A mortgage, given to secure a large number of bonds, provided
that the bonds should become payable if any execution should be
sued out against the property of the company and such company
should not forthwith pay the same. A bondholder brought suit before
a justice of the peace upon six coupons. The defendant company
consented to a judgment and to the issue of an execution, and upon
the same day the trustees gave notice that, by reason of such
execution's having been unpaid, they declared the principal and
interest upon all the bonds to be immediately payable, and at once
took possession of the property.
Held that while these
proceedings were taken by connivance and consent of the parties,
they were not collusive in a legal sense, as the debt was honestly
due and the plaintiff entitled to the judgment.
Held also
that, while the judgment was obtained for the obvious purpose of
enabling the trustees to declare the mortgage to be due, the court
would not inquire into the motives of the parties.
Where a bill is filed to foreclose a mortgage and the answer
admits the bonds secured by such mortgage to have been issued, it
is not necessary that the bonds should be put in evidence before a
decree of foreclosure and sale.
Bonds payable "to the bearer or, when registered, to the
registered owner thereof," and declared to be due on or before a
certain date, are negotiable, though redeemable by installments
determined by annual drawings.
The fact that the mortgagor corporation may have been organized
for the purpose of creating a trust or unlawful combination in
restraint of trade is no defense to the mortgage.
The fact that such corporation was organized in pursuance of a
fraudulent scheme to defraud certain stockholders who had
contributed their properties to the capital stock of the
corporation is no defense to a foreclosure of the mortgage, so far
at least, as the bonds were held by parties innocent of the
fraud.
Promoters of a corporation are bound to the exercise of good
faith toward all the stockholders, to disclose all the facts
relating to the property, and to select competent persons as
directors who will act honestly in the interest of the
shareholders, and are precluded from taking a secret advantage of
other shareholders.
This was a bill in equity filed in the Circuit Court for the
Northern District of Illinois by the Northern Trust Company,
Page 176 U. S. 182
a corporation organized under the laws of Illinois, having its
principal office in Chicago, and Ovid B. Jameson, a citizen of the
State of Indiana, as trustees, against the Columbia Straw-Paper
Company, a corporation organized under the laws of the State of New
Jersey, to foreclose a trust deed of some thirty-nine papermill
properties, leaseholds, and water powers situated in thirty-two
different counties and in nine different states. This deed, which
was dated December 31, 1892, was given to secure the payment of one
thousand bonds of the paper company of $1,000 each, with coupons
bearing interest at six percent per annum, payable half yearly.
These bonds were issued and delivered to one Emanuel Stein, in part
payment for the properties acquired by it from him.
The bill, which was in the ordinary form of a foreclosure bill,
averred that, by the terms of the bonds, it was agreed by the paper
company that it would redeem, on the first day of December, 1893,
one hundred of such bonds, and annually thereafter until December
1, 1901, a similar number, and that the principal of such bonds
should become due if the paper company should make default for a
period of three months in the payment of any interest, and an
election so to do were given in writing; that, by the terms of the
mortgage or deed of trust, it should become enforceable, provided
default were made in the payment of any one of the bonds which had
become due and payable for one month thereafter, or, if default
should be made in the payment of interest on any of such bonds or
in the performance of any of the covenants or conditions in the
bonds or mortgage, and such default should continue for three
months after written demand for payment or performance by the trust
company, or if a judgment or order should be made, or any effective
resolution adopted by the paper company for the winding up of such
company,
"or if a distress, attachment, garnishment, or execution be
respectively levied or sued out against any of the chattels or
property of either company, and such company shall not forthwith
upon such distress, attachment, garnishment, or execution being
levied or sued out, remove, discharge, or pay such distress,
attachment, garnishment, or execution. "
Page 176 U. S. 183
The bill alleged as the only grounds for enforcing the security
of the mortgage (1) that the mortgagor had made default in
redeeming or discharging the several amounts of bonds designated in
the mortgage and bonds for redemption, (2) in failing to pay
certain installments of interest, and (3) in failing to pay a
certain execution sued out on January 22, 1895, against the
property of the company upon a judgment obtained against it by one
James Flanagan before a justice of the peace of Cook County,
Illinois. That, by reason of such default, complainants had
declared the principal and interest of the bonds to by immediately
due and payable.
The bill contained the usual prayer for foreclosure and sale,
and for a receiver and an injunction against disposing of any of
the mortgaged property. The trustees having taken possession of the
property, a receiver was appointed by consent of the company upon
the same day the bill was filed.
The answer of the paper company admitted the material
allegations of the bill, averred its inability to pay its debts,
and asserted that the property covered by the mortgage was worth
much more than the amount of the bonds and the indebtedness of the
company.
A few days thereafter, Dickerman, together with others, filed a
petition setting forth that they, with other stockholders of the
defendant company, had been injured by the wrongful and fraudulent
manner in which its securities had been issued; that the defendant
and its defense were under the control and direction of the
bondholders and their trustees; that the directors were not fitted
to conduct the suit by reason of their adverse interests, and
prayed to be made defendants and be allowed to plead, answer, or
demur to the bill, and to file a cross bill. This was allowed.
Thereupon petitioners filed their answer admitting the execution
of the bonds and mortgage, but denying that the bondholders were
entitled to the benefit of the trust created by the mortgage;
denied that all of the one thousand bonds were duly issued,
negotiated, and sold, or that they were outstanding and valid
obligations of the mortgagor, and also denied that all of such
bonds and coupons had come into the possession
Page 176 U. S. 184
of, or were held by, persons who had become the owners thereof
in good faith and for a valuable consideration.
