30 F. 513 | U.S. Cir. Ct. | 1887
This is a wreck. Gross mismanagement, culpable disregard' of the extent of corporate power, and of the regularity of corporate proceedings, unquestionable dishonesty, and false representations 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 Tinder the laws of the state of Nebraska. By its charter its capital stock was $25,0,0(3, 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, Chauncey Hale, 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 Halé, 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 continued in office during all the transactions involved in this case.
The purposes of this organization 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 Company its property, consisting of real estate, with mills, machinery, etc., for a term of one year, at a rental of $300 per month, payable
Nothing was paid into the association by these several stockholders for these additional share's, but they wore 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 witli respect to an increase of the capital stock were not complied with; but, as this increase was made by the consent of all the stockholders, it must, as to each of them, and as to the corporation, be considered as valid and binding. During the forepart oí 1888, 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 assigned in writing his stock to the Middletown National Bank. The 105 shares
There are two- questions presented at the outset, affecting the jurisdiction of this court. The original bill was filed in the name of four members of the firm of Kent & Co., two of whom, Kent and Young, are citizens of New York, the state in which several of the defendants reside. The present and amended bill, in the name of Poole and Sherman alone, as complainants, makes Kent and Young defendants, and alleges that the sole interest in the stock above 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. are interested in this stock, and should be plaintiffs; that, where some of the plaintiffs and some of the defendants are citizens of the same state, this court has no jurisdiction; and that the substitution of Kent and Young from the position of plaintiffs to that of defendants was wrongful, collusive, and simply for the .purpose of giving this court jurisdiction.
The facts in respect to this matter are these: There was a firm of Poole, Sherman & Co. doing business in Chicago, and another of Kent & Co. doing business, in New York city. The same parties were members of
2. It is insisted that this is a proceeding to dissolve a corporation; that equity has no jurisdiction over such an action; and also that whatever rights the plaintiffs are 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 no sufficient proof of any satisfactory efforts to compel action by tho corporation before the commencement of this suit by stockholders. Obviously, this is not a more action to dissolve a corporation, nor is the right asserted by plaintiffs one properly to be assorted by the corporation. The paramount question is not one between tho corporation and its creditors, but between a stockholder and the principal cred-iior, the former claiming a priority over the latter out of the assets of the corporation, — a question which it is not the province of the corporation itself to settle, and which can he settled fairly only in a direct proceeding between tho stockholder and the creditor. Further, as I said, this is not a proceeding merely to dissolve a corporation; it is an action by one claiming an interest in the property of an insolvent to subject that property to 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. I think, therefore, both objections must fail, and that it is the duly of tho 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 lliroo parties whose rights aro to be determined in the winding up of the affairs of a corporation, to-wit, a secured creditor, an unsecured creditor, and tho stockholder. 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 payment of the creditors.
I notice, first, the claim of D. W. Clancey. He was a depositor in the Elkorn Valley Bank, which was turned over to the association by B. D. Brown for the 800 shares which afterwards 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 management at West Point, that-security would be given him if desired; and, in pursuance of those assurances, certain warrants were in fact turned over tp him, and a chattel mortgage given by such superintendent. Now, considering the loose and irregular way in which the affairs of this association were managed, I do not think X need stop to inquire whether this chattel mortgage was executed by a party legally authorized to- sign such papers for the corporation. The debt, it is conceded, is a just one, and the security was 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 will be one provision in- the decree.
I notice, second, the claim of the cross-complainant, the receiver of the Middletown Bank ‘ His claim arises for moneys advanced by the bank directly to the association, 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 cross-complainant.
In the third place the claim of Eager, and his assignee, Wannamaker, is for the salary of Eager 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. The stock was assigned as collateral for moneys advanced to B. 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. Thej'- insist that they were
“October 17, 1883.
“Mesa, E. A. Kent & Co., N. Y. City — Gentlemen: By request of Mr. Brown, I would say that the West Boint Butter & Cheese Association, of West Point, (Nebraska, has recently increased its capital stock to $250,000, which is fully paid. It has been prosperous since its organization, and its futuro, I think, is very promising.
“Yours, respectfully,
Thomas King.”
“October, 19, 1883.
“Mess. E\ A. Kent c6 Cto., Broad Street— Gents.: If Mr. Brown wishes to use any of the West Point Butler & Cheese Association stock as a collateral for a loan, we consider the stock good for its face value.
“ Yours, respectfully,
Thomas King, Pr.”
A few days thereafter they directed their attorney, Mr. Gould, to examine 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 pretenso of claim against the Middletown Bank rests in those two letters. In those letters there is an opinion expressed as to the value of the stock, and the prosperity of the association, — an opinion, which,
One other matter is suggested, and that is the illegality of the increase 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. The complainants hold only stock which was thus irregularly issued, and I do not think it lies in their mouth, or, in
The last matter is that of the manufacturing company’s claim. It, as I have stated, leased its property to the association. The latter obtained a large proportion of the manufacturing company’s stock, and had gotten possession of a series of bonds issued by it, which, however, after-wards passed into the hands of the Middletown Bank. Exactly what the state of the account would bo between the manufacturing company and the association it is impossible now to toll. I think, however, as the parties are all before the court, the true way would bo to have that account stated. Then, perhaps, the receiver might be directed to sue the manufacturing company, to sell the claim of the association against the manufacturing company, or in some other way to realize the amount that shall be due, if there be any such amount.
I believe this covers all that I need now consider. A decree will be entered, finding the rights and equities of the parties in the manner heretofore indicated, and referring the case to a master to examine and report — Mrsi, the amount due Clancey, principal and interest; the value of ihe securities transferred by the superintendent to him, as well as all amounts realized therefrom; second, the amount due Waunamaker, principal and interest; third, the amount due the cross-complainant; fourth, the account between the association and the manufacturing company; and, fifth, the amount of money now on hand after the payment of all the intervening claims. A final decree will bo entered on the coming in of such report.