21 N.Y.2d 40 (1967)
A judgment obtained through a vigorously contested action against an insolvent corporation is not automatically invalid under Section 15 of the Stock Corporation Law; the prohibition applies primarily to judgments suffered by consent or connivance to give a creditor a priority.
Summary
Abraham sued New York Offset Co. to recover loans. The company argued the funds were an investment, not a loan, and a judgment would violate Section 15 of the Stock Corporation Law given its insolvency. The referee found the funds were a loan, and the Appellate Division affirmed. The Court of Appeals held the statute, concerning transfers of property to stockholders for debt payment when a company is insolvent, does not automatically invalidate a judgment from a contested action. It mainly applies to judgments by consent or connivance meant to give a priority.
Facts
Abraham claimed that they loaned money to New York Offset Co., which the company denied. The company argued Abraham was actually an investor, and they were insolvent, which would make a judgment for Abraham invalid under Section 15 of the Stock Corporation Law. The company argued the transfers would constitute a preference to a stockholder over other creditors during insolvency. The lower court determined the funds advanced were a loan and not an investment. The defendant corporation argued it was undisputed the corporation was insolvent.
Procedural History
The Special Referee ruled in favor of Abraham, finding that the money advanced was a loan. The Appellate Division unanimously affirmed the judgment. The case then went to the New York Court of Appeals.
Issue(s)
Whether a judgment obtained through a vigorously contested action against an insolvent corporation, on the merits of whether a plaintiff was a creditor or stockholder, is invalid under Section 15 of the Stock Corporation Law.
Holding
No, because Section 15 applies primarily to judgments suffered by consent or connivance intended to give a creditor a priority, not to judgments resulting from contested litigation on the underlying debt.
Court’s Reasoning
The court reasoned that Section 15 of the Stock Corporation Law uses the term “judgment suffered” in conjunction with other acts suggesting the creation of favorable priority for the stockholder or officer, such as ‘payment made, judgment suffered, lien created or security given”. The term “judgment suffered” in this context means by the consent and connivance of the corporation to give the plaintiff a priority.
The court distinguished this case from situations where a corporate officer or stockholder attempts to gain an improper preference through a warrant of attachment or other means outside of a fully litigated action. The court noted that the defendant affirmatively pleaded facts which it thought brought it within section 15 and had the burden of establishing this defense. The court relied on Throop v. Hatch Lithographic Corp., 125 N.Y. 530, distinguishing it because that case concerned a warrant of attachment and not a fully litigated claim. It said the warrant of attachment was “equivalent” to “an assignment or transfer by… voluntary action.”
The court also cited Kingsley v. First Nat. Bank of Bath, 31 Hun 329 which states that an action to establish rights is not interdicted by the statute “for that may be necessary to secure an adjustment and liquidation of a disputed demand”.
The court also cited Welling v. Ivoroyd Mfg. Co., 15 App. Div. 116, affd. 162 N.Y. 599, holding that an officer’s assignee has a right to sue upon a proper cause of action and obtain judgment; the remedy, it was said, must be addressed to the levy. Thus, the court focused on the validity of the judgment itself, separate from any subsequent enforcement efforts that might create an improper preference.