POOLE '11. WESTPOINT BUTT:EJR
WEST POINT BUTTER
.' .' BOlrE'
,. JURl!llJICTION - C!'l'II!ENSHIP -BUrT i»yPARTNERS'HIP-
'A in tlie federal court ,infthe' name of the four memberS composing the firm of ·Kent & Co.· two of whom', Kent and Young, were citizens of New York, the state in which several of the defendants resided. Objection being anticipated to the jurisdiction of the court, because some of tiffs and some of the defendants were thus citizens of the same state, an amended bill was filed by Poolell.n'd 'Sherman, two of the partners,. making Young aI!'d Ke!1t defen(],lJ,!HII., It that, the ,four pll:rtners, theIr busmess was conducted P;Y.; two houses, on.e III ChICago, managed by Poole and Sherman, and one iltNew'Yo'rk city, matlaged by Kelit Young; that the action arose out of a certificate, of stock which had be.en pledged to Kent and Young by the defendant, a debtor of the New York tl:!atth!l New indebted to,tlle C,hicago hOllse, hliall'ansfl!I'1'ed'the debt and stock'secuntyln payment. Kent and Yoimg;on being1ilade,dl.lf,endants, filed. an answer disclaiming all interest in Iltock. ,m!g.l,tt be madedefen\iaJ;its,. and there, was tllereafter no to the of the court attachmg. . .' .'
ANDSo¥lIl D)l:FENDANTS. . '
.. theformalitiee. llequired bra ll!tat.e statute, is binding uJlpn t,he stockholdllra and the ,CQrp6rat!On, .where it, appears that the ",as made with the consent'of all the stockhold'ets.. ' . ' " '.
An In:erease in tlie capital stock of a corporation, although not 'made with
OF STOcK-STATUTORY REQU1REM:ENTS.
will in equi.tybe first appropdated to the payment of the creditors; the funds, '" of a ll;re a ,fund for the pl,\yment of debts, and . have no nghts untIl the credItors are paId. "
'; . AlB be tween t'he creditors hf a corporation and its stockholders,tbeproperty
Onehavihg money on deposit with a corporation purposed to withdraw it, but permitte(I it to remain '\lipon who was left in charge of the affairs of the company, to hIm a cbatt!)1 Held, although the superintendent may not.have been legally authorIzed to make the mortgage, yet, considering tbe loose and irregular way in which the business of the corporatio:t;l was managed, and that he was left in of affairs, anp the equitable character of the claim. the mortgag'e mW't be alloweli to be valid, and, the corporation proving insolvent, the mortgagee is entitled to priority as a,se,cured creditor.
CREDITORS-MoRTGAGE BY SUPERlNTE'NDENT.
A bank advanc'ed money directly to a corporation, and also to the president, to be expendliid for the benefit Of the corporation, which SUIDS were recognized as debts by the corporation, and were attempted to be secured to the bank by each stockholder !\ssigning his shares in the corporation. Held, eqUity would treat both suins as debts due by the corporation to the bank.
SAME-I'REFElni:NCE OF SALARy-ASSIGNEE Oll' STOCK.
A stockholder who so assigned his stock to pay the bank's debt, and afterwards took a bill of sale executed by the superintendent upon certain personal property of the corporation to secure his salary as general manager, is not en to enforce the bill, until the bank is paid; nor has an assignee of his claim any better rights in the matter than he has.
'l.SAME-SUBSORIPTION FRAUDULENTLY INDUCED-STOCKHOLDER AND PROMOTER.
An action by a stockholder, against the insolvent corporation, to have his shure of the assets set apart to him before the claim of a particular creditor should be 'paid (by whose fraudulent representations he alleges he was induced to become a stockholder) is not a proceeding to dissolve the corporation, and it iSllot necessary for him to allege his previous efforts to the corporation to pring ilie ,action. ' ,,,
8. SAME-PLEDGEE OF STOCK A SHAREHOLDER.
Wheresh:ares of stock in a corporation are assigned by a debtor to his creditor as collateral security for the debt, and are duly transferred on the books of the company. the creditor becomes a stockholder, and entitled to all the rights of iuch. ' .
. of a corporation having acknowledged of the company for a particular debt, they, cannot afterwards repudiate It on the groundth!J;tit was in excess 9f the indebtedness which the corporation was authorized by law to contract.
