Opinion
No. 1410.
June 10, 1934.
J.O. Sams, of Meridian, Miss., for Claimant, M.P. Johnston.
George B. Neville, of Meridian, Miss., for trustee.
In Bankruptcy. In the matter of the Dalton Electric Company, bankrupt. On review of referee's order sustaining trustee's objections to allowance of claim of M.P. Johnston for wages.
Order affirmed.
The findings and certificate of Referee Lester E. Wills are as follows:
An order was entered sustaining the objections of the trustee to the allowance of the claim of M.P. Johnston for wages from which review has been allowed. The claimant duly filed his claim for wages in the amount of $390, being $130 per month for the three months preceding bankruptcy; and claimed priority under section 64b (5) of the Bankruptcy Act, as amended by Act May 27, 1926 ( 11 USCA § 104(b)(5).
The trustee objected to the allowance of this claim because, first, the claimant was not working for wages and the claim is not entitled to priority; second, the trustee is entitled to set off against the claim the amount of $850 which remains unpaid on advances illegally made to Mrs. Jacqua, a sister of the claimant, who was a stockholder in the bankrupt corporation, said loan being prohibited by section 4151 of the Mississippi Code of 1930; and, third, the trustee is entitled to a set-off for wages paid to the claimant on his past due account during the four months next preceding bankruptcy.
The claimant was the secretary and treasurer of the corporation, owning 49 per cent. of the stock, while his brother, who was president of the corporation, owned 49 per cent. of the stock, the other 2 per cent. belonging to Mrs. Jacqua and another. The claimant managed the store operated by the corporation. kept its books of account and records, sold merchandise, and performed any and all classes of services needed in the operation of the store. Claimant's brother was in charge of all outside work which consisted in performing contracts for electrical installations, making estimates for work, and planning work to be performed.
Both the claimant and his brother assumed responsibility for advances made to Mrs. Jacqua, beginning July 1, 1925, and continuing until a short time prior to bankruptcy, the last balance being $882.51. From November 15, 1930, until November 15, 1933, date of adjudication, the total charges to this account were $720.04.
Claimant and his brother knew that the corporation had shown an operating deficit for two years prior to adjudication, and for approximately one year prior thereto they contemplated the filing of a voluntary petition. During the four months preceding the filing of the petition, payments were made to claimant on his wage account in the amount of $232.66. These payments were applied to periods preceding the three months for which wages are claimed, and no credit is allowed therefor in the proof of claim.
On the question of priority of payment the test is the meaning to be given to the words "workman," "clerk," "salesman," and "servant" as used in the statute; and (2) the requirement that claimant be a subordinate employee.
From a consideration of the many cases in which section 64b (5) of the Bankruptcy Act, as amended, is considered and applied, it appears that the words "workman," "clerk," "salesman," and "servant" are descriptive of the relationship existing between the claimant and the bankrupt and that the character of work performed is not conclusive but merely evidence of the relationship existing. In re Crown Point Brush Co. (D.C.N.Y.) 200 F. 882, 29 A.B.R. 638; In re Gay Sturgis (D.C. Mass.) 233 F. 604, 36 A.B.R. 350; In re Boston French Range Co. (D.C. Mass.) 235 F. 916, 37 A.B.R. 508; In re Footville Condensed Milk Co. (D.C. Wis.) 237 F. 136, 38 A.B.R. 472; In re Eagle Ice, etc., Co. (D.C. Pa.) 241 F. 393, 39 A.B.R. 184; In re Snow Wire Works (D.C.N.Y.) 34 A.B.R. 152, referee's opinion; In re Blessing v. Blanchard (C.C.A. Cal.) 223 F. 35, Ann. Cas. 1916B, 341, 35 A.B.R. 135; In re Lawsam Electric Co. (D.C.N.Y.) 300 F. 736, 3 A.B.R. (N.S.) 678.
See, also, Remington on Bankruptcy (3d Ed.) §§ 2785.06 and 2785.07 (New).
In order for the relationship contemplated by the statute to exist, the claimant must necessarily have been subordinate to some other authority in the corporation. In re Brady v. McCann (C.C.A. Ohio) 8 F.2d 928, 7 A.B.R. (N.S.) 299; In re Greenberger (D.C.N.Y.) 203 F. 583, 30 A.B.R. 117; In re Crown Point Brush Co. (D.C.N.Y.) 200 F. 882, 29 A.B.R. 638.
