CARTER
v.
BOGDEN.
In re WESTON-HANSEN, Inc.
No. 6888.
Circuit Court of Appeals, Eighth Circuit.
May 8, 1926.*91 *92 J. E. Robinson, of Denver, Colo., for appellant.
Ivor O. Wingren, of Denver, Colo., for appellee.
Before STONE and VAN VALKENBURGH, Circuit Judges, and WILLIAMS, District Judge.
WILLIAMS, District Judge (after stating the facts as above).
It is assumed for the purpose of this case that, no statute forbidding, and all stockholders agreeing thereto, and no equitable rights of other creditors intervening, the corporation, in assuming or agreeing to pay the indebtedness of the stockholders Weston and Hansen to appellant, same being a valid indebtedness as between said parties, would be bound thereby. 1 Cook on Corporations (8th Ed.) § 3, par. 16. However, will appellant be permitted in bankruptcy, which is a court of equity, administering the law according to its spirit rather than its strict letter, by equitable principles (1 Collier on Bankruptcy [3d Ed.] 39), to participate in distribution of such estate in bankruptcy until creditors whose claims arose subsequent to organization of said corporation, rendered insolvent from its beginning by his designs, have been fully satisfied?
In Duvivier & Co. v. Gallice et al. (2d Circuit) 149 F. 118, 80 C. C. A. 556, relied on by appellant, it was held that a "corporation organized by the members of a partnership, to whom all the stock is issued, to take over all of the property of the partnership and continue its business at the same place, is liable for the debts of the partnership, even though they are not expressly assumed." Duvivier & Co. as a partnership were indebted to Gallice & Co. upon transactions arising whilst the partnership existed, and prior to organization of the corporation contracting such indebtedness, and not appearing to have any relation to the paying in of the capital stock, or its issuance, in such a way as to give such partnership creditor an advantage over subsequent creditors; such corporation acquiring such assets and continuing the business which had theretofore been conducted by said partnership. Neither does it appear, nor is there any suggestion from the opinion or statement of facts, that upon assumption of this indebtedness the corporation was thereby rendered insolvent though it afterwards became a bankrupt. That the assumption of said indebtedness was valid appears to have *93 not been controverted, the only question being raised or considered being as to amount. The question of any rights or equities in favor of subsequent creditors was neither involved nor considered, although the holding is in general terms. The statement in Remington on Bankruptcy, to which reference is made in appellant's brief, is practically that as stated in Duvivier & Co. v. Gallice, the only case cited in its support.
In Re Stone-Moore-West Co. (D. C.) 292 F. 1004, another case relied on by appellant, it is held that, though a purchase by a corporation of partnership assets does not necessarily involve liability for the partnership obligations, such liability may be agreed on as part of the purchase price. The value of the assets purchased equaled the amount paid or agreed to be paid. In the opinion the court says: "The corporate creditors are no worse off than if the corporation had given the partnership its formal note for the value of the assets taken over."
In York Mfg. Co. v. Brewster (5th Circuit) 174 F. 566, 98 C. C. A. 348, another case cited by appellant, it is held that, where associates, who hold property subject to a lien or under a conditional sale, combine to create a corporation to take over the property, such associates being the only persons who have any substantial interest in the corporation, it stands in no better position than that occupied by the prior holders, citing as authority York v. Cassell, 201 U. S. 344, 26 S. Ct. 481, 50 L. Ed. 782, which holds that a trustee obtained no better title than the bankrupt held, and that the title of the bankrupt could not prevail against a contract or conditional sale, and which was decided before the amendment of 1910.
In Re A. G. Crosby (D. C.) 199 F. 344, also cited by appellant, it is held, where a corporation is organized to take over and continue the business of a partnership, acquiring the partnership assets and assuming the liabilities, and "the partnership was solvent at the time," and the corporation "continued to be solvent for a considerable time thereafter, the corporation assets were liable in bankruptcy for a note executed by it to a creditor of the firm to cover a part of the firm's debts so assumed." By implication this case would be an authority, where the corporation was thereby rendered ab initio insolvent and continuing to be insolvent thereafter until adjudication in bankruptcy, for holding that the claim of appellant, the designer and manipulator of such plan, should be deferred until claims of creditors accruing subsequent to its organization, and while insolvent, and before adjudication in bankruptcy, should be fully satisfied.
In Keith v. Kilmer, In re National Piano Company (C. C. A.) 261 F. 733, 9 A. L. R. 1287, it was held: "An executory contract by a corporation for the purchase of its own stock cannot be made the basis of a claim against its estate in bankruptcy, thus permitting the selling stockholder to share with ordinary creditors in the assets." In reaching such conclusion it was assumed that such a contract was sufficiently authorized or ratified, or both, by the directors and stockholders as was required under the state law, and that at the time of the transaction the corporation was solvent, and that it was not (therefore) tainted by fraud in fact, and intent to cheat creditors existing or prospective.
