
    William H. Darcy, Respondent, v. The Brooklyn and New York Ferry Company, Defendant, Impleaded with Joseph J. O’Donohue, Jr., and Others, Appellants.
    Second Department,
    June 18, 1908.
    Corporation—transfer of assets without providing for debts—personal liability of directors — motive — debtor and creditor—assumption of debt by vendee — lights of creditors.— laches.
    Although on the transfer of the entire property of a corporation the vendee assumed the debts of the vendor, creditors of the latter cannot be compelled to accept the former as a substituted debtor.
    Hence, directors who have so transferred all the property of their corporation without providing for the payment of an outstanding judgment are personally liable, to the judgment creditor in a suit brought under sections 1781 et aeq, of the Code of Civil Procedure.
    
      As such suit does not involve the right Of the creditor to set aside the transfer for fraud or to enforce an equitable lien upon the property transferred, but is merely a suit in equity against the directors to compel them to account for a breach of duty, questions of motive or fraudulent intent are immaterial.
    - As the property of a corporation is a trust fund in the hands of its directors for' the payment of its debts, they may not transfer the same in disregard of the rights of their .cestuis que trusteni no matter how honest their motive.
    Such action against, the directors individually lies independent-of the statute.
    Nor does it alter the case that at the time of transferring the property the trustees did not know of- the plaintiff’s claim, for they were under the duty to .provide in some way foi-unknown claims.: '
    Directors of a corporation may not distribute its assets to' stockholders without ■^cotice to-creditors, even though the corporation be not formally dissolved.
    
      It seems, that as directors of a corporation are subject to the control of tiie court, they, may apply for advice and instruction and for leave to distribute the trust funds in their hands, in which case the court may require notice to be given. Where all the assets of a. corporation are transferred to a third party, which assumes the debts, a creditor is not guilty of laches in failing to proceed against the vendee, for he is not bound to look to it.
    The plea of laches-made by a trustee-against his. cestui que trust is not regarded with favor. . ■ . ' ■
    Appeal by the defendants, Joseph J. O’D'onohue, Jr., and others, from a judgment of -the Supreme Court, in favor of the plaintiff, entered in the office of the clerk of the county of Kings'on "the 16 th day of January, 1908, upon the decision of the court rendered after a trial at the Kings County Special-Term.
    
      John Delahunty, for the appellants.
    
      James C. Cropsey [Rufus O. Catlin with him. on the brief], for the respondent.
   Miller, J.:

This suit is brought under sections 1781 et seq. of the Code of Civil Procedure by a judgment creditor of the Brooklyn and \Hew York Ferry Company against its managing directors-to reco,ver the value of property of said corporation transferred by them in violation of their duties. The plaintiff’s judgment was recovered for personal injuries, and was founded upon a cause of action which arose July 2, 1897. On the 22d day' of August, 1898, the defendants transferred all of the property of the said corporation to the Brooklyn Ferry Company of Hew Y ork, in consideration whereof said latter company delivered $6,000,000 of its bonds to H. B. Hollins & Co., the owner of all but a few shares of the stock of the said Brooklyn and Hew York Ferry Company.

The transaction was, in effect, a dissolution of said judgment debtor corporation and the distribution of its assets among its stockholders without making any provision whatever for the payment of its debts, at least so far as the plaintiff was concerned. The said H. B. Hollins & Co. and the Brooklyn Ferry Company of Hew York agreed to assume the debts of the old company, but of course its creditors could not be compelled to accept a substituted debtor. . Said agreement operated to afford a measure of protection' to the directors, who could thus compel the new company to pay the debts of the old, but said directors could not thus discharge their obligation to the creditors of the old company. Before distributing the assets of their corporation to its stockholders, they were required to pay its creditors, and that duty could not be discharged by getting an agreement from someone else to discharge it for them.

There is no question of fraud or bad faith in the case, and the appellants contend that for that reason the judgment Cannot- be supported. The cases cited on that head have no application. This case does not involve the right of a creditor to set aside a transfer for fraud, nor, indeed, the right of a creditor to enforce an equitable lien on the property of the corporation in the hands of third parties. The action is in equity against trustees to compel them to account for a breach of duty, and their motives and intent are wholly immaterial. The action could be maintained independently of the statute.

That the property of a corporation is a trust fund in the hands of its directors for the payment of its debts has long been settled. (Bartlett v. Drew, 57 N. Y. 587; Hastings v. Drew, 76 id. 9 ; Cole v. M. I. Co., 133 id. 164; Hurd v. N. Y. & C. Steam Laundry Co., 167 id. 89.) Trustees may not transfer the funds in their hands in disregard of the rights of their cestuis gue trustent, no matter how honest their motive.

It is found that at the time of the transfer of said property the defendants did not know of the plaintiff’s claim; nevertheless something should have been done to provide for unknown claims. We do not need to say in this case precisely what the defendants should have done, because. they did nothing whatever except to protect-themselves so far as they could by an agreement from, the transferee. Sections 2419 etseq of the Code of -Civil Procedure, prescribing what shall be done in proceedings for the voluntary dissolution of a - corporation, may, by. analogy at least, suggest how directors of a corporation may relieve themselves from liability upon transferring all the property of the corporation and distributing the avails without formally dissolving the corporation. Every known creditor must be given notice personally or by mail; all others receive notice by publication.- Section 30 of .the General Corporation Law (Laws of 1892, chap. 687) provides that upon the . dissolution of a corporation its directors, unless other persons shall-be appointed, shall be the trustees of its creditors and stockholders; and section 57 of the Stock Corporation Law (Laws of 1892, chap. 688, added by Laws of 1896, chap. 932) provides for the voluntary .dissolution of a stock corporation, except a- moneyed or a railroad corporation, upon the consent of the holders of two-thirds in ■ amount of the stock, at a meeting called for the purpose. . Notice of such a meeting is required to be published as prescribed,, as is' also a copy of the certificate of the Secretary of State of the filing of the necessary papers, and the board of directors are required to wind up the affairs of the corporation and to apply its assets first in discharge of the debts and obligations of the corporation, and may only distribute the balance among the stockholders after “ paying and adequately providing for the payment of' such debts and obligations.” It seems plain that the directors of a corporation may not .-distribute its assets among the stockholders, where the corporation is not formally dissolved, without at least giving the creditors some notice. Trustees are subject to the-control of the court, and of course may apply to the court for advice and instruction, and it would seem (though we do not need to decide this) that they might apply to the court for leave to distribute the trust fund, and that upon giving such notice as the court prescribed they might be permitted to do that without' incurring personal liability. • Whether director’s may distribute the assets of a corporation among the stockholders, where the corporation is not dissolved, without rendering themselves personally liable to creditors, is a question which we do not have to decide, because it is plain that they cannot do that without at least applying to the court and giving notice of the proposed distribution.

It is urged that the plaintiff has been guilty of such laches as to defeat the action; that he should have proceeded against the new' company on its agreement to assume the debts of the old company, and that not having done so he should not now be permitted, after the insolvency of the new company, to recover of the defendants. There is no evidence that the plaintiff had knowledge of said agreement, and in any event he was not bound.to look to the new company. The plea of laches made by a trustee against his cestui que trust cannot be regarded with favor. The defendants, not the ■plaintiff, incurred the hazard of the insolvency of the new company, and cannot complain because the plaintiff did not proceed against them until he ascertained what they had done.

The judgment should be affirmed.

Woodward, Jenks, Gaynor and Rich, JJ., concurred.

Judgment affirmed, with costs. 
      
      8ince atad, by Laws of 1900, chap. 760.— [Rep..
     