Lackenbach v. Finn

California Court of Appeal Feb 5, 1915 No. Civ. No. 1424.Published

Before: THE COURT. —

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Holding. A chattel mortgage executed by a corporation to one of its directors is voidable rather than void ab initio, and a third-party creditor or sheriff cannot invoke the rule of voidability to challenge the mortgage's validity. Consequently, a sheriff who seizes mortgaged property without complying with statutory requirements for payment or tender to the mortgagee is liable for conversion.

Issues

Whether a chattel mortgage authorized by a board of directors where the mortgagee was a voting director is void ab initio or merely voidable.
Whether a sheriff may challenge the validity of a corporate chattel mortgage on the grounds that it was authorized by an interested director.
Whether a sheriff's failure to comply with Civil Code sections 2968 and 2969 upon seizing mortgaged property constitutes conversion.

Disposition. Affirmed

Quotations verified verbatim against the opinion

“a contract between a corporation and one of its directors by which such director obtains property or some other advantage to himself, is not absolutely void, but is voidable at the instance of the corporation or its stockholders”

“the rule defendant attempts to invoke is solely for the benefit of the corporation and its stockholders, and is not available to him as a defense.”

“The mortgage being valid, the levy of the writs and the taking possession of the property without having complied with the provisions of sections 2968 and 2969 of the Civil Code constituted a conversion”

Synopsis

Action for Conversion—Levy upon Mortgaged Property—Failure to Pay Mortgage Debt —Director as Mortgagee. — In an action against a sheriff for the conversion of mortgaged personal property belonging to a corporation in seizing the same under attachment or execution against the mortgagor without first paying or tendering to the mortagee the amount of the mortgage debt, it is no defense that the mortgage was void by reason of the fact that the mortgagee was a director of the corporation and that she voted for the resolution authorizing the execution of the mortgage.

Id. — Corporation Law — Contracts Between Corporation and Director.—A contract between a corporation and one of its directors by which such director obtains property or some other advantage to himself is not absolutely void- but is voidable at the instance of the corporation or its stockholders.

Id.—Bankruptcy of Mortgagor—Delivery of Property to Trustee— Bights of Mortgagee.—Where the corporation mortgagor is adjudicated a bankrupt and the property is delivered by the officer to the trustee in -bankruptcy, the mortgagee is not bound to follow the property into the bankruptcy proceedings for the purpose of proving her claim and minimizing the damages, or for any other purpose', as the mortgage, being valid, the levy of the writ and taking possession of the property without compliance with the code provisions constitutes a conversion thereof.

THE COURT.

This is an action brought against the defendant, as sheriff of the city and county of San Francisco, for the alleged wrongful conversion of property by the taking thereof without having paid or offered to pay to the mortgagee the amount due on the mortgage.

The facts in the case are in substance as follows: It appears that Minnie Lackenbach, the daughter of the plaintiff, with others as partners, had been conducting the business of the Bellevue Hospital; that she bought out her partners, and later organized a corporation which took over the hospital business. It also appears that she was indebted to her mother the plaintiff, in the sum of one thousand five hundred dollars for money she had borrowed from plaintiff, and which money had been actually used in conducting said Bellevue Hospital and in buying out the interests of her partners, just prior to the formation of the corporation. It further appears that upon the organization of the corporation she transferred to it the furniture and equipment of the hospital; and the plaintiff having demanded a mortgage upon the furniture and equipment as security for said indebtedness, the chattel mortgage in question was thereupon executed, to wit, on August 15, 1910, and delivered to plaintiff. No money was loaned to the corporation by the plaintiff, but the corporation assumed, it seems, the indebtedness owing from Minnie Lackenbach to plaintiff. The board of directors of the corporation consisted of the plaintiff, her daughter Minnie Lackenbach, - and Mrs. R. P. Gabriel. A resolution authorizing the execution of the chattel mortgage was passed by the board, 'being carried by the votes of plaintiff and Mrs. R. Gabriel, Minnie Lackenbach not voting, having been excused at her own request. More than six months subsequently to the execution of the mortgage and in April, 1911, the defendant herein, acting under executions in the one case and

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an attachment in another, levied upon the mortgaged property and took possession thereof, hut did not pay or tender to plaintiff the amount of the mortgage debt, or deposit the amount, as required by sections 2968 and 2969 of the Civil Code. In May, 1911, three creditors of the corporation filed a petition to have it declared and adjudged a bankrupt, and a writ of injunction was issued out of the United States district court directed to the defendant herein, restraining him from proceeding to an execution sale of the property here involved pending the hearing and disposition of said petition. The corporation was subsequently adjudged bankrupt, and the property in question was delivered by the defendant to the trustee in bankruptcy. Upon the day of the filing of the petition in bankruptcy the board of directors—the plaintiff not voting—passed a resolution ratifying the execution of the chattel mortgage.

Lackenbach v. Finn

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Synopsis

THE COURT.

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