CONSOLIDATED TANK

LINE CO. tI.

KANSAS

VARNISH

CO.

7

CoNSOLIDATED TANK LINE Co. et al.

11.

KANSAS CITY VARNISH Co. et al.

(O£rcuit COUrt, W. D.MiBsoun, W. D. February 9, 1891.)
1.

INSOLVENT CORPORATION-PREFERENCE TO DIREOTORS-FRAUDt;LBNT CONVEYANOES.

a.

Directors of an embarrassed corporation, holding claims· against it wbich they wished to protect, hild the notes of the companY'.payable to themselves drawn and antedated, arid procured th'em to be discounted l;Iy defendant bank. They then caused to be executed a deed of trust conveying all the assets of the company as security for these notes, among others. flew:, in a proceeding ·by unsecured creditors to set It aside, that, being a security for debts upon which.the directors were themselves liable as Indorsers, it was in effect a preferende' to themselves, and fraudulent and void.

I

SAME,..-NoTIOEOF FRAUD.

a.

, Nor is such preference valid as to another creditor, a corporation, on whose claim the directors were not liable as sureties, when it appears that tbl!lsecretary thereof, the insolvent corporation, who, as an attorney, was prosecuting its claim was employed' to draw the deed of trust, and adVised concerning it, and was fully aware of all tbe. circumstances, and declined to act unless his client's claim was in· . cluded in the seC\1rity. .A!s the directors of an Insolvent corporation beoame trustees for the oreditors a bill to set.aside .as fraudulent a deed of trust of corporateasse,ta to secure debts for Which the directors are themselves liable as sureties need not shOW that the complainanthas established his claim by judgment. '

SAME-TRUST·

In Equity. This is a creditors' bill on the part of the complainants and othercreditors who may com,e in to set aside a deed of trust made by the Kansas City Varnish Company, a business corporation, preferring as creditors the German National Bank for $16,205, Harkness, Wyman & RUSSell, bankers, for $5,500, and the Kaw Valley Paint & Lead Company for $974.50. The deed of trust was executed August 25,1890. The <lase, . on prelimina.ry hearing for writ of in.junction and the appointmentdfa receiver, is reported in 43 Fed. Rep. 204. It has now been heard on the pleadings and full evidence. The principal facts will appear from the opinion of the court. Henry WoUman, for complainants Tank Line Company and Heath & Milligan Manufacturing Company. Harwood &c Meredith, for National Linseed Oil Company and L. C. Gillespie, intervenors. Lathrop, Smith &c Morrow, for defendants L. V. Harkness, W. F. Wyman, L. D. H. Russell, William Peet, James W. White, and Charles N. Howard. J. L. Wheeler,for defendants Kaw Valley Paint & Lead CQmpany, Nellie F. Benton, and Robert E. Benton. Ounningham &c Dolan, for defendants Kansas City Varnish Company, O. H. Brown, and David C. Howey.· HajJ &c Van Valkenburgh, for defendants German American Bank.
f

Pmups, J. The question to be decided is as to the right of an insolvent business corporation to make a deed of trust for the benefit of certain of its to which debts the directors sustain the relation of indorsers, and especially whether the directors may thus prefer them-

8

FEDERAL REPORTER I

vol. 45.

selves when they know, or should know, that the corporation is insolvent, and· the effect of the deed is to suspend the functions of the directors in the management of the entire assets, by turning them over to a trustee, to dispose of summarily, when the fact is that the assets are barely sufficient to payoff the preferred creditors. A brief review of the history of the debtor corporation will show that its business from the outset of its career was more or less fictitious, and its financial condition was never healthful and prosperous. It was organized under thegeneral corporation laws of the state of Missouri as a business corporation in 1886. Its capital stock was $3,000. The evidence shows that at least one of its subscribers, in violation of the statute, gave his note for his. shares,-say for $800,-which has never been paid, and the subis insolvent. In January, 1887, an increase of stock was voted for $16,000, and in 1889 an additional increase to $30,000 was voted. From that time forth the company held itself out to the public as having such amount of capital stock. It is true, as contended by counsel, that the,8tatute did nqt require that this increment of stock should be actually paid up. Yet the public deals with such concerns on the faith of such capital in esse, and it is that which chiefly gives 'it credit. It is to be imputed to these directors arid stockholders that they pretended and claimed all along that the stock subscribed by them was paid up, and it Was among the 'difficult facts at this trial to develop how much ,had been paid, or rather how much had not been paid, and who are the :delinquentconstituents. The only subscriber who did pay up his subscription is Mr. Benton, who was admitted on the nominal increase to $30,000, and he paid under the impression that others had done likewise. The older stockholders, on the assumption that the concern was making money, claim to have in part paid up their stock in supposed dividends, and by charging the new takers with what they are pleased to term "the good-will of the company;'? whereas, as a matter of fact, if a correct estimate of profit and loss had been timely made after the first year of its life, the fact would have appeared that the com pany had made no profit; and, although the fact was studiously concealed, and developed at this trial only after rigid inquiry, it further appears that, for so much of the increased stock as was not covered by the assumed dividends of profit and "good-will'.' of the concern, the subscribers, except Benton, executed their notes to the company. These notes were then placed with the bank as collateral security for money borrowed by the company, where they remained for some time, when they were·surtendered to the company and destroyed, or in some fashion made way with by the secretary. While the debts represented by these stock notes constitute a part of the consideration of the very claim of the German American National Bank which this deed of trust attempts to prefer, by this device the directors so mingled their individual indebtedness to the companywith that of the company to the bank that it is quite difficult on the proofs now made to determine the relative proportion; so that the directors by this deed of trust are not only attempting to protect themselves as indorsers of the company's paper, but to prefer debts owing di.

