Opinion
12-15-1939
BEATTY v. PATERSON-GARFIELD-LODI BUS CO., Inc., et al.
Israel B. Greene, of Newark, for complainant. Emil H. Block, of Newark, for defendant Frank Levenstein. Mendelsohn & Mendelsohn, of Newark, for defendant David Kimmel. Albert H. Kreamer, of Paterson, for remaining defendants.
Syllabus by the Court.
I Under R.S. 14:13-5, 6, N.J.S.A. 14:13-5, 14:13-6, upon the dissolution in any manner of a corporation, the directors who participated in the distribution of the assets are primarily, jointly and severally liable as statutory trustees for the payment of the debts of the corporation; and the stockholders are secondarily liable to the extent of moneys which they received upon distribution.
2. The assets of a corporation are a trust fund for the payment of debts, and no. stockholder can entitle himself to any dividend or share of such assets upon distribution until all debts are paid.
3. Complainant's claim in the instant case, although based upon a contingent liability, existed at the time of distribution of the assets, and notwithstanding that liability thereon may have been remote, the directors as trustees were under a duty to make provision for it.
Suit by Lloyd G. Beatty, as receiver of the Jersey Mutual Casualty Insurance Company, against the Paterson-Garfield-Lodi Bus Company, Incorporated, and others, to hold directors of the Paterson-Garfield-Lodi Bus Company, Incorporated, as statutorytrustees to pay a judgment in favor of complainant against the Paterson-Garfield-Lodi Bus Company, Incorporated, and against the stockholders, to the extent that they had received money on distribution by the directors.
Decree advised in favor of complainant.
Israel B. Greene, of Newark, for complainant.
Emil H. Block, of Newark, for defendant Frank Levenstein.
Mendelsohn & Mendelsohn, of Newark, for defendant David Kimmel.
Albert H. Kreamer, of Paterson, for remaining defendants.
STEIN, Vice Chancellor.
Complainant, receiver of the Jersey Mutual Casualty Insurance Company, is the holder of a judgment for $1,623.15 against the Paterson-Garfield-Lodi Bus Co., Inc. The judgment debtor operated its buses in and about the City of Paterson, and from January 21, 1928, to June 27, 1928, it insured its buses with the Jersey Mutual Casualty Insurance Company, rendering the bus company contingently liable to an assessment under such insurance policy. Lincoln Bus Co. v. Jersey Mutual, &c, Co., 112 N.J.Eq. 538, 165 A. 112. The insurance company having become defunct, the receiver levied an assessment (April 1, 1933, payable April 10, 1933), and thereafter obtained the aforesaid judgment thereon.
On June 27, 1928, the judgment debtor sold its buses, franchises and equipment to Public Service Coordinated Transport for a sum approximating $100,000. The money was distributed by the directors of the bus company among its stockholders without formal dissolution and without making proper provision for the payment of complainant's claim.
By the bill of complaint the receiver seeks to hold the directors, all of whom participated in the distribution, primarily liable, jointly and severally, as statutory trustees under sections 54 and 55 of the Corporation Act (R.S. 14:13-5, 6, N.J.S.A. 14:13-5, 14:13-6) to pay his judgment to the extent of moneys which passed through their hands; and the stockholders secondarily liable to the extent of moneys which they received upon distribution. The equitable ground for relief urged is that the stock is regarded as a trust fund for all the debts of the corporation, and no stock holder can entitle himself to any dividend or share of it until all the debts are paid; that the capital stock was a trust fund for the creditors, and the stockholders, upon the division, took it subject to all equities attached to it, as impressed with the trust cum onere. Williams v. Boice, 38 N.J.Eq. 364; Mills v. Hendershot, 70 N.J.Eq. 258, 62 A. 542.
The material facts in this case are not in dispute and complainant is entitled to a decree unless the defenses raised by the defendants are meritorious. Such defenses will now be considered and disposed of.
More than six years having elapsed from the time any cause of action accrued to complainant the statute of limitations it is urged should be applied. However, as to those defendants who were directors, their liability as trustees is not governed by any statute of limitations. In Windmuller v. Spirits Distributing Co., 83 N.J.Eq. 6, 90 A. 249, there was a ten year delay before suit was brought against directors as trustees in dissolution. But assuming that a six year period of limitations does apply, complainant's bill was filed on March 7, 1939, and all defendants were served in March, while the complainant's cause of action would run from the date upon which it accrued April 10, 1933, the date when the assessment was due and payable.
The defendants contend that section 30 of the Corporation Act (R.S. 14:8-19, N.J.S.A. 14:8-19) which limits the liability of directors to six years is applicable rather than section 55 of the Corporation Act. Section 30 only applies where dividends have been paid out of the capital of a going concern. Sections 54 and 55 of the statute apply where there has been a distribution or a dissolution, and under these sections there is no statutory limitation of the duration of the liability of the directors as trustees. So that as to those defendants who were only stockholders, their liability as stockholders—distributees —to pay back trust moneys unlawfully paid out, is not subject to any period of limitation. Williams v. Boice, supra; Mills v. Hendershot, supra.
