Opinion
June Term, 1900.
Delos McCurdy, for the appellant.
Edwin C. Dusenbury, for the respondent.
This action was brought by the plaintiff, as receiver of the Commercial Steam Laundry Company, Limited, to procure a judgment declaring that certain personal property transferred by the said laundry company to the defendant was impressed with a trust in favor of creditors and constituted a trust fund, in the hands of the defendant, for the benefit of creditors and stockholders of the first-named company, and that the defendant company account therefor. Also that the plaintiff be awarded judgment for the value of the property.
Upon the trial it appeared that there were no other creditors or persons interested in the property except the plaintiff, and the court having determined that the transfer was void as against creditors of the old company as having been made in fraud of their rights, it directed judgment in favor of the plaintiff for the amount of the claim represented by him. The evidence disclosed that prior to the creation of the defendant corporation there was in existence the company of which the plaintiff is receiver, and that one Thomas E. Sloan was engaged in the laundry business under the name of the New York Steam Laundry Company. Of the former company, Anthony O. Rowe was the president and treasurer. Rowe and Sloan entered into an agreement by which each agreed to contribute machinery and cash and organize the defendant company. Sloan made his contribution of $10,000 in machinery and $15,000 in cash; Rowe contributed $5,000 in cash and procured the Commercial Steam Laundry Company, Limited, through action of its stockholders, to execute a bill of sale of its personal property, valued at $20,000, to the defendant. The only property which the company possessed after executing the bill of sale was some book accounts and a lease of real property with an option of purchase. What was the value of these items of property does not appear. The consideration for the transfer of the property to the defendant as expressed in the resolution authorizing the same was 200 shares, of the par value of $100 each share, of the stock of the defendant. This stock pursuant to the resolution was to be delivered to Rowe, the president and treasurer of the old company. The defendant company was duly organized with Rowe, Sloan and two other persons as incorporators. The only person connected with both corporations was Rowe. The latter was elected president and Sloan treasurer. By direction of Rowe the 200 shares of stock in payment for the transfer of the property were issued to Margaret H. Rowe. This issue continued to stand in this form for about seven months, when the certificate issued to Margaret was surrendered and a new certificate was issued to Anthony O. Rowe, as treasurer of the old company. Shortly afterward this certificate was surrendered and the stock was then divided among the stockholders of the old company. When the bill of sale was executed the old company was indebted to Eliza N. Hall upon an unliquidated claim which was the subject of dispute, upon which she brought action, obtained a judgment and issued execution, which was returned unsatisfied. Thereupon she brought an action against the old company for the sequestration of its property in which final judgment was entered, the plaintiff was appointed receiver, qualified as such and thereupon brought this action.
The court has held that the transfer of the property of the old company to the defendant was not in the regular course of business and was fraudulent and void as against creditors of the company. This ruling proceeds upon the ground that the sale of the property was in effect a transfer of all the property of the corporation; that it necessarily operated to prevent performance by it of its corporate functions; and that it was the intent of the parties interested to deprive it of its power to carry on its business; and that in particular it effected the creation of a new corporation by the consolidation of Sloan's business with that which it had formerly carried on. The evidence in the case justifies the finding that there was intended to be a consolidation of the corporate interests and the business represented by Sloan. The defendant in fact took much of the custom if not all which had formerly gone to the old company, and it was the evident intent of the stockholders of the old company to cease to perform its corporate functions, and if not to formally dissolve to go into liquidation. Such, however, was not absolutely a necessary result, as it still had its place of business, its lease and book accounts, and if the stock which it received for its property was worth par, it had sufficient means with which to prosecute its business. So that whatever might have been the intent it does not appear from this record that it had placed itself in such a position that it could not prosecute its business and perform all of its corporate functions. And there is no proof that it was insolvent, or that the stock of the defendant corporation which it held was not worth par. So far as shown, bearing upon that question, it appears that the defendant had a paid-up capital in machinery and cash of $50,000. It had no debts and there is nothing to show that it was not an absolutely solvent going concern, and so far as it appears none of the incorporators or stockholders had any knowledge of plaintiff's claim except Rowe. The mere fact that a corporation intends to retire from business and makes a sale of all its corporate property, taking in payment therefor the stock of another corporation, does not render the transaction illegal. ( Holmes Griggs Mfg. Co. v. H. W.M. Co., 127 N.Y. 252.) In every case of this kind the question is of bona fides upon the part of the purchaser and seller. The fact that the selling corporation retains some of its property, and possibly may be able to continue its business, is not the test. It may retain some of its property after such sale and still be guilty of the grossest fraud; it may part with its entire property acting in good faith and selling for value, and both purchaser and seller be protected therein as being in the exercise of a legal act. ( Cole v. Millerton Iron Co., 133 N.Y. 164.) So far as the case of Hibernia Ins. Co. v. St. Louis New Orleans Trans. Co. (13 Fed. Rep. 516) carries the rule further, it is not in harmony with the decision of the Court of Appeals.