In Equity. , a. N. PoweU and E. B. Gould, for complainants. F. T. Ransom, 'for receiver'Middletown Bank.' J. L. Webster, for defendant association. ' N. B for Chancey.
BREWER, J. This is a wreck. Gross mismanagement, culpable dis.regard of the extent of c(jrporate power, and of the regularity of corporate proceedings, unqtiesti(jnable dishonesty, and false representatiolli1 have caused what might be expected, and now, in this court, in this case, have come many parties, each seeking to save something from the general wreck: "It is very difficult to work through such a confused mass, and determine the real facts, and adjust rights and liabilities on an equitable basis. Let me outline the principal facts. On May 13,1878, the West Point Butter & Cheese Association was incorporated under 'the laws of the state of Nebraska. By its charter its capital stock was $25,000, divided into 250 shares of $100 each. By the same charter its indebtedness, was limited to one-half of the capital stock. The six shareholders and incorporators were B. D. Brown, W. B. Eager,phaunceyHale, T. King, J. J. King, and J. A. Brown. The latter soon assigned his stock to his brother B. D. Brown, and the entire stock was owned by the five in the following proportions: B. D. Brown, 105 shares; W.B. Eager, 35 shares; Chauncey Hale, 35 shares; J. J. King, 30 shares; Thomas King, 45 ,shares. At the organization these five gentlemen were elected directors, and by them B. D. Brown was elected president; W,' B. Eager, Vice-president; C. Hale, secretary; Thomas King, treasurer; and J. J. King, superintendent. There was no subsequent election of officers, and these gentlemen therefore continlIed in office during all the transactions involved in this case. The purposes of this were disclosed in the third article of the charter, which reads: "The general nature of the, ,business to be transacted by this corporation shall be the manufacture of butter, cheese, flour, feed, raising stock, buying and selling stock and real estate, and buying and selling grain and flour, and for the transaction of such other business as may be deemed conducive to the best interests' of this association. " On October 20, 1879, it leased from the West Point Manufacturing consisting of real estate, with mills, machinery. etc., for a term of one year, at a rental of $300 per month, payable
POOLE V. WEST PoINT' BUTTER & CHEESE ASS'N.
monthly In advance. By the lease it had the privilege of addingaily rp.achinery, or making any improvenients, with the right of removing such machinery and improvements atany!timew:ithin 60 days after the termination lease. 'Though this lease was; but for: a year, it was in factcontinuoo without further writings until the commencement Of this suit.' This manufacturing company ha.d a capital stock Of $500,000, divided into share!;l of $25 each. Thomas King, the treasurer of the aB'" sociation, ,was the president of the' Middletown National Bank, ,located at Middletown, New York. He and Btown were, prior to the incorporation of the association,the owners of certain real estate in the state of Nebraska; They were'the promoters and organizers of the association, and transferr.ed to it that real estate as property with which to commence its operations. Brown, the president of the association, was evidently a bold and reckless speculator,with many ifonsin the fire. Besides thj3 business of the association, he bought and conducted a bank, bought, 801d,and shipped grain, was engaged in' building an elevator,and in perhaps enterprises. He borrowed largely from the Middletown Bank, used large sums in increasing the property apd business of the association,as well asimprd'v'ing the property of the manufacturing company. He seems to have been the responsible manager of both the association and the manufacturing comptniy, borrowing 'money, contractingdebts, alid making improvements and purchases, without any direct authority from the directors. in 1883 the properties of the association had largely increased, so that by an inventory they amounted to $160,000. On September 21, 1883, by conseut of all parties, at a meeting of the directors, the capital stock of the IlSsociation was increased to $250,000; . Brown, who had a year before purchased and since been running the Elkorn Valley Bank, turned that into the association at $80,000. He agreed to add $10,000, taking for these two properties $90,000 in stock of the association. l'he balance of the increase !'took was distributed pro