192 N.Y. 61 | NY | 1908
Lead Opinion
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *63
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *64 In March, 1901, Frank A. Umsted, but recently a salesman in the employ of the Hartman Manufacturing Company, a Pennsylvania corporation, and William L. Kiefer, a lawyer, borrowed $125,000 of the defendant, the City Trust Company, a New York corporation, in their own names and for their own benefit. They had previously arranged to purchase the entire capital stock of the Hartman Company of the face value of $250,000 for $110,000, and they used enough of the proceeds of the loan to pay for such stock, which they pledged as collateral to their promissory note given to secure the loan. The trust company knew that the bulk of the money was to be used to pay for the stock, although it believed that the purchase price was much larger. The interest reserved was at the rate of fourteen per cent a year and a commission of over $5,000 was paid in addition. As a condition of the loan, which was procured by misrepresentation and fraud on the part of Umsted and Kiefer, Chapman, a director, and Plummer, a representative of the trust company, were elected directors of the Hartman Company to look after the interests of the former until the loan should be paid. At the same time Umsted was elected president and Kiefer secretary and treasurer. No part of the proceeds of the loan was turned over to the Hartman Company or used for its benefit, nor was any representation made that it was procured, or was to be used in its behalf.
The period of credit was six months, and about sixty days before it expired, Umsted and Kiefer applied to the trust company for another loan which was refused, but consent was given to the payment of the note before maturity. *67 Thereupon, Umsted, on the second of August, 1901, falsely representing that the loan from the City Trust Company for $125,000 "had been made for the Hartman Company," procured a loan for the latter from the Hanover Bank of $200,000, which was secured by the promissory note of the Hartman Company, indorsed by Umsted and Kiefer, and the certificates of all the stock of the Hartman Company were pledged as collateral. In paying over the proceeds of that loan the Hanover Bank delivered to Umsted, at his request, to enable him to pay the loan to the trust company and redeem the certificates of stock, its check for $125,000, payable to the order of the Hartman Manufacturing Company and placed the balance of $75,000 to the credit of that company on its books. Umsted indorsed the check in the name of the Hartman Manufacturing Company by himself as president and general manager and delivered it to the City Trust Company in payment of the note made by himself and Kiefer. The Hartman Company received no consideration for the use made by Umsted of said check. The note, as well as the certificates of stock pledged as collateral thereto, were surrendered to Umsted. The money lent was out of the possession of the trust company only from March 27th until August 2d, so that the interest actually received was at the rate of more than twenty per cent per annum.
At the time of this transaction Umsted, as president of the Hartman Company, had been authorized by a resolution of the board of directors "to take charge of all the property and business of the company" and to make and sign "all checks, notes, contracts and other obligations of the corporation." After adopting said resolution the directors held no further meetings until after all rights involved in this action had become fixed and unchangeable. Umsted transacted all the business of the company. There was no by-law of the Hartman Company, nor any resolution of its board of directors, authorizing the use of its money or assets to pay other than corporate obligations, or ratifying the use made of said check.
Between three and four months after the check had been *68 so used the Hartman Company failed, and all its property, except its alleged right to recover from the City Trust Company said sum of $125,000, was sold at the instance of a reorganization committee composed of creditors, and the proceeds, amounting to $238,000, applied proportionately upon its debts, leaving still unpaid the sum of $371,140.29. The remaining claims of the various creditors were assigned to the plaintiff, who recovered judgment against the Hartman Company for the amount thereof and an execution issued thereon was returned unsatisfied. Said judgment is wholly unpaid. Of that indebtedness the sum of $226,840.62 was in existence on the 2d of August, 1901, and prior to the date of the withdrawal from the assets of the Hartman Manufacturing Company of said sum of $125,000 used to pay the debt of Umsted and Kiefer to the City Trust Company for that amount. That withdrawal made the Hartman Company insolvent, and the object of this action was to recover from the trust company the sum thus misappropriated.
The referee before whom the action was tried, after finding the foregoing facts in substance, further found that the trust company acted in good faith, with no intent to hinder, delay or defraud the creditors of the Hartman Company; that the form of the cashier's check was notice to the trust company that the money represented thereby was the property of the Hartman Company; that the trust company, knowing that Umsted and Kiefer owned all the capital stock of the Hartman Company, and believing that they were authorized to dispose of said check, made no inquiry as to the authority of Umsted as president and general manager to use the same in payment of the individual debt of himself and Kiefer, or as to the financial condition of the Hartman Company, or whether the effect of the withdrawal of $125,000 from its assets would make it insolvent; that if reasonable inquiry had been made it would have disclosed the said resolution of the board of directors, that no meeting of the board had since been held, and that Umsted, after the passage thereof, had had the exclusive control of the business of the company. *69
It was also found that the law of Pennsylvania is the same as the law of New York in the respect that the amount of the assets of a corporation over and above its liabilities are in equity a trust fund held by the corporation for the benefit of creditors; that so far as the rights of creditors are concerned in this case there is no difference between the law of New York and the law of Pennsylvania and that by the law of the latter state the directors of an insolvent corporation may authorize a sale of all or any of its assets without authority from the stockholders thereof.