Thus the managing officers of the corporation or the managers of the business of a bankrupt are not entitled to priority within the meaning of the act. Keyes v. Davie (C.C.A. Wash.) 231 F. 688, 36 A.B.R. 884; In re Eagle Ice Co. (D.C. Pa.) 241 F. 393, 39 A.B.R. 184.
The case of In re Grubbs-Wiley Grocery Co. (D.C. Mo.) 96 F. 183, 184, 2 A.B.R. 444, presented a question similar to the one under consideration. The claimant was a stockholder in the corporation, one of the board of directors, and its general manager. In passing upon his claim for priority under section 64b (5), the court used the following language:
"Could it be maintained that he was a workman or servant of the company on a salary, entitling him, on the declaration of bankruptcy of the concern, to have his salary paid as a preferred claim? Indeed, it would present a remarkable feature of the bankrupt act, if the managing officers of a business corporation could vote themselves salaries ad libitum, and after, by their mismanagement, wrecking the company, and inviting an adjudication of bankruptcy, they could, to the exclusion of other creditors of the concern, whose money and property they had obtained on credit, come in as preferred creditors, to the exclusion of such general creditors. The act, in my judgment, admits of no such construction."
See, also, In re Ye Ladies Shoppe, Inc. (D.C. Del.) 283 F. 693, 49 A.B.R. 268.
It seems clear from the principles applicable to this case that the claimant is not a "workman," "clerk," "salesman," or "servant" within the meaning of those words as used in section 64b (5), as amended, especially in view of the fact that the absolute control of the bankrupt corporation was vested jointly in the claimant and his brother. This being true, the claim, if allowed, would not be entitled to priority.
The second objection of the trustee to this claim, if sustained, will preclude any recovery at all by the claimant.
Section 4151 of the Mississippi Code of 1930 provides as follows:
" Restrictions on Loans by (Corporations). — A loan of money shall not be made * * * to any stockholder therein; and in case such loan be made, the officers who make it or assent thereto shall be jointly and severally liable for the amount thereof, and interest, to creditors whose debts were contracted before the repayment of the money by the borrower."
The claimant contends that since this section, by its terms, specifically limits the right of action therein created to creditors whose debts were contracted before the repayment of the money by the borrower, the right against the officer of the corporation making the loan cannot be asserted by the trustee in bankruptcy.
In discussing the trustee's title and rights, Remington on Bankruptcy divides them into three groups: First, the title and rights of the bankrupt; second, the title of the creditors to the property of the bankrupt under state law; and, third, the peculiar rights and title conferred by the Bankruptcy Act.
The second group, that is, as a creditor or successor in title to a creditor, this text also divides into three groups, which are as follows:
1. Rights as to fraudulent transfers and holdings under section 70a(4) and section 70e, 11 USCA § 110(a)(4) and (e) and section 67e, 11 USCA § 107(e).
2. Rights which some existing creditor actually has acquired and to which the trustee is subrogated under section 67a, b, and e, 11 USCA § 107 (a, b and e), as aided by the provisions of section 67f, 11 USCA § 107(f) for the preservation for the benefit of the bankrupt estate of otherwise nullified liens.
3. Rights which are independently conferred by the amendment of 1910 to section 47a (2), 11 USCA § 75(a)(2). Remington on Bankruptcy (3d Ed.) § 1508.
In section 1537 of this same text, the following appears:
" Unlawful Disposition of Corporate Assets by Directors. — The Trustee may, in general, recover corporate property unlawfully disposed of by directors. Thus he may recover dividends paid out of capital and not out of net earnings (Citing Mackall v. Pocock, 38 A.B.R. 680, 136 Minn. 8, L.R.A. 1917C, 390, 161 N.W. 228). Thus he may recover property transferred to a stockholder in payment for stock of the corporation while insolvent (Citing Henderson v. Garner, 39 A.B.R. 792, 200 Ala. 59, 75 So. 387). Thus he may sue the directors or managing officers for waste or misappropriation of corporate assets (Citing Bynum v. Scott [D.C.N.C.] 217 F. 122, 33 A.B.R. 436)."
The test applied generally by this text is whether or not the right conferred upon the creditor is procedural or substantive. See section 1512. Thus, it is stated in section 1610 that the right of the creditor specifically conferred by state statute generally inures to the trustee, the instances wherein they do not being where the rights depend on special remedies not available because of bankruptcy.
