very corporate existence of the sold-out railway passes to the new organization by virtue of the statute. Ordinarily such purchaser and associates need no further legislation.' 1 375. Liable in Equity to Extent of Assets Received. Where several corporations are united in one, and the property of the old companies is vested in the new, the latter is liable in equity for the debts of the former, at least to the extent of the property received from them; and if it is also liable at law, the legal remedy is not exclusive. The governing principle here is that a corporation cannot give away its assets to the prejudice of its creditors; but that a court of equity will follow such assets as a trust fund into the hands of any new custodian, the same not being a creditor or bona fide purchaser. It is scarcely necessary to add that, in such a case, the consolidated corporation holds the property received from the absorbed company with notice of any trust attaching to it in favor of its creditors, and cannot claim the rights of a bona fide purchaser without notice. 3 A statute which pro § 376. Observations and Illustrations. vides for a consolidation by the purchase by one company of the stock of another, and the issue of its own stock for the same, and which adds that "the purchases herein provided for, or the surrender of the franchises, shall in no way affect the rights of the creditors of the company," that is, of the absorbed company, gives to the general creditors of such company a remedy in equity against the assets of the absorbed company in the hands of the absorbing company, upon the theory of a lien, and is not limited to the vain and ideal remedy of an action at law against the absorbed company, although the existence of such company is continued for the purpose of such actions. In so holding it was said: "If, leaving its debts unpaid, its capital, property and effects are distributed among the stockholders, or transferred for their benefit to third persons who are not bona fide purchasers without notice and still more, if the corporation be dissolved, or become so disorganized that it/ 1 Houston &c. R. Co. v. Shirley, 54 Tex. 125, 138, 139. Harrison v. Arkansas Valley R. Co., 4 McCrary (U. S.), 264; BarksFinney, 14 Gratt. (Va.) 338; dale . ante, § 265. S.) 307; Bacon v. Robertson, 18 Id. 48; 5 Montgomery &c. R. Co. v. Branch, 59 Ala. 139, 154; The Key City, 14 Wall. (U.S.) 653. 6 Montgomery &c. R. Co. v. Branch, 59 Ala. 139. cannot be made answerable at law, - then a court of equity will pursue and lay hold of such property and effects, and apply them to the payment of what it owes to its creditors. A suit having that object is the most direct, if not the only efficient means of asserting and vindicating any right of the creditors, in such a case as the present; and, by holding that it is not maintainable, we should refuse to give any real effect to the saving clause in the statute, if such a clause was necessary to enable them to maintain the suit. Certainly if, by virtue of the act, one of the contracting companies might transfer all of its ample property and effects, out of which its creditors ought to be paid, to the other and weaker company, in consideration of its admitting stockholders of the former to become shareholders of its capital and property thus augmented, and might then, by a sort of legal suicide, slip out of existence, leaving those creditors to sue at law the surviving company, which they had never dealt with, or accepted as their debtor, their rights would be very seriously affected thereby."1 Another excellent illustration of the principle of the preceding section is found in a well considered case in Virginia where the president and acting manager of a mining corporation which will be designated as the B. company, who owned most of the shares in it, contracted with certain persons that he would obtain an act of incorporation for a new company, with provisions which would enable them to conduct the business in England; that he would cause to be transferred to the new company all the property of the B. company (except slaves and some specified lands) and all the shares of stock in that company; for which they were to pay him a certain sum of money and a royalty upon the product of the mines. The new company was organized, and the shares of stock in the B. company were transferred on their books to the new company, but there was no conveyance of the real estate, which, however, the new company took possession of and held as its own. It was held that the new company was the successor of the old, and held the property of that company subject to its debts, and that equity would charge it with the payment thereof.2 § 377. Rule does not Apply to Bona Fide Sale of Assets. The foregoing does not, it is assumed, apply to a bona fide sale, for a good consideration, by one company, of all its properties, to another. In such a case the consideration of the sale would pass to the directors of the selling company, and they would hold it as a trust fund for their creditors first and their shareholders 1 Ibid. 153, per Manning, J. Barksdale v. Finney, 14 Gratt. (Va.) 338. next. It would be a mere substitution of trust funds, and the purchasing company would not, on well settled principles, be bound to see to its proper application by the directors of the selling company. Such purchases can only take place under two conditions: 1. Where they are authorized by the legislature. 2. Where they are sanctioned by the stockholders, both of the purchasing and of the selling company. In such a case there is no principle which makes the purchasing corporation liable for the debts of the selling corporation, except so far as it has undertaken, under the terms of the contract of purchase, to become so liable. It is precisely the same as a purchase by one individual of the property of another individual. If the purchase is in good faith and for a valunble consideration, it will stand, although it may operate to defeat the creditors of the seller." Where the transfer is of this nature, a bill in equity by a creditor of the selling corporation, brought against the purchasing corporation, which contains no allegation of fraud nor that the transfer was not made for a valuable consideration, nor that the defendant was not a bona fide purchaser, nor that there was any trust for the benefit of creditors, will be dismissed.3 378. Rights of Bona Fide Purchasers from Consolidated Company. A simple contract debt, owing by one of the antecedent companies, does not constitute a lien upon the property of such company, which passes into the hands of the consolidated company; though, while it remains in the hands of the consolidated company it will be chargeable in equity with any of the debts of the antecedent company, the new company not being an 1 A purchaser in good faith from a trustee is not bound to see to the proper application of the purchase money. Mason v. Bank of Commerce, 16 Mo. App. 275; Goodwin v. American Nat. Bank, 48 Conn. 564; Shaw v. Spencer, 100 Mass. 391; Ashton v. Atlantic Bank, 3 Allen (Mass.), 217; Fountain v. Anderson, 33 Ga. 337; Rev. Stat. Mo. 1879, § 3937. 