The referee found as conclusions of law that the trust company was a bona fide holder for value of said check for $125,000; that it obtained a good title thereto as against the Hartman Company and its creditors, and that the plaintiff is not estopped to maintain this action by the use made by the reorganization committee of the certificates of capital stock of the Hartman Company. The complaint was dismissed on the merits, with costs.
Upon appeal to the Appellate Division the judgment was affirmed by a divided vote upon the opinion of the referee, which, together with the dissenting opinion of Mr. Justice SCOTT, concurred in by Mr. Justice McLAUGHLIN, may be found reported in
The main question presented for decision is whether the facts found, when all are considered together, support the conclusions of law. The form of the check in question was notice to the trust company that Umsted was using the property of the corporation of which he was president, to pay the personal debt of himself and Kiefer in apparent violation of its rights. (Rochester Charlotte Turnpike Road Company v. Paviour,
In the case before us no inquiry was made, although the check was for so large an amount as to induce a prudent man to proceed with caution. The transaction upon its face involved a gift to Umsted and Kiefer, or the theft by them, of a large portion of the assets of the Hartman Company, and under such extraordinary circumstances reasonable inquiry meant one prosecuted with a degree of diligence *71
adapted to those circumstances. Inquiry of Umsted and Kiefer would not have satisfied the requirement, for it was apparent that they were acting in their own interest and, hence, beyond the general scope of their authority. (Bank of New York NationalBanking Association v. American Dock Trust Co.,
The next inquiry would naturally have been whether Umsted had implied authority, to be inferred from similar acts and past conduct known to the directors of the corporation and not objected to by them, but that inquiry would have *72
disclosed nothing to rebut the presumption. There is no evidence that Umsted, before his misappropriation of the check in question, had ever used the property of the corporation he represented to pay his own debts or otherwise than in the transaction of its business. No fact of any kind would have been discovered, because none existed, to show authority, express or implied, and the presumption would, therefore, have stood in full force. While inquiry would have discovered that Umsted had full power to act for the corporation in all its corporate business, it would not have shown that he had the right, either real or apparent, to use the check in question in payment of the debt owing by himself and Kiefer to the trust company. If an officer of that company "had made the inquiry he would have learned the facts already stated. He is, therefore, chargeable with all that these facts import or which is fairly to be inferred from them." (Cohnfeld v. Tanenbaum,
If the check had been regular on its face, that is, if it appeared to have passed through the hands of the Hartman Company, and thence into the channels of commerce, as in a case relied upon by the respondent, then, even if offered in payment of his personal debt by one of the officers of the company, the taker without notice would have the right to assume that the relations of the various parties to the paper were what they appeared to be. (Cheever v. Pittsburgh, Shenango Lake Erie R.R. Co.,
According to the facts found by the referee, when all are read together, we think that proper inquiry by the trust company, or its officers, would not have shown that Umsted possessed the authority which he assumed to exercise, but on the contrary, that he had no such authority, either express or implied.
Thus far we have confined the discussion to the rights of the Hartman Company and to the authority, or want of authority, of its president to use the check for his own benefit. The rights of creditors, however, were also involved, for the Hartman Company was insolvent, yet the transaction on its face indicated a gift by that company to Umsted and Kiefer of $125,000, or precisely one-half of its capital as it stood at the time. While Umsted and Kiefer owned all the stock and Kiefer ratified whatever Umsted did, still the rights of creditors remained, even if the corporation and its stockholders were ready to give away every right within their power. (Hurd v. N.Y. Comc'l Steam LaundryCo.,
The trust company had notice that apparently it was dealing with a donee, who had no title to the check as against creditors, or with a thief, who had no title as against any one. It knew the Hartman Company was a heavy borrower and that there were creditors with large claims. It knew the enormous rate of interest that these men had promised to pay when they procured the loan, as well as the payment by them of about $5,000 in addition as a commission to Plummer, its representative, who aided the borrowers in procuring the loan. It knew through Chapman and Plummer, with whose knowledge it was charged, that the company was heavily involved. The presumption was against the transaction, and, as we have seen, unless that presumption was overcome by reasonable inquiry, the transaction, unlawful in fact and unlawful on its face, is presumed to have been known to the trust company to be unlawful. The duty of inquiry extended to all the facts and defects suggested by the form of the check, and hence went beyond the question of authority and included the rights of creditors. As was well said in the dissenting opinion below, to which we are greatly indebted: "Primarily, the capital of a corporation is held for the protection of its creditors and is impressed with a trust in their behalf, and the directors cannot lawfully, nor can the stockholders divert the funds of a corporation to the individual use of its members, if thereby the capital is impaired and the corporation rendered insolvent." (Hurd v. N.Y. Comc'l Steam Laundry Co.,
The learned counsel for the respondent contends that the plaintiff, although a creditor armed with judgment recovered and execution unsatisfied, is not entitled to maintain this action because the creditors, who are his assignors, used new stock of the Hartman Company, issued in place of that surrendered to Umsted, to reorganize that corporation and another, the capital stock of which it had purchased.
