229 F. 489 | 2d Cir. | 1916
(after stating the facts as above), The trustee in bankruptcy seeks a decree adjudging that certain bonds held by the appellee Bank were unlawfully transferred to it by the bankrupt, and that these bonds do not constitute a lien upon the real property of the bankrupt, and that the Bank be required to return the bonds to his possession. This relief has been refused him in the court below, and he has come into this court asking that the order of the District Judge be reversed, and that the order made by the referee in bankruptcy be affirmed.
“No corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purpose of such corporation.” Consol. Daws, c. 59.
It is claimed that under this statute the corporation had no power to issue its bonds for an antecedent debt. That a real debt existed, and that the directors authorized the issue of the bonds and tire surrender of them to secure the payment of it, is not disputed. The provision in the New York statute is not unusual. It may be found inserted in the Constitutions of some of the states, while in others it exists merely as a statutory prohibition.
The question we have to determine is one of local law. The construction placed upon a local statute by the highest judicial tribunal
The courts have held that where the Legislature of one state enacts a provision taken from a statute of another state, in which the language of the act has received a settled construction, it is presumed to have intended that such provision should be understood and applied in accordance with such construction. See Ryalls v. Mechanics’ Mills, 150 Mass. 190, 22 N. E. 766, 5 L. R. A. 667; Rhoads v. Chicago, etc., R. Co., 227 Ill. 328, 81 N. E. 371, 11 L. R. A. (N. S.) 623, 10 Ann. Cas. 111. But if this provision of the statute of New York has been adopted from the legislation of some other state, and had received a settled construction in that state prior to its enactment in New York, the fact has not been brought to our attention by counsel on either side.
The question now presented to this court is one upon which the New York decisions afford little light. In the Matter of Snyder, 29 Misc. Rep. 1, 59 N. Y. Supp. 993 (1899) the question was as to the right to use the bonds not as collateral security for an antecedent debt but for the actual payment of the debt, the outstanding notes being surrendered. The right to use the bonds as payment was sustained. The court said:
“The company’s creditors who received its notes had already given either money or property to the company; so that the substitution of bonds for their notes was equivalent to the issue, in the first instance of bonds for money or property actually received for the use and lawful purposes of the company.”
In Haule v. Consumers’ Park Brewing Co., 150 App. Div. 582, 586, 135 N. Y. Supp. 900, 902 (1912), Judge McLaughlin stated that:
“The corporation could issue its stock only for money paid or property received. It could not issue it as collateral security for money borrowed or for ^the future delivery of bonds.”
We passed on this provision of the New York statute in Re Waterloo Organ Co., 134 Fed. 345, 67 C. C. A. 327 (1904), and held the bonds in that case validly issued. The facts in that case were that the corporation already indebted to the bank desired further credits which the bank was unwilling to grant except upon further security. Under those circumstances the company issued the bonds to the bank as security for past and future advances and under an agreement that the bank would account for them at their par value. We said that, as the company had actually received a consideration equal to the full value of the bonds and had enjoyed the benefits thereof, it should not
The foregoing cases do not go- to the question involved in the present case, and we shall therefore examine the cases elsewhere decided to see what the courts have held respecting similar constitutional or statutory provisions.
The Constitution of California (article 12, § 11) has a provision very similar to the New York statute. It reads.:
“No corporation shall issue stock or bonds except for money paid, labor done or property actually received.”
This was construed in the United States Circuit Court for the Southern District of California in Farmers’ Loan & Trust Co. v. San Diego Street Car Co., 45 Fed. 518 (1891), in a proceeding to foreclose a mortgage upon the property of the railroad company given to secure the payment of certain bonds which had been pledged to secure the payment of antecedent indebtedness and, at least in some cases, to obtain an extension of time. The court held that none of the bonds, were ever legally issued. In its opinion the court said:
“This constitutional and statutory inbibition is plain, and has but one meaning — the money paid, labor done, or property actually received must be paid, performed, or received, as the ease may be, on account of the issuance -of the bonds; and any bonds issued contrary to this provision are of course illegally issued. The provision does not mean, and cannot be held to mean, that, such bonds may be issued as collateral security for any sort of pre-existing indebtedness. Now none of the bonds in question are, or ever were, issued or held for money .paid, labor performed, or property actually received on account of their issuspce: On the contrary, all of them were delivered and are held as collateral ’security in part for pre-existing indebtedness of the defendant corporation, and in'large part for pre-existing indebtedness, not of the defendant corporation, but of one of its creditors. As bad already been said, not one of the bonds was ever sold, and not one of the holders of them paid a dollar on account of their delivery.”
