Opinion
Decided November 18, 1929.
Corporations — Voluntary dissolution and liquidation — Assets not exempt from garnishment by judgment creditor — Sections 8623-83 and 11772, General Code — Judgment lien preferred over insolvent corporation's unsecured creditors, when — Trust fund doctrine not defense to garnishment, when.
1. That corporation's assets were in hands of liquidator in process of liquidation under Section 8623-83, General Code, which provides way in which corporation may wind up its affairs without considering solvency or insolvency of corporation, did not exempt assets from garnishment under Section 11772, in behalf of judgment creditor.
2. Even if corporation, being liquidated by third person under Section 8623-83, General Code, was insolvent, creditors could sue corporation and obtain judgment and establish specific lien which would give that creditor preference over unsecured creditors.
3. Equity court which has assets of insolvent corporation in its hands will administer estate and distribute it among creditors on theory that equality is equity, and no creditor then can pursue legal remedy in such a way as to obtain preference, but equity court will respect legal rights already acquired when it took jurisdiction.
4. There was no defense to garnishment proceeding under "trust fund doctrine," where judgment debtor corporation was being liquidated by third person under Section 8623-83, General Code, and jurisdiction of court of equity never came into exercise.
ERROR: Court of Appeals for Cuyahoga county.
Messrs. Efros Efros, for plaintiff in error.
Mr. C.A. Chapman and Mr. A.R. Johnson, for defendants in error.
This cause is here on error from the municipal court of the city of Cleveland, and the question to be decided is whether the court below committed prejudicial error in holding that a judgment in garnishment was not good as against a corporation which was in process of dissolution under Section 8623-83, General Code, which provides: "The board of directors may, in its discretion, appoint or employ one or more persons or corporations to liquidate or wind up its affairs with all the power and authority of the board or such as the board may see fit to grant, and the title to all or any of the property and assets of such corporation may be conveyed and transferred to such liquidator or liquidators for that purpose."
The cause is here on findings of fact and conclusions of law and one of the facts found by the court below is as follows:
"The court finds that when order in aid was served on The Cleveland Stone Company, to wit: On May 11, 1928, it had in its possession and under its control the sum of $880.00 due the defendant, the Cowie Cut Stone Company, as a balance on the purchase price of $2500.00 for the physical assets of The Cowie Cut Stone Company.
"That the plaintiff's claim on his judgment, interest and costs totals $235.00 with interest at 6 per cent. from May 8, 1928, and costs in both actions."
It will be noted that the section of the General Code merely provides a way in which a corporation may wind up its affairs, and the question of the solvency or insolvency is not taken into consideration in this section, and this bears upon the question whether there was any statutory effect upon the assets of the corporation which precluded any disbursement of them as against a judgment in garnishment procured by statutory procedure, and it will be noted from the finding of the court quoted that the Cleveland Stone Company had, upon the date of the pronouncement of the judgment, in its possession and under its control the sum of $880, due the defendant, the Cowie Cut Stone Company, as a balance of the purchase price of $2,500 which was the consideration for the physical assets of the Cowie Cut Stone Company, and the plaintiff's claim totals some $235 with interest and costs.
Thus there is, as against the statute, which apparently was the basis for the judgment of the court below in favor of the defendant, this finding of the court as against the effect of the statute which provides merely for the liquidating of the business of the corporation for the purpose of winding up its affairs, without the question of solvency or insolvency having any effect in concentrating the assets of the corporation and confining the same alone for distribution and disbursements to the general creditors.
This judgment in garnishment was secured by a default in answer, and subsequently the defendant came into court and set up the liquidation noted under the statute, and urges that this proceeding prohibited any preference by way of attachment or garnishment under the provisions of the statute in such cases made and provided.
Under Section 11772, General Code, garnishees in aid of execution are liable to the judgment creditor for all moneys, property, and credits in their possession, or under their control, belonging to the judgment debtor, from the time of the service of the order upon them. We do not find anything in the statute relating to liquidation that would deprive a creditor of his judgment and its collection under this section of the General Code. There is nothing in the statute of liquidation for the purpose of winding up the affairs of the corporation that distinguishes the assets from any other property belonging to the corporation that would be subject to attachment and garnishment proceedings. The liquidation does not create any lien, and there is no prohibition which makes the fund sacred and immune as against the statutory provisions relating to attachment and garnishment in behalf of a judgment creditor.
The judgment in the instant case on default of answer was rendered regardless of any issue as to solvency or insolvency, or any other defense that would surround the assets with an impassable barrier as against the statutes relating to garnishment. Even though the question of insolvency of the corporation had been an issue in the trial of the case at the time of the default of answer, yet there is nothing in the statute relating to liquidation that would have the effect of depriving creditors of their legal remedies, because, that being so, these creditors would be at liberty, even in the face of insolvency of the corporation, to sue the corporation in an action at law and by such procedure establish a specific lien upon the property, the subject of which was the attachment. That lien is of such a nature in our judgment that it entitles the creditors, acquiring it, to a preference over other unsecured creditors, under the authority of Roseboom v. Whittaker, 132 Ill. 81, 23 N.E. 339, as well as other cases of like nature.
Under that holding the court takes the assets of the insolvent into its hands, and its jurisdiction becomes exclusive, and it will proceed in administering the estate upon the maxim that "equality is equity." After the jurisdiction has attached, no creditor can pursue a legal remedy in such a way as to obtain a preference. However, under such circumstances the court of equity is bound to respect legal rights already acquired, as in the instant case, where there is a judgment in garnishment unassaulted, unappealed from and unquestioned.
In the instant case the "trust fund doctrine" has no application because the court of equity has not been invoked and therefore in our judgment, the conclusions of law of the court below are erroneous. The only defense in the instant case is the liquidation under the statute for the purpose of winding up the affairs of the judgment debtor. There is no claim that any legal proceedings were instituted whereby the jurisdiction of a court of equity came into exercise. There was no attachment of insolvency by any court for any reason, and there was no petition or discharge in bankruptcy, and no other action that involved the jurisdiction of the federal court.
We think that under the circumstances of the case, taking into consideration the entire record, the judgment is contrary to law and the evidence for the reasons herein given, and the judgment is therefore reversed, and from the ultimate facts appearing in the record final judgment for plaintiff in error is hereby given, and an entry may be made accordingly.
Judgment for plaintiff in error.
VICKERY, P.J., and LEVINE, J., concur.