American File Co. v. Garrett,
110 U.S. 288 (1884)

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U.S. Supreme Court

American File Co. v. Garrett, 110 U.S. 288 (1884)

American File Company v. Garrett

Argued January 16-17, 1884

Decided January 28, 1884

110 U.S. 288


A, residing in Maryland and a stockholder in a manufacturing corporation in Rhode Island, pledged with B, also residing in Maryland, as security for a debt due from A to B, bonds of the company secured by mortgage of all its property. The company became embarrassed and unable to pay its debts, and its stockholders became individually liable to its creditors. A became bankrupt, and B agreed with the assignee to receive the bonds and a sum of money in payment of A's debt, and to indemnify the assignee against loss or damage as holder of the stock. B then instituted proceedings to enforce the individual liability of other stockholders: Held that the agreement with the assignee was not an agreement to save A harmless against liability as stockholder; that neither the assignee in bankruptcy nor the bankrupt's property in his hands was subject to the liability which attached to the stock, and that B assumed no liability which could be set up by a stockholder as a defense against his individual liability to B.

The American File Company was a manufacturing corporation created by a special act of the Legislature of Rhode Island, passed in May, 1863, and carried on its business in the Town of Lincoln in that state. The company purchased a patent under which the manufacture of files had before been carried on in the City of Baltimore, and the persons, among them one Allen A. Chapman, who sold the patent took nearly half the stock of the company.

The business of the company was carried on at a loss. About the beginning of the year 1870, it owed a large sum of money, which was evidenced by promissory notes of the company, endorsed by the stockholders in Rhode Island, and Chapman and other stockholders in Baltimore -- all the stockholders being under the statutes of Rhode Island individually liable for the debts of the company by reason of its omission to file certain

Page 110 U. S. 289

statements respecting its business in the office of the clerk of the town. In this state of its affairs, the company resolved to issue its bonds, to be secured by a mortgage on all its property, real and personal. They were to be offered to the stockholders in proportion to the stock held by them, and such as were not taken were to be disposed of in "the order of applicants." The bonds were issued accordingly. They were payable to bearer five years after January 1st, 1870.

The bonds for Chapman and the other Baltimore stockholders, for which Shapman had subscribed, were sent to him and charged against him on the books of the company, and the bonds were paid for by him by the surrender of a like amount of the promissory notes of the company. The notes so surrendered were the property of the firm of Kirkland, Chase & Co., merchants, of the City of Baltimore, of which Chapman was a member. Come of the Baltimore stockholders refused to subscribe for the bonds, and their share of them was taken by Chapman or his firm.

The firm of Kirkland, Chase & Co., on May 2, 1872, borrowed of the firm of Robert Garrett & Sons, bankers of the same city, $50,000, and pledged as security therefor certain promissory notes, which were afterwards, on May 28, withdrawn, and a cargo of sugar, stored in a warehouse in Baltimore, was pledged in lieu thereof, and the warehouse receipt deposited with Garrett & Sons. Besides the $50,000, Kirkland, Chase & Co. at this time owed Garrett & Sons more than $500,000, and it was the agreement between them that all securities pledged were to be held not only for the specific loan for which they were pledged, but for the general balance due from the pledgeors to the pledgees.

On September 12, 1872, Kirkland, Chase & Co. failed, and the firm and each of its members were subsequently adjudicated bankrupts, and their property, co-partnership and individual, was assigned for the benefit of their creditors.

On the day of the failure, Chapman informed Garrett & Sons that on May 30, Kirkland, Chase & Co. had withdrawn and sold the cargo of sugar pledged as security for the loan of $50,000, and that bonds of the American File Company to the

Page 110 U. S. 290

amount of $81,500 had been substituted therefor and handed to his son previous to September 12 to be delivered to them. On September 12, the bonds were delivered into the manual possession of Garrett & Sons in lieu of the cargo of sugar so withdrawn and sold. The assignees in bankruptcy of Kirkland, Chase & Co. disputed the title of Garrett & Sons to these bonds and some other securities on the ground that their transfer was a fraudulent preference.