rata among the five stockholders, giving to Brown 567 shares, to Eager 189 shares, to Hale 189 shares, to J. J. King 162 shares, and to Thomas King 243 shares. Nothing was paid into the association by these several stockholders for these additional shares, but they were distributed among them by consent of all, and on account of the increased value of the properties of the association. The formalities required by the statutes of Nebraska with respect to an increase of the capital stock were not complied with; but"as this increase was made by the consent of aU the ers, it must, as to each of them, and as to the corporation, be considered as valid and binding. During the forepart of 1883, Brown's indebtedness to the Middletown Bank, amounting to some hundreds of thousands of dollars, much of which was borrowed and spent for the benefit ,of the association and manufacturing company, the bank was notified by the government inspector that this amount of indebtedness must be reduced. To secure so much of the indebtedness as was for the benefit of the association, each of the five stockholders assie:ned in writinghis'stiOck to the Middletown National Bank. The shares
516 originally issued to Brown. had been theretofore by him assigned .to a bank at Indianapolis, of.which William ;II. English was president; but Brown, representing that he had lost this certificate,. ,obtained a duplicate from the association, and Rssigned the duplicate tO,the Middletown Bank. In October, 1883, Brown obtained from tqt) Middletown Bank the certificate for the 800 sh:ares iElsued to him on account of the Elkorn Valley. Bank, claiming that it was. never his intent to assign that to the bank,and deposited it with the prill of E. A. Kent & Co., of New York city, as collateral security for moneys to be advanced to him. Upon this security they did in fact advance several thousand dollars. In the fall of 1884 the Middletown.National Bank suspended, and the collapse of theassocilltioncame.. And there are nqw.before the court five parties 1, insisting upon rights in the property., At the institution of this suit a receiver was appointed, and tlIe property taken pOl'lsession of, and is now in the custody, of the court. The first of these parties is the cioss-complainant, the receiver of the Middletown National Bank, who claims as creditor secured by the assignment of stock lIeretofore referred to. Second.. The plaintiffs, Poole and Sherman, two members of the firm of ,Kent & Co. ,who claim that they alone are entitled to the benefit of the 800 ,shares ofstock left as collateral; that the firJ;Il took that collateral by virtue of and in reUance upon representations made by the officers of the Middletown National Bank, over whose as a creditor they thereby insist that they are entitled to preference and priority. Third.D. W. Clancey, who claims as a depositor in the Elkorn Valley ia,nd secure<l by It Ghattel mortgage given by the association through J. J. King, its superintendent. Fourth. W. B. Eager, and his assignee, John Wannamaker, who claim as creditors secured by a bill qf sale executed by saili King ItS superintendent. Fifth. The manufacturing company, and JQqnD.;Neligh, its president, who claim ;that the company should not.be.broughtjoQto this snit, and that no accountingshould be as t() the transactions between the association and the company. ,There are' two qljestion!l at the outset, affecting the jurisdicmemtion of this court. The original ,bill was filed in the name of bers of: the prm of Kent& Co., two of whom, Kent and Young, are citizensofI;\ew ¥ ork, the state in which several of the ciefendants reside. rhe present and amended bill, in the name of Poole and Sherman alone, as complainants, makes Kent and Young defendants, and alleges that sole in the referred to is in them. Now, the claim is that, as a matter of fact, all of the members of the firm of Kent & Co. in this stock, and should be. plaintiffs; that, where some'of the plaintiffs and some of the defendants are citizens of the same lItate, this Cpurt has no jurisdiction; and that the substitutioll of Kent and Young from the position of plaintiffs to that of defendants was wrongful, C.aJlqilive, simply for the purpose of giving this court jurisdiction. The fagts i:9 respect to this matter are these: There was a firm of Poole, Shermall&; Co. doing business in Chicago, .and another of Kent & doing b)l.ilinel!1! ,in N:ew'York city. The. same parties werem¢mbers of
POOLE V. WEST
BUTl'ER & CHEESE ASS'N.
