Teitig v. Boesman Bros.

12 Mont. 404 | Mont. | 1892

Harwood, J.

The first assignment of error by appellant’s counsel is based upon the allowance of said amendment of the complaint, as set forth in the above statement. Appellants insist that having pleaded said instrument, alleging that said company had “duly made, executed, and delivered” the same to defendant, and annexed a copy thereof to the answer, “the genuineness and due execution of such instrument” was admitted by reason of plaintiffs’ failure to deny the same by affidavit, as provided in section 98 of the Code of Civil Procedure, which reads as follows: “ When the defense to an action is founded on a written instrument, and a copy thereof is contained in the answer, or is annexed thereto, the genuineness and due execution of such instrument are deemed admitted, unless the plaintiff file with the clerk ,within ten days after the filing of the answer, an affidavit denying the same, and serve a copy thereof on the defendant.” Upon this point appellants cite Sloan v. Diggins, 49 Cal. 40. To this citation may be added Parkison v. Boddiker, 10 Colo. 510; Crowley v. City R. R. Co. 60 Cal. 628; and Fox v. Stockton etc. Agricultural Works, 73 Cal. 273, as treating of the application of said provisions of statute. Respondents resist this position by arguing that the provision of the statute cited was taken from California, where the system of pleading included no replication, and, there being a verified replication provided for in the Montana Code, said statute does not, in reason, apply with the same force as was given to it in California.

Although in our system of pleading, as prescribed in the Code, a replication is provided for, and it is also provided that pleadings shall be verified, still the legislature has retained in the Code, sections 97-99, which are distinct, in their provisions, even from the subject treated in the other portion of chapter 6 of the Code. And the same follow immediately after the provisions defining what pleadings shall be used in a civil action, and their contents and purpose, and that the same shall be verified. From the earliest enactment of the Code in Montana, it has contained provisions similar to those sections, yet in terms varying somewhat from time to time, as the Code has been revised and readopted. The Code adopted by the legislature convened at Baunack in 1864 (§§ 52, 53) provided substantially the same- as sections 97 and 98 of the present Code. In the revision of the Code adopted at the seventh session, convened in 1871, it appears that only the substance of section 52 of the Bannack Code (being substantially the same as section 97 of the present Code) was retained. (See 7 Sess. Laws, § 62, Code Civ. Proc.) At the tenth legislative session, another revision of the Code was adopted, and sections 52 and 53 of the earliest Code were again reinstated, side by side, in a slightly modified form, and another section on the same subject was added. (See 10 Sess. Laws, §§ 95-97, Code Civ. Proc.) In the latter revision these provisions appear in exactly the same terms as in sections 97, 98, and 99 of the present Code of Civil Procedure, and have retained that form from the tenth session to the present time. The modification of those provisions, the omission and reinstatement of certain portions thereof, and the addition of a further provision on the same subject in the various revisions of the Code, show the deliberation with which the legislature has enacted them; and during all the time the system of pleading prescribed in this Code, of which these sections are a part, provides for a verified replication as to new matter set forth in the answer. Section 99, which appears to have been added in the revision of 1887 (10 Sess. Laws, § 97, Code Civ. Proc.), sheds additional light upon the intent of the legislature, if any such light was needed. It seems clear, when said sections are considered together, that the legislative intent was to provide that a party may rely upon not being put to the trouble of proving the genuine character and due execution of an instrument upon which an action or defense is founded, where a copy thereof is set out in, or annexed to the pleadings, unless the genuineness or due execution of such instrument is directly denied in the manner required: provided, the party pleading the same allows an inspection of the original on demand. This seems to be a just and salutary provision. Otherwise, mere formal, or possibly captious, denials might in many cases be asserted by a party who had neither made investigation, nor had any positive apprehension that the instrument asserted by copy was fictitious or a forgery, or not duly executed. Such denial might, without just reason, involve great trouble, delay, and expense in proving the matter denied, by reason of the lapse of time, death, or change” of residence of the parties or witnesses. In the case of negotiable instruments, which have extended circulation, it is perceived at once that the rule prescribed in said sections would be a just and salutary one. It should be observed, however, that the requirements of said sections appear to be applicable (1) only to instruments on which the action or defense is founded; (2) only when a copy is set out in the pleadings, or annexed thereto; (3) only where inspection of the original is allowed on demand. It is apparent that there are a great many cases in which written instruments, or other writings offered in evidence in the course of a trial, would not be controlled at all by said provisions. We are not inclined to hold that the proper force and effect of the provisions of sections 97, 98, and 99 of our Code are inapplicable because a replication is provided for in our system of pleading. No doubt the replication can be used to effect the denial of the “genuineness and due execution” of an instrument set forth in the answer, by following the requirement of section 98 of the Code, because the substance of things, and not mere form, is the essential feature. It seems from said provisions that it was intended such denial should, in unequivocal terms, deny the genuineness or due execution of the instrument pleaded by a copy, after full opportunity to examine the original. This certainly could be done by verified replication, where an instrument on which the defense is founded, is set out by copy in, or annexed to, the answer. The only further requirement of section 98 is the service of such denial. But in the case at bar it does not appear that plaintiffs even contend that the denials in the replication answered the requirement of said statute, if this was a case where the provisions of said statute applied.