The assignees and Garrett & Sons settled all their controversies growing out of the bankruptcy of Kirkland, Chase & Co. by an agreement in writing, dated May 4, 1874, whereby the assignees relinquished all claim upon the "collaterals" of every nature, or the proceeds thereof, held by Garrett & Sons on the debts due them by the bankrupts, and agreed to pay Garrett & Sons $5,000, and the latter relinquished all claim to dividends declared and to be declared on the estate of Kirkland, Chase & Co. by the assignees or their successors. The settlement also contained this stipulation:

"And said Robert Garrett & Sons likewise further agree that whereas said assignees have been offered the sum of fifty cents in the dollar for certain bonds of the American File Company (now held by Messrs. Robert Garrett & Sons, which were received as collaterals from Messrs. Kirkland, Chase & Co.), and an indemnification against loss or damage of any kind as holders of certain stock of said American File Company, as assignees of A. A. Chapman and Kirkland, Chase & Co., said Robert Garret & Sons hereby agree to indemnify the said assignees against loss or damage of any kind as holders of the stock aforesaid, and in consideration of said acts of said assignees, said Robert Garrett & Sons do also hereby agree to indemnify the said assignees and said estate of Kirkland, Chase & Co. and the estate of A. A. Chapman against loss or damage of any kind for releasing their claim to the said bonds of the American File Company now held by Messrs. Robert Garrett & Sons, and agree to hold said assignees and said estate harmless for said transfer and release."

Garrett & Sons, on June 23, 1876, recovered a judgment in the Supreme Court of the State of Rhode Island against

Page 110 U. S. 291

the file company on the bonds transferred to them by Chapman, or the firm of Kirkland, Chase & Co., for the sum of $132,611.33, the principal and interest due on the same. At that time, by the statute law of Rhode Island, the creditors who recovered a judgment against a corporation whose stockholders were individually liable for its debts could take out execution thereon and seize the persons and property of the stockholders in satisfaction thereof, in the same manner as on executions issued against them for their individual debts.

Before either of the cases brought up by these appeals was commenced, the affairs of Kirkland, Chase & Co. had been nearly settled and the bankrupts discharged. After the recovery of the judgment by Garrett & Sons, William F. Sayles and other Rhode Island stockholders, about November 9, 1876, filed a bill in equity against them in the Supreme Court of Rhode Island to enjoin them from levying execution upon the persons or property of the complainants. The bill alleged that when the bonds of the file company were issued in 1870, there was an agreement between the stockholders that the bonds were to be taken by them in proportion to the stock which they held respectively, and that they were to be a final payment of the debts of the company, relieving the stockholders from liability, and requiring the holders to look for payment of their bonds to the property which was mortgaged to secure them, or to the property of the company, and not to the individual liability of the stockholders; that Garrett & Sons had notice of this agreement when they acquired the bonds, and had no better right to enforce the individual liability of the stockholders than Chapman or Kirkland, Chase & Co., from whom they derived title, and that they, Garrett & Sons, had agreed to indemnify the assignees in bankruptcy of Chapman and Kirkland, Chase & Co., and thereby had discharged the complainants from any liability, if any such existed, by reason of said bonds, and that in equity and of right, their said guarantee inured to the benefit of the complainants, and the court should enforce it in that suit, and thereby avoid the circuitry of action which would ensue if the complainants

Page 110 U. S. 292

should call on the assignees for contribution, and they on Garrett & Sons for indemnity.

After this cause was put at issue by the answer of Garrett & Sons and by the replication of complainants, it was removed to the Circuit Court of the United States for the District of Rhode Island.

In the year 1877, an act was passed by the Legislature of Rhode Island taking away the right of the judgment creditors of a corporation, whose stockholders were individually liable, to issue execution against them, and substituting a bill in equity or an action of debt to enforce the liability of the stockholder.

In pursuance of this statute, Garrett & Sons, on April 6, 1878, filed their bill in the United States Circuit Court for the District of Rhode Island against the American File Company and all the stockholders thereof who were citizens of the State of Rhode Island to enforce their individual liability to pay the judgment recovered against the American File Company.

The stockholders, against whom this liability was sought to be enforced filed their joint answer to the bill, in which they set up by way of defense the same matters, in substance, as they had alleged in their bill against Garrett & Sons.

These two cases, which involved substantially the same questions and controversies, were heard at the same time and upon the same evidence. In the case of Garrett & Sons v. The American File Company and Others, the circuit court decreed that the defendants were jointly and severally liable for the payment of the judgment recovered Garrett & Sons against the American File Company, and that the complainants have and recover of said stockholders holders the sum of $165,440.65, that being the amount due on the judgment. In the case of William F. Sayles and Others v. Garrett & Sons, the circuit court dismissed the bill. Appeals were taken from both decrees -- by the complainants in the case of Sayles and Others v. Garrett & Sons, and in the case of Garrett & Sons v. The American File Company by William F. Sayles and other stockholders against whom the decree was rendered. Both cases were argued together in this Court.

Page 110 U. S. 293

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