Bulkley v. Whitcomb — 30 N.Y. St. Rep. 569

Majority

p. 569

Moses Bulkley et al., Resp’ts, v. Parker R. Whitcomb, App’lt.^[1]

(Court of Appeals,

Filed April 15, 1890.)

Headnote

■"Corporation —Liability of stookholdbb.—Offset in fayob of stockHOLDEB.

A director of a company cannot buy up its outstanding debts at a nominal sum for Ms own benefit, knowing it to be insolvent, and intending thus to get an advantage over other creditors, and hold the debts purchased for their full amount as an offset to his liability for the debts of the corporation, and he has no equitable claim beyond the amount which he actually paid on such debts.

Appeal from judgment of supreme court, general term, second department, affirming judgment at circuit in favor of plaintiff.

• L. Laftin Kellogg, for app’lt; Frederic A. Ward, 'for resp’ts.

The substantial controversy on this appeal respects the validity of the equitable offset asserted by the defendant The Waverly Publishing Company became a corporation by filing a certificate under the manufacturing act of 1848 on the 12th day of February, 1886. Whitcomb was not named in it as one of the five trustees. No certificate of full payment of the capital stock was filed until October 8, 1886, so that during this interval of about eight months all debts contracted by the corporation had the security of the stockholders’ personal liability to an amount equal to their shares. The defendant Whitcomb became such a stockholder. The stock book showed him to be the owner of twenty shares of the par value of $2,000. Objection was taken to the manner of proving it and the sufficiency of the evidence, and thereupon the plaintiff called Whitcomb himself, and referring to the shares already mentioned, asked him: “ When did you get your stock in the Waverly Publishing Company ?” to which he answered: “When the project was started; I don’t remember when.” Later on, when asked if he got it before the 1st of May, he replied, “ I presume I did.” He was also a director of the company. He said in answer to that inquiry: “I presume that I was, but I don’t know it; I never resigned.” It was further established that in August and September of 1886 the plaintiff sold and delivered to the Waverly Company large quantities of paper, for which indebtedness accruing before October 8, 1886, they recovered judgment in April, 1887, for more than $5,000 and issued an execution which was returned unsatisfied. That made the plaintiff’s case.

The defendant then gave proof of his alleged off-set. He proved two notes dated September 15, 1886, executed by the Waverly Company by E. G\ Bideout, president, and John F. Phillips, treasurer, to the order of John F. Phillips and endorsed by him without recourse for more than $1,200 each. What they were given for we do not know. In January, 1887, they were sued by Joseph B. Stillwell, who alleged their transfer to him by Phillips for

p. 570

value and before maturity and obtained judgment about February of that year. Phillips, although named as a defendant, was not served with the summons. At about the same date the Waverly Company failed. Munsey was appointed receiver at some time in March, but how early does not appear. Stillwell made a written assignment of each of his judgments for an expressed consideration of ten dollars and dated March 1, 1887, to the defendant. Each assignment was witnessed by Frank P. Morton, who on the 19th of October, 1887, made the formal affidavit of their execution by Stillwell but without certifying when that event occurred. Meither Stillwell nor Morton made their appearance as witnesses. The defendant testifies that he bought the judgment of Eideout. The latter was president of the company and in that character executed the notes upon which it was obtained. How Eideout acquired his ownership we are not informed. The ■ defendant’s purchase was made at the office of the company and in the presence of Phillips, and must have been after Stillwell obtained his judgments on the 1st of February, but how long after it is again impossible to say with certainty. While defendant bought of Eideout the assignment was made by Stillwell. Even the ten dollars recited as the consideration appears not to have been paid, for the defendant says the consideration was his going" into a business venture with Eideout Called upon to explain, he said it was a land scheme, “The Leroy Florida Land Co.,” which was never organized and fell through. It is these two judgments which constitute the defendant’s alleged- equitable offset The counsel for the plaintiff denounces them as a sham, and to a suspicious temperament the circumstances might easily seem suggestive; but without going so far as that there appears to be sufficient reason for the action of the court in rejecting them as an offset.

The trial judge was justified in assuming that the defendant was a director of the Waverly company at the time of his purchase of the Stillwell judgments. If his election to that office-was after March 1st, 1886, which was the date of that purchase specified in the assignments, it was easy for him to say so, but while admitting his official character and that he never resigned it, he omits to say when it began. It is enough that he averred no such defense of his action when its validity was directly assailed, and the proof of his official character came from his own words.

As a director of the company, owing to it the duty of acting in its interest and for its benefit, he could not buy up its outstanding debts for his own benefit, knowing it to be insolvent, and intending thus to get an advantage over other creditors, and hold the debts purchased for their full amount. The stockholder’s liability is a trust fund, which the directors are bound to apply honestly and in good faith for the interest of the company and its creditors, and the officers cannot be allowed to avail themselves of their position and opportunity to deplete that fund for their own benefit, so as to escape the supervision of equity. The stockholder’s right of offset is founded upon no statutory provision,

p. 571

but is the creation of a court of equity, and is measured by the just requirements of the situation. It goes upon the ground that the two equities are in all respects equal, and so refuses to give one the mastery of the other. But in this case they are not equal. It would be very dangerous to hold otherwise. Directors who were stockholders to large amounts and personally liable as was this defendant, might upon the approach of insolvency be tempted to contract corporate debts by the issue of notes for the purpose of buying them up cheaply thereafter and escaping their personal liability. The defendant here, who purchased while a director, has no equitable claim upon the fund which it is his duty to protect and administer beyond the amount which he actually paid. It does not appear that he paid anything for the judgments or has exhausted any part of his liability in the payment •of corporate debts.

We think, therefore, the judgment was right and should be affirmed, with costs.

All concur.