Merch.S’ Nat. Bank Of Richmond v. Mills, 20 S.E. 765, 115 N.C. 507 (N.C., 1894)
20 S.E. 765
115 N.C. 507
MERCHANTS’ NAT. BANK OF RICHMOND et al.
NEWTON COTTON MILLS.
Supreme Court of North Carolina.
Dec. 27, 1894.
Fraudulent Conveyances—Insolvent Corporations—Preferring Creditors—Confession of Judgment.
1. Under Code, § 685, providing that a conveyance by a corporation shall be void as to pre-existing creditors, if such creditors begin proceedings within 60 days, a confession of judgment by an insolvent corporation to prefer a creditor is valid if not attacked within such time.
2. The words “trust fund, ” as relating to the assets of an insolvent corporation, apply only after it has been placed in the hands of a receiver.
3. Confession of judgment and filing are sufficient authority for its entry, in the absence of words expressly authorizing it in the statement required, under Code, § 571, which pro vides for a statement which, inter alia, shall “authorize the entry of the judgment.”
4. A statement that the amount was due by a certain note described in the judgment; that said note became due on a day named; and that the consideration was cotton sold and delivered, —was a compliance with Code, § 571, subsec. 2, which provides that the statement “must state concisely the facts out of which it arose, and must show that the sum confessed therefor is justly due or to become due.”
5. A judgment by confession is not vitiated by failure to file the note upon which it is given.
6. A judgment on a note is not vitiated because confessed for a greater rate of interest than the note bears.
7. Irregularities in a judgment by confession, which do not make it void, may be amended.
8. A judgment by confession is not vitiated by a stipulation therein that no execution shall issue for a certain time.
9. A failure to file authority to confess judgment, where such authority in fact exists, does not vitiate the judgment.
Appeal from superior court, Catawba county; Bynum, Judge.
Action by the Merchants’ National Bank of Richmond, Va., and others, against the Newton Cotton Mills, for the appointment of a receiver, etc. From a decree sustaining exceptions by the Potter & Atherton Machine Company to the report of the referee, the bank and others appeal. Modified.
Jones & Tillett and L. L. Witherspoon, for appellants.
Walker & Cansler and W. P. Bynum, Jr., for appellees Potter Mach. Co. and Mitchell & Co.
MacRAE, J. Let us examine first the case presented by the appeal as to the right of an insolvent corporation to make a preference. It is contended with great learning and research by the counsel for the appellees that, when a corporation becomes insolvent, it is thenceforward unlawful for its directors to make any preference in the payment of its debts, but that all its property must be kept and administered for the common benefit of all Its creditors, in the same manner as if the receiver had taken charge thereof, under sections 379 and 668 of the Code. The late cases of Hill v. Lumber Co., 113 N. C. 173, 18 S. E. 107, and Foundry Co. v. Killian, 99 N. C. 501, 6 S. E. 680, are cited as direct authority for such contention. If it has been adjudged by this court that such is the law, every consideration in favor of the stability of judicial decision demands, except in the face of manifest error, that we should abide by it. This leads us to inquire what was decided in Hill v. Lumber Co. The question there was as to the validity of a preference made in favor of a director of an insolvent corporation. His duties and liabilities, as one occupying a fiduciary relation to the stockholders and creditors, were there discussed, and the language of the opinion delivered is to be understood in its application to the facts of that case. In the examination and decision of appeals, we are confined to the questions at issue.
[20 S.E. 766] Whatever is written must be taken with reference to its environment; and that which, isolated, would be a broad proposition, when considered in connection with the subject-matter under discussion, may be, and generally is, restricted in its meaning. It is the tendency to give further effect than was intended to words used in reference to a particular state of facts, which sometimes confuses the interpretation of the law, and makes that broader and more comprehensive which in its application to the case at bar is simple and plain. Could a director of an insolvent incorporation, who was also a creditor, take advantage of the means of information at his hands, and so protect himself, to the injury of other creditors who were debarred from the same opportunities? Herein was invoked the principles of equity, the relation of trust and confidence borne by the director to all the stockholders, and extended in case of danger of loss to all the creditors; and the broad proposition, so often stated and so often explained in cases like the present, where it was thought to extend its meaning beyond the purposes for which it was used, was laid down that a director is a trustee, first, for the stockholders, and then for the creditors. The present question was in that case not necessary to be and was not decided, and, if it had been in express terms decided, such decision would have been simply a dictum, binding no one further than in its application to the question then before the court Understood as used and applied in Hill v. Lumber Co. in case of the insolvency of a corporation, and as against the fiduciary in charge of its assets, those assets are a trust fund, and the general creditors are, at least, entitled to be secured out of the assets upon equal terms with the directors who are also creditors. But, after diligent examination, we find that, by the laws of this state, corporations have never been restrained from the exercise of preference in favor of creditors, not corporators, further than individual persons are, subject, of course, in both instances, to the controlling principles of the statute of frauds that these preferences must not be made with a purpose to defeat, delay, or hinder other creditors or parties in interest We may here say that the expression used in Hill v. Lumber Company that creditors have a lien upon the assets was a quotation from 2 Story, Eq. Jur. § 1252, where the word “lien” is explained to mean simply a right of priority of payment in preference to any of the stockholders in the corporation.
