
    Mary B. O. Dwight et al., Plaintiffs, v. Irvin A. Williams and William A. Matteson, as Receiver of the Kirkland Iron Co., Defendants.
    (Supreme Court, Oneida Special Term,
    December, 1898.)
    Insolvent corporations — Preference to officer — Verbal agreement of all the trustees to indorse for the corporation — Estoppel — Illegal preference to managing trustee — His compensation.
    A manufacturing company, all of whose stock was owned by its three trustees, D., W., and B., and which was then indebted to D. and to W., being in need of money, the trustees agreed orally that the-company should make notes to be discounted and renewed, that the trustees should, for a period not fixed, individually indorse the notes,, for accommodation and in proportion to their interests in the capital stock, that the iron manufactured should stand as security, and that the notes should be paid prior to the debts of the company to D. and W. The company paid to W. certain of the accommodation notes, indorsed by him, at a time when it was insolvent. No rights of general creditors were involved. In an action by claimants under D.,
    Held, that the payment to W. was not an illegal preference by an insolvent corporation, that the verbal agreement was enforceable, and that the claimants under D. were estopped from alleging that that agreement was void under the Statute of Frauds.
    It further appeared that D. finally refused to make further indorsements and wished the business closed, but that the other trustees, under an honest error of judgment, continued it at a loss for nineteen months. Held, that such continuance did not release D. from the verbal agreement. A payment made when a corporation is hopelessly insolvent to a trustee, W., for past services as general manager and with a view to secure to him a preference over D., is void and must be repaid by D. to the receiver; but D. is entitled to some compensation, and, upon the amount thereof as fixed by the court, will be entitled upon final distribution to a pro rata dividend with other creditors.
    This action is brought to compel the defendant Williams to pay about $10,000 and interest, to the defendant W. A. Matteson as receiver of the Kirkland Iron Go., on the ground that the company paid that sum to Williams, as its president and treasurer, in the payment of his individual claims in contemplation of insolvency, thus giving him an illegal preference over the plaintiff’s assignor, Prof. Theodore W. Dwight, who was also a creditor of the company.
    W. W. Cook, Adelbert Moot, and P. C. J. De Angelis, for plaintiffs.
    William Kernan, for defendant Williams.
   Wright, J.

The company was insolvent to the knowledge of the trustees when the payments in question were made. The defendant WilEams claims that $54,028.51 of the amount was legally paid, because done in pursuance to an agreement between himself and the other members of the board of trustees, whereby the claim which he held against the company should have preference over all other debts, there being no other creditors interested; and he claims that the balance of said payment, viz., $16,329.10', was legally paid as a salary for services as general manager of this company.

The plaintiffs claim that all said payments were void and that the money should be refunded to the receiver for equal distribution among the creditors of said company in proportion to their respective claims against it.

The Kirkland Iron Company was incorporated in January, 1880, for the manufacture and sale of pig iron.

In January, 1887, its capital stock was $50,000, owned by Theodore W. Dwight and Irvin A. Williams in equal shares. The company then owed Dwight $28,500, and owed Williams the same amount, for which each held the promissory note of said company. On that date, Dwight and Williams, each, sold to Edward B. Bulkley $5,000 stock. The stock was then owned as follows: Dwight, $20,000; Williams, $20,000; and BulHey, $10,000. They were the trustees of the company, Dwight being president.

Eor some time prior to this date, the company had done no business. It had no money in the treasury, and no material for manufacture. The following method was adopted by an agreement of said gentlemen, individually, to raise funds with which to carry on business. They, as a board of trustees, however, took no action thereon. It was orally agreed that promissory notes should be made by the company; that the trustees individually should indorse them for the accommodation of the company in proportion to their respective shares in the capital stock; that the company should procure them to be discounted at banks and use the proceeds thereof for the purpose of carrying on its business in the manufacture and sale of iron; that the said notes should be renewed from time to time, according to the requirements of the business; and that the iron manufactured should stand as security for the payment of said accommodation notes; and that said accommodation notes should be paid prior to the payment of the said old notes of $28,500 each, which were held against the company by Dwight and Williams.

Such accommodation notes were accordingly made and the business was thereafter carried on by means of said indorsed notes, and on December 7, 1891, $54,028.57 of the money above mentioned as involved in this action was used by the company in the payment of such indorsed notes, with interest thereon, which were held by Williams. The face amount of said notes was $53,500. Dwight was an indorser thereon to the amount of $10,000, and Williams, $43,500. This payment was in accordance with said agreement.