We think it is apparent, however, that the provisions of said statute have no application to the instrument pleaded in defendants’ answer in this case, and annexed thereto by copy. The object of the action was to contest the right of Kleinschmidt to the property received by him from said company. In the proceedings which preceded this action, Kleinschmidt had held up said assignment as the title by which he claimed the right to receive, hold, and dispose of said property, according to the directions of said instrument. That instrument stood in the way of these creditors in their attempt to reach and apply said property to the satisfaction of their demands. The purpose of the complaint was to show grounds, if any could be shown, why said assignment should be declared null and void, and have the same set aside, or treated as of no force or effect; and the property of said company, as it stood at the time of making the alleged assignment, still be considered and treated as property belonging to said company, in the possession of Kleinschmidt, subject to plaintiffs’ demands through the liens acquired by garnishment in the former proceedings. The allegations of the complaint were directed to that end, and attempted to accomplish that result by showing facts entirely outside of said instrument. In the averments of paragraph 24 of the original complaint, the plaintiffs “laid the axe upon the root of the tree,” but did not cut deep enough to destroy it. Hence, when it was attempted to show by the introduction of evidence that said instrument never had in fact been executed by authority of, and as the act of said company, the court held, as we think correctly, that the allegations of the complaint were insufficient to permit the introduction of such testimony. Plaintiffs did not rély upon their replication to effect the purpose desired. They went to their complaint, and, apparently admitting that the original allegations thereof were insufficient, applied to the court, upon affidavit setting forth the facts which they desired and intended to introduce proof to establish, and sought leave to amend their complaint, by alleging facts upon which that proof could be introduced. The amendment was allowed, no doubt, in view of section 116 of the Code of Civil Procedure. It is true, as defendants assert, that said amendment introduced new issues upon which plaintiffs sought to avoid said instrument. That fact would undoubtedly have been ground for a continuance if defendants had asked it, but no continuance was sought, We think, under the provisions of the Code, the court was authorized to allow the amendment, and that the object of the action being to annul or avoid said instrument, for reasons not shown on its 'face, the complaint was the proper pleading in which to set forth the facts relied on to annul or avoid the same. We do not think the case is one to which section 98 of the Code of Civil Procedure applied, because the instrument set up in the answer was not strictly a defense to the action, nor was the defense strictly founded upon said instrument, in the sense that the instrument in itself was a defense to the action. Where it is affirmed in an action that a certain instrument relied upon by a party was made with intent to defraud, or that it was not a genuine instrument, and the facts are alleged which, if proved, would tend to establish such affirmation, can the party seeking the benefit of such instrument defend such action by holding up the instrument, and assert that it is the defense ? It would seem in such a case, where the attack was made by showing facts outside of the instrument, that the instrument would not be the defense; that the defense would be accomplished by rebutting the attempt to impugn the good faith of the transaction evidenced by the instrument, or by rebutting the attempt to show that it was not genuine, and such showing could not proceed from the instrument itself. The instrument might be said to be the subject of the action, but the action is not founded upon the instrument. The action is founded upon facts dehors the instrument, and the instrument itself, we apprehend, could not operate as its own defense, or the foundation of the defense to such an action; but the defense would depend upon facts dehors the instrument.

The court held said assignment void, upon the ground, among others, that it was not accompanied by the affidavit mentioned in sections 1538 and 1555, fifth division of the Compiled Statutes. Section 1555 constituted in itself a separate act of the legislative assembly, entitled “An Act Concerning Mortgages of both Beal and Personal Property of any Incorporated Company.” This act was, without doubt, intended to enable corporations owning property of a mixed character, both real and personal — such as a street railway, with the rolling stock and other appliances, and equipment for supplying motive power, whether by the use of animals or machinery, some of which would be classed as personalty, while other portions of the plant could be classed as real property; or such property as is owned by gas or water companies, or mining companies, where the plant, being one property, includes both realty and personalty — to mortgage the same in one instrument, which would be governed by the law relating to mortgages of real estate. And as to the personal property included therein, such instrument would not be subject to the limited duration of a strictly chattel mortgage. In cases of that kind, where a large proportion of the value of the entire plant is in personal property, and so connected with the entire plant as not to be severable therefrom, without injury or destruction of the property, it was expedient to provide a way by which a corporation owning a property of such mixed nature could hypothecate the same, to secure bonded or other indebtedness, by one instrument not subject to the limitations of a strictly chattel mortgage. Such was the purpose of said act. It relates to mortgages, or deeds of trust partaking essentially of the nature of a mortgage, for security, where no actual change of possession of the property accompanies the transaction. We are confident that the act was not intended to apply to assignments or transfers of personal property, or of both real and personal property, by a corporation, where actual delivery of possession accompanies the conveyance, even though such conveyance and delivery of possession was in trust to convert the property into money and pay debts, and would not, therefore, apply to the instrument in question in this case.

The court further held that by means of Kleinschmidt’s “connection with said company, and his action in organizing said corporation, and controlling its affairs, he gave to such corporation a credit wholly fictitious, and in violation of the laws of Montana relating to corporations, and the management of the same; and by reason of his acts aforesaid Kleinschmidt stood in the same relation to said corporation as its trustee and managing officer,” and by reason of such connection with, and control of the affairs of said company by Kleinschmidt, and by reason of the agreement between himself and said company, for security of the claims held by him, in case said company became financially embarrassed, the said assignment procured by Kleinsehmidt was fraudulent and void as to the creditors of said company; and that the taking of possession of said property by Kleinschmidt was without right or authority; nor did he thereby acquire any interest in said property against creditors of said company.

These conclusions of law, and all findings of fact upon which the same are based, were excepted to by defendant Kleinschmidt, and are assigned in this appeal as erroneous, on the ground that the evidence in the case does not justify said conclusions, or the findings of fact upon which the same are presumably based. This assignment of error, and other assignments allied to it, require a careful review of the whole ease, as set forth in the record, including the evidence:

It should be remembered in this inquiry that the complaint attacked this assignment on two grounds: First. Because it was not made by authority of the corporation. Second. Because it was made with the intent and purpose of hindering, delaying, and defrauding the creditors of the assignor. Under the first head it was sought to show that the assignment was not authorized by vote or resolution of the stockholders or trustees of said company at a meeting duly and regularly called; that Richard Boesman, who signed said instrument as secretary, was not the secretary of said company, he never having been regularly elected as such, and that the seal affixed to said instrument, purporting to be the corporate seal of said company, was not its seal, because it had never been regularly adopted by said company as its corporate seal. Neither the findings of fact nor conclusions of law expressly refer to any irregularity respecting the corporate seal as grounds for declaring said instrument a nullity; but evidence was introduced as to the regularity of the adoption of the corporate seal, and that question is argued in briefs of counsel. We therefore group that alleged cause of nullity with the others presented by the plaintiffs.