CONSOLIDATED TANK LINE CO. 'V. KANSAS CITY VARNISH CO.

9

rectly by them to the company. Such a transaction bears its own comment.' . As might well have been anticipated, a concern aspiring to a business representing a capital of $30,000, with little over one-third paid up, if that much, without phenomenal success, found itself doing a strained', precarious busine8sj and it' is quite apparent from the developments at this trial that, but for the personality of its president, Mr. Peet, and the money he constantly advanced and borrowed on his indorsement, the unduly inflated concern would have collapsed long ago. This is justi.. fied ,by the fact, as testified to by Mr. Peet, that when he could no lon'ger,' in justice to his other business operations, divert money therefrom, nor would longer obtain money from the bank for the varnish compan,y, this deed of trust, or some similar resort, became The evidence further shows that in the two years prior to J anuarYt 1890, the company had lost from $10,000 to $12,000,-8 sum equalM its ll.ctual paid-up capital; that from June, 1889, to the time ofmaking the deed of trust, August 25, 1890, the ,total-amount ofsales was $71)818.81, while the expenses were $17,599.66,-equal to about 25 pe.r cent. ,-whereas the testimony ofcompetent experts is that it should have made 25 per cent. on its sales, gross, to have sustained a successful busi.:. ness. It is true, as much paraded by the secretary and directors on this hearing, that the company had credit in commercial circles such as would have enabled it to obtain goods on credit. ,But this credit was predi';' eated of a suppressed condition of its actual affairs. It is not too much to say'that no competent business man or house would have sold this oompany a dollar of goods on credit had it made known the true state of it!! capital and profits and losses. It is true the company had credit at the banks, provided, however, that Mr. Peet, or other good indorsed for it. ' But the real question is, what was its actual financial condition just prior to the execution oHhis trust-deed? In June and July it was unable to meet, its maturing obligations. Extensions were obtained in some instances' by the well-phrased assurances of the secretary that he would soon be able to make payments. He could make no collections on the, motley character of its notes and accounts to meet -these pressing demands. Mr. Peet needed all the funds he could, with safety to his other enterprises, afford to borrow. In August a crisis was imminent; The secretary,when urged by one of the creditors, promised that the directors would hold a meeting on the ·22d to devise ways and means for raising money. Ithad overdrawn its account in bank. It gave checks on the bank where it had no money, which failed to pass the clearing:. house. It is idle now to pretend, as claimed by counsel, that, had a certain officer of .the bank been present, those checks would not have been thrown out. This is wholly problematical, and, had he so acted, it would have' been in ignora.nce of the extreme condition of the com:' pany's affairs. But the factremainsthlit 'its fictitious credit did Dot

.10

FljiDERAL

vol. 45 .

