National Broadway Bank v. Wessell Metal Co.

The real question in this case is, whether the directors of an . insolvent corporation have a right, by improper indirection, to prevent an honest creditor from obtaining the preference which his diligence entitles him to. To put it more fully and precisely, have ■ these directors a right to secure equality of distribution for all the creditors by means, other than those pointed out by the various statutes regulating their duties and powers, and which, apart from the object sought to be obtained, would clearly be irregular and a fraud upon the law ?

That it is not their duty to take measures to procure a disposition of the company’s property among the creditors, without preference, •was expressly held in Varnum v. Hart ( 119 N. Y., 105 ). “ They may,” says Earl, J., “ like an insolvent person, permit the creditors to take hostile proceedings, and allow those to obtain preferences who are the most vigilant. The statute places no restraint whatever

But while no such duty is imposed upon the officers of a corporation, there can, of course, be no objection to any lawful act on their part tending to effect equality of distribution. The statute (it. S., pt. 1, chap. 18, tit. 4, §4) is aimed at an unjust discrimination by the company or its officers among the creditors of an insolvent corporation, and these officers cannot be condemned for any lawful or proper effort to prevent one creditor from obtaining an advantage over the rest. We think, however, that the officers are limited to such direct remedies as the statute affords, or at least to such methods as may be pursued without an abuse of the forms of law, and that they cannot effect their ends by legal shams or other improper indirection. If the authority conferred by the statute, or the remedy afforded by a proper use of some- of its provisions, is insufficient to prevent an impending preference by judgment and execution, the officers must submit. However pure their motive, they cannot, to effect their end, transgress the law, or by an abuse of its forms and processes work an equity for which the legislature has made no provision.

Speaking of the legislative purpose to prevent “ unjust discrimination,” Earl, J., in the case cited, observed that it “was to be accomplished in only one way, to wit: by 'resti'cdnt upon the action of the corporation and its officers. They having the best and the earliest knowledge of the actual or impending insolvency were not 'to transfer or assign any of its property, so as to give any preference or advantage therein to any person ; but the purpose was in such cases to leave the property to be taken or disposed of by due course of law.”

The officers of a corporation must not be wiser or more just than the law. When they find what they imagine to be a casus omissus, they must not attempt to supply the remedy by artifices foreign to ■the statute, and which, but for an undoubtedly good motive, would be morally, as well as legally, corrupt and fraudulent. Let us apply these principles to the facts of this case. The present plaintiff had sued the defendant company and the directors found themselves face to face with an impending judgment and execution. What

The device, then, and the sole device at hand, was to obtain a receiver in sequestration proceedings under section 1784 of the Code. But the right to institute proceedings under this section was not conferred upon the directors.. They could only invoke the remedy indirectly, namely, by an arrangement with a judgment-creditor. This proceeding, however, plainly excludes a case where the company, though insolvent, is possessed of sufficient property, real or personal, within the county where it transacts its general business, ■or where its principal office is located, to satisfy the judgment-creditors’ execution. It is a proceeding looking solely to the sequestration of such assets of the company as are not leviable. It thus contemplates the possibility of the very preference by due course of law which the directors desii'ed to prevent. For it is only when the vigilant creditors have had all the tangible property of the company, within one or the other of the specified counties, applied upon their ■executions, and there is still a balance unpaid thereon, that the court is authorized to appoint a receiver. And it is only the assets which are left, after the application, thus preferentially, of -the tangible

