National Tube Works Co. v. Ring Refrigerating & Ice Machine Co. , 118 Mo. 365 ( 1893 )

Maceaklane, J.

This is an appeal by plaintiff from a judgment in favor of defendant on a plea in abatement to an attachment suit.

Plaintiff commenced its suit on the twenty-fifth day of October, 1890, on several notes and bills made and accepted by respondent between August 6, 1890, and October 4, thereafter, and in aid thereof filed an affidavit and sued out an attachment, which was levied upon the property of defendant, and to which the plea in abatement was filed. The grounds of the attachment were that the defendant had fraudulently conveyed and assigned its property and effects and was about fraudulently to convey its property and effects so as to hinder and delay its creditors, and also that the debt sued for was fraudulently contracted on the part of the defendant.

The evidence tends to prove that John Ring owned three letters patent of the United States. Early in the year 1879, Ring and his associates, John H. Tracy, Frank K. Ryan, A. R. Payinhaus and James J. Campbell organized defendant corporation with a capital of $100,000 and themselves constituted the first board of directors. The agreement among these promoters was that said letters patent should be transferred by Ring to the corporation for $60,000 of the full paid stock of the company and in full for said patents. Of the remaining $40,000 of the capital stock $20,000 was to be sold for cash and $20,000 was to remain in the treasury of the company. No cash was paid into the hands of the board of directors when the corporation was organized, though the certificate filed showed that the whole capital stock had been paid up in lawful money of the United States.

The evidence tended further to prove that after the organization of the corporation, $80,000 of paid up capital stock of the company was issued to Mr. Ring in consideration of the assignment of the letters patent, and $20,000 was placed in the treasury of the company for sale and which was to provide the operating capital.. Part of this was afterwards sold. From its organization John Ring was president and general manager of the company.

The evidence tended to prove, though conflicting, that in December, 1889, Ring, representing defendant, with a view of obtaining a line of credit with plaintiff, stated that there was $20,000 in cash in the treasury of the company, when in truth there was nothing. That on the faith of this representation plaintiff gave defendant the credits which are the foundation of the suit.

The evidence also tended to prove that Ring borrowed of Tracy the sum of $10,000 for which he gave his individual note and a portion of his stock in the corporation as collateral security, and that the money borrowed went into the corporation to the credit of' Ring and was applied in liquidation of his indebtedness to the company. On August 6, 1880, the $10,000 so borrowed from Tracy was included in a note made to Tracy by defendant and this note amounting to $20,000 was secured by the deed of trust on the property of defendant. The note from Ring to Tracy was thereupon canceled. This deed • was not recorded until October 6, 1890. A mortgage was also given to Tracy on the letters patent to secure a note of $5,000.

At the request of the plaintiff the court gave the usual instructions in such cases to the effect that if, at the date of the attachment, defendant had concealed, removed or disposed of its property or effects with the intent to hinder and delay its creditors, or was about to do so, the verdict should be for plaintiff.

The court on its own motion instructed the jury that, if defendant represented to plaintiff before contracting any of its indebtedness that it had on hand in its treasury $20,000 of its own funds and that said representation was untrue, but was believed by plaintiff and the credits sued on were given in reliance of their truth, then the debt sued for was fraudulently contracted and the verdict should be for the plaintiff.

The third instruction given at request of defendant was as follows: “If the jury believe from the evidence that the mortgage upon /the real estate and buildings, machinery and apparatus of the defendant, dated August 6, 1890, the chattel mortgage given to Tinker and the mortgage covering the patents, were all given in consideration of, and to secure the payment of, moneys actually advanced or loaned to the defendant, then neither of said conveyances were fraudulent, although the effect of their having been given was to give a preference or preferences to certain creditors over other creditors of the defendant.”

The fifth instruction was as follows: “The court instructs the jury that if they believe from the evidence that the moneys secured by the deed of trust dated August 6, 1890, which has been read in evidence were moneys which had actually been loaned to the defendant by John.H. Tracy, or by him to John Ring, and used by Ring in the business of the company, then it was lawful for the defendant to execute this deed of trust, and such deed was valid, even though it was not put on record by Tracy until shortly before this suit was begun. The law did not require the deed to be recorded and it was valid, unless it was given without consideration and merely for purposes of fraud, or was kept from record as a part of a design to work a fraud upon creditors of the corporation.”

