Henderson v. Garner , 200 Ala. 59 ( 1917 )

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] While the bill avers that the capital stock of the Ariton Mercantile Company was "mainly paid for by ragged remnants of stock-worn merchandise at largely inflated values, turned over to it by the stockholders in payment of their stock, with only a small portion * * * of the capital stock issued by it paid for in cash," yet these averments were but thrown in, as we construe the bill, as a mere premise to the allegations which follow as to the insolvency of the said corporation. This, we think, very clearly appears from the following language used in the immediate connection with the above:

"In consequence whereof, and in connection with bad management of its affairs otherwise, it was from the beginning financially crippled, and labored under disadvantages financially."

The bill does not seek and was not filed for the purpose of collecting any unpaid subscription to the capital stock, but, as we construe it, was filed for the purpose of having set aside transfers of property, both real estate and personalty, by said corporation to the respondent, one of the directors thereof, as in fraud of the rights of creditors.

That the complainant as trustee in bankruptcy may maintain the bill is, of course, clear and unquestioned. Sherrill v. Hutson, 187 Ala. 189, 65 So. 538.

The right of a corporation to use its assets in the purchase of its capital stock, or any part thereof, has been the subject of much discussion, which has resulted in a great diversity of opinion, as will be noted from an examination of the authorities found cited in the notes to the following cases. Hall v. Henderson, 126 Ala. 449, 28 So. 531, 61 L.R.A. 621, 85 Am. St. Rep. 53; Schulte v. Boulevard Gardens Land Co.,164 Cal. 464, 129 P. 582, 44 L.R.A. (N.S.) 156, Ann. Cas. 1914B, 1013; Fitzpatrick v. McGregor, 133 Ga. 332, 65 S.E. 859, 25 L.R.A. (N.S.) 50; Atlanta Walworth, etc., Ass'n v. Smith, 141 Wis. 377, 123 N.W. 106, 32 L.R.A. (N.S.) 137, 135 Am. St. Rep. 42; Draper v. Blackwell Keith, 138 Ala. 182,35 So. 110; Dacovich v. Canizas, 152 Ala. 287, 44 So. 473; Glenn v. Hatchett, 91 Ala. 316, 8 So. 656.

The author of the note to the case of Hall v. Henderson, 61 L.R.A. 621, supra, after an examination of the numerous authorities on this question, set out in his introductory remarks the following observations which are of interest in this connection:

"The courts of this country are divided on the question involved in this note. In some of the jurisdictions they hold that a corporation, unless forbidden by statute, may purchase its own shares of stock without an express or implied statutory grant of power. In other states the existence of such power is denied. The English authorities are also against the recognition of such a corporate power. It will be noted, however, that both sides of the controversy recognize the existence of exceptions to their particular doctrine. The rule that corporations have this power is universally accepted as subject to the condition that the transaction must be free from frand, and not prejudicial to the rights of stockholders or creditors. On the other hand, the courts which deny the existence of this power concede the validity of such a transaction, where it is made in good faith to prevent the loss of an indebtedness due the corporation.

"The existence of these exceptions to the general rules necessitates a somewhat detailed presentation of the facts of each case; for, if these exceptions exist, others may be recognized by the courts whenever a suitable case arises. It will be noted that in many of the cases sustaining this corporate power the court, while laying down a broad, comprehensive rule, in fact shows an intention to limit its application by calling attention to the particular facts involved which justify the application. It will also be noted that the discussion has been somewhat confused by the fact that the cases which only pass on the right of a corporation to take its shares in payment of a debt, or under particular statutory authority, have been cited in support of the broad proposition that the general right to purchase exists. As said in a case arising in Illinois a state which recognizes the existence of the broad corporate power to purchase, each case must depend upon, and be determined by, its own circumstances. Fraser v. Ritchie, 8 Ill. App. 559.

"The fact that the court, in passing on a case of limited facts, uses broad and comprehensive language, does not render that case authority for a doctrine broader than its facts. The tendency of the courts to attempt to enunciate rules broader than the facts of the particular cases they are passing upon has so manifested itself in the cases presented here that it may not be out of place to refer to the maxim expounded by Chief Justice Marshall in Cohens v. Virginia, 6 Wheat. 399,5 L.Ed. 290: 'It is a maxim not to be disregarded that general expressions in every opinion are to be taken in connection with the case in which those expressions are used. If they go beyond the case, they may be respected, but ought not to control the judgment in a subsequent suit when the very point is presented for decision. The reason of this maxim is obvious. The question actually before the court is investigated with care, and considered in its full extent. Other principles which may serve to illustrate it are considered in their relation to the case decided, but their possible bearing on all other cases is seldom completely investigated.' "

We therefore find no necessity for a review of all the authorities upon this question or an expression or indication of opinion in regard to situations and conditions not presented by the present record, but we prefer to confine ourselves to the facts as set forth in the bill before us, and to a decision as to the sufficiency of the bill thus presented.

The bill alleges that at the time of the sale of the stock by the corporation to the respondent the capital stock was worthless and the corporation was insolvent, and had been so for a long time prior to said sale, and that the value of the property conveyed was the sum of, to wit, $18,000, which was nearly one-half of all the estate and assets at the time belonging to said corporation, and it is not argued in brief by counsel for appellee that the averments as to insolvency are not sufficient. By virtue of our statute (section 3509, Code 1907) the assets of insolvent corporations constitute a trust fund for the benefit of creditors, and as said by this court in Warren v. Kilgroe, 176 Ala. 476, 58 So. 432, "it is not now important or desirable to take account" of those cases cited therein which treated the question as to the trust character of the assets of a corporation prior to the passage of the act now embodied in the above-noted section.