They further set forth in great detail the manner in which the
combination had been formed in the summer of 1892, to purchase
seventy paper mills with their plants, appliances, and goodwill by
means of securing from their respective owners option contracts
whereby each owner agreed to sell his property to the combination
for a stated sum in cash, and the residue in the capital stock of
the corporation to be organized, to which the seventy paper mills,
with their properties, etc., were to be conveyed; that the
corporation so to be formed was to be capitalized at $3,000,000 of
common and $1,000,000 of preferred stock, to be issued at par, in
part payment for the mills at the option prices so obtained, until
the whole amount was exhausted, and that in such contingency the
corporation so to be organized was to have the power to issue
$1,000,000 of its bonds to complete the payment for said mills;
that after options had been obtained upon thirty-nine mills, the
total purchase price of which was $2,788,000 in cash, stock, and
notes, the parties met to consider them, and decided that it would
be necessary to provide $1,000,000 to purchase the property and
furnish the running capital; that the combination thereupon caused
the option contracts to be transferred to one Emanuel Stein, and
then arranged to divide up and to fraudulently appropriate to
themselves $2,113,000 of the capital stock of the proposed
corporation, which would not be required to pay for the thirty-one
mills which were left out of the combination.
That after having arranged how many of the one thousand mortgage
bonds of the new corporation each member of the combination was to
receive for an equal amount in cash, and how many shares of
preferred and common stock each was to receive gratuitously with
bonds, they caused articles of incorporation to be filed December
6, 1892, in the State of New Jersey, to organize the paper company
with a capital stock of $4,000,000, with themselves and their
agents as directors. That on December 14, 1892, they procured
Stein, who held the option contracts for the purchase of the
thirty-nine mills,
Page 176 U. S. 185
to present to the stockholders a proposition to secure the
titles to the thirty-nine mills, and to convey the same to the new
corporation for $5,000,000, as follows: $1,800 in cash; $1,000,000
in first-mortgage bonds; $1,000,000 in preferred and $2,998,200 in
the common stock of the new company; that this proposition was
accepted by the stockholders and also by the directors, and the
property conveyed to the company; the bonds and capital stock
divided among the members of the combination, as had been
previously arranged, and that such persons still owned and were
still liable for their capital stock in a much larger amount than
the bonds of the company, and that the latter were owned by the
same persons, who were liable on their stock. That the Columbia
Straw-Paper Company, having been organized for the purpose of
taking such conveyances, and thus consolidating said mill plants,
their contention was that, by reason of fraudulent overvaluation of
the various mill plants and properties upon which options of
purchase had been taken, a defense in the nature of a set-off
existed in favor of the company against such bondholders as were
also stockholders to the extent of the unpaid part of the stock
held by them.
The answer also contained an averment that the judgment and
execution in favor of Flanagan before a justice of the peace was a
fraudulent and collusive act on the part of the managers of the
defendant company in order to give the trustees the right to begin
this foreclosure proceeding; that, in pursuance of this, the
directors had fraudulently neglected and refused to pay six
interest coupons on the bonds owned by Flanagan, in order that a
suit might be instituted thereon; that the defendant corporation
appeared upon the return of the summons, consented to an immediate
trial, made no defense, but allowed judgment to be entered and an
execution to issue on the same day, and that the firm of lawyers
who had devised this proceeding acted as solicitors for the
trustees in filing the bill of foreclosure. It was denied that the
straw-paper company was insolvent, and was averred that the
complainants and others had combined to wreck the company and
defraud the defendant stockholders by withdrawing from
Page 176 U. S. 186
the treasury of the company bonds and stock to the value of
$3,000,000, which the complainants held in trust for the company,
and that the same are assets and not liabilities, as in the bill of
complaint alleged.
Defendants also filed a cross-bill for an accounting in respect
of the transactions complained of, especially in reference to the
issue of the alleged mortgage bonds and the preferred and common
stock, and if, on such accounting, anything should appear to be due
from any of the defendants to the straw-paper company, a decree
might be entered for the payment of the same, and that the receiver
theretofore appointed might be removed and a proper and practical
person be appointed receiver in his stead, with power to take
possession of the property, as well as of the books, papers, and
writings of the Columbia Straw-Paper Company, and that an
injunction issue restraining the officers and directors of the
company from interfering with his possession. The cross-bill was
subsequently stricken from the files.
Defendants later amended their answer, alleging that the bonds
and mortgage were part of an illegal scheme to create a monopoly,
regulate prices, and prevent competition among the mills purchases,
who had, prior to the consolidation, been in active competition
with each other.
The case was referred to a master to take proofs and report the
testimony. He reported that the material allegations of the bill
were sustained by the proofs; that all of the one thousand bonds
set up in the bill were negotiated and sold and were outstanding
and valid obligations of the company; that the company made default
in redeeming the first one hundred bonds maturing December 1, 1893,
as well as one hundred and five bonds maturing December 1, 1894;
that the company also made default in the payment of interest upon
its bonds due June 1 and December 1, 1894, though the same was duly
demanded; that, by reason thereof, and of the execution obtained by
Flanagan, the complainants declared the principal and interest of
the entire issue to be immediately due and payable; that they had
been requested in writing by the holders of more than one-third of
the bonds to enforce the provisions of
Page 176 U. S. 187
the deed of trust; that the company had been for some time and
was still insolvent; that at the date of the report, there was due
upon the bonds, principal and interest, $1,249,632.86; that the
contention of the defendants that the bonds were not issued and
outstanding was not supported by the testimony; that the contention
that the stock of the company, which passed into the hands of
Emanuel Stein by virtue of his contract with the company, was not
fully paid-up stock was also not supported; that as a matter of
fact such stock was received by Stein as fully paid stock, and that
as a matter of law no question in regard to it between the
stockholders of the company could be inquired into in this
proceeding. He further found that there were no creditors of the
company except those represented in this suit.