While the laws of Colorado do not require payment of any specified amount of capital to authorize organization of such a corporation and to begin business, section 2273 of the Compiled Laws of Colorado of 1921 makes it the duty of the president and a majority of the directors or trustees, after payment of the last installment of the capital stock fixed and limited by the company, to make a certificate stating the amount of the capital so fixed and paid in, the same to be sworn to and recorded in the office of the secretary of state and a copy filed in the office of the recorder of deeds of the county where the corporation is located. If such statement so filed is false, then such parties are to be jointly and severally liable for all damages arising therefrom. In this case a statement that the capital stock was fully paid up was so filed, but there is nothing in the record to show that any creditor had actual knowledge thereof and thereby relied thereon, but the making and filing of this affidavit at the outset as a part of the transaction is evidence of the painstaking design on part of appellant and his attorney or agent to cause this corporation to be launched in such a way that, though insolvent ab initio, it should have credit; it being contemplated that it should contract debts in order that, though in such insolvent condition, it might operate as a going concern, and add to the stock by purchases on credit extensions, and, whether the business emerged from insolvency, realize on his claim, though at the ultimate expense of such creditors.
Any one, becoming a creditor of a corporation, has a right to rely on the security afforded by the money or assets paid in by the stockholders for its capital stock, and in *94 a proper case equity will prefer the claims of innocent general creditors over claims of stockholders deceived by officers of a corporation. Scott v. Abbott (8th Circuit) 160 F. 573, 87 C. C. A. 475; American Wood Working Machine Co. v. Norment (4th C. C. A.) 157 F. 801, 85 C. C. A. 165; Upton v. Tribilcock, 91 U. S. 45, 23 L. Ed. 203.
The turning of said properties to the corporation, under such scheme, at such an overvaluation, to the knowledge of all contracting parties, including appellant, and that having the effect of rendering said corporation ab initio insolvent, is evidence tending to prove, in connection with other facts disclosed by the record, fraud on part of appellant. Thompson on Corporations, § 1621; In re Royce Dry Goods Co. (D. C.) 133 F. 100; McLellan v. Detroit File Works, 56 Mich. 579, 23 N. W. 321.
Appellant insisted on selling in a lump sum without an inventory. He was chargeable with the knowledge, as was found by the referee, that the contract price was 2½ times its actual value. The plan designed by him and his attorney or agent provided for organization of such corporation to be controlled by him, without any other financial responsibility as a stockholder or otherwise, and rendering it ab initio insolvent. By incurring debts whilst in such insolvent state, and operated, as contemplated by him, as a going concern, if it did not prosper beyond reasonable expectation, so as to enable it to pay the new creditors as well as himself, thereby emerging from insolvency, its adjudication as a bankrupt was inevitable.
The goods or property, such sale agreed upon at a lump sum of $25,000, were invoiced at cost price, at a little over $8,000. An inventory taken shortly after the corporation was formed showed a value between $8,000 and $10,000. A subsequent appraisement, made after some sales and some accretions, fixed maximum value as between $11,000 and $12,000. The value of the property as actually turned in to the corporation did not amount to exceed $9,000. The balance of the $25,000 was made up of good will, which is shown to have been without value, and a short time lease, which was of negligible value. Fictitious values cannot be given to property on account of such considerations. Actual fair value is not made up of good will to the extent of three-fifths of a business. While a seller may arbitrarily fix his own price for his property, he may not participate in a scheme to turn it into a corporation at such arbitrary excessive value, when he knows that it is worth far less especially under such circumstances as will reasonably work a fraud on prospective and contemplated creditors. Neither the individual purchasers nor the corporation had theretofore been engaged in this business. The corporation did not take over a business which had in good faith incurred debts in due course. Appellant's claim is a part of the scheme devised by him by which the corporation became indebted to an extent of at least double the actual value of its assets, thereby rendered insolvent at its very inception, and which renders him ex delicto to the extent that he should not participate in the distribution of its assets until their claims have been satisfied.
Though a novel question is here presented, yet fundamental principles of honest dealing and sound public policy forbid his receiving any distribution on this claim at expense of such creditors of said corporation. The appellee neither having sought a revisal of the order of the referee by the District Court, in so far as it allowed appellant's claim in the sum of $2,800, nor any relief as to said allowance from this court, but having in his brief here asserted that the "ruling of the referee, as confirmed by the District Judge, allowing the appellant's claim to the extent of $2,800, is correct and should be confirmed," this case is remanded, with instructions to modify the order confirming action of referee in disallowing all of said claim in excess of $2,800, so as to allow the balance, with the proviso as to such balance that the appellant is not to participate in the distribution of the assets of said bankrupt corporation until claims of all other creditors, including said $2,800, as allowed, have been satisfied.