Mary Lee Coal & Railway Co. v. Knox & Co. , 110 Ala. 632 ( 1895 )

COLEMAN, J.

The Mary Lee Coal & Railway Company sued out an attachment against the Etowah Furnace Co., which was levied upon certain pig iron as the property of the defendant in attachment. E. L. Knox & Co. interposed a claim to the property,- and under the direction of the court, an issue was made up for the trial of the right of property. The case was tried without the intervention of a jury, and the court found the issue for the claimant. The plaintiff introduced proof of its demand, and that-the pig iron was manufactured by the EtoAvah Furnace Company. The claimants deduced title from an agreement between themselves and the Et-OAvah Furnace Company and the EtoAváh Mining Company, and the delivery of pig iron to claimants in pursuance of said agreement. The evidence for the claimants, if true, shoAved, that the Etowah Mining Company was indebted to claimants, that the Etowah Furnace Company was indebted to the Etowah Mining Company, and that by d mutual agreement between the three parties, the debt of the EtoAvah Furnace Company and the debt of the Etowah Mining Company to the claimants were to be paid and satisfied, by the sale and delivery of the pig iron to the claimants, and that this agreement was concluded and fully performed, at least a month before the issue and 'levy of the plaintiff’s attachment. The evidence showed that one George Nixon was the general manager and superintendent of both corporations, the Etowah Furnace Company and the Etowah Mining Company, and a director and stockholder in both, and represented both corporations in the sale and delivery of the pig iron, and in the payment and satisfaction of the debt of the Furnace Company to the Mining Company and of the Mining Campany to the claimants. The evidence sIioavs that this transaction was consummated by the authority of, or subsequent ratification of, a majority of the directors and stockholders of both debtor corporations. The claimants, E. L. Knox & Co., had no interest in either corporation as directors or stockholders, but were simply creditors of the Mining Company. The members of the partnership of E. L. Knox & Co. were- brothers -in-law of George Nixon. There was evidence tending to show that at the time of the sale of the pig iron the Etowah Furnace Company was insolvent; and it is insisted in argument that from the circumstances of the case, the claimants had notice of the insolvency of the Furnace Company. The claimants controvert both of these charges. The plaintiff in attachment contends also that the debt claimed by E. L. Knox & Co. was not a bona fide demand, but manufactured to defraud the creditors of the Etowah Furnace Company.

There are but three questions in the case : First. Did the Etowah Mining Company owe claimants? Second. Was the debt paid by the sale and delivery of the pig iron? Third. Whether the Etowah Eurnace Company could prefer a debt due the Etowah Mining Company to the other creditors of the Furnace Company; the directors and stockholders of the two corporations being the same persons.

As to the first proposition, the books of the two corporations were in evidence. A very strong argument is made by appellant, based upon erasures, interlineations and irregularities in the manner of keeping the accounts and books, and which would have great force, if the appellant was in a position to avail itself of these circumstances. The balances struck, show that the debts were due. The parties testified to the correctness of the demands and of the books in their then condition. Those who kept the books were examined as witnesses and were detained in the court room. The erasures, inter-lineations and irregular entries, as entered, led to the balances. The plaintiff, in its cross-examination, did not call for explanations, or make any references to the matters now complained of. If the witnesses had been called upon to explain the alterations of items in the books and irregular entries, and had failed to make satisfactory explanations, a different inference would be authorized. We do not find an entry or correction or change made in the books that is necessarily inconsistent with the positive testimony of the indebtedness claimed to be due. We would not be justified in holding that the suspicious circumstances appearing in tlfe books, were sufficient to overcome fjhe direct, positive evidence of so many witnesses, without calling their attention to the circumstances and giving them an opportunity to explain, as should have been done on cross-examination .

We do not doubt that the facts of the sale and delivery constitute a payment. The amount entered on the books of the Etowah Mining Company to the cx*edit of the Etowah Furnace Company, and also the credit entered on the account of indebtedness to E. L. Knox & Co. showing payment in pig iron,is not all the evidence of payment. The iron was delivered to the claimants, and removed by them from the Furnace Company and placed upon their own grounds. The agreement' was that the iron should be received in payment and satisfaction of their debt. It was so received, and had been in their sole and exclusive possession and control for a month before the levy of the. attachment. E. L. Knox & Co. are not seeking to avoid the sale for fraud perpe-’ trated on them by the two corporations or either of them. They stand upon the bona jide-s and validity of the transaction. Their debt against the Mining Company, under the agreement, was extinguished by the reception of the iron. -Neither is it a case of a vendor asserting title to property sold to a fraudulent purchaser. The agreement and receipt of the iron, furnish a complete defense t o the mining Company against tho demand of the plaintiff. The case of Loeb & Brother v. Flash Brothers, 65 Ala. 526, and the principles decided do not apply. .The cases are not analogous.

