PREFERENCE. The paying or securing, to one or more of his creditors, by an insol vent debtor, the whole or a part of, their claim, to the exclusion of the rest. The right, which a creditor has acquired over others to be paid first out of the assets of his debt or ; as, when a creditor has obtained a judg ment against his debtor which binds the lat ter's land, he has a preference.
A failing creditor, if an ijadividual or part nership, may at common law prefer any one creditor to the exclusion of others ; Wilder v. Winne, 6 Cow. (N. Y.) 285 ; Clarke v. White, 12 Pet. (U. S.) 178, 9 L. Ed. 1046; York County Bk. v. Carter, 38 Pa. 446, 80 Am. Dec. 494. See Sartwell v. North, 144 Mass. 192, 10 N. E. 824. Knowledge of in solvency does not render a preference in valid, except under some statute; Merillat v. Hensey, 221 U. S. 333, 31 Sup. Ct. 575, 55 L. Ed. 758, 36 L. R. A. (N. S.) 370, Ann. Cas. 1912D, 497.
At common law, unless prohibited by stat ute, a corporation whether insolvent or not, had a right to pay a creditor, whether a director, officer, stockholder or outsider; Coats v. Donnell, 94 N. Y. 168; 2 Moraw. Corp. § 802. As to preference by failing cor porations, there are now two doctrines; one that the assets are a trust fund for the bene fit of all creditors pro rata and no preference can be given to any creditor; Consolidated Tank-Line Co. v. Varnish Co., 45 Fed. 7; Beach v. Miller, 130 Ill. 162, 22 N. E. 464, 17 Am. St. Rep. 291; Haywood v. Lumber Co., 64 Wis. 639, 26 N. W. 184; Rouse v. Bank, 46 Ohio St. 493, 22 N. E. 293, 5 L. R. A. 378, 15 Am. St. Rep. 644; Gillet v. Moody, 3 N. Y. 479; State v. Brockman, 39 Mo. App. 131; Goodyear Rubber Co. v. G. D. Scott Co., 96 Ala. 439, 11 South. 370 ; Kendall v. Bishop, 76 Mich-634, 43 N. W. 645. ' The other that a corporation has the same power in dealing with the assets and preferring creditors as an individual has under similar circumstanc es ; Garrett v. Plow Co., 70 Ia. 697, 29 N. W. 395, 59 Am. Rep. 461; Allis v. Jones, 45 Fed. 148 ; Pyles v. Furniture Co., 30 W. Va. 123, 2 S. E. 909 ; Planters' Bk. v. Whittle, 78 Va. 737; Farwell Co. v. Sweetzer, 10 Colo. App. 421, 51 Pac. 1012; Cowan v. Glass Co., 184
Pa. 1, 38 Atl. 1075. In the absence of statu tory prohibition it has been held a corpora don may convey its property to a creditor upon condition that he pay himself and re turn the surplus; Catlin v. Bank, 6 Conn. 233.
It has been held that a failing corporation may prefer its own stockholders ; Reichwald v. Hotel Co., 106 Ill. 439; but not its own di rectors ; Sicardi v. Oil Co., 149 Pa. 148. 24 Atl. 163 ; Smith v. Putnam, 61 N. H. 632; Howe, B. & Co. v. Tool Co., 44 Fed. 231; Beach v. Miller, 130 Ill. 162, 22 N. E. 464, 17 Am. St. Rep. 291; Haywood v. Lumber Co., 64 Wis. 639, 26 N. W. 184; Lippincott v. Carriage Co., 25 Fed. 577; but see, contra, Garrett v. Plow Co., 70 Ia. 697, 29 N. W. 395, 59 Am. Rep. 461; Foster v. Mill Co., 92 Mo. 79, 4 S. W. 260 ; it is held that it may prefer its directors and its creditors on whose claims its directors are sureties ; Nappanee Canning Co. v. R. & Co., 159 Ind. 614, 64 N. E. 870, 1115, 59 L. R. A. 199.
After suspension and insolvency no prefer ence will be allowed ; Richards v. Ins. Co., 43 N. EL 263 ; Olney v. Land Co., 16 R. I. 597, 18 Atl. 181, 5 L. R. A. 361, 27 Am. St. Rep. 767. The directors may advance money to a corporation in difficulties and secure themselves by mortgage of its property ; Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328 ; Mullanphy Say. Bk. v. Schott, 135 Ill. 655, 26 N. E. 640, 25 Am. St. Rep. 401. If the preferred creditor be one of its officers, he must show that the preference was fair and conscionable and not collusive for the mere purpose of preference ; Cowan v. Glass Co., 184 Pa. 1, 38 Atl. 1075. The liquidation in good faith of debts due to directors with the hope of continuing business, is not in valid ; Dutcher v. Bank, 59 N. Y. 5. Judge Thompson takes very strong ground against the right of a corporation to prefer any credi tor, but especially an officer, or stockholder ; Thompson, Corp. § 6492 ; 32 Am. L. Rev. 138. The opposite ground is taken on principle in 2 No. W. L. Rev. by Prof. Harriman. In New York, by statute, a failing corporation cannot transfer any of its property to an offi cer, director or stockholder.