This contention was properly overruled by the referee and we adopt his reasons for such action, which we quote from his opinion: "Nor can I find, as urged by the learned counsel for the defendant, that the subsequent use of the stock in being voted upon for the purpose of an increase of the capital, or its being transferred to a third party for the benefit of the creditors or of the corporation through the intervention of Mr. Chapman after it was discovered that the corporation was in bad financial condition, or its subsequent transfer to the receiver of the corporation for its benefit, in any way operates to make this surrender of the stock to Umsted and Kiefer a purchase by the corporation, or to estop in any way the plaintiff from maintaining this action if otherwise he could maintain *76 it. What was done with the stock after it was delivered to Umsted and Kiefer was done by them as owners and not in any sense by the corporation. The final surrender of Umsted's interest in the stock seems to have been in consideration of a release of a claim of the creditors against his wife in respect to other property. These questions, however, like many other questions of fact and law that were fully and ably discussed on the trial and summing up of the case are not material to the disposition of the main issues in the case, as I understand them."
The stock that was pledged to secure the note of the City Trust Company, and to redeem which the check for $125,000 was paid, was not the property of the Hartman Company. The company did not own its own stock but it was owned by the two stockholders who had borrowed the money from the trust company and in no respect was it essential to the contemplated increase of the capital stock of the corporation that the pledged stock should be acquired by the Hartman Company or canceled. Hence the surrender of the stock did not inure to the benefit of the Hartman Company in any way.
The finding of fact made by the referee that the trust company acted in good faith and with no intention to defraud the creditors of the Hartman Company, when considered with his other findings, is inconsistent therewith and the appellant is entitled to rely upon those most favorable to himself. (City of Buffalo
v. Del., L. W.R.R. Co.,
As thus construed the facts found do not warrant the conclusion of law that the complaint should be dismissed. We are, therefore, constrained to reverse the judgments below and order a new trial, with costs to the appellant to abide event.
Dissenting Opinion
The Hartman Manufacturing Company was incorporated under the laws of the state of Pennsylvania with a capital stock of $250,000, consisting of $100,000 of preferred stock and $150,000 of common stock. In the spring of 1901 Frank A. Umsted purchased from the *77 owners all of the capital stock for the sum of $110,000. Thereupon he arranged with William L. Kiefer, a lawyer, to take a third interest therein, and together they applied to and obtained a loan of $125,000 from the defendant, the City Trust Company, upon their promissory note, payable in six months, secured by a pledge of the certificates representing the entire capital stock of the company. To induce the trust company to make the loan, it was represented by Umsted and Kiefer that the loan was desired to enable them to pay the balance due from them to the persons from whom they had purchased the stock, the price of which was $350,000; that there were no claims, liens or incumbrances against the property of the company and that the cash assets, consisting of bills receivable, cash, open accounts, raw materials and unfinished stock, exceeded the total liabilities by at least $40,000; that the business was very prosperous and that dividends had been paid on the stock of the company ranging from fourteen to twenty-three per cent per annum, the dividend for the last year having been nineteen per cent. After acquiring the stock of the company Umsted was elected its president, and by resolution he was placed in charge of the property of the corporation and made the general manager thereof, and all checks, notes, contracts and other obligations of the corporation were required to be made and signed by the president or by the secretary and treasurer. On the second day of August thereafter Umsted applied to the Hanover National Bank for a loan to the Hartman Company of $200,000 to be secured by the promissory note of that company indorsed by himself and Kiefer, and in making such application he stated to the Hanover National Bank, for the purpose of procuring the loan, that the Hartman Company needed additional banking credit for the character and extent of the business; that it desired to enlarge its business and increase its capital stock; that Kiefer and he had borrowed of the City Trust Company $125,000 for the Hartman Company on their promissory note secured by a pledge of the capital stock of the company, and he asked the Hanover *78 National Bank to give him as a part of said loan a cashier's check for $125,000 with which to pay said loan at the trust company. Thereupon the Hanover National Bank made a loan in accordance with the offer and delivered a cashier's check to Umsted for $125,000, with which Umsted went to the City Trust Company, indorsed