The evidence introduced shows, as set forth in findings 1 to 3, inclusive, that said company was organized and commenced operations in October, 1888; that the three Boesman brothers —Charles, Henry, and Richard — were the organizers, members, stockholders, trustees, and officers of the so-called corporation ; that, after the organization of such company, and the naming of the said Boesman brothers in the certificate of incorporation as the trustees thereof for the first three months of its existence, and the holding of one meeting of the trustees at which said persons were elected to the office of president, secretary, and treasurer, respectively, of said company, no other meeting of the stockholders or trustees was ever held. The corporation was organized on a stated capital of $10,000. In finding No. 5 it is affirmed by the court that at the time of the issuance of stock in said company to said Boesman brothers, respectively, each and all of them were insolvent, and that Kleinschmidt and the Union Warehouse Company, of which he was president, supplied the goods on which said Boseman Bros. & Co. commenced business. The evidence shows further that Kleinschmidt loaned said company money with which to commence and carry on its business, besides the goods supplied on credit; and for such goods and money took promissory notes from said company, or the individual members thereof. But we are unable to discover in the record evidence to support the finding that said Boesman brothers were insolvent. Undoubtedly all that was meant by the court in that finding is that it appears from the evidence that neither of said brothers was the owner of any property upon which to commence business, or with which to buy an interest therein. That condition, however, does not in law place a man in the category of insolvents. (Anderson’s Law Diet. 552, 553; 1 Bouvier’s Law Diet. 809; Webster’s Unabr. Diet.; 11 Am. & Eng. Law, 168.) There is no showing in the evidence that any of the Boesman brothers were indebted and unable to pay their debts at the time said company was organized to commence business. For aught that appears in the evidence, each of them may have been entirely clear of indebtedness, and with good business prospects. This finding is noticed, because in a case where fraud is alleged, and it is contended that the party, against whom fraud is charged, organized a company to accomplish fraudulent purposes, all such conditions have a bearing to some extent. If Kleinschmidt, by giving credit as stated in the findings, aided insolvent persons, instead of persons clear of debt, and with fair business prospects, to embark in business, that fact might tend to attach suspicion to the promoter of the enterprise, considered in connection with other charges.

The eighth finding affirms that "said corporation was organized at the suggestion and instigation of said Kleinschmidt; that at the time said corporation was transacting business he had fall knowledge and control of its affairs, and exercised such control, and that said corporation was enabled to secure and did secure, solely on account of the solvency and indorsement of said Kleinschmidt, credits upon which it could do, and did do, business.” This finding of fact, together with the conclusion that Kleinschmidt stood in the same relation to said corporation as the trustee and managing officer, is the main support of the decision against Kleinschmidt holding him liable to pay plaintiffs’ judgments against said company; and he complains that the evidence does not justify this finding.

As to the circumstances under which said company was formed, there is no material dispute between witnesses. Henry Boesman, a witness called on behalf of the plaintiffs, was asked concerning said organization and commencement of business by said company, and in his testimony said: “I cannot tell who first suggested the organization of the corporation of Boesman Bros. & Co. I was not there at the time. There was some talk about starting a business before I came back to Helena. Kleinschmidt was our financial backer. We got money from him to start the business. When we started business we got about $4,000, for which we gave Kleinschmidt a note. We did not receive any money from Kleinschmidt. We got about $6,000 worth of goods at the start, and we paid him $4,000. Boesman Bros. & Co. did not have any property when they started business. The amount of the company’s indebtedness when we started business was what we owed Kleinschmidt at the time we commenced. We owed Kleinschmidt for goods that we got of him. I believe it was $5,500. I don’t remember exactly how much. Kleinschmidt was familiar with our business in a general way, but he did not know anything about the details.” Again, the witness says upon the same point: “I am one of the three brothers, Charles, Henry, and Richard Boesman. At the time we determined upon organizing this corporation I was working at Townsend. My two brothers, Charles and Richard, were in Helena at the time. Charles Boesman was traveling for the Union Warehouse Company, and Richard Boesman was clerking in Fred Lehman’s store. Just before the company was organized, Charles Boesman and Paffendorf were in partnership. Their business was never started. It was talked of. Charles, Henry, and Richard Boesman were the original trustees of Boesman Bros. & Co.....When we went into business we had the stock of goods we bought from Kleinschmidt; it consisted of wines and liquors. The value of that stock was about $5,500. The corporation of Boesman Bros. & Co. bought that of Kleinschmidt.” Charles Boesman, a witness called on behalf of plaintiffs, was asked to state the circumstances under which said corporation was formed, and said: “I am not certain whether this company was organized at my suggestion, or at the suggestion of Kleinschmidt. I think Kleinschmidt talked first about it. I recollect it was in August he talked to me in the street car about it; just suggested it, and said, if we wanted to start in business, to take part of his stock, just as we needed it. He was present at the time the company was organized. He did nothing with regard to the organization; just made suggestions once in a while. We got capital stock this way: We gave him our individual notes, and it was first intended that he should deposit a check for $4,000 in the bank; and after that he gave up the idea, and indorsed our notes, as we needed it, to the amount of $4,000.” This witness further said: “ Kleinschmidt did not have anything to do with the management of our business. For the last two months he did. He came and looked over pur books, and so on. He did not give any directions prior to that time; just made suggestions was all. During the two months he knew what the amount of our indebtedness was. He knew what creditors we were owing for goods, in the East. He knew our financial condition.” Kleinschmidt testified as to the organization of said company, and the part he took in respect thereto, to the folio wing effect: “ I kno w Charles Boesman quite well. He was in my employ about seven or eight months, perhaps longer. Henry Boesman I knew casually. I am not sure I ever knew Richard Boesman before he became a member of said company. I think the corporation of Boesman Bros. & Co. was organized some time in October, 1888. A proposition came to me from Charles Boesman, after I had sold out the business of the Union Warehouse Company. I had assisted one of the young men, who is now a member and a stockholder of the Union Mercantile Company, to become a stockholder. I loaned him $10,000, so that he could join that corporation, and buy $10,000 of its stock. Charles Boesman interviewed me, and says: ‘You have helped Cottingham, and I have been with you, and, if you could assist me, I think I could arrange with Paffendorf to go into the liquor business here;’ and we talked about it, and he afterwards brought Paffendorf to me. I arranged then to sell him and Paffendorf my -broken stock of liquors. They bought, measured, inventoried, and accepted them, and I believe they ordered goods from some other place to go into business. I. agreed to build a house over on Clore Street that they would rent for $75 a month. I commenced the building of the house, excavation, and made contracts for the construction of the house. The goods remained in the Union warehouse that they bought of me. A car of beer consigned to Boesman Bros. & Co. arrived here. Brisben called on Paffendorf, and furnished his quota of the capital. He made arrangements with him to loan him his part of the capital, which was $2,500]; each one was to furnish that. Paffendorf did not come forward, and Boesman came to me, and said he had backed out of the arrangement, and says: ‘What can I do? If you help me out of this, and fix it so that my brothers could come in, I think we can make money; and, if you can advance some money so we can start, we will go ahead with the business;’ and we talked it over, and I agreed to do it. They incorporated, and made arrangements with me to borrow $4,000.” It will be remembered that Kleinschmidt is corroborated in his version of the conditions and circumstances pertaining to the organization of said company and the commencement of its business by the testimony of the plaintiffs’ witness, Henry Boesman. Charles Boesman was called in rebuttal, and said: “ I remember when this company was organized; it was on the 1st of October, 1888. It seems to me that Kleinschmidt suggested to have it the ‘Montana or Helena Liquor Company,’ or something like that; and we thought we might just as well run it in our individual names; and I think he suggested the name of Boesman Bros. & Co.; and it was immaterial to us, so we just adopted the name.”