The defendant stockholders, who were complainants in the
cross-bill, filed exceptions to this report, which, upon a hearing
by the court, was overruled, and a decree of sale
nisi
entered in favor of the original complainants.
Northern Trust
Co. v. Columbia Straw-Paper Co., 75 F. 936. On appeal to the
Circuit Court of Appeals for the Seventh Circuit, the decree of the
circuit court was affirmed. 80 F. 450. Whereupon the appellants
applied for and were granted a writ of certiorari from this
Court.
MR. JUSTICE BROWN delivered the opinion of the Court.
This case presents primarily the question whether a minority of
the stockholders of a corporation have a right to intervene in the
foreclosure of a mortgage upon the corporate property for the
purpose of showing that the property was sold to the corporation by
the connivance of the mortgagees at a gross overvaluation, and to
compel the bonds held by them to be
Page 176 U. S. 188
subjected to a set-off of their indebtedness to the corporation
for unpaid stock.
It should be borne in mind in connection with the several
defenses set up by the interveners that they do not appear here in
the capacity of creditors, but as stockholders; that their rights
are the rights of the corporation, and must be asserted and
enforced through the corporation, and upon the theory that the
latter has or threatens, by collusion or otherwise, to neglect the
proper defense of the foreclosure suit.
Dodge v.
Woolsey, 18 How. 331,
59 U. S.
341-343;
Koehler v. Black River Falls
Iron Co., 2 Black 715;
Bronson v.
La Crosse &c. Railroad, 2 Wall. 283;
Davenport v.
Dows, 18 Wall. 626;
Dewing v. Perdicaries,
96 U. S. 193;
Hawes v. Oakland, 104 U. S. 450,
104 U. S. 460;
Greenwood v. Freight Co., 105 U. S.
13;
Detroit v. Dean, 106 U.
S. 537; Cook on Stockholders, ยงยง 645, 659, 750.
There are several preliminary objections made by the interveners
to this foreclosure which require to be disposed of before entering
upon the proper merits of the case. They are --
1. That the bonds were not due. This in a certain sense is true.
The bonds were peculiar in this respect. There was no date fixed
for their maturity, but there was a provision that, on the first
day of December, 1893, and upon the same date in every succeeding
year, the company would redeem a certain number of bonds to be
ascertained by drawings made under the direction of the Northern
Trust Company in the month of November in each year. That
immediately after such drawing, the company should cause the
numbers of the bonds drawn for redemption to be published in New
York and Chicago newspapers, and that every bond so drawn should
become redeemable on the first day of December next thereafter.
There was no evidence that any such drawing was ever made, and the
trust company did not institute their foreclosure proceedings upon
the theory that any of the bonds, by their terms, had matured.
There was, however, a provision that the mortgage should become
enforceable if the trustees should declare the principal
Page 176 U. S. 189
and interest upon the bonds to be immediately payable, after any
execution should be levied or sued out against the chattels or
property of the company, and such company should not forthwith,
upon such execution's being levied or sued out, remove, discharge,
or pay the same.
It appears that one James Flanagan, who was a bondholder,
brought suit against the company on January 22, 1895, upon six
coupons. The action appears to have been brought directly or
indirectly through the legal firm who were also counsel of the
defendant company. Summons was issued, returnable January 28, 1895,
and served upon the president of the company at 5 o'clock P.M. on
the day it was issued (22d). On the same afternoon, the president
appeared before the justice of the peace and consented to an
immediate trial, which resulted in a judgment for $180. Execution
being sworn out, it was issued and placed in the hands of the
constable at about half-past five o'clock of the same day. Later on
the same day, the trustees gave notice to the company that, by
reason of such execution's having been unpaid, they declared the
principal and interest upon the one thousand bonds named and
described in the trust deed to be immediately payable, and upon the
same night, the trustees took possession of the property of the
company in the vicinity of Chicago, the officers and agents of the
company making no resistance. It also appeared that the president
of the company had been in consultation with the attorneys of the
trustees about foreclosing the mortgage and taking possession of
the property, for several days prior to January 22.
Upon this state of facts, the master to whom the case was
referred reported that the contention of the defendants that the
procurement of the Flanagan judgment was the result of a collusion
of the company was not supported by the testimony. This was also
the opinion both of the circuit court and of the court of
appeals.
We have no doubt that this judgment was collusive in the sense
that it was obtained by the plaintiff and consented to by the
defendant company for the purpose of giving the trustees a legal
excuse for declaring the principal and interest of
Page 176 U. S. 190
the mortgage to be due, and to give authority for a foreclosure.
