Chatham v. Mecklenburg Realty Co., 180 N.C. 500 (1920)

Dec. 8, 1920 · Supreme Court of North Carolina

180 N.C. 500

PAUL CHATHAM et al. v. MECKLENBURG REALTY COMPANY et al.

(Filed 8 December, 1920.)

1. Judgments —Assignment —Pai’ol Evidence —Ti’usts —Beneficiaries — Ratification.

It may be shown by parol that an assignment of a judgment, absolute in form, was, in fact, to be field as a security for a debt; and this applies to one acquiring an interest under tfie assignment, wfio was not aware of it at tfie time, but afterwards accepted it and claimed its benefits.

2. Same — Actions—Parties.

Where a judgment has been assigned to one for tfie benefit of himself and others, tfie one to whom tfie judgment has been assigned holds as trustee for tfie others, and he and tfie others holding an interest therein may maintain an action against tfie judgment debtor; and while such assignee is not a necessary party, when fie holds merely as a trustee, fie is a proper party.

3. Judgments — Assignment—Estoppel—Trusts.

A judgment assigned either absolutely or in trust operates as an estoppel between tfie judgment debtor and tfie parties, and privies, or others having an interest therein as oestuis qtie irustent. C. S., 449.

4. Corporations — Judgments—Dividends—Fraud—Execution—Limitation of Actions.

Pending an action to compel tfie refund of moneys of a corporation wrongfully distributed as dividends among its stockholders, by tfie assignees of a judgment against it, an attempted liquidation by tfie corporation is in fraud of tfie plaintiffs, but tfie running of tfie statute of limitations does not begin until execution has been issued against tfie corporation and returned unsatisfied; and C. S., 441 (9), as to tfie time for commencing an action after tfie discovery of tfie fraud, has no application.

5. Corporations — Parties—Receivers.

It is unnecessary to have a receiver appointed in order for tfie assignee of a judgment creditor, and those thereunder beneficially interested, to maintain an action against its officers and stockholders for misapplication of its funds in distribution among tfie shareholders as dividends.

Allen, J., dissenting; Bbown, J., concurring in tfie dissenting opinion.

Appeal by both, parties from Shaw, J., at September Term, 1919, of MeCKLENBITBG.

At February Term, 1917, of Mecklenburg, Paul Chatham and the Charlotte Rapid Transit obtained judgment against the defendant, the Mecklenburg Realty Company, for $10,000 and interest from date of judgment. On appeal, this was affirmed with modification that the judgment should bear interest from 19 May, 1913, the date of the contract sued upon, and not from the first day of the trial term as in actions for tort, where the verdict does not expressly allow interest. A petition to rebear was denied. Execution upon tbe judgment was issued 14 March, 1918, and was returned 2 April, 1918, "nulla bona." Thereupon plaintiffs made demand upon the officers and directors of the Mecklen-burg Eealty Company to pay in sufficient funds from the assets of the company which had been distributed among the stockholders to liquidate said judgment, which was refused.

This action was begun 2 April, 1918, against the directors and stockholders of the Mecklenburg Eealty Company to enforce payment of said judgment, and upon an order for examination, made in this cause, by the officers of the Mecklenburg Eealty Company, it was ascertained that its entire assets and capital had been distributed among the stockholders. On 17 August, 191Y, the plaintiffs in the judgment assigned to E. T. Cansler and H. L. Taylor one-fifth interest in the proceeds as security for payment of fees for legal services rendered, and to be rendered in said ease. On 2 January, 1918, the plaintiffs in the judgment assigned to BL.L. Taylor $2,305 in said judgment as security for debts due him,, but for which he held other security amply sufficient to secure said debts. On 2 January, 1918, the same plaintiffs assigned to Margaret Kava-naugh as security for certain debts due her the balance arising from the proceeds from said judgment.

The Mecklenburg Eealty Company, on 7 December, 1916, filed a certificate of voluntary dissolution, and thus attempted to dissolve. The summons in the original action in this case-had been served upon said realty company theretofore on 12 August, 1914.

