1. Where a corporation, solvent at the time, and having no
actual intent to defraud creditors, disposes of its lands for an
inadequate consideration or by a voluntary conveyance, its
subsequent creditors cannot question the transaction.
2.
Semble that where a corporation has waived, or
omitted to exercise, the right to institute proceedings to recover
lands of which it has been defrauded, such right does not inure to
the benefit of subsequent creditors or purchasers.
This is a bill in equity filed by Lawrence G. Graham and Donald
D. Scott against the La Crosse and Milwaukee Railroad Company, the
Milwaukee and St. Paul Railway Company, Moses Kneeland, James
Ludington, Byron Kilbourn, and others, to subject certain real
estate in the City of Milwaukee, Wisconsin, to the satisfaction of
certain judgments recovered by the complainants against the
first-named company for an indebtedness on contracts arising after
its sale and conveyance of that real estate, to Charles D. Nash.
The defendants deraign title through him.
Page 102 U. S. 149
The court below dismissed the bill, whereupon the complainants
appealed here. The remaining facts are stated in the opinion of the
court.
Page 102 U. S. 151
MR. JUSTICE BRADLEY delivered the opinion of the Court.
In September, 1855, the La Crosse and Milwaukee Railroad Company
not being at that time, so far as appears, indebted in any
considerable amount, sold certain lands in the City of Milwaukee
not then wanted for railroad purposes to Charles D. Nash for the
sum of $25,000. The officers of the company who took a leading part
in negotiating the sale are charged to have been interested in the
purchase, and to have furnished Nash the means for effecting it. At
all events, shortly after it was made, Nash conveyed the property,
for the original consideration, to Moses Kneeland, one of the
officers referred to, and Kneeland, retaining one third part,
subsequently conveyed the other two third parts to Ludington and
Kilbourn, they all being directors of the company, and members of
the executive committee. The company itself never questioned the
fairness of this transaction; on the contrary, the sale was
subsequently (in March, 1858) expressly confirmed by the board of
directors, and a further quitclaim deed executed by the company in
confirmation thereof. In September and November, 1858, the
appellants recovered two judgments against the company for
indebtedness on contract, arising after the sale of the lands, and
issued executions thereon, under which levies were made on said
lands, as lands of the company. In January, 1860, the appellants,
having sued on these judgments in the United States court,
recovered a second judgment for upwards of $40,000, issued
execution thereon, and made another levy on the lands. Being
unwilling to attempt a sale under their said execution in
consequence of the deeds for the lands being recorded, the
appellants, in June, 1860, filed the bill in this case against
Kneeland, Kilbourn, Ludington, and the railroad company, setting
forth their said judgments, executions, and levies, stating the
fact of the said sale to Nash and his conveyance to Kneeland, and
the latter's conveyance to the other parties; alleging that the
transaction was a fraud against the corporation and its creditors,
and complaining that the said
Page 102 U. S. 152
conveyances of the lands were a cloud upon their right to sell
the lands under execution, and an impediment in the way of the
execution of their writ of
fieri facias; and prayed that
the lands might be decreed subject to the lien of their judgment;
that they might be decreed to be authorized to sell the same, or so
much as might be necessary for the purpose of satisfying their
judgment; and that Kneeland, Kilbourn, and Ludington might join in
the conveyance, and might be restrained from claiming the land; and
that the conveyances to them might be declared null and void. The
bill, amongst other things, averred that the lands were sold to
Nash for much less than their real value; but it contained no
allegation that the company was insolvent, or that it had not other
assets available under an execution; nor was any offer made to
repay the consideration which the purchaser had given for the
lands.
To this bill the defendants severally filed answers, denying
that the lands were worth more than $25,000 at the time of sale;
averring that the sale was made in good faith, and with the
company's concurrence, and setting forth in detail many
circumstances tending to show that the title was involved and
embarrassed; that they required large outlays of money to render
them available; that the company had offered them for sale in the
market, and was unable to get from any other person the price paid
for them by Nash; that although Nash was requested to purchase the
lands by Kneeland, and was aided by him in paying therefor, yet
Nash had the option to keep them; but after making the purchase and
inquiring into the title and situation of the lands, he asked to be
relieved from the purchase, and that thereupon Kneeland, Kilbourn,
and Ludington took them off of his hands.