,avail it inthe,(lI;nergency culminating. ,This. state:of affairs doubtless impelled the president to call for an inventory to be taken, which was 23d of August. Owing to its limited, deposits and ,lack of dltily 'balarices,the bank it credit shortly before this at a leBS rate ,of interest than 10 per cent., whereas it had, in comn;lOp, with other reputable business concerns, been obtaining loans at 8 per cent,., interest. It had then in bank paper for about $17,000, drawbig 10 cent. interest. According ,to their ascertainment, the stock of snppliesamounted to about $15,000, and, allowing a most liberal ,priceAor second-hand fixtures; $1,000 ,more might be added. These ,Jtoods were inventori!ldby the receiver appointed by this court at $12,600., And as best proof of its actual cash value, after the most earneatetrorts of the receiver for months to make Elale, the best price he could obtain was from Mr. Peet, himl\elf, at $8,700. But, grant that IllhOPO was a reasonable apparentva)\Ie, what else had this company? ;A.sahown by the receiver's inventory, there in nO!;Els and accounts, numbers,,$19,OOOj amlin money turned OVer to him by the trustee on account of sales made by him after tiJ,kingpossession under the deed of trust, $626.1i8 , totlll aggregate of $34,626.48. The amoJIPt, of liabilities thus far discJosed 835,000. This estimation of assets assumes that the bills receivable are Such, howeVer, is not the fuet. :Th(j secretary of the compllony:himself, when reques,ted by ;tak;ingcharge, to mark ",hat were bad debts, goqd, and douptful , at once marked over,$9,000 as bad, aQ;4 the courps justified fr«;ml' the evidence in, concluding that llot Qv:er 50 per cent. oftbe $19,090, can ever be collected; cepting ,the valuation placed by. l:\e<;}retary on the goods, when ,he ;was make showings as possible of his administration, and $24-j OOO, or less, 'was the hl,ld to meet $35,000 of liability, and, as the sequel shows, not enough to meet the sum of the "It by one of the l;l.,mount of the Unpaid capitiJ,lstQck owing by the stock,holqersshould bel;tdt;Ied to the sum of tbe/il.pparent assets.· ' As a propqsitioJl, of law, the unpaid stock is, an as-:IlElt1:-atrust fund,-wbich the ,corporation holds for the payment of debts. Hawp,; v. Dana, lOl 210; Invoking this liability now, ip. order to ,swell ,the aSEletsllit the time of making the deed of trust, the court may' be permitted to suggest, iI.l,no offensive sense, howev;er, that itwQ'!lldhave cpmewithmoregrace.PlIid the learned ,counsel and his cli.:. ents rather than at-the hearing the ascertainment .of the true amount of this asset. On the, contrary" whenever this matter was into, thj:l counsel interposed the objection that it is irreleyap!, etc. ,to; the issu.eiJ on trial. t1,lisl:1ccount,: the inquiry was not 'apy,spacificiasceda,inment., it does appearin evidence that perhl,lps not oyer tWq pf, the.se SUbscriberS could be made to pay, on judg,;. ment anli It is fprthermoreEltated, over and over, bycounsel fpr, respondents; ;ignorant of the true. state, ,of

CONSOLIDATED TANK LINE CO.

v.

KANSAS CITY. VARNISH CO.

11

the financial condition oftbis cOlllpany; thatthey b.elieved it was healtllY, pay all the that its credit was good, and its assets ample to debts. Leaving out of view what the evidence on this' hearing develops as to their actual knowledge of the insolvent condition of this company, we pause to say that nothing so marks the progress of-equity jurisprudence in conserving the ends of justice as the now recognized principle that directors of corporations occupy a trust relation to the stockholders and the creditors of their COmpany. They are expected, by the law, to do their duty as directors and trustees, and to have such knowledge of its affairs as diligence, fidelity,· and honesty would disclose. If these directors: did not know this concern was bankrupt, they should have known it. They did know its paper was being discredited at bank; they did know it owed $35,000 approximately; they did know what their own inventory showed: they did know it was losing money; and, by its president on 23d day of Au'-: when they were called gust, they then knew it was to take counsel as to what course should be taken'in its·dire extremity. They knew that there were but two ,roads openta them,-either to raise money on their own credit, and infuse new life into the sick concern, or to surrender its assets to its creditors. The instinct of self-preservation its3erted itself, and mastered their sense of ffiirplay. They resolved to take care of themsel"es by making a deed of trust; which preferred' on1'y the debts on which they were sureties. With aRdlie respecHo the personal character'of the directors, the court is unable to credit the pretension, now setup by them, that they ably expected that by making such a deed of preference they would be· better enabled to go ahead with the business of the corporation, and keep· it "n going concern!' They'now say that the more conspicuous fact discovered by them on the rt'sult of the inventory and examination of the books was that they were overstocked with paints, and that their principal losses' were traceable to the· handling of this class of goods. . Perhaps over one-half of the goods invoiced 23d Consisted of paints, brushes, etc. They now say it :was their purpose in the action taken by them tomtlrelygetrid of the paints, and to liniit their business in'the future in the hand1ing of varnish. How this desired consummation was to be wrought out by means'of the deed of trust challenges common sensa, provided there was no fraudulent collut'don between the makers, the trustees,and the cestuisquHrustent. The directors, when pressed on the witness stand,were utterly unable to give any plausible reason for this pretension. ' The law, responsive to the practical maxim that actions speak lOUder than worlls,presumes that a .man intends the natural and reasonable consequences;of his acts. This deed of trust was given, ostensibly, to' secure· the payment· of over '$22,000 of debts. These· could not possibly bedisC'harged oy the saleM. the paints,aided by any possible expecutHon from .collections on bills rteceivable. If stichWftA the purpose of making the why did they n<lt, at theit conference on the 23d, reso)ve, and; direct their own·tnanager ,to 'proceed· at once to close out the paints, and: ,waysaIid means aliWnde to meet their pressing debts? If

