Irvine v. New York Edison Co.

The Block Lighting and Power Company, No. 1, transferred its property, real and personal, including its franchises, by bill of sale to the Manhattan Lighting Company on December 13, 1898. The consideration of such transfer does not appear. The Block Company and the Manhattan Company were merged into and with the New York Gas and Electric Light, Heat and Power Company on February 1, 1900. The gas company and the Edison Electric Illuminating Company of New York were consolidated and became the defendant, The New

The question in this case is reduced to a consideration of the plaintiff’s remedy. Can the plaintiff maintain this action as one of debt against the defendant ? I think not, and I concur in the opinion written by Justice McLaughlin in the court below.

The legislature has provided two ways of uniting two or more corporations by transfer of their property to a single corporation. One statute provides that “Any two or more corporations organized under the laws of this state for the purpose of carrying on any kind of business of the same or of a similar nature ” which a corporation organized under the Business Corporations Law might carry on, may consolidate such corporations into a single corporation. (Business Corporations Law, § 7 [Cons. Laws, ch. 4]. See, also, §§ 7 to 11 inclusive; former Business Corporations Law [Laws of 1890, chap. 567], §§ 8 to 12 inclusive, as amended prior to 1909.)

Another statute provides that “Any domestic stock corporation and any foreign stock corporation authorized to do business in this state lawfully owning all the stock of any other stock corporation organized for, or engaged in business similar or incidental to that "of the possessor corporation may file in the office of the secretary of state, under its common seal, a certificate of such ownership, and of the resolution of its board of directors to merge such other corporation, and thereupon it shall acquire and become, and be possessed of all the estate, property, rights, privileges and franchises of such other corporation, and they shall vest in and be held and enjoyed by it as fully and entirely and without change

It is also provided in the Transportation Corporations Law (Laws of 1909, chap. 219, § 61, subd. 3 [Cons. Laws, ch. 63]) that “subject to the permission and approval of the proper public service commission, any two or more corporations organized under this article or under any general or special law of the state for the purpose of carrying on any business which a corporation organized under this article might carry on, may consolidate such corporations into a single corporation, and any such corporation may with the like permission and approval be merged with any other such corporation, upon complying with the provisions of the Business Corporations Law relating to the consolidation of business corporations and the Stock Corporation Law relating to the merger of stock corporations.”

The Transportation Corporations Law thus expressly recognizes the right of corporations to consolidate under, the Business Corporations Law, and also to merge under the Stock Corporation Law. Each form of procedure is independent of the other. Where a consolidation is consummated pursuant to the statute it is expressly provided that the rights of creditors of any corporation that shall be so consolidated shall not in any manner be impaired,! and also “such new corporation shall succeed to and be held liable to pay and discharge all such debts and liabilities of each of the corporations consolidated in the same manner as if such new corporation had itself incurred the obligation or liability to pay such debt or damages.” (Cons. Laws, ch. 4, § 11.)

This reservation of the rights of creditors permits them to proceed against the debtor corporation, notwithstanding such corporation is merged into another. The rights of creditors include the right to sue the debtor corporation and to take the property which was of the debtor corporation by execution issued upon a judgment obtained against such debtor. Such right rests upon the express terms of the statute and does not necessarily depend, as has been suggested, upon the existence and a finding of a fraudulent transfer.

This court has recently considered the effect of a merger of banking -corporations. (Matter of Bergdorf, 206 N. Y. 309 :) Upon a merger of banking corporations (Banking Law [Cons. Laws, ch. 2], §§ 36 to 40 inclusive) it is expressly provided that the corporation into which they are merged shall “be held liable to pay and discharge all such debts and liabilities, and to perform all such trusts of the merged corporation in the same manner as if such corporation into which the other shall become merged had itself incurred the obligation or liability.” But it is provided by the statute that no “ action or other proceeding then pending before any court or tribunal in which any corporation that may be merged is a party shall be deemed to have abated or discontinued by reason of any such merger, but the same may be prosecuted to final judgment

This court, in considering the effect of a merger in the Bergdorf case, say: “It could not have taken place without statutory authority and the legislature fixed the indisputable and exclusive effects of it. (People v. N. Y., Chicago & St. Louis R. R. Co., 129 N. Y. 414 .) ”