In this connection the evidence is to be further examined, to ascertain whether or not the finding that Kleinschmidt had and exercised control of the affairs of said company during the time it transacted business is sustained by proof.

Henry Boesman says in his testimony that “Kleinschmidt was familiar with our business in a general way, but he did not know anything about the details;” that when the company was organized and commenced business Kleinschmidt insisted that each of the Boesman brothers should limit himself to $75 per month in cash out of the proceeds of said concern, for personal use; and further stated: “As I said before, Kleinschmidt knew all about the business in a general way. He examined the books once in a while, perhaps once in two months. I think in a general way he knew what persons we owed for goods, and who were foreign creditors. Sometimes we consulted with Kleinschmidt with regard to buying goods.” That at the time the company was formed, “we had a meeting of the incorporators, and elected Charles Boesman president, and myself secretary, and Richard treasurer of the company. At that time it was determined that Charles Boesman was to have' the general management and control of the business. "We others were present, and gave our services all the time.” That afterwards this witness, Henry Boesman, left said institution, and commenced what appears to have been a branch business at Butte, Montana, and in this connection he says: “I went to Butte. It was understood I should have exclusive control and charge of the Butte business, as far as the Helena business was concerned, and that Gharles and Richard should have control of the Helena business.” That said “arrangement remained in force until May, 1890. We dissolved partnership; that is, the Helena business dissolved partnership with the Butte business. After that time I entirely retired from the Helena business, and had nothing whatever to do with it.” Charles Boesman said, concerning the management and control of the business of Boesman Bros. & Co. during the existence of said company: “I managed the business. I ran the business from the 1st of October, 1888, to the 11th of June, 1890,” when the assignment was made. He further testified: “ At the time of making the assignment Kleinschmidt wanted to restrict us to certain rules, and to do either that or make an assignment. The rules were: He wanted us to sell for cash only, because he wanted us to do a smaller and safer business. Kleinschmidt did not have anything to do with the management of our business. For the last two months he did. He came and looked over our books, and so on. He did not give any directions prior to that time; just made suggestions was all. He examined our books. During the two months he knew what the amount of our indebtedness was. He knew what creditors we were owing goods for in the East. He knew our financial condition.” He further testified that Kleinschmidt insisted on the members of said company limiting themselves to $50 per month for personal use, out of the proceeds of said concern, but he added in that connection, “ We overdrew most of the time.” He further testified, saying: “ Charles and Bichard were the trustees of the corporation of Boesman Bros. & Co. on the 12th of June. Henry had retired from the corporation and gone to Butte to live. He had nothing whatever to do with the management of the affairs. Bichard Boesman and myself were the sole managing trustees of the corporation at the time. Charles and Bichard Boesman were the stockholders of Boesman Bros. & Co. at the time. On the 12th of June, 1890, Henry Boesman had retired. He sold his interest. I know of his selling of his stock to a man by the name of Sillis. He had assigned his stock to Sillis at the time the assignment was made, and had nothing whatever to do with the corporation in any way. Sillis at the time lived in St. Paul, and was not at the time acting as trustee or anything of the kind. He had not been elected as a trustee. I do not know where his stock is. The certificates of the stock when I last saw them were in our safe. I do not know what became of them. I think they were turned over by my brother before he left. The stock which Sillis took was turned over to my brother before he left. I think Sillis had half of the stock assigned to him in that agreement. I agreed to obtain for Sillis thirty-three shares of the stock. This was in addition to the stock which Henry Boesman turned over to him. Henry Boesman’s share is a part of the thirty-three shares. I never obtained the balance for him. At the time of the assignment, Henry Boesman had no interest whatever in the corporation, either as a stockholder or otherwise.” Further explaining said transaction with Sillis, the same witness said: “ I never transferred the stock to him [Sillis] as president. He went to St. Paul after we made that agreement, and when he came back he said he could not raise the money.” The same witness further testified: “ For two months before this assignment was made there was an effort to restrict the purchase of goods. Kleinschmidt was anxious for us not to purchase any more goods. Kleinschmidt suggested to restrict us in everything. He wanted us to sell for cash only; wanted us to reduce our purchases down to small amounts. He suggested that we buy everything for cash and sell for cash.” This witness, Charles Boesman, whose testimony we have just been quoting from, was, by all witnesses for both plaintiffs and defendants, said to have had general charge and management of said business, and the leading member and owner in the company, and such is his testimony as to Klein schmidt’s part and lot in relation thereto. The deposition of Richard Boesman was introduced by plaintiffs. He testified that while the Boesman brothers were engaged in the operation of said business, Kleinschmidt was their “confidential adviser in all business transactions of importance. The reason he advised us in regard to the business, we borrowed his money, and he gave us goods to run the business.” Again he says: “My oldest brother managed the affairs of the corporation.”

