168 F. 822 | 8th Cir. | 1909
This is a proceeding in bankruptcy wherein nine creditors have appealed from a decree of the District Court which disallowed certain portions of their claims against the estate of the bankrupt and affirmed rulings of the referee which suppressed the testimony of some of their witnesses. The claims of these alleged creditors are founded upon promissory notes made by the Union Transfer Company, a corporation, .the bankrupt, payable to the order of the New Decatur Buggy Company, another corporation, and indorsed by the. latter before maturity in the ordinary course of business to the respective claimants.
The Transfer Company was engaged in the business of buying and selling carriages, wagons, tools, and agricultural implements in the state of Iowa. The Decatur Company was manufacturing and selling carriages in the state of Ohio. In 1905, the Transfer Company agreed that prior to September 30, 1906, it would purchase of the Decatur Company 1,000 vehicles, and in September, 1906, it-contracted to buy 1,500 vehicles of the Decatur Company before September 1, 1907. These contracts provided that the Transfer Company should pay for these vehicles upon their receipt by promissory notes payable to the order of the Decatur Company without interest, four months after the dates of the invoices respectively. These parties further agreed, and they performed this agreement, that the Transfer Company should order vehicles in advance of its needs, and should deliver to the Decatur Company its notes therefor payable in four months from their date; that at the maturity of these notes the Transfer Company should make and deliver like notes payable in four months to the Decatur Company, called “renewal notes,” which the latter company should use to take up the original notes when possible, and, when this was impracticable, should discount and send the proceeds to the Transfer Company to enable it to pay these original inotes. Under this agreement and practice the Transfer Company issued two classes of original notes, those given for vehicles received, and.those given for vehicles to be delivered; and it issued three classes of renewal notes, those issued to take up original notes for vehicles received, those used to take up original notes for vehicles to be delivered, and those issued to be discounted by the Decatur Company to raise money to send to the Transfer Company to pay the original notes which could not be renewed. All the notes of these various classes were in the usual form of such commercial paper, and there was nothing about them to enable any third party to distinguish those of one class from those of any other. A very large number of these notes, which amounted in the aggregate to more than $60,000, was issued, and many were paid; but in January, 1907, when the Transfer Company was adjudged a bank-
It is assigned as error that the testimony of II. Scherer was suppressed by the referee and by the court for the reason that he refused to answer questions and produce exhibits on cross-examination. The facts pertinent to this specification are these: Scherer testified at Detroit, Mich., on May 1, 1907; the motion to suppress his deposition was' filed with the referee in Iowa on June 29, 1907; the referee sustained that motion on September 30, 1907; on October 1, 1907, the claimant moved that the deposition be returned to the notary public for the purpose of having the questions upon cross-examination answered, and that motion was denied by the referee. Scherer testified in his deposition upon his direct examination that he was the president of the claimant; that between August 20 and November 30, 1906, he purchased the notes of the Transfer Company from the Decatur Company before their maturity for his corporation, and that his corporation paid the face value thereof less interest at. 6 per cent, per annum, with a just claim it held against the Decatur Company to the amount
The deposition of Barnitz, a witness for another of the claimants, was suppressed because, after he had testified on direct examination that between July, 1906, and November 12, 1906, the claimant had purchased for value without notice 19 of these notes, he refused to produce letters written subsequent to those dates, and after the failure of the Transfer Company, between the Decatur Company and the claimant, and between the claimant and Flickinger Bros., its attorneys, concerning these notes and the bankruptcy of the Transfer Company. The letters were utterly immaterial, were not part of permissible cross-examination, and the deposition should have been received and considered. Other depositions were suppressed, but it is unnecessary to consider the rulings upon them, because the relevant matters to which they refer are sufficiently proved to sustain the claims of the appellants to which they refer without' them.
