Opinion
Submitted October term, 1936.
Decided January 22d 1937.
1. It is the settled law of this state that a corporation has implied power to purchase its own capital stock, provided no illegitimate design appear.
2. At a time when the dissolved company was prosperous and had a large surplus, defendants, who were officers, stockholders and directors of that company, consented to the making of the contract by which they bought complainant's stock. After partially performing that contract, the defendants dissolved the company and subsequently formed the new company, defendant here, under the identical name of the dissolved company, turned over all the assets of the old corporation to the new corporation and issued to themselves the same number of shares of stock as each theretofore held in the dissolved corporation. Complainant brings his bill, praying decree for the unpaid balance due on his contract. After sale of his shares, complainant was recognized as a creditor of the old company, which carried his account on its books until dissolved. Held, at the dissolution of the old corporation, the directors, by virtue of section 54 of the Corporation act, became trustees at the moment of dissolution, and the assets became a trust fund for the equal benefit of all creditors, as the rights of such creditors existed at the time of dissolution, and thereafter for the benefit of stockholders — the debts to be paid ratably.
3. Defendants' contention that complainant waived the statutory duties and requirements of the defendants as trustees in dissolution, by reason of the fact that he accepted several checks after the date the new company was formed, cannot prevail. It appears from the evidence that the complainant was not informed of the formation of the company and at no time subsequent to that occurrence gave his assent to the arrangement. Nothing connected with the checks gave him notice of the new corporation being formed, since they were identical with the checks of the old company.
4. Counter-claim admitting complainant's contract and the balance due thereon, together with the fact that defendants are trustees in liquidation, and praying that if counter-claimant be held liable to complainant, that it be decreed that the new company be held primarily liable and the counter-claimant exonerated for such sum of money as may be required to pay the complainant, and that a lien be impressed therefor on the property of defendant company, dismissed. Complainant held entitled to a decree against all the defendants, individual and corporate. The new company took the assets of the old company cum onere and is primarily liable; the individual defendants are jointly and severally secondarily liable.
On appeal from a decree of the court of chancery advised by Vice-Chancellor Stein, who filed the following opinion:
"Complainant's bill is founded upon a contract made with Radel Leather Manufacturing Company, dated March 26th, 1929, by the terms of which complainant sold to Radel Leather Manufacturing Company two hundred and thirty-nine shares of the capital stock of that company at $112.33 per share making a total of $26,846.87. The balance sheet of the defendant company as of December 31st, 1929, reflected the following under `liabilities:' `Owen E. Fox $23,846.87,' and showed the company's surplus as of January 1st, 1929, to be $48,298.76. The company thereafter partially performed its contract and paid to the complainant on account thereof $17,246.87, in installments extending over a period of years.
"The individual defendants herein, composing the entire board of directors and officers of the company, dissolved the company on May 13th, 1932, and filed the certificate of dissolution with the secretary of state May 23d 1933. Subsequently the same individual defendants by certificate dated August 14th, 1933, incorporated a new company by the identical name of the dissolved company and turned over to the newly formed corporation all of the assets of the old corporation and issued to themselves the same number of shares of stock as each theretofore held in the dissolved corporation.
"Complainant prays decree for the unpaid balance due on the contract (stipulated to be $9,600), together with interest, charging that at the moment the company was dissolved, the defendants by virtue of the Corporation act of this state became statutory trustees in dissolution for the purpose of winding up its affairs by converting its assets into money, and paying its debts, and that as such trustees they are jointly and severally liable for the payment of complainant's debt to the extent of the money and property of the dissolved company which came into their hands or possession.
"Practically all of the facts necessary to establish complainant's cause of action are admitted in the pleadings, or stipulated by counsel.
"At the time the contract was entered into, the defendants constituted all of the stockholders, directors and officers and were closely related one to the other. The company was prosperous and had a large surplus. The admitted book value per share of the stock was $116.01, while the price agreed to be paid to complainant was $112.33 per share.
"No rights of creditors are involved. The issues raised are raised by the officers, stockholders and directors of the old company, all of whom knew of and consented to the making of the contract and who have, for upwards of six years, taken the benefits thereof. They now seek to rid themselves of a trust imposed upon them by statute which obligated them to liquidate in accordance with the law.
