Wiseman v. United Dairies, Inc. ( 1949 )

The trial judge correctly dismissed plaintiff's bill of complaint as to all of the defendants. I do not agree with Mr. Justice REID'S opinion for reversal. Additional facts disclosed by the record should be stated. I also shall refer to the plaintiff Belrose Creamery Company as Belrose, defendants United Dairies, Inc., as United, and Michigan Milk Producer's Association as Producers.

On December 15, 1943, Belrose was almost in extremis. It had rapidly lost ground. The manager of Producers, a Michigan nonprofit association, which supplied Belrose with milk, testified that on or about February 1, 1943, Producers was unwilling to extend credit to Belrose without security. Prior to that date it had purchased milk on a cash basis. It was operating on a hand-to-mouth basis. Its money was tied up in equipment. Its ability to continue was not free from doubt. Producers did not consider Belrose as financially sound when it demanded security before advancing credit. Producers thereupon was given a real estate mortgage from Belrose on the building occupied by Belrose although the title stood in the name of Rosen and Blifeld who were the owners of all of the capital stock of Belrose. It further received a chattel mortgage on all of the personal property of Belrose. It also received an assignment of the accounts receivable. It also received an agreement from the owners of the stock in Belrose in which they stated that they owned certain trucks, routes, stops, points and good will of Belrose through individual purchases made by them, all of which they agreed to pledge to Producers to guarantee the payment of the account of Belrose to Producers and they further agreed not to dispose of such assets without notifying Producers. It was agreed that on the first day of each month Belrose would pay for the milk sold to it by Producers during the first 15 days of the preceding month, and on the 15th day of the month for the milk sold by Producers to Belrose during the last 15 days of the previous month. It was on the strength of these securities and guarantee that Producers continued to supply Belrose with milk on a credit basis. These credit periods are strictly in accordance with those set forth in Act No. 169, § 10a, Pub. Acts 1929, as added by Act No. 236, Pub. Acts 1935^* (Comp. Laws Supp. 1940, § 5316-1, Stat. Ann. § 12.611), which further provides for a revocation of the license of dealers who shall be in default in making payments to the supplier in accordance with such terms. Also, see Johnson v. Commissioner of Agriculture, 314 Mich. 548. Act No. 206, § 2, Pub. Acts 1935⁸²²⁴ (Comp. Laws Supp. 1940, § 5394-22, Stat. Ann. § 12.802), provides for a preference over other creditors to Producers if a dealer is adjudicated bankrupt, gives a trust mortgage for the benefit of his creditor, et cetera.

United for a long time had negotiated for the acquisition of Belrose. It intended to operate its retail milk and ice cream business from or through Belrose. The record does not show that on December 15, 1943, or any time theretofore, United had negotiated for the outright purchase of the assets of Belrose. Its final agreement was to purchase all of the shares of the capital stock of Belrose and the land and buildings owned by Rosen and Blifeld.

On November 30, 1943, the finances of Belrose, as indicated by its balance sheet of that date, were in a most precarious condition. Mr. Justice REID points out the fact that the balance sheet still showed a capital of $7,910.18. However, it further showed that the original capital was $25,000 to which there had been added a surplus of $2,829.99 and donated capital of $7,518.73, all of which aggregated $35,348.72; of this sum $27,438.54 had been wiped out. On November 30, 1943, there was included in this showing of capital $2,200 for "good-will" in a business that was being run at a loss at a time when dairies could sell all the milk they could obtain. The November 30, 1943, balance sheet may be summarized as follows: Current accounts payable were $13,955.18 due Producers, of which about $7,000 was payable on the following day under the terms of the credit agreement, and $13,966.96 due trade creditors, being a total of $27,922.14. There were also accrued liabilities, consisting of taxes, including $2,492.91 payroll withholding tax, drivers' bonds in amount of $1,101.43, payroll of $1,515.36, et cetera, aggregating $6,187.50. There were also long term liabilities totaling $10,435.62. The total liabilities amounted to $44,545.26. To meet these liabilities the assets consisted of $5,142.54 cash on hand, $264.34 due from officers, $110.73 from other sources, accounts receivable of $9,901.64 and loans of $135.77, or a total of $15,555.02 of current assets. The other assets consisted of an inventory of $9,817.81, of which only $217.81 were products and $9,600 consisted of bottles, cases and cans. Fixed assets of $18,493.53 consisted of equipment carried at a depreciated value of about 50 per cent. of the original cost, and deferred assets, consisting of prepaid caps, cartons, office supplies, insurance, et cetera, amounted to $6,388.98. After adding the "good-will" of $2,200, the amount of the total assets was $52,455.34 as carried on the books. The liabilities exclusive of capital stock amounted to $44,545.26, but it could not pay its debts for the amount of its current assets, including the inventory consisting principally of supplies and not milk was $25,372.83 while it had current liabilities of $27,922.14, accrued liabilities of $6,187.50 and long term liabilities of $10,435.62. It had only $5,142.54 cash to meet an obligation of about $7,000 due to Producers in accordance with the contracts.

