Opinion
12-08-1905
RUSSELL & ERWIN MFG. CO. v. E. C. FAITOUTE HARDWARE CO.
F. Benjamin and E. C. Duffield, for receiver. Brown & Beecher, for respondent.
Suit by the Russell & Erwin Manufacturing Company against the E. C. Faitoute Hardware Company. On petition of the receiver of the defendant to set aside an assignment of book accounts by the defendant company to one Peters. Petition allowed.
F. Benjamin and E. C. Duffield, for receiver. Brown & Beecher, for respondent.
EMERY, V. C. The receiver of an insolvent corporation, the E. C. Faitoute Hardware Company, files this petition in the insolvency proceedings to set aside assignments of book accounts, amounting to $4,107.00, made by the company to the respondent, Peters, on December 6, 1904, four days prior to the filing of the bill, upon which the company was declarded insolvent and the receiver appointed. The ground alleged in the petition is that the company had suspended its ordinary business on the day of the assignments and before they were made, and that the assignments, which were made to secure an indebtedness of $4,000, were made in contemplation of insolvency, of which Peters had notice. The respondent by his answer admits the company's suspension of its ordinary business on December 6, 1904, and that its stock in trade was on that date taken possession of by the mortgagee holding a chattel mortgage. The assignments are admitted to have been made to secure an indebtedness of $4,000, but it is denied that the assignments were made after the suspension of business and in contemplation of insolvency of which respondent had notice. As a further defense the answer sets up that the assignment of the accounts was made for a then present consideration, and not a preexisting debt, and that its consideration was the assignment and surrender by respondent of certain other book accounts of the company assigned and taken possession of by the respondent previous to that time, and the payment by the respondent to the company of moneys collected for him from book accounts previously assigned and delivered by the company to him. The corporation law (P. L. 1896, p. 298, § 64) prohibits any sale, conveyance, transfer, or assignment of the property of a corporation, including choses in action, rights, or credits, "whenever any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same and also prohibits such sale or transfer "in contemplation of insolvency." The act further declares that "every such sale, conveyance, assignment or transfer shall be utterly void as against creditors; provided that a bona fide purchase for a valuable consideration, before the corporation shall have actually suspended its ordinary business, by any person without notice of such insolvency or of the sale being made in contemplation of insolvency, shall not be invalidated or impeached."
The first question relates to the time of the making of these assignments, and whether they were made after the corporation actually suspended its ordinary business for want of funds to carry it on. If actually made after such suspension, and the company was insolvent at the time, the assignments are not, as I read the act, protected by the proviso, even if the transfer was upon a present valuable consideration and without notice of the insolvent condition of the company. The facts in reference to the time of the delivery of the assignments are proved by the officers of the company—Mr. Hare, the president, and Mr. Beach, the secretary and officer who delivered the assignments to Mr. Peters. Their evidence shows that the assignments were completed by annexing the full list of accounts and signed by the president, Mr. Hare, and the seal of the company affixed by Mr. Beach, about 9 o'clock in the morning of December 6th, at the store or place of business of the company in Newark. After the execution of the assignments and while Mr. Beach (and probably Mr. Hare) were still in the store, and about noon, Mr. Gray, who held a chattel mortgage on the stock to secure a debt of $5,000 and an assignment of the lease to secure an advance made about December 1st for $500 to pay the rent, took possession under his chattel mortgage. Mr. Beach subsequently went to New York City, and there, at Mr. Peters' office, about 4 o'clock, delivered the assignments to Mr. Peters, receiving from him previous assignments of accounts dated November 19, 1904, which were in Mr. Peters' possession in New York and were delivered to Mr. Beach for cancellation. At this interview Mr. Bench informed Mr. Peters that the chattel mortgagee had foreclosed his mortgage and was in possession of the store and stock of goods, and Beach then received direction from Mr. Peters to consult counsel and protect his interest in the accounts. Pursuant to this direction notices of the assignments of accounts (dated December 0th) were printed and mailed on the three following days and before the filing of the bill for a receiver.
The assignments must be considered as having been legally made at the time of their actual delivery in New York, and not at the time of the execution of the papers in Newark. At the time of the delivery the company had actually suspended its ordinary business, by reason of this foreclosure of the chattel mortgage and entry under the lease. Thatthis suspension was not voluntary on the part of the company, but was under legal proceedings, does not relieve the assignment from the effect of the act, as counsel claim. The assignments therefore are void, if the company was insolvent at the time of their delivery, or if they were made in contemplation of insolvency. Under the evidence in the case, both of these points are established. At this time the entire tangible property, the leasehold and most of the company's accounts, were assigned as collateral security for debts aggregating $10,000, and the unsecured debts amounted to about $15,000 more, far more than any possible equity in the property mortgaged. Suits had been brought against the company. One was then pending on which judgment was entered on December 9th, and the credit of the company was exhausted. The company had little or no cash on hand or in bank. There appears in the case that general inability to meet pecuniary liabilities as they matured, by means of either available assets or an honest use of credit, which constitute insolvency, under our corporation acts. Empire State Trust Co. v. Trustees of Wm. F. Fisher & Co. (N. J. Err. & App.; April, 1905) 60 Atl. 940. The only basis upon which solvency is here claimed is that the book valuation of the stock and property, which was made on October 31, 1905, exceeds the entire liabilities by about $4,000, and that the officers and the assignee, who knew of this valuation, believed this was honest and correct. As a test of insolvency, such valuation is entitled in this case to little or no weight. The company being insolvent and having suspended its business before the delivery of the assignments to the respondent, they are under the act "utterly null and void against creditors," and are not at all within the proviso, which reaches only to a bona fide purchase before the corporation shall have actually suspended business. The assignee's notice of the suspension of business at the time of the delivery of the assignments is proved, and was besides such notice of the insolvency, or of a transfer in contemplation of insolvency, as to prevent the transfer being bona fide. Notice of facts such as the foreclosure of the mortgage and entry under the lease, which on inquiry would have led to information as to the actual condition of the company, must be taken as notice of the insolvency. Tantum v. Green (Err. & App. 1809) 21 N. J. Eq. 364, 369; Dougherty v. Connolly (1901) 61 N. J. Eq. 421, 48 Atl. 777, and cases cited by me on page 428 of 61 N. J. Eq., page 780 of 48 Atl.