The case of Foundry Co. v. Killian, 99 N. C. 501, 6 S. E. 680, presented one single question, —the liability to creditors of corporations of the stockholders thereof, to the extent of their unpaid subscriptions; and the decision there was founded upon the principle that the property, including the capital stock, paid and unpaid, constitutes a fund for the benefit of creditors; “that the capital stock of a corporation is a trust fund, to be preserved for the benefit of corporate creditors.” Our laws provide for the appointment of a receiver of an insolvent corporation, or one in imminent danger of insolvency. This appointment is to be made on application of any creditor, stockholder, or member of such corporation. Code, § 668, as in Killian’s Case. And, when the receiver shall have collected the assets, he is required to pay all the debts if the funds shall be sufficient, and, if not sufficient, to distribute the same ratably among all the creditors who shall prove their claims. When once the court of equity, through its receiver, takes charge of the assets, they are to be distributed pro rata among the creditors, subject to such priorities as have already accrued. It is provided in section 685 that corporations may convey by deed, but that such conveyance shall be void as to existing creditors, etc., provided proceedings to enforce such claims be commenced within 60 days after the registration of said deed. The converse of this provision is, if no creditor or party injured brings his action within 60 days, his remedy fails, and the conveyance is good. Thus, a conveyance by an insolvent corporation, not forbidden by the statute of frauds, is good, unless some creditor or party injured objects within 60 days. These corporations, creatures of the statute, artificial persons, under the direction of the legislature, have all the rights and liabilities, generally speaking, of individual persons. Before the passage of the amendment to the act of 1798, we think, by the act of 1872 (now section 685 of the Code), a corporation might convey land, etc., by deed executed according to the statute or the common law. The amendment added the provision that any such conveyance should be void as to pre-existing debts and torts, “provided such creditors or persons injured shall commence proceedings, etc., within 60 days after the registration of said deed, as required by law.” The effect of this amendment is not to make void such deeds as against creditors and persons injured unless proceedings are begun in 60 days. This has been expressly decided in Blalock v. Manufacturing Co., 110 N. C. 99, 14 S. E. 501, which was cited with approval in Hill v. Lumber Co. This question, then, is settled in North Carolina against the contention of the appellees and the judgment of his honor below.
The meaning of the words “trust fund, ” as used in this connection, is to be explained, as it has been many times in other courts, not strictly a trust to be administered in the first instance upon the insolvency of the corporation for the benefit of all the creditors pro rata; but whenever proceedings under the statute are had, and the court takes charge of the assets, through its receiver, it will make equitable distribution, among all the creditors, of all the assets not subject to prior liens or rights. Until such jurisdiction takes hold of
[20 S.E. 767] the assets, they are subject to the action of the individual creditors, and such preferences may be made by the corporation as a natural person might make under the same circumstances of insolvency. The present exigency will not permit us to notice the many authorities adduced by the learned counsel in support of the contrary doctrine. We must content ourselves with a reference to the language used in Hollins v. Iron Co., 150 U. S. 371, 14 Sup. Ct 127, in reference to the ordinary meaning of these words “trust fund” in the present connection: “While it is true language has been frequently used to the effect that the assets of a corporation are a trust fund held by the corporation for the benefit of creditors, this has not been to convey the idea that there is a direct and express trust attached to the property. As said in 2 Pom. Eq. Jur. § 1046, they are not, in any true and complete sense, ‘trusts, ‘ and can only be called so by way of analogy or metaphor.” After reviewing many cases in that court where these words are used or explained, the court proceeds: “A party may deal with a corporation in respect to its property in the same manner as with an individual owner, and with no greater danger of being held to have received into its possession property burdened with a trust or lien. The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to an account for fraud, or sometimes even mere mismanagement in respect thereto. As between itself and its creditors, the corporation is simply a debtor, and does not hold its property in trust, or subject to a lien in their favor, in any other