Defendant Kleinschmidt in testifying said: “So far as I know, Charles Boesman was president of the corporation of Boesman Bros. & Go. He had the entire management of the concern, after Henry Boesman went to Butte. Henry Boesman Went to Butte some time in the early part of January or the latter part of December, 1889, or 1890.” He further testified that “at the time I returned from California, in March, 1890, I urged upon the Boesmans to discontinue the purchase of goods, and turn the business into a cash business, so as to be able to liquidate, and not to require any further assistance. Charles Boesman thought it was a good suggestion, but I do not think they ever followed it out. For two months prior to the assignment, the ledger of Boesman Bros. & Co. showed that they purchased about $1,100 worth of goods. Before that their purchases were from $4,000 to $6,000 per month. I had no interest in the corporation of Boesman Bros. & Co. .except to get what they owed me. This assignment, which was made on the 12th of June, 1890, was not made or procured on my part with the intent to hinder, delay, or defraud the creditors of the corporation of Boesman Bros. & Co. I had no intent to defraud any one. I have never been a partner of Boesmau Bros. & Co., either as a corporation or otherwise. I have never been a partner of them. I do not know why this corporation took the name of Boesman Bros. & Co. There were three brothers, though, and naturally I supposed it would take that shape, on the ground that there were more than two of them, though I do not know positive as to that.”

We are unable, upon a careful study and consideration of all the testimony, to find proof to support the finding of the court that Kleinschmidt had and exercised control and management of the affairs of said company during its business career, in any sense which justified the conclusion that he “stood in the same relation to said corporation as its trustee and managing officer.” The finding that he had knowledge of the affairs of the company is supported by proof that he had general knowledge of the affairs and condition thereof. He was a creditor of the company from the commencement of its career, and as such he had a right to inform himself of its affairs and condition. Such action was not fraudulent, nor could that operate to defraud any one, uuless, having such knowledge, he was guilty of conduct calculated to deceive, and which did deceive, others to their inj ury. The evidence also shows that Kleinsch midt gave advice to the Boesman brothers from time to time in respect to the management of said business; and in every instance where a witness relates what such advice was, it is shown to have been of a nature calculated to protect, rather than injure or prejudice, others interested in the success of said company. Such prudent advice was in no way fraudulent.- Kleinschmidt sought by way of advice to influence its managers to curtail the proportion of its credit business, and pay its indebtedness, and transact business on a cash basis. But it seems such policy was not adopted; and finally, when the affairs of said company were undoubtedly in a bad financial condition, Kleinschmidt insisted on that rule being adopted, or that an assignment be made. If Kleinschmidt had and exercised control of the affairs of said company, and of the Boesman brothers in charge of its operations, why did he not put in force the wholesome suggestions which all witnesses .say he made? It is clearly shown that he did not profit at all by the manner in which said company conducted its business, and that such conduct not only resulted in loss to the plaintiffs in this case, but in greater loss to Kleinschmidt. There is no dispute as to this result. • The testimony shows without dispute that Kleinsehmidt’s claims against said company were not in any manner fictitious, but for the value of the goods and for money intrusted to said company on credit; and it appears from the reading of the testimony of the Boesman brothers that they were not unwilling witnesses for plaintiffs, and made no effort to favor Kleinschmidt. They were the witnesses called by plaintiffs. This is not a case of conflict of testimony. There is very slight, if any, conflict in the testimony on the material questions in this case. This action was the final and supplemental proceeding in an investigation which had been going on for some time, in proceedings supplemental to garnishment and execution; in which proceedings ample means were afforded for the discovery of all facts and conditions pertaining to the matters in controversy. If said company, its members and managers, were all under the control of Kleinschmidt, and he was intending to so operate it as to defraud its creditors, why is it that all his influence and suggestions, as brought to light by the testimony, without one exception, would tend, if followed, to put said company’s affairs in such condition that no one would have suffered loss, unless it be himself, who was its heaviest creditor? The very policy which Kleinschmidt advised and sought to have pursued by said company was practically in favor of other creditors in its tendency.

It was found that said company “was enabled to secure, and did secure, solely on account of the solvency and indorsement of said Kleinschmidt, credit upon which it could do, and did do, business;” and no doubt upon that finding was based the conclusion of law declared by the court, that Kleinschmidt “gave said corporation a credit wholly fictitious.” This finding is hard to understand, in view of the nature of the action and the proof. If Kleinschmidt really stood in the attitude of an indorser or surety of plaintiffs’ claims in the usual legal sense, that fact, ascertained, would fix the liability of Kleinschmidt to plaintiffs; and such liability would be direct, and not by way of garnishment, or by way of setting aside an alleged fraudulent conveyance of property by the principal debtor. If it was shown by proof that Kleinschmidt, by false representation or deceit, had misled plaintiffs into believing that he was responsible directly or collaterally for the indebtedness of said company, and thereby plaintiffs had been induced to give such credit, although in fact he stood in no such relation, said finding would then be applicable to the facts shown. But no such facts as are premised in the above propositions are shown in this case, and no one so contends. The language of that finding must not be given the usual legal significance of the terms used, but must rather be regarded as an expression of the conclusion of the court below that said company, or the members thereof engaged in its organization and operations, could not have embarked upon the transaction of said business except by the financial aid of Kleinschmidt— that except by such aid the members of said company would have been unable to organize and carry on said business; hence if such aid had not-been given, the business of Boesman Bros. & Co. never would have been commenced. No such business having been commenced, there never would have been any transactions between said company and the plaintiffs in this action, by which credit was given. Hence the aid of Kleinschmidt, thus remotely operating, was the cause of plaintiffs giving credit to Boesman Bros. & Co. Such is the only interpretation which can reasonably be given to said finding, in the light of the case made out. In that sense the finding under consideration may, or may not, be true. At all events, it is not sufficient ground upon which to involve Kleiuschmidt as surety or indorser for plaintiffs, nor as liable for plaintiffs’ claims against said company, by reason of having wrongfully induced plaintiffs to give said company credit. If Kleinschmidt had not aided the Boesman brothers in the commencement of their business undertaking, it is possible that some other party may have been found imprudent enough to have given such aid; and it is possible that such credit might have been given by plaintiffs if the same business had been commenced by the aid of some other party. If, however, Kleinschmidt was the only person imprudent enough to aid said Boesmans to embark in business, that fact, if proved, would not be sufficient to bind Kleinschmidt as surety for all credits which said company could obtain, or to bind him for having fraudulently enabled said company to obtain credit. In reviewing the testimony in view of the finding that said company secured credit “ solely on the solvency and indorsement of Kleinschmidt,” it would naturally be expected that some evidence would appear in the record tending to show that Kleinschmidt had in some way influenced plaintiffs to extend credit to said company, or that he had in some manner misled plaintiffs to believe that said company was a safe institution to credit by reason of his connection with it, directly or indirectly. But there is no evidence whatever tending in any degree to show any such fact. It does not appear whether or not the plaintiffs in this action, or an;y of them, who now seek to charge Kleinschmidt with having in some way defrauded them, ever sought from Kleinschmidt, or otherwise, information concerning the financial condition of said company; or information as to who could be looked to for payment in case it failed; or whether or not Kleinschmidt could be relied upon to aid said company in meeting its liabilities; or what amount Kleinschmidt held against said company, and would seek to secure in ease it became financially embarrassed; nor is there any evidence tending to show that plaintiffs sought such information ; or that it was withheld; or that any information, either misleading, false, or otherwise, was given by Kleinschmidt, or on his behalf. For aught that is shown, plaintiffs had knowledge of the exact condition of said company, its liability to Kleinschmidt, and all other facts which any party might wish in contemplation of giving credit; except that it is found that the agreement hereafter to be reviewed, evidenced by the paper introduced as “Exhibit C,” “was kept secret between said Kleinschmidt and said Boesmans.” But it nowhere appears in the evidence that plaintiffs ever sought information in respect to that agreement, or in respect to any other claims of Kleinschmidt.upon said company, or arrangement between him and said company. Thatv plaintiffs were in any manner misled or deceived into giving credit to said company, relying on the solvency of defendant Kleinschmidt, or on his indorsement of their claims against said company, there is no evidence whatever in the record to establish. Nor is there any evidence whatever in the record tending to establish the fact that the effort of Kleinschmidt to keep himself fully informed of the condition of said company, to the end that he might secure payment of his claims, if possible, in any manner operated to deceive, influence, or mislead the plaintiffs in their dealings with said company.

