Opinion
08-26-1898
TENNANT v. APPLEBY et al.
Charles M. Vreeland and P. P. MeDormott, for complainant. Warren Dixon, for defendant Leonia Co.
Bill by George C. Tennant, as receiver, against J. Randolph Appleby and others. Heard on bill and supplemental bill, answers, replications, and proofs. Dismissed.
Charles M. Vreeland and P. P. MeDormott, for complainant.
Warren Dixon, for defendant Leonia Co.
EMERY, V. C. The original bill in this cause was filed by the receiver of an insolvent corporation, the Appleby Bros. Company, against J. Randolph Appleby, a director and officer of the company, for the purpose of declaring void a lien obtained by him, upon personal property of the company, by means of a judgment and execution against the company, and also to declare void certain conveyances of real estate of the company made to him in February, 1895, less than two months before the adjudication of insolvency. A sale under the execution had taken place on the day previous to the filing of the bill in the insolvency proceedings (March 14, 1895), and the money realized by the sale was afterwards paid into the court out of which the execution issued. The supplemental bill is filed to obtain a decree that the receiver is entitled to these funds, and the Leonia Company, to which J. Randolph Appleby assigned his right in the judgment and claim against the company, is made a party to the supplemental bill. The original and supplemental bill attack the judgment as irregularly entered before judgment was due, and for the purpose of preferring Appleby. They also charge that the notes upon which the judgment was based were without consideration. But, in reference to the indebtedness of the company to the director Appleby, the receiver is concluded by the adjudication on this subject made in the suit at law, where the judgment was set aside, and he was admitted to defend the suit on behalf of the company. This determination of the existence and amount of the indebtedness is conclusive against the receiver in the insolvency proceedings, and in this suit.
Upon opening the judgment and allowing the receiver to defend the suit, it was directed that the judgment was to stand as security. Upon the trial a verdict was obtained against the receiver for $2,000 damages, upon which judgment was entered, this amount being in excess of the amount paid into court upon the sale under execution ($1,399.47). J. Randolph Appleby was the secretary and treasurer and the managing officer of the company from the time of its organization, in the fall of 1894, until its insolvency, and the owner of most of its capital stock. His wife was a director, and was the president upon whom the process in the suit was served, and his mother was the other director. The execution practically absorbed the assets of the company then remaining, so that little or nothing has come to the possession of the receiver for the payment of other creditors of the company. in relation to the judgment, the bill charges, among other things, that it was suffered to be entered by the company in order to defraud the creditors of the company, and to enable Appleby to absorb the available assets of the company, and prays that the money realized on the sale should be declared to be held in trust for the receiver. Upon consideration of the evidence in the case, I reach the conclusion that, at the time when this judgment was entered and the execution issued under which the lien upon the personal property was obtained, the company was insolvent, and that the object and intent of the director, Appleby, in obtaining judgment and execution, was to obtain a preference over the other creditors of the company in the distribution of its assets. The rule in equity governing such cases, as finally declared by the court of errors and appeals in Montgomery v. Phillips (1895) 53 N. J. Eq. 203, 31 Atl. 622, and Savage v. Miller (February, 1898) 39 Atl. 665, is that, independent of any statute relating to preference of creditors by an insolvent corporation, the directors of a corporation upon its insolvency become trustees for its creditors, and cannot use their own positions of trust to obtain for their own debts an inordinate share of the assets. The right of the receiver against the director in case the director does, either by direct conveyance or the machinery of a judgment and execution, obtain such preference, is an equitable right to set aside the security, and recover the property for the general benefit of the creditors, including the director as a creditor with others. J. Randolph Appleby was a director, and was the real manager of the company in control of its affairs from the time of its organization, in 1894, up to the date of entering judgment and issuing the execution, March 6, 1895; and it was at this time his duty, as director and trustee, to institute proceedings for the equal division of its assets, rather than to permit or procure the entry of a judgment in his own favor, which did practically absorb the then available assets of the company. The insolvency of the company, as early as February 7, 1895, the date of the conveyance to Appleby, and of the notes upon which judgment was obtained, is alleged in the bill; and the principal disputed question of fact at the argument was whether the company was Insolvent as early as this date. But so far as relates to the preference obtained by lien on the personal property, under the judgment and execution, the question is whether the company was insolvent at the time of obtaining the preference by lien, and whether the preference obtained by the directors by means of the judgment and execution was in violation of his duties as trustee under the doctrine of the above cases. I conclude that it was, and that the complainant, as receiver, is entitled to recover against Appleby, and against the Leonia Company, his assignee, the money paid into the court on the execution. The assignment was made pendente lite, and with notice of the receiver's claim, and no claim was made at the hearing that the Leonia Company was a bona fide purchaser. The consideration of the assignmentwas not proved. Appleby's claim, as established against the receiver by judgment in the action, must, however, be considered as one of the claims or debts of the company for the purpose of distribution, and the recovery will be upon that condition.
As to the conveyances made by the company to Appleby, in February, 1895, the only charge in the bill relating to these conveyances is that they were in fact voluntary and without consideration, and made to defraud the creditors of the company. The proof in the case on the part of the defendant is that they were made in payment of $600 of the Indebtedness of the company to the defendant, and complainant has not produced any proofs sufficient to overcome this evidence as to the transaction. There is some question in my mind whether, on the bill and answer, and without amendment of the pleadings, the issue of unlawful preference of a director can arise in reference to these conveyances. But assuming that it can, or that the defect could be cured by an amendment to meet the proofs offered on the subject by the parties, I do not think the evidence satisfactorily establishes that these conveyances were made either for the purpose of preferring a director in contemplation of insolvency, or with the actual intent to defraud, and as to these I conclude that the receiver is not entitled to set aside the conveyances. All of the claims of creditors which have been proved before him seem to be based upon liabilities of the company arising after the date of the conveyances; and the conveyances in payment of the directors' debt are therefore valid as to the receiver and the creditors he represents, unless actual intent to defraud be proved, or it be proved that they were made in actual contemplation of the subsequent insolvency. I do not think either of these grounds is established, and, as to the conveyances, relief will be denied, and the bill dismissed.