Referring again to the statutory provisions under which the merger was consummated, the court further say: “ Those statutory provisions state plainly the effects of the merger of the Morton Company into the Guaranty Company. The former company became (with the nominal exception hereinafter stated) rightless, propertyless and powerless; and the latter company was enlarged by the absorption of all that the former surrendered. * * * But the Morton Company did not surrender its corporate existence. It was not dissolved. It remained a corporation, but for the single purpose and with the sole power of being sued or proceeded against upon and defending against causes of action alleged to exist against it at the time of the merger. All the other powers bestowed upon it and which were evidenced by its certificate of incorporation and the statute law relating to it were by the merger transferred to the Guaranty Company. A corporation may exist though it possesses no property. A corporation may have a partial as well as a total extinction, and a legislature may enact that the merged corporation shall be extinguished by the merger, except in so far as the statute shall keep it nominally alive for a specified purpose. Our conclusion is that the Morton Trust Company does not exist within or as a part of the Guaranty Company, and the two are not identical. As a legal being, a corporate entity, it retained the one activity and power, and otherwise is non-existent.” (p.315.)

The language of the court in the Bergdorf case is applicable to this case. The Block Company never existed within the gas company, and does not exist within or as

The provisions of the merger statute and of the consolidation statute were considered together by the legislature in 1890, and they have since been considered by it from time to time. There would seem to be little or no objection and much reason for making a corporation which takes all of the assets of other corporations by consolidation or merger liable for the indebtedness of such consolidated or merged corporations. The acceptance of such property could be made an assent to such liability. The whole matter was, however, clearly before the legislature for its consideration, and it was considered by it, and it made a corporation accepting the assets of other corporations under the statute authorizing the consolidation of corporations liable for the indebtedness of the corporations so consolidated. It declined so to do in the case of corporations transferring assets under the merger statute. The rights of creditors were not overlooked, as the legislature expressly provided that the rights of such creditors should be preserved and that the merger should be without prejudice as to them.

In view of the history of the acts referred to it must be assumed that the omission to make the possessor company directly liable for the debts of the merged corporations was intentional. The courts should not attempt to supplement the legislative provision relating to the creditors of the merged corporations by making the possessor company liable as upon contract for the indebtedness of such companies, either wholly or to the extent of the property

The reservation by the legislature of the rights of creditors negatives the suggestion that a transfer in pursuance of the statute would be a crime. Such a transfer is not one made “ with intent to defraud prior or subsequent purchasers, or to hinder, delay or defraud creditors or other persons ” within the meaning of section 1170 of the Code of Criminal Procedure.

If the property of the Block Company is not of such a nature that it can be reached directly by execution or otherwise, it constitutes a trust fund for the benefit of such creditors and can be reached as such precisely as if a merger of the Block Company had never taken place.

The rule in equity is that as between cestui que trust and trustee, and all parties claiming under the trustee otherwise than by purchase for a valuable consideration, without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruit of such property, whether in its original or altered state, continues to be subject to or affected by the trust. (Matter of Hicks, 170 N. Y. 195 .)

A creditor of a corporation has the right to follow the assets of a corporation and appropriate the property by due process of law, including any property which has been changed, provided the trust fund can be clearly ascertained, traced and identified. (Matter of Hicks, supra.)

In my view the objection to sustaining the action now before us may be summarized by stating that the defendant has never contracted directly or by inference to pay the debts of the Block Company; and the statute, which is the authority for the transfer of the property, if any, from the Block Company to the gas company, does not provide that the possessor company shall assume the indebtedness of the merged company, but expressly pro

It is the duty of the court to enforce the provisions of the statute without reading into it affirmative provisions.

The plaintiff does not claim to recover in equity, but if he did he would be required to first take other steps preliminary thereto.

This court in Trotter v. Lisman ( 199 N. Y. 497 ) held that creditors seeking the aid of a court of equity to reach equitable assets of their debtor in satisfaction of their claims must first exhaust their legal remedies, according to the laws of this state, by the recovery of a judgment in one of its courts and the return of execution thereon unsatisfied, unless there are facts constituting a sufficient excuse for the failure so to do, which facts must he set forth in the complaint.

The statements of the courts of other states have hut little value in determining the question now before us because they are based upon the particular facts or statutes there under consideration. In Indianapolis, C. & L. R. R. Co. v. Jones ( 29 Ind. 465 ) the conclusion of the court was reached after holding that under the statutes then under consideration the consolidated companies had so passed out of existence that they could not be sued by the creditors of such corporations; and after the further holding that the consolidated companies continued to exist in the new company and that as a matter of necessity the old companies could be sued in the name of the new company. The reasons for the conclusion in that case do not exist in the case now before us.

There is nothing that was said by this court in Polhemus v. Fitchburg R. R. Co. ( 123 N. Y. 502 , 508) that aids the appellant. The court there simply held that the words “ except mortgages,” in the statute therein referred

The defendant has never contracted to pay the plaintiff’s debt, and has never been made liable therefor by statute.