When this cause came on for trial at September Term, 1919, of Meck-lenburg, both parties, by consent, entered on the minutes of the court, waived trial by jury, and consented that the issues of fact be tried by the court, who heard the evidence and rendered the findings of fact and judgment holding that the assignees of an interest in judgment were not necessary parties in the said action; that plaintiffs’ cause of action against the stockholders of the Mecklenburg Eealty Company was barred by the three-year statute of limitations; and that plaintiffs could only recover against said stockholders to the extent of the assets and capital of said company, which had been distributed among them within said three years, but that plaintiffs’ cause of action against the directors of said company was not barred by the statute of limitations. Both parties appealed. At Spring Term .of this Court, 1920, a per curiam order was entered that the assignees of interests in the judgment should be made parties in the Superior Court, with leave to them to file pleadings and to the other parties to except, and that the action taken should be certified to this Court, the case being retained here for further orders, but the order of this Court was “not to be taken as conclusive upon the parties who might except thereto, and they could take such course in the Superior Court, or in tbis Court, to protect tbeir rights as tbey may be advised.” Tbe pleadings bad below in pursuance to said order bave been certified to tbis Court, and are now a part of tbe record of tbis case.

Cansler & Oansler and II. L. Taylor for plaintiffs.

W.,8. O’B. Robinson, Jr., and Morrison & Dockery for officers and directors.

Q. W. Tillett for stockholders.

Clare;, C. J.

Tbougb tbe assignments were absolute in form, tbe judge finds as a fact from tbe evidence tbat tbey were made as a security for debts for legal services'and other indebtedness. H. L. Taylor testified tbat tbe assignment to himself and to Mr. Oansler was as security for tbe payment of fees due them as counsel, and tbat at bis suggestion a further assignment was made of an interest in judgment to secure an indebtedness due bis client, Mrs. Kavanaugh. She was not at tbe time aware of tbis provision for her benefit, but has since then accepted it, and has filed her pleas in tbis Court, as well as Oansler and Taylor, claiming tbeir beneficial interests in tbe proceeds of tbe judgment.

“Tbe Court finds as a fact tbat plaintiffs bave such an interest in said judgment, as gives them tbe right' to prosecute tbis action in tbeir own. name, in behalf of themselves and all other creditors having an interest.” Tbe above assignees of a beneficial interest in said judgment bave been made parties and filed pleadings in behalf of such beneficial interests. Thus all parties interested in tbe judgment are before tbe court. Tbe original owners of tbe judgment could thus maintain tbe action in tbeir own behalf, and for tbe benefit of tbeir assignees as trustees of an express trust under tbe terms of said assignments, and can prosecute tbis action. “An executor or administrator, a trustee of an express trust, or a person expressly authorized by statute, may sue without joining with him tbe person for whose benefit tbe action is prosecuted. A trustee of an express trust, within tbe meaning of tbis section, shall be construed to include a person with whom or in whose name a contract is made for tbe benefit of another.” C. S., 449.

It was proper, tbougb not necessary, tbat such assignees' should be made parties, which has been done, and tbey bave filed tbeir supplemental pleadings. Tbe exception tbat tbe owners and plaintiffs in tbe judgment could not bring tbis action was properly overruled.

Tbe proceedings to recover tbe assets and capital which has been distributed among tbe shareholders and against tbe officers and directors was in tbe equitable jurisdiction of tbis Court. Tbe statute is simply a cumulative legal remedy. Barnawell v. Threadgill, 40 N. C., 89; Oliveira v. University of N. C., 62 N. C., 70; Humphrey v. Wade, 70 N. C., 281.

In Settle v. Settle, 141 N. C., 563, tbe Court affirmed tbe above principle from wbicb it is clear tbat tbe statute declaring tbe liability of directors and stockholders to> creditors, upon tbe admitted facts of tbis case, merely extended tbe equitable powers of tbe court to- obtain possession of tbe assets of'tbe corporation and administer tbem in accordance witb tbe principles of equity, and does not substitute tbe statutory remedy to tbe exclusion of tbe equitable remedy heretofore existing. Tbe intent of tbe Legislature was to make tbe remedy of creditors swifter and more efficacious, and tbe statutory remedy does not restrict tbe right of tbe creditors by shortening tbe time within which those rights could have been enforced in an equitable proceeding.-

