Baker v. Emerson — 74 N.Y. St. Rep. 203

Majority

p. 203

Frederick L. Baker, as Receiver, etc., App'lt, v. Louis Emerson et al., Re sp'ts.

(Supreme Court, Appellate Division, Third Department,

Filed April 14, 1896.)

Headnote

1. Corporations—Insolvency.

A corporation is insolvent when it is not able to pay its debts.

3. Same—Preference.

The phrase, “with a view to give a preference,” used in chapter 688 of 1S03, includes “an intent to give one creditor any advantage over others in respect of payment or security of his debt.”

p. 204

3. Same—Rebuttal.

Such intent to prefer is not rebutted by showing that the debtor has also another motive to the proceeding, namely, an expectation of pecuniary or or other future benefit to himself, by means of further loans of money, and being enabled thereby to continue his business.

4. Same.

The validity of the payment is not made to depend on whether it is made in the ordinary course of business, or on whether the creditor has any reasonable ground to believe the debtor insolvent, but simply on the fact whether there is insolvency actual or imminent and an intent to prefer.

Appeal from a judgment entered on the decision dismissing the complaint.

Potter & Lillie, for app’lt; T. D. Trumbull, Jr., for resp’ts.

—The Ft. Ann Woolen Company is a domestic manufacturing corporation, incorporated in 1893, and was engaged in the business of manufacturing woolen goods until June 5,1893, when it stopped doing business. Upon that day attachments to a large amount were levied upon its property. The plaintiff was afterwards duly appointed receiver, and on the 14th May, 1894, brought this action to recover of the defendants the sum of $3,-000, which was paid by the company to the defendants on tne 29th May, 1993, in payment of a note' of the company of that' amount held by the defendants. The note was dated February; 2, 1893, had been discounted by the defendants for the company,' and it became due on June 5. 1893. The claim of the plaintiff is that the payments to defendants was in violation of the provisions of section 48 of chapter 683 of the Laws of 1892. That sec-' tion, so far as it is important here, is as follows:

“ No corporation which shall have refused to pay any of its notes or other obligations when due, in lawful money of the United States, nor any of its officers or directors, shall transfer any of its property to any of its officers, directors or stockholders, directly or indirectly, for the payment of any debt, or upon any other consideration than the full value paid in cash. No conveyance, assignment or transfer of any property of any such corporation by it or by any officer, director or stockholder thereof, nor any payment made, judgment suffered, lien created or security given by it or by any officer, director or stockholder when the corporation is insolvent or its insolvency is imminent, with the intent of giving a preference to any particular creditor over other creditors of the corporations shall be valid. Every person receiving by means of any such prohibited act or deed any property of the corporation shall be bound .-to account theieforto its creditors or stockholders or their trustees.”

It was found by the special term that the payment was not made with the intent of giving a preference to the defendants. The plaintiffs claim that this finding is not warranted by the evidence. On the 29th May, 1893, the company was in debt to the amount of about $60,000, mainly for bank discounts. Of this there was then past due $8,500, of which $7,000 became due May 19th and

p. 205

$1,500 on May 20th. Protest thereof had been waived. There was also about $8,500 that became due prior to June 5th. The entire indebtedness became due on or prior to September 6, 1893. A few days before 29th May, Mr. Barnett, the president of the company, was informed that the defendants were not willing to renew the note. He then proposed to give them a draft on Hull & Co., at four months; saying to them that they must get along with that, as he could not pay them money. Ho arrangement was then concluded. Hull & Co. were dealers in woolen goods at Poughkeepsie, and the company had sent them its goods for sale under a contract brought about by one of the defendants. On this deal, Hull & Co. owed the company on the 29th May about $4,700. On the 27th May one of the defendants and Mr. ¡Hall appeared at Ft. Ann, and on the 29th the note held by the defendants was paid by a draft on Hull & Co. of $3,075, due Hovember 4th, which Hull then and there accepted. Upon the same occasion, Hull & Co. advanced to the company $500, used to pay the pay roll of the week, and a draft of $370 was turned over to Mr. Barnett,—for what purpose does not appear. The balance of the claim of the company against Hull &Co. was settled by allowance for imperfect goods. The other property of the company consisted of its mill and machinery, stock of goods in in tlie mill, and accounts with commission merchants. The mill and machinery, according to the estimate of Mr. Barnett, was of the value of about $50,000; and the stock in the mill, $25,000. A witness for plaintiff estimates the value of the mill and the machinery at about $10,000, and that is about what it sold for afterwards, on a public sale under the order of the court. The stock was sold at public sale for $5,600. Of the accounts with commission merchants, there were two representing goods of the company to the amount of about $1,500; and goods bad been consigned to Whitman & Phelps, unaccounted for, to the amount of about $14,000, Whitman & Phelps had a large claim against the company, and some of the goods were defective. In Brouwer v. Harbeck, 9 N. Y. 589 , 594, it is said:

“ A corporation, like an individual, is insolvent when it is not able to pay its debts. ‘ Insolvency 1 means a general inability to answer, in the course of business, the liabilities existing and capable of-being enforced. Cutten v. Sanger, 2 Younge & J. 459 ; 2 Bouv. Inst. 157.”

