204
I'EDERAL REPORTER, vol. 43.
.
r Section 1 of the act of 1887 is void and of no effect in the case of contracts like this, where this per centum was not due and payable prior to January 17, 1879. This being so, the defendants are acting without the authority of law, -without the authority of the lltate. They do not represent the state. The state is not a party to this suit either on the record or in substance or effect, and therefore the court has jurisdiction of the same as a suit between private persons who are citizens of different states. The plaintiff is entitled to a perpetual injunction against the defendants, and for costs.
CONSOLrDATED TANK-LINE Co. v. KANSAS CITY VARNISH Co. (Circuit Court, W. Do Missouri, W. D. September 5,1890.) Where a manUfacturing corporation has debts exceeding its capital stock, and it is unable to meet its paper as it matures, and its assets· are in such condition that they are not avaUable either as security or oollateral for the purpose of borrowing or for the purpose of conversion, and it is apparent that enough would not be realized from a forced sale of its plant and. accounts to meet its obligations, which will Boon become due, and where its credit is gone, and its directors have of their OWl) accord executed a deed of trust of all the corporate property for the benefit of certain creditors to secure paper indorsed by the directors, and where the trustee has taken possession, an apphcation by the non-preferred creditors to enjoin further proceedings under the deed of trust and for the appointment of a receiver will be granted. : OF RECEIVER.
In EqUity. Hen1"y Wollman, for complainant. Lathrop, Smith MorrQW, J. L. Wheeler, and D. J. Hoff, for defend. ant. PHILIPS, J., (ora7J.y.) This is an application for injunction and the appointment ofa receiver. I have given the case such consideration as the limited opportunity would permit. Of course, on this preliminary hearing, before the coming in oean answer, the principal questions to bl'l determined by the court are as to the existence of the solvency or insolvency of the defendant corporation, and the necessity for the appointment pf a receiver under the circumstances. It appears from the face of .the bill, and the affidavits pro and con submitted on the prelim. ipary hearing, that this Kansas City Varnish Company, with a paid.up cllpital stock. of 326,000, in the course of a year's business or more, has_ to-day an existing indebtedness of about 832,000 in round figures. The affidavits show, as well as the allegations of the bill and the correspondence with its creditors, that for some time past it has been under distress. It has been under an irresistible pressure, unaple practically to meet its accruing and maturing obligations. While it is' true that the great body of the indebtedness .of this concern does 110t mature until this month, yet part of the obligations are due, and
CONSOLIDATED TANK-LINE CO. ". KANSAS CITY VARNISH CO.
205
for some time back some of its creditors haye been exigent and urgent, and they haye complained that the debtor has been delinquent and On one debt of $2,500. owing to the Consolidated Tank-Line Company, one of the creditors here, some time ago the last payment of $250 was aU that it could make. It has no money in bank, but has been overdrawing, and the matter of a check of a hundred dollars was repudiated and protested for non-payment. It claims by affidavits read on this hearing to have about $25,000 of assets in the form of bills receivable, notes and accounts, and outstanding claims; but the court, at least on this preliminary hearing, is clearly justified, from all the facts and circumstances in evidence, in concluding that these claims are not. in tangible shape; that its assets are not available for immediate emergencies. Otherwise, either by placing these assets or account':! and notes as collateral security, it might have obtained loans, or it might have converted some of them by reasonable discounts, to have raised sufficient money at least to keep the concern going; to impart to it some vitality and some life. It is, however, quite inferable from the character of the correspondence and other facts disclosed that it has run its length of credit about to the end; so that on the 25th day of August last past, the board of directors, who seem to be its principal and almost exclusive stockholders, on final conference and consultation concluded that the ·best thing they could do was to make a conveyance in the form of a deed of trust, in which they assigned every article and item of property it has, all its notes and accounts, even its lease on the property, down to a little pony and surrey; everything, with great particularity, were transferred to the trustee for the benefit of certain specified creditors. In other words, it transferred by this deed of trust everything it has except the mere franchise. It simply reserved the franchise ad hoc; all else it conveys. This deed of trnst seems to have been made under some emergency. It was put to record at 9 o'clock and 50 minutes at night, and at 10 o'clock the same night, as stated by the trustee, he took possession of the concern. Now, it is true that, asa rule of equity