It is set forth in findings 6 and 7 that “about the time said corporation was organized, defendant Kleinschmidt, as president of the Union Warehouse Company, and individually, entered into an agreement (Exhibit C) with the persons named as trustees in the certificate of incorporation, whereby it was agreed that any paper of said Union Warehouse Company, or of defendant Kleinschmidt, held against Boesman Bros. & Co., should become immediately due and payable if said Boesman Bros. & Co. should become involved, or be sued on any indebtedness, unless said Boesman Bros. & Co. would immediately secure Kleinschmidt;” and “that said agreement was kept secret between said Kleinschmidt and said Boesmans.” Exhibit C, referred to, reads as follows: —

“Helena, Mont. Ty., Sept. 18, 1888.

“ In consideration of Boesman Bros. & Co. having purchased from the Union Warehouse Company $5,000 worth of goods, I, Keinhold H. Kleinschmidt, as president of the Union Warehouse Company, and I, Keinhold H. Kleinschmidt, as an individual, agree to take their note for said amount on one year, drawing interest at the rate of ten per cent per annum, and payable semi-annually. After the expiration of the first year I agree to again renew the above transaction, so as to take their notes at six, twelve, eighteen, and twenty-four months in equal proportions, to draw interest at the rate of ten per cent per annum, payable semi-annually. In addition to this, I will loan to Mr. Charles Boesman, of the corporation, $2,000, on which he is to pay interest at the rate of ten per cent per annum, payable semi-annually, and secure the same by his stock in the corporation of Boesman Bros. & Co.

“It is also understood and agreed that any paper that the Union Warehouse Company or its president may hold against Boesman Bros. & Co. shall become immediately due, should they become involved, or be sued for any indebtedness that they may owe, unless they immediately secure me.

“ Should Boesman Bros. & Co. at any time require indorsement in order to carry on their legitimate business, I will guaranty to either loan them additional funds over this, to the extent of $5,000, or, if I have no funds to loan, I will guaranty their account to the bank for $5,000.

“Interest in no case to be over ten per cent per annum; aud, if I make the loan, they to arrange their rate with the bank.

(Signed,) “Reinhold H. Kleinschmidt.”

The court found as a legal conclusion that the making of said agreement, and afterwards the assignment, by said parties, operated as a fraud upon the creditors of said company. The agreement evidenced by Exhibit C appears to have been executed by Kleinschmidt only, and in it he promised to furnish said company a large sum of money, if required, by way of loan, in addition to merchandise; and along with this agreement is the provision, apparently as a promise on the part of said company or its members, that, in the event of said company becoming financially embarrassed, its obligations owing to Kleiuschmidt aud the Union Warehouse Company should become immediately due, unless said Boesman Bros. & Co. secured said claims. Although said agreement was signed by Kleinschmidt only, the testimony shows that there had been promises made by the members of Boesman Bros. & Co. to the same effect, and Kleinschmidt admits that when he returned from California, and advanced said company a loan of considerable amount to enable it to pay its overdraft at the bank, it is likely Boesman did say he would protect Kleinschmidt in the event of said company becoming financially embarrassed.

Did this agreement, taken in connection with the other facts in the case, and the subsequent assignment, operate as a fraud upon those who became creditors of said company? It is not shown whether said creditors knew or ever sought information as to said agreement. The finding states that said agreement “was kept secret between said Kleinschmidt and said Boesmans.” Undoubtedly the great majority of agreements as to private affairs are in general kept secret between the parties thereto, and that fact could be asserted as to nearly all private agreements, not of such a nature as to require recording. There is no finding that said agreement was kept secret when inquiry was made as to it, or as to any arrangements which Kleinschmidt might have with said company, by any party having a right to inquire concerning the same. Said agreement is dated September 18, 1888. This was just prior to the organization of, and commencement of business by said company. There is no evidence tending to show that it was antedated, or not made at the time of its date. The finding of the court is that said agreement was made about the time said corporation was organized, so that when made, considering all the other testimony, said company was commencing its career under no unfavorable circumstances, and it is not shown that it was then insolvent. Even taking it in the strongest light as a promise by said company, the condition of Exhibit C was in the alternative that the indebtedness should become immediately due unless immediately secured. The agreement was made when Kleinschmidt was in good faith loaning, and promising to further loan, considerable sums of money to said company, which the evidence shows he fulfilled, to enable it to pay its obligations.

