Sanford Fork & Tool Co. v. Howe Brown & Co. - 157 U.S. 312 (1895)
U.S. Supreme Court
Sanford Fork & Tool Co. v. Howe Brown & Co., 157 U.S. 312 (1895)
Sanford Fork and Tool Company v. Howe Brown and Company
Argued January 28, 1895
Decided March 28, 1895
157 U.S. 312
A corporation, acting in good faith and without any purpose of defrauding its creditors, but with the sole object of continuing a business which promises to be successful, may give a mortgage to directors who have lent their credit to it in order to induce a continuance of that credit and to obtain renewals of maturing paper at a time when the corporation, although it may not be then in fact possessed of assets equal at cash prices to its indebtedness, is in fact a going concern, and is intending and is expecting to continue in business.
Under the circumstances detailed in the statement of facts and in the opinion of the court in this case, it is held that the mortgage given by the Sanford Fork and Tool Company, by special direction of its stockholders, to its directors to secure them for endorsing and for continuing to endorse the paper of the company is valid.
This was a suit commenced in the Circuit Court of the United States for the District of Indiana by the appellees, creditors of the Sanford Fork & Tool Company, to set aside a mortgage given by such company to secure certain of the directors and stockholders of the company for endorsements made by them of the company's paper. No proofs were taken, and the case was disposed of on the bill and answer, and a decree entered in favor of the plaintiffs adjudging such mortgage invalid as against them. The facts disclosed by the pleadings are as follows: the Sanford Fork & Tool Company was a corporation organized under the laws of the State of Indiana, doing business at the City of Terre Haute in that state. Its capital stock at first was $100,000, but afterwards increased to $150,000. It commenced business in 1888, and continued as a going concern for about eighteen months, and up to May 13, 1890 at which time it failed, and its property passed
into the possession of one of the defendants John W. Davis as receiver. The plaintiffs were creditors of the company whose claims all accrued prior to March 17, 1890, at which time the mortgage complained of was executed. The defendants McKeen, Hulman, Nixon, Minshall, Kidder, and Mayer were each stockholders, and the first five constituted the board of directors of the company. Early in its history, and on July 2, 1888, the company had executed a deed of trust to one Deming, as trustee, to secure an issue then made of $50,000 of its ten-year negotiable bonds. This trust deed conveyed as security the manufacturing plant of the corporation, a tract of about three acres in the City of Terre Haute, with the buildings and appurtenances.
Being a comparatively new enterprise, the company, in addition to the means derived from its capital stock and its bonded indebtedness, required large sums of money to enable it to successfully carry on and develop its business and to obtain this money it executed during the fall and winter of 1889-90, and between September 18, 1889, and March 3, 1890, its ten promissory notes, amounting in the aggregate to the sum of $69,000, which notes were endorsed by the six parties named above as directors and stockholders, the notes being severally as follows:
1. Executed to the Terre Haute Savings Bank, for $5,000, dated September 18, 1889, due in five months, and endorsed by McKeen, Hulman, Kidder, and Nixon.
2. To the same bank, same date, due in six months, for the same amount, and endorsed by the same parties.
3. Executed to Nixon, dated December 14, 1889, due March 15, 1890, for $15,000, endorsed by Nixon, Hulman, and Kidder, and held by the Vigo County National Bank.
4. Executed to Nixon, dated January 21, 1890, due in sixty days, for $5,000, endorsed by Nixon, McKeen, Hulman, and Kidder, and held by the Terre Haute Savings Bank.
5. Executed to Minshall, dated January 21, 1890, due in thirty days, for $4,000, endorsed by Minshall, Hulman, McKeen, and Kidder, and held by the First National Bank of Brazil.
6. Executed January 30, 1890, to Nixon, due in ninety days,
for $15,000, endorsed by Nixon, Kidder, McKeen, Mayer, and Hulman, and held by the Vigo County National Bank.
7. Executed February 5, 1890, to Nixon, due in sixty days, for $5,000, and endorsed by Nixon, Minshall, McKeen, Hulman, and Kidder, and held by the Vigo County National Bank.
8. Executed February 2, 1890, to Nixon, due in thirty days, for $5,000, endorsed by Nixon, Minshall, McKeen, Hulman, and Kidder, and held by the Vigo County National Bank.
9. Executed March 3, 1890, to Nixon, due in sixty days, for $5,000, endorsed by Nixon, Kidder, Hulman, Minshall, and McKeen, and held by the Terre Haute Savings Bank.
10. Executed March 3, 1890, to the Terre Haute Savings Bank, due in sixty days, for $5,000, endorsed by Nixon, Kidder, Hulman, Minshall, and McKeen.
All the money received from these notes was expended upon and went directly into the property and material of the tool company. At the time these directors and stockholders endorsed these notes, the tool company was a going concern, in full operation, with property and means "amply sufficient to pay all of its indebtedness, if its property was worth what it had cost in cash." They believed that such property was worth what it had cost in cash, that the corporation was
"solvent, and capable of becoming an independent and profitable manufacturing institution as soon as it could win its way to a favorable market for its manufactured products."
As these notes thus endorsed began to mature, the directors found that the company was unable to pay them, and required a renewal or an extension. Thereupon, on March 1, 1890, they called a special meeting of the stockholders, which was held on March 15. At this meeting, out of a total of 3,000 shares, 2,250 were represented, and a resolution was passed authorizing the directors to execute a mortgage or mortgages upon all or any part of the property of the corporation, to secure any new indebtedness that might be incurred or the renewal and extension of any present indebtedness or liability of the corporation. Thereupon, the directors having taken suitable action, the mortgage in controversy was executed conveying to Buena V.
Marshall, as trustee, the property described in the trust deed hereinbefore referred to, to-wit, the company's manufacturing plant, to indemnity the six endorsers for their endorsements of the notes, or renewals thereof, or on account of any moneys thereafter advanced by them. Relying upon such security, the endorsers above named either paid or procured renewals of the several notes, and in addition two of them endorsed and subsequently paid other paper of the company to the amount of $6,000. This mortgage was not recorded until May 1, 1890. At the time of its execution and delivery, as at the time of the endorsements hereinbefore mentioned, the company "was in full operation as a going concern," with ample means to pay its indebtedness, if the cash cost of its property could be obtained therefor. The endorsers believed that "the property was worth what it had cost in cash, and believed the corporation to be solvent," and in fact the corporation continued to be
"a going concern, and carried on its business in the usual way, and met all its obligations (other than the notes embraced in the indemnity mortgage) as they matured in the usual course of business,"
until the appointment of a receiver, on May 13, 1890, during which time it paid out for current expenses and maturing obligations $30,000 or over. The endorsers
"believed that it was only necessary to tide the corporation over a temporary embarrassment until it could succeed in establishing a favorable footing in the market for the sale of its manufactured products."
They accepted the indemnity mortgage in good faith, with knowledge that all the money obtained by means of the notes upon which they had become liable as endorsers had been properly appropriated to and gone into the property and material of the company.
At the date of the execution of this mortgage, the tool company was indebted in the sum of $275,000. The value of its property at that time does not appear, but after the appointment of a receiver, it was appraised, the manufacturing plant -- the property described in the trust deed and mortgage -- being appraised at $116,055.39, the other and unencumbered property at $88,390.85.