The plaintiffs claim, as above stated, that no such agreement existed, as above set forth; but it is established by the uncontradicted testimony of two apparently disinterested witnesses. Their testimony, being reasonable, cannot be disregarded. Lomer v. Meeker, 25 N. Y. 361; Denton v. Carroll, 4 App. Div. 532; Cunningham v. Gans, 79 Hun, 434.

The plaintiffs urge that the payment of said notes should not be jpennitted to stand under said agreement on the ground that said .agreement is void under the Statute of Frauds. The answer to that .argument is that all the parties relied upon ajad noted under it, causing the company to incur liabilities in making its promissory .notes and procuring the discount thereof; and each of the parties .also incurred personal liabilities by indorsing said notes. They also, with the proceeds thereof, and in reliance on said agreement built up and carried on the business, and manufactured the iron.

After the parties in reliance on this agreement had thus created ■and got the business on their hands, a member could not ask release from the agreement on the ground that it is void under the Statute •of Frauds. He is estopped from taking that position. The following authorities substantiate this position: Thompson v. Simpson, 128 N. Y. 270; Trustees etc. v. Smith, 118 id. 634; N. Y. Rubber Co. v. Rothery, 107 id. 310.

On December 27, 1889, Dwight having become dissatisfied with the financial prospects, desired to close out the business, but Bulkley and Williams deemed it wise to continue, at least until the iron •ore on hand should be manufactured and sold. Dwight thereupon presented his resignation as president and trustee. Charles J. Williams was elected trustee in his stead, and Irvin A. Williams was elected president. Dwight, in January, 1890, refused to indorse further accommodation notes. The plaintiffs claim that no particular period being mentioned for the duration of the said agreement, it continued in force only for a reasonable time; and . that the company continued its business for an unreasonable period after January, 1890, when Dwight refused to renew his indorsements, and that, therefore, the payment of the said accommodation motes in pursuance to said agreement, in preference to the old notes, held by Dwight and Williams, was an illegal preference. After •January, 1890, when Dwight refused to proceed further under the •agreement in the way of renewing his indorsements, the company continued to protect its indorsed paper held by the banks, and continued manufacturing its raw material then on hand (which had been purchased with Dwight’s consent) until June; 1990, when it 'finally ceased manufacturing. After June, 1890, when the com•pany had completed the manufacture of the ore which was on hand when Dwight resigned, the company having on hand over 11,900 "tons of pig iron was engaged in selling it until January 21 1892, when the company was closed out by the sheriff under executions. During that period the company used the proceeds of its sales of iron, above expenses, towards the payment of the accommodation notes. In January, 1892, there was still on hand 4,189 tons which was sold by the sheriff under executions for $55,735, which by order of the court was applied upon said executions which were issued upon judgments obtained against the company on several of said accommodation notes, some indorsed by Williams and others by Dwight; and such application was made in proportion to their respective indorsements, in accordance with said agreement.

The only creditors concerned in this matter are said I. A. Williams and the plaintiffs.

It appears that the company suffered loss by continuing for one year and seven months after ceasing manufacturing, the slow method of private sales in disposing of its product, and that a much larger sum might have been realized upon a forced sale immediately upon going out of blast in June, 1890: The plaintiffs claim that this was an unreasonable continuance of the business by the trustees of the company and that such unreasonable continuance released Dwight from the binding force of said oral agreement. The agreement required honest action of the parties while acting as a board of trustees, with a view of carrying it out .and securing to each party the protection thereof. There is no evidence of any fraudulent act or intent on the part of any member of the board of trustees. The question then arises: Did the honest error of the board of trustees in failing to adopt the speedier method of closing out the stock of iron, and in failing to foresee an approaching fall in prices, and thus incurring loss, have the effect of annulling the agreement, and forfeiting Williams’ individual right thereunder to the preference above mentioned? I think not. Professor Dwight, as well as each other member of the company, was obliged to submit to the united honest judgment of the board of trustees respecting the wisdom of its business methods and management. The law presumes that these gentlemen in making this agreement had in mind their dependence upon the honest and reasonably prudent judgment and action of the company with reference to the policy of the company in the management of its business. Each one knew that his possible future dissatisfaction with such policy and management might not control the majority of the board of trustees, consequently the agreement implied that the accommodation notes should be paid when the company in the exercise of its honest judgment should decide to do so. We have to judge of the acts of the board of trustees in the light of appearances existing when they acted. I think that the method adopted cannot be adjudged as unreasonable, when viewed in that light.