"Under the circumstances the authorities are legion and their pronouncements emphatic that the corporation had a right to purchase its corporate stock. It was so held in Chapman v. Iron Clad Rheostat Co., 62 N.J. Law 497, approved by the court of errors and appeals in Berger v. United States Steel Corp., 63 N.J. Eq. 809, and thereafter many times cited with approval. Vice-Chancellor Berry recently in the case of Downs v. Jersey Central Power, c., Co., 115 N.J. Eq. 348; affirmed, 117 N.J. Eq. 138, said: `But irrespective of charter provisions it is the settled law of this state that a corporation has implied power to purchase its own capital stock "provided, of course, no illegitimate design appear."'
"And so in Wolff v. Heidritter Lumber Co., 112 N.J. Eq. 34, Vice-Chancellor Buchanan held: `Aside from the rights of creditors [which in the instant case were in nowise prejudiced or infringed], and the right of the state that no criminal or fraudulent act be perpetrated [which is in nowise intimated in the present case], it would seem that the stockholders are the only ones interested, and that any purchase might be made to which all stockholders expressly assented.'
"When the contract was executed complainant assigned his shares to the old company, and thereafter was recognized and considered as a creditor. His account was so set up in the books of the corporation and in every financial statement for a period of six years, from 1929 to 1935.
"The case of Wolff v. Heidritter Lumber Co., supra, presents a striking parallel both factually and legally with the case at bar. There one Poppenga entered into an agreement whereby he agreed to sell and the company agreed to buy from him one hundred and fifty shares of the capital stock of the company for $40,000. The contract provided for the payment of the purchase price in stated installments. The lumber company became insolvent. Poppenga's claim as a creditor, filed with the receiver for the unpaid balance of the purchase price of the stock was resisted. `In the instant case,' said the vice-chancellor, `the contract was a presently operative purchase — not an executory contract to purchase in futuro; it gave no right to the stockholder to continue his status as a stockholder as long as he deemed it profitable and then later to convert himself into a creditor at the expense of other creditors — it converted him at once into a creditor and not a stockholder [although there was a clause giving him the option to repurchase the stock]; and the corporation, at the time of making the purchase, was not insolvent but had a large net surplus.'
"Not only is the contract in this case free from the option to repurchase, extended to the vendor of the shares in the cited case, but in addition thereto the complainant, Fox, transferred and assigned his shares to the old company immediately upon the execution of the contract, thus immediately vesting title in the old company.
"Upon the dissolution of the corporation it is provided by our Corporation act ( 2 Comp. Stat. p. 1635 § 54), that the directors `shall be trustees thereof, with full power to settle the affairs, collect the outstanding debts, sell and convey the property and divide the moneys and other property among the stockholders, after paying its debts, so far as such moneys and property shall enable them. * * *' The following section 55 provides that such directors as trustees shall have power to sue for and recover debts and property, `and shall be suable by the same name or in their own names or individual capacities, for the debts owing by such corporation, and shall be jointly and severally responsible for such debts, to the amount of the moneys and property of the corporation which shall come to their hands or possession as such trustees.' The legislative intent as manifested by the statute was held to be, that at dissolution the assets of the corporation become a trust fund for the equal benefit of all creditors as the rights of such creditors may be found to have existed at dissolution, and for the benefit of the stockholders after the payment of all debts of the corporation, and that this trust fund shall be preserved for and applied to the payment of such debts ratably; and that the effect of the provisions of the statute is to fasten the debts of the corporation upon its property at the moment of dissolution to exactly the same extent as though by express terms of the statute the legal title of the assets as distinguished from the equitable title, had at that moment been made to pass to the trustees for the purposes of a trust for equal distribution. Trustees of Sea Isle City Realty Co. v. First National Bank of Ocean City, 87 N.J. Eq. 84; Camden Mortgage Guaranty and Title Company et al., v. Haines, 110 N.J. Eq. 461.
"The evidence in the instant matter presents a situation in which on the filing of the certificate of dissolution on May 13th, 1932, the directors became at once trustees with certain fixed statutory duties and responsibilities with reference to the administration of the trust for the benefit of the complainant a creditor and the stockholders of the company. Complainant having parted with his stock and assigned it to the company immediately upon the making of the agreement of March 26th, 1929, became a creditor, and upon dissolution the balance due him under his installment contract became at once due and payable. Disregarding their duty as trustees to apply the trust fund in their hands to the payment of the debt and the orderly liquidation of the corporation, the defendants, so to speak, divided the assets of the corporation which formed the trust fund among themselves and formed a new corporation, concerning all of which procedure it appears from the evidence the complainant was not informed and at no time subsequent thereto gave his assent.
