further avers that the board of directors of executing the mortgage. A copy of the the company had no authority to order a mortgage is hereto annexed and made part of chattel mortgage to be given to the plaintiff this finding; and, upon request of the defendto secure the individual debt of T. J. Not-ant, it is further found that the other morttingham; that the chattel mortgage was at-gages executed were signed both at the close tempted to be executed, with several other chattel mortgages, for the purpose of giving the bank and others a preference over general creditors, and was procured from the board of directors, and the order for the same was procured by said T. J. Nottingham, who well knew that the debt due the bank was his own individual debt, which he was thus attempting to have the company prefer out of its assets over its own general creditors; that an assignment for the general benefit of creditors, under the insolvent laws of Ohio, was duly executed, and delivered to F. W. Browne, as assignee, at the same time, and before the mortgage set up in the petition was attempted to be executed by the said T. J. Nottingham; that the assignment was duly delivered to said Browne by the company for the general benefit of creditors; that the mortgage was never delivered to the bank, but after its attempted or pretended execution was delivered, in an unfinished condition, to the said F. W. Browne, the assignee, who caused it to be filed in the recorder's office in Hamilton county, and a few minutes thereafter caused the deed of assignment, which was then in his hands, to be filed in the probate court of Hamilton county; and the defendant alleges that said chattel mortgage is void, and in fraud of the rights of the general creditors.

of the body of the mortgage and at the close of the schedule. On the 25th of June the completed mortgage was filed in the recorder's office of Hamilton county, where chattel mortgages, executed in Cincinnati by residents thereof, are required by law to be filed, and on the same day, an hour or two later, the assignment was filed with the judge of the probate court. The amount due the plaintiff on the first day of this term, secured by said mortgage, is $6,542,41. F. W. Browne, assignee, was removed, and George L. Rouse, defendant, was appointed trustee in his place. The property has been sold, and the proceeds are in the hands of said trustee. The plaintiff presented his claim to said trustee, and demanded its allowance and payment, all of which the said trustee refused. As conclusion of law the court finds that the mortgage is a valid instrument, and has preference over the assignment, and the plaintiff is entitled to the payment thereof from the proceeds of the mortgaged property. To all of which findings the defendant then and there excepted, and thereupon the defendant made and filed a motion to set aside the said findings, and for a new trial, which motion was by the court overruled, to which action of the court the defendant then and there excepted. It is therefore considered by the court that the plaintiff recover from the said trustee, from the said proceeds in his hands, $6,542.41, with interest at six per cent. per annum from the first day of February, 1886, and that the costs of this action be paid from said proceeds, and that this judgment be certified to the probate court."

The present proceeding in error is prosecuted here to reverse the foregoing judgment of the superior court.

Lincoln, Stephens & Lincoln, Watson, Burr & Livesay, and Albery & Albery, for plaintiff in error. John W. Herron, for defendant in error.

The case was heard upon the pleadings and evidence, and then reserved to the general term for decision, where, at the request of counsel, the court stated its findings of fact | and conclusions of law separately, as follows: "That on the 23d day of June, 1884, the T. J. Nottingham Manufacturing & Supply Company, defendant, being insolvent, resolved to make a general assignment of its property for the benefit of its creditors, and resolved to give a mortgage on the same property to the plaintiff, and other mortgages to other creditors, which mortgages should have preference over the assignment, and appointed F. W. Browne assignee. The deed of assignment was executed and delivered to the said F. W. Browne, who drew all the instruments, and acted as attorney for the company in the whole matter, as well as assignee, on the 24th of June. Before the execution of the assignment, the mortgage was drawn, but a blank was left therein for the insertion of the amount secured by it. Next day, the 25th of June, the mortgage was completed and executed, and immediately thereafter, the other mortgages were completed and executed, the whole being done at one sit-efit of its creditors; and, the directors in posting. The property was described in the body of the mortgage as the goods and chattels described in the schedule hereunto annexed,' and was signed, not at the close of the body of the mortgage, but at the end of the schedule, and the signature was there affixed for the purpose of authenticating and