But this did not constitute collusion in the sense of the law, nor
does it meet the exigencies of the petitioners' case. Collusion is
defined by Bouvier as "an agreement between two or more persons to
defraud a person of his rights by the forms of law, or to obtain an
object forbidden by law," and in similar terms by other legal
dictionarians. It implies the existence of fraud of some kind, the
employment of fraudulent means or of lawful means for the
accomplishment of an unlawful purpose; but if the action be founded
upon a just judgment, and be conducted according to the forms of
law and with a due regard to the rights of parties, it is no
defense that the plaintiff may have had some ulterior object in
view beyond the recovery of a judgment, so long as such object was
not an unlawful one. In
Morris v. Tuthill, 72 N.Y. 575,
which was also a suit to foreclose a mortgage, the court
observed:
"The facts that the assignor of a mortgage and his assignee
acted in concert with the view unnecessarily to harass and oppress
the mortgagor, and with intent to prevent payment, to the end that
the equity of redemption might be foreclosed, and they become
purchasers for less than the value, do not constitute a defense to
an action to foreclose a mortgage. So also, the facts that the
assignee took title from motives of malice and solely with the view
to bring an action, and that the assignor assigned from a like
motive and without consideration, furnish no defense, and do not
impeach plaintiff's title. It is sufficient to sustain the action
that the mortgage debt is due, has been transferred to and is owned
by plaintiff, and the mortgagor can only arrest the action by
paying or tendering and bringing into court the amount due."
If the law concerned itself with the motives of parties, new
complications would be introduced into suits which might seriously
obscure their real merits. If the debt secured by a mortgage be
justly due, it is no defense to a foreclosure that the mortgagee
was animated by hostility or other bad motive.
Davis v.
Flagg, 35 N.J.Eq. 491;
Dering v. Winchelsea, 1 Cox
Ch. 318;
McMullen v. Ritchie, 64 F. 253, 261;
Toler v.
East Tennessee v. &c. Railway, 67 F. 168.
Page 176 U. S. 191
Now in this case, there is no doubt that Flanagan's claim was an
honest one, that the coupons upon which he brought the suit were
due and unpaid, and there is nothing to show that he would not have
been entitled to a judgment upon them if the defendant had made a
contest. The company was notoriously insolvent. Its coupons for
1894 and 1895 were unpaid. All its property was subject to the
mortgage given to secure its bonds. It could no longer continue its
business. Flanagan had a perfect right to bring suit, and under
these circumstances the president of the company was guilty of no
wrong in consenting to a judgment and to the immediate issue of an
execution. The company was not bound to defend if there were no
defense. The forms of law were complied with. It would doubtless
have been more seemly if judgment had not been entered until the
return day of the summons, if the execution had not issued until
the expiration of the twenty days allowed by law, and if the
trustees had not been so alert in seizing upon the nonpayment of
the judgment as an excuse for declaring the principal and interest
of the bonds to be due. But this haste did not render the judgment
or execution void. If the company had become insolvent and could no
longer carry on its business, it was not only its legal obligation,
but its moral duty, to surrender the mortgaged property to the
mortgagees in order that the latter might protect their interests.
If the corporation saw fit to consent to a foreclosure, a minority
of stockholders cannot question their right to do so. The fact that
the Flanagan action was undertaken for the purpose of enabling the
trustee to declare the principal and interest due does not
invalidate the proceeding so long as there was a debt due, an
action properly conducted to recover it, and the object to be
gained was not an illegal one.
The reports of this Court furnish a number of analogous cases.
Thus, it is well settled that a mere colorable conveyance of
property, for the purpose of vesting title in a nonresident and
enabling him to bring suit in a federal court, will not confer
jurisdiction, but if the conveyance appear to be a real
transaction, the court will not, in deciding upon the
Page 176 U. S. 192
question of jurisdiction, inquire into the motives which
actuated the parties in making the conveyance.
McDonald
v. Smalley, 1 Pet. 620;
Smith v.
Kernochern, 7 How. 198;
Barney v.
Baltimore, 6 Wall. 280;
Farmington v.
Pillsbury, 114 U. S. 138;
Crawford v. Neal, 144 U. S. 585.
The law is equally well settled that if a person take up a
bona fide residence in another state, he may sue in the
federal court notwithstanding his purpose was to resort to a forum
of which he could not have availed himself if he were a resident of
the state in which the court was held.
Cheever v.
Wilson, 9 Wall. 108,
76 U. S. 123;
Briggs v. French, 2 Sumn. 251;
Catlett v. Pacific Ins.
Co., 1 Paine 594;
Cooper v. Gulbraith, 3 Wash. 546;
Johnson v. Monell, Wool. 390. So also, in cases where a
surety attacks a judgment against his principal upon the ground
that it was obtained for the purpose of defrauding him, it must be
made to appear either that no debt existed against the principal,
or that the amount was grossly exaggerated for the purpose of
defrauding the surety.
Parkhurst v. Sumner, 23 Vt. 538;
Annett v. Terry, 35 N.Y. 256;
Dougherty's Estate,
9 Watts & S. 189;
Thompson's Appeal, 57 Pa. 175;
Willard v. Whitney, 49 Me. 235;
Pierce v.
Jackson, 6 Mass. 242;
Great Falls Mfg. Co. v.
Worster, 45 N.H. 110;
Berger v. Williams, 4 McLean
577;
Feaster v. Woodfill, 23 Ind. 493. So too, it has been
held that a person may purchase stock in a corporation for the very
purpose of bringing a stockholder's suit, and that the law will not
inquire into the motive which actuated his purchase.
Bloxam v.
Met. Railway, L.R. 3 Ch.App. 337;
Seaton v. Grant,
L.R. 2 Ch.App. 459;
Elkins v. Camden & Atlantic
Railroad, 36 N.J.Eq. 5.