The seventh■ instruction was as follows: “The court instructs the jury that an insolvent debtor has the right to prefer or secure one creditor to the exclussion of all other creditors, and that a ' conveyance by way of preference or security, made in good faith and merely to prefer or secure is valid, although the effect of it may be to postpone the demands of other creditors, or, in the language of the attachment act, to ‘hinder or delay’ such creditors. Before such a conveyance can be found to be. fraudulent, within the meaning of the statute, it must have been proven to have been given not for the purpose of preference or security merely, but to preserve a secret use for the debtor or create for such debtor a secret estate in the property in fraud of the Tights of creditors not preferred or secured.!’

Plaintiff asked and the court refused to give instruction B as follows: “The court instructs the jury, that if they believe, from the evidence, that $10,000 of the debt secured by the deed of trust given by the defendant to John H. Tracy’s trustee^ was for a loan made by said Tracy to John Ring individually, and secured by shares of stock in the defendant corporation, in April 1890, and that thereafter, by connivance between said Ring, or Tracy, and the directors of the defendant corporation, said stock was surrendered to said Ring, and said$10,000 was included in said deed of trust, then said deed of trust was a fraudulent conveyance, in that it would tend to hinder and delay creditors, and the jury should find for the plaintiff.”

The action of the court in giving and refusing these instructions constitutes the errors complained of.

I. Questions of fraudulent preferences given by a debtor in failing circumstances to one or more creditors to the exclusion of others usually arise in contests between the creditors themselves. In such contests in order to defeat the preference it must be shown that the preferred creditor was a party to the fraud of the debtor or participated with him in committing it. Fraudulent intent on the part of the debtor alone is not sufficient to defeat the preference. The questions in this case arising on a plea in abatement concern the acts and intent of the debtor alone. The decisions are all to the effect that a conveyance may be fraudulent, though made to secure a bona fide debt. Its character depends upon the intent with which it is made. Dougherty v. Cooper 77 Mo. 529, and cases cited; Sexton v. Anderson, 95 Mo. 379; Craig v. Zimmerman, 87 Mo. 478.

Instruction 3 advises the jury that the mortgages were not fraudulent if they were made by defendant to secure money actually advanced or loaned to it. The intent of the grantor in making the deed is wholly ignored. The other instructions informing the jury that an intent on the part of defendant in making the conveyances, to conceal, remove or dispose of its property só as to hinder or delay creditors would make them fraudulent, do not in our opinion, supply the omissions of the element of fraudulent intent from this one. The jury might readily infer, taking the instructions together, that a fraudulent intent could not exist, if the mortgages were made to secure bona fide debts.

II. The validity of $10,000 of the debt secured by the deed of trust to Tracy was questioned. The evidence, we think, tended to prove that Tracy loaned Ring, who was president of the company, on his own account, $10,000, which was used in liquidating his own indebtedness to the defendant company, and that the „ mortgage afterwards given to secure an alleged indebtedness of $20,000 to Tracy included this debt of Ring.

A corporation has no right, as against its creditors, to apply its assets in satisfaction of the debts of other persons which it is under no obligation to pay. It is said: ‘‘A corporation cannot give away its property or transfer it, unless in good faith for value, if its creditors would thereby be left unsecured.” 2 Morawetz on Private Corporations, sec. 789. "We are unable to make a distinction between directly giving away the property and using it in payment of the private debts of its officers. Either would be fraudulent as to creditors. Morawetz on Corporations, sec. 792. If Ring borrowed the money on his own account, the debt became his individual debt, regardless of the use he made of the money. Using it in satisfaction of a debt of his own to the company, did not create an obligation on the part of defendant to assume the payment to Tracy of the debt, though the money, by that means, was used by Ring in the business of the company. ■

Now, it can be inferred from instruction 3, and is, in effect, declared in instruction 5, that though the money was loaned by Tracy to Ring still if it was used, by the latter, in the business of the company, then the mortgage securing it would be valid. These instructions, to say the least of them, were misleading and should have been so modified as to require a finding by the jury that the money was borrowed by Ring for the use of the company, and not for his individual use for the purpose of liquidating his indebtedness to it.

III. It is well settled law that if a part of the consideration for a conveyance is fraudulent or fictitious, as to creditors, the entire transaction will be vitiated. The doctrine was so emphatically announced in State ex rel. v. Hope, 102 Mo. 429. The court says: “If any part of the consideration of the bill of sale was fraudulent and void, it would taint the whole transfer and render such instrument entirely void." See authorities cited in that case.

So we can say here, if a part of the $20,000 indebtedness secured by the mortgage to Tracy was the individual indebtedness of Ring, then *the deed, in its entirety, was fraudulent as between defendant and its creditors, and the attachment should have been sustained. It follows that instruction B asked by plaintiff should have been given.

On account of the errors indicated, the judgment is reversed and cause remanded.

All concur, except Bakclay, J., who is absent.