Thus the statutory prerequisite to sequestration proceedings was intended to be, and was, a mere form, for Mr. Riggs frankly avowed that he had no intention of levying under his execution, and that his sole object, and that of his fellow directors, was a mere nominal compliance with the law, which required that such an execution should be returned unsatisfied in whole or in part. In other words, the purpose was to proceed by means of an avowedly false return, for there was ample property to satisfy Mr. Riggs’ execution. There was also enough to satisfy the plaintiff’s execution, even if Mr. Riggs had proceeded under his. Mr. Riggs’ judgment was for $4,108.70, while the two judgments recovered by the plaintiff amounted to $6,100. The tangible property was subsequently sold by the receiver appointed in the sequestration proceedings to thievery Mr. Riggs for $10,000, which is but $175 less than the total amount of all the judgments ; and this sum of $10,000 was but a fraction of the real value of the property. The receiver reported to the court that, although no fraud or deception was practiced on the sale, the price was grossly inadequate, so much so that, as an officer of the court, he would not carry out the sale, because of the “ great hardship ” and “ actual injustice to the creditors of the company ; ” and, in fact, he refused to do so until directed by the court.

The sequel is thus a singular commentary upon the high-sound

Thus it may fairly be said that the plaintiff here has been frustrated solely by the acts of the parties, not by the true or genuine operation of the law. The statute has simply been diverted

“ Thirteenth. The action in which said judgment of Riggs was recovered was commenced by the drawing of a summons and com. plaint in the name of Karrick Riggs against said Wessell Metal Company, by one E. I). Worcester, Jr., an attorney-at-law, and a director of said Wessell Metal Company, who procured the same to be subscribed by one D. Frank Lloyd as said plaintiff’s attorney, -on the 29th day of May, 1889; a notice of appearance for said Wessell Company was written out by said Worcester, and the name -of his firm, Saunders, Webb & Worcester, subscribed thereto by him on June 3, 1889, and an offer of judgment for $4,000 and interest was written out and prepared by said Worcester and executed by said Wessell Metal Company, and dated as of June 8, 1889, and an acceptance of said offer was written out and prepared and dated as of said June 8, 1889, by said Worcester, and subscribed by said Lloyd.

“ Fourteenth. That said Worcester wrote out a form of judgment, and on said June 8, 1889, caused to be put together and filed with the clerk of the city and county of New York said papers in said action, and thereupon judgment was entered on said day with said clerk therein, in the name of Karrick Riggs against the Wessell Metal Company, at the hour of eleven o’clock and twenty-one minutes, for the sum of $4,075.

“ Seventeenth. That after the return of said execution as aforesaid, defendant Karrick Riggs began an action to sequestrate the property of said defendant company,, being the same action in which the defendant George W. Yan Siclen was appointed receiver. That the summons and complaint therein were prepared by said Worcester in advance of June 8,1889, and were subscribed by Saunders, Webb and Worcester as attorneys ; and on said day an order was obtained by said Worcester to show cause, returnable on the 10th day of June,

Mr. Worcester was the attorney for the company. His firm were its attorneys of record in Mr. Riggs’ common-law action, and they were Mr. Riggs’ attorneys of record in his sequestration action. Although Mr. Floyd was nominally Mr. Riggs’ attorney in the common-law action, yet it was Mr.-Worcester who procured his signature to the various papers, who handed the execution to the sheriff and who directed that officer to return it forthwith. It was also Mr. Worcester who moved the resolution in the board of directors authorizing the president to confess judgment to Mr. Riggs, and who moved a subsequent resolution authorizing tlie president to consent to the appointment of Mr. Higgs, or any other proper person, as receiver. Nearly every word in both records, the common-law action and the sequestration proceedings,.was written by Mr. Worcester, and his firm moved the court for the appointment of the receiver. Mr. Yan Siclen was appointed upon the written suggestion of Mr. Riggs, and upon'the consent of the defendant corporation. . It is not too much to say, therefore, however it may appear in form, that this company appUedfor its own sequestration and obtained its own receiver. If such proceedings as these are to-be sustained, what, then, becomes of the statute forbidding an assignment or transfer of any kind, even n'on-preferential, in trust for creditors % What have these gentlemen effected if it be not the-transfer thus forbidden ? Formally, the transfer is by operation of law; substantially, it is by their own act. It wa,s held in Kingsley v. First National Bank of Bath (supra;) that a corporation by offering to “ allow judgments to betaken against it (in certain actions) before its time to answer therein had expired, in effect transferred and assigned its property, in contemplation of insolvency, in violation of section 4 of title 4 of chapter 18 of part 1 of the Revised Statutes, and that the judgments entered upon such consent were thereby avoided and rendered of no effect.”