The parties went into proofs, and it appears that the company
had, for months prior to the sale, been endeavoring to dispose of
the lands, and could get no purchaser at the price offered by Nash;
and the leading statements of the answer, as to the title and
situation of the lands, were verified. It also appeared that the
railroad company never objected to the sale, but that it was
expressly confirmed in March, 1858, by a resolution of the board of
directors, as before noticed.
Various transactions subsequently took place, by which other
Page 102 U. S. 153
parties became interested in the lands, and in the affairs and
property of the railroad company, which are fully developed in the
supplemental proceedings and proofs; but it is unnecessary to
notice them further. The foregoing statement exhibits the leading
features of the case as presented for our consideration.
The main question is, whether the sale to Nash, made before the
railroad company became indebted to the appellants, and when for
all that appears it was perfectly solvent, even though made for the
use and benefit of the officers referred to, can be set aside at
the instance of the complainants, for the purpose of subjecting the
lands to sale under their execution. And this question, we think,
must be answered in the negative.
It is a well settled rule of law that if an individual, being
solvent at the time, without any actual intent to defraud
creditors, disposes of property, for an inadequate consideration,
or even makes a voluntary conveyance of it, subsequent creditors
cannot question the transaction. They are not injured. They gave
credit to the debtor in the status which he had after the voluntary
conveyance was made.
The authorities on this subject are fully collected in the notes
to
Sexton v. Wheaton, 1 Am.L.Cas. 1, and in the opinion of
Mr. Chief Justice Marshall in that case; and the general doctrine
is affirmed in
Mattingly v.
Nye, 8 Wall. 370.
It is true that if a debtor dispose of his property, with intent
to defraud those to whom he expects to become immediately or soon
indebted, this may be a fraud against them, which they may have a
right to unravel. But that is a special case, to which the present
bears no resemblance. It is not pretended that the railroad company
disposed of the property in question for the purpose of defrauding
creditors, much less for the purpose of defrauding those who
afterwards in due course of business might become its
creditors.
But it is contended that this is a case in which the debtor
corporation was defrauded of its property, and that as the company
had a right of proceeding for its recovery, any of its judgment and
execution creditors have an equal right; that it is a property
right, and one that inures to the benefit of creditors.
Page 102 U. S. 154
Conceding that creditors who were such when the fraudulent
procurement of the debtor's property occurred -- and cases to that
effect have been cited -- the question still remains, whether, the
debtor being unwilling to disturb the transaction, subsequent
creditors have such an interest that they can reach the property
for the satisfaction of their debts. We doubt whether any case,
going as far as this, can be found. No such case has been cited in
the argument. Dicta of judges to that effect may undoubtedly be
produced, but they are not supported by the facts of the cases
under consideration.
It seems clear that subsequent creditors have no better right
than subsequent purchasers, to question a previous transaction in
which the debtor's property was obtained from him by fraud, which
he has acquiesced in, and which he has manifested no desire to
disturb. Yet, in such a case, subsequent purchasers have no such
right. In
French v. Shotwell, 5 Johns. (N.Y.) Ch. 555,
Chancellor Kent decided, upon full consideration, that when a party
to a judgment, entered upon a warrant of attorney, voluntarily
waives his defense or remedy on the ground of fraud or usury, and
releases the other party, a subsequent purchaser under him, with
notice of the judgment, will not be allowed to impeach it, or to
investigate the merits of the original transaction between the
original parties; and he dismissed a bill filed by the subsequent
purchaser for relief in such a case. The Chancellor said:
"If the party himself who is the victim of fraud or usury
chooses to waive his remedy and release the party, it does not
belong to a subsequent purchaser under him to recall and assume the
remedy for him. If a judgment was fraudulent by collusion between
the parties to it, on purpose to defraud a subsequent purchaser,
the case would present a very different question. But if the
judgment was fraudulent only as between the parties, it is for the
injured party alone to apply the remedy. If he chooses to waive it
and discharge the party, it cannot consist in justice or sound
policy, that a subsequent voluntary purchaser, knowing of that
judgment, should be competent to investigate the merits of the
original transaction as between the original parties.
Quisque
potest renunciare jure pro se introducto. . . . It is stated
to have been a principle of the common law that a fraud could only
be
Page 102 U. S. 155
avoided by him who had a prior interest in the estate affected
by the fraud, and not by him who subsequently to the fraud acquired
an interest in the estate.