WILLIAMS, J., (after stating the facts as above.) The general question for decision in this case is whether a corporation for profit, organized under the laws of this state, can, in the disposition of the corporate property, after it has become insolvent, and ceased to further prosecute the objects for which it was created, prefer some of its creditors over others. The claim of the plaintiff in error is that, when the corporation becomes insolvent and ceases to carry on business, its property and assets constitute a trust fund for the ben

session of the corporate property being trustees for all the creditors, cannot lawfully dispose of it otherwise than for the equal benefit of all the corporate creditors. The defendant in error, on the other hand, contends that, when not restricted by the law of their creation, or prevented by the operation of

some bankrupt or insolvent law, insolvent | attributes only with which the law, under corporations may, the same as natural per- which they are created, invests them, and can sons, make preferences among their credit- exercise no powers not expressly conferred or ors. Decisions of courts will be found main- necessary to carry into effect those in terms taining each of these diverse positions. The granted. Since the constitution of 1851 it precise question has not been decided in this has been the settled policy of this state to afstate, and, in view of the conflict of author- ford adequate protection to the creditors of ity elsewhere, we are at liberty to adopt that corporations. That constitution contains the rule which best harmonizes with the policy provision that "dues from corporations shall and legislation of the state, rests upon the be secured by such individual liability of the sounder reason, as we conceive it to be, and stockholders, and other means, as may be precoincides with our sense of justice and right. scribed by law; but in all cases each stockThe right of the individual debtor to prefer holder shall be liable over and above the stock one creditor to another, though at the time by him or her owned, and any amount unpaid insolvent, rests upon his complete dominion thereon, to a further sum, at least equal in over, and consequent unrestricted power of amount to such stock." Legislation, under disposition of, his property; and the cases this constitution, has been shaped to fully which hold that insolvent corporations are effectuate the constitutional guaranty. All entitled to make preferences among their corporations organized for profit are required creditors attribute to them the same unlim-to have a capital stock, 50 per cent. of which ited control over their property that is pos- must be subscribed, and at least 10 per cent. sessed by individuals over theirs. In Catlin paid in, before the organization can be effectv. Bank, 6 Conn. 233, which is the leading ed; and the stockholders are made liable, in case in this country maintaining the right of addition to their stock, to an amount equal to an insolvent corporation to prefer one or more the stock held by them, to secure the payment of its creditors over others, the decision is of the debts of the corporation. This liabil distinctly placed upon the ground that the ity, it has uniformly been held by this court, particular corporation was invested with the is a security exclusively for the benefit of the control and power to dispose of the corporate creditors of the corporation, over which the property, as fully, and to the same extent, corporation has no control; and, moreover, that natural persons have with respect to the security is for the equal benefit of all the their property. HOSMER, C. J., in the opin- creditors. The suit to enforce it must be by jon in that case, says: "If the corporation, all the creditors, and against all the stockholdso far as regards its right to manage and dis-ers, and no creditor can acquire priority over pose of its property, has power analogous with the others with respect to it; and, while powthat which is vested in an individual, the plaintiff's bill is wholly destitute of merits. *** The cases of an individual and of a corporation in the matter under discussion, it appears to me, are not merely analogous, but identical; and I discern no reason for the slightest difference between them. And again he says that "no express trust was created on the happening of the bank's insolvency; but the charter, on every fair principle of construction, conferred on the corporation the entire control of its property, as well after as before this event." * * * "The insolvent banking corporation is just as much a trustee of the creditors, and no more, as the insolvent individual is the trustee of his creditors. The relation of creditor and debtor exists in both cases; but from this relation no trust arises."

er is conferred on corporations to reduce their capital stock, it is expressly provided that the rights of creditors shall not be affected, nor in any way impaired. The corporate powers, business, and property of the corporation must be exercised, conducted, and controlled by a board of directors, all of whom must be stockholders; and, as a still further guaranty for creditors, the powers of corporations over their property, its use and disposition, are so circumscribed by positive statute that no corporation can employ its stock, means, assets, or other property, directly or indirectly, for any other purpose whatever than to accomplish the legitimate objects of its creation. The extent of the powers expressly conferred on them are to sue and be sued, contract and be contracted with, and acquire and convey such real and personal estate as may be necesWe have not the charter of the corporation sary or convenient to carry into effect the in question in that case before us, but we as-objects of the incorporation, to make and use sume that the learned judge was correct in saying that by every fair construction it conferred upon the corporation the entire control of its property after its insolvency. If so, no fault need be found with his conclusion, that it might, like any individual, prefer some of its creditors over others. Corporations generally do not possess such amplified powers, and especially those created under the laws of this

state.

