215 Mass. 506 | Mass. | 1913
This consolidated cause was begun by three bills in equity which as amended are brought by or in behalf of one Heinze, .primarily to redeem certain securities pledged by Heinze as collateral for ten promissory notes in the aggregate sum of $300,000.
The allegations of the three bills are much the same. It is alleged in them that at the time of making the loans Adams was insolvent and procured the pledge of the securities here in question for the fraudulent purpose of converting them to his own use. Joined with Adams as co-defendants are thirteen ■ individuals, firms or corporations who furnished Adams with the $300,000 (or some of it) which was lent by him to Heinze, and who, it is alleged, conspired with Adams to carry the above fraud into effect and to share in the plunder. The secondary relief sought by the bills is for an accounting for the profits obtained by the defendants through the fraudulent conspiracies with Adams.
The case was sent to a master
The suit is here on an appeal taken by the plaintiffs from that decree.
It will not be necessary to state at length all the facts found by the master. For the purpose of deciding the questions raised by the plaintiffs’ appeal the following are the facts which we deem material: Heinze was a large operator, particularly in mining stocks, and had promoted and “financed” the Davis-Daly Copper Company, the United Copper Company and the Ohio Copper Company. He managed and controlled these companies, and with his associates he owned their capital stock and bonds. The companies were known on the street as “Heinze companies,” and
Under these circumstances, wishing to borrow $50,000 on stock of the United Copper Company and of the Davis-Daly Company, he applied to a New York note broker, Dresser by name, for his assistance. Dresser suggested to Heinze that he apply to the defendant Adams to see if he “could negotiate such a loan.” Adams was known by Dresser, but not by Heinze. He had come from New York to Boston in 1906, without capital, and had conducted the business of lending and borrowing money on collateral. In addition he bought and sold some stocks in a small way. In October, 1909, “he went into bankruptcy.” The master goes into a detailed statement of the business methods employed by Adams in his three years’ business career in Boston. He states his methods before the first of the loans which he made to Heinze and then n states that they remained the same during the ten Heinze loans. The money which Adams lent to his customers was obtained by him from others including the co-defendants, by repledging the securities pledged with him, and by paying for the money borrowed by him interest which “averaged from two to five per cent a month on monthly loans and renewals, and somewhat more than that on loans and renewals for a shorter time,” in a few instances paying two per cent a week and one per cent a day.
In lending money Adams used a form of note substantially like that passed upon by this court in Commonwealth v. Althause, 207 Mass. 32. The clause in Adams’s note was in these words: “In consideration of the loan hereby made the borrower agrees that the holder or holders of this obligation shall have the right to make use of the collateral security herein named as they may desire, subject only to their obligation to deliver to said borrower collateral of the same amount and kind as that mentioned above upon the payment of this note at maturity.” In borrowing money, however, Adams used an ordinary collateral note which gave the holder a
Adams lent Heinze $300,000 on the following ten notes secured by the following collateral:
The first two notes were signed by Heinze, the next seven by Warfield and the last one by Joyce. The first two were renewed at maturity for six months, and “with these two exceptions none of the plaintiff’s loans were renewed.” It follows that no notes were due when these bills in equity were filed unless it was the third note. If that was a note for three months it was two months overdue when the bills were filed. But throughout the report it seems to have been assumed that no notes were overdue at that time.
The ten promissory notes given by Heinze, Warfield and Joyce bore interest at six per cent per annum. On the first two notes Adams was paid in addition a commission of two per cent. But on the other eight he was not paid, nor was he entitled to receive, anything beyond interest at six per cent per annum.
In addition to the general statement that all the money lent by Adams to Heinze was borrowed from the co-defendants in these suits and from others who did a similar business of lending money at from two to five per cent a month, the master stated at length
“At the time of the first Heinze loan Adams was practically insolvent, and his creditors were clamoring for their money or securities. His purpose and intention in making this and the other nine loans was to thereby get possession of the collateral named in the notes, and, after using so much of it as might be necessary to raise the amount called for by the plaintiff’s notes, to use the rest of it to get money to relieve his own financial distress and generally to use in his business, intending to return it if possible upon payment of the notes, and trusting to the future to enable bim to do so, or, perhaps, through a break in the market and the consequent impairment of the twenty per cent margin stated in the plaintiff’s notes or otherwise, to relieve him entirely from the necessity of so doing. He knew that the only way he could make money out of these transactions was by selling the pledged securities in the market, and buying them in at a much less price when the notes matured. It was a desperate chance, but he took it. He got large sums (in excess of the amounts he loaned the plaintiff) by loans on and sales of the plaintiff’s collateral from time to time. These sums went into his general funds, and were used by bim in paying interest and carrying charges on the loans he got from his co-defendants and others on the plaintiff’s collateral, in making loans to others, in paying importunate creditors, in meeting his personal expenses, and generally in the conduct of his business.”