both firms. In fact it wa;S the same firm doing business in two places under different names. The New York house advanced the money ,and received the stock. It lost in its business, while the Chicago house made money in its. There has been no final settlement and division between the parties, but, before the original bill was filed, the New York house: being in need of money, asked and obtained several thousand dollal'S from the Chicago house, and sent to them, .with other property, this stock. The only witnesses who testified, being Kent & Young, the citizens of New York, and the managers of that branch of the business, tsetified that they intended to transfer this stock to Poole and Sherman, the Chicago members of the firm, personally as security to them for the money advanced, and for the balance which they: are satisfied wiUbe found due by themselves to them on the final adjustment of the partnership affairs.. They have also filed an answer disclaiming any iilterest in the stock. Under these circumstances, it seems to me, it would be resting upon the letter and ignoring the spirit of the transaction to bold that tIrey were still legally interested in this stock, and for that alone, after all that had been done, to dismiss tbe case as outside the jurisdiction of this court. 2. It is insisted that this isa proceeding to dissolve a corporation; tbat equity has no jurisdiction over such an action; and also that whatever rights the plaintiffsal'e seeking to assert are rights vested in the corporation, and which it was proper for it in the first place to assert; and that there is nosufficient proof of any satisfactory efforts to compelaction by the corporation before the commencement of this suit by stockholders. Obviously, this is not a mere action to dissolve a corporation, the nor is the right asserted by plaintiffs one properly to corporation. The paramount question is not one 'between the corporation and its creditors, but between a stockholder and the principal creditor, the former claiming a priority ovet the latter Ol,1t of the assets of the corporatioll,..:.-a question which it is not the province of the corporation itself to settle, and which can be settled fairly only in a direct ceeding between the stockholder and the creditor. Further, as I said, this is not a proceeding m:erely to dissolve a corporation; it is an action by one claiming ali<interestin the property of an insolvent to subject that property io the payment of his claim. It matters not to this caSe whether the corporation continues to exist, or by decree of court is formally dissolVed. It is not the corporation, but the corporate property, which is the burden of this litigation. 1 think, therefore, both objections must fail, and that it is the dnty of the court to proceed to determine the rights of the various parties to the property. It may'be remarked generally, in the first place, that there may be three parties whose rights are to be determIned in the winding up of the ,af1'airs of a corporation, to-wit, a secured creditor, an unsecured credi.tor, and the stockh,older. The secured creditor, to the extent of his security, is first entitled to protection. Beyond that security he is simply a general and unsecured creditor. . As between creditors and stockholders, in equity the property'is first appropriated to the paj'mentof the creditors.
, FEDERAL REPORTER.
The funds of a corporation are a trust fund for the payment of its debts, and the stoc;kholders have no rights until after the creditors aJ;e paid. This is elementary. and needs no citation of authority. I notice, .the claim of D. W. Clancey. He was a depositor in the Elkorn Valley, Bank, which was over to the association by B. D.Brown for the 800 shares which passed to complainants. Before the collapse he became worried about his deposit, and proposed to withdraw it, but permitted it to remain on the assurances of King, the local superintendent, and the man in actual charge of the affairs and maJ;lagement at West roint, that security would be given him if desired; and, in those assurances, warrants were in fact turned over to him,anda chattcl. mortgage given by such superintendent. Now, considering the loose and irregular way in which the affairs of this association were:\llanaged, I d() not think I need stop to inquire whether this chattel mortgage was execlJted by a party legally authorized to sign such papers for the corporation.. The debt, it is conceded, is a jusi one, and the security w:as given by one left by his associates in the actual charge and management. Equitably, I think he is entitled to be recognized as a secured creditor, and to be paid in full, and that ,be one provision in the decree. , I notice, second, the of the cross-complainant, the receiver of the Middletown Bank His claim arises for moneys advanced by the bank directly to the atlsociation, and also moneys advanced by it to Brown which were by him expended for the benefit of the association, and which were recognized by the association uniformly as debts of the association, and which were attempted to be secured by an assignment to the bank by each stockholder personally of his shares. I think equity will jump all intermediate transactions, and treat both amounts as debts from the association to the eross-complainant. In the third place the claim of Eager, and his assignee, Wannamaker, is for the salary oiEager as general manager, as well as moneys advanced by him to the corporation. He also obtained a security of a bill of sale upon certain personal property, executed by Supt. King just before the collapse of the company. It is evident to me, from the testimony of the transactions between Eager and Wannamaker, that the latter has no higher claim than the former; and as Eager, before this bill of sale, had assigned his stock to the Middletown Bank, with the intention on his part, as well as on the part of other stockholders making like assignments, to secure the debt of the association to the bank, he is not now entitled to payment until after the bank is satisfied in full. ' I pass now to the claim of the complainants, and here arises the great controversy in this case. 'fhe stock was assigned as collateral for moneys advanced toB. D. Brown. It was duly transferred on the books of the company, SO they unquestionably have all the rights of stockholders. Pullman v. Upton, 96 U.S. 330; National Bank v. Case, 99 U. S. 628; Vail v. Hamilton, 85 N.Y. 453; Colebrook on Collateral Securities, 366. But simply as stockholders they would have in equity no claim upon this property until the creditors were fully paid. They insist that they were
POOLE V. WEST POINT BUTTER .I: CHEESE ASS'N.
