, and September 4,1893, the defendant company was insolvent; that the directors for whose benefit the judgment was confessed did not indorse the company’s paper upon an agreement that they should be secured by such note, and that the execution issued upon the judgment two days before the appointment of the receiver has not been returned.”

The facts found by the learned auditor are clearly deducible from the evidence. It is equally apparent from the testimony that at the time the judgment note was authorized to be executed, the directors knew the insolvent condition of the corporation. The auditor and court below were, therefore, right in holding that the appellant was not entitled to have his claim paid in full out of the fund for distribution. There is no equity in the claim of the appellant that would sustain a contrary conclusion on the facts disclosed by the evidence. The indorsement of the company’s paper was made by the directors in 1892. They were not induced to assume this liability by reason of any misunderstanding or agreement that they should be protected by the company. The company at that time was presumably solvent and fully able to meet its obligations. The credit of the directors was not used to assist it in an emergency nor to protect the corporate property from sacrifice. Several months after they became indorsers to the Central Bank, the directors undertook to secure themselves against the liability they had incurred the previous year, and by resolution authorized the execution of the judgment note upon which they claim a preference here. In the meantime conditions had changed and the corporation had become hopelessly insolvent. After this was known to the directors they directed the secretary of the company to deliver the note to their trustee. One of the directors, who was also the receiver, gives the circumstances under which the note was made and clearly discloses the unfairness of the transaction. He testifies : “ I was in charge, and also being an interested party on that indorsement my recollection is that I was told to watch the condition of the company, and if it was able to talce care of its paper itself there would be no necessity of entering a judgment; while the board had directed it to be given, yet there was no specified time ; when I felt there was danger, I notified the board and called them together, and they directed then that the note be made in favor of Lewis McMullen, trustee.” At the meeting of the directors on September 4, 1893, when they authorized the making of the note, they resolved to join with other creditors in having a receiver appointed for the company. Two days prior to the appointment of the receiver, a judgment was entered on the note and an execution issued thereon. This conduct of the directors was a clear violation of their official duties and could secure for them as individuals no preference over other creditors of the company. Their action was not taken for the benefit of the company but solely to give themselves a preference in the distribution of its assets. The burden was upon them to show that the preference was in all respects fair and conscionable and that it was not collusive for the mere purpose of preference : Cowan v. Penna. Plate Glass Co., 184 Pa. 1. This they have failed to do. They are, therefore, within the well settled rule forbidding a preference which is recognized in the decisions of this court and stated in Morawetz on Corporations, sec. 787, as follows: “ Directors of an insolvent corporation, who have claims against the company as creditors, must share ratably with other creditors in the distribution of the company’s assets. They cannot secure to themselves any advantage or preference over other creditors by using their power as directors to that purpose. Their powers are held by them in trust for all the creditors and cannot be used for their own benefit.”

The first assignment is based on a misapprehension of the facts. The wage claims were not allowed a preference out of the fund produced by the sale of the real estate, as the appellant claims, but as distinctly stated by the auditor they were held to be a lien and payable out of the proceeds of the personalty with which the auditor surcharged the receiver.

The other assignments need no special consideration. The claims which are the subject of these assignments were properly allowed to participate in the distribution of tire fund in the hands of the receiver.

The assignments of error are dismissed and the decree is affirmed.