As to the thirteen co-defendants the master made the following findings: “None of Adams’s co-defendants were aware of his financial condition or aforesaid purpose and intention at the time of the first Heinze loan, nor thereafter during the first six months of 1909, nor had they reasonable cause to suspect it. He kept up the same appearance of prosperity as before, carrying about with bim bank bills of large denominations and checks of large amounts, which he displayed ostentatiously from time to time, and boasting of his
All loans made to Adams by the co-defendants and others were paid at the date of the filing of these bills, and all the plaintiffs’ securities had been sold and disposed of except that one hundred and nine Ohio Copper Company’s bonds were held by some of the co-defendants and fifty-one Ohio bonds by persons other than the co-defendants, to secure loans made by them to Adams.
The master summed up his findings in these words: “My conclusions are, and I find on all the evidence in the case: 1. That when they were given the plaintiff intended to pay at maturity the ten notes referred to in the bills, given by himself, Warfield, and Joyce to Adams, and to redeem the collateral deposited to secure the same. 2. That Adams did not make these ten loans, and procure the collateral given to secure the same, in good faith, but with a fraudulent intent. 3. That throughout their various dealings involving the plaintiff’s collateral Adams’s co-defendants acted, not in collusion with him or each other as alleged, but in good faith, without notice, knowledge, or information of any fraudulent intent on his part, or of any fraud practised or attempted by him upon either Heinze, Warfield, or Joyce, or that he was making any unauthorized use of the plaintiff’s collateral.”
The finding of bad faith on the part of Adams was amply justified by the facts found by the master. Were it important, further details could be stated which would demonstrate the correctness of this finding. But as Adams took no appeal from the decree it is not necessary to consider it so far as he is concerned. And in the
So far as the main allegations of the bill go the master has found that the co-defendants did not in fact conspire with Adams to rob Heinze. The evidence before the master is not before us. On the facts found by him we see no reason for disturbing this finding of fact. In that connection the master made this finding: “I find that, considering the time of the loans and the nature of the collateral, the sums paid by Adams therefor as above were not extortionate nor unreasonably large, and (if material) that they were the usual and current rates at the time on loans of that kind.” The evidence on which this finding was made is not before us, and we cannot say that it was wrong.
.We take up first the question of the liability of the defendants who lent money to Adams knowing or believing that the securities given by him to them as collateral were “ collateral which had been pledged by the plaintiff with Adams as security for loans” made by him to Heinze.
If these co-defendants are liable on the findings made by the master, they are liable because they were put on inquiry. And if they were put on inquiry it is of no consequence whether the securities taken by them were or were not negotiable securities. In that connection it is of no consequence what they believed were the terms of the notes on which Adams lent money to Heinze, nor what counsel had advised them was the true construction of those notes. The advice given them by counsel and their belief in that connection were of importance on the question of their having been privy to the fraud committed by Adams. But in connection with their liability on the ground that they were put on inquiry those facts are not of consequence.
It nowhere appears that the co-defendants knew that Adams was lending to Heinze at six per cent per annum the money which he was borrowing of them at from two to five per cent per month. Had they known that, it would have been hard to believe that they did not know of his mala fides or to hold that they were not put on inquiry as to it.
But these co-defendants (with the exception of Gove and C. P. George) knew that the securities pledged by Adams for money
As we have said, if these defendants had known that Adams was lending to Heinze at six per cent per annum and borrowing the money so lent at an average of from two to five per cent a month, that fact in our opinion would have been notice of Adams’s bad faith. On the findings made by the master the defendants were put on inquiry as to Adams’s authority to re-hypothecate but not as to his bad faith. If in pursuing the inquiry as to his authority to re-hypothecate they necessarily would have learned of his bad faith, it may be assumed that they are chargeable with knowledge of it although not put on inquiry as to it. The question therefore comes to this: Were these defendants, in pursuing the inquiry as to Adams’s power to re-hypothecate Heinze’s securities, bound to see Heinze’s notes held by Adams? If they were, it may be that they are chargeable with knowledge of Adams’s bad faith, for in that case they would have learned that he was lending Heinze at six per cent per annum the money which he was borrowing of them at from two to five per cent a month. But if they were justified in pursuing the inquiry (which they were bound to make- as to Adams’s power to re-hypothecate) in any other way or ways than by inspection of the executed notes, they are not chargeable with knowledge of his bad faith. We are of opinion that they were not limited to informing themselves by inspection of the notes, and therefore that they are not chargeable with knowledge of his bad faith.