In this state corporations have not the same powers and capacities as natural persons, but are authorized for specified and defined purposes. They are clothed with those

a common seal, and do all needful acts to carry into effect the objects for which they are created. It is obvious that the corporate property cannot, with propriety, be said to be owned by the corporation in the sense of ownership, as applied to property belonging to natural persons. The latter may, without restriction, acquire and dispose of property for any lawful purpose, while both the power of acquisition and disposition of the former are limited to the special objects already mentioned. The corporate property is, in reality, a fund set apart to be used only in the attain

ment of the objects for which the corporation | pro rata. If, therefore, a corporation should was created, and it cannot lawfully be divert- dissolve, and divide its property among its ed to any other purpose. As soon as acquired, shareholders without first paying its debts, it becomes impressed with the character of a equity would enforce the claims of its credtrust fund for that purpose, and the share-itors by converting all persons, except bona holder or creditor may interpose to prevent fide purchasers for value, to whom the propits diversion from the objects of the incorpo-erty had come, into trustees, and would comration injurious to him. Tayl. Corp. § 34.

pel them to account for the property, and contribute to the payment of the debts of the corporation, to the extent of its property in their hands."

The creditors

The custody and control of the property, and the management of the business of the corporation, are confided to a board of directors chosen by the shareholders. Into the It is now firmly established that the prophands of these officers, through whom alone erty and assets of a corporation are a trust corporations can act, the shareholders surren- fund for the payment of its debts, especially der their funds, and intrust the management in case of its insolvency. Since the case of of the affairs and property of the corporation Wood v. Dummer, 3 Mason, 309, where Mr. to them. A relation of trust and confidence Justice STORY is said to have first formulated therefore arises between the stockholders and the doctrine, it has been generally accepted, directors of a corporation, out of which grow and is sustained by the highest authority. the duties of the latter to so administer the Mr. Justice SWAYNE announces it with great trust as will best promote the interests of the clearness in Sanger v. Upton, 91 U. S. 56, former, to pay them their appropriate divi- 60, as follows: "The capital stock of an indends from time to time, and, upon the ter- corporated company is a fund set apart for mination of the corporation, to distribute to the payment of its debts. It is a substitute them their respective shares of the corporate for the personal liabilities which subsists in property, after the payment of its debts and private copartnerships. When debts are inliabilities. These duties are eminently of a curred, a contract arises with the creditors fiduciary nature. It is now so well estab- that it shall not be withdrawn or applied, lished as to be no longer a subject of contro- otherwise than upon their demands, until versy that the relation of trustee and cestui such demands are satisfied. que trust subsists between the directors and have a lien upon it in equity. If diverted, shareholders; and since the directors, as such they may follow it as far as it can be traced, trustees, represent and act for all the share- and subject it to the payment of their claims, holders, they cannot lawfully favor any par- except as against holders who have taken it ticular shareholder or class of shareholders, bona fide for a valuable consideration, and but every authority and power possessed by without notice. It is publicly pledged to them must be exercised for the benefit of all those who deal with the corporation for their alike; otherwise no corporation could endure. security." In Curran v. State, 15 How. 312, If the directors and officers of a corporation Mr. Justice CURTIS said on this subject: were allowed, in the conduct of the business "The capital and debts of banking and other and disposition of the property, to favor one moneyed corporations constitute a trust fund or more shareholders, to the detriment of the and pledge for the payment of its creditors and others, the minority would be the prey of the stockholders, and a court of equity will lay majority; for it would then be within the hold of the fund, and see that it be duly colpower of the majority to combine and elect | lected and applied. And in Upton v. Tribilthe officers, who in turn should manage the cock, 91 U. S. 45, 47, Mr. Justice HUNT thus whole business, and apply the whole corporate lays down the doctrine: "The capital stock property for the benefit of the majority, and of a moneyed corporation is a fund for the thus practically confiscate the entire property payment of its debts. It is a trust fund, of interest of the minority. Corporations would which the directors are the trustees. It is a thus become traps for the unwary, and legal- trust to be managed for the benefit of its ized instruments of fraud. The doctrine that shareholders during its life, and for the benthe directors are trustees for the sharehold-efit of its creditors in the event of its dissoluers, and for the equal benefit of all, it is ob- tion. This duty is a sacred one, and cannot vious, is essential to the existence of corpora- be disregarded. Its violation will not be untions. But it is the right of the creditors, dertaken by any just-minded man, and will equally with the shareholders, to have the cor- not be permitted by the courts." The docporate property applied to the purposes for trine is sustained by many authorities. 2 which the corporation was created, and this Story, Eq. Jur. § 1252; 2 Pom. Eq. Jur. § includes the payment of the corporate indebt- 1046; Tayl. Corp. §§ 654, 655; Haywood v. edness contracted in the prosecution of its Lumber Co., 64 Wis. 639. It was held by business. The rights of the creditors to the this court, as early as Taylor v. Exportcorporate property, so far as it is necessary to ing Co., 5 Ohio, 165, where the opinion of meet their demands, are superior to those of Mr. Justice STORY in Wood v. Dummer, stockholders. In Perry on Trusts, § 242, the supra, is quoted with approbation; and it is relative rights of the creditors and sharehold- more distinctly announced in the later case ers are thus defined: "A corporation holds its of Goodin v. Canal Co., 18 Ohio St. 182, where property in trust-First, to pay its creditors; it is said to be "well settled that the property and, second, to distribute to its stockholders of a corporation is a trust fund in the hands