A creditor who has obtained a judgment - against a corporation can maintain such action when tbe execution has been returned nulla bona. In Guilford v. Georgia Co., 112 N. C., 36, tbe Court said: “There being no distinction between actions at law and suits in equity in tbis State, any proper relief can be granted in a civil action. A creditor’s suit is of itself a very comprehensive and liberal action. It is not demurrable, because tbe remedy might have been bad by supplemental proceedings. Bronson v. Ins. Co., 85 N. C., 411; Hughes v. Whitaker, 84 N. C., 640. It is not demurrable because tbe cause of action is dormant. Bacon v. Berry, 85 N. C., 124; Bank v. Harris, 84 N. C., 206; Mebane v. Layton, 86 N. C., 571. It is an old and well settled mode of procedure, fully adequate to settle all conflicting interests.”

This right of action existed prior to tbe statute, and is not penal in its nature, and tbe statute governing penal actions has no application. Tbe summons in tbe action in wbicb tbe judgment was recovered was served upon tbe Mecklenburg Realty Company 12 August, 1914. Tbe judgment was obtained at February Term, 1917, and is conclusive as to tbe indebtedness. Tbe officers and stockholders of tbe realty company, in December, 1916, evidently seeing beforehand tbat judgment would be obtained in February following, attempted to evade payment by their voluntary proceeding for dissolution in December, 1916, and tbe distribution of tbe capital and assets of tbe corporation among tbe stockholders. Tbis was an attempted fraud, and as was held in McIver v. Hardware Co., 144 N. C., 484: “When tbe property has been divided among tbe shareholders, a judgment creditor, after a return of an execution against a corporation unsatisfied, may maintain a creditor’s bill against a single shareholder or against as many shareholders as be can find within-the jurisdiction, to charge him or tbem to tbe extent of tbe assets thus diverted, it is immaterial whether be got tbem by fair agreement witb bis associates, or by an act wrongful as against tbem.”

Tbe judgment is an estoppel upon tbe officers and stockholders of tbe corporation, and cannot be collaterally attacked by tbem. ’ Heggie v. Loan Asso., 107 N. C., 581; Clark v. Marsh Corp., 10 Cyc., 733, and cases there cited; Hawkins v. Glenn, 131 U. S., 319, in wbicb last the facts are almost identical with those in this case.

C. S., 1197,- provides: “In the case of the dissolution of a corporation, the debts due to and from it are not thereby extinguished, nor do actions against a corporation which is dissolved before final judgment abate by reason thereof, but no judgment shall be entered therein without notice to the trustees or receivers of the corporation.” The action was pending at the time the dissolution proceedings were taken out, and the directors and trustees were fixed with notice thereof, and at the rendition of judgment they not only appeared by counsel, but appealed to this Court, and after the affirmation of the judgment -here applied for, and were refused a rehearing. C. S., 1193, continued the existence of the corporation for three years for the purpose of prosecuting and defending actions, and section 1194 constitutes the directors trustees to wind up the affairs of the corporation, collect debts due it, sell and convey the property, and, "after paying ils debts, divide any surplus money and other property among the stockholders.” And section 1198 provides for the distribution of funds, and section 1199, supra, provides that the debts due to and by such corporations shall not be extinguished nor actions abated by dissolution before final judgment.

There is no statute of limitation which protects either stockholders or the directors who receive the capital and assets of the corporation with notice by the pending suit of a claim of the plaintiff. In Long v. Miller, 93 N. C., 233, it was held that even though a contract sued upon was barred by the statute, yet the creditor could follow the funds placed in the hand of the trustee to secure such indebtedness. To the same purport are Faison v. Stewart, 112 N. C., 334; Baker v. Brown, 151 N. C., 15, and many other cases. Both the directors and the stockholders of the company received and held the capital distributed among them in trust and for benefit of the creditors.