The judgment should be affirmed, with costs.

(dissenting). This action was brought by the assignee of an accommodation indorser of the Block Lighting and Power Company to recover of the defendant the amount the indorser had been obliged to pay in taking up such note, on the ground, as alleged in the complaint, that the defendant corporation “had assigned and transferred to it and become possessed of all the assets and became liable for all the debts and obligations of the Block Lighting and Power Company.” On the trial it was proved that the Block Lighting and Power Company had transferred all its property to the Manhattan Lighting Company; that subsequently these two companies were merged, under the provisions of section 58 of the Stock Corporation Law (now section 15 of the Consolidated Stock Corporation Law), in the New York Gas and Electric Light, Heat and Power Company, which had become the owner of all the capital stock of the two constituent companies, and that thereafter the latter

The evidence on behalf of the plaintiff established a prima facie case of liability against the Block Lighting and Power Company, and as the complaint was dismissed at the close of the plaintiff’s case, the only question before us is whether the facts proven tend to show any liability on the part of the defendant for the debts or obligations of that company. It may be that the allegations of the complaint that the defendant had become liable for the debts of the Block Company were so indefinite as to render the complaint subject to demurrer, but as no objection was taken on that ground, the question before us is as to the sufficiency, not of the allegations of the complaint, but of the proofs adduced by the plaintiff to establish such liability.

It is true, as urged by the respondent, that the acquisition by the Manhattan Lighting Company of the property and franchise of the Block Company of itself imposed no liability upon the former company to discharge the debts and liabilities of the latter, and it may also be, as contended, that the presumption is, there being no evidence or proof to the contrary, that the Manhattan Company paid the Block Company full consideration for the property bought and that the sale was bona fide. I do not see, however, how the determination of those questions is at all material to the disposition of the case. Both vendor and vendee were merged into the New York Gas and Electric Light, Heat and Power Company, and the responsibility of the new corporation for the liabilities or obligations of the merged corporations, if any, was just as great for those of one company as for those of the other. It is argued on behalf of the respondent that the

The merger of these companies was effected under section 58 of the Stock Corporation Law (L. 1890, ch. 564, as amended; now section 15 of Consolidated Stock Corporation Law), which will be quoted hereafter. The consolidation of the New York Gas and Electric Light, Heat and Power Company with the Edison Electric Illuminating Company, by which the defendant was created, was effected under a different statute — section 61, subd. 3 of the Transportation Corporations Law (L. 1890, ch. 566), and sections 8 to 12 of the Business Corporations Law (L. 1890, ch. 567, as amended). Those statutes provide in express terms that the new corporation shall be liable for all the debts and liabilities of the corporations consolidated. There is no question, therefore, that the defendant has assumed all the liabilities of the New York Gas and Electric Light, Heat and Power Company, whatever they were, and the question in the case is whether under the merger statute, the last-named company became responsible for the debts and liabilities of the Block Company, and if so, to what extent. That statute is as follows:

“Any domestic stock corporation and any foreign stock corporation authorized to do business in this state lawfully owning all the stock of any other stock corpora, tian organized for, or engaged in business similar or inci-

There is no express provision that the new company shall be liable for the debts of the old, nor is there any express provision as to the fate of the merged corporations, whether on the merger they cease to exist or not. The only provision is that the merger shall be without prejudice to the liabilities of the corporations merged or the rights of the creditors thereof. I am inclined to the view that in the absence of any provision to that effect in the statute the new corporation does not become absolutely and unqualifiedly liable to the debts and obligations of the old ones, though I reach this conclusion rather unwillingly under the stress of authority, and there are some very respectable decisions to the contrary. (Berry v. K. C., F. S. & M. R. R. Co., 52 Kan. 759 , 774; Cleveland, C., C. & St. L. Ry. Co. v. Pretvitt, 134 Ind. 557 ; Shadford v. Detroit; Y. & A. A. Railway, 130 Mich. 300 .) But it by no means follows that the new corporation is under no liability in the premises. On the contrary, it is absolutely clear that it does incur liability, to be enforced in one way or another, to the extent of the assets it may have received from the constituent corporations. The proposition that the stock of a corporation is to be regarded as a trust fund for

Nor could the legislature relieve the new company from such liability, at least as to creditors existing at the time of the enactment of the statute; for to permit a debtor company to divide its property among its stockholders to the exclusion of the creditors would as clearly impair the obligation of contracts in contravention of the Federal Constitution, as statutes exempting the property of a debtor from liability for his debts, which have been condemned by the Supreme Court of the United States. (Gunn v. Barry, 15 Wall. 610 ; Edwards v. Kearzey, 96 U. S. 595 ; Memphis v. U. S., 97 id. 293.)

