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Futurity Realty Corp. v. Passaic National Bank & Trust Co.

Decided: December 8, 1948.

FUTURITY REALTY CORPORATION, AND ANOTHER, COMPLAINANTS,
v.
PASSAIC NATIONAL BANK & TRUST COMPANY, DEFENDANT



On bill &c.

Bigelow, J.s.c.

Bigelow

Complainants seek to recover moneys that they paid the defendant bank from time to time through the years, beginning in 1931. The Futurity Realty Corporation had been organized the preceding October by Dr. Morris Joseph, who conveyed to it his home in Paterson and a summer place at Budd Lake. A few months later, January 19, 1931, he assigned to the corporation a half interest in a valuable lease. The consideration for these transfers was the capital stock of the company which Dr. Joseph caused to issue to his wife, either as a gift to her, or else to hold for his use. He became president and manager of the company, and Mrs. Joseph, secretary.

On April 24, 1931, the complainant company gave the bank its note for $14,500 and secured it by an assignment of the lease. The proceeds of the note were applied to a personal obligation of Dr. Joseph. That is the first transaction which is questioned. When the note fell due in three months, the company made a small payment on account and gave a new note for the balance, and so every three months until July, 1932, when a renewal note for $13,600 was made. The second transaction under attack took place November 14, 1932, when the company gave the bank its note for $15,875, payable in one month, in the place of the $13,600 note, and of another note of the company for $900. The balance of the new note, $1,375, took care of personal liabilities of Dr. Joseph. At the same

time, the company agreed with the bank that the lease should be held as security for the new note and also as security for a certain note of Harry Joseph, endorsed by Dr. Joseph, in the sum of $9,350, and which the company guaranteed. The agreement, of course, covered renewals.

For ten years thereafter, the two notes were renewed from month to month, with small payments made by the company on the principal of the $14,500 note. On March 11, 1943, the bank received the last of the notes, one from the company for $3,600, one from Harry Joseph endorsed by Dr. Joseph for $9,150. Just before the notes matured 30 days later, the bill of complaint in this cause was filed. Complainants were denied an interlocutory injunction against the bank's disposing of its collateral, namely the lease. Thereupon, the complainant, Mrs. Joseph, paid the bank the amount of the notes and took an assignment of the lease, and was permitted to file a supplemental bill setting up the payment. The relief presently sought is repayment by the bank of all of moneys it has received as aforesaid from the company or Mrs. Joseph, whether principal or interest.

The company does not appear to have made any payments on the Harry Joseph note. On the other note and renewals thereof, it paid to the bank, besides interest, the principal sum of $13,185, of which $900 was in satisfaction of a debt of the company incurred in its business, and $12,285 was paid on obligations of Dr. Joseph which the company had assumed or secured. A corporation generally has no power to execute an obligation for the payment of money, or to pledge its assets, as an accommodation for one of its officers. Heidler v. Werner & Co. , 97 N.J. Eq. 505. It has no power to give away its property. Atlantic City, etc., Co. v. Johnson , 81 N.J. Eq. 351; Deutsche Presbyterische Kirche v. Trustees of Presbytery of Elizabeth , 89 N.J. Eq. 242.

Let us first take up the consideration for the company's assumption of Dr. Joseph's debt on April 24, 1931. The properties that Dr. Joseph turned over to the company were his principal assets. He was obligated to the bank at the time as endorser of a note for $30,000, and there were other

debts of his to the bank, the amount of which I do not find stated in the proofs. Dr. Joseph testified, however, to a threat by the bank "of making me pay up my other obligations which I was in no financial position to do." He says that his purpose in making the transfers was "to protect my wife and family against any attack on my estate." When the bank officers learned that the debtor had transferred the greater part of his assets to a corporation and given the stock of the company to his wife, they were naturally disturbed. They demanded security and threatened to bring suit to set aside the transfers to the company as made in fraud of creditors. Finally a compromise was reached, whereby the bank forebore to sue and the company assumed Dr. Joseph's note liability to the extent of $14,500. There can be no doubt of the bona fides of the bank's alleged cause of action against the company. The compromise was a good consideration for the company's assumption of the debt. Second National Bank of Paterson v. Curie , 116 N.J. Eq. 101 (E. & A. 1934).

When the company, the next year, took over other liabilities of the doctor's in the sum of $1,375, the bank agreed to reduce the interest rate on the company's notes from six per cent to three per cent. The amount of interest saved by the company in the years following, was more than twice $1,375.

Let us assume, however, that the company's notes to the bank were not supported by a consideration. The rule that a corporation shall not give away its property is established for the benefit of creditors and stockholders. If creditors are not harmed, and all the stockholders consent, the transaction is not objectionable. City of Forth Worth v. National Park Bank , 261 Fed. 817. Where the transaction has been completed, the gift made, the corporation cannot recover the money which it has paid unless some stockholder, who is in a position to do so, takes the ...


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