The trustee took the deposition of one Elwood, one of the officers of the Decatur Company, but did not introduce it in evidence. The claimants offered in evidence a portion of this deposition, and the referee and the court below ruled it out on the ground that the claimants could not introduce arbitrarily any part of the deposition, and on the further ground that the attorneys for the trustee attempted to verify the statements in it, but the witness refused to produce and permit them to introduce books and papers which they demanded. But this was
The rulings of the referee and of the court upon the various motions to suppress the depositions of these witnesses have been considered, so far as they were material, on the theory, adopted by court and counsel below, that' the suppression of depositions was the proper remedy for the refusal of witnesses to produce relevant evidence. But this is an error. The remedy in the national courts in equity and in bankruptcy for the failure or refusal of a witness to answer competent questions or to produce material evidence is not the suppression of the deposition or of the evidence which he does produce, and that for the reason that all evidence which is not glaringly irrelevant, whether deemed material and competent by the referee and the court below or not, must be made a part of the record, and in case of an appeal returned to the appellate court to the end that a final adjudication may be rendered in that court without another hearing below. The true remedy for the refusal of a witness to answer proper questions or to produce relevant evidence is an enforced order of the proper court that he shall do so. Dowagiac Mfg. Co. v. Lochren, 74 C. C. A. 341, 343, 344, 143 Fed. 211, 213, 214; First National Bank v. Abbott (C. C. A.) 165 Fed. 852, 855; Blease v. Garlington, 92 U. S. 1, 7, 8, 23 L. Ed. 521; In re De Gottardi (D. C.) 114 Fed. 328, 342; Dressel v. North State Lumber Company (D. C.) 119 Fed. 531; In re Romine (D. C.) 138 Fed. 837, 839.
We return to the claim of Scherer & Co. The question it presents is, Was this claim a fixed liability of the Transfer Company when the petition in bankruptcy was filed against it? Bankruptcy Law, c. 541, § 63 (Act July 1, 1898, 30 Stat. 562 [U. S. Comp. St. 1901, p. 3447]). If the Transfer Company could not have escaped liability to Scherer & Co. upon this claim then neither the trustee nor other creditors of the Transfer Company can defeat it now, for these creditors derive all their rights here through it, and they have no defenses to this claim which were not available to the Transfer Company.
The 10 promissory notes of the Transfer Company which were disallowed were, payable to the order of the Decatur Company, were indorsed by it, and were taken by the claimant before their maturity in
. What defenses has the trustee established? There is a statement in the brief of its counsel that W. A. Southard, the president of the Transfer Company, who signed the notes in its name, had no authority so to do, but no argument is presented in support of this suggestion. On the other hand, the record indubitably proves that Southard made-all the notes and contracts and conducted all the business of the corporation for many months before these notes were signed, and no doubt remains that, by the acquiescence of the corporation in the-course of business pursued, plenary power was granted to him to-issue its commercial paper for all lawful purposes. Merchants’ Bank v. State National Bank, 10 Wall. 604, 19 L. Ed. 1008.
Counsel contend that these notes are void because the capital stock of the Transfer Company was only $25,000, only $12,000 of it was-issued, and the limit of its indebtedness was $8,000 under section 1611 of the Code of Iowa, while its actual indebtedness was known to the claimant to have been vastly in excess of this limit when it took the notes. Det these facts be conceded, nevertheless. the Transfer-Company issued and authorized the sale or exchange of these notes-by its agent, the Decatur Company. Scherer & Co. paid full value for them to this agent. The moment the title to them was transferred to the claimant and its payment received, these notes became executed contracts on the part of the claimant. It had performed its part of' the agreements. It had paid the price for the commercial paper. The Transfer Company had the power to make promissory notes of this character. Their execution was within the scope of its corporate powers. It was but an excessive exercise of them.
The statutes of Iowa in effect -declared that the limit of the indebtedness of this corporation should be $8,000. But they did not provide-that notes or contracts issued by the corporation which created an indebtedness beyond the limit thus prescribed should be void, and it is not the province of the courts to impose a penalty for the violation of a statute in which there is no moral turpitude or breach of public policy where the law fails to do so. In such a case the remedy for the violation is not the destruction of the contracts or of the property of those who have purchased them, but it is the ouster- and dissolution of the corporation at the suit of the state. It is no defense for a private corporation against the enforcement of its commercial' paper or other contracts, in reliance upon which a creditor has parted with value, that while their execution was within the general scope of its powers it involved an excessive exercise of one of them. Sioux.