sense than does an individual debtor. The assets of such a corporation [an insolvent bank] are a fund for the payment of its debts. If they are held by the corporation itself, and so invested as to be subject to legal process, they may be levied on by such process.” Curran v. Arkansas, 15 How. 304. The text writers, while criticising the doctrine with singular unanimity, admit its existence. In 2 Mor. Priv. Corp. § 802: “In the absence of statutory prohibition, a corporation has the same power of making preferences among its creditors in the distribution of its assets as an individual.” This is stated as collected from the repeated decisions of the courts, although the author, in the next section, in giving his own views, strongly combats the principle. To the same effect is 2 Spel. Priv. Corp. § 999. “However unjust it may appear in principle, It seems to be settled by the decisions that a corporation may, prior to any interference with the conduct and management of its agents on account of its insolvency, and in the absence of different provisions in bankrupt or insolvent laws, give a preference in payment or security to one creditor or class of creditors over another.” And 2 Wat. Corp. § 208: “A corporation, unless restrained by its charter or by statute, has the same right to prefer one creditor to another in the distribution of its property as an individual, and it may execute a mortgage or give a lien which shall operate as a preference.” The author, after admitting that this doctrine is recognized both at law and in equity, proceeds to question its justice. Seeing, then, that it has already been settled in this state, and is recognized as the law by the supreme court of the United States, and admitted by the text writers, we must declare that his honor was in error in holding these preferences void as against the other creditors.
It is contended by Mitchell & Co. and the Potter & Atherton Machine Company, appellees, that, although they did not appeal from the judgment of the court below, the judgments confessed in favor of the Merchants’ Bank of Richmond and others were in conformity to the statute (sections 570-572 of the Code), and they are entitled to have their exceptions to this ruling considered here, in order that if this court shall be of the opinion that, for any reason, the conclusion reached by his honor that said judgment creditors are not entitled to preference or priority over other creditors, the judgment below ought to be affirmed. Conceding this last proposition under the authority of Bell v. Cunningham, 81 N. C. S3, we proceed to consider the question whether said judgments were confessed in conformity to the statute.
We reproduce here a copy of the proceedings on the judgment confessed in favor of the Merchants’ Bank of Richmond, as all the others except one are substantially similar:
“$5,371.60. Newton, N. C, March 16th, 1893. Pour months after date, we, the Newton Cotton Mills, promise to pay to the order of Heath, Springs & Co. five thousand three hundred and seventy-one and sixty one-hun-dredths dollars at Mercantile National Bank, New York. Value received. No. ——. Newton Cotton Mills, by W. H. Williams, President Due July 16-19, 1893.
“North Carolina, Newton Township. Catawba County, July 31st, 1893. At a meeting of the stockholders of the Newton Cotton Mills, this day duly called, all the stock being represented at such meeting, it was unanimously resolved that the president, W. H. Williams, be, and he is hereby, authorized to confess judgment against the Newton Cotton Mills, and in favor of the Merchants’ National Bank of Richmond, Va., for the sum of five thousand three hundred and seventy-one and sixty one-hundredths dollars, for money due the said bank by the corporation; also to confess judgment against the corporation in favor of the Exchange Bank of Chester, S. C, for the sum of forty-eight hundred and thirty-two and thirty-eight one-hundredths dollars, for money due the said bank by note made to Heath, Springs & Co., and indorsed to it, which said note will become due August 4th, 1893; also to confess judgment against the corporation in favor of the Bank of Lancaster, S. C, for the sum of forty-seven hundred and fifty-six dollars
[20 S.E. 768] and ten cents, due by the corporation to said bank upon two notes made by it to Heath, Springs & Co., the one to become due on August 20th, 1893, for twenty-four hundred ($2,400.00) dollars, and the other to become due on August 27th, 1893, for twenty-three hundred and fifty-six and ten one-hundredths dollars, which said notes have been indorsed to the said bank by Heath, Springs & Co. All of the said judgments are authorized to be entered in the superior court of Catawba county, North Carolina.
“I certify that the foregoing is a full, true, and perfect copy of the resolution passed this day at a meeting of stockholders of the Newton Cotton Mills. W. H. Williams, President Newton Cotton Mills. G. A. War-lick, Secretary.
