to the extent of its value.98 If the sale is not a bona fide one for a valuable consideration and in the usual course of business, the purchaser is liable for the debts of the seller.99 "Corporations cannot, any more than individuals, relieve their property from the payment of debts, except by a sale or transfer in good faith and for a full consideration." 1 The fact that the new corporation assumes the

debts of the old corporation does not make it a bona fide purchaser, so as to prevent a creditor of the old corporation from attacking the transfer as fraudulent, since creditors cannot be compelled to accept a change of debtors. In one case, it was held that the purchase was not in the usual course of business, within this rule, where stock was issued to the president of the selling company, as the consideration of the purchase, with knowledge that it was to be used by him for his own private purposes.3

But when a corporation receives a transfer of all the property and franchises of another corporation in good faith, and pays a full consideration therefor, the transfer is not fraudulent as against the unsecured creditors of the old corporation, and they cannot follow and subject the property in the hands of the new corporation, or sue to set aside the transfer. It was so held, for example, where a corporation purchased all the assets of another corporation, and paid full value therefor by assuming and paying a debt secured by a mortgage thereon. The fact that the purchasing company knew that the selling company was insolvent does not necessarily render the purchase fraudulent, so as to make the purchaser liable for the debts of the seller.5

When a corporation transfers its property in fraud of its creditors, their right to follow the same in equity, or in some states at law, is superior to the rights of all persons who are not in the position of bona fide purchasers for value. Their right is superior to any right of mortgagees of the new corporation with notice." And it is superior to the rights of stockholders of the new corporation who have received their stock solely in consideration of their claims as creditors of the old corporation, for they are not in the position of bona fide purchasers.8

Vance v. McNabb Coal & Coke Co., 92 Tenn. 47, 59, 20 S. W. 424.

2 Cole v. Millerton Iron Co., 133 N. Y. 164, 28 Am. St. Rep. 615, 30 N. E. 847.

3 Luedecke v. Des Moines Cabinet Co., 140 Iowa 223, 32 L. R. A. (N. S.) 616, 118 N. W. 456.

4 Warfield v. Marshall County Canning Co., 72 Iowa 666, 2 Am. St. Rep. 263, 34 N. W. 467.

5 Union Coal Co. V. Wooley, 54 Okla. 391, 154 Pac. 62.

6 Montgomery & W. P. R. Co. v. Branch, 59 Ala. 139.

7 Blair v. St. Louis, H. & K. R. Co., 24 Fed. 148; Montgomery & W. P. R. Co. v. Branch, 59 Ala. 139; Cole v. Millerton Iron Co., 133 N. Y. 164, 28 Am. St. Rep. 615, 30 N. E. 847.

8 Montgomery Web Co. v. Dienelt, 133 Pa. St. 585, 19 Am. St. Rep. 663, 19 Atl. 428.

§ 4755. Where transferee takes with notice of claims. A purchasing corporation which takes with notice of the rights of a third person under a contract with the selling company is liable thereunder for claims against the selling company. So a claim for breach of contract by a corporation which subsequently transfers all its assets to another corporation taking with knowledge of such breach of contract may be enforceable against the transferee corporation.10 And if one company purchases the business of another, including a patent, with notice of the rights and equities of one having a royalty contract with the seller, and the latter affirms the transfer, he may compel the purchasing corporation to account for royalties upon articles manufactured under the patent.11 So a corporation which purchases all the property of another corporation, knowing that the other corporation is insolvent, under an arrangement by which the purchase price will be placed beyond the reach of creditors, if there are any, is under a duty to inquire as to the existence of unsecured creditors, and is chargeable with all knowledge which such an inquiry would disclose.12

§ 4756. - Where consideration for transfer is shares of stock in transferee company. It is necessary to distinguish cases where one corporation transfers all its assets for a fair and adequate consideration to another company from cases where one corporation purchases all the assets of another with its own stock, or stock and bonds. So far as the stockholders themselves are concerned, where they all agree to it, there is no question but that the corporation may sell all its property, where not a quasi public corporation, and receive the stock of the purchasing corporation in payment therefor.13 It is sometimes held that where there is a transfer of the assets of one company to another for shares of stock in the transferee company, at least where such shares are distributed among the stockholders of the transferrer company, there is a consolidation but it is submitted, as elsewhere stated,14 that it is a misuse of terms to say that in such a case, where nothing more appears, there is a statutory "consolidation," since at the most all that is accomplished is a "merger," and it is very doubtful if, in an ordinary case, there can

9 Schaake v. Eagle Automatic Can Co., 135 Cal. 472, 63 Pac. 1025.

10 Vicksburg & Y. C. Tel. Co. v. Citizens' Tel. Co., 79 Miss. 341, 89 Am. St. Rep. 656, 30 So. 725.

12 Chattanooga, R. & C. R. Co. v. Evans, 66 Fed. 809.

13 Wilson v. Eolian Co., 64 N. Y. App. Div. 337, 72 N. Y. Supp. 150, aff'd 170 N. Y. 618, 63 N. E. 1123. 14 See § 4666, supra.