of its directors, for the benefit of its creditors tions become insolvent, the duty of the diand stockholders." rectors toward its creditors becomes even It being established that the corporate stricter and more imperative; for, under such property is a trust fund for the benefit of the circumstances, the rights of creditors are corporate creditors, it follows that, after the paramount, and it has become probable that insolvency of the corporation is ascertained, they will be somewhat damaged; and the and the objects of its creation are no longer plain duty of directors who control the pursued, the managing board of directors funds from which corporate debts are paid then having the custody of the property be- is to see that the loss is as small as poscome trustees thereof for the creditors, and sible. Moreover, since, upon the insolvency this relation necessarily forbids any discrim- of the corporation, the rights of unsecured ination between the beneficiaries in the dis- creditors are equal, it would seem to be untribution or application of the fund. The lawful, even in the absence of a statute exdue execution of the trust demands absolute pressly forbidding it, for directors to make impartiality towards the cestuis que trustent. preferences among them." (Section 759.) They must be treated alike, and no prefer- And in section 668 it is further said: "To ence can be made among them without a di- allow an insolvent corporation to make an asrect violation of the duties arising from the signment of its property, giving preferences relation. It would seem clear that if the cor- to a portion of its creditors over the others is porate property constitutes a fund for the unjust, as well as utterly repugnant to the creditors, it is as much so for one creditor as doctrine that corporate property is a trust for another, and that the directors in posses- fund, on the credit of which persons contract sion are without authority to dispose of it in with the corporation. If such property condisregard of the rights of any creditors. They stitutes such a fund, it is clearly held in trust can no more discriminate between creditors for the benefit of one creditor just as much in such case than they could, before the in- as another; and to prefer one creditor to ansolvency of the corporation, between the other is evidently beyond the authority of the shareholders. The objects for which the cor- trustee. This view is far from being unporation was created being no longer prose- supported by direct authority." Mr. Moracuted, and the occasion for the exercise by wetz, in his excellent work on Private Corthe board of directors of the power of control porations, referring to the cases which hold and disposition of the property for such pur-that corporate preferences are valid, says: pose having ceased, there remains no purpose "This doctrine, in the opinion of the writer, to which its assets can lawfully be devoted, is wholly indefensible on principle. The capexcept to the payment of the debts. In eq-ital provided for the security of the creditors uity the corporate property becomes the prop-of a corporation is a fund held for the benerty of the creditors, and their equities are efit of all the creditors equally. That the equal. Every creditor who became such by unsecured creditors of a corporation are entiparting with his money, property, or other tled to an equal distribution of the common things of value to the corporation, contribut-security has often been recognized by the ed to the accomplishment of its purposes, and augmented its corporate fund; and, when the fund is no longer demanded for the purposes of the corporation, the rights of the creditors become fixed instantly and equally, for each, having contributed to the common fund, has an interest in it, in proportion to his claim, equally with every other creditor. This interest is sometimes called the equitable lien of the creditor on the corporate property, which enables him to follow it, even after it has left the hands of the directors, wherever it can be found, except in the possession of bona fide purchasers for value, and subject it to the payment of the corporate indebtedness. It would seem to result as a necessary consequence that insolvent corporations which have ceased to carry on business cannot, by pledge or mortgage of the corporate property to some of the creditors in payment or security of antecedent debts, without other consideration, create valid preferences in their favor over others, and it is maintained by the more recent writers on the subject that such preferences cannot be made.

courts of equity in adjusting the rights of creditors among themselves, and in relation to the company's shareholders. After a corporation has become insolvent, and has ceased to carry on business, the rights of its creditors become fixed. If a corporation, whose assets are not sufficient to satisfy all of its creditors in full, can prefer certain creditors, leaving others unpaid, this must be by virtue of a power reserved by implication to the company and its agents. But this power cannot justly be included in the general powers of management which a corporation must necessarily possess over its property in order to carry on its business and further the purposes for which the company was formed. The purposes of a corporation are not furthered in any manner by giving it or its agents the power, after the company has be come insolvent, and has ceased to carry on business, and after its shareholders have lost their interests in the corporate estate, to prefer a portion of the creditors, according to interest or mere whim, and to pay their claims in full, leaving the others wholly without redress. The doctrine that an insolvent corpoIn the last edition of Taylor on Private ration may prefer certain creditors at the exCorporations it is said: "When corpora-pense of others seems to have been first start