“State of North Carolina, County of Catawba. In the Superior Court The Merchants’ National Bank of Richmond, Va., vs. The Newton Cotton Mills. The Newton Cotton Mills, by W. H. Williams, president being thereunto duly authorized by the Newton Cotton Mills, hereby confesses judgment in favor of the Merchants’ National Bank of Richmond, Va., the plaintiff above named, for the sum of five thousand three hundred and seventy-one dollars ana sixty cents, with interest at 8 per cent. from July 19th, 1893. This confession of judgment is to secure the plaintiff the sum above named, which is due by a certain promissory note made by the Newton Cotton Mills to the firm of Heath, Springs & Co., and which the said Heath, Springs & Co. indorsed to the plaintiff for value, which said note became due and payable on the 19th day of July, 1893. That the consideration of this note was cotton sold and delivered to the Newton Cotton Mills by Heath, Springs & Co. Newton Cotton Mills, by W. H. Williams, President.
“North Carolina, Catawba County. Before me, J. F. Herman, clerk of the superior court, of Catawba county, personally appeared W. H. Williams, president of Newton Cotton Mills, who, being duly sworn, maketh oath that the statement above signed by him is true. W. H. Williams.
“Subscribed and sworn to before me, July 31st, 1893. J. F. Herman, Clerk Superior Court
“State of North Carolina, County of Catawba. In the Superior Court. The Merchants’ National Bank of Richmond, Va., vs. The Newton Cotton Mills. Upon filing the foregoing statement and confession, it is ordered and adjudged by the court that the plaintiff, the Merchants’ National Bank of Richmond, Va., do recover of the defendant, the Newton Cotton Mills, the sum of five thousand three hundred and seventy-one dollars and sixty cents, with interest at 8 per cent. from July 19th, 1893, and costs of action. J. F. Herman, Clerk Superior Court. July 31st, 1893.
“I agree that no execution issue on this Judgment until after six months from date. H. C. Jones, Attorney for Plaintiff.”
The first objection is that there is no authority for entering the judgments stated in the confession. Code, § 571, provides that “a statement in writing must be made, signed by the defendant and verified by his oath, to the following effect: (1) It must state the amount for which judgment may be entered and authorize the entry of judgment therefor.” It will be noted that there are no words in the confession expressly authorizing the clerk to enter the same upon the records, but the record does show that the said confession was sworn to and filed, and judgment thereupon entered. The necessary result of the proceedings was to authorize the clerk to enter the same upon the record. The filing with him could be for no other purpose, and we think that the confession itself, with the filing thereof, was express authority for its entry.
(2) That it is not shown in the confession that the sums for which judgments are confessed are justly due or to become due. It will be observed that it states the amount for which the judgment is confessed; that the same is due by a certain promissory note described therein, which said note became due and payable on a day named; and that the consideration for the same was cotton sold and delivered. The requirement of the statute (the. same section last named in subsection 2) is not that it shall state, but “and must show, that the sum confessed therefor is justly due or to become due.” If the statement is true, it follows that It is shown to be justly due.
(3) That the evidences of Indebtedness, or copies of the same, were not filed with, attached to, or described in, the confessions. We do not understand that the failure to file the specialty when a judgment is rendered has the effect to invalidate the judgment. Frequently, in practice, when the complaint is upon a promissory note, and there is an answer filed admitting the debt, or where the complaint is verified, and no answer filed, judgment is entered, and the attorney permitted to bring in the note at a subsequent time. The note is not strictly part of the record, though it should be produced that it may be canceled when required. In this respect there is no difference between a judgment rendered according to the ordinary course of the court and one by confession. “Among the matters which are not (unless made so by bills of exceptions, or by consent or by order of court) matters of record are all matters of evidence, written or oral, including note, bond, or mortgage filed in the case, and upon which suit is brought.” Freem. Judgm. 79. The note upon which the Judgment is confessed is thus described in the statement: “A certain promissory note, made by the Newton Cotton Mills to the firm of Heath, Springs & Co., and which the said Heath, Springs & Co. indorsed to the plain-
[20 S.E. 769] tiff for value, which said note became due and payable on the 19th day of July, 1893.” We think this is sufficient description to enable a party to make inquiry, and ascertain the truth of the matter. 2 Freem. Judgm. 549.
(4) “That the said judgments were confessed for goods sold and delivered, and the time of sale, quantity, price, value of the goods, and ‘the exact consideration’ of the indebtedness are not stated in the confessions.” It is required by the statute that “it must state concisely the facts out of which it arose.” Recently, in considering similar objections to a confessed judgment, to those now taken, where the affidavit stated that the amount was due “on a bond under seal for borrowed money due and payable November 2, 1876, ” we held the statement sufficient. Uzzle v. Vinson, 111 N. C. 138, 16 S. E. 6. See, also, 1 Black, Judgm. 63.