Similar contracts have been under consideration in the courts. Mr. Waite, in his work on Fraudulent Conveyances (§ 394), says: “An agreement between a debtor and creditor that, in consideration of receiving a loan, the debtor will prefer such creditor in the event of insolvency, has been considered to be in the nature of a secret lien, which is a fraud upon subsequent creditors of the debtor who are ignorant of the arrangement, and all subsequent disposition of the property in accordance with such an arrangement can be avoided by such subsequent creditors. We doubt the soundness of this conclusion, however.” In the above, reference is made to Smith v. Craft, 11 Biss. 340; 12 Fed. Rep. 856, in which it appears to have been held as stated by the author; but the same ease appears after-wards to have been reconsidered, and a contrary view held. (17 Fed. Rep. 705.) In this treatment of the case it was said: “In no case or book cited has it been decided or said that merely because the borrower, at the time of procuring a loan or credit, had made an oral statement or promise that he would secure or prefer the one who gave such credit over others, he thereby disqualified himself from giving, and the creditor from receiving the promised favor; and I am not able to agree that such Is the law. If it be, then, instead of confining their prayer for relief to the goods in question, the plaintiffs might as well have asked that Fletcher and Churchman be held to account for all payments made to them upon their loans to Craft; for if the payment in goods was unlawful, payments in money were equally so, and, if necessary, should be brought under the same trust which it is sought to fasten upon the goods. Carried to its logical consequences, the doctrine contended for made it impossible that Fletcher and Churchman, as against the plaintiffs or other creditors of Craft in the same situation, could have lawfully accepted payment from Craft upon the loans which they made him, so long as he was unable to pay the plaintiff and like creditors in full; and this would be so, irrespective of the good faith of the parties, and notwithstanding the validity of the debt, its full consideration, and every other feature of merit, except only the fatal promise to prefer, the taint of which, once it had attached, it would seem, could in no manner be escaped. If it be the law that an express promise to secure or prefer a loan cannot be performed, it must be that an implied promise or tacit understanding would have the same effect; and whether or not there was such an understanding in each case, as it arises, must be a question to be determined usually upon circumstantial evidence. Upon such an inquiry, the personal and business connections, and even the social and domestic relations, of the parties might be deemed significant; and so the facts which afford the best motive for a proper preference might be converted into proof that the preference was given in consummation of an unlawful understanding or assurance given when the credit was obtained. Such a doctrine, if established, instead of constituting a healthful restriction upon the right of preference, would amount to' a practical denial of the right in the cases wherein, if in any, it may be meritoriously exercised. I do not doubt that a promise to secure or to prefer a creditor, made at the time the credit is given, may be fraudulent, but it must be when a fraud is intended, or when the circumstances within the knowledge of the creditor are such that he must know that injury to others will probably result.” The ease was then taken to the Supreme Court of the United States. (Smith v. Craft, 123 U. S. 436.) In dismissing the ease, the court, by Mr. Justice Gray, said: “As the debtor might lawfully prefer one of his creditors, if there was no actual fraud, it cannot, in the absence of any finding upon that point, be said, as matter of law, either that the previous agreement to prefer was fraudulent, or that it was not; but the question of fraud or no fraud involved a question of fact, which, if this case had been on the common-law side of the court, and either party.had desired it, must have been submitted to a jury. (Bank of Leavenworth v. Hunt, 11 Wall. 391; National Park Bank v. Whitmore, 104 N. Y. 297.)”

In the opinion of the court in the ease of Bank of Leavenworth v. Hunt, supra, it is said: “ In the second place, the supposed agreement, if established, was void as against other «•editors of the bankrupts. It did not create any lien upon the property, or entitle the bank to any preference over other creditors in the event of the debtors being afterwards proceeded against under the bankrupt act. The subsequent sale, even if made in pursuance of the agreement, did not take effect by relation at its date. Transfers of personal property, situated as in this case, only take effect as against creditors from the delivery of the property to the purchaser.”

So in the case of National Park Bank v. Whitmore, supra, the court said: “This agreement did not create any lien, legal or equitable, upon the property of the defendants. It was not an agreement for a future lien upon the specific property, which is sometimes held to create an equitable lien which may be enforced in equity. It was not an agreement for any lien at all. . It was simply an agreement, in case of an assignment by the defendants, to prefer Whiting. The agreement did not bind defendants’ property, nor encumber it, but left it subject to all the remedies of their creditors, and it neither hindered nor delayed those creditors. They could have made the same assignment without a previous agreement, and it is impossible to perceive how the agreement worked any legal harm to any one.”

The opinion of the court in Anderson v. Lachs, 59 Miss. 115, is expressed to the same effect, as follows: “The appellant also contends that the deed is fraudulent in fact, because of an antecedent agreement between the assignor and Speed [the creditor], that, if at any time it should be necessary to execute the assignment for Speed’s protection, it should be done. The act itself of making the assignment being lawful, it is difficult to apprehend how a previous promise to do it can make it unlawful. If the debtor Hillyer could at any time lawfully execute the conveyance by which his property is devoted to the debt due to Speed, how are other creditors injured by the fact that he had previously promised on certain contingencies so to do ? It is not admissible, from the fact alone that such precedent agreement was made, to infer the existence of a scheme devised for the purpose of entrapping others into sales of goods to the debtor, which goods were then to be by him appropriated to the payment of the debt of Speed. The law would not tolerate the consummation of such a scheme, but it does not, in the absence of proof, presume its existence.”

Respondents cite Blennerhassett v. Sherman, 105 U. S. 116. In that case the point under consideration was not as to the debtor having made a prior promise to prefer a creditor in case of financial embarrassment. The question involved related to an actual conveyance, by way of mortgage of real estate of great value, having been made by the debtor, then insolvent to the knowledge of the mortgagee, which mortgage, by prearrangement, had been withheld from record by the mortgagees. That was one circumstance indicative of fraud, but not the only one. How far the case is distinguished from that at bar by the facts involved is shown by the following extract from the opinion of the court, expressed by Mr. Justice Woods, as follows: “ There are several propositions of fact which, in our opinion, the evidence satisfactorily shows.....Fourth, while the mortgage was thus kept from the record and from public knowledge, Stephens and Blennerhassett were busily engaged in sustaining the credit of Allen and the Cook County Bank, and, to accomplish their end, falsely and fraudulently represented him to be a man worth over a million of dollars, and of unlimited credit, and the Cook County Bank to be sound and good. Fifth, that by means of these representations of Stephens and Blennerhassett, and the concealment of the mortgage, and the withholding of it from the record, the creditors of Allen and the Cook County Bank were misled and deceived, and in consequence thereof they did, between the date and the registration of the mortgage, deposit large sums of money in Allen’s private bank at Des Moines, and in the Cook County Bank, and, at the instance of Stephens and Blennerhassett, discounted the paper of Allen and the Cook County Bank to a large amount, and that such deposits and discounts, though due, still remain unpaid.” (See, also, Fechheimer v. Baum, 43 Fed. Rep. 719.)

