
    First National Bank of Chicago et al. v. Trebein Company et al.
    
      Corporation a legal entity — Limits of this fiction — Effect of fraucRFormation of corporation by failing debtor — Transfer of property for stock — Fraudulent nature of such transaction — Rights of creditors.
    
    1. In. contemplation of law a corporation is a legal entity, an ideal person, separate from the real persons who compose it.' This fiction, however, is limited to the uses and purposes for which it was adopted — convenience in the transaction of business and in suing and being sued in its corporate name, and the continuance of its .rights and liabilities, unaffected by changes in its corporate members. But the fiction can not be abused ; a corporation can not be formed for the purpose of accomplishing a fraud or other illegal act under the disguise of the fiction; and when this is made to appear, the fiction will be disregarded by the courts and the acts of the real parties dealt with, as though no such corporation had been formed, on the ground that fraud vitiates everything into which it enters, including the most solemn acts of men.
    2. Where a failing debtor forms a corporation, composed of himself and certain members of his family, he taking substantially all the stock, and at once conveys all his property to the corporation in exchange for the stock by him taken and for no other consideration; and immediately places all his stock, except one share, with certain of his creditors who have knowledge of the facts, as collateral security to their claims; and, as president and general manager, retains control of the property and manages it for his own use and benefit, such a conveyance is a fraud on his other creditors, and may be set aside by a court at their suit, and the property administered for the benefit of all his creditors under the insolvent laws of the state.
    3. The good faith of the parties to such a transaction must be determined by its legal effect on the rights of others. If its ' legal effect works a fraud on their rights, the finding of a court that the parties acted in good faith is simply an erroneous conclusion of law from the facts.
    (Decided November 29, 1898.)
    Error to the Circuit Court of Greene county.
    The First National Bank of Chicago, and The Rock Island National Bank, both of the state of Illinois, having recovered judgments, aggregating $30,000 against F. C. Trebein in the common pleas court of Greene county, filed their petition in that court against F. C. Trebein and “The F. C. Trebein Co.” ostensibly a corporation under the layrs of Ohio, to set aside a certain conveyance of real estate made by F. C. Trebein to the company, on the ground that it was made to hinder, delay and defraud them. Upon issue joined as to these allegations the court found in favor of the defendants and dismissed the action. An appeal was taken by the plaintiffs to the circuit court. In that court an amendment to the petition was filed, alleging that the object and purpose of the formation of “The F. C. Trebein Company” and the conveyance to it of the real estate and about $20,000 of personal property was, while securing certain creditors to the exclusion of others, to enable F. C. Trebein to retain for himself a beneficial interest in the property, real and personal, and asking that the conveyance of said property, real and personal, be declared to be a deed of assignment and held in trust for the benefit of ereditprs. Issue was taken on these averments. On the trial the court found for the defendants, and dismissed the action of the plaintiffs. The judgment was, however, rendered on a finding of facts made at the request of the plaintiffs, and an exception taken to the judgment on the findings. The findings are as follows:
    “First — We find that for many years prior to the formation of the corporation known as The F. C. Trebein Company, the defendant F. C. Trebein carried on the business of buying, selling and milling grain in Greene county, Ohio, under the business name of F. C. Trebein & Company; that his property connected with this business consisted of The Excelsior Mills at Trebeins, Ohio, including valuable water rights and real estate near by; also the Shawnee Mill in Xenia, Ohio, and the Jamestown Elevator, at Jamestown, Ohio, with the personal property used in the business.
    Second — We find that Mr. Trebein also owned, prior to December and January, 1895, a large amount of real estate and personal property, including common and preferred stock of The Columbia Straw Paper Company.
    Third — We find that F. C. Trebein was on, and had been for several years prior to January 22, 1895, an endorser, with six other directors of The Columbia Straw Paper Company, of the notes of that company to the extent of about $85,000, which sum includes notes to Th'e City National Bank of Dayton, Ohio, for $18,000; to the Xenia National Bank of Xenia, Ohio, for $10,000; also $25,000 to the First National Bank of Chicago, Illinois, and for $5,000 to The Rock Island National Bank of Rock Island, Illinois.
    Fourth — We find that not later than November, 1894, that F. C. Trebein knew that The Columbia Straw Paper Company was then and soon would be financially embarrassed, and not later than January, 1895, knew that said company would not further he able to take up or renew its obligations as they became due, and knew that upon January 19, 1895, there was a meeting of the directors, including F. C. Trebein, of said company; that the officers were authorized by a resolution, to take such steps as might be necessary to put all of said company’s property into the hands of a receiver; and that pursuant thereto, a receiver was appointed by the circuit court of the United States, on the twenty-fourth day of January, 1895, to take charge of the property of the said company.
    Fifth — We find that Mr. Trebein, in December, 1894, and January, 1895, conveyed and assigned in payment in part, of an alleged prior indebtedness to his wife, real and personal property to the value of $40,900, and to his daughter, real estate to the value of $2,100, which he had promised to her as a wedding gift in June, 1894, and that he pledged a large amount of stocks, probably valueless, to his wife, as collateral for an alleged balance of about $8,700 due her.
    But for the reason that.the validity of a number of these transactions is questioned in another ac tion now pending a hearing in the common pleas court in this county, and because there is not sufficient evidence before us on which to predicate a finding of an intent to defraud in these contemporaneous acts, we do not so find, and therefore have not considered them in the determination of this action.
