American Exch. Nat. Bank of New York City v. Ward

Citations

• 111 F. 782
• 55 L.R.A. 356
• 1901 U.S. App. LEXIS 4431

Syllabus

<p>1. Corporations—Effect of Insolvency—Right to Prefer Creditors.</p> <p>The insolvency of a corporation does not ipso facto transform its as- ' sets into a trust fund for the equal benefit of its creditors, but such trust attaches only in the administration of the assets after possession is taken by a court of equity; hence so long as a corporation continues in possession of its property it may lawfully prefer one creditor over another.</p> <p>.2, Same—Preference ob’ Directors.</p> <p>A corporation is not precluded from preferring a bona fide creditor because be is also one of its directors, although in such case the transac- ‘ tion will be subjected to tbe most rigid scrutiny by a court of equity, '■ and the creditor must assume the burden of proving his absolute good faith and the justice of his demand. In many cases the condition of Hie corpora!ion may be sncli that it cannot borrow money from outside sources wlien a timely loan will save it from serious loss, and a director or stockholder who under such circumstances advances money to the corporation in good faith and for its benefit is entitled to all the rights of any oilier creditor in obtaining security for his demand, either at the time or subsequently.</p> <p>3. Same—Behai,tty of Preference—Facts Considered.</p> <p>A mercantile corporation had four unsecured creditors, three of whom, holding much the larger part of its indebtedness, as well as all of its preferred stock, by agreement with the common stockholders obtained the election of their representatives as directors and manager; the i>urpose being to secure a change of management because the business of the company liad become unprofitable. The fourth creditor was advised of such action, and made no objection. Such creditors remained in control for 2>t years, during which time they paid t'he fourth creditor one-third of its claim, but increased the indebtedness of the corporation to themselves by advancing money for its use. It did not appear that a