In this connection, it is claimed that the trust company was
premature in declaring the principal and interest of the mortgage
to be due, although the mortgage provided that such declaration
might be made if the company should not "forthwith," upon execution
being sued out, discharge or pay it. It is insisted that the
company was entitled to a reasonable time in analogy to certain
cases which hold that, in insurance companies, the word "forthwith"
carries this significance.
Page 176 U. S. 193
But "forthwith" is defined by Bouvier as indicating that
"as soon as by reasonable exertion, confined to the object, it
may be accomplished. This is the import of the term; it varies, of
course, with every particular case."
In matters of practice and pleading, it is usually construed,
and sometimes defined by rule of court, as within twenty-four
hours. Anderson (Law. Dict.) says of the word that it "has a
relative meaning, and will imply a longer or shorter period
according to the nature of the thing to be done." There are many
cases which turn upon the question whether a person was not too
late in complying with a requirement that a thing must be done
forthwith, but we can recall none where he has been held in default
for doing such act too speedily, and as the corporation in this
case made no objection to an instant declaration by the trustees
that they would treat the principal and interest of the mortgage as
due, it was not within the power of the appellants to set up the
fact that they acted with too great haste. It is one of those
matters within the discretion of the directors, and we do not think
the appellants are in a position to impugn their judgment.
Railway Co. v. Alling, 99 U. S. 463,
99 U. S. 472;
Cook on Stockholders ยง 750. Possibly the mortgagor or the unsecured
creditors of the mortgagor might have had some reason to complain,
but so far as the mortgagees are concerned, the action seems to
have been taken in their interest, and to have redounded in their
benefit.
2. That the bonds were not put in evidence prior to the decree
of foreclosure and sale. This objection is unsound. The foreclosure
suit was by mortgagees in possession. The bill averred and the
answer of the company admitted the issue of one thousand bonds of
$1,000 each, with the accompanying interest coupons, and the answer
of the interveners admitted that these bonds were issued and
certified by the trust company, and only denied that
all
of them were duly issued, negotiated, and sold, and that they were
valid and outstanding obligations. The testimony for both parties
showed that the entire number were certified and issued by the
company, and the master also made a finding to the same effect. He
also found that they were valid
Page 176 U. S. 194
obligations of the company, and that there was due thereon
$1,249,632,86. Given the number of bonds and coupons, the amount
due was a simple matter of mathematical computation. No further
proof was required to justify a decree of foreclosure and sale.
Nothing could be gained by an order to produce the bonds before the
master prior to such decree. The complainants were trustees under
the mortgage, and had no personal interest in the bonds, but held
the legal title to the mortgage, which they were foreclosing for
the benefit of others. This power was expressly given them by the
mortgage. It was sufficient to prove that the bonds were valid and
were outstanding obligations of the company, and it was not
necessary to show in whose hands they were or to require their
production. Indeed, an order to that effect could only result in
delaying a decree indefinitely, since in cases of corporate
mortgages, the bonds are often widely scattered, owned in foreign
countries, or by persons totally ignorant that a suit for
foreclosure is in progress. Months and even years might be required
to produce them all. The practice has been to order a decree for
foreclosure and sale without their production.
Guarantee Trust
Co. v. Green Cove Railroad, 139 U. S. 137,
139 U. S. 150;
Toler v. East Tenn. &c. Railway Co., 67 F. 168,
180.
When, after a sale, the case is referred to a master for proof
of claims against the proceeds of sale, they must, of course, be
brought into court for payment and cancellation, and the title of
each holder must then be proved.
3. That the bonds were not negotiable. This objection is also
unsound. The bonds were payable "to the bearer, or, when
registered, to the registered owner thereof," were declared to be
due on or before December 1, 1901, and were redeemable by annual
drawings conducted under the supervision of the trust company. It
was not known which bonds it would redeem in any one year, as this
was to be determined by drawings, but its promise was to redeem all
of them before December 1, 1901. Considering the nature of
corporate bonds and the difficulty of redeeming so large a number
and amount upon any one day, we do not think the fact that they
were
Page 176 U. S. 195
redeemable by installments, determined by drawings, impaired
their negotiability. Promissory notes much more indefinite as to
their time and payment have been held to be negotiable,
Stevens
v. Blunt, 7 Mass. 240;
Goodloe v. Taylor, 3 Hawks
458;
Cota v. Buck, 7 Metc. 588, and in
Goshen &c.
Turnpike Road v. Hurtin, 9 Johns. 217, it was held directly
"that a promise in writing to pay a certain sum" in such manner and
proportion, and at such time and place, as he shall from time to
time require, is a promissory note.
It is at least doubtful whether the fact that these bonds were
or were not negotiable is a material one; but, assuming it to be
such, we think they were negotiable within the meaning of the
law.
4. That the circuit court should have allowed the answer to be
amended for the purpose of showing that the organization of the
defendant company and the execution of the bonds and mortgage were
parts of a scheme to form a trust or unlawful combination in
restraint of trade. After the answer of the defendant company and
the original answer of the appellants -- who had been admitted as
defendants by leave of court -- were filed, and all the proofs had
been taken, appellants filed an amendment to their answer setting
up that the bonds and mortgage were parts of a combination or trust
in restraint of trade and in direct violation of the act of
Congress of July 2, 1890, "to protect trade and commerce against
unlawful restraints and monopolies," and also in violation of the
act of the General Assembly of Illinois
"to provide for the punishment of persons, co-partnerships, or
corporations forming pools, trusts, and combines, and mode of
procedure and rules of evidence in such cases,"
approved June 11, 1891. The answer set out the facts at length,
averring that there were seventy mills engaged in the manufacture
of straw paper, all in competition with each other, and that the
company obtained control of forty of the mills and operated
sixteen. This amended answer was filed without objection from court
or counsel, and still remains as part of the pleadings in the
case.