We think such an agreement as that under consideration in the case at bar might in some cases become a material circumstance, proper for consideration, where a transaction was sought to be avoided on the ground of fraud. But in connection with such agreement there must be shown some fact or circumstance indicative of fraudulent intent on the part of the parties concerned. In the case at bar no such showing is made

There remains for consideration the question of the validity of said assignment as the act of said company. The main facts necessary to the consideration of this branch of the case have already been recited.

As heretofore observed, respondents contend that said assignment was invalid (1) because it was not authorized by vote or resolution of the stockholders or trustees of said corporation; (2) because Bichard Boesman, who signed said instrument as secretary, was not secretary of said corporation, having never been regularly elected as such; (3) because the seal affixed to said instrument was not the corporate seal of said company, having never been regularly adopted as such.

It has been seen by the foregoing statement what said company was, as to the formation, control, operations, and ownership thereof. It was attempted in the formation of said company to put upon it the apparel or garb of a corporation as fashioned by the law of this State, and necessary to domestic corporate existence. In this undertaking the parties forming said company filed the usual certificate of incorporation, showing among other things its corporative stock, number of trustees, and names of those chosen for the first three months of said company’s existence, etc. The capital stock was stated in the certificate at $10,000; and it appears from the evidence $4,000 worth of it was taken up, in the proportion of $2,000 worth to one of said brothers, and $1,000 worth to each of the other two brothers. That was all the stock ever taken by any one, and that was owned by those who had organized said company, and were actually in charge of its property, and operating its business.- It is shown that, after ■ the organization of said company, a meeting was held by the so-called stockholders and trustees; and an election of officers of said company took place, whereby a president, secretary, and treasurer thereof were elected. Thereafter, no regular meeting of stockholders or trustees, as of a corporation, was ever held, but all said stockholders and trustees were in charge of, and jointly managing, the business of said company themselves. Nor was there any board of trustees ever elected to succeed those named in said certificate for the first three months; but the members of said board first named appear to have become a perennial board of trustees, if there was any, and they were trustees of their own property and affairs, of which they were personally in charge, because there were never auy interests in said company owned outside of said three persons in charge; nor was there ever any further election of officers of said corporation held. It is shown that Charles «Boesman was, by the understanding and consent of the others interested, chosen general manager of the business of said company; but the other owners therein were present, co-operating in conducting its business, until Henry Boesman set up the branch business at Butte City. Thereafter, and before the assignment in question was made, said Henry Boesman, as is proved without dispute, had severed his connection with said company, and had no interest whatever therein, leaving Charles and Richard Boesman in charge of said company, and sole owners of its property. They were then two of the so-called board of trustees, and the entire owners, stockholders, proprietors, and managers of said institution. No attempt was made to supply a third member of the board, although the statute requires three members. (§ 450, div. 5, Comp. Stats.) No statement was ever published or filed, as required by section 460, fifth division of the Compiled Statutes, and by such delinquency said trustees became jointly and severally liable in the dealings of said company with the world at large, the same as copartners. It is clearly shown that to all intents and purposes, so far as third persons were concerned, said company had degenerated, if it ever had any fully developed corporate existence, into a mere joint proprietorship, with all the joint owners in actual charge and management of their own.

As to property interests, absolute and complete ownership and possession carry with them absolute power of disposition. If there are several distinct owners of portions of the whole, and all, without exception, join in the conveyance of the property, observing the rules of law applicable to the transfer of real or personal property, there can be no question that good title passes thereby. It is objected that said company had never kept its board of trustees renewed, and in full membership, as required by provisions of statute as to corportaions; nor had a regular meeting of stockholders or trustees been called and met and authorized said assignment; nor had the seal used been adopted as a corporate seal by resolution or by-law of the trustees of said company. These objections might be pertinent in many cases, where the parties doing an act stood solely in the capacity of an officer of a corporation, representing, as such, the interest of others not present, nor joining in the act; but these objections are all answered at once by the fact that the assignors were there acting as such by virtue of superior authority than that of agents or trustees, or president or secretary, or other officer. That authority was absolute ownership and possession, and the whole ownership was present, and joined in the act of assignment and delivery of said property, and it is not contended that there was any defect in said instrument as the assignment and delivery of such property by the owners thereof. If said assignment fails, it must fail on the ground of fraudulent intent in its execution, and as to that branch of the case we have seen that sufficient grounds for declaring it void on that score were not shown.

There are numerous exceptions in the record, and assignments of alleged error urged thereon by appellants, as to admission and exclusion of testimony, and otherwise, which we deem unnecessary to pass upon, having proceeded directly to treat the law and facts involving the merits of the action and the foundation upon which the judgment against appellant Kleinschmidt rests. There was no exclusion of any material testimony offered by plaintiffs in the trial of the action, after they amended their complaint by permission of court. All material facts upon which plaintiffs seek judgment against Kleinschmidt appear to have been before the court, and brought into the consideration, both here and in the court below; and there having been numerous investigations in proceedings supplemental to garnishment and execution for discovery of all the facts and conditions in relation to the matters involved in this action prior to the commencement thereof, and our conclusion being that the judgment against Kleinschmidt should be reversed, because there is not sufficient grounds shown to sustain it, therefore, there appears to be no just reason to remand the case for a new trial. For these reasons we think the judgment should be reversed, and the cause be remanded, at the costs of respondents, with direction to the court below to enter judgment therein in favor of defendant Kleinschmidt, to the effect that plaintiffs take nothing by their action against him, and that he have and recover from plaintiffs his costs and disbursements therein expended; and it will be so ordered.

Reversed.

Blake, C. J. I concur.

Case Details

Case Name: Teitig v. Boesman Bros.

Court Name: Montana Supreme Court

Date Published: Jul 29, 1892

Citation: 12 Mont. 404

Court Abbreviation: Mont.