"Points," representing customers as reflected by milk sold on the routes is not mentioned in the balance sheet unless included under the term of goodwill. They would be valuable only if the business continued and milk was obtainable under Federal restrictions during the war. There was no indication that the supply would be shut off under the government regulations. The balance sheet of December 15, 1943, the date United purchased the stock of Belrose, showed a worse condition. The capital of the company had been reduced on the balance sheet to $7,287.36, thus showing a further loss of over $600 in 15 days. The cash on hand had been reduced to $1,457 against which there was a bank overdraft of $1,161.07. The amount due Producers was $14,195.72 of which over $7,000 was to become due the following day under the credit agreement. We mention these figures to show that United was buying the capital stock of a business that was rapidly losing ground and that required further credit and the best of management for its rehabilitation. United loaned Belrose money to pay off the total amount due Producers and received as security a chattel mortgage. This was less than the security held by and released by Producers, when United advanced the money with which to pay off Producers.

In the agreements for the sale of the stock of Belrose and the building and land, title to which stood in the name of the 2 stockholders, as stated in Mr. Justice REID'S opinion, United further agreed to indemnify these 2 stockholders of Belrose for any contingent personal liability because of Belrose's previous failure to file its annual report. It also agreed to repay the $1,100 received from drivers, referred to as "drivers' bonds," and also some $1,500 still due the government on account of payroll withholding taxes, but only on the condition that the 2 stockholders were held personally liable for such debts. The sellers warranted that the total liabilities would not exceed $42,000. Mr. Justice REID correctly states that United did not expressly or impliedly assume and agree to pay the debts of Belrose. Ascertaining the amount of Belrose's debts was a prudent and not uncommon business precaution to protect the buyer, and had no other purpose or effect. I cannot agree with the holding of Mr. Justice REID that the giving of the chattel mortgage by Belrose to United was fraudulent and that United must account to the creditors for the assets taken on the foreclosure of said mortgage.

Mr. Justice REID points out that Belrose had always paid Producers and that it was not yet in default on December 15, 1943. There, however, was over $7,000 due on December 16, 1943, and the statement does not show there were funds on hand to make this payment. It is true that there was no showing that Producers had yet made any demands as to this payment. It held security therefor which it could have foreclosed. Also under the law, it could have demanded the revocation of Belrose's license. Even had it not done anything so drastic, it is very doubtful whether it would have supplied Belrose with any more milk. Producers already had liens on all the assets of Belrose when United advanced enough to pay off Producers and secure a release of all the security held by it. It used its own credit to obtain the milk thereafter delivered to Belrose. This was done by United buying the milk for Belrose directly from Producers and charging Belrose with the amounts due for milk thus purchased. The chattel mortgage given by Belrose to United covered not only the amount advanced to pay off Producers but also further sums, but in all not over $40,000 that would become due from Belrose to United.

The record shows that United did not seize the assets of Belrose on December 16, 1943, as claimed by the plaintiff. It is true that as the sole stockholder it had control of Belrose. It elected its own board of directors as the directors of Belrose. This it had a legal right to do although it placed a higher duty of fair dealing on such directors in transactions between Belrose and United. It does not appear that such duty was breached in the giving of this chattel mortgage. The terms were strict, but they required only a payment of $400 weekly on the debt of $14,195 previously owed to Producers. It also required the payment on Monday of each week for the milk delivered to Belrose during the previous week. These were far more liberal terms than the payment of the $7,000 due Producers every 15 days under the Belrose's previous agreement. The unsecured creditors' position certainly would not have been improved if United had merely taken an assignment of the security held by Producers.

It was claimed by United that it intended to operate Belrose separately from United, and there was no showing that this intention would not have been carried out. The fact that it intended to use Belrose for the retail milk and ice cream business in no way made the sale fraudulent. Shwedel, whose testimony is referred to in the foregoing opinion, testified that United wanted to get the entire Belrose business through the acquisition of its capital stock. However, it is not shown that anything illegal was done. United had a right to operate Belrose as a subsidiary.