“Theterm “ insolvency,” as used in the bankrupt act, when applied to traders and merchants, has been held to mean an inability of a party to pay its debts as they become due, in the ordinary course of business. Toof v. Martin, 13 Wall. 40 . Very dearly, in the present case, to say the least, the insolvency of the corporation was imminent. The further question then is, under the statute, was the payment made with the intent of giving the defendants a preference ?

The managers of the company were the president and secretary, Mr. Barnett, the president, testified that there was no intent to prefer the defendants; that he at that time considered the company solvent, with property enough to pay all its debts, if he could

p. 206

have time to bring it around. Mr. Richmond, the secretary, testified that he did uot intend to give the defendants a preference, “ if all agreements were carried out.” It does not appear what the agreements were that he referred to. A preference was in fact made, in the sense that the defendants received their pay, and other creditors whose debts we re due did not. Nor did those whose debts became due afterwards, and before the defendants’ note, by its terms, become due. These two classes of debts amounted to about $17,000, and the defendants’ debt was, by the act of the officers of the company, placed ahead. This was purposely done, and the officers knew that there were then- no available assets to provide for the other debts. In Forbes v. Howe, 102 Mass, 427 , 435, under a statute that avoided a sale made with a view to give a preference if the debtor, at the time, was in fact insolvent, although he may not have in fact contemplated insolvency, it was held that the phrase, “ with a view to give a preference,” should be construed to include “ an intent to give one creditor any advantage over others in respect of payment or security of his debt.” The same view was taken in Rasin v. Ammidown, 15 Hun, 422 . There would seem to be no doubt about defendant’s receiving an advantage, and that the company, through its officers, meant it should be so. They knew that the company, with the moneys it then had, could not meet its obligations in the ordinary course of business as they become due. The company could pay one debt. It could not then pay all that were due, and it was, to say the least, very doubtful whether it could ever pay at all. It gave the defendants the benefit of the certainty. But the managers say, in a qualified way, that they expected to be able to pay all, and therefore there was no intent to prefer. Still, in two days after, and on the 31st May, a suit in behalf of a friendly creditor was brought, at the instigation of one or both of the managers, and on the 2d June a suit was brought against the company by the secretary himself, on a demand note held by him. of $3,000. Both of these suits were brought in order to obtain, if possible, a prefer-' ence, and there had been no change in the affairs of the company, after the 29th: This would not look as if the managers, on the 29th, believed in their ability to pay all with the means the company then had. It may be that they expected to get help through1 Hull & Co., or the defendants, and in some way to go on. This, however, would not validate the transaction. Every person is to-be presumed to intend the natural and probable consequences of his own acts. The intent to prefer is not rebutted by showing “that the debtor has also another motive to the proceeding, namely, an expectation of pecuniary or other future benefit to himself, by means of future loans of money, and being enabled thereby to continue his business.” Denny v. Dana, 2 Cush. 172 . In Vennard v. McConnell, 11 Allen, 562 , it is said :

“ The proposition cannot be maintained * * * that the payment of a debt by a party who is insolvent cannot be regarded as a preference, if made with the hope and expectation by the debtor that he will be able eventually to pay all his debts in full.”

p. 207

See, also, Rison v. Knapp, 1 Dill. 195 , Fed. Cas. No. 11,861; Silverman’s Case, 2 Abb. (U. S.) 243, Fed. Cas. No. 12,855.

An argument is based on the inconvenience of dealing with a corporation, where, without fault of the creditor, payment may be recovered back The trouble, if any, in that respect, it with the statute. The validity of the payment is not made to depend on whether it is made in the ordinary course of business, or on whether the creditor has any reasonable ground to believe the debtor insolvent, but simply on whether there is insolvency actual or imminent, and an intent to prefer. Bish. Insolv. (3d Ed.) § 183. If the statute is too severe, the remedy is not with the courts. The undisputed facts in this case show, I think, in substance, an intent to prefer the defendants, and it is no answer to this for the managers to say that they did not mean to do it. They knowingly and purposely did do it. The judgment should, I think, be reversed, on the ground that the evidence does not warrant the conclusion that there was not an intent to prefer.

Judgment reversed and new trial granted; costs to abide the event

All concur»

Cases cited

Brouwer v. Harbeck 9 N. Y. 589 N.Y. at 594 p. 205
Toof v. Martin 13 Wall. 40 SCOTUS p. 205