In the case of In re Swofford Brothers Dry Goods Co. (D.C. Mo.) 180 F. 549, 25 A.B.R. 282, it is held that rights of action by a corporation, under a local statute, are vested in the trustee in bankruptcy. There does not seem to be any escape from the conclusion that the trustee may assert whatever rights have accrued to the creditors of the bankrupt under section 4151 of the Mississippi Code of 1930.
The claimant contends that even if the trustee is entitled to the set-off, still he is barred by the three-year statute of limitation, section 2299 of the Mississippi Code of 1930. However, it will be noticed that advances were made on this account during the three-year period in the amount of $720.04. In this state of the record, such payments as were made must be applied to the oldest items in the account not already barred by limitation, and the statute applied to each new advance as of the date on which it was made. Travis Co. v. Mosley, 148 Miss. 368, 114 So. 628. Since the offset extinguishes the claim, it should be disallowed without regard to priority.
The trustee contends that the payment of $232.66 during the four months preceding bankruptcy amounted to a voidable preference and should be offset against the claim if the claim is otherwise allowable. In this contention the trustee relies upon the case In re King Co. (D.C. Mass.) 113 F. 110. In this case it was held that preferential payment of wages to a workman where the same results in a net increase of the indebtedness of the bankrupt to the employee, does not constitute a voidable preference. However, the court holds that where such a payment reduces a common claim during the four-month period, the claimant cannot be allowed priority for the balance. Under this case it would appear that the claimant would not be entitled to priority for $232.66 of the wages claimed because this amount was paid to him during the four-month period and his common claim was thereby reduced. No other case has been found in which this question is considered.
I have carefully considered this case upon the certificate of the referee and briefs of counsel, and think the decision of the referee is correct and should be affirmed. The excellent manner in which the referee has presented the issues and the bases of his findings thereon make it unnecessary for me to write anything further. However, without too much repetition, it may not be inappropriate for me to enlarge upon the reasons why the trustee in bankruptcy may assert as a set-off any claim against corporate officers, who lend to its stockholders money belonging to the corporation, given by section 4151 of the Mississippi Code of 1930 (section 922 of Mississippi Code of 1906), whether such claim accrues to the creditors of the corporation or to the corporation itself.
Under said section 4151, the loan is illegal and the officer is liable in damages to the corporation for a breach of a statutory duty. This duty is to refrain from lending money to shareholders. When the right is violated, the common law gives a remedy for the wrong done. The fact that a direct remedy is given to creditors by the statute was not intended to deprive the corporation itself of the right to hold the officer to account for breach of his duty to it. Doubtless a double recovery would not be permitted, but no such question can arise here because, as will be seen later, in this case the rights of the corporation to sue a faithless officer at common law, and of creditors to sue under the Mississippi statute, are merged in the trustee in bankruptcy under sections 70a, as amended, and 47a (2) of the Bankruptcy Act, 11 USCA § 110(a), and § 75(a)(2).
Returning to the right of the corporation to sue an officer who has made an illegal loan of corporate funds to a stockholder of the corporation, the claim is a property right or chose in action vesting in the corporation by reason of the violation of a statutory duty. This property right passes to the trustee in bankruptcy under section 70 of the act ( 11 USCA § 110). For this illegal loan a direct right, remedy, or power to sue is given specified creditors by said section 4151 of the Mississippi Code of 1930. It is a right "as to property of the bankrupt" given creditors of the bankrupt by a state statute. It also passes to the trustee in bankruptcy under section 47a (2) of the Bankruptcy Act, because, under said section, the trustee does not merely stand in the shoes of the bankrupt, but occupies the status of its most favored general creditor who has obtained a judgment and holds an execution duly returned unsatisfied.
Since the amendment of 1910, decisions holding that a trustee has no other right than belonged to the bankrupt are no longer controlling. The state law controls as to what rights a lien or execution creditor would have. The argument of claimant's attorney in his brief as to lack of mutuality necessary to the right of set-off by the trustee is completely answered by this view because the wages are claimed to be due by the corporation to the officer thereof. Against the claim, the trustee seeks to offset a claim due by the officer to the corporation which passed to the trustee under said section 70. Therefore, the claim of lack of mutuality cannot be sustained against the trustee in bankruptcy, who is vested with every property right, including choses in action, which belonged to the bankrupt at the time the petition in bankruptcy was filed and, in addition, who is vested with every right, remedy, and power of a judgment creditor holding an execution duly returned unsatisfied. There is mutuality of right because any debt, counterclaim, or recoupment which either the corporation or any creditor of the corporation might assert against the claimant may be set off by the trustee in bankruptcy.