    Sixth — We find that when the directors of the said Straw Paper Company determined to borrow from the banks, upon their endorsements, they ag-reed together, among themselves, that in case of necessity each would protect the banks from which they obtained their loans upon The Columbia Straw Paper Company’s notes, with the endorsements of the directors, and that Mr. Trebein had stated to the three banks in his vicinity when he made loans for The Columbia Straw Paper Company, with the endorsements of the directors, that he would protect them, but counsel for the defendants do not claim, for the purposes of this suit, that the plaintiffs knew of such agreement.
    Seventh — We.find that on the twenty-eighth day of August, 1895, by the consideration of the court of common pleas of Greene county, Ohio, The First National Bank of Chicago, Illinois, recovered a judgment against the said F. C. Trebein for the sum of $25,362.50; and that the Rock Island National Bank, of Rock Island, Illinois, by the consideration of the said court, recovered a judgment against F. C. Trebein for 'the sum of $5,145.82; that executions were issued upon the said judgments, and levies were made upon the real estate described in the petition.
    Eighth — We find that upon January 22, 1895, all the residue of the property owned and held by F. C. Trebein, remaining after the said conveyance to his wife and daughter, consisted of the real estate described in the petition, and the personal property, accounts and merchandise connected with his milling business, and thereafter conveyed and transferred to The F. C. Trebein Company, and which was believed at the time by Mr. Trebein to be , worth $60,000, and this his attorney then thought to be too high a valuation.
    Ninth — We find that upon January 22, 1895, F. C. Trebein had not sufficient property to pay his outstanding obligations, including his liability as indorser for The Columbia Straw Paper Company, and thereupon, for the purpose and with thé intent in good faith to secure The City National Bank of Dayton, Ohio, The Xenia National Bank of Xenia, Ohio, and The Farmers’ and Traders’ Bank of Jamestown, Ohio, upon their claims against him as endorser and otherwise, did, with his wife, Joan Trebein, his daughter, Elizabeth T. Flynn, his son-in-law, P. H. Flynn, and his brother-in-law, Horace Ankeney, who acted with him for his accommodation, at his request and to carry out the purposes and object of the said F. C. Trebein, form and organize “The F. C. Trebein Company,” with a capital stock of '$60,000, divided into 600 shares of $100 each; that pursuant to said intention, said corporation purchased all of the property of said F. C. Trebein connected with his said business, the same being all the property he then possessed, on the said twenty-second day of January, 1895, and on the same day the said Trebein conveyed and transferred said property to said corporation; that on the same day, in the further pursuance of said purpose, there were regularly issued certificates for 596 shares of stock in said corporation to said F. C. Trebein in payment therefor, which said stock, except one share, pursuant to said purpose said Trebein placed as a general collateral with said three banks, as security upon their claims against him as endorser and otherwise; and in pursuance of the further intention of the said Trebein in the formation of the said corporation, the said F. C. Trebein remained in the charge of the affairs of the said corporation as president, treasurer and general manager, and continued the business theretofore conducted by him, and the remaining four shares of stock were taken by the said Joan Trebein, P. H. Flynn, Elizabeth Flynn and Horace Ankeney respectively, and paying $90.00 a share therefor.
    Tenth — We find that upon January 23d, that the stockholders of The F. C. Trebein Company, authorized, in writing, the president of the company to issue, without said company being liable therefor before said authority, its notes to The City National Bank of Dayton, Ohio, for $23,000; to the Xenia National Bank of Xenia, Ohio, $20,000; and to the Farmers’ and Traders’ Bank of Jamestown, Ohio, $5,000, in lieu of notes held by them on which F. C. Trebein and the firm of F. C. Trebein and Company were liable as makers and indorsers; and on January 23, 1895, The F. C. Trebein Company had a meeting and gave this authority to the president of the company; we find $12,000 of notes made by F. C. Trebein and Company were in pursuance to the resolution, taken up and replaced by the notes of The F. C. Trebein Company as .they respectively became due; we find that said action did not form a part of the intention of Mr. Trebein, or those acting with him, at the time of the formation of the corporation or at the time of the conveyance of the property by Mr. Trebein to the corporation, but was the result of an after thought.
    Eleventh — We End that none of said indebtedness or the said City National Bank of Dayton, The Xenia National Bank of Xenia, and The Farmers’ and Traders’ Bank of Jamestown has been paid, and said banks still hold said stock as collateral.
    Twelfth — We find that the directors of the said F. C. Trebein Company, since January 24, 1895, have held only one meeting, on March 10, 1896, and heard the report of the president, who reported that the profits to that date were $1,062,’ and had been passed to the profit and loss account; that F. C. Trebein has had possession of all of the property since the organization of The F. G. Trebein Company; that none of the directors other than the said F. C. Trebein have taken any active part in the management of the affairs of the company, except to attend said meeting.
    Thirteenth — We find due and legal notice has been given of the pendency and object of this action, as provided by section 6344, that no creditors have intervened or come into this action. To which finding of fact the plaintiffs except.
    On consideration whereof the court finds that the equities in said action are with the defendants, and that they are entitled to be dismissed with their costs.”
    A bill of exceptions was also taken setting forth all the evidence and a motion made for a new trial, which was overruled and exception taken.
    The plaintiffs ask a reversal of the judgment on the findings; and that judgment be rendered in their favor.
    