The cause of action in this case for the recovery of assets of the corporation from the stockholders and the directors did not accrue until judgment was obtained against the corporation upon the indebtedness and the return on the execution issued thereon “milla bona.” Until that time they could not have taken proceedings to compel the return of the assets distributed among the stockholders, and the application thereof to the plaintiff’s judgment. Hughes v. Whitaker, 84 N. C., 640, in which it was said that the plaintiff’s remedy “is open, and is not obstructed by the lapse of time, since until he recovers judgment his claim as a creditor is not established.” In that case the judgment creditor was seeking to pursue the funds of the estate which had been fraudulently alienated. “No cause' of action accrues against the shareholder until the creditor bas failed to make tbe amount of bis judgment or ascertained claim from tbe assets of tbe company, or unless, perhaps, in certain cases it appears to be useless to proceed against tbe corporation.” Hawkins v. Glenn, 131 U. S., 319; Scoville v. Thayer, 105 U. S., 143.

In Taylor v. Bowker, 110 U. S., 113, it was beld tbat in a proceeding “to enforce judgment against tbe property of a corporation whose charter bad been surrendered, tbe cause of action does not accrue until tbe execution bas been returned against tbe corporation.”

If there were any statutes of limitation which began to run against tbe plaintiff’s cause of action prior to tbe judgment and return of tbe execution, it was tbe 10-year statute “for relief not herein provided for,” C. S., 445; Lynch v. Johnson, 171 N. C., 615, and cases there cited: Allen v. Gooding, 173 N. C., 95; Barnes v. McCullers, 108 N. C., 55; Ross v. Henderson, 77 N. C., 170, and numerous other cases.

It is true tbat C. S., 441 (9), provides tbat “An action for relief on tbe ground of fraud or mistake must be brought in three years.” If tbat section applied, it is further provided in tbat section tbat “tbe cause of action shall not be deemed to have accrued until tbe discovery by tbe aggrieved party of tbe facts constituting such fraud or mistake.” It does not appear here tbat tbe plaintiffs made such discovery before tbe rendition of tbe judgment and tbe return of tbe execution unsatisfied, and indeed, until tbat was done they bad no cause of action to recover tbe misapplied assets of tbe corporations. Besides, tbe distribution of such assets did not take place until within less than 3 years before tbe beginning of this action. In no aspect are tbe plaintiffs barred by tbe statute of limitation.

We are of opinion tbat tbe plaintiffs were entitled to proceed directly against tbe stockholders and directors who received tbe assets of tbe Mecklenburg Eealty Company without tbe appointment of a receiver, and tbat tbe plaintiffs’ cause of action against the stockholders and directors of said company is not barred by tbe statute of limitation.

In tbe plaintiffs’ appeal tbe judgment is modified, in accordance with tbe above opinion. In tbe defendants’ appeal,

No error.

AlleN, J.,

dissenting: At February Term, 1917, of tbe Superior Court of Mecklenburg, Paul Chatham and tbe Charlotte Eapid Transit Company, in which Chatham was tbe principal stockholder, recovered judgment against tbe Mecklenburg Eealty Company, a corporation, for $10,000, and being unable to collect tbe judgment, tbe same plaintiffs, without tbe joinder of other parties, instituted this action against tbe stockholders and directors of tbe realty company to compel tbe payment of tbe judgment.

Tbe former action was commenced 12 August, 1914.

Tbe realty company began tbe distribution of its assets among its stockholders in 1911, and in that year paid to each stockholder $157.50 on each share of stock of the par value of $100; in 1913, $10; in 1916, $7.94, and on 7 December, 1916, all of the assets being distributed, the corporation was dissolved.

The judge finds that Paul Chatham and the Charlotte Rapid Transit Company are the only creditors of the realty company, and that the payments to the stockholders were made without intent to defraud the plaintiffs.

It also appears that before this action was commenced the plaintiffs made three assignments of their judgment, the first two being as security for debts, and the last to Margaret Kavanaugh, and the record failing to disclose that Mrs. Kavanaugh knew of the assignment to her, or that she had accepted the same, the order recited in the opinion was made, which states that it was not to be conclusive on the parties.

In obedience to the order, Mrs. Kavanaugh filed the following plea in the Superior Court:

Pursuant to the order of the Supreme Court made in this case, Mrs. Kavanaugh hereby comes into court and makes herself a party plaintiff herein, adopts the complaint heretofore filed herein, joins in the prayer for relief therein contained, and agrees to be bound by any judgment rendered herein by the Supreme Court.

