102 N.Y.S. 50 | N.Y. App. Div. | 1907
Lead Opinion
Judgment affirmed, with costs, On opinion of referee.
Present ■—• Patterson, P. J., McLaughlin, Laughlin, Houghton and Scott, JJ.; McLaughlin and Scott, . JJ., dissented.
The following is the opinion of William G. Choate, Esq., referee: '
This’ is an action brought by a judgment creditor of the Hartman Manufacturing Company, a corporation organized under the laws of Pennsylvania, against that company and .the City Trust Company. The judgment creditor’s execution having been, returned unsatisfied, he seeks tó recoVer from the City Trust Company $125,000, with interest from August 2, 1901, on the ground that $125,000 of the money of the Hartman .Company was used by its president, Frank A. Umsted, on August 2, 1901, to pay, a personal debt to the City Trust Company. • . •
On March 27, 1901, the City Trust Company loaned to Umsted and one William L. Kiefer the sum of $125,000, taking- from Umsted and Kiefer their personal note for that amount, dated March 21, 1901, and maturing September 21, 1901. Umsted and. Kiefer were the. owners of all the capital stock of the Hartman. Company, $150,000 common stock and $100,000 preferred stock, and the certificates for this stock were indorsed over to and deposited with the City Trust Company as security for the loan. For
Before the loan became due Hmsted applied to the trust company for a further loan either for himself or for the Hartman Company, and stated that one of his objects was to increase the capital stock of the company.
The president of the trust company, who thought that a loan of , this character was not one fairly within the proper business province of a trust company, but rather such a loan as should be obtained from a bank, was very willing that the loan should be paid off, and, knowing that Hmsted could not increase the stock of the company without obtaining possession of the certificates of stock which were pledged with the trust company, refused to loan any more money, but consented that Hmsted should pay off the loan before maturity. Accordingly, Hmsted negotiated with the Hanover Rational Bank a loan on the credit of the Hartman Manufacturing Company for
' I.- That the use of the money of the corporation by' Umsted, president and general' manager, was without .the consent of the corporation.
2. That by this 'transaction,- diverting as it is claimed the fund's of the company to the private use of Umsted and Kiefer, the assets of the company were reduced below the amount of its authorized capital stock and that the corporation itself had no authority or lawful right, being a going concern, thus to use its funds for the benefit, of its stockholders ,of to divert them from corporate use.
3. That this payment or diversion of its funds from the use of the corporation ór for other than corporation purposes made the corporation insolvent, and "that the .plaintiff could, therefore, recover the money so paid as a fraud upon-the creditors.
I. As regards the first claim of the plaintiff, the trust company seems "to have regarded Umsted and Kiefer as constituting in effect the corporation, they being, as the trust company was truly informed, the sole stockholders, and the president of the trust company seems to have acted"upon the theory that as the sole owners of.the stock they Could lawfully dispose of the assets of the corporation;. and it ■is a little difficult to see how if the suit were brought by the. Hart;. man Company itself it could under these circumstances, recover the money except as the representative of creditors, and on the ground of a fraud upon them. The trust company made.no inquiry as to any action on the part of the board of directors authorizing this disposition'- of the funds of- the company by the. president: It undoubtedly had notice from the form of the draft of the Hanover
This draft was commercial paper and the trust company took it in discharge of a debt, and so taking it extinguished the debt and released the collaterals it held. It was, therefore, a holder - for value. One who takes commercial paper in extinguishment of a debt, surrendering the note of his debtor and the collateral, whether before or after the note becomes due, is a holder for value. (Phœnix Ins. Co. v. Church, 81 N. Y. 218, 223, 224; Leslie v. Bassett, 129 id. 525 ; Youngs v. Lee, 12 id. 551, 555 ; Cowing v. Altman, 71 id. 435, 439.)
The question is, did the defendant acquire a good title to the draft ? To do so, it must not only have given Value, but also must have taken it in good faith.
The trust company’s actual good faith is not impugned, or at any rate there is no evidence which is entitled to any weight impugning the position of the officers of the trust company that they actually believed that they were entitled to recéive this draft although it represented the moneys of the corporation in payment of the debt of the sole owners of the stock.