      Ghmies II. Kyle and Charles Darlington, for plaintiffs in error.
    
      John Little and F. FT. Shaffer, for defendants in error.
   Minshall, J.

We are unable to see how, as against his creditors, the transaction by which F. C. Trebein with his wife, his daughter, his son-in-law and his brother-in-law,0 formed “The F. C. Trebein Company” and then conveyed to it every vestige of property he had not before conveyed, either to his wife or to his daughter, can be sustained, against the justice of their demand to have the property so transferred administered for the benefit of all his creditors under the insolvent laws of this state. He was at the time liable in a large sum of money on indorsements he had made for the accommodation of the Straw Paper Company of which he was a member and one of its directors. He knew it was about to fail and that he would have to respond to these indorsements. This fact induced the conveyances he had before made to his wife and to his daughter, whether for a valid consideration or not, was not considered by the court for the reasons stated in its finding, that there were suits then pending to set them aside. The capital of The F. C. Trebein Company was fixed at $60,000, divided into 600 shares of $100 each, Trebein taking 596 of the shares and each of the other persons named taking one share. It was formed on January 22, 1895, Trebein being made the president, treasurer and general manager, and conveyed to the company the property in question, estimated to be worth $60,000 and received therefor the shares above stated, and at once placed all of them, except one, in pursuance of his original purpose, with three of the banks who held his indorsements of the paper of the Straw Paper Company, for the purpose of securing them on his indorsements ; and be continued in the control and management of the milling and grain business as he had before the corporation was formed and the conveyance made. The court found that this was all done in good faith. But, in view of the facts, we are unable to see how the court could have meant more than that he meant no wrong by it. Good faith in law, however, is not to be measured always by a man’s own standard of right, but by that which it has adopted and prescribed as a standard for the observance of all men in their dealings with each other. When one conveys all his property to another with the intention of hindering and delaying his creditors, or a part of them, in pursuing their legal remedies against him and his property, his conduct in law is deemed fraudulent however honestly he may have intended to deal with all his creditors, in the future. Trimble v. Doty, 16 Ohio St., 118. The good faith of a party under such circumstances must be determined by the legal effect of what he deliberately does. Brinkerhoff v. Tracy, 55 Ohio St., 558; Lee v. Hennick, 52 Ohio St., 177; Gashe v. Young, 51 Ohio St., 376, 389. The formation of the corporation and the conveyance to it by Trebein of all the property he then had, necessarily hindered and delayed all his creditors in the pursuit of their claims against him. The formation of the corporation in no way facilitated the transaction of his milling business and that connected with it. Nothing was added to his capital, unless we regard the few hundred dollars that may have been paid for the four shares of stock taken by the other members of his family, such an addition. Evidently an addition to capital was not the controling object. The transaction cannot be likened to a conveyance to a third person for a valuable consideration — considered in the light of the facts, it was no more than a conveyance from himself to himself. The corporation was in substance another F. C. Trebein. His identity as owner of the property was no more changed by his conveyance to the company than it would have been by taking off one coat and putting on another. He was as much the substantial owner of the property after the conveyance as before; and had substantially the same use of it as if the conveyance had not been made. The only purpose the creation of the corpoxation and the conveyance to it subserved, was to hinder creditors in levying upon the property and selling it on execution at law; and it is this hinderance the law will not permit, and, when ascertained in a proper proceeding, requires the conveyance to be set aside and the property administered for the benefit of all the creditors of the fraudulent grantor.