12

FEDERAL REPORTER,

vol. 45.

they were of the opinion that a trustee could better accomplish the desired result, why did they not authorize him to first dispose of this stock summarily, and provide tor adding to and building up the varnish branch of the goods? The deed of trust itself, on the contrary, utterly refutes their assumption. By it they conveyed every particle of property they had, including the plant, and every instrumentality for a further prosecution of the business, to the trustee. Practically, they abdicated their functions as a managing board in favor of the trustee. They authorized and directed him to take immediate possession, and proceed to dispose of for cash the entire property, which could not reasonably be expected to. payoff the preferred debts. In the entire absence of any arrangement made, or even suggested, by them to meet the unprovided for outstanding deb,ts, amounting to say $13,000, they must, as reasonable, sane men, have anticipated that these creditors would not complacently and inactively standby to witness the result of the Utopian idea of the directors for infusing new life into the suspended corporation. The unpreferred be expected to take heroic meaSures to see that every Clollar of surplus that might possibly arise from the trustee's administration s;hould go direct to themselves" to say nothing of expected assault upon the deed of preference. Furthermore, the whole subsequent conduct of the directors contradicts the claim now set up by them. They were advised by their counsel, when they applied to him to draw up the deed of trust, that they could nO'!; prefer themselves. While we have not been fully admitted .into the .fullness of that inner consultation, it is; qllite inferable that ithisadvice was predicated of the attorney's knowledge of the condition of the company's affairs. At that time, Mr. Peet, the president, hada.claim against the company for $1,500, principal and interest, and Mr. White, another director, held a claim against it for, principal and interest, $1,225. To evade, as they conceived, the operation of the law which forbade a director from directly preferring himself as a creditor of an 'insolvent corporation, they had notes of the company drawn, payable to themselves, respectively, for these debts, antedated, which Mr. Peet took to the preferred banks, and had discounted on the indorsement of Peet Bros., his other business concern. Instead of paying over to Mr. White the amount of his note, Mr. Peet, from some unexplained cause, had the proceeds thereof placed to the credit of Peet Bros., where it yet remains. Whether this was a simulated arrangement. b,etween him and the bank, as it seems on its face,is not positively known. These notes were then put into the deed of trust as preferred debts to the banks. . Of like character, indicating unmistakably that the president and ,secreregarded the company as hopelessly wrecked, at or ab.ontthe time of making the deed oftrnst the secretly turned over to Mr. Peet about 81,OPO of notes and accounts of the company, which Peet appropriated to his own use, or at lel;lst they were ;withheld frolll the., trustee and the reCeiver, and the fact was only extracte,d from Mr. Peeton cross-examination at this hearing. ,And, still further. it cropped out on trial that ?4r. about 'the time of the collapse, doubtless

CONSOLIDATED TANK LINE CO. 11. KANSAS

CITY VARNISH CO.