And the said Mrs. Margaret Kavanaugh hereby accepts the assignment of the judgment sued on in this action, and prays that she may be declared to be the owner thereof, subject to the previous assignments of H. L. Taylor and E. T. Oansler, if in law, equity, and good conscience she is entitled thereto. Mss. Mabgaeet T. KavaNaugh,

By H. L. Taylor, Attorney in Fact.

The other assignees were made parties, and neither they nor the Charlotte Rapid Transit Company and Paul Chatham resist the prayer of Mrs. Kavanaugh to be declared the owner of the judgment subject to the prior assignments, and the defendants- allege in their answer that she is the owner of the judgment.

It appears, therefore, that no party to this action denies the allegation of Mrs. Kavanaugh that she is the owner of the judgment sued on, by assignment executed before this action was commenced, and this presents two questions for decision.

1. Can the owner of a judgment assign it, and afterwards prosecute an action in his own name to enforce payment ?

2. If not, can the assignee be made a party to an action instituted by the original owner after appeal to the Supreme Court, and continue the prosecution of the action?

1. It was undoubtedly the doctrine of the common law that the assignment of a judgment, whether absolutely or as security, only passed the equitable and beneficial interest, leaving in the plaintiff in the judgment the legal title, but this legal title was not held for the benefit of the assignor, but to enable the assignee to bring an action in the líame of the assignor to his own use.

As said in Winberry v. Koonce, 83 N. C., 353, the assignor “occupies the relation of a sort of trustee in the sense of being bound to allow the use of his name in actions at law for their collection.”

The -doctrine at common law, and under modern authority, is stated in 15 R. C. L., 778, as follows: “At common law the effect of an assignment of a judgment was merely to transfer an equitable title, and the assignee was not permitted to bring an action thereon in his own name, but the assignee, by virtue of his equitable interest, had the right to control the collection of the judgment, and for that purpose to use the name of the plaintiff, his assignor, and to receive the money collected. The general rule today is that an assignee of a judgment is the real party in interest in actions based upon such judgment, and may bring suit in his own name. "Where an assignment of a judgment has been made as collateral security for the payment of a designated debt, the right of the assignee to sue is not impaired by the residuary interest of the assignor, and the latter cannot bring suit, unless it be alleged, that the assignee neglects or refuses to do so, under circumstances calculated to prejudice the right of the assignor.”

Our State, departing from the refinements and subtleties of the common law, follows 'the modern thought in this particular, and deals with the substance instead of the mere shell of a legal title.

The statute (Rev., 400) provides that “Every action must be prosecuted in the name of the real party in interest,” and the Court said in Moore v. Nowell, 94 N. C., 270, after holding that the assignee may maintain an action on the judgment in his own name, “The judgments mentioned and described in the complaint, were assigned to the plaintiff in writing, for value, and he became the complete equitable owner of them and the Teal party in interest.’ ”

This case was approved in Ricaud v. Alderman, 132 N. C., 64, where it is stated that “It is well settled that a judgment is assignable, and that the assignee for value acquires all of the rights and remedies of the original plaintiff.” (Italics mine.)

. It is therefore clear to me that the original plaintiffs cannot maintain this action because they parted with all interest in the judgment by assignment before the action was commenced.

2. The second question is answered by what is said in Bennett v. R. R., 159 N. C., 347, which is quoted by Walker, J., in Reynolds v. Cotton Mills, 177 N. C., 425.

“While courts are liberal in permitting amendments, sucb as are germane to a cause of action, it bas been frequently beld that the court has no power to convert a pending action that cannot be maintained into a new and different action by the process of amendment. Best v. Kinston, 106 N. C., 205; Merrill v. Merrill, 92 N. C., 657; Clendenin v. Turner, 96 N. C., 416.

“In the last case it is said: ‘The court has no power, except by consent, to allow amendments, either in respect to parties or the cause of action, which will make substantially a new action, as this would not be to allow an amendment, but to substitute a new action for the one fending.’ ”

If, however, the assignees could be substituted as plaintiffs, the statute of limitations is pleadéd, and as it would run against them until actually made parties, their cause of action would be barred by the statute of three years.

I think the action ought to be dismissed.

BeowN, J), concurs in this opinion.