2 Powell v. North Mo. R. Co., 42 Mo. 631. See also Bruffett v. Greatwestern R. Co., 25 Ill. 353, 356. 3 Powell. N. Mo. R. Co., supra. Although this case seems to have been badly decided on its facts, the reasoning of the opinion seems well enough. It was, that there had been, under what had taken place, no consolidation between two railroad companies, but that the property of one had merely been conveyed to the other; and stress was laid on the fact that there was no averment or proof that the defendant held the property otherwise than as a bona fide purchaser for a valuable consideration. innocent purchaser. It follows that if, before any judgment or other lien has attached to the property, the consolidated company conveys it to an innocent purchaser, one who brings an action against the original company and prosecutes it to judgment against the consolidated company, cannot maintain a suit in equity against the innocent purchaser to charge the property in his hands. In the absence of fraud, the case is simply that of a party who is in debt, conveying his property to a third person, who takes as an innocent purchaser.2 § 379. Creditor of Old Corporation not Bound to Accept Responsibility of New. But while the creditor of the old corporation may pursue his remedy against the new, he is not bound to assent to the arrangement of consolidation so as to create a novation, if that term may be used. Thus, where a railroad company agreed to give its bonds in consideration of certain moneys to be paid in installments, and afterwards becoming, by legislative authority, amalgamated with two other companies, tendered the bonds of the consolidated corporation, and brought suit for the money, it was held that the action would not lie, the consideration offered not being that agreed for.3 The governing principle here is that a party to a contract who disables himself from rendering the agreed consideration, cannot require the performance of a promise which rests on that consideration." § 380. Power of New Company to Deal with Credits of Old. As the new company succeeds to the rights of each of the precedent companies, it may compromise and settle a claim against one of them, and sustain an action to enforce the settlement; and the directors of the new company have authority without a vote of the stockholders, to pay and cancel as many of the outstanding obligations of one of the precedent corporations as they may see fit." 5 1 Ante, § 375. 2 McMahan v. Morrison, 16 Ind. 172. 3 New Jersey &c. R. Co., v. Strait, 35 N. J. L. 323. 4 Keys v. Harwood, 2 C. B. 905; Planche v. Colburn, 9 Bing. 14; Frost v. Clarkson, 7 Cow. (N. Y.) 24; Newcomb v. Brackett, 6 Mass. 161. 5 Paine v. Lake Erie &c. R. Co., 31 Ind. 283. 6 Shaw v. Norfolk County R. Co., 16 Gray (Mass.), 407. § 381. Guaranty by the Officers of One Company of the Obligations of the Other. The courts of New York, with some irregularity and contradiction, have made an innovation upon a strict rule in the law of contracts, by which a promise made by A. to B. for the benefit of C., may become the foundation of an action by A. against C., although C. was privy neither to the promise nor to the consideration; and other courts, especially those which have adopted the modern codes of procedure modeled after that of New York, have adopted the same rule.2 In New York it has been held that, where such a promise is in the nature of a contract of guaranty, the party for whose benefit the promise was made, may bring an action thereon directly against the guarantor; that the guaranty goes with the principal obligation, and is enforcible by the same person who could enforce the other. But the application of this principle was denied in a case presenting the following facts: Pending negotiations for the consolidation of the business of the A. insurance company with the B. insurance company, officers of the A. company wrote that they pledged themselves that all contracts of the B. company, of every name and nature, would be fulfilled, to the same extent and in the same manner as though no change had taken place. The consolidation was effected. Both companies then were solvent, and the A. company agreed to assume the liabilities of the B. company. Afterwards, both companies were dissolved, and the assets of the B. company were insufficient to reinsure its outstanding risks. It was held that the officers of the A. company, who had written as above, were not liable, in an action brought by the holder of a paid-up endowment policy in the B. company. The court laid stress on the fact that the promise which the defendant guaranteed was a pledge that the contract obligations of one of the precedent companies with its policy holders and others, of every nature and kind, would be rigorously fulfilled to the same extent and in the same manner, as if the change contemplated had not taken place. The court could not read it, with this language in it, as a guaranty of the absolute payment of the obligations of the precedent company, but regarded it as amounting to nothing more than an assurance to the five 1 See Lawrence v. Fox, 20 N. Y. 268, where the doctrine was established by a divided court; also Burr v. Beers, 24 N. Y. 180; Etna Nat. Bank v. Fourth Nat. Bank, 46 N. Y. 82; Coster v. Mayor &c. of Albany, 43 N. Y. 411; Merrill v. Green, 55 N. Y. 270; Claflin v. Ostrom, 54 N. Y. 581; Secor . Law, 4 Abb. App. Dec. (N. Y.) 188; Simson v. Brown, 68 N. Y. 360; Thorp v. Keokuk Coal Co., 48 N. Y. 257; Arnold v. Nichols, 64 N. Y. 119; Pardee v. Treat, 82 N. Y. 387. 2 See, for instance, Markel v. Western Union Tel. Co., 19 Mo. App. 80; Fitzgerald v. Barker, 13 Mo. App. 192. 3 Claflin v. Ostrom, 54 N. Y. 581. |