Whitehead v. O'Sullivan

In September, 1891, a petition was filed by Amasa Lyon & Co., a corporation, for its dissolution, and one Andrew J. Hutting was appointed temporary receiver. The plaintiff, who had been the legal adviser of the corporation, assumed that relation to the receiver, and rendered professional services to him for which he made a charge of $5,000. The receiver havingbrought the affairs of the corporation into some degree of order, and the creditors having extended the time for the payment of their claims, the court, considering that the corporation was again solvent, dismissed the petion for its dissolution, and discharged the receiver. Before this could be done, however, it was necessary that some arrange-. ment should be made with the latter in respect to his fees and certain liabilities, including the charges of plaintiff, which he had incurred in the administration of his office. A few days before the final order was made, a conference was held between the plaintiff, the receiver, and the three persons who then constituted the entire

The effect of the agreement made between the first receiver, the plaintiff, and the trustees above mentioned, followed, as it. was, by complete performance on the part of the two former, was sufficient to create an equitable lien in favor of the plaintiff in respect to the identical property which was turned over by the receiver to the corporation. Possession is not necessary to-the existence of such a lien; on the contrary, an essential distinction between common-law and equitable liens is that the latter arise in respect to property which still remains in the possession, and under the dominion and control of the owner. 3 Pom. Eq. Jur. § 1233. Nor does there seem to have been anything illegal or inequitable in the arrangement that was made. The-possession of the property was essential to the corporation to enable it to resume its business. The receiver had a right to retain the-assets in his hands until he had accounted, and to apply so much, as might be necessary towards the payment of his fees and disbursements allowed by the court He was not only entitled, but it was his duty, to seek legal advice in aid of his function, and, if he had insisted ypon the adjustment of his accounts and the:

It is not necessary to follow the argument of the learned counsel for the defendant that the lien, so called, of the receiver for the payment of the indebtedness he had incurred to the plaintiff was not assignable. The plaintiff’s right does not rest upon any such foundation. His claim to a lien upon the assets of the corporation is an original and not a derivative one. It arose out of the agreement with the corporation, and is quite distinct from that which the receiver possessed, although it is true that the two are closely related, the one having been the reason for the other, and the equity of the plaintiff’s claim under the agreement being supported and reinforced by a similar charge in respect to the same indebtedness which had existed in favor of the receiver. The elements which should exist to confer the right of equitable lien are well defined in 3 Pom. Bq. Jur. § 1235. It is there said:

“The doctrine may be stated, in its most general form, that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, or whereby the party promises to convey or assign or transfer the property as security, creates an equitable lien upon the property so indicated, which is enforceable against the property in the hands not only of the original contractor, but of his heirs, administrators, executors, voluntary assignees, and purchasers or incumbrancers with notice. Under like circumstances, a merely verbal agreement may create a similar lien upon personal property. * * * In order, however, that a lien may arise in pursuance of this doctrine, the agreement must deal with some particular property, either by identifying it, or by so describing it that it can be identified, and must indicate with sufficient clearness an intent that the property so described or rendered capable of identification is to be held, given or transferred, as security for the obligation.’’

The case at bar seems to respond to this test. The property affected by the lien created in favor of the plaintiff was definite, and capable of exact ascertainment, but it was over and in reference to this,and not future acquired property,that the lien extended. The. agreement was that the assets transferred by Nutting to the company should be subject to the charge, and the burden of proof is with the plaintiff to show that the defendant received into his possession assets or identified proceeds of assets originally subject to the charge in question. The proportion of the amount now in the receiver’s hands which the plaintiff is entitled to have specially applied on account of his claim must be measured by and limited to the identified proceeds of the sale of the particular assets which were so affected by such lien. The evidence discloses that the only property thus susceptible of identification which came into the hands of the receiver was the machinery and fixtures. The other property was used in the business of the corporation, new materials were purchased, the old debts of the corporation, amounting to $45,000 or $46,000, were paid, new debts were incurred in the prosecution of the business, a portion of which, to the extent of $13,000, was borrowed money,, so that it is utterly impossible to say or rationally to infer that the ultimate residuum of $9,000 includes the proceeds of any portion of the original assets beyond the machinery and fixtures. Even in the case where equity will follow misappropriated trust funds through the transmutations following upon their absorption in other properties, the rule is well settled that the property-finally impounded must be the specific product of the misappropriation. “ The right of following the trust property in the new form which has been given to it, or in the property substituted for it, ceases only when the means of ascertainment fail, which, of course, is the case when the subject matter is turned into money, and mixed and confounded in a general mass of property of the same description.” 2 Story, Eq. Jur. § 1259, and note 4; Ferris v. Van Vechten, 73 N. Y. 113 , at page 120; Cavin v. Gleason, 105 N. Y. 256 ; 7 St. Rep. 13 ; American Sugar Refining Co. v. Fancher, 145 N. Y. 552 ; 65 St. Rep. 506 . The principle involved in these cases is' equally applicable to such a one as this. In each case the thing sought to be impressed with the charge must be the identified representative of the property to which the right invaded or impaired had originally attached. In the present case, it is quite plain that the residuum of $9,000 in the receiver’s hands includes the proceeds of the sale of the machinery and fixtures which came into the hands of the corporation at the time the agreement with the plaintiff was made. The evidence shows that this property passed to the defendant, and was sold by him for the sum of $1,442.16. The lien which affected the property followed it into the hands of the defendant, and upon the sale attached to the proceeds, which now, in legal contemplation form a part of the funds in the receiver’s -hands. There is some evidence showing that the furniture and fixtures: account upon the books of the corporation is charged with the

Some question has been made as to the lack of any action of the trustees in their corporate capacity in respect to the agreement upon which the plaintiff sues. The evidence shows that there were but three trustees, each of whom were actively engaged in promoting the business of the corporation at the same place; that meetings were held informally and irregularly, taking place from time to time, whenever it might seem to be desirable, without the issue of formal notices, and apparently without any of the forms usual in such cases. The minute book of the board does not disclose any meeting of the trustees at which any action was taken in respect to the claim, or in fact any of the liabilities incurred by the receiver Nutting. The evidence, however, of each of the directors confirms that of the plaintiff as to what took place when the conference was had between the trustees, the plaintiff, and the receiver Nutting. All assented to the arrangement, and, as we have seen, the agreement has been fully performed on the part of the plaintiff. It also appears that Amasa Lyon, who was one of the trustees, represented, also, nearly the entire stock of the corporation, and was one of the consenting parties. It is not absolutely essential to the validity of a corporate act that the trustees of a corporation should proceed according to any particular form. If all are present, or have received due notice of the proposed meeting, action taken by them, intended to be a corporate act, although informally expressed, is as valid as if it had been surrounded by all the formalities usual and, it may be said, desirable in such cases. The law looks to the substance rather than to the form of things. Melledge v. Iron Co., 5 Cush. 158 ; Sheridan Electric Light Co. v. Chatham, Nat. Bank, 52 Hun, 575 ; 24 St. Rep. 622 . Here there can be no doubt about the fact that the trustees entered into the agreement in question, all meeting together, and that the 'agreement has been wholly executed by the plaintiff. The corporation has received the full benefit of it, and there should be no difficulty, as thére is none, in finding the action of the trustees sufficient to charge the corporation with the obligations assumed on its behalf under the agreement in question.