for such portion of the debts, existing while they were such stockholders, as is equal to the proportion which their stock bears to the stock held by all stockholders liable for the same debts. Admit the power of the board of directors of an insolvent corporation to make preferences among its creditors, and it must follow that they may prefer any they may choose to select for that purpose. This would be wholly inconsistent with the trust relation subsisting between the directors and shareholders, for, since different stockholders, or classes of stockholders, may be liable for different debts, and not all for the same debts, if the directors could apply the corporate property to some of its debts, leaving others entirely unprovided for, they would be at liberty to select the debts for which particular stockholders alone were liable, and appropriate all of the property to their satisfaction, leaving the other stockholders to respond to the full extent of their statutory liability for the remaining debts. The directors would in this way be enabled to apply the whole corporate property to their own exoneration. Whether an insolvent corporation, which is still a going concern, and in good faith engaged in the prosecution of its busi

ed in Catlin v. Bank, 6 Conn. 233, a case in which the fundamental rule that the assets of an insolvent corporation constitute a trust fund pledged for the security of creditors was denied. It is a doctrine which is at variance with the whole theory of the law concerning the rights of creditors of insolvent corporations, and is contrary to the plainest principles of justice." 2 Mor. Priv. Corp. § 803. And in a very recent work on Insolvent Corporations it is said: "The practical working of the rule sustaining corporate preferences is monstrous. The unpreferred creditors have only a myth or shadow left to which resort can be had for payment of their claims; a soulless, fictitious, unsubstantial entity. that can be neither seen nor found. The capital and assets of the corporation, the creditors' trust fund, may, under this rule, be carved out and apportioned among a chosen few; usually the family connections or immediate friends of the officers making the preference. This rule of law is entitled to take precedence among the many reckless absurdities to be met with in cases affecting corporations as being a manifest travesty upon natural justice." Wait, Insolv. Corp. § 162. "Elsewhere we have deprecated the right, which is recognized in a number of cases, of insolv-ness, may borrow money, or contract, or proent corporations to make preferential assignments. It would seem to be an idle waste of words to designate the capital and assets of a corporation as a trust fund for the benefit and security of creditors in the event of dissolution or insolvency, if one of the first principles of the law of trusts-equality of distribution-could be openly violated, and the effects of the bankrupt company apportioned among a favored few." Id. § 654.

cure an extension of other bona fide indebtedness, and convey or pledge the corporate property in security thereof, is a question not involved in this case, and upon which we here express no opinion.

It appears from the finding of facts in this case that the directors of the corporation declared its insolvency, and directed, by the same resolution, the execution of an assignment for the benefit of its creditors, and of the preferential mortgages to the bank and other creditors. It does not appear that there had been any agreement between the mortgagees and the corporation that such mortgages should be given, nor that they were given for any other consideration than the antecedent indebtedness of the corporation to the creditors receiving them. Being merely voluntary mortgages to secure pre-existing debts, without other consideration, they cannot prevail against the equitable rights of the corporate creditors. Lewis v. Anderson, 20 Ohio St. 281.

Without extending the discussion, we are of opinion that, when a corporation for profit, organized under the laws of this state, becomes insolvent and ceases to carry on its business or further pursue the purposes of its creation, the corporate property constitutes a trust fund for the equal benefit of the corporate creditors, in proportion to the amounts of their respective claims; and that it cannot then, by pledge or mortgage of the property to some of its creditors as security for antecedent debts, without other consideration, create valid preferences in their behalf, over the other creditors, or over an assignment thereafter made for the benefit of creditors. Instead of the individual liability of the stockholders being a ground of objection to this conclusion, it furnishes an additional reason in its support. It is well settled that the corporate property is the pri-gages, was directed by the same resolution, mary fund for the payment of the debts of the corporation, and the statutory liability of the stockholder is a security to be resorted to only when the payment of its debts cannot be enforced against its property; and it was held in Harpold v. Stobart1 (decided at this term) that stockholders, who have assigned their stock to an insolvent assignee, are liable only

121 N. E. Rep. 637.

Counsel have argued at length, and with great ability, another question sufliciently raised on the record, and that is whether, in view of the facts found by the court below, that the execution of the assignment for the benefit of creditors and the preferential mort

and were in fact executed at the same time, the several instruments may not be treated as constituting together an assignment in trust with intent to prefer the mortgagees, and so inure to the equal benefit of all creditors. The determination of this question not being necessary to the decision of the case, no opinion is expressed upon it.

Other questions presented in the argument, and considered by the court, do not