11 Barnes v. American Brake-Beam Co., 238 Ill. 582, 87 N. E. 291.

ever be said to be even a merger such as is provided for by the statutes. However, it is of little moment, so far as the effect of the transaction on the rights of holders of claims against the transferrer company is concerned, what the transaction is called, since the courts generally hold that such a transfer makes the transferee company liable on the obligations, whether arising ex contractu or ex delicto, of the transferrer company,15 although there is some authority to the contrary.16 Thus, in Kansas, the rule is stated that "where a corporation becomes practically extinct, transferring all its assets to another and receiving in return stock in the other corporation, which succeeds to its business, the new corporation is liable, to the extent of the value of the property acquired, for the debts of the old one. Such an arrangement is essentially a merger, and should be attended with the same consequences as a consolidation." 17 This is so at least where the stock is delivered to the stockholders of the transferrer company,18 upon the theory that the transferee company is not a

15 Where the property of one company is taken without compensation other than the issuance to it of stock in the acquiring company, the latter is liable for debts of the former, at least in an amount equal to the value of such property. Chicago, I. & S. R. Co. v. Taylor, 183 Ind. 240, 108 N. E. 1.

A corporation cannot sell all its property and take in payment stock in the purchasing corporation, without making the purchaser liable for the debts of the selling company. Grenell v. Detroit Gas Co., 112 Mich. 70, 70 N. W. 413, followed in Shadford v. Detroit, Y. & A. A. R. R., 130 Mich. 300, 89 N. W. 960.

If a new corporation is not a mere continuance of an old one, but the property has been paid for in full by stock in the new company, then, although the old company is insolvent, the new company is liable for the debts of the old to the extent of the value of the property received. Sharples Co. v. Harding Creamery Co., 78 Neb. 795, 11 L. R. A. (N. S.) 863, 111 N. W. 783.

entire property of another corporation under an arrangement which has the effect of distributing the assets of the latter among its stockholders in fraud of its creditors takes the property subject to the payment of all the debts of the vendor, including a judgment subsequently recovered against the latter in an action for negligence pending at the time of the transfer. Grenell v. Detroit Gas Co., 112 Mich. 70, 70 N. W. 413.

16 See Swing v. Empire Lumber Co., 105 Minn. 356, 117 N. W. 467.

17 Altoona v. Richardson Gas & Oil Co., 81 Kan. 717, 722, 26 L. R. A. (N. S.) 651, 106 Pac. 1025.

18 A corporation which purchases all the assets of another company with its own stock and bonds which are distributed among the stockholders of the selling company, takes the property subject to the debts of the selling company which may be enforced against the property sold. Wesco Supply Co. v. El Dorado Light & Water Co., 107 Ark. 424, 155 S. W. 518; Harbison-Walker Refractories Co. v. McFarland's Adm'r, 156 Ky. 44, 160 S. W. 798; Grenell v. Detroit Gas Co.,

A corporation which acquires the

purchaser for value nor in good faith.19 Stated in other words, the reason for this rule is that the purchasing company is bound to know that the property of the selling corporation "ought not to be distributed among the stockholders to the exclusion of creditors," and that hence it is a party to a diversion of the trust fund and holds it subject to the payment of debts, since "it cannot be called a bona fide purchaser of the property, as against existing creditors." 20 In such a case, it is generally held that the transaction is out of the ordinary course of business, and that the circumstances of the case imply full knowledge on the part of the purchasing corporation of all facts necessary to charge the property in its hands with the debts of the selling corporation, at least to the extent of the value of the property thus obtained,21 especially as to a demand on which suit was pending at the time of the sale,22 and this is so, it seems, at least to the extent of the value of the property turned over, notwithstanding the sale agreement was that the purchasing company should assume payment of certain debts "and none other." 23 In such a case, creditors of the old corporation cannot be required to look alone to the stock,

112 Mich. 70, 70 N. W. 413; McIver v. Young Hardware Co., 144 N. C. 478, 119 Am. St. Rep. 970, 57 S. E. 169; Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 47 L. R. A. (N. S.) 1058, 159 S. W. 1088.

"Such an arrangement is essentially a merger, and should be attended with the same consequences as a consolidation." Altoona v. Richardson Gas & Oil Co., 81 Kan. 717, 26 L. R. A. (N. S.) 651, 106 Pac. 1025.

A corporation acquiring the entire property of another corporation under an arrangement which has the effect of distributing the latter's assets among its stockholders in fraud of its creditors is chargeable with knowledge of the arrangement and its purpose possessed by all its promoters and stockholders. Grenell v. Detroit Gas Co., 112 Mich. 70, 70 N. W. 413. A corporation which purchases the entire property of another corporation, and issues therefor its own stock to the stockholders of the other corporation, is not a bona fide purchaser as against creditors of the other cor

.

poration defrauded by the transfer. Grenell v. Detroit Gas Co., 112 Mich. 70, 70 N. W. 413.

19 Wilson v. Æolian Co., 64 N. Y. App. Div. 337, 72 N. Y. Supp. 150, aff'd 170 N. Y. 618, 63 N. E. 1123.

As against creditors it is a fraud for one corporation to transfer its entire assets and business to another corporation, in consideration of stock in the purchasing company, no provision for payment of creditors of the transferring corporation being made. Tacoma Ledger Co. v. Western Home Bldg. Ass'n, 37 Wash. 467, 79 Pac. 992.

20 Grenell v. Detroit Gas Co., 112 Mich. 70, 72, 70 N. W. 413.

21 Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 47 L. R. A. (N. S.) 1058, 159 S. W. 1088.

22 Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 47 L. R. A. (N. S.) 1058, 159 S. W. 1088.

23 Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 47 L. R. A. (N. S.) 1058, 159 S. W. 1088.