practice, the courts are very reluctant to ,appoint receivers, upon the idea that it is a practical displacement of the boam of directors. . It is an assumption of the functions of the directors. It displaces the board of managers placed there by the stockholders, who sustain the relation of trustees for' the stockholders. trustees for the corporation, and trustees for its creditors; and, before the court will take charge of the corporation, and thus displace its chosen directors and managers, it ought to have the clearest evidence of the absolute necessity for such extraordinary action for the protection of the creditors, stockholders, and all parties CODcerned. But the court, in this case, has been relieved of this aspect or embarrassment of the question somewhat by the conduct of the board of directors. This deed of trust, by which they have placed the entire assets and property of the concern in the hands of this trustee, and authorized him to take immediate possession, which he did do at once, and has since been :in the absolute,unrestricted, and un-
'of the' whole, property, 'amounts in effect·' to an' ao" AaclltiOJ;l:of: the functions rOf the board of directors. They . thereby (the fact that the concern can no longergo under their rnent,and they have given up its control by their own voluntary ,act to a that attit.Udeitisnow a question,.iti respect to these nonwhether' a cOl'lrt of equity should interpose and taka andll',lanage it. ,. . There is one very promip,ent fact connected with the history of the Ql1Se which is not unworthy of consi,deration. It appears that on a part, in fa:ct, a. very considerable part, of the indebtedness secured, by tbis deed oftrWlt.;,the board of directors, or at least a part of them, are themselves indol'aers. ,They are sureties upon these notes; and this movement on the part.of tne board of directors was entirely voluntary. It does not appeal'; that ,they Were urged to the making of this deed of trust by the ,QreditOr$, but they did this without the knowledll;e of at least some of the credi.wrs;and it is to be assumed for the purpose of the present inquiry thatthe boa.rdof dir!3ctors in making this deed of trust, by which they, preferred the debts upon which they were sureties, were more concElrqed {or their own protection tha.n for that of the creditors, because areb9und to ;the creditors for the debt, and it appears that they are : Thatipresents this question: It has been held......and I had ,tp(l.Onsiderthe question very thoroughly'whileon the court of. v.Allen, 28 Mo. App. 132.) and the opinion since by the supreme court of this state, or cited with approvliI;-:o-tl;1akafter a business <lorporation ceases to be a "going conlonger possessed of vitality enough to survive and conthe board of directors conclude that they can go w):;furtherj, the directors become, eo insta'llti, ,by that very act, t.»Qllooesfor the benefit botp of:the stockholders and the creditors; and it lSll:ll)t w.ithin :thepower or competency of the trustees to prefer them.oJ directors"llscreditors of.the concern. Their relation becomes 'one of trustee to the whole property. They must admini.!tM W:hQle the corporation for the benefit of aU of the credbe; distributed paripu88u equally. between them; and they can'" th;6icor:poration raticnes. that juncture and condition of affairs, Yl.llJl:e $,preffrli)'PQefor themselves. Now, these director!, in so far as the' which they. are. sureties, if this deed is sustained, ale'in by indirection what they cannot do directly I prov:ided isinsolvellt,·and: no longer a going concern. I do not unsay ,at this hearing or at this juncture that the case as :preComelhwithin the rule laid down in the cases to which I refer,' h\l:t- it ;st,rikes ;uponfirst im'pression ,. as being so nCllrIy in lirrewith the prinQiple ,involved j'tnatfor the purposes of this preliminary hearing the. C9Jlllt OUght to treat the matter for the time being as if these directors 'Ilud.ertakeu to·sec\Jre·and.prefer'themsel\'estoitheexclusion of other (,lreditors()£,tbe concern,taking advantage of their inside knowledge of Mtual.cQndition, an,d,work,ings of the.corporationto gain a personal al'C'"b9Qndto.:considari themselves astrustees ofa; trust
CONBOLlDATEDTANg.UNE CO. V. KA;NBABCPrv VARNISH
00.207
'which they ire toadtninister as any other trustee; .with absoiute impartiality, ha.ving no friends to reward or enemies to punish; and when they undertook to do, what has been done, to say thevery least,.it creates-suspicion. Of course, that is a questi.on which lies beyond the present decision for ultimate consideration and determination, when all the facts are before the court; but I think for the purposes of this preliminary hearing the court ought to construe that special act against the board of directors, as one which ought to invoke and invite the interposition of a court of equity for the protection of the interests and rights of all the parties concerned, ad interim. Going back to the question of solvency, it is very difficult for a court ,to lay qown a definition of solvency or insolvency that is applicable interchangeablyto every case. A great ma.ny authorities have been cited by counsel under the bankrupt la.w. I would not in