Jefferson National Bank v. Townley — 74 N.Y. St. Rep. 212

Majority

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Jefferson National Bank, Resp't, v. Margaret A. Townley et al., App'lts.

(Supreme Court, General Term, Fourth Department,

Filed December 26, 1895.)

Headnote

Cobpobatiobs—Pbbbebeitobs—Claims.

An officer, who has full knowledge of the insolvency of the corporation, cannot transfer his claims against the corporation to his wife who has equal knowledge of such insolvency, in order to circumvent the letter of the statute.

Appeal from a judgment in favor of plaintiff.

The appellants were and are husband and wife, and each became a stockholder in the defendant corporation. On the 12th day of March, 1888, the appellant, Margaret A. Townley, executed a formal assignment of her thirty shares of stock to her husband. The full transfer of the stock on the books, and the issuance of the scrip therefor, were not completed. On March 21, 1888, the husband, in a letter to F. C. Eddy, giving a list of stockholders in the corporation, enumerated Mrs. H. C. Townley as the owner of thirty shares of stock. On the 17th day of September, 1889, and subsequently Hugh C. Townley was a stockholder of the defendant corporation, and was secretary, treasurer and manager of the company, and held claims for services and an indebtedness against the corporation, as well as for advances made; and the evidence seems to indicate that, after he and his wife knew of the insolvency of the corporation, they entered into a scheme to circumvent the provisions of the statute which prohibited him from acquiring, by transfer or otherwise, any of the assets in payment of his indebtedness . by way of preference; and in consummation of that scheme formal assignments of his indebtedness to his wife were made, and actions were brought in her name upon the indebtedness against the corporation. The papers were served upon him as an officer of the corporation, and the fact of such service was kept secret until judgments were entered by default upon which executions were issued and levies made by the sheriff. The trial judge found, viz.: “ The assignments of the claims against the Eureka Chemical Company made by the defendant Hugh C. Townley to the defendant Margaret A. Townley, were made by the said Hugh C. Townley and received by the said Margaret A. Townley, having full knowledge of the insolvency of the Eureka Chemical Company, for the purpose of enabling the said Margaret A. Town

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ley to obtain a judgment and lien upon the property of the Eureka Chemical Company, and for the purpose of avoiding and evading the statute providing that, whenever an incorporated company shall have refused the payment of any of its notes or other evidences of debt in specie or lawful money of the United States, it shall not be lawful for such company, or any of its officers, to assign or transfer any of the property or dioses in'action of such company to any officer or stockholder of such company, directly or indirectly, for the payment of any debt, and to avoid the decisions of the courts under such statute, and to create and obtain an illegal preference over the plaintiff and other creditors of the said defendant the Eureka Chemical Company,”.

Louis Marshall, for app’lts; A. H. Sawyer, for resp’t.

Plaintiff, having recovered a judgment against the Eureka Chemical Company, brings this action on the equity side of the court to obtain relief. The plaintiff alleges the invalidity of the judgments recovered by Margaret Townley, and asks the intervention of the court through the instrumentality of its equity powers. Braem v. Bank, 127 N. Y. 509 ; 40 St. Rep. 327 . Section 4, tit, 4, c. 18, pt. 1 Rev. St (8th ed., vol. 3, p. 1729), was in force at the time of the occurrence of the transactions that are the subject of inquiry in this action. The evidence indicates that the corporation had refused payment of its notes or debts peior to the commencement of the actions by Margaret Townley, and therefore the prohibiting parts of the section were applicable to the corporation. That section of the Revised Statutes provides:

“ It shall not be lawful for such company or any of its officers to assign or transfer any of the property or choses in action of such company to any officer or stockholder of such company, directly or indirectly, for the payment of any debt; and it shall not be lawful to make any transfer or assignment in contemplation of insolvency to any person or persons whatever; and any such transfer or assignment to such officer, stockholder or other person, or in trust for them or their benefit, shall be void.”

The evidence makes quite manifest the scheme of Hugh Townley to so transfer his indebtedness against the company to his wife as to enable her to obtain a preference which he could not by the the letter of the statute have or receive. We are called upon to determine whether such scheme can be successful or not. We think, under the construction that has authoritatively been given to the statute, that the efforts on the part of Hugh Townley and Margaret Townley to gain a preference over the other creditors by the means adopted should fail. Kingsley v. Bank, 31 Hun, 329 ; Throop v. Lithographing Co., 58 id. 149 ; 33 St. Rep. 880 ; affirmed, 125 N. Y. 530 ; 35 St. Rep. 816 . While that case was under consideration in the general term of the Eirst department, it was said:

“ It seems to have been the intention of the legislature to prevent persons occupying confidential relations from either directly or indirectly profiting by the information which they may have

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acquired because of their relation to the corporation they could use to the detriment of the general creditors of the corporation.”

In National Broadway Bank v. Wessell Metal Co., 59 Hun, 477 ; 37 St. Rep. 102 , the scheme pursued was condemned on the ground that unlawful means were used to effect a forbidden end. The means adopted in that case which were condemned consisted of a collusively confessed judgment, and a collusive execution “ issued as a sham and returned as a sham, followed by sequestration proceedings founded upon these shams, instituted by the defendant company against itself, through its own counsel, all to effect the end of a practical transfer by the directors themselves.” In the course of the opinion delivered in Throop v. Lithographing Co., 125 N. Y. 531 ; 35 St. Rep. 816 , Andrews, J., said:

“ The construction given below is salutary, and in many cases will prevent frauds upon the statute which could not be proved.”

He then adverts to the question as it was presented and discussed in Kingsley v. Bank, 31 Hun, 329 , and approves the conclusion there reached. He further adds:

“We think a construction which disables an officer of an insolvent corporation from acquiring a preferential lien on the corporate assets by legal process is justified.” ‘

In the ease in hand we have the effort on the part of an officer, ■who had full knowledge of the insolvency of the corporation, to so transfer his claims to his wife, who is found to have had equal knowledge of the insolvency of the corporation, in order to circumvent the letter of the statute. The scheme was condemned by the special term, and the trial judge expressed his views in respect to the same in an opinion which is found in the appeal book in language which meets with our approval. The force of the opinion of the special term, and the views already expressed, lead to the conclusion that the judgment should be affirmed..

Judgment affirmed, with costs.

Cases cited

Throop v. Hatch Lithographic Co. 125 N. Y. 530 N.Y. 1891-02-24 p. 213