indu('ed to take the stock hy false representations made by the officers of the Middletown Eank as to its value and the condition of the association and its property, and that, having taken this stock in reliance upon those representations so falsely and fraudulently made, they are entitled to priority o\'er the bank. This is, as I said, the principal controversy in the case. It is beyond any dispute from the testimony that representations were made by some of the officers of the bank to Kent & Co. Bnt were these representations misrepresentations of existing facts, or mere expressions of opinion as to values and prospects? Were they made by an officer of the bank authorized to speak for and bind it in such a matter? Were they of such a character as would naturally mislead prudent business men? And did the complainants in fact rely upon such representations, and, from such reliance, part with their money? It would be impossible for me to review in detail all the testimony bearing upon this matter. I must content myself with noticing some salient facts. And, first, Brown was no stranger to Kent & Co. They had large dealings with him for months prior. He had consigned grain to them for sale; he had bought and sold stocks through them; and, at the very time they received these certificates of stock, he waslargely indebted to them on account of prior dealings. He was engaged in building an elevator at Burlington, Iowa, representing it to be the largest and most complete in the west. He-represented that the money which he wanted was for the purpose of completing that elevator. He transferred to Kent & Co. stock in that elevator, as well as the stock in question at the same time. It is claimed, it is true, that the elevator stock was transferred as security for the past indebtedness, and the stock in question only as collateral for future advances. At the time of giving Kent & Co. the stock in question, or within a day or so thereafter, he presented two letters, signed by King, president of the Middletown Bank, as follows:
"Mess. B · .A.. Kent & 00., N. Y. Oity-GENTLEMEN; By request of Mr. Brown, I would say that the West Point Butter & Cheese Association,of West Point, Nebraska, has recently increased its capHal stock to $250,000, which is fully paid. It has been prosperous since its organization, and its :t;uture, I. think, is very promising. "Yours, THOMAS KING."
"Mess. B. A. Kent & 00" Broad Street-GENTS.: If Mr. Btown wishes to use any of the West Point Butter & Cheese Association stock as a collateral for a loan, we consider the stock good for its face value. THOMAS KING, PI'," "Yours, respectfully,
A few days thereafter they directed their attorney, Mr. Gould, to ex· amine into the condition of the association, and report the value of this stock. Before, however, any report was made by him" they had advanced many thousand upon this stock, and for such advancement the . only pretense of claim against the Middletown Bank rests in these two letters. In these letters there is an opinion expressed as tb the value of the stook, and the prosperity of the association,-an opinion, which,
from the amount of money advn,nced by the Middletown Bank, would seem to be no m(jrethan an honest expression of'confide,nce. The <'lssertion :that the stock had been increased to $250,000, and that it was fullypaid,.wasa stateruentof fact warranted by-what had actually transpired. Beyond that there.is rtothing in these letters. Mr. Gould, the .attorqey, went up to Middletown to miJ,keaa examination. In the eveding, after: his arrival, he met the officers of the association, examined their books, and heard theirstatements,-all ot which were exaggerated, some of which· were untrue. The president of the bank was not present; but he met him in the morning, before leaving for New\York; and, in the course of a conversation between them, the president gave him strong assurances of the value of :the stock, and the confidence that the bank had in, it, its; habit in the past to loan. on the security of such stock, and its' value as security in the future. Mr. Gould testifies, it is true, that ,the president said to him that the association was not in debt, at least beyond some trifling amounts,-a statement which was obviously and grossly untrue. In this he is not supported by either the president .Brown; and the letter written by him to Kent & Co. immediately after his return toNe", York, containing his report of the examination that he had' made, fails. to disclose any such statement as coming fronl Mr. King. I think it probable, therefore, that Mr. Gould is mistaken as to the person who made that statement; but; whether so or not, such statement does