Hinkley v. Reed

Mr. Justice Adams

delivered the opinion of the court.

It appears from the stipulation of facts that Alanson H. Beed and John Warner Beed, composing the partnership firm of A. Beed & Sons when, May 27, 1898, they caused to be recorded the certificate of organization of the corporation A. Beed & Sons, and attempted to transfer their property to that corporation in exchange for stock, were insolvent, and that their liabilities exceeded their assets. It also appears from the circular which, by reference, is made a part of the stipulation of facts, that one object of the partnership firm of A. Beed & Sons in so transferring their assets and property to the corporation, was to hinder and delay certain of their creditors who, in the exercise of their legal rights, were making efforts to collect their claims against the firm. In the circular, after mentioning the transfer of their assets to the corporation, they say: “We were led to do this by the actions of certain of our creditors who, in their efforts to gain advantage over others, seemed willing that any sacrifice of our assets should be made, if they should thereby gain preference for themselves.” It further appears from the stipulation of facts, that after the transfer to the corporation, there was no change in the possession of the assets of the copartnership, or in the control or management of the business. The Beeds, one the president, and the other the secretary and treasurer of the infant corporation, retained possession of the assets and managed and controlled the business precisely as before. There were three directors, the Beeds being two of them, and Signor, their bookkeeper, the third.

It is fundamental in equity jurisprudence that a court of equity will look to the substance rather than the form of a transaction. 1 Beach on Mod. Eq. Jurisp., Sec. 7; 1 Pomeroy’s Eq. Jurisp., Sec. 363.

In Anthony et al. v. Am. Glucose Co., 146 N. Y. 407, the court uses this language:

“ There are two theories of the facts of this case; one technically true but substantially an error; the other really true but formally open to criticism; and upon our choice between them will be quite certain to depend the ultimate conclusion. One theory interposes between the parties interested and actually contracting, the corporate entities of the five original companies, and behind that legal shelter seeks to protect the company in default to its stockholders and turn them over for relief to their own original company after, by agreement, all its functions had ceased, although possibly it may not be altogether and hopelessly dead. The defense is not meritorious. It simply attempts to substitute circuity of action for direct responsibility, and requires us to blind our eyes with the theoretical abstraction so as to shut out the obvious and undoubted truth. ¥e have of late refused to be always and utterly trammeled by the logic derived from corporate existence, when it only serves to distort or hide the truth, and I think we should not hesitate in this case to reject the purely technical defense attempted.”

In Sondheimer et al. v. Graeser, 172 Ill. 293, the .court did not hesitate to hold that Sondheimer & Co., who largely •controlled a corporation which succeeded to the rights of a mortgagor, sustained the same relation to the mortgagee as did the mortgagor, and that they, Sondheimer & Co., were practically the corporation. In that case, Sondheimer & Co’s, control of the corporation was not nearly so great as was the control of the Eeeds of the corporation A. Eeed & Sons. The Eeeds were the corporation and the corporation was the Eeeds. The corporation was a mere dummy, and the substance of the transaction was that the Eeeds, in formally transferring the assets to the corporation, really retained them in their own possession and control. There was a mere paper transfer, nothing more. “ The court will sometimes ignore the-corporate existence in order to do justice.” 1 Cook on Corp., 4th Ed., See. 6.

The same author writes thus: “ The rules laid down in the preceding sections are applicable in most respects to a sale by a partnership of all its property to a corporation in. exchange for stock. Such sales often are made in order to merge a solvent copartnership into a corporation. They are also made sometimes by an embarrassed or insolvent firm. In such a case, the creditors of the firm may object. They may levy an attachment or execution on the property, or reach the stock, or file a bill in equity to set the sale aside,” etc., citing cases. 2 Id., Sec. 675.

In Booth v. Bunce, 33 N. Y. 139, the creditor of an insolvent firm, which had formed a corporation and transferred its property to it, levied an execution on the property as the property of the copartnership firm. The court held that the transfer was void, and that the title remained in the copartnership and the property was subject to the execution.

To the same effect are Buell et al. v. Rope et al., 39 N. Y. Supplement, 475, and Skinner v. Terhune, 45 N. J. Eq. 565. The pretended transfer by the Reeds to the dummy corporation being void, the title to the partnership property did not pass to the corporation, but remained in the Reeds.

The next question is as to the effect of the assignment of May 28, 1898, by the Reeds to George H. Signor. The circular states, “ That a deed of voluntary assignment for the benefit of creditors was executed by said principal defendants on the 28th day of May, 1898, delivered to George H. Signor, as assignee, and duly filed for record in the recorder’s office and County Court of Cook County aforesaid, and that said Signor duly qualified as assignee, and gave bond as required by the statute.”

Alanson II. and John W. Reed, in their answer to the bill, admit that on the 28th day of May, 1898, they executed and delivered to Signor a deed of assignment of all of their property for the .benefit of their creditors, etc. The assignment by the Reeds to Signor of all their property, vested in Signor, as such _ assignee, title to all the property of the Reeds, for the benefit of their creditors, and the assigned estate is to be administered and séttled by tbe assignee subject to the directions of the County Court, and as prescribed in the act concerning voluntary assignments. Inasmuch as no title passed to the corporation, A. Reed & Sons, by the pretended transfer to it of date May 27, 1898, the assignment by that corporation to the Chicago Title & Trust Company, of date July 8, 1898, was ineffective to convey to the Chicago Title & Trust Company any title to the property and assets of the Reeds. The title to the property of the Reeds having passed to George H. Signor, by the assignment to him, and the County Court having acquired jurisdiction over the same prior to May 31, 1898, the date of appellant’s judgment, appellant acquired no lien on the property, and is not entitled to be preferred to other creditors in the administration of the insolvent estate. Appellant, however, is entitled to have the pretended transfer to the corporation, A. Reed & Sons, set aside and declared void. Clinton Hill Lumber Co. v. Strilby, 52 N. J. Eq. 576; Metcalf v. Arnold, 110 Ala. 180; Buell v. Rope, supra.

This being true, the bill should not have been dismissed. The decree will be reversed and the cause remanded, with directions to enter a decree declaring fraudulent and void the pretended transfer by Alanson U. Reed and John Warner Reed to the corporation, A. Reed & Sons, and that the assignment of May 28,1898, by the Reeds to George H. Signor, for the benefit of the creditors of the Reeds, was valid and effectual, as a voluntary assignment, to invest said Signor with title to all of the assets and property of the Reeds, and that the said pretended assignment by the corporation A. Reed & Sons to the Chicago Title & Trust Company of date, to wit, July 8,1893, was of no force or effect, and was ineffective to convey title to any property or assets theretofore owned by the Reeds or in which they theretofore had any interest.

Reversed and remanded with directions.