Another argument which is urged upon our consideration with persistent force is that the Decatur Company defrauded the Transfer Company of these notes and hence the claimant cannot enforce their collection. Ret us see. Take the most vulnerable notes, those delivered to the Decatur Company to be substituted by it for original notes of the Transfer Company, or to be sold for the Transfer Company under the agreement that the Decatur Company should remit the proceeds to the maker of the notes. Concede that the Transfer Company never received anything for these notes, a fact which is by no means satisfactorily established, yet the testimony is undisputed that the Transfer Company signed the notes, that it delivered them to the Decatur Company, and that it authorized that company to discount them and to send the proceeds to it or to substitute them for its original notes. So far as the Decatur Company discounted the notes and received the proceeds in cash, it acted by the express authority of the Transfer Company, and, if it subsequently converted those proceeds to its own use, that fact constituted no defense to the notes, because the purchaser thereof from the authorized agent of the Transfer Company was not liable for that agent’s disposition of the money which the Transfer Company had authorized it to receive on its account.
The Decatur Company, however, was not authorized to use these notes to pay its own debts, and it is said that its delivery of them to' Scherer & Co. for that purpose was a fraud upon the Transfer Company which constitutes a defense to the paper. If so, the purchaser of the notes which took them in good faith in reliance upon their apparent validity and upon the Decatur Company’s' apparent ownership of them must suffer for this fraud, while the Transfer Company which made the notes, which knew they were without consideration, which created their false appearance of validity and the false appearance of their ownership by the Decatur Company, escapes the evil consequences of its participation in the fraud. This would be a reversal of the familiar and salutary rule that one who by his acts or representations, or by his silence when he ought to speak out, intentionally or through culpable negligence induces another to believe certain facts to exist, and the latter rightfully acts on such a belief, so that he will be prejudiced if the former is permitted to- deny the existence of such facts, is thereby conclusively estopped to interpose such denial. Paxson v. Brown, 61 Fed. 874, 882, 10 C. C. A. 135, 143; Union Pacific Ry. Co. v. United States, 67 Fed. 975, 979, 15 C. C. A. 123, 127; Illinois Trust & Savings Bank v. City of Arkansas City, 76 Fed. 271,
It is said that these notes were accommodation paper, that the issue of accommodation paper was beyond the power of the Transfer Company, and that for that reason the notes constitute no .valid claim against its estate. The corporation had no power to issue accommodation paper, and this fact would have been a perfect defense to these notes in the hands of any holder who knew they were accommodation paper when he purchased them. But the corporation had power to issue negotiable paper for value. “When a corporation has power under any circumstances to issue negotiable securities, the bona fide holder has a right to presume that they were issued under the circumstances which give the requisite authority, and that they are no more liable to be impeached for any infirmity in the hands of such a holder than any other commercial paper.” City of Lexington v. Butler, 14 Wall. 282, 296; 20 L. Ed. 809. The Transfer Company intentionally' gave these notes the false appearance of negotiable paper issued by it for value, and thereby induced the claimants to buy them. Where a corporation which has the power to issue negotiable paper puts forth accommodation paper beyond its power, it is estopped from denying that the latter was lawfully issued for value for the purpose of defeating the claim of a bona fide holder of such paper for value. Bank v. Dunn, 6 Pet. 51, 8 L. Ed. 316; In re Troy & Cohoes Shirt Co. (D. C.) 136 Fed. 420, 425, 430, 431; German Savings Bank v. Hanna, 124 Iowa, 374, 100 N. W. 57; Farmers’ National Bank v. Sutton Mfg. Co., 52 Fed. 191, 3 C. C. A. 1, 17 L. R. A. 595; Martin v. Niagara Falls Paper Mfg. Co., 122 N. Y. 165, 25 N. E. 303; Holmes et al.