After reviewing several of the authorities bearing upon the question of the purchase by a corporation of its capital stock, the Supreme Court of Georgia in Fitzpatrick v. McGregor, supra, used the following expression, which we quote with approval:

"We know of no case wherein it is held that an insolvent corporation has the power to purchase its own shares of stock. Without regard as to what is the sounder view as to the power of a corporation, in the absence of statutory prohibition, to purchase its own stock, it must certainly be true that, if the corporation, at the time of making such purchase, is in an insolvent condition, and therefore the purchase is to the prejudice of its creditors by diminishing their chances of collecting their claims, the transaction cannot be sustained, and the selling stockholder who thus receives a portion of the capital holds the same subject to the superior equities of creditors."

Indeed, very similar observations were made by this court in Hall Farley v. Henderson, 126 Ala. 449, 28 So. 531, 61 L.R.A. 621, 85 Am. St. Rep. 53, where it was said:

"We are aware that the courts of this country are divided upon the question as to the power of corporations to acquire and hold its own stock. But in no jurisdiction is the power of a corporation to purchase its own shares sustained, if the purchase is made with the intent to injure its creditors or to defeat them in the collection of their claims or if it has such effect."

The bill further discloses that the corporation still owes a majority of the creditors to whom it was indebted at the time of the transaction here complained of, and that the assets of the bankrupt estate when sold produced less than $4,000, and that after applying all the assets belonging to it at the time it was put into bankruptcy (aside from the property here involved) there will remain upwards of $40,000 of unpaid indebtedness owing from said bankrupt to its said creditors of debts, most of which it owed them when said transfer and conveyances were made.

In the case of Sherrill v. Hutson, supra, the following language from the case of Hall v. Ala. T. Co., 143 Ala. 464,39 So. 285, 2 L.R.A. (N.S.) 130, 5 Ann. Cas. 363, in reference to a purchase by a corporation of shares of its capital stock, was quoted:

"Such a diversion of corporate property is, in respect of creditors, essentially a gift to the shareholders whose shares are purchased by the company, a purely voluntary transfer of corporate assets in fraud of corporate creditors, fraudulent and void as to creditors, and this regardless of the intention actuating the company and the selling shareholders."

The complainant in this cause, as trustee of the bankrupt estate in this proceeding, represents more particularly the creditors of said estate, many of whom, as disclosed by the averments of the bill, were existing creditors of said corporation at the time of the transfers here complained of, and the insolvency of the corporation at that time, as previously stated, is also averred. The excerpt from the opinion of Hall Farley v. Henderson, supra, shows that the transfers made to the respondent in consideration of the purchase by the corporation of the stock were but gifts to the respondent, and therefore fraudulent at law, and void without regard to the question of intent.

The assignment of demurrer, therefore, taking this point was properly overruled. It is next insisted, however, by counsel for appellant, that the transaction would not be declared fraudulent and void as to creditors unless it also appeared that the respondent had knowledge or notice of the insolvent condition of the corporation at the time the transaction was entered into. The respondent was shown by the bill to have been one of the directors of the corporation from the time of its incorporation to the date of said purchase, the bill alleging "that the said W. C. Windham, E. R. Phillips, and J. C. Henderson continue to act as directors of said corporation, and to conduct its affairs as such, until, to wit, the 19th day of February, 1913," the date of the original purchase of stock by the corporation from said respondent.

This question was also given consideration in the case of Hall Farley v. Henderson, supra, where in 126 Ala. on page 493, 28 South. on page 543 (61 L.R.A. 621, 85 Am. St. Rep. 53), in the opinion, the following from Thompson on Corporations was quoted with approval:

"It is a sound view, at least in so far as the question respects the rights of third parties, that the directors of a corporation are in law conclusively presumed to know its condition, its business, its receipts and expenditures, and all the general facts which go to make up that condition and business, as shown by the entries on its regular books. The reason for this is that it is their duty to know these things in the exercise of their official functions. This doctrine is said to be one founded in public policy, essential to the safety of third parties in their dealings with corporations, and to the protection of the stockholders interested in the welfare and safe management of corporations."

See, also, 2 Thomp. on Corp. (2d Ed.) § 2034, and note, wherein are cited German Sav. Bank v. Wulfekuhler, 19 Kan. 60, and Falloon v. Schilling, 29 Kan. 292, 44 Am. Rep. 642.

In the case of German Sav. Bk. v. Wulfekuhler, supra, speaking to the question, the court said:

"He cannot now, as against the interests of the bank and its stockholders, and perhaps its creditors, be allowed to plead ignorance and innocence, and thereby profit by his own want of knowledge and by his own failure to do his duty as an officer of the bank. Such would be against both morals and law. Of course, we do not hold that a director is bound to know everything that transpires in a bank, and at the very time when it occurs. But we do hold that a director, having personal and private dealings with his bank, is bound to know (so far as the same affects his said personal dealings) the general condition and management of his bank and everything of importance that occurs therein either at the time it occurs or soon thereafter."

It is quite clear, therefore, from our own authorities that a director of a corporation will be presumed to know the conditions of the corporation when personal transactions of this character are being had by him with the corporation, and that it would be against public policy to permit him to thus plead his ignorance and profit by his own want of knowledge when it was his duty to know.

We have here treated the questions discussed by counsel for appellant in his brief, and conclude that the insistence here made is without merit.

It results that the decree of the chancery court will be here affirmed.

Affirmed.

ANDERSON, C. J., and McCLELLAN and SAYRE, JJ., concur.