is

for the purpose of avoiding responsibility of himselfand wife as indorsers on the bank debts in question, conveyed, with his wife, valuable real estate held in her name at Omaha, Neb.; and on the day of the execution of the trust-deed the secretary was busy posting up the books of the company, giVing credit for salaries of employes; and making various other entries, and the books show erasures changing dates and the like, as if to conceal the fact that they were made on that day. These acts ind tcate final administration, and by an administrator de Bon tort. As in the case of a sinking ship, they scuttled it, and the crew treated its cargo as common spoil. In the peril of the sea, the thought uppermost in their minds was self-preservation. Having, as they supposed, secured a day's provisions for themselves, each director. struck out for himself. If they have done a single act to verify their pretension of a purpose to rescue the ship and continue the voyage, the evidence wholly fails to disclose it. Under any accepted definition of insolvency, this company, on the 25th day of August, 1890, insolvent.' All of its debts could not be. collected out of its means.. Pdtter v. McDowell, Mo. 73 .. There was potf\. .present ability of the deb1i9r to payout;of its owp. [email protected] all its nor sufficient property to respond on execution,forsuch satisfaction. Eddy v. Baldwin,32Mo.369. There was an inability to fulfill its obligations according to its undertakings, and a generalinability tOllDswer in 'court' for all its liaibilities, and with no reasonable asin the usual of trade,. of recovering frOID its er;nbarraSsment. Waltonv. Bank, (Colo.) 22 Pac. Rep. The deed of trust was, in effect, a confession of insolvency. It conveyed all the company had to meet only a ,part of its liabilities. It< virtually took away the ability...... the tneans......of the directory to further prosecute the 'object of the fra.n;;' chise. While the corporate autonomy was not extinguished in 'law, it exists merely in a state of suspended animation, with no reasona1;>lehopl:l or assurance of resuscitation. When a corporation, in its fairs, is thus in articulo mortis, whatever may yet be maintained ondivided opinions as to its right to dispose of so as to giVe a preference to some general creditor, the law iBtOO well settled"O:t leaSt in this jurisdiction, to admit of extended discussion that its :direct()rs cannotrnltkeadisposition of the aSSets 60 as to secure to themselves, di· rectly or indirectly, a preference over general creditors·. This is'therule of the Missouri courts. V. 23 App. 132 v. Kampe, 38 Mo. App. 229; Roan v. W",nn, 93 Mo. 503,4 S. W.Rep. 736. It is not too much to say that it is the established doctrihe:\)f the federal <lourts. It is strongly maintained by JudgeTHAYEll. in. the eastern district ofthisstate.. White, etc., Manuj'g Co. v>Pettes, etc.,. 30 Fed. Rep; 865; Ada'rn8 v. Millin1JCo., 35 Fed. Rep. 433. "See, also, lJippincott v· Carriage Co., 25 Fed. Rep. 577; Koehler Fron eo:, 2 Black, 715-721; Railroad 00. v. HOOJard, 7 Wallo 392:; OUC'1J. v.'Marbury, 91 U. S. 587. .....; , In Graham v. Railroad 00., 102 U.S. BRADtEl' said:
. . ' · .: , _ -- . . i _

property may 'be administered as. a trust 'tuM. for the benefit of its8,tockhold-

a

inso1yent·. lUli

, : '

,.

:

;

-, -

,far, civj1ly

• _ :,
  

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j : .i

'!

,:

.: . "

"_

REPORTER,

vol. 45.

A court of equity, at the instance of therProper parties, wilt then take those trust,funds, which in other circuillstances areas much the absolute property of. the corporation as any man's property is his." ' recent of this question is to be found in the very able of Judge WQODS, in Howe v. Tool 00., 44 Fed. Rep. 231I cannot better express strength of the reason why a director should not be permitted to prefer himself, under circumstances like those undel' review, than by quoting his language: "A sound public policy ,and a sense of common fairness forbid that the directors or managing agf'ntS,of a business corporation, when disaster has befallen or threatens the enterprise, shall be permitted to convert their powel'lS of pianagement and their intimate. as it may be, exclusive, knowledge of the corporate affairs into means of sPlI,protection, to the liarmof other creditors. They ought not to 'be competItors in a contest of which they mllst be the judges. The necessity for this limitation upon the right, to give preferences among creditors, when asserted by a corporation, may not have been times, hut th,e and variety of llIouern perccived in compel its recognition and corporate enterprises and interests I think adoption. ... "','" Whetheror n,ot such preferences are fairly given, isan impracticallI"ilnquiry; because there can be, in ordinary cases, no means of discovering'the truth, and consequently the presumption to the coutrary should in every case be conclusive. Concede that it, is a qUestion of proof, and that a favor of a diredor wil1!)e deemed valiu if fairly given, and it may as well be declared to be a part of the 11\w of corpol'ations that,inoallPs of insolvency, df'bts to directors, and liabdities in whi,ch, they have a spectal interest, may first be discharged. That will bl! the practical' effect, and t.he examples willuluItiply ofindi\'idual enterprises prosecuted under the' guise of corporate, organizar.ions for the purpose, not only of escaping 'the ordinary riskso·f business dOlle iutbe <lwnt'r's name, which may be legitimate enough, but of enabling, the pTomoters and managerl!l when failure l,lomesto appro. priate the rell!alns of the wreck by declaring themselvt's favorl'd creditors. Besides with that equality which equity loves, BllCh favors in· · olve too many pl)ssibilities of dishonesty and successful fraud to be tolerflted in an en.'ightelled of jurisprlldence. It ,

in Sawyer ' "When we conSider the rapid development of corporations,las instrumentalities of thecoll!merciaL and wurld, in the last fewye!ll'S, with the ponespo!!ding'llecessity of adapting lef.tal principlestothe varying exigencies f?f this busi ness, it is no solid objection to such a i)l;inciple that it is'modern, for th,e occasion for it conldnot BOOnel" have arisen; It

v. Hoag, 17 Wall; 620, .wheJil.he observed:

The

wRsin the mind of Mr. Justice

It behalf oltbe l?al},ks tllat, although· of ,may be voidable as against the directors, yet the banks are ,to be regarded fide. pU,fcbasers. B\l,tare the banks such p.urchasers? In the tirst place, they parted with l10thing on the faith of deed. They loanedtho,lUoney! as their evidences,bows, on the iudqrsement of the dE-ed. , did nat know of its existence until after it was executed and recorded. They may QC tpalawintheir favor, that where such a deed. for tbe!r, they I1re presuDled to accept its provisions. But,It 1,8 on, the: face. ,of the deed and from ,the facts, to

CONSOLIDATED TANK tINE CO.

v. 'KANSAS

'CITY VARNISH CO.

15

the banks, that the deed inured to ,the benefit of the directors as in· dorsers of the notes held by the banks. The. banks could not" there::!ore,take without being' prNy to the wrong attempted by the directors. Tf the law were OtherWise',' the rule would bedf no avail which seeks to prevent such directors "from preferring debts in the payment of which they have a personal interest," as declared in 'Adamav. M?£ling Co., 35 Fed. Rep. 435. . The next matter for deterrr:ination is as to the clailll of the Kaw ley Paint &; Lead Co. As the directots ate not indorsers on this note, it is assumed by its Counsel that, in order to avoid the deed as to it, the court must go to the .extentof affirming thedoctrihe that an insolvent corporation cannot dispose of its property so' as to preferff general itor. My opinion isthst tbe courts, of -ohancery ought' ttireach out 'fot the attainrileil-t of a sound public polioy-'Which asserts When a nesBcorporation becom.es so insolvent that it cannot further prosecute its ,business, and, to avoid art assignment o'rsurrender for the benefit of an its creditors, it must, to avoid attachments or executions, make a 8itioo of its property to appease the of its creditors, the ,eo inatanti, should beheldJto be trustfeesoftbe assetsM'the company for the equal'benefit of aU its creditors. But'it'is nolessential to'g,o so fat in this' case. That the"Raw Vallet Paint & Lead'Co. are 'chargeable .with notice ofrthree important fact!l, is 'SIltiBfactorily' deduCiblefrotn the First, that when this deed executed, had reason to believe, the debtor company was insolvent; 8econd, that: it probably could go. nofurtber' in .the proseeu·tion of·: its business; -and', third,dihattheKaw VltUeyPaint &tead·Co. was:privy,to aria paH:Icipated i!l the fraudulenhlitte'mpt ofthEl.dlrectors6r'the'debtorcol'.l1pany to prefer themselves. ' The eVidenee showsthatJohnL. Wbeelerwas the attorney to whom the direotorsofthe varnishoolllpanyttppliEld for coufisel, and toprepare .the on the 25th of Auga8t,1890. 'Hettdvised, ,tn.tet'dlia', that they could not, under the law 8S he it, prefer themselves as creditors of. the compan)'; It was: ,doubtless Mthis suggestion that Peetand White resorted to the subterfuge of discounting, ostensibly; the two notes held by them againstihecompany to banks, thltt,the debts might appear in the deedaa clilims of the banks. Thesenotes were drawn .that day on blanks at:his office, and were dated back. He knew they were then put in the deed of trust as, preferred debts of'the banks. At this time Wheeler was also secretary' of tMKaw'Va1ley Paint & Lead Co., 'andwas acting as its attorney fot'the collection; of its .claim against the varnish company. He notified the directors of the debtor cOmpany that they mUst,include ,his claim. in the deed of preference if he, drew up the deed.' They so consenting, he drew theqeedac.cordingly,aIitedatingtQ .the 15tbof:August the note of his Facts coming to the knowledge of an agetit otiattorney whileenliated of his agency areI in ,law, pitesu".Ded to 'be kn61VIi to l the prineipa;l;6r client.. Hayward v.lh8Urame 0)'.';'52 Mo;181;,17tY;W.