this case be disposed to apply the rigor olthe rule that obtains in bankruptcy proceedings,-,-that whenever a business concern is unable to meet its Qommercial paper as it matures, in the ordinary course of business, it is insolvent. The term must necessarily be oonstrued with reference to the particular facts of the case. Take the case of a farmer who has his farm stock; H,e may have a note outstanding, and may be unable to he has property, both .land and stock, meet' it. at maturity, and subject to execution, which could be seized and applied to the payment ·of debts. We would not apply to him the :rigors of the commercial law. ·rhen take ·acorporationlike thi8, a business concern. I think It mediumground is to be taken between the bankrupt law and that inthe ·case of the farmer such as I have presented. A business concern like this, with nothing but its franchise, its capital stock, and the intelli.gence and business capacity of its board of directors, depends for its ·very:life upon .credit: It could hardly: run' a day without credit. It is buying material, manufacturing and selling it.' It must have credit iirhank.> Hmust have credit with itsvendors,--':-the parties fromwhoin it. buys. I think it would he a very safe rule toP say in a case of that ch(lracter that where it is unable to meet its paper in bank and to other ·oreditors: asit matures, and its assets .are in such a oonditionthat they are not available either as security or coUateral for the purpose 'of borrowing, or for the purpose of conversion".ll.nd, in addition to that, it is apparent that there would not be sufficient money realized by sale under execution to meet these liabilities, it is practically insolvent. Respondents estima,teintheir affidavits the plant of property at $20,000, and the paper owing the concern-notes and accounts outstanding -at $25,000. I think the court would·be very safe in saying that, if on a forced sale or execution it had to be wound up within t,inle anp.qtlQ,er ordinary ·there shoUld. be 'on the doUalof those assets, it would be a pretty large dividend; and it''\Vouldtltke aboqt75.per cent. to me,etthe matlirillg in 'this'month "and shortly after.. So tha(I think the concern, with &32,. 000 of outstanding indebtedness now nearly due, with no m()ney in bank, credit gone, unable to meet a check of a hundred dallm ':sent to
·208
FEDERAL REPORTER,
vol. 43.
bank, is sick, and almost sick unto death; and whether it can survive .will depend much on the good nursing a COUl;t of chancery can give, and.bywhich it may possibly be resuscitated. Now, these respondents seem to think-and hope is always a great thing in commerce-that they can survive with a little rest. I know of no better means for them to keep life in them and stay on their fep.t than for the court to take charge of. this matter for them. In the management of a concern like this, in an insolvent condition, with the latitude which a court of equity has in running the business, and giving it provisional credit, authorizing a receiver to go ahead with the business, keeping it going, if the court discovers there is any hope and vitality in it, seems to me to be best for all. parties in interest. If the assets turn out as respondents seem to think they will, there will be no end put to the corporation. They can pay off these debts, or the. court will pay them from the business, and they have their franchise. I think this a case where sound discretion and a proper regard for the interests of all parties concerned will justify the court in interposing to enjoin further action under the deeds of trust for the present, reserving the question of the rights of the respective parties for determination upon final hearing. The court does not desire to be understood as casting any reflection upon the competency or of the present trustee. There is only this to be said in respect to t4at: He was chosen by this board of directors; he is in the employ of the president of the cortcern in another branch of his business; he is without bond, and is possessed of little property. While he might manage the affairs of the concern with ability and fidelity, yet a receiver is required to give bond·. He then becomes an officer of the court, and is under the direction and supervision of the court. This is better for all the creditors. As to the preferred creditors, it is to their interest that the very most be realized out of the assets possible. It is also better for the non-preferred creditors that the Wl1tter be managed by the court for the time being. So that as the matter stands the prayer of the petition will be granted provisionally. A provisional order of injunction will be made, and if you can agree upon a receiver the court will appoint him, otherwise the court will select One.
CARTER
et al. v.
ALLING
et
aZ.
(Olrcuit. oourt, N. D. Illinois. June 80, 1890.) A contract between a manufacturing corporation, whose business extends through. out the United States and Canada, and one of its traveling salesmen, who baa been in its employ for several years, whereby he agrees not to enter the service of· .any busines8competitor of the corporation for tbree years after leaving its 8ervlce, 1& valid. . 01.1' TRADE.
In Equity.