Where the construction of these ten notes is governed by the law of Massachusetts, and perhaps where it is governed by the law of New York, sales of collateral made by Adams were made without right. So far as Massachusetts is concerned that was decided in Commonwealth v. Althause, 207 Mass. 32. And sales, if any, made by a co-defendant were wrongful which were not made for default on the part of Adams, under the notes given by Adams for payment of which Adams re-hypothecated the collateral under
We have not found anything in the cases cited by the plaintiffs which requires special notice.
In addition to the matters which we have now considered, the plaintiffs have argued twenty-two exceptions to the master’s report and an appeal from a refusal of the single justice to recommit the case for further hearing by the master. One of the twenty-two exceptions argued (No. 68) consists of the refusal by the master to give twenty-seven requests for rulings asked for by the plaintiffs, and another (No. 69) is to the adoption by the master of six rulings asked for by the defendant Gove.
We first take up the forty-fifth exception because it is typical of many others. The forty-fifth exception is in these words: “ The plaintiffs except to the finding, to the refusal to find, and to the failure to report the evidence set forth in the forty-fifth written objection, — (a) Because the facts requested are material to the issues in the cause and the master has not stated that the same are
“Prior to June, 1909, he occupied one small office in the Exchange Building and was neither a member of the Curb or the Boston Exchange.
“Gale and Gould agreed to make a clearance June 9, 1909, which was not carried out. Gould, however, charged Adams $1,000 for the use of $12,500 for a week, although it had not left Gould’s possession, and to pay himself $1,000 he later sold one hundred shares of Davis-Daly stock which he held as collateral to the loan, which was not payable and which had been deposited with him by the defendant Adams.
“In May, 1909, for a clearance of $25,000 by Bloom for Adams, Bloom charged him a commission for the use of money for five days of $1,250, or practically four times the usual rate.
"Practically all the sales made by Gale and Gould of the plaintiff’s securities were deliveries to brokers. All of the plaintiff’s securities which were sold by the defendants Gale and Gould were made through Barnum as their agent and the brokers through whom the sales were made were the defendants Cawley and Gove.”
The consolidated cause now before us was referred to the master under a rule which did not secure to the parties a right to have the
For the reasons already stated we are of opinion that the forty-fifth exception taken to the master’s report must be overruled.
Taking up the other exceptions in their order. The fact that the defendants (who the master found believed that under the form of note here in question Adams had a right to sell the collateral pledged with him) knew that he was selling it, must be taken to have been intended to be found by the master; and the ninth exception must be overruled.
Whether Adams’s “appearance of prosperity” corroborated the assurances which he gave to the defendants that he was making
The sixteenth, eighteenth, twenty-first, twenty-seventh, twenty-eighth, thirty-ninth, forty-fourth, fifty-sixth (in part) and fifty-seventh exceptions are disposed of by what we have said as to the forty-fifth; and the seventeenth, twentieth, twenty-fourth twenty-fifth, fifty-sixth (in part) and sixty-fourth, by what has been said as to the fifteenth. As the master ruled on his findings that no defendant but Adams was liable and the plaintiffs disclaimed having an account stated to charge him, the master was right in not stating the account as against Adams, and the sixty-second exception must be overruled.
We proceed to deal with the sixty-eighth exception which is to the refusal of the master to adopt twenty-seven rulings of law asked for by the plaintiffs.