Therefore, on final analysis, the question in this case is reduced to one of remedy. Is the creditor bound to recover a judgment against the old corporation — if it exists after the merger, which is doubtful — and then

A very well-considered decision to this effect, made by the United States Circuit Court, will be found in Hibernia Ins. Co. v. St. L. & N. O. Transp. Co. ( 13 Fed. Rep. 516 ). In that case the statute made no provision as to the debts of the merging companies, and the question was left open by the court whether the new company could be permitted to show by way of defense that it had paid debts against the old company equal to the value of its property. In the view that I have taken of the obligation imposed by statute, such a defense would be. available, but I think with the Federal court that the burden should be on the defendant to establish the facts constituting the defense and not on the plaintiff to show the contrary. Presumptively each of the merged corporations had property of some value, whether tangible property or franchises. Otherwise, there would be no sense in the merger. The insolvency of one of the corporations would be no defense to a creditor's claim, unless the new corporation had paid out as much as or more than the value of the property it had received. If this were not so, the fact that there was not property sufficient to pay all the debts of the old corporation would relieve the new corporation from paying any debt. These facts — what was the value of the property received by the new corporation, and what debts it had paid — would be within the exclusive knowledge of the defendant, not of the plaintiff, and on the former should rest the burden of proof. The Supreme Court of Indiana has also held that upon the consolidation of two corporations where there was no statutory provision on the subject, a suit might be maintained directly against the new company on a liability of one of the old corporations. It was there said: “ This

In answer to the opinion of my brother Chase that the right of the creditor to sue the debtor corporation and take the property on execution rests upon the provision of the statute, that the merger should be “ without prejudice to any liabilities of such other corporation, or the rights of any creditors thereof,” I repeat that as to creditors existing at the time of the enactment of the merger statute, such right did not depend at all on the statute, that if the statute had provided exactly to the contrary, those creditors could still have enforced their claims against the property of the merging corporation, unless it had been transferred to some bona fide holder for value, and if it had been so disposed of, then against the new corporation which had so disposed of it to the extent of its value. This because such right of the creditor is protected by the Constitution of the United States "that no state shall pass any law impairing the obligation of a contract. The Supreme Court of the United States in the cases I have cited has held that a state law exempting the property of a debtor from seizure to satisfy the claims of his creditors existing at the time of the enactment of the statute is a violation of those provisions of the Constitution, and, therefore, void. I am not prepared to assert that as to subsequent creditors a provision that thenceforth the property of any corporation should not be liable for its debts if the legislature should see fit to authorize the corporation to transfer its property to its stockholders, would be unconstitutional. It might be said that the loss of their claims was due to the folly of the creditors in extending credit to corporations with such a statutory provision staring them in the face. If, however, the court should assume that position it would be destructive of the whole fabric of the present mercantile credit.

Under the construction about to be adopted by the court, the only manner in which a clerk, a mechanic, a hay laborer or the humblest employee of any kind can enforce his week’s pay or wages is to sue the original company, recover a judgment, find out if he can what tangible property (because an execution can be levied only on tangible property) the new company has received from the old company, issue an execution, indemnify the sheriff for levying on such property, and fight a second law suit through the courts. .But if he cannot find such property, or if the property transferred is intangible, such as choses in action, he must file a creditor’s bill and prosecute another action through the courts. His claim might be only $5, which ordinarily he could speedily collect by suit in any Justice’s Court. As a rule the holders of small claims could not afford to carry through an expensive litigation, and as to them a restriction to such a procedure amounts to a denial of justice. True the new corporation might pay without putting the claimant to this trouble, but if so, it would not be because, as it is sought to hold, the company had assumed any obligation to pay, but solely of its magnanimity and bounty.

I have assumed that the old corporation would continue in existence after the merger—an assumption, however, that is not certain. It is entirely competent for the legislature to abolish every corporate existence that has come, into being since 1846, even if it has creditors, but what it cannot do is to exempt the property of the corporation from the claims of its creditors. The case of Matter of Bergdorf ( 206 N. Y. 309 ) is not in

But if my brother be correct in tho position that the

Gray, Collin and Cudderback, JJ., concur with Chase, J.; Werner, J., concurs with Cullen, Ch. J.; Miller, J., not sitting.

Judgment affirmed.