"The defendants' counsel in their brief admit that upon the dissolution of the old company, its directors became trustees in dissolution charged with the duties imposed upon them by the statute, but contend that such statutory duties and requirements were waived by the complainant, Fox, when the new company was formed. The contention thus made is based, as I understand it, upon the fact that subsequent to August 14th, 1933, the date upon which the new company was formed, the complainant received and accepted seven checks totaling $400, on account of the contract for the sale of his stock. The complainant insists that he knew nothing of the formation of the new corporation and never assented thereto. Certainly the checks which he received did not lead him to suspect that a new corporation had been formed since on their face they were identical in every respect with the checks which he theretofore received from the old company. The name of the new corporation was the same `Radel Leather Manufacturing Company' and the checks were drawn upon the same bank, The Merchants and Newark Trust Company, Newark, New Jersey, and signed by the same officers who functioned for the old company. Moreover, the evidence discloses that the defendants endeavored to procure from the complainant a new contract on behalf of the new company, which, in a letter dated September 19th, 1933, he refused to enter into and in which letter he said in part: `I want to be fair, and as far as a new agreement on payments is concerned, I think that a matter for our lawyers, as the liquidation and reorganization endangers the whole status of our previous contract. Let us be open and above board and place our cards on the table face up.' I do not find from the evidence that the complainant at any time relinquished his right to hold the individual directors and trustees in dissolution responsible to him as a creditor.
"The complainant's bill presents a cause of action against the defendant corporation and the individual defendants.
"The defendant Frederick Radel filed answer and counter-claim admitting complainant's contract and the balance due thereon and therein admits that upon the dissolution of the company, he together with the other directors became trustees in liquidation. By way of counter-claim he prays that if he be held liable to the complainant that it be decreed that the new company formed be held primarily liable and decreed to exonerate him as a defendant for such sum of money as he may be required to pay to complainant, and that to the extent of such sum as he may be decreed to pay a lien may be impressed therefor upon the property of the defendant company. Equitably this defendant-trustee is in no better position or entitled to any higher rights than his co-trustees. The counter-claim will be dismissed.
"The complainant is entitled to decree against all of the defendants. The property and assets of the old company were transferred to the new company and it assumed the liabilities of the old company. The defendant corporation admits this assumption of liability in its answer and there is ample authority to support the proposition that since the new company took over the assets of the old company for the purpose of carrying on its business and without change in the personnel of the corporation it is liable for the payment of the debts of the old concern. Under such circumstances, it is held to take the benefits and advantages cum onere. 10 Cyc. 1111 and cases there cited; Parsons Manufacturing Co. v. Hamilton Ice Manufacturing Co., 78 N.J. Law 309; Chorpenning v. Yellow Cab Co., 113 N.J. Eq. 389; affirmed, 115 N.J. Eq. 170.
"The decree will be that the defendant Radel Leather Manufacturing Company is primarily liable and the defendants Frank J. Radel, Frederick W. Radel, Conrad H. Koellhoffer and Dennis F. O'Connor, are jointly and severally secondarily liable for the debt due to the complainant to the amount of the moneys and property of the Radel Leather Manufacturing Company, a corporation of this state, which came into their hands or possession as trustees upon the dissolution of the corporation."
Messrs. McCarter English, for the appellants.
Mr. Harry Krieger, for the respondent.
For the reasons expressed in the foregoing opinion of Vice-Chancellor Stein, the decree appealed from will be affirmed, with the following modification, to wit: the defendants should be held liable to the complainant in the sum of $9,600 with simple interest only, to be computed from May 24th, 1933, to the date of payment rather than with interest thereon from said date to be computed by annual rests, as provided in said decree.
For affirmance — THE CHIEF-JUSTICE, TRENCHARD, PARKER, CASE, BODINE, HEHER, PERSKIE, HETFIELD, DEAR, WELLS, WOLFSKEIL, RAFFERTY, COLE, JJ. 13.
For reversal — None.