In this case, however, if the trust company had made further inquiry with regard to the authority of TJmsted to deal with the funds of the company, it would have discovered these facts : That from the' twenty-eighth of March, when TJmsted went into the
And also the following resolution : “ .That all of the property of whatever name and nature of. this corporation be placed in charge of the. - president and general manager, and all checks, notes, contracts or ■ other obligations of- the corporation be made and- signed by the president, or by the secretary and treasurer, and that the signature of one or the other be required, oh all .papers, contracts, and other documents executed by the said corporation.”
That the board of directors then adjourned, and held no further meeting until after the payment of this loan on the second of August.
Reasonable inquiry, therefore, on the part of the officers of the trust company would have disclosed .the fact that Umsted, the president, was during the interval between March. twenty-^eightli and August second permitted by the board of directors to do any business on behalf of -the corporation which the corporation itself might have done by special order of the board ; and when it is considered that U.mstedj with his associate,. Kiefer, were the sole owners of the stock, there is nothing strange or .calculated to awaken suspicion in the fact that-, this absolute trust was reposed in Umsted. The question whether the rights .of creditors might possibly he affected by the act comes more properly into- discussion under other, pints, but on the mere'question of Umsted’s authority to disposed of the assets; even by distributing them among the stockholders, Is am of opinion-that on the facts known-.to. the trust company and the facts which they would have discovered- on inquiry, they were justified in treating the acts of "Umsted as the acts of the’ .corporation. - •
The use which the president of the corporation made-of this-draft in oischarging the note of himself and Kiefer and getting into his posses
But the question of the title acquired by the transferee for value of commercial paper — in this case a negotiable draft belonging to
In this ease there was'nó notice,of any*such abusé of trust or fraud bn the part of the corporation or of Umsted, the president of the company,, in the use of the draft. in question or any circumstances known to the defendant which amount to such notice to the trust company that by. this; payment to-Umsted and Kiefer the capital.of the corporation was reduced below'that required by the law of New York or of Pennsylvania, to be kept intact for. the benefit of creditors.. As above stated, diiring all the negotiation the information. received' by the trust company úp to the time of the payment of this draft on the second' of August was in every way favorable
The circumstance, however, of the borrower dividing up the money borrowed into various sums for various purposes is too common to excite remark; it is not a matter with which the lender has anything to do, and the fact known to the trust company that in addition to interest at six per cent the borrower was paying a commission of four per cent was not, in my opinion, sufficient to excite suspicion. Beyond this there were no suspicious circumstances in the transaction known to the defendant.
The fact, also, that the trust company was aware .that the corporation was borrowing large sums of money at and before the time of this payment, on the .second of August, is insisted upon as notice of a circumstance which should have put the trust company on its guard or on inquiry. It is true, as shown by subsequent develop-. ments, that TTmsted, for the company, borrowed of various banks
On the question of fact, whether this payment did deplete the assets of the company below the capital stock, I think if it were material or could avail the plaintiff it must be found in his fayor. The representations, made by Umsted at the time he negotiated the ' loan with the trust company in March, were grossly untrue, with regard to the financial condition and prospects and resources of the corporation. Instead of giving $350,000 for the stock which was put up as collateral, as represented by him in a letter to the company, he was giving only $110,000. The condition of the company was by no means as good or prosperous as he caused the defendant trust company to believe. But these facts were only discovered by the trust company long aftérwards, and do not in any way tend - to impugn the good faith of the officers of the trust company in taking this draft.