In June, 1890, as above stated, the company ceased manufacturing, and from that date proceeded to close out its business. On July 31; 1890, as appears from its annual report, dated that day, the corporation was, and for several months prior thereto had been insolvent. The entire capital stock of $50,000 had been lost and its liabilities exceeded its assets by over $6,000 Later, in January, 1892, on winding up the business the deficiency was found to be over $115,000. On July 31, 1890; the company paid to I. A. Williams individually a back salary of $10,122.22, pursuant to a resolution of the board of trustees, passed on the 5th day of June, 1890, “ for services rendered as an officer of the Kirkland Iron Co., from January 20, 1888,” as expressed in said resolution. Thereafter the company paid I. A. Williams a salary of $5,666.66, pursuant to a resolution of the board of trustees, passed December 4, 1891, “ for services as Treasurer and General Manager of the Kirkland Iron Co.,- since the last settlement, June 1st, 1890,” as expressed in said resolution; and the further sum of $540.22 was paid after the sheriff had taken possession of all the assets of the company under executions, and after a receiver had been appointed., said payment being made in pursuance of another clause in the last-mentioned resolution which authorized the payment of his salary to be continued until the further direction of the Board of Trustees.” .

The payment to I. A. Williams of the three items of salary amounting to $16,329.10 were made after the company had refused to pay some of its outstanding and due promissory notes, and when the company was hopelessly insolvent, which was well known to each of its trustees and officers; and such payment was made with a view of such insolvency and with the purpose of securing to him an unlawful preference over the claim of Professor Dwight. Such payment was, therefore, void.

1 R. S., 603, § 4, as left in force by Laws of 1880, chap. 245, § 1 (1 Bird. ed. 679), which reads as follows: “Whenever any incorporated company shall have refused the payment of any of its notes, or other evidences of debt, in specie, or lawful money of the Hnited States, it shall not be lawful for such company, or any of its officers, to assign or transfer any of the property or choses in action of such company, to any officer or stockholder, of such company^, directly or indirectly for the payment of any debt; and it shall not be lawful to make any transfer or assignment in contemplation of the insolvency of such company, to any person or persons whatever; and every such transfer and assignment to such officer, stockholder, or other person, or in trust for them or their benefit, shall be utterly void.” See, also, Laws of 1890, chap. 564, §. 48; and Laws of 1892, chap. 688, § 48; vol. 2, R. S. (Banks’ 9th ed.), 1022; Jones v. Blun, 145 N. Y. 333-339; Throop v. Hatch Lithographic Co., 125 N. Y. 530; Kingsley v. First National Bank, 31 Hun, 329.

But there are other considerations respecting this salary. On the 18th day of February, 1888, at a meeting of the board of trustees an agreement was made orally by all the trustees that I. A. Williams should have a salary for his services as general manager. No amount was agreed upon and no resolution authorizing such payment was recorded on the books of minutes of the corporation. But Williams acted under that agreement and rendered valuable services, to the knowledge of the company, as general manager, outside of his duties as trustee and treasurer. Therefore, although the action of the board fixing the amount and authorizing the payment of said items of salary is void under the statute, yet he is entitled to a reasonable compensation. Outterson v. Fonda Lake Paper Co., 42 N. Y. St. Repr. 556; Barril v. Calendar Water Proofing Co., 52 Hun, 257; Farmers’ Loan & Trust Co. v. Housatonic R. R. Co., 152 N. Y. 251.

From the testimony I think that Williams’ services as-general manager were worth at the rate of $4,000 per year, from February 18, 1888, until the company ceased manufacturing ini June, 1890. During that period the general management involved the purchase of raw material and the employment and payment of from seventy-five to one hundred men in the manufacturing department. After June, 1890,. he was relieved from that burden which comprised at least half of his duties. After that date the property of the company kept running down in value, and the deficiency continued increasing the longer the company continued its existence, and Williams’ duties kept lessening in amount and value. The testimony placing the value of his services at $5,000 per year can only be reasonably construed as having reference to the period during which the company was engaged in manufacuring as well as selling its product. He accepted a salary at the rate of $4,000l during that period. From these considerations, I think that from June, 18901, when the company ceased manufacturing, until the company passed into the hands of the sheriff and receiver, January, 1892, Williams’ compensation should be allowed at the rate of $2,000 per ¡year, and nothing after that date.

Williams must, therefore, pay over to the receiver for distribution among the creditors, the amount he has received as salary with interest He will be entitled to receive on final distribution his pro rata dividend on the amount hereby fixed as the value of his services.

Findings may be prepared in accordance with this opinion.

Ordered accordingly.  