(5) “That said judgments, except that confessed to J. R. Gaither, were confessed for a greater rate of interest (to wit, 8%) than was allowed by the notes or contracts upon which the said judgments are alleged to have been based, which notes and contracts, when filed, not with the confessions, but before the referee, showed that they carried only 6% interest.” It appears in the case that, upon the hearing before the referee, these judgment creditors remitted all claim for interest over 6 per cent. The question is whether the confession of judgment for a greater amount of interest than was justly due was rendered void thereby, or could the judgments stand for the true amount, —interest at 6 instead of 8 per cent.? As we have indicated, the object of the statute in requiring a concise statement of the facts constituting the liability does not necessitate a full history of the whole transaction, does not require a bill of particulars, but does require such a statement as will enable one who desires to inquire into the transaction to do so by reference to the statement made. It would not be contended that an ordinary judgment could be vacated for an overcharge of interest unless the act was fraudulent. Here, by reference to the note which, if not filed with the confession, might be required to be produced by proper proceeding, it would at once be ascertained that the interest confessed was too great. The remedy would be the correction of the judgment to that ex. tent, but, unless fraud was shown, it would not vitiate the judgment. Hard v. Foster (Mo. Sup.) 11 S. W. 763; 2 Freem. Judgm. 545, 519.
(6) “That plaintiffs, in said judgments, could not, after said judgments had been confessed, and before the referee, after the hearing was begun, amend or change the same by filing the evidences of Indebtedness or resolutions, or remitting interest, or in any other respect or particular.” If the proceeding were so defective in form and substance that it was void upon its face, no amendment could be made to give it life; but, If there were irregularities which in ordinary judgments might be cured by amendment, there is no reason why they could not be amended. 1 Freem. Judgm. 66, 67. No liens had been acquired by the appellees by force of the filing of their complaint. Our statute (Code, § 273) is liberal in the power granted the court to allow amendments.
The next objection is that, to the three judgments confessed in favor of the Merchants’ Bank of Richmond, the Exchange Bank of Chester, and the Bank of Lancaster, the stipulation at the foot that no execution should issue in six months was a benefit reserved by the debtor for his ease and comfort, to the impairment of the rights of other creditors, and therefore a fraud which vitiated these confessions. The lien of the judgments began from the docketing of the same, as to the real estate of the judgment debtor. There is no requirement of law that a judgment creditor should at once proceed to have execution. There is no lien upon personal property except from the levying. If there were any personal property to be subjected to the payment of the debts of the corporation, this stipulation was more for the benefit than to the detriment of other creditors. And, the lien on real estate having been acquired by the docketing of the judgments, their rights could not be affected by the agreement on the part of the judgment creditors to a cessat executio.
What we have written disposes of all the exceptions, except the additional one as to the Gaither judgment, —that he was permitted to amend by appending an itemized statement of his open account, and this before any liens had been acquired by the appellees. This amendment it was in the power of the court to permit. 2 Freem. Judgm. 554; 1 Black, Judgm. 66. These matters, connected with confessions of judgments, have been quite fully considered by this court, and the rule laid down in Davidson v. Alexander, 84 N. C. 621, has been upheld, —that the confession must contain a concise verified statement of the facts, circumstances, business transactions, and considerations out of which the indebtedness arose. What constitutes such a concise statement has been considered in Davenport v. Leary, 95 N. C. 203; Nimocks v. Shingle Co., 110 N. C. 20, 14 S. E. 622; and in Uzzle v. Vinson, supra. In Nimocks’ Case it was said: “Ordinarily, a corporation should act through its properly constituted board of directors, or its officers or agents duly authorized to do particular acts, such as confessing a judgment. That the officer or agent was authorized to have the judgment confessed, as directed, should appear to the clerk in some way, as by a properly authenticated certificate of the proceedings of the directors of the company, and this should be filed with the statement, in writing, of the claim upon which the judgment is founded. This, perhaps, would be the better course ”
[20 S.E. 770] in our last case, the affidavit set out the authority, but the authority itself, though presumably submitted to the clerk when the judgment was confessed, was not filed until later. We are of the opinion that the failure to file the authority at the time of the confession does not vitiate the judgment
Having disposed of the exceptions of the appellees, as if the points had been made in an independent action to vacate for fraud or other, cause making void the judgment, and not upon a motion to set aside for irregularities, it follows that in our opinion, there was error in the judgment of his honor that these judgments were void as to the other creditors, for any reason. The judgment will be modified so as to direct the satisfaction of these judgments after the payment of the mechanics’ and laborers’ liens, except that of the Foster Machine Company, instead of placing them in the class with all the unpreferred claims proved before the referee. Modified.