the same and delivered it to the trust company in payment of the loan made by that company to himself and Kiefer and procured a surrender to him of all of the stock of the corporation which the trust company held as security for the loan. This payment was made with the knowledge and consent of Kiefer, who, in writing, approved of the payment out of the loan made by the Hanover National Bank, and inasmuch as Umsted and Kiefer were then the owners of all of the stock of the corporation, it follows that the payment was made with the consent and approval of all the stockholders. This, to my mind, disposes of all of the questions raised and discussed with reference to the authority of Umsted to make the payment in question. His authority was, in effect, the same as if he had been expressly authorized so to do at a meeting of the board of directors. It, consequently, follows that the question remaining for consideration pertains to the rights of the creditors of the corporation existing at that time. As to such creditors we have the representations made by Umsted and Kiefer to the trust company, at the time the $125,000 was borrowed, the financial condition of the Hartman Company, its prosperity, earnings and dividends declared, to which attention has already been called, and the further fact that so far as the Hanover National Bank is concerned, it was expressly informed at the time the application for the loan was made that it was for the purpose in part of enabling Umsted and Kiefer to take up their promissory note and the stock pledged by them for its payment, to the end that they might enlarge the business of the company and increase its capital stock, and that the loan from the trust company was made by Umsted and Kiefer upon their personal promissory note. The findings are to the effect that the City *79 Trust Company believed these representations to be true at the time it made the loan to Umsted and Kiefer and that it had no knowledge that the company had subsequently become insolvent, and that in accepting the cashier's check of the Hanover National Bank in payment for the note held by it and the surrender thereupon of the stock of the company, it acted in good faith, and, consequently, became a bona fide holder of the cashier's check for value.
Again, this is an equitable action, brought for the purpose of obtaining purely equitable relief, in which the plaintiff demands the payment to him by the trust company of the $125,000 received by it through the payment of the cashier's check of the Hanover National Bank. It appears from the findings that, after the trust company had surrendered the capital stock of the Hartman Company to Umsted and Kiefer upon the payment of its promissory note, Umsted and Kiefer procured an increase of the capital stock to be made from $250,000 to $2,500,000, and that they had purchased the property of the Shelby Steel Tube Company at Newcastle, Penn., at a cost of $80,000, which was less than its real value and had also purchased the entire capital stock of the Cuyahoga Steel and Wire Company for $250,000, on which they had paid the sum of $125,000 and had expended a large sum of money in substituting new machinery in the plants purchased. It further appears that after trouble had arisen with reference to meeting the obligations of the corporation as they matured and became due, a meeting of the creditors was held and at such meeting a committee of such creditors was appointed, consisting of William Logan of the Hanover National Bank and others, to reorganize the Hartman Company and the Cuyahoga Steel and Wire Company and that, thereupon, at the request of the committee, Umsted and Kiefer transferred all of the capital stock of the Hartman Company to the persons designated by the committee, and such new stockholders, in the interests of the committee of the creditors, authorized a sale of the property of the corporation, other than the claim *80 now in suit, and that the same was bought in by the plaintiff in this action, to whom the claims of these creditors had been previously assigned, for the sum of $238,000. It thus appears that, by reason of the transfer of the stock of the corporation to the committee appointed by the creditors, they were enabled to vote the stock, elect new directors and control and manage the affairs of the company. They were enabled not only to direct the sale of the property, but also to prescribe the terms of the sale and arrange for its transfer to their own assignee, deriving therefrom a material and substantial benefit to themselves, thereby depriving the trust company of the protection that it otherwise would have had, had it still held and controlled the stock of the corporation. To hold that these creditors, including the Hanover National Bank, whose claims are represented by the plaintiff, may now recover from the defendant the amount of this claim, after they have reaped the benefit derived from the control of the stock of the corporation, which had been surrendered by the trust company, would, to my mind, be most inequitable and unjust.
I, therefore, favor an affirmance of the judgment.
CULLEN, Ch. J., WERNER, HISCOCK and CHASE, JJ., concur with VANN, J.; GRAY, J., concurs with HAIGHT, J.
Judgments reversed, etc.