Js to the third proposition. In the case of Corey v. Wadsworth, 99 Ala. 68, it was declared as to insolvent corporations “that the assets are in a sense a trust fund for the payment of the corporation’s debts, and that it is both their [directors’] moral and legal duty to maintain a perfect equality, in their administration and disbursement, at least to the extent that they cannot prefer themselves.” The principle declared in the case was, that tho assets of an insolvent conporation- are a trust fund, held by the directors in trust for the benefit of creditors, and that the directors cannot prefer themselves. If we were to concede the correctness of the principle as contended for, we do not see how they are available to the plaintiff in the present case. If the Et-owah Furnace Company was insolvent at the time of the sale of the pig iron,' so that its assets were held by the directors as trustees only in trust' for all of its creditors, the plaintiff’s remedy was in a court of equity where the rights of its creditors could be protected, and where alone the' trust could be administered. The rule that a director of an insolvent corporation, cannot prefer himself, directly or indirectly, over other creditors, is but the application of a very familiar principle to the directors and stockholders of a corporation. No insolvent person who is a debtor, is permitted to dispose of bis property,.by which a benefit is reserved to himself, to the prejudice of his creditors. This was the question of merit in the case of Corey v. Wadsworth, 99 Ala. 68, supra. Much that was said in that case should be regarded as dicta, although the doctrine declared is fully sustained in the very recent case of Manufacturing Co. v. Hutchinson, 63 Fed. Rep. 496, opinion by Mr. Justice Harlan, and which seems to have been fully endorsed in the subsequent case of Bosworth v. Bank, 64 Fed. Rep. 615. In one sense, corporations are entities, but corporations and the stockholders are not separate and distinct entities for all purposes and in all respects. A corporation is a collective body composed of different persons.—M. & O. R. R. Co. v. Nicholas, 98 Ala. 124; Morawetz Corp., § 227. Whatever is of benefit to the corporation as a collective body, is a benefit to the stockholders of which it is composed.* Corporations are controlled by and act through a board of directors or stockholders. When, therefore, an insolvent corporation acting by its governing body, which by reason of their relations to the corporation may know its condition and have advantages superior to other creditors, sells or transfers its assets or any portion of them on such terms or conditions as to place the property beyond the reach of its creditors, and thereby protect the members or any of them from loss, and yet secure a benefit to those who effect the sale and transfer, whether consummated directly, or through another corporation of which they are the owner’s and beneficiaries, such sale or transfer is in violation of the rule which prevails as to persons, and is void as to such persoás making the sale and are thus benefitted. The rule is as much a necessity to prevent fraud, injustice and undue advantage on the part of the directors and stockholders of corporations, as to similar transactions between individuals. A person can not be a debtor to and creditor of himself ; but by reason of the fact that the same persons may be the directors and stockholders of separate corporations, one of which may become the debtor of the other, and thus, though not in name and form, in fact, stockholders often sustain the relation of debtor and creditor to themselves. In arriving at the bona fides of transactions and motives of parties thus situated, for the prevention of fraud and undue advant-age, and the administration of Justice, courts should not regard corporations as separate, distinct entities from the owners and stockholders, and sanction as valid transactions which if done by individuals, under the same circumstances would be set aside and annulled. We would not apply, however, to corporations, whether solvent or insolvent, which have not been dissolved or ceased todo business as a going concern, a different rule than that applied to individuals acting as such in this respect, and disable them from paying some creditors at the expense of others under any and all circumstances.—Goodyear Rubber Co. v. George D. Scott Co., 96 Ala. 439.

There is evidence tending to show that at the time of the sale of the pig iron, the Etowah Furnace Company was not possessed of sufficient assets to pay off all its liabilities, and the proof shows that claimants had access to the books of their debtor, the Etowah Mining Company. It is uncontroverted that the Etowah Furnace Company was a going concern at the date of the sale, and kept its business up to its full standard up to the levy of the attachment; a month after the sale and delivery of the iron.. It does not appear that the books of tlie Etowah Mining Company to which the claimants had access, furnished any evidence or indication of the condition of the Etowah Furnace Company. The claimants deny that they had notice or knowledge of the financial condition of the Etowah Furnace Company. The most material fact or circumstance tending to show notice, is that of relationship as brothers-in-law between claimants and George Nixon. Upon a fair consideration of the whole evidence, we do' not think the plaintiffs have discharged the burden to bring notice or knowledge of the insolvent condition of their debtor, conceding that it was insolvent for the purpose of the argument, to the purchaser of the iron. Our conclusion is that the claimants received the pig iron at a price fairly equivalent to its value, in payment of an antecedent debt, without notice, and are protected as bona fide purchasers. This was the conclusion of the trial court, and its judgment must be affirmed.

Affirmed,