The rulings asked for by the plaintiffs numbered 2-21, inclusive, were not passed upon by the master. If the bill is amended as hereinbefore suggested, it will be necessary to rule on the matters covered by these rulings, and we consider them for that reason. We already have held that the ten notes did not give the holder a right to sell except on default by the maker. But he had a right to re-hypothecate the securities and pledge them alone or en bloc mixed with other securities for a new loan made to him. We do not know just what the plaintiffs mean by the proposition that the right of re-hypothecation is such that it must be made “on such terms and conditions and at such rates of interest that the control of it would remain with the first pledgee.” Of course the original pledgee who re-hypothecates collateral under this clause has control of the securities no matter what the terms and condition of the re-hypothecation áre, and no matter what the rate of interest is. Since his use of the collateral is limited to a re-hypothecation of it, he has control of it because he can redeem the rehypothecated securities by paying the note for security of which the collateral is re-hypothecated. If by this ruling the plaintiffs mean that one lending to the holder of such a note cannot get rights in the re-hypothecated collateral other than those which the holder had, the ruling is wrong.. The very purpose of inserting in the note this clause (which gives to the holder the right “to make use of the
From what has been said in the earlier part of this opinion it is apparent that the plaintiffs were not prejudiced by the master’s refusal to give the twenty-second, twenty-fourth, twenty-fifth (without the qualification he added), twenty-sixth, twenty-seventh and twenty-eighth requests for rulings. The thirtieth ruling was not borne out by the evidence.
This brings us to the sixty-ninth exception, which is an exception to six rulings given by the master at the request of the defendant Gove. The first two of these rulings were wrong. The conspiracy charged in the third bill (to which alone the defendant Gove was a party) alleged a conspiracy to which all the co-defendants were parties. If under such a bill a conspiracy between Adams and some one or more of the co-defendants had been proved, the plaintiffs would have been entitled to a decree against Adams and them. The master therefore was wrong in ruling at the request of the defendant Gove that to succeed against any defendant the plaintiffs must prove a fraudulent scheme “in which all the parties defendant were engaged,” and that this bill cannot.be maintained unless the plaintiffs prove “that the other defendants [meaning the co-defendants other than Gove] corruptly conspired with Adams.” It is apparent that the finding of facts made by the master was not affected by these erroneous rulings of law. They
The plaintiffs do not now contest the correctness of the tenth, eleventh and twelfth rulings given at the request of Gove unless the defendants were put on inquiry.
The motion to recommit was addressed to the discretion of the single justice. We see no reason for doubting that this discretion was properly exercised by him.
In addition to the ground for holding the co-defendants liable which we already have referred to as not covered by the bill nor by the findings of the master, the plaintiffs on the findings made by the master were entitled to some relief against them. From the master’s report it appears that eight of the thirteen co-defendants still hold as security for money lent by them to Adams some of the securities originally pledged by Heinze as collateral for the ten notes or for some of them. Heinze has a right to redeem these securities on which Adams originally had a lien for money lent by him to Heinze and on which (under the findings made in the master’s report) these defendants have a lien for money lent by them to Adams. But although there is no express disclaimer on the plaintiffs’ part so far as this relief is concerned, there are indications in the master’s report that the plaintiffs did not ask for it. Under these circumstances we are of opinion that the decree dismissing the bill as against the co-defendants should not be reversed on this ground unless the plaintiffs ask that that be done.
Some of the defendants have contended that under no circumstances are the plaintiffs entitled to any relief. The defendant Barnum contends that there is a finding of the master which prevents the plaintiffs from maintaining this bill. The master found incidentally that Heinze had caused a fictitious market value to be made for the securities by causing apparent sales to be made by one broker to another, both of whom were acting as his agents. Barnum relies also upon a finding of the master that he (Barnum) and
Nor do these facts prevent the plaintiffs from maintaining this bill on the doctrine that he who seeks equity must do equity as has been contended in behalf of the defense.
The defendants Mason and Potter have contended that on the findings of the master the plaintiffs are estopped from contesting the validity of sales made by Adams. The whole of the finding in this connection is in these words: "Early in January, 1909, and from time to time thereafter, the plaintiff [Heinze] learned that some of the very securities he had pledged with Adams were appearing in the market, and he believed that Adams was selling them. This belief led to the insertion in the note of March 25 of the restriction against selling the collateral hereinbefore referred to, and the clause in Adams’s receipt of April 5, binding him to return the identical certificates pledged to secure Joyce’s note of that date. During this time Adams was selling the plaintiff’s collateral as occasion required, although he denied it when from time to time accused of so doing by the plaintiff [Heinze] or his associates, and at all times did what he could to prevent the knowledge of it from reaching them.” Clearly no estoppel on the part of Heinze arises as against unknown persons to whom Adams under these circumstances was wrongfully selling these securities.
Unless the plaintiffs within ninety days from the date of the re-script in this case file in the clerk’s office of the Supreme Judicial Court for the county of Suffolk a statement in writing that they
So ordered.
F. Rockwood Hall, Esquire.
By order of Hammond, J.