III. The final claim made by the plaintiff against the defendant is, that this payment to Umsted and Kiefer made the corporation insolvent and unable to pay its debts and, on that ground, that it was a fraud upon creditors. It is a sufficient answer to this claim that the defendant, the trust company, which gave value for the draft had no knowledge or information leading it to believe or suspect that the corporation was thereby.made insolvent. If it were material to the case I think it must be found upon the evidence that this payment did make the corporation insolvent. Its financial condition at that particular time, second of August, as affected by this payment, from which, in fact, it received no valuable consideration, cannot with any certainty be shown or. deduced from the books of the company or from the testimony. That the company was largely insolvent in November following is undoubtedly true, but the course taken by the banks, who were the principal or only creditors, in abruptly putting an end to Umsted’s plans for the reorganization of the business of the company, and their act in procuring the appointment of a receiver were calculated to turn solvency in August, if it existed, into insolvency in November. I think, however, it is true that there was very little substantial value in the- assets over the liabilities in August, and the debts had already increased very largely over what they were in Harch, and if it were a material point in the case it must be found that this loss of $125,000 made the company insolvent. But for the reasons stated under the former, second point, the judgment must be for the defendant on this point, as the defendant had every reason to believe in the prosperity and solvency of the company, and was not informed of any facts at that time which should have led it to suspect insolvency.
IY. Some other questions of great importance in themselves have been discussed in this case, but, in my opinion, they are not material' to the determination of the controlling questions. Some of them
■ Upon the whole case I am of opinion that the plaintiffs claim is not sustained and that his complaint must be dismisséd on the merits,, -with costs.
Dissenting Opinion
In the year 1901 Frank A. Umsted, a salesman in the employ of the Hartman Manufacturing Company, arranged to purchase the whole capita] stock of the company of the par value of $250,000, for the sum of $110,000. William L. Kiefer, a la-wyer, became to some- extent interested in the purchase.
In order to procure the money necessary to complete the purchase, Umsted and Kiefer, by the most extravagant overstatements as to the büsiness and condition of the-company,, the value of its assets, and the price which they had. agreed "to pay for- the stock, induced the City Trust Company of-Hew York to loan them $125,000. As security for this loan the whole capital stock of the Hartman Company was deposited with the trust company, and placed in the name of one of its officers, and for the further protection of the trust company it was agreed that Elverton It. Chapman, a director of the trust company and one John F. Plummer, who had been active and-interested financially in negotiating the loan, should be made directors of the’Hartman Company. It was thoroughly understood by the trust company and all those who interested themselves concerning "the loan, that it was a personal loan to Umsted and'Kiefer, and" was made' to them in order that they might personally acquire the capital stock of thé Hartman Company. Of the $125,000 loaned $110,000 was paid to the vendors of the stock, the balance being used in payment of. interest in advance, a bonus' of $5,000 to the trust company, and certain commissions. In due course Umsted,- Kiefer, Chapman; Plummer and Elton, an employee of the company, were elected directors of the Hartman Company* Umsted being made president* Plummer vice-president, and Kiefer secretary and treasurer.- The directors met and adopted resolutions. placing'the" property and "business in charge of the president, and authorizing him, or the secretary and treasurer, to-sign all notes, contracts, and other obliga
This check Hmsted indorsed to the City Trust Company, signing the name of the Hartman Company by himself as president and general manager. The City Trust Company accepted this check in payment of its loan to Hmsted and Kiefer and surrendered to Hmsted the promissory note and the stock of the Hartman Company held as collateral thereto. Shortly thereafter the Hartman Company, by action of its board of directors, increased the capital stock from .$250,-000 to $2,500,000, and the entire issue of the new stock was delivered to Hmsted and Kiefer in substitution for the old stock held by them. On November 18,1901, the Hartman Company failed to meet its
Such an inquiry would have disclosed the fact that such authority had never been given to the board unless it could be spelled out of the following resolution adopted at the first meeting after Umsted and Kiefer had obtained control of the company: “ Resolved, that the president (Umsted) at once take charge of all the property and business of the company, and that all officers and employees of the company report to him and receive orders from him.”
“ Resolved, that all of the property of whatever name and nature
That the payment was made by what is known as a cashier’s
Ordinarily a corporation can act only through its directors, and it is only under special and unusual conditions that the assent of the individual stockholders may be taken in place of action by the' directors, and certainly, when the rights of creditors intervene, the individual stockholders cannot make a disposition of the corporate
For these reasons the judgment appealed from should be reversed and a new trial granted, with costs tó appellant to abide the event.
, McLaughlin, J., concurred. -