It was not shown that the chattel mortgage was given to cut off the unsecured creditors by foreclosure proceedings. It is true that this was done a short time after the giving of the mortgage. The record, however, shows that attorneys for unsecured creditors holding about $4,500 in unsecured claims, as well as 4 or 5 other creditors demanded payment almost immediately after December 16, 1943, and they threatened to bring suit and obtain judgments unless their accounts were paid. Belrose was in no better position to pay unsecured creditors than it had been in prior to this date. The total unsecured claims were $24,770.68. At the end of the first week, when the first payment became due under the mortgage, and the creditors had threatened suit, United began foreclosure proceedings in accordance with the terms of the mortgage. Belrose also filed a bill for dissolution. It alleged its inability to continue as a paying business. United continued to operate Belrose as a going concern until the foreclosure sale. After some delay, the sale was held by an auctioneer who acted in that capacity in the Federal courts. The record shows the sale was well attended and that it was announced at the sale that United would give the purchaser a favorable lease of the building. However, one of the attorneys for the creditors, who also appeared as co-counsel at the hearing of the case in the trial court, announced, at the sale, that anyone who purchased at the sale would buy a lawsuit. Obviously this froze the bidding and United obtained the assets on a bid of $15,000. The receiver appointed in the dissolution proceedings in the State courts is the trustee in bankruptcy appointed in the Federal courts and as such trustee brought the instant suit. No fraudulent intent or action on the part of United has been shown. Upon the demands of the creditors it became clear that Belrose could not be continued without an additional advance by United. It was not shown that United used the failure of Belrose to pay the first instalment as a pretext to seize the assets. There was nothing fraudulent or illegal in United asserting its legal rights. Its directors also still owed duties to the stockholders of United.

The claim was made in the bill of complaint that the giving of the chattel mortgage by Belrose to United was an illegal preference under the Federal bankruptcy act. This charge was not proven as it was shown that the chattel mortgage was given for a present passing consideration. Appellant in its statement of questions involved obviously has abandoned this claim, so we do not need to discuss it. Other claims of appellant have been considered but do not merit discussion.

In the last analysis we are relegated to rules of law. It is no vice or illegality for one corporation to invest in another or own the capital stock of a subsidiary and to thereby control its operations. It is incumbent upon the parent corporation to deal fairly and honestly with its subsidiary. See Gledhill v.Fisher Co., 272 Mich. 353 (102 A.L.R. 1042); Finley v.Union Joint Stock Land Bank of Detroit, 281 Mich. 214; John A.Parks Co. v. General Discount Corporation, 294 Mich. 316. While the facts of the case are rather complicated and possibly create a cloudy atmosphere at first appearance, a careful examination of the entire transaction as disclosed by the record shows that United acted strictly within its rights; it did not act fraudulently and did not even inferentially become responsible for the unsecured debts of Belrose. I believe the law and its proper application is set forth in Chase v. Michigan Telephone Co., 121 Mich. 631. We quote from the syllabus as follows:

"Evidence that the property and franchises of a telephone company were purchased by another company, which was the owner of nearly all of the seller's capital stock, and that after the sale the business was conducted in the same manner as before, without a change of employees, does not show that the new company was a consolidated company, liable for the payment of the obligations of the old."

We further quote from the opinion as follows:

"The law is well settled in regard to liability of the consolidated or purchasing corporation for the debts and liabilities of the consolidating or selling corporation. Such obligations are assumed (1) when two or more corporations consolidate and form a new corporation, making no provision for the payment of the obligations of the old; (2) when by agreement, express or implied, a purchasing corporation promises to pay the debts of the selling corporation; (3) when the new corporation is a mere continuance of the old; (4) when the sale is fraudulent, and the property of the old corporation, liable for its debts, can be followed into the hands of the purchaser. Austin v.Tecumseh National Bank, 49 Neb. 412 (68 N.W. 628, 35 L.R.A. 444, 59 Am. St. Rep. 543). Plaintiff produced no evidence tending to bring the defendant within any of these cases."

The decree of the trial court dismissing the bill is affirmed, with costs to defendants.

BUSHNELL, J., concurred with BUTZEL, J.

^* 2 Comp. Laws 1948, § 288.10a. — REPORTER.

⁸²²⁴ 4 Comp. Laws 1948, § 720.402. — REPORTER.