It is suggested that the px-operty may be levied on. This is true, but it cannot be sold on execution until the conveyance is set asid.e; for it is not the policy of the law to sell a law suit. It is also suggested that the stock of Trebein may be reached by a proceeding provided by statute. This is true, but it is not the simple proceeding of an execution at law; besides few persons, at this day, would care to take stock in a manufacturing or any similar company, with its statutory liability attached, as a substitute for tangible px-operty.

The fiction by which an ideal legal entity is attributed to a duly formed incorporated company, existing separate and apart from the individuals composing it, is of such general utility and application, as frequently to induce the belief that it must be universal, and -be, in all cases adhered to, although the greatest frauds may thereby be perpetrated under the fiction as a shield. But modern cases, sustained by the best text writers, confine the fiction to the purposes for which it was adopted— convenience in the transaction of business and in suing and being sued in its corporate name, and the continuance of its rights and liabilities, un- ■ affected by changes in its corporate members; and have repudiated it in all cases where it has been insisted on as a protection to fraud or any other illegal transaction. Thus in Brundred v. Rice, 49 Ohio St., 640, where an incorporation had been formed for the purpose of giving effect to an illegal agreement between it and a railroad company for a discrimination in freig’hts between it and other shippers, the fiction was disregarded, and a recovery allowed against the promoters by one who had been thus discriminated against, in like manner as if the corporation had no existence. See also the following citations: Morawetz on Corporations, sections 1 and 227; Railway Co. v. Miller, 51 N. W., 981; Gas Company v. West, 50 Iowa, 16; Booth v. Bunce, 33 N. Y., 139; State ex rel. Atty. Gen. v. Standard Oil Co., 49 Ohio St., 137; Bennett v. Minott, 28 Oregon, 339, 348.

A like attempt has frequently been made of late to use this fiction in connection with a conveyance to the legal entity, as a means of defrauding- creditors; but seems to have uniformly failed.

In Montgomery Web Co. v. Dienelt, 133 Pa. St., 585, which was a suit by a creditor of one company to set aside a conveyance by it to another, as in fraud of his rights, it appeared that the latter was formed substantially by the stockholders of the former, who relinquished their stock in it for stock in the latter; this being substantially all the consideration given by the purchasing company. This was held to be a fraud on the creditors of the former company, called the Aronia. The case does not differ in principle from the one before us. Here the conveyance was by an individual, and in consideration of stock taken in the corporation formed. The judge, delivering the opinion, said: “Is the Montgomery Company so completely a new and different company from the Aronia Company that the law must close its eyes to the fact that the difference is a mere jungle of names? We do not think there is any compulsion to such legal blindness. Settled general principles, and the analogies of the law, are against such a contention. If the corporation had merely changed its name, there could have been no doubt of the continued liability of the property. ” As to the creditors of the old company who had taken stock for their claims in the new one, they were held bound to know the nature of the transaction, and that the property conveyed could be followed by the creditors of the old company for the satisfaction of their claims. The Hibernia Ins. Co. v. Transportation Co., 13 Fed. Rep., 516, is a case of like character and was decided in the same way. In Bennett v. Minott, 28 Oregon, 337, a case quite similar to the one before us, in all its facts, the court held that: “When a debtor, for the purpose of hindering and delaying creditors, organizes a corporation and transfers to it all his assets, he himself being the owner of practically all the corporate stock, and continuing the business the same after as before the incorporation, using the proceeds for his own benefit, equity will set aside such transfer at the instance of creditors, notwithstanding the incorporation is valid, and the corporate stock subscribed by the debtor is subject to sale under execution. Under such circumstances a court of equity will look beyond the legal forms, and decide the case on the rights of the parties.” Terhune v. Savings Bank, 45 N. J. Eq., 344, is another case, where an insolvent debtor, with the members of his family, formed a corporation, a manufacturing company, and conveyed to it his property, real and personal, much as in the ease under review. The conveyanee was set aside, at the suit of a creditor. It was there said that in conveying his property to the corporation so formed, he simply “changed his habiliments. ’ ’ The fiction in regard to a corporation being a legal entity was not allowed to avail him. And Kellogg v. Douglas County Bank, 58 Kan., 43, is a recent case of similar character. It was there held, that, “A fraud may be perpetrated by an insolvent merchant through the instrumentality of a corporation organized and controlled by himself, to which he transfers the bulk of his property, as well as by a transfer to an individual; and where it appears that this has been done for the purpose of hindering and delaying’ creditors and enabling the debtor to retain the management and control of his property, and of depriving his creditors of an opportunity to collect their dues, and when such insolvent retains substantially all the stock in the corporation, and no innocent person contributes any substantial sum to its assets, the court in sustaining attachments levied on the property, and directing the sale thereof to satisfy the claims of creditors, is warranted in treating the whole transaction as a sham.”