In the present case, as we have before observed, there was no proof that either the old corporation or the new company were insolvent. If the sale had been for cash, and it had been paid over and distributed among the stockholders, we apprehend that no court would hold such sale invalid and impress the property in the hands of the purchaser with a trust for the payment of a creditor whose claim was yet to be established. Upon the present state of proof it does not appear but that the stock was the equivalent of cash. If it was in fact worth par we think this would establish the validity of the transaction, as there can be no legal distinction between a cash sale and its equivalent in value. If this stock is of only nominal value, or so far below par value that it may be seen that an equivalent in value was not given for the property, it is clear that the transaction could not resist the attack of a creditor. It is said, however, that the proof is conclusive as to fraud for the reason that the certificate was given to Margaret H. Rowe instead of her husband as the treasurer. If this was mistakenly done and subsequently corrected, and no one was prejudiced by the act, we should not think that it invalidated a previously valid act. No one suffered by it as the stock was subsequently transferred to the treasurer, and thereafter it was divided among the stockholders as the resolution provided. Margaret H. Rowe was the principal shareholder of the Commercial Steam Laundry Company and eventually received the most of the stock. The attorney who attended at the stockholders' meeting and drew the resolution of the stockholders testified that in examining the stock book of the defendant he discovered the mistake and procured it to be corrected. This action had not then been commenced. Indeed, the action of Mrs. Hall to enforce her claim had but just begun, and it was not till some two years afterward that she obtained her judgment. There is nothing to cast discredit upon the statement of the attorney, nor any sufficient basis upon which fraud may be predicated of this act. It is insisted that the old company is insolvent for the reason that the receiver can obtain no property. There is not a scintilla of evidence that the receiver has ever tried to obtain any. Confessedly there were the book accounts and the lease; what effort there was to reduce them to possession does not appear. He has ample remedy to pursue the stock, which was received for the property, in the hands of the stockholders. It may be that the plaintiff can show that the stock was not a sufficient consideration for the property; if he does, we see no reason why he is not entitled to relief even though the old company retained some property after the sale. Upon the present proof, however, it appears that the transaction was for full value, and if this be conceded the mere fact that it was nearly all of the property of the corporation is not sufficient to invalidate the sale in the absence of proof of actual fraud. These views lead to a reversal of the judgment, with costs to appellant to abide the final award of costs.
Judgment reversed, a new trial ordered, with costs to appellant to abide the event.
VAN BRUNT, P.J., and INGRAHAM, J., concurred; RUMSEY, J., dissented.
I think this judgment should be affirmed. I do not see how upon the facts found by the learned justice at the Special Term, and which were clearly warranted by the evidence, the case can be distinguished from the case of Cole v. Millerton Iron Co. ( 133 N.Y. 164). It is undisputed that the sale by the Commercial Steam Laundry Company to the defendant was made with the intent to close out the business of that company. The defendant purchased all the plant; it took over all the customers and business of the Commercial Company and left nothing except a few books and accounts, the value of which nowhere appears but which it is quite evident was not sufficient to pay the debts of the company of which the plaintiff was receiver. For this transfer, the necessary effect of which was to put it out of the power of the Commercial Company to do any other business or to pay its debts, the defendant gave to the Commercial Company no consideration whatever. It agreed to issue to that company $20,000 of the par value of its stock. Had that been done, so that as a result of this transfer the Commercial Company had become the owner of the stock, which possibly might have been worth enough to pay its debts, it is quite likely that this transfer could not be attacked. But it was not done. No stock whatever was issued to any officer of the Commercial Company, but the payment was made to a person who not only had no official connection with the company as an officer, but against whom a creditor of that company could only recover by an action to set aside the transfer. The effect was that the creditors of the Commercial Company were deprived of an opportunity to resort to the property of that company to pay their debts. This was done not only with the consent but with the active co-operation of the defendant. There can be no doubt that such a transfer would operate just as it did operate to defraud the creditors of the Commercial Company out of their debts. I see no reason why the defendant, which not only permitted this to be done, but took an active part in it, should not be held liable for the result of its action.
For this reason I think the judgment should be affirmed.
Judgment reversed, new trial ordered, costs to appellant to abide event.