16

J'lCDERAL ltEPORTER,

vol. 45.

tilled Spirits, 11 Wall. 3.56-367. In May v. Le Claire, Id. 217-233, the court observe: , ,
,., "John:P. Cook was counsel of Le Claire in all hiskansact(ons touching tbIs property. He knew that was done, and his knowledge was ' notice to 'bis client."

Again, any fact or circumstance connected with the transaction, calculated to excite his suspicion and put him on his guard, should prompt inquiry, and he is affectec;J: with notice of every fact which a prompt and diligent prosecution of the inquiry would develop. The conduct of the the very character of the instrument they advised Mr, Wheeler of the fact of the financial extremity of the debtor His demand to have his company admitted to the preference, while .creditable to his fidelity as the agent and attorney of his client, and. company, yet evidenced his apprehension of the debtor's critical condition. He could but see that the directors were anxious to protect themselves, and he was consenting to the'endeavor, on that his opposition . was silenced by a participation of his client in the undue advantage. So impressed was he of the extremity of the debtor and the of the situation, that at much personal inconvenience, ona raiQy night, he hunted up a clerk of the recorder's. office, and inducedh,im to accompany:b,im to theoflice at 9 P. M., to place the deed on file,and. at 10 P. M. had the tl'llstee take possession of the store and goods. There was no purpose of the debtor company to admit the Kaw Valley Paint & Lead Co. to this preference, until practically coerced tl;lereto by the suggestion of Mr. Wheeler; and there wasil, mutual consenting ,that the scheme (If .the directors might proceed on condition of the admission of the Kaw Valley Paint & Lead Co. to share in the preference. These facts, in my opinion, except this case from the operation of the rule. that, Ii'. deed of tl'llst or assignment may be good as to one or more of thenamedbenefioiaties,and bad as to the others.. ,The embracing of one in this case was made to depend, in effect, on the admission ()f the other, whereby a fraud was attempted by both. The two acts were thus, interdependent. In such case the deed is an entirety, and aU tile must stand Or fall together. Where the acts of a Pl\rtyoperate as a eV.en though done without a fraudulent intent, he,9!1nnot be permitted to reap any benefit from them. Clarkson .Y. ereeJ,'!h 40 Mo. 114. It is·finaDy insisted by counsel representing some of the respondents that tbe -action U)ust failfor the reason that complainants are not judgment creqitors, and there blitsbeen,no return of nulla bona on execution. Ourv;iew :of this Qlatteris e:xpressed by Mr. Justice STRONG in Case v. Beauregard, lOlJI. 8. 688'791H, . Looking to the fonndation upon which thllrulec<mterv.led:for.rests, it ought not to apply where judgment and execu;tion would be fruitles.a. ' I the debtor's mere. equitable one, which cannot be reached b1 any at. I!, w. ,reallon· for reg I,Jiring attempts to J;each

CONSOLIDATED TANK LINE CO. t1. KANSAS erTY '7 ARNISH

17

It by legal process. '" .. .. It may be said that, whenever a creditor has a trust in bis favor, or a lien upon property fOr the debt due him. he may go into equity without exhausting legal processes or remedies. Indeed, in those cases in which it has been held that obtaining a judgment and issuing an execution is necessary before a court of equity can be asked to set aside frallllulent dispositions of a debtof's property the reason given is that a general creditor has no lien. And when such bills have been sustained without a judgment at law, it has been to enable the creditor to obtain a lien, either by judgment or execution. But when the bill asserts a lien or a trust, and shows that it can be made available only by the aid of a chancellor, it obviously makes a case for his interference." '