We are so clearly satisfied that the conveyance by Trebein of his property to the corporation, was made to hinder and delay creditors, and should have been so declared by the court, and ordei'ed administered for the benefit of all his creditors under the provisions of section 6344, Revised Statutes, that we think it unnecessary to consider whether, upon the facts, it did not also constitute an assigment in trhst, in contemplation of insolvency, to secure one or more creditors, within the meaning of section 6343, Revised Statutes, and, for such reason, should • be ordered administered as before stated.

There is no doubt that an insolvent debtor when he acts in good faith may prefer one or more of his creditors. Cross v. Carstens, 49 Ohio St., 548. But the way in which this may be done has been very clearly defined. He may pay any of his creditors in money, or may convey property in satisfaction of his claim, or may give him a mortgage on property to secure it. But he must deal simply with the creditor preferred, and the latter must deal with an eye single to himself; and when property is conveyed it must be no more than a fair satisfaction of the debt. Jamison v. McNally, 21 Ohio St., 295. If the conveyance or mortgage is to secure others than the particular creditor to whom the property was conveyed or mortgaged, and was made in contemplation of insolvency, it becomes in law an assignment within the meaning of section 6343, Revised Statutes, and inures to the benefit of all the creditors of the grantor. Pendery v. Allen, 50 Ohio St., 121; Cashe v. Young, 51 id., 376. If thei'efore we regard a corporation capable of taking such an assignment, and holding the property for the benefit of one or more creditors of the assignor, it would seem to follow that, in this ease, the conveyance of Trebein to The F. C. Trebein Co., must be regarded as an assignment in trust for the creditors with whom he placed the most of his stock as “a general security” to their claims against him; and therefore, under the section just referred to, may be held to be an assignment for the benefit of all his creditors. The primary object was, as stated by the attorney who conducted the matter, to give security to the three banks; and the plan of a corporation was adopted in preference to a mortgage, that Trebein might remain in control of the business, and make money enough to pay their claims. Hence if this be true, the corporation took the legal title in trust for the benefit of these three creditors and the grantor; and the ease would, in principle, differ but little, if any, from that of Loudenbach v. Foster, 39 Ohio St., 203. The law of Hoffman v. Mackall, 5 Ohio St., 124 and Conkling v. Coonrod, 6 Ohio St., 611, may be regarded as abrogated by the act regulating assignments for the benefit of creditors adopted in 1859, and carried into the revision of 1880. By this law all conveyances in trust for creditors are, by sections 6335-36, required to be administered in the probate court, irrespective of fraud; and all conveyances, transfers and assignments made to hinder, delay or defraud creditors, when set aside at the suit of any creditor; and all' assignments in contemplation of insolvency in trust to prefer one or more creditors are declared to be for the equal benefit of all creditors and are required to be administered in the same court.

The decision, however, is placed on the ground that the conveyance by Trebein to the company was fraudulent as to his other creditors, and should be set aside, and the property administered for the benefit of all his creditors.

The judgment is reversed, and cause remanded to the court of common pleas for further proceedings under section 6344, Revised Statutes.  