Prior, however, to this amendment's being filed, and on January
10, 1896, Charles A. Miller filed his petition to be
Page 176 U. S. 196
made a party defendant and to set up the trust or monopoly
defense. His petition, which sets out with great particularity his
theory of a trust, was with its affidavits and all the testimony in
the case submitted to the court, carefully examined, and finally
denied.
But admitting everything that can be claimed for the combination
in this connection, we do not see how it can affect materially the
foreclosure of this mortgage. If this were a proceeding in
quo
warranto to attack the organization of the corporation, or an
indictment under the statute of Illinois, or an action against a
member of the combination to enforce any of the provisions of the
original contract, the validity of such contract would become an
important question. But, in a suit to foreclose a mortgage upon the
property of the concern, it is difficult to see how the purpose for
which the corporation was originally organized can become a
material inquiry. So long as the corporation existed, it had the
power to create a mortgage, and when that mortgage became due, the
trustee had a right to foreclose. This trustee was no party to the
alleged combination, and the fraud, if any existed, was wholly
extrinsic to the mortgage. It would seem a curious defense if a
mortgagor could set up against the mortgage that the property
covered by it was used for an illegal purpose unknown to the
mortgagee -- as, for instance, gambling -- and therefore that the
mortgage was invalid.
5. That the court erred in holding that the evidence did not
support the contention of the petitioners that there is a
liability, enforceable in this cause, against the bondholders
holding stock that is not paid for, to the Columbia Straw-Paper
Company, amounting to $2,113,000, and which indebtedness should be
set off against the indebtedness on each bond. This proposition
involves the real merits of the case. The gravamen of the
petitioners' contention is that the bondholders should be held for
the difference between the amount paid by Stein for the thirty-nine
mill properties -- namely, $1,887,000 of stock -- and the amount
for which he subsequently turned them over to the paper company --
namely, $4,000,000 in stock -- the difference being $2,113,000.
Page 176 U. S. 197
In support of this contention, petitioners introduced evidence
of the following facts:
In October, 1892, there were about seventy straw-paper mills
doing business in the northwestern states, and having a practical
monopoly of the manufacture of straw paper.
Some efforts had been made to combine them in a single
corporation, but they had proved unsuccessful, when, in February,
1892, the scheme was revived by one Stein, who represented a firm
of New York capitalists, certain other capitalists in Buffalo, who
were represented by one Beard, and still others in Chicago.
As the result of certain conferences between Stein and some
others who had previously endeavored to obtain options, Philo D.
Beard and Thomas T. Ramsdell undertook to obtain options for the
purchase of these mills, to be turned over to a corporation to be
organized by Beard and Ramsdell with a capital stock of $4,000,000.
The options did not specify the number of mills that were to join,
although it seems to have been understood that the entire seventy
were to be gotten in if possible, but as a matter of fact, Beard
and Ramsdell obtained options upon only thirty-nine. The options
show clearly that it was intended to turn the properties over to
the new corporation. For these properties they agreed to pay
$2,788,000, part in cash ($766,000), part in preferred stock
($629,000), part in common stock ($1,258,000), and part in notes
($135,000) of the new company. The stock payments thus aggregated
$1,887,000.
Instead of calling the mill owners together and organizing a new
corporation, Beard and Ramsdell turned over the options to Stein,
and articles of incorporation were drawn by a member of the New
York firm under the laws of New Jersey, which were executed by
Beard, one Taylor, a clerk in the office of the New York firm, and
one Heppenheimer, a New York lawyer residing in New Jersey, each of
these subscribing for four shares, aggregating twelve shares out of
a total issue of 40,000 shares. These articles of incorporation
were filed in the office of the secretary of state on December 6,
1892. The three incorporators met immediately in Hoboken as
stockholders, and elected themselves as directors with six
Page 176 U. S. 198
others, two of whom were members of the New York firm and the
others clerks in their office. Not a single mill owner who expected
to become a stockholder was placed on the board at this time,
although representations had been made by the syndicate that a
majority of the stockholders would be mill owners. Philo D. Beard
was elected president and Samuel H. Guggenheimer secretary.
Immediately thereafter, and on December 10, 1892, Stein, who
held all the options, assuming to act as an independent owner,
though he had obtained the options for the benefit of the company
and had promised to pay for them in the stock of the company, made
a proposition in writing drawn by a member of the New York firm to
this board of directors to sell the thirty-nine mills to the paper
company for $5,000,000, being and advance of $2,113,000 over what
he had agreed to pay for them. This proposition was drafted by the
New York firm, and the stockholders, upon the day the proposition
was received, had another meeting and instructed themselves as
directors to accept. They authorized Beard as president to enter
into a contract with Stein, which was accordingly done. Stein and
wife acknowledged it before a clerk in the office of the Chicago
firm.
This board of directors served for only two weeks, when they
were succeeded by another board composed of Beard, Stein,
Heppenheimer, and others mostly in their interest.
For the next month, the members of the Chicago firm were busy in
getting the mill owners to deposit their title deeds and abstracts,
but nothing appears to have been said to them of what had occurred
in New York. The New York firm engaged itself in raising money to
pay for the bonds, and deposited over $800,000 with the trust
company to be disbursed to the mill owners, which money should be
checked out by its personal agent, who proceeded to make
settlements with the mill owners and take over their properties by
giving checks payable to Stein, who endorsed them over. Stein
testified that he did not understand the plan, but left everything
to the agent to attend to, though it involved Stein's paying out
one million in cash and four millions in stock. The
Page 176 U. S. 199
principal parties in interest did not seem to trust Stein, and
attended to the payment of the purchase price themselves.