The queation was considered ,l;lJld the authorities reviewed by the court of appeals in M"1ll 00. v. Kampe, 38 Mo. App.234 et seq., where it was held that a geneml creditor might maintain the action obtaining judgment, etc. Rules of equity, or rather the application of equitable principles, must, in the progress of civilization, .constantly expand ·to meet the intricacies of commercial transactions, and to cirouman!! inventions of men to defraud justice of her rights. Lord Chancellor CO'l'TINGHAMheld th,at it was the duty of a court of equity to"Adapt its, practice and course of proceeding,' 88 far as possible, to the lsting state of society, and apply its jnrisdiction to all these new cases wbich, from tJ;te progress daily making in the atraira of men, must continually afise." And Judge Story observed: "The beantiful character, pervading excellence, of equity jUrisprudence is tbat it varies its adjustments and proport.onsso as to meet the very form; and presence of each, particular case in all its complex habitul1es." 1 Story, Eq. Jur. § 439. The .legislature of the state of Missouri but sought to the province of a court of equity in enacting section 2790, Rev. St. 1889: "The circuit court shall have jurisdiction over the directors, managers, trustees,and other officers of corporations now existing'or hereafter orgapized under and by virtue of this article-First, to compel such directors, managers, trustees, and other officers to account for their official conduct in the metlt and dispOSition of the funds, property, and business committed to their charge; 8ecP1'/.d, to order, decree, and compel payment by them to the tilln which ,tb!lY represent, and to its creditors, of all sums of money ando.f the value of ,all property which they may have acqUired to themselv!ls, or transferred, to others, or may have lost or wasted by any violation of their duties or abuse'of their powers as such directors, trustees, or otb!lr officers of sucb corporation." And by the succeeding section the ,court ia authorized to appoint a receiver to carry out the objects of the law in the prevention of malyersation by the directors. It the prayer of the bill, is granted, the temporary writ of made perpetnal, the deed of trust is annulled, and the proceeds of the;8S4l!ta of the rllSpondent company, in or coming to .the bands of the will be ratably, wr'i pa88U, among I;ll.Hbe Q.fthe respondent corporation whosedepts,.Q1ayb" properly v.45F.no.1-2 '

18

,".

DDERAL REPORTER,

vol. 45.

proved' :Up, and the complainaIits'and intervening'i'creditors' may t!tke judgment against the respondent cOmpany for the lmiount of their debts respectiv,ely. , Decree accordingly.. ,
,l'

, I

CONVERSE tI. MICIDGAN DAIRY Co.

e£ aZ.

coirCuu

L

,

W. D.

MWMgwn,S. D. 'Februe.J,'112, 18111.) .

','.'

\',

,',,')

.A O1Ortgagee can make judgmell;t creditors of the mo11;ga:gor's grantor parties to hi8 foreolo8ure suit when. these creditors. assert a cl,aim' on the ground that the transfer to the mortgagor was in fraud of tb>ir rights, 'Bndt-hat therefore tnelr executions,levied after the execution are prior,liens on the land.

"".

S. it Jhtiltlfarlous' .it brings in . ,partiei' claiming, righU.'paramouht'&lldh6stlleto ml)rtgagor comes too late when made at the hearing, If such olalm is of equitable
S.

, <4 mortgage executed to.'8fO\cu'!ie'notea whioh are'indorsed.before; due for\"8lue notice, peforet4!l is:ljiVied on by tpejudgment cred,l,torsoftbe claim that ,10M tl? the mortgagor wasin fraud · is paramount to the executions'of suoh oreditors, sinoe, under the Michigan law, a judgment is no lien.
mortgagee sues to ,a· ,fll<ieral ,Qourt, and makes judgment the Iilortgagorls' grantor' defendant, the suit will not 00 post;. 'poIilM ',uiitilthe termination 'Of proceedings instituted bytl1ese oreditorsin the to,establish theirl.lenll 011 tlieland; towhich,prooee,dings the mortgagee is not a party. . Opel'!'tes
'

BAHE-J'UDGMENT CREDITORS-PRIORITIES.

.

.

4. SAME-COURTS-STATE AND

o.

SAMII:-INDORSEMII:NT OF NOTII:S-AsSIGNMENT OF MORTGAGE.

;" .

'.'

,'J;hllil1.dorae/Dentand of the ,mortgage notes by ".l¥! an'assignment of the, mortgage to the'holder of the notes." . " ' ,.,. ';'

'

."

' .

II,lEquitj'., OIl finalliearing. . . , ' . , . " '. " . '.... " in this far the are necessary to an understanding subjoined <minion, are ,as follows: . ,Theq.efendant the Michigan Dairy, C()mpanydllrived its title -to the landsdnvolved in this proceeding from·the defenda,ntDavidP. Clay; ,a.portion, of such lands having' been conveyed to the':dairy company in the year 1884, and the remainder on the 13th <lay of September, 1886. On thelilst-nienti9ned day the dairy company 'executed a mortgage upon said lanqs to, David Clay, to secure the 'payment of 56 notes, of$l,boo each, due six years In the mortgage ",as a clause making the whole debt upon defa,ultiIi the payment payable, anhe election of the of the annual interest. All of these notes were afterwards indorsed by Mr.Clay, and delivered tothecomplainant, as for the pay'inent of about borrowed byeam Clay of the com:recorded, October! 22i 1886',: and this suit t' was -instituted to foreclose·.said National' Bank· of, Gz:aild' Rtipids';Mich; ;: arid' tb,e 'Germ8ii:Batik of .Sheboygan, m\:(departies·'Uhder;'the of the