Upton v. Basset, Cro.Eliz. 445,
and recognized in 3 Co. 83
a."
This decision of Chancellor Kent was afterwards nearly
unanimously affirmed by the Court of Errors. 20 Johns. (N.Y.)
668.
When the question of the right of a creditor to set aside a
conveyance procured from the debtor by fraud first came before the
courts in England, it was held that the debtor's own right was
merely the right to file a bill in equity against the fraudulent
grantee adversely; and, if he did not see fit to take such a
proceeding, his creditor had no such privity with the transaction
as to enable him to obtain relief, even though the debtor should
assign his supposed right to the creditor; that the transaction
savored of champerty, and was opposed, at least, to the spirit of
the law against champerty and maintenance. This was the substance
of the decision by the Court of Exchequer in 1835, in
Prosser
v. Edmonds, 1 Y. & C. 481. Lord Abinger treated the case
as a new one, and at the close of the argument remarked that his
impression was that such a claim could not be sustained in equity,
unless the party who made the assignment joined in the prayer to
set it aside. He afterwards gave a deliberate opinion upon the
point. In that case, an executor and trustee had fraudulently
procured an assignment of his brother-in-law's interest in the
estate, knowing its value, which was unknown to the assignor. A
subsequent creditor of the assignor, to whom he assigned his whole
interest in the estate, filed a bill to set aside the assignment to
the trustee. Lord Abinger distinguished the case from that of an
assignment of a chose in action, as a note not negotiable, or a
bond, or a mortgage, or an equity of redemption, where possession
of the thing assigned is delivered to the assignee, and treated it
as an assignment of a mere naked right to file a bill in equity, in
which the last assignee purchased nothing but a hostile right to
bring parties into a court of equity as defendants to a bill filed
for the purpose of obtaining the fruits of his purchase. "What is
this," says the Lord Chief Baron,
"but the purchase of a mere right to recover? It is a rule, not
of our law alone, but of the of all countries (Voet ad Pandect,
Page 102 U. S. 156
Lib. 41, tit. 1, sec. 38), that the mere right of purchase shall
not give a man a right to legal remedies. The contrary doctrine is
nowhere tolerated, and is against good policy. All our cases of
maintenance and champerty are founded on the principle that no
encouragement should be given to litigation by the introduction of
parties to enforce those rights which others are not disposed to
enforce. There are many cases where the acts charged may not amount
properly to maintenance or champerty, yet of which, upon general
principles, and by analogy to such acts, a court of equity will
discourage the practice. . . . Robert Todd, when he assigned, was
in possession of nothing but a mere naked right. He could obtain
nothing without filing a bill. No case can be found which decides
that such a right can be the subject of assignment, either at law
or in equity."
These remarks are very broad, and would apply to the case of
existing as well as subsequent creditors; though the case itself
was that of a subsequent creditor. It forms the subject of a
section in Story's Commentaries on Equity (sec. 1040
h),
where, in a note, Lord Abinger's opinion is extensively quoted; and
it has been followed by other very respectable authorities, and, as
applied to subsequent creditors, at least, we think that the
reasoning is sound.
The principle established in
Prosser v. Edmonds has
been adopted by the Supreme Court of Wisconsin, in which state the
lands in question are situated. In
Crocker v. Belangee et
al., 6 Wis. 645, decided in 1858, it was held that a deed
obtained from the grantor, through fraudulent representations made
by the grantee, is not void, but voidable only, at the election of
the grantor, and that the conveyance of the same land by the
grantor to another person is not the exercise of such election, and
does not avoid the former deed; that in order to avoid such former
deed, some proceeding must be had by the grantor to which the
grantee is a party, and that a subsequent purchaser from the
grantor cannot set up the alleged fraud of the first grantee to
defeat his title -- the court holding that the right of a vendor to
avoid a sale or deed on the ground of fraud practiced by the vendee
is not a right or interest capable of sale and transfer, so as to
enable a subsequent vendee of such right, for such cause, to attack
the title
Page 102 U. S. 157
of the first vendee; that it is a mere personal right, incapable
of sale or transfer.