not seem to have been conveyed to Kent & Co., and so they did not act in reliance thereon. It also appears that .:Mr. Gould came west both to Burlington, Iowa, and to West Point, N braska, .and made a personal, examination into both :properties. I think his co,rrection in his later testimony as to the date is probably right, and that this western trip was not made until after his visit to Middletown. But, be that as it may, he discovered nothing in his western tri p which led him to advise Kent & Co, to withdraw their confidence in Brown. On the contrary, he seems to have been personally infatuated with the enterprises, and thereafter had on his own account personal dealings with Brown to a large extent. The truth of the matter seems to be that Mr. Brown "ias a man of vasf schemes, with a power of impressing upon others a belief in their feasibility, and a conviction of the extent of his resources. He led the Middletown Bank into extravagant loans to him on acconnt of his va:rious enterprises, and in like manner he obtained money from Kent & Co;, and also from Mr. Gould. But, after reading all the testimony bearing upon the question of the misrepresentations of the bank, and their influence upon Kent & Co., it seems to me the complainants have failed to show that Kent & Co. parted with their money in reliance upon any misrepresentations of fact made by the officers of the bank. . One other matter is suggested, and that is the illegality of the increas.e of the stock from $25,000 to $250,000, and the limitation both in the statutes of Nebraska and in the charter of the company against the amount of indebtedness. Thj'J complainants hold only stock which was thus irregularly issued, and I do not think it lies in their mouth, or, in-
UNION S!.V. ASS'N.
deed, in the mouth of any of the original stockholders cognizant of the fact, and assenting theret<>, to question' the liability of the corporation for the entire debtbreated in favor of the Middletown Bank. No man can plead his own wrong'to defeat an h6nest debt. I shall therefote have to find against the claim of the complainant to priority of payment over the crossJc6mplainanL The last matter is that o£themanufactunng company's claim. Itias I have stated ,leasedits property to the association. The latter obtained a'large proportion6f the manufacturing company's- stock,·and had got· ten possession of a.' series of bonds issued by it, which, Ihowever, wards passedinto'tne of the Middletown Bank. Exactly what would; be ,between the manufaCturing company Rnd theassociationiidsim1>Gssible now to:tell. I think,however, as the parties are all before the court, the ttue way would be to have that cotint stailkd. Then, perha:ps, the receiver might be ditectM to sue the manUfacturing company, to sell the claim. of the association against the manufactliring ctinlpany, or in some; other way td1reaIize the amouilt that shall be dUe', be any such amount. ' ; [i'. I believe'this:Colvetsall:that I need how consider. A clooree vvillrbe entered, finding i·the;rightB'and; :equities of the parities 'in the malHiat heretofore indicated, and'referring theiedse to 8. master 'to examine ,and report-First, the amount due Clancey) ,Principal and interest i ,the value of ihe securities transferred by the superintendent, to 'him,ae! as all amounts realized' 8econd, t'he\amoul'ltdue'Wanllamaker, principaland interest; third, the amount due the cross-complainant; fourth, the account between the associRition and the manufacturing company i and, fifth, the'atnoill'ltofinoneynowon hand after the payment/ofall the intervening claimS. ulfinal decree will be entered on the corning in"of such report.
WILllON 'V. UNION SAV. ASS'N
March 80; 1887.)
" OF DIFFEBBNT ;
«(Jiic";'it (Jourt, E. D. MiB8ouri, E. D.
REMOVAL OF CkUSES- SEPARABLE
A suit by a citizen of. Missouri against a'panking corporation of that state. with which certain railroad aid bonds, sought to be recovered, were placed on joint deposit by two residents of Kansas, also is a suit, involvinga sepllor)l,ble, controversy betwlleIj. citizells of, states; and, as such, remonble the state. to the federal courts; Where the bank denies all interest in the bondsRve a lien for storage and counsel fees, where'one of the defel',ldallts depositlIlg, the bonds, .denies that his ha$,sp performed his contract of which the bonds were given him as to vest in any rightVl'hich could be assigned to the plaintiff, as set 'out In the bil};' and: the township, which appeared: voluntarily, llets up the ,same defenSe, that theb0.nds were iss,qed withollt and l\:1'e all.solutely VOId. ,On such pleadmgs the controversy IS between the plaintiff and',citiz.ens of Kimsas. ' ,,: ,