Taylor v. Walker
117 F. 737
U.S. Circuit Court for the Nor...
1902
Check Treatment
JENKINS, Circuit Judge.

I adhere to the opinion, expressed in the opinion sustaining the demurrer to the original bill, and filed June 19, 1895, that, within the decisions of the supreme court therein referred to, a suit by the complainants can only be sustained upon the ground that the assets of the firm of James H. Walker & Co. were taken in payment of the stock in the corporation at a large overvaluation, fraudulently, and with the intent to cheat and defraud those who might become creditors of the corporation. I am also of the opinion that a gross and obvious overvaluation of property conveyed to the corporation in consideration of an issue of stock is presumptive evidence of fraud, requiring the stockholders charged to show that the transaction was in good faith. I have carefully scrutinized the evidence and the arguments of counsel, and am constrained to the conclusion that the finding of the master must be sustained. It is not necessary, if time served for that purpose, to enter into a critical examination of the evidence. The summing up of the whole matter is well stated by the master, and there is really nothing to be added to his lucid exposition of the facts. In a general way, I may say' that the overvaluation of the assets of the firm taken for the stock is gross, in my judgment, and called for an explanation by the defendants. But I think that explanation is forthcoming. Cummings and Howard were special partners in the firm, interested to the extent of $900,000, against the capital supposed to have been contributed by Walker to the amount of $200,000. Mr. Walker was a merchant with a high reputation for ability. The firm conducted a large wholesale business, and also á retail business, in the city of Chicago. In considering the question of good faith, we are to look at the value of-assets, not as determined at the end of the great panic of 1893, but as it appeared in the fall of 1892. There is no evidence that either of them anticipated a panic which certainly took the world by surprise. The theory of the complainants is that this corporation was organized in December, 1892, with a view to shield the partners from personal liability for the debt, anticipating the panic, and with knowledge of the coming insolvency of the copartnership. With respect to this it is to be said that neither Cummings nor Howard could possibly profit by such a transaction, as neither of them was personally liable for the debts of the copartnership. Mr. Howard was in ill health, and had shortly before returned from Europe. It would seem that' prior to his visit to Europe the formation of the corporation had been sug*740gested by Cummings. Mr. Howard does not seem to have been friendly to the idea until his voyage home, when he met on shipboard and consulted with a large creditor of the firm, who warmly approved the suggestion, and would seem to have converted Mr. Howard to the idea. Mr. Cummings’ thought, manifestly, was to infuse young and more active blood into the concern, and also to have more direct control over the business, and that it should not be left wholly within the management of Mr. Walker. Singularly enough, if this were a scheme to defraud, Mr. Walker, the only man personally liable for the debts, was opposed to the corporate scheme, and did not yield to the insistence of his special partners until he had consulted the principal creditors of the firm in New York. I think there is no foundation for the claim that the corporation was formed for the purpose of defrauding the creditors. The corporation had a "professed capital stock of $1,500,000, the three partners taking nearly the entire stock. There was no payment of cash by them for the stock taken, but the corporation took the assets of the firm in payment, assuming the liabilities of the firm. It is shown that the estimate of the property was founded upon the statement made by the bookkeeper July 1, 1892, and included an estimate of profit for that year of $100,000 in the wholesale business, which was not realized. An item of $186,000 represented a credit in favor of the wholesale business against the retail department. This latter item represented the value of goods furnished and charged against the retail department, less the amount of sales, but did not represent expenses or losses in the retail business. There was also an item of $101,227.96, which was in fact suspended accounts, probably not of greater value than $25,000. Cummings and Howard knew of the standing of the business only from statements furnished them by the bookkeeper, who seems to have had the exclusive charge of the books, and carried them on upon his own system, which proves to have been erroneous, with reference to arriving at the actual condition of the firm. Indeed, Mr. Walker, while he knew more of the actual management of the business than his special partners, was obliged to place reliance upon the statements furnished by the bookkeeper. We can now see that the bookkeeper should not have included suspended accounts at their face in any statement to show the actual standing of the firm, and should have included losses and expenses, but the question is whether these men were guilty of fraud in accepting in good faith these statements and relying upon them. I do not think they were. A large business was being conducted, and it was but natural that they should, as they must, rely upon statements furnished by their confidential men. As I read the evidence, they had no reason to suppose that the statements contained other than the actual facts with respect to that business, and they had no purpose in creating the corporation, other than to put new life into the business, and to establish a better control over it. The disasterwhich came about with the panic of 1893 would have resulted if the corporation had not been formed, in which event there would have been no personal liability upon Cummings and Howard, who were the financial support of the concern. Certainly, so far as they are concerned, I can see no object to be at*741tained in perpetrating the supposed fraud upon creditors of the firm. Mr. Walker might have profited by such a scheme, in escaping personal liability, but he was opposed to it, and yielded only to his special partners. And while he doubtless entertained very sanguine views of the business, I do not doubt that he acted in good faith, placing reliance upon the statements of his bookkeeper, the inaccuracies of which resulted from the peculiar method of bookkeeping. These inaccuracies are gross, it is true, but I think the defendants have fully explained how they came about, and have shown their good faith in the matter. They certainly did not anticipate the shipwreck that followed, and, as I think, acted without any purpose of defrauding creditors.

The exceptions to the master’s report are overruled, the repon confirmed, and the bill dismissed for want of equity.

1. Acts of corporators .and promoters, see note to Yeiser v. Paper Co., 46 C. C. A. 576.

See Corporations, vol. 12, Cent. Dig. §§ 883, 884.