Again it is argued that at the time of distribution or dissolution, the insurance company was not an existing creditor of the Paterson-Garfield-Lodi Bus Co., Inc. It is true complainant's claim is based upon a contingent liability which existed at the time of distribution, and notwithstandingthat liability thereon may have been remote, the defendants were under a duty to make provisions for it. Reinfeld v. Fidelity. Union Trust Co., 123 N.J.Eq. 428, 198 A. 220, affirmed 125 N.J.Eq. 347, 5 A.2d 699; ætna, Casualty & Surety Co. v. International, &c., Corp., 117 N.J.Eq. 190, 175 A. 114.
It is urged that complainant is guilty of laches because of the delay in instituting this suit; that because of such delay the financial condition of some of the co-defendants has changed. It appears that the receiver is engaged in the collection of assessments against approximately 2,200 policyholders resident in various Counties in this State. Admittedly the commencement and prosecution of so many suits requires much time, study and effort. It can scarcely be said that the bringing of this suit five years after the assessment was levied and four years after the entry of judgment thereon is an unreasonable delay. Nor has this delay been prejudicial to the defendants, there having been no change in position or loss of testimony. Elements which invoke the application of the doctrine of laches are not here present. Hinners v. Banville, 114 N.J.Eq. 348, 168 A. 618.
Nor has complainant an adequate remedy at law as insisted upon by the defendants. The jurisdiction of the Court of Chancery is peculiarly appropriate for granting the relief here sought. Keen v. Maple Shade Land & Imp. Co., Err. & App., 63 N.J.Eq. 321, 50 A. 467. This court has jurisdiction over the trust created by the voluntary dissolution of the corporation because of its inherent jurisdiction over trusts. Trustees of Sea Isle City Realty Co. v. First Nat. Bank of Ocean City, 87 N.J.Eq. 84, 99 A. 929.
The further contention on the part of the defendants that complainant's judgment was obtained contrary to law because no notice had been served upon the directors of the defendant company before the entry thereof is not tenable. The judgment is res judicata and not open to collateral attack in this court. Chorpenning v. Yellow Cab Co., 113 N.J.Eq. 389, 167 A. 12, affirmed 115 N.J.Eq. 170, 169 A. 691; In re Leupp, 108 N.J.Eq. 49, 153 A. 842.
Lastly, the defendant Frank Levenstein, one of the directors and stockholders of the defendant corporation, asserts that the capital stock of the corporation was sold to Public Service Coordinated Transport rather than the buses, equipment and franchises; that the money arising from such sale which he and the other defendants received was in payment for the transfer of the capital stock, so that the Paterson-Garfield-Lodi Bus Co., Inc., existed as a corporation with its properties and franchises after the receipt of the moneys by the defendants, and their individual severance from the corporation. This assertion is not supported by the evidence. There was introduced into evidence a certified copy of a resolution passed by the Board of Directors of the defendant company from which resolution it appeared that "the offer of the Public Service Corporation for the purchase of the business of the Paterson-Garfield-Lodi Bus Co. be accepted and that all buses and franchises of the Paterson-Garfield-Lodi Bus Co. be sold to the Public Service Corporation." Other evidence introduced was the bill of sale; the written request by the defendant corporation under its seal directed to certain municipalities and the Public Utility Commission, for transfer of the franchises to the Public Service Coordinated Transport, and the testimony on behalf of the Public Service Coordinated Transport that it purchased from the defendant company the buses, franchises and equipment.
There is no doubt in my mind from the evidence that the defendant corporation sold its business, equipment and franchises; that upon distribution of the money received from the sale, among the stockholders, the defendant corporation was rendered a hollow shell.
I will advise a decree holding the directors of the Paterson-Garfield-Lodi Bus Co., Inc., primarily liable, jointly and severally, to satisfy complainant's judgment, interest and costs, to the extent of the moneys that passed through their hands. The distribution of all the assets by the directors of the defendant company without making provision for the debt of complainant, was in violation of sections 54 and 55 of the Corporation Act. R.S.14:13-5, 6, N.J.S.A. 14:13-5, 14:13-6. And the stockholders are secondarily liable to complainant to the extent of moneys which they received. They knew that the distribution of the moneys was not in the ordinary course of business and that it was not a dividend, but made for the purpose of winding up the affairs of the company, and the stockholders were chargeable with the knowledge that themoneys which came into their hands carried with it the burden of the unpaid debts of the corporation.
As to the defendant David Kimmel the complaint will be dismissed. It appeared from the testimony that he was fraudulently induced to purchase the stock of the defendant corporation, and that upon the discovery of the fraud he promptly rescinded the purchase and later received the money which he paid for the stock.