The same provision came before tire Circuit Court of the Northern District of California in Atlantic Trust Co. v. Woodbridge Canal & Irr. Co., 79 Fed. 842 (1897). But in this casé the debt secured was" not an antecedent debt. That case decided — what will not be questioned, we take it — that the prohibition under discussion does not prevent the arse of bonds as collateral when issued at the time the debt is incurred. The case also decided that the word “issue,” used in the constitutional provision, is broad enough to cover a pledge, as well as a sale,- of the bonds'. “In the contemplation of tire law, bonds pledged by á corporation are just as much issued as when they are sold.” That such is. the law was settled for the federal courts by the decision of the - Supreme Court in Memphis & Little Rock Railroad Co. v. Dow, 120 U. S. 287, 7 Sup: Ct. 482, 30 L. Ed. 595 (1887).
“No corporation shall issue any stock or certificate of stock except in consideration of money or labor or property estimated at its true money value, actually received by it, equal to the par value thereof, nor any bonds or other evidence of indebtedness, except for money, labor or property estimated at its true money value, actually received by it, equal to seventy-five per cent, of the par value thereof, and all stocks and bonds issued contrary to the provisions of this section, and all fictitious increase of the capital stock of any corporation shall be void.”
The court held that the issuance of bonds by a corporation for antecedent debts is not an issuance for “money, labor, or property,” as the statute required. In its opinion the court said:
“Literally considered, these bonds are not within the statute, because they were not issued for money, nor for property estimated at its true money value. Existing debts are not money, and to say that they are property capable of estimation at its true money value does considerable violence to the words used. No property, claim, or debt was released or given up. Had the bonds been issued at the time of the respective loans, but for some reason the money not then paid over, subsequent payment of it might * * * be said to bring the case within the statute. The bonds would then be issued for money, as in the Kenosha Case they were issued for property. Haynes v. Kenosha Electric Co., 139 Wis. 227, 119 N. W. 568, 121 N. W. 124. Again, if the notes or claims had been given up and canceled, and the bonds taken outright at not more than four to three, another question would be presented. This might be held the purchase of property at not less than three-fourths of its true value. No such novation, however, occurred. The intent and purpose of the statute will be presently considered; but from the language alone it is clear to a demonstration that the issue of bonds for a pre-existing debt not surrendered is not covered. Pre-existing debts are neither money nor property capable of being valued unless actually given up.”
It added:
“In none of the transactions by which the bonds were pledged for the preexisting debts was there anything paid on account of, or induced by, the delivery of the bonds. * * * Even if there had been an express agreement with every pledgee to account for the' Bonds at three-fourths their par value, they would still be invalid, because issued for a prohibited purpose.”
The above case came before the Circuit Court of Appeals in the Seventh Circuit as First Savings & Trust Co. v. Waukesha Canning Co., 211 Fed. 927, 128 C. C. A. 305 (1914). The court reversed the District Court on the proposition that if the holders of bonds taken as collateral to secure a pre-existing debt agreed to account for them at three-fourths their par value the agreement would still be invalid. It said:
“We are therefore of the opinion that in agreeing to take the bonds in question as collateral at the rate of hot less than 75 per cent of their face value upon their past-due claims, and in extending time of payment of the same, the present bondholders afforded to the corporation a valid property consideration equal to 75 per cent, of the face of the bonds, and are therefore satisfying the demands of the Wisconsin statute above set out, provided, of course, the creditors had agreed to accept" the bonds on that basis.”
The court agreed that, unless there was such an agreement to account for the bonds at three-fourths their face value, the collateralized bonds would be invalid. - ,
“No corporation shall issue stock or bonds, except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void.” Const. Mo. art. 12, § 8.
“The stock or bonds of a corporation shall be issued only for money paid, labor done or money or property actually received.” Rev. St. Mo. 1909, § 2981.