speaking for the General Term, said that “there is no real distinction between a conveyance or transfer, directly from the corporation to its creditor, and one from the sheriff by means •of legal proceedings against its property. The sheriff realizes the

The decision against confessed judgments in that case was not placed solely upon the ground that a preference was thus effected. That ground was specially applicable to officers of the company. But the court, in what we have quoted, was considering the cases of •ordinary creditors, and the decision was expressly placed upon the ground not merely of a preference, but of what amounted vn law to a transfer or assignment of property forbidden by the statute. This is evident from Mr. Justice Barker’s subsequent language.- “ The statute,” he says, “ declares the assignment or transfer void, in case the same is made in contemplation of insolvency. The question to be determined is not one of fraud, or of an intent on the part of the creditor to obtain a preference in the payment of his debt; but the simple inquiry is, was there actual or contemplative insolvency and a transfer of property for the benefit of creditors. If both these acts are established, then the transaction is void.” (And he cites Brouwer v. Harbeck, 9 N. Y., 589 ; Burris v. Thompson, 15 Barb., 62 , cited and approved in Sibell v. Remsen, 33 N. Y., 96 ; Robinson, as Receiver, v. The Bank of Attica, 21 id., 406; Dutcher v. Importers and leaders’ Bank, 59 id., 5; Bump on Fraudulent Conveyances, 256; In the Matter of Burst, an Insolvent Debtor, 7 Wend., 239 .)

The question, then, is unimportant whether by means of the confession and subsequent proceedings there was a transfer for the benefit of a particular creditor or of creditors generally. Any transfer is forbidden, and if, in fact, such transfer was effected without direct statutory authority, and .without even the genuine application of a judgment-creditor, operating in good faith under the provisions of the statute as to sequestration, such transfer is unauthorized and void; and being unauthorized and void, it is, in law, a,fraudulent obstruction to the plaintiff’s judgment and execution. We do not mean to intimate that in the sequestration proceedings the court had not jurisdiction, nor do we doubt that the defendant

Such a doctrine would lead to perpetual evasions of the statute and in the end to its practical nullification. Our judgment, then, rests on no narrow or technical point, but on the broad ground that <unlawful means were here used to effect a forbidden end, namely, the means of a eollusively confessed judgment, an equally collusive execution, issued as a sham and returned as a sham, followed by sequestration proceedings founded upon these shams, instituted by

The judgment should, therefore, be reversed and a new trial ordered, with costs to abide the event.

I concur in the foregoing opinion, except the proposition that in this action the question of the jurisdiction of the court in the sequestration proceedings could not be inquired into, and that the defendant company could waive all objections based upon the want of return of the execution at the time the sequestration action was commenced. The authority cited, Whittlesey v. Frantz ( 74 N. Y., 456 ), does not sustain the proposition.

This was an action by the receiver of a corporation to recover a debt, and it was held that, in such an action, the regularity of the appointment of the receiver could not be called in question, as that would be assailing such appointment collaterally.

In the case at bar the sequestration proceedings are not attacked collaterally, but an action is brought to set them aside because of fraud; they are attacked directly. If the admission of the corporation that an execution has been returned unsatisfied, where, in fact, it has not been so returned, is binding in this action, then I can see no reason why sequestration proceedings may not ripen into the appointment of a receiver, which cannot be assailed, where there is not even a judgment, in fact. All that would be necessary would be to have the complaint allege a judgment and the answer of the corporation admit it, and jurisdiction would be conferred. This, of course, cannot be so. In an action brought to set aside such proceedings, jurisdiction depending upon admission can certainly be inquired into.

Bartlett, J., concurred.

Judgment reversed and new trial ordered, with costs to abide event.