These assignments, moreover, are not within the saving clause of the statute, not only because the assignee did not receive them before the suspension of the company's business, and because he is chargeable with notice of the company's insolvency at the time of receiving them, but the assignments were not, except to a small extent, for a valuable consideration, and were made to secure what was in fact for the most part an antecedent indebtedness of the company. Such antecedent indebtedness is not a valuable consideration for a mortgage or assignment under this act. Empire State Trust Co. v. Trustees of Fisher, supra. The facts as to the consideration are these. In October, 1903, Mr. Peters advanced to the company $4,000; the repayment being secured by assignments of book accounts, specified in lists annexed to the assignments, which were declared to be made as collateral security. The loan, which was payable on demand, continued, and weekly thereafter new assignments of accounts were prepared; the previous assignments being delivered up for cancellation upon the execution of each subsequent assignment. Each subsequent assignment included accounts previously assigned which had not been collected. The last of these assignments, preceding December 6th, were two dated November 19, 1904, one of accounts amounting to $3,038.89, to secure $3,000, and one of $1,042.41 of accounts to secure $1,000. Up to this time and in fact up to December 3, 1904, the course of business between the parties had been that the company, and not Mr. Peters, collected the money due on the assigned accounts in regular course, and the money collected was deposited with the company's other funds in its bank account, and was in fact drawn against for the ordinary uses of the company. Whether Mr. Peters knew that the money was so used, is perhaps not entirely clear. There was no express provision in any of the assignments for the collection of the accounts by the company or the substitution of new accounts in the place of accounts collected, nor was any express agreement of this character proved. Beach's present statement is that, on the making of each new assignment, he asked for a continuance of the loan, stating that the money for the assigned accounts then collected was on hand, and that he (Mr. Peters) could have the money or a new assignment. Upon this assurance regularly made, as he says, the new assignments were taken and the loan continued. At the time of the failure, December 6th, the only money on hand from collection of accounts was money which from December 3, 1904, was put by Mr. Beach in his own name from these accounts collected by the company. The amount of this does not appear, nor whether it was from accounts included in the November assignment. On December 6th, the situation in fact was that some of the accounts included in the November assignment, being uncollected, were included in the December assignment, and for the accounts included in the November assignment which had been collected by the company the other accounts specified in the December assignment were substituted. But previous to December 6th, the company had in fact used the money collected on these accounts (except those which might harebeen paid over to Mr. Beach since December 3d), and this fund could no longer be followed. As to this amount, therefore, the company on December 6th was merely a debtor to the company, and to this extent the assignment of December 6th was made to secure an antecedent indebtedness for money collected by the company for the respondent and used by the company. The only part of the consideration for the December assignment, which was a present valuable consideration, were those accounts included in the November assignment still uncollected and continued in the respondent's security by the December assignment, and the money (if any) in Beach's hands, received from the assigned accounts. The surrender and cancellation of the November assignments operated as a relinquishment of title thereunder to the accounts uncollected, and a release of claim thereunder to the proceeds of accounts collected and actually in the control or possession of the company. To this extent, but to this extent only, the consideration for the December assignment was a present valuable consideration, but as this surrender and cancellation, the valuable consideration paid, was made with notice of insolvency, the assignment made "utterly void as against creditors" by the statute cannot be validated, even to this extent. The statute of frauds, making conveyances with intent to defraud creditors utterly void and of no effect as against creditors, contains a proviso saving conveyances for a good consideration and bona fide to a grantee not having notice or knowledge of the fraud. 2 Gen. St. pp. 1604, 1605, §§ 11, 12, 15. Under this proviso, a conveyance with notice is void, although full consideration be paid. Tantum v. Green (Err. & App. 1869) 21 N. J. Eq. 364. And if only a partial consideration is paid, the conveyance is also to be declared void in toto. Mead v. Combs (Zabriskie, Ch.; 1868) 19 N. J. Eq. 112; Holt v. Creamer (Van Fleet, V. Ch.; 1881) 34 N. J. Eq. 181, 187. The express language of the sixty-fourth section of the corporation act controls the case.
The assignment must be declared altogether void, and Mr. Peters must account for the amounts received from the accounts assigned in December. The form of decree will be settled on notice, and I will then hear counsel on the question of including in the account the amounts, if any, received on the accounts assigned in November and held by Mr. Beach after December 3d, and on December 6th at the time of the December assignment.