James Clark Co. v. Colton

Fowler, J,, delivered the opinion of the Court. The questions wé are to consider grow out of the failure of the South Baltimore Bank, which by a decree of the Circuit Court of Baltimore City, passed on the 1st of June 1898, was declared insolvent and dissolved. By the decree just mentioned the appellees, Messrs. Colton and Schott, were appointed receivers with the usual powers given to such officers and also with power to. wind up, under the Court’s direction, the affairs of the bank in conformity with the provisions of Art. 23 of the Code of Public General Laws in so far as the same apply to the liquidation of the affairs of insolvent corporations through the agency of receivers ; and to that end they were authorized to exercise and have “ all the, title, power and authority ” which it is declared by. the said provisions of Art. 23 shall be conferred upon, or vested in, receivers appointed by the Court of the estate or effects of corporations.

In the exercise of the powers thus conferred upon them they brought two suits in the same Court by the decree of which they were appointed, - one against The James Clark Company, a body corporate, and Winfield S. Cahill, and the other against Cahill, Norman H. Storey and Walter L. Denny. The first bill asked that the payment of a check of the James Clark Company on the South Baltimore Bank for $10,000 be declared a fraudulent preference, and the prayer of the second bill was to the same effect in reference to the payment of a note of said bank for $5,000, held by the Citizen’s National Bank and endorsed by Cahill, Storey and Denny. The defendants named in both bills answered, fully denying all ²⁰³ fraud. Testimony was taken and the Court below found that both these payments were unlawful and fraudulent preferences.

A decree was passed accordingly (the two cases having been consolidated by the agreement of all parties) and from that decree this appeal was taken. There are but three questions in the case, only two of which require consideration, although at the hearing a number of other questions were discussed in a most interesting and able manner. The questions we are to consider are, whether, under all the circumstances of this case, the payments above referred to were made by the South Baltimore Bank, that is to say, by its officers and agents, at a time when it was insolvent and about to close its doors ; secondly, whether the payments thus made, when the corporation was insolvent in fact, by such officers, of their own claims to the exclusion of and to the detriment of other creditors of the bank are unlawful preferences within the meaning of the Insolvent Law; and third, whether, apart from the Insolvent Law and sections 264, 264A, Art. 23 Code, the payments made under the circumstances these were made will be declared by a Court of Equity to be consistent with a fair, equitable and just distribution of the assets of an insolvent corporation. (1.) The first question is one entirely of fact and is fully answered in the affirmative by the testimony.

Indeed it is conceded all the way through the case that the bank had been insolvent for several years. The evidence shows, without contradiction, that in addition to this long continued state of insolvency, the bank became hopelessly insolvent at the time when these payments were made, or immediately following thereupon. There is no denial of either condition of insolvency; but the officers, especially the defendants, Cahill, Storey and Denny, who got the benefit of the payments, place their defense on their denial of knowledge of the bank’s insolvency. We are forced to the conclusion, however, that if the bank is conceded to have been insolvent for years, its officers must have known ²⁰⁴ it, and that if it was hopelessly insolvent on the 23rd they knew or ought to have known it on the preceding business day when the payments were made.

We have not overlooked the fact that Mr. Cahill and his coendorsers have denied that they had any knowledge of the insolvency of his bank at the time the payments were made. The fact that he was, as he said, only president in name, may to some extent account for his want of that accurate knowledge which he should have had. As president and director of-such a financial institution the law imputes the requisite knowledge and neither he nor they can be given, on account of their wilful ignorance, a better standing than they would have had if they had performed their duties. Corbett v. Woodward, 5 Sawyer, 416; McDaniel v. Harvey, 51 Mo.

Appeal, 205; Sicardi v. Keystone Oil Co., 149 Pa. St. 148 ; Lowrey Banking Co. v. Empire Lumber Co., 91 Ga. 626 ; Roan v. Winn, 93 Mo. 511 . (2.) It was urged, with a good deal of force, that the bill, which was filed in the original case, in which receivers were appointed and dissolution decreed, and under which proceedings were first commenced against the South Baltimore Bank, was not filed under the provisions of sections 264 and 264A, Art. 23, relating to the dissolution and winding up of insolvent corporations, and that, therefore, the Court below had no jurisdiction to decree dissolution and that the Insolvent Law has no application, to this case. Section 264, just referred to, provides, that “whenever any corporation in this State shall have been determined by legal proceedings to be insolvent, or shall be proven to be insolvent by proof offered under any bill filed under the the provisions of this section, it shall be deemed to have surrendered its corporate rights * * * and may be adjudged to be dissolved after hearing, according to the practice of Courts of Equity in this State, upon a bill filed for that purpose,” &c., &c.