It appears that 957 shares of preferred and 4,441 shares of
common stock went directly into the hands of Beard; 859 shares of
the preferred and 4,357 shares of common stock to the New York
firm; to the friends of this firm 420 shares of preferred and 840
shares of common stock; to the Chicago firm, 172 shares of
preferred and 515 shares of common; to a trustee, 1,110 shares of
preferred and 2,232 shares of common; to Stein, himself, 270 shares
of preferred and 2,377 shares of common. No money consideration
passed from Stein or from any of these parties to the company for
any of this stock.
It thus appears that the syndicate received 3,788 shares of
preferred and 14,751 shares of common stock from the treasury of
the company, aggregating 18,459 shares of the par value of
$1,854,900. As it took but $1,887,000 of the stock at par to
acquire the mills, this leaves $258,100 unaccounted for. This is
explained in the testimony of Sherwood, where he says that this
stock went to the promoters and their friends. Add this $258,100 to
the $1,854,900 above stated, and it amounts to $2,113,000, which is
the total capitalization of $4,000,000, less the $1,887,000 that
went to the mill owners.
As thus organized, the corporation began business. It raised the
price of paper six dollars a ton, which invited competition, and a
new corporation was organized by the New York firm under the laws
of New Jersey, called the Paper Commission Company. The sole
function of this company was to sell the product of the straw-paper
company, and the other paper mills which had not given options, the
straw-paper company paying the new company a commission of
twenty-five percent for selling all its paper, reducing the net
price realized by the straw-paper company to less than it had
obtained when selling its own paper.
The mill owners, although the largest stockholders, never seem
to have been treated as a factor in these operations, and in some
way or other the syndicate got possession of $2,113,000 in stocks
and bonds, which they appear to have used in furtherance of their
own interests.
Page 176 U. S. 200
From this testimony it would appear:
(1) That the options were to be secured for the benefit of a
corporation to be organized by Beard and Ramsdell, and that the
mill owners were to be paid principally in the stock of such
corporation.
(2) That Stein, the successor of Beard and Ramsdell, had no
title personally to the property he pretended to sell, but that he
held it as trustee for the corporation to be organized.
(3) That the corporation was organized by three parties who held
but twelve shares out of forty thousand shares, one of the three
being a clerk in the office of the New York firm, and the other two
acting in their interest.
(4) That a member of the New York firm drew the proposition by
which Stein offered to sell these properties to a corporation, in
which the member himself was the only responsible stockholder.
(5) That the owners of the mill properties knew nothing of the
organization of the corporation, or of its acceptance of Stein's
proposition to sell his properties to the straw-paper company.
(6) That the stock was fixed at $5,000,000 upon the idea that
seventy mills would join in the combination, but as a matter of
fact only thirty-nine joined; that but $2,788,000 was paid for
these properties, and that $2,113,000 of stock was distributed
among the parties who got up the corporation without any distinct
consideration being received.
(7) That the mill owners received stock which was worth but
one-half the value of that which they supposed they would
receive.
Assuming these facts to have made out a case of fraud in the
organization of the straw-paper company and in the purchase of the
mill properties, it is difficult to see how they affect the
validity of the bonds as a whole, the right of the trustee to
foreclose, or how they can entitle the complainant to compel the
bondholders, so far at least as they were innocent holders, to set
off their indebtedness to the paper company for stock, against the
indebtedness of the company upon the bonds.
The company did, in fact go through the form of an
organization
Page 176 U. S. 201
under the laws of the State of New Jersey, and while the first
board of directors seem to have been mere tools in the hands of the
New York firm with no real interest in the company, they appear to
have conformed to the letter of the law, and until formally
dissolved, the corporation had a legal existence. As thus
organized, it accepted a proposition from Stein to purchase the
mills for $5,000,000 -- namely, $1,800 in cash, $1,000,000 in
bonds, $1,000,000 in preferred stock, and $2,998,200 in common
stock of the paper company, "all of which," both preferred and
common, "shall be fully paid and unassessable, and so expressed on
the face of the certificates." It thus appears that the entire
transaction by which the title of the thirty-nine mills was finally
vested in the straw-paper company was accomplished through three
distinct transfers: first, from the several owners of these
properties to Beard and Ramsdell; second, by assignment from Beard
and Ramsdell to Stein; and, third, from Stein to the paper company.
It also appears that when the mortgage was made, the legal title to
the property was in the straw-paper company, and that whatever be
the circumstances connected with the organization of the company
and the transfer from Stein, it had the legal right to make this
mortgage. The master found that all of this issue of $1,000,000 in
bonds was negotiated and sold, and is now outstanding and a valid
obligation of the paper company, that they are the same bonds
described in the mortgage, and that they are now due and unpaid.
The original options given by the owners of the mill properties
provided that $766,000 should be paid in cash, and in the facts
above stated it appears that a member of the New York firm engaged
himself in raising money to pay for the bonds, and deposited over
$800,000 with the trust company to be disbursed to the mill
owners.