In
Milwaukee & Minnesota Railroad Co. v. Milwaukee &
Western Railroad Co., 20
id. 174, the latter company
had covenanted to pay a certain portion of an encumbrance on
railroad property afterwards purchased by the complainant company
under a subsequent mortgage. A release of the obligation had been
fraudulently, as alleged, procured from the original mortgagor
company owning the road. The complainant purchased under a mortgage
which conveyed "all causes of action, demands, and choses in
action, of whatever nature," of the mortgagors; and claimed to have
purchased the right to set aside the alleged fraudulent release,
and filed a bill for that purpose; but the bill was dismissed on
the ground that such a right of action could not be thus assigned.
The court said:
"Admitting that the facts alleged present a case which would
entitle the La Crosse and Milwaukee company [the mortgagor] to have
the release set aside on account of these acts of fraudulent
concealment by one of its directors of his interest in the
defendant company, and assuming that the further fact appears that
this right of action has been assigned by the La Crosse and
Milwaukee company to the plaintiff, the question would then arise,
whether the release could be avoided on the application of such
plaintiff, the La Crosse and Milwaukee company making no complaint
of the fraud whatever. In other words, is this mere right to
litigate the question, and to set aside the deed of release on
account of fraud practiced upon the assignor, a subject of
assignment and transfer, and will a court of equity allow the
assignee to stand in the shoes of the assignor in respect to the
remedies?"
And then referring to the previous case of
Crocker v.
Bellangee et al., and to
Prosser v. Edmonds, the
court expresses its approbation of those decisions, and adds:
"A reference to these authorities is all which probably need be
said at this time in regard to the allegations above cited
[referring to the contention of counsel], and upon the point
whether the plaintiff company could avoid the release for the
alleged fraudulent act of concealment, even if this right of action
had been assigned to it by the La Crosse and Milwaukee company.
"
Page 102 U. S. 158
It seems to us that those cases, which, so far as it appears,
declare the settled law of Wisconsin, are conclusive of the present
case.
It is contended on the part of the appellants that
Prosser
v. Edmonds has been overruled by the subsequent cases of
Dickinson v. Burrell, Law Rep. 1 Eq. 337, and
McMahon
v. Allen, 35 N.Y. 403. We have examined these cases, and
others which are supposed to be in conflict with
Prosser v.
Edmonds. In
Dickinson v. Burrell, the Master of the
Rolls, Lord Romilly, expressly disavows any intention to overrule
the former case. He says:
"The demurrer is mainly supported on the case of
Prosser v.
Edmonds, which was decided, after long deliberation, by Lord
Abinger; but I am of opinion that the case before me does not fall
within the rule established by that decision."
The case then before the court was, that a conveyance of an
interest in an estate had been fraudulently procured from
Dickinson, by his own solicitor, to a third party for the
solicitor's benefit, and for a very inadequate consideration.
Dickinson, ascertaining the fraud, by a conveyance which recited
the facts, and that he disputed the validity of the first
conveyance, transferred all his share in the estate to trustees for
the benefit of himself and his children. The trustees filed a bill
to set aside the fraudulent conveyance upon repayment of the
consideration money and interest, and to establish the trust. The
Master of the Rolls sustained the bill, observing:
"The distinction is this: if James Dickinson had sold or
conveyed the right to sue to set aside the indenture of December,
1860, without conveying the property, or his interest in the
property, which is the subject of that indenture, that would not
have enabled the grantee, A.B., to maintain this bill; but if A.B.
had bought the whole interest of James Dickinson in the property,
then it would. The right of suit is a right incidental to the
property conveyed. . . . I think that the distinction between the
conveyance of the property itself and the conveyance of a mere
right to sue, or what in substance is a right to sue, is taken by
Lord Abinger in the case of
Prosser v. Edmonds. The
distinction is also taken in
Cockell v. Taylor, 15 Beav.
103, and in
Anderson v. Radcliffe, Ell., B. & E. 806,
and has been adopted and approved in many other cases; and it is, I
think, founded in reason and good sense. "
Page 102 U. S. 159
Surely there is here no overruling of
Prosser v.