The court held that the bonds of a corporation issued and pledged to secure a pre-existing debt were invalid. The court said:
“But the great weight of authority is clearly to the effect that the money, labor, or property received for the bonds, whatever its value, must constitute a present consideration for the issuance thereof. Counsel for appellant have cited cases which they claim are authority for the proposition that a private corporation may pledge its bonds to secure an antecedent debt, under such constitutional and statutory provisions as are in force in Missouri. An examination of these cases disclosesi that not more than one of them can be said to support the proposition as stated, and it is doubtful whether that one, when rightly considered, does so. The case last referred to is Nelson v. Hubbard, 96 Ala. 238 [11 South. 428, 17 L. R. A. 375], Under the Code of Alabama a private corporation has the power ‘to borrow money, and to mortgage or otherwise convey or pledge its property, real or personal, and its franchises to secure the payment of the money so borrowed, or any other debt contracted by it.’ The Constitution of Alabama has the same provision as that of Missouri. The Supreme Court of Alabama in the case cited decided that a difference between the amount of bonds issued and the debt does not create a fictitious increase of indebtedness, 'if they can properly be regarded as issued for money, labor done, or money or property actually received, .and that the power to borrow money given by the Code included the power to pledge the bonds of the corporation, secured by its mortgage on property as collateral security-for debts of the corporation presently created or already owing. Whether or not the- bonds of a private corporation could be pledged for an antecedent debt was not the question directly in issue in the case, and we fail to find in it any strong support, for the position of counsel.”
The same court had the matter before it in Mudge v. Black, Sheridan & Wilson, 224 Fed. 919, 140 C. C. A. 397 (1915). The question again came up under the Missouri provision and the former decision was reiterated. The court declared that bonds issued by a Missouri corporation and pledged to secure its antecedent indebtedness without the receipt by the corporation of any valuable consideration for them except the consideration of the old debts and the extension of the time for their payment were invalid, and that under the clause of the constitutional provision that “all fictitious increase of * * * indebtedness shall be void” it was indispensable to the issue of valid bonds that they be issued only for money paid, labor done, or property actually received which is equal in value to the par value of the bonds.
We think the cases establish the law to be that under such a statute as that herein involved bonds cannot be pledged to secure payment of a pre-existing debt, and that an extension of the time for payment of a debt does not satisfy the requirement of the statute. The surrender of the corporation’s old note and the substitution therefor of the corporation’s new note in hs place, either with the same or with different indorsers, cannot justify the issuance of tire bonds, because
“I think the provision of the New York statute quoted, fairly construed, means that the bonds may he issued for money borrowed at substantially their par value, or given in exchange for labor substantially equal in value to the par value of the bonds, or given in exchange for proxierty to be used for the corporate purposes of the corporation of substantially equal value to tlie par value of the bonds. The right to sell and dispose of the bonds includes the right to pledge them, as we have seen; but when pledged by the corporation issuing them, with power in tlie pledgee to sell, the obligation must be imposed on the pledgee to dispose of them at substantially their par value.”
“The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred, unless he was a bona fide holder for value prior to the date of the adjudication. Such property may be recovered or its value collected from whoever may have received it, except a bona fide holder for value.”
The District Judge in his opinion said:
“It cannot be doubted that if the Progressive Wall Paper Corporation, finding itself unable to longer secure the indorsement of Wing, and through it a renewal of its note at the Bank, had executed a new note indorsed by Cunningham, Ingalsbee, and Derby for the same amount and due three or six months later, and had presented the same at the Bank for discount to obtain money to take up the old note, and had been refused on account of the insufficiency of the security of the indorsers, and the corporation had thereupon pledged $7,000 of its mortgage bonds as additional security for the payment of such notes, and had thereupon secured the discount of such note at the bank and had the proceeds of such note passed to its credit, and thereupon had given its check to the Bank in payment of its old note and had thus secured a surrender of the old note, that the transaction would have been legal and binding, and that the issue of such bonds by so pledging them to the Bank would have been legal and binding under the statute.”
It is to be observed of this statement that if the assumption of the District-Judge were true, and if it followed from such assumption that what was done in the case at bar was valid, then the courts are wrong which hold that a deposit of bonds to secure an extension of time for the payment of a pre-existing debt is invalid; for the assumption of the District Judge might be equally applied to such a. case.
“Seeking equity, the corporation or any one suing in its riglit, would be required to do equity, and make tender, as a condition of relief, of tile debt for which they (the bonds) were pledged. Besides, both the corporation and Hinckley, as its president, participated in the unlawful issue of them, and occupy no position to ask the intervention of a court of equity, for they could neither of them make out a title to relief, except by showing a plain and positive violation of the statute. They are in equal wrong with Blister, the party to whom the bonds were issued. * * * The law will leave the parties as they are, affording a remedy to neither.”
The order of the District Court is reversed, and that made by the referee is affirmed.