Hibernia Ins. v. St. Louis & New Orleans Transp. Co.

This case has been considered upon the plea interposed by the defendant to the fifth subdivision of the bill, and the proofs adduced in support of the same. The bill alleges that the complainant is, by subrogation to the rights of certain shippers, a creditor of the Babbage Transportation Company, a corporation of Missouri, and that, after the creation of the' indebtedness, said corporation transferred all its property to the St. Louis & New Orleans Transportation Company, another Missouri corporation, without making provision for the payment of complainant’s claim. It is alleged that Henry Lourey, being the President of said Babbage Transportation Company, and the principal owner of the stock thereof, organized the said St. Louis & New Orleans Transportation Company, and caused all the property of the former to be sold and transferred to the latter, without paying or securing the debt due the complainant. It is averred that the said sale was made witnout the payment of any consideration by said St. Louis & New Orleans Transportation Company. Then follows the following allegations, to which the plea applies:

"Fifth. And your orators charge that said sale and transfer of the property of said Babbage Transportation Company to the said defendant, St. Louis &Hew Orleans Transportation Company, was fraudulent as against the rights of the complainants, creditors of the said Babbage Transportation Company, and that the said Henry Lourey and the said St. Louis &Hew Orleans Transportation Company had notice of said fraud; and so your orators allege and charge that said St. Louis & Hew Orleans Transportation Company was not a bona fide purchaser of said property for a fdll and valuable consideration, without notice of the rights and claims of your orators in the premises, and that said sale and transfer of said properly was made subject to the rights of all persons who had claims, debts, or demands against said Babbage Transportation Company, and the claim and demand aforesaid of your orator.

“ Wherefore your orators pray process against the said St. Louis & New Orleans Transportation Company, the said Babbage Transportation Company 'and the said Henry Lourey, and that they bo cited to appear before this honorable court, and true answer make to all and singular the matter aforesaid, their answer under oath being hereby expressly waived, and that this honorable court will be pleased to decree payment of the aforesaid debt to your orators, with interest thereon and costs of suit, and that said St. Louis & New Orleans Transportation Company be restrained from selling or otherwise disposing of any of the said property until your orators’ said debt, and interest and cost, be paid and satisfied, and that until the said debt bo satisfied your orators have a lien upon said property in said Exhibit A described, and that this honorable court will be pleased to give and decree to your orators such other and further relief as to law and Justice and as this honorable court shall be able to give in the premises.”

The plea avers that the Babbage Transportation Company, being the owner of its property, for a valuable consideration, and with the consent of all its stockholders, sold and delivered the same to the St. Louis & New Orleans Transportation Company; that the consideration paid consisted of 500 shares of the capital stock of the last-named company, of the value of §1.00 a share, and the agreement of said last-named company to pay all the then known outstanding debts of the former company, not to exceed §42,000; that the sale was bona ficla, and that neither of the parties thereto were awrare that tho old company was in any manner liable to or indebted to the complainant, or the parties under whom it claims by subrogation ; that the stock was delivered to the old company, and the new company paid all tho debts of which the parties had notice at the time of the sale. All fraud is denied. The proof shows the following facts:

(1) The Babbage Transportation Company sold all its property to the St. Louis & New Orleans Transportation Company in consideration of 500 shares of full-paid stock in the latter company, and the payment of the debts of the former company to an amount not exceeding §42,000. (2) This consideration was paid by tlie delivery of the stock and the payment of tho debts, amounting to something more than $42,000, but not including the claim of complainant. (3) All the stockholders in the old company assented, to the sale on these terms. (4) Henry Lourey was a large stockholder in th e Babbage Transportation Company, and was also president, general manager, and treasurer thereof. (5) The said Henry Lourey was also then an officer of the St. Louis & New Orleans Transportation Company, and the stockholders of the two companies were substantially identical. (6) The officers and stockholders in both corporations at the time of the sale knew of the accident and loss out of which the complainant’s claim arose, hut no demand had been made for the payment of the sum, and they did not know that any would be made. (7) At the time of the sale inquiry was made as to the amount of outstanding indebtedness of the Babbage Company, and the same was estimated at about $42,000.

Upon these facts this court holds that the sale by the Babbage Company of all its property to another corporation, composed mostly, if not wholly, of the same persons, was fraudulent and void as to all creditors of the former company not assenting thereto. The purchaser knew that it was buying all the property of the seller, and ihat, by the transaction, the latter was being deprived of the means and power of meeting any of its outstanding obligations. The fair inference from the transaction is that the old company was about to be dissolved, and to cease to be. It was to be absorbed by the new company. This is the inevitable consequence of the formation of the new company, composed substantially of the same persons, to transact the same business at the same places, and with the same property. By the transfer, the creditors of the old company were deprived of the means of enforcing their claims. Probably no officers of the old company have since been elected, and it is to be presumed that none will be. This being so, it is at least doubtful whether service of process could be obtained so as to procure a judgment at law against the old company. And if a judgment were obtained, it could not be collected out of any assets in the possession of the old company, because it had turned all its assets over to the new company. It has received, it is true, paid-up stock in the new company, but that has doubtless been disposed of; or, if it has not been, it may at any moment be transferred. Equity will not compel the creditor of a corporation to waive his right to enforce his claim against the visible and tangible property of the corporation, and to run the chances of following and recovering the value of shares of stock after they are placed upon the market. A distinction with respect to transactions of this character exists between a corporation and a natural person. A natural person may sell all his property for a fair consideration, if the transaction is bona fide, and the buyer will not be required to take care that the seller provides for and pays all his debts. A corporation, unlike a natural person, by disposing of all its property, may not only deprive itself of the means of paying its debts, but may deprive itself of corporate existence, and place itself beyond the reach of process at law. At all events, equity cannot permit the owners of one corporation to organize another, and transfer from the former to the latter all the corporate property, without paying all the corporate debts; and that is the exact case now before us.

Here was a corporation engaged in a profitable business, and owning and possessing property valued at $92,000, exclusive of its franchise. It owed debts confessedly amounting to more or less than the value of its property. It ceases to transact business. Its stockholders organized themselves into another corporation, and all the property is transferred from the old to the new. It matters not that the stockholders in the two companies may not be precisely identical. We are not prepared to say that it would make any difference if the members of the new company were none of them interested in the old. The thing which we pronounce unconscionable is an arrangement by which one corporation takes from another all its property, deprives it of the means of paying its debts, enables it to dissolve its corporate existence and place itself practically beyond the reach of creditors, and this without assuming its liabilities. The fact here, however, appears to be that the owners of the two corporations aré substantially identical, and hence there is a still stronger case in equity. It may be that in such a case the purchasing company might be permitted to show, by way of defense, that it has paid debts against the old corporation to an amount equal to the whole value of the property received from it, including the value of its franchise. But this is a doubtful question, which does not arise here, and we express no opinion upon it.