Edmonds, even if such overruling could avail against the
Wisconsin decisions. It leaves that case in full force as to
assignments of the mere right to sue. In the case before us there
is not even that. The railroad corporation acquiesced in the sale,
and confirmed it. The conveyance, which, perhaps, might have been
set aside had the company seen fit, became absolute as between the
parties and carried the title. It is as valid between the parties
as if the corporation had conveyed to a stranger. The appellant
then becomes a creditor, and afterwards obtains judgment, and
simply makes a levy; and then comes into court and asks its aid to
remove a cloud from its title. What title? Has he acquired any
title? Was there any title for him to acquire? There had been a
right to file a bill in equity, and that right had been remitted by
the company's acquiescence in the sale -- probably for the reason
that it obtained all that the property was worth at the time. The
contrary, at least, is not established. And if it were established,
it would only make out a case of voluntary conveyance as against a
subsequent creditor, which has already been considered. We think
that there is nothing in the case of
Dickinson v. Burrell
to overrule the effect of
Prosser v. Edmonds, so far as
the present case is concerned.
Then, as to
McMahon v. Allen, 35 N.Y. 403, decided in
1866. One Harrison, in March, 1852, being in debt, was induced by
the fraudulent contrivance of his agent and attorney, and to the
prejudice of his creditors, to convey to said agent, for a very
inadequate consideration, his interest in his mother's estate and
in certain other property, he being ignorant of the fraud practiced
upon him. In August, 1852, Harrison made a general assignment for
the benefit of his creditors of all his property and rights of
action, with full power to sue for and collect the same. The
assignee filed a bill to set aside the conveyance to the agent. The
bill was sustained. The court, Mr. Justice Hunt delivering the
opinion, relied on
Dickinson v. Burrell, saying: "In the
recent case of
Dickinson v. Burrell, this precise question
was presented," and, after quoting largely from the opinion in that
case, added:
"This was a well considered case, is of high authority, and,
in
Page 102 U. S. 160
my opinion, is an accurate exposition of the law. I think it
should control the present case."
In the New York case, it is true, there was no express
repudiation of the fraudulent conveyance, as in
Dickinson v.
Burrell, but there was a conveyance of the estate to the
assignee, with a power to sue for the benefit of creditors, and
those creditors had been directly defrauded. Without further
comment, it seems to us clear that
McMahon v. Allen cannot
control the present case.
The principle that subsequent creditors cannot question a
voluntary or fraudulent disposition of property by their debtor not
intended as a fraud against them is especially applicable in cases
of constructive fraud, like that charged in the present bill.
Suppose it be true that the purchase of the lands in question by or
for the benefit of officers of the company actively concerned in
the transaction could be set aside at the instance of the company
as a constructive fraud, yet if there was no actual fraud, if the
company received full consideration for the property sold, how can
it be said that subsequent creditors of the company are
injured?
In the present case, we are satisfied from the evidence that the
property was sold for its fair value at the time, and that no
actual loss accrued to the railroad company's estate.
It would be unjust and a great hardship, therefore, on the mere
ground of the constructive fraud to allow creditors who had no
interest at the time to seize and dispose of the property sold.
It is contended, however, by the appellant that a corporation
debtor does not stand on the same footing as an individual debtor;
that whilst the latter has supreme dominion over his own property,
a corporation is a mere trustee, holding its property for the
benefit of its stockholders and creditors; and that if it fail to
pursue its rights against third persons, whether arising out of
fraud or otherwise, it is a breach of trust, and creditors may come
into equity to compel an enforcement of the corporate duty. This,
as we understand, is the substance of the position taken.
We do not concur in this view. It is at war with the notions
which we derive from the English law with regard to the nature of
corporate bodies. A corporation is a distinct entity.
Page 102 U. S. 161
Its affairs are necessarily managed by officers and agents, it
is true; but in law it is as distinct a being as an individual is,
and is entitled to hold property (if not contrary to its charter)
as absolutely as an individual can hold it. Its estate is the same,
its interest is the same, its possession is the same. Its
stockholders may call the officers to account and may prevent any
malversation of funds or fraudulent disposal of property on their
part. But that is done in the exercise of their corporate rights,
not adverse to the corporate interests, but coincident with
them.
When a corporation becomes insolvent, it is so far civilly dead
that its property may be administered as a trust fund for the
benefit of its stockholders and creditors. A court of equity, at
the instance of the proper parties, will them make those funds
trust funds which, in other circumstances, are as much the absolute
property of the corporation as any man's property is his. We see no
reason why the disposal by a corporation of any of its property
should be questioned by subsequent creditors of the corporation any
more than a like disposal by an individual of his property should
be so. The same principles of law apply to each.
We think that the present bill cannot be maintained.
Decree affirmed.