The testimony also showed that the bonds were all paid for in
full, and there is no testimony to the contrary. The decree of the
circuit court also found that all of the bonds were duly issued,
negotiated, and sold, and were outstanding and valid obligations of
the company, and the affirmance of that decree by the court of
appeals showed that also to be its
Page 176 U. S. 202
finding. A list of the parties to whom the bonds were delivered
by the Northern Trust Company upon the request of the straw-paper
company shows that nearly all the bonds were originally issued to
Samuel Untermeyer, Philo D. Beard, John D. Hood, to members of the
Chicago firm, and others more or less connected with the
organization of the company. But the testimony shows that far the
larger part of them had been transferred to other parties,
presumably for the purpose of raising the $800,000 deposited with
the trust company. There is nothing to impugn the good faith of
most of these holdings. It is true that these parties, in disposing
of the bonds, allowed to each purchaser of a one thousand dollar
bond two hundred dollars of preferred and four hundred dollars of
common stock, but they did not seem to have profited by this
themselves. And if it were necessary to the negotiation of the
bonds to give a bonus in stock, it cannot be considered in the
light of a mere donation. Nor, if it were done in good faith, would
it necessarily afford a ground of complaint to dissenting
stockholders.
Graham v. Railroad Co., 102 U.
S. 148. Certainly if this bonus were received in
ignorance of the fraud practiced upon the original mill owners, and
simply as an inducement to take the bonds, the dissenting
stockholders could not compel the bondholders to submit to a
deduction from their bonds of the par value of the stock received
as a bonus, particularly in view of the fact that the stock might
turn out to be worthless.
In addition to this, however, the contract with Stein provided
that the stock to be issued to him should declare upon the face of
the certificates to be fully paid and unassessable, and we know of
no principle upon which it can be held that innocent bondholders
can be required to deduct from the face of their bonds the amount
unpaid upon their stock. The very authorities which hold that the
declaration that the stock is fully paid and unassessable is not
binding upon creditors also hold that the corporation cannot
repudiate it and proceed to collect either from the person
receiving the stock or his transferee the unpaid part of the par
value. Thus, in
Scoville v. Thayer, 105 U.
S. 143,
105 U. S. 153,
in which a similar declaration was
Page 176 U. S. 203
held to be invalid against creditors, it was said:
"The stock held by the defendant was evidenced by certificates
of full-paid shares. It is conceded to have been the contract
between him and the company that he should never be called upon to
pay any further assessments upon it. The same contract was made
with all the other shareholders, and the fact was known to all. As
between them and the company, this was a perfectly valid agreement.
It was not forbidden by the charter or by any law or public policy,
and as between the company and the stockholders, was just as
binding as if it had been expressly authorized by the charter."
There is no doubt that if this were a suit by creditors to
enforce payment of the unpaid portion of the stock subscription,
the fact that the stock certificates declared that they were fully
paid and unassessable would be no defense; but it is a suit of
stockholders in the right of the corporation, and as between the
corporation and its stockholders, the declaration that the shares
are fully paid up and unassessable is a valid one. If an action by
the corporation would not lie to recover the unpaid part of the
subscription, then such unpaid part cannot be deducted from the
bonds.
Somewhat different considerations apply to those who took part
in the organization of the company and in the purchase of the
thirty-nine mills, and who received the bonds and stock of the
paper company with notice of the fraudulent character of the
scheme. We are not disposed to condone the offenses of those who,
through Beard and Ramsdell and their assignee Stein as their
agents, purchased these plants for $2,788,000 and immediately
thereafter went through the form of repurchasing of their own
agents (in fact of themselves) the same properties at $5,000,000.
These men stood in the light of promoters of the straw-paper
company. A promoter is one who
"brings together the persons who become interested in the
enterprise, aids in procuring subscriptions, and sets in motion the
machinery which leads to the formation of the corporation
itself."
Cook on Stock & Stockholders sec. 651. Or, as defined by the
English statute of 7 & 8 Vict. c. 110, sec. 3, "every person
acting, by whatever name, in the forming
Page 176 U. S. 204
and establishing of a company at any period prior to the
company's" becoming fully incorporated.
See also Lloyd,
Corporate Liability for Acts of Promoters 17. He is treated as
standing in a confidential relation to the proposed company, and is
bound to the exercise of the utmost good faith. Lloyd on Corporate
Liability 18;
Densmore Oil Co. v. Densmore, 64 Pa. 43;
Bosher v. Richmond Land Co., 89 Va. 455. The promoter is
the agent of the corporation, and subject to the disabilities of an
ordinary agent. His acts are scrutinized carefully, and he is
precluded from taking a secret advantage of the other stockholders.
Cook on Stock & Stockholders, sec. 651.
"Accordingly it has been held that if persons start a company
and induce others to subscribe for shares for the purpose of
selling property to the company when organized, they must
faithfully disclose all facts relating to the property which would
influence those who form the company in deciding upon the
judiciousness of the purchase. If the promoters are guilty of any
misrepresentation of facts or suppression of the truth in relation
to the character and value of the property, or their personal
interest in the proposed sale, the company will be entitled to set
aside the transaction or recover compensation for any loss which it
has suffered."
Morawetz on Corporations, secs. 291, 294, 546;
New Sombrero
Phosphate Co. v. Erlanger, Ch.Div. 73;
Bagnall v.
Carlton, 6 Ch.Div. 372;
Emma Silver Mining Co. v.
Grant, 11 Ch.Div. 918.
"In those cases where the scheme of organization gives the
promoters the power of selecting the directors who are to represent
the company in the proposed purchase, they are bound to select
competent and trustworthy persons who will act honestly in the
interest of the shareholders. A purchase made from the promoters
under these circumstances will not bind the company unless it was a
fair and honest bargain