Some of these notes were taken by Scherer & Co. in payment of a past due debt of the Decatur Company, and to these the objection is interposed that the claimant paid no value for them. But one who takes commercial paper before maturity, in payment of or as collateral security for a debt of the seller, due or not due, is a purchaser for value in the ordinary course of business, and protected by the same estoppels as a purchaser for cash. Swift v. Tyson, 16 Pet. 1, 15, 21, 10 L. Ed. 865; Railroad Company v. National Bank, 102 U. S. 14, 22, 28, 26 L. Ed. 61; Robinson v. Lair, 31 Iowa, 9, 14; Code Supp. Iowa 1907, §§ 3060a25, 3060a26; Woodworth & Co. v. Carroll, 104 Minn. 65, 112 N. W. 1054; McMurray v. Moran, 134 U. S. 150, 158, 10 Sup. Ct. 427, 33 L. Ed. 814; American File Co. v. Garrett, 110 U. S. 288, 294, 4 Sup. Ct. 90, 28 L. Ed. 149; Hamilton v. Fowler, 99 Fed. 18, 22, 40 C. C. A. 47; Doe v. Northwestern Coal & Trans. Co. (C. C.) 78 Fed. 62, 68; Wood v. Seitzinger (C. C.) 2 Fed. 843, 814; In re Huddell, Fed. Cas. No. 6,825.
There is a statute of the state of Iowa to the effect that no holder of commercial paper procured by fraud upon the maker shall recover thereon a greater sum than he paid therefor with interest and costs. Ann. Code Iowa 1897, § 3070; Richards v. Monroe, 85 Iowa, 359, 52 N. W. 339, 39 Am. St. Rep. 301. It is contended that Scherer & Co. paid nothing for these notes, but the cash which it advanced, some $1,200, and that this should he the limit of its recovery. The answer is that the Transfer Company and the trustee of its estate are estopped by the inducing false representations of the former from claiming or proving against this claimant that this paper was procured by fraud, and, if this estoppel did not exist, the amount of the debt of the Decatur Company to the claimant, which was paid by these notes and the cash which the claimant advanced, substantially equal the face of the notes. The debt of the Decatur Company was paid for them as much as was the cash, and both may be recovered under the statute.
The objections to the claim of Scherer & Co. have now been considered under the concession that the notes which they held were originally without consideration, and our conclusion is that even if that fact were satisfactorily proved these objections- cannot be sustained. The fraud in this case was not prepared, inspired, or effected by this claimant. It was the victim, not the pex-petrator, of it. The Transfer Company‘furnished the false representations which accomplished it, and the Decatur Company, its agent, used them. Neither the Transfer Company, nor its creditors, nor the trustee can take advantage of the wrong of that company to deprive the most direct victims of it of their share in its estate. That company had no available defense to this claim when the petition in bankruptcy was filed, and the trustee and the other creditors have none now.
Decisions of state courts have been called to our attention and con
So far as our conclusion rests upon a construction of the statutes of Iowa, it is not inconsistent with the decisions of the Supreme Court of that state, and it is sustained by those cited above, and by the decision of the Supreme Court in Sioux City Terminal R. & W. Co. v. Trust Company, 173 U. S. 99, 19 Sup. Ct. 341, 43 L. Ed. 628.
The testimony regarding the disallowed claims of the eight other appellants in this case has been considered, and it brings those claims within the decision announced upon the claim of Scherer & Co. They are founded on promissory notes of the Transfer Company indorsed by the Decatur Company and purchased by the claimants before maturity in the regular course of business for debts of the Decatur Company paid thereby, or for cash, and they must be allowed.
The decree of the court below must accordingly be reversed, and this case must be remanded to the District Court with instructions to allow the claims of the appellants in controversy in this appeal upon the same basis as claims of other unsecured creditors are allowed, and it is so ordered.