And section 264A, among other things, provides “ that whenever such corporation shall have been adjudged to be dissolved, as provided in the next pre ²⁰⁵ ceding section of this Article, all of its property * * * shall be distributed * * * in the same manner,” as is required by our insolvent laws. (Art. 47 of the Code of Public General Laws.) And this section further provides, that the receivers so appointed of such corporations shall have the same powers to bring suits and to set aside transfers, payments and preferences made by the corporation, or by any of its officers on its behalf as the permanent trustee of a natural person who is an insolvent debtor has under the Insolvent Law of this State. It was contended that the bill in the original case does not specifically ask for dissolution and that, therefore, it must be held not to have been filed either for that purpose or under the sections mentioned. It does, however, ask not only for the appointment of receivers, but also that the bank (a corporation), be declared insolvent.

It prays for the “winding up” of the corporation by the distribution of its assets among the stockholders should anything remain after the payment of debts and for general relief. The Act of 1896, chapter 349, was passed to bring corporations within the provisions of the Insolvent Law, and to give Courts of Equity power to declare them insolvent and dissolve them. But, as we have said, the decree shows the purpose of the bill. Aside from any other view, it would seem to be beyond the power of these defendants in this case to deny the validity of the decree dissolving the South Baltimore Bank.

It is true they do not make a direct attack upon the decree nor deny the jurisdiction of the Court to pass it But the contention is that the bill was not filed for dissolution nor for winding up under sections 264 and 264A, Art. 23; and that, therefore, the Court was without jurisdiction to entertain this bill and hence the Insolvent Law has no application. The decree, however, provides that the estate and assets of the bank shall be administered according to that law, and that the receivers shall have the same powers as to setting aside illegal preferences which are thereby given to permanent trustees. Now, for the first time, it is suggested that the ²⁰⁶ dissolution decree is not to have full force and effect. No such suggestion was made when that decree was before us in the case of Colton & Schott, Receivers, v. Building Association, 90 Md. 85 , and Same Receivers, v. Lee Mayer, decided last January Term, 90 Md. 711 .

On the contrary, the receivers relied upon that decree to show that the extent of their powers was the same as that of permanent trustees under the Insolvent-Law, and in the former case the opinions of this Court assume that the proceedings were under 264A, and in. the latter declare that the receivers were acting under that section. Indeed, ever since the date of that decree, June 1st, 1898, declaring the South Baltimore Bank insolvent and dissolved, its affairs and estate have been administered by the receivers without objection from any quarter under the provisions of the Insolvent Law. It is perfectly obvious that all interested were in fact acting under the provisions of sections 264 and 264A. The decree is conclusive upon this point.

It was passed without objection, if not with the implied consent of all parties. If the intention had been unquestioned to proceed under those sections, and counsel had been instructed so to file the bill, but had omitted to add the three words, “they pray dissolution,” can it be supposed for a moment that any-serious difficulty would have arisen from this omission ? If attention had been called to it in the Court below, the bill would have been amended in that respect. No objection on the ground of defective averments of the bill nor any objections based on want of jurisdiction could have been taken in this Court by the defendant.

In addition to this, if the bill now before us be regarded, as we think it may be, as a bill filed to carry into execution the dissolution decree, the law of the latter is not examinable, and will be enforced unless attacked by bill of review. Tomlinson v. McKaig, 5 Gill, 256 -278. We do not, therefore, feel inclined favorably to consider this question of jurisdiction, presented as it is in this collateral way at this late day, and by some of the parties, too, at whose instance the decree now objected ²⁰⁷ to was passed. In Hayes, Receiver, v. Brotzman, 46 Md. 519 , it was contended, as in the case at bar, that it did not appear from the record that the bill was filed under the provisions of the general incorporation law (Act of 1868, ch. 471); and that, therefore, the receivers could not rely upon section 195 of that Act (now codified as section 274 of Art. 23, Code), for authority to sue, but this Court said that the order of the Circuit Court, appointing receivers of the property and effects of that corporation, being the order of a Court of competent jurisdiction to pass it, carried with it the presumption of regularity.

Unless, therefore, the decree appointing these receivers and declaring the bank insolvent be successfully attacked in some direct and proper way other than in this collateral manner, it must stand, and these appellees have a right to rely upon section 174, which expressly provides that receivers appointed as they were, and with the powers they have, shall have authority to sue in their own names. In the case just cited it was held, therefore, that whether the order appointing the receivers authorized them to sue or not was immaterial for their authority to do so is ample under section 195 of the Act of 1868, chapter 471, which is the same as section 174 of Art. 23 of the Code. But, in addition to this, the decree we are considering declares they shall have “all the title, power and authority,” which, by the provisions of Art. 23, are conferred upon or vested in receivers appointed by the Court of the estate or effects of corporations. See also section 239 of Art. 23.

If, therefore, the decree stands, then, under section 264A, these receivers have authority to maintain suits to set aside preferences by insolvent corporations in the same manner and to the same extent as the Insolvent Law gives to the permanent trustee of a natural person who is an insolvent debtor. It can hardly be contended that the preferences which are here so earnestly defended, would be held valid under the provisions of sec. 22 of Art. 47, which prohibits preferences of every kind made by a party when insolvent or ²⁰⁸ in contemplation of insolvency. The fact that the bank, which is conceded to have been insolvent for several years and shown to have been hopelessly insolvent the day after the payments, had not actually suspended payment of its negotiable paper, and therefore had not committed that act of insolvency, has no tendency to prove that it had not made • any of the unlawful preferences prohibited by law. The case of the Gaslight Improvement Co. v. Terrell, L. R. 10 Eq. p. 175, bears directly upon this aspect of the case, for the English Statute in respect to unlawful preferences is very similar to the provisions of our Insolvent Law, which, as we have seen, are adopted by section 264A of Art 23.

In disposing of this case Lord Romilly, M. R., said: “ The directors of the company think fit to pay themselves. It is to be observed that the directors of any company, who are also creditors, fill two distinct and antagonistic characters. In the first place they are trustees for the benefit ‘ of the company, and are trustees for the creditors to that extent.' They are bound to apply all the assets for the benefit of the creditors as far as they will extend. They themselves are also creditors, and have an interest to have their own debts paid.

Now, if they had themselves passed a resolution to pay A, B, who was not a director, but a stranger to the company, nobody, in my opinion, would be found to assert that that was not a fraudulent preference, the creditor having done nothing, having made no application for the payment. Is the case altered by the fact that the creditor is one of the directors ? So far from that being the case, in my opinion it only adds a breach of trust to the fraudidentpreference." It will be observed that the conclusion reached by Lord Romilly in the above case is not based on the so called trust-fund doctrine as adopted in this State (Fear v. Bartlett, 81 Md. 435 ), by which it is held that when a corporation has been dissolved or has committed an act which by law is an act of insolvency, its entire property becomes a.trust-fund for the payment of its creditors in preference to the claims of stockholders. ²⁰⁹ (3.) This brings us to a consideration of the merits of the case. We are not willing to adopt the view which was so forcibly presented, that the payments here attacked as fraudulent preferences, are free from fraud and should be protected by a Court of Equity.

On the contrary, our view is that whether the estate of the insolvent bank be administered under the Insolvent Law, or according to the rules which govern Courts of Equity, is immaterial, for, in either case, as we have seen, the rule of distribution is the same, and that rule requires fairness and equality and prohibits favor and preference. Assuming, therefore, that we have already shown that these payments were made to the officers of the bank when it was insolvent and about to close its doors, and that therefore, they are illegal preferences under the Insolvent Law, we will proceed to discuss the question whether apart from the Insolvent Law a Court of Equity will recognize them as fair and equitable payments. In the case of Finch Mfg. Co. v Stirling, 187 Pa.

St. 596, ( 41 Atl. Rep. 294 ), decided by Supreme Court of Pennsylvania in 1898, the preferred creditor, as in the case before us, was a president and director in both the debtor and creditor corporations. The Court said : “ Although hampered by debts it did not follow that the company was insolvent. Statutory insolvency is generally determined as an inability to pay its debts when due or demandable; but the rule'that an officer or director of an insolvent corporation cannot prefer his individiial debt is based, not on statutory insolvency, but. on the unfair and fraudident character of the transaction..

He is a trustee of the corporate property for the benefit of all creditors and stockholders, and has superior knowledge of the financial condition of his company. It would be highly unjust to permit him to use his position for his individual interest to the prejudice of others.” Before proceeding further with the discussion of this' branch of the case, it must be remembered that it is a conceded fact that when Mr. Schott examined the statement of the affairs of the bank on the afternoon of Wednesday, the ²¹⁰ 23rd February, he found it hopelessly insolvent. It is also conceded that it had been in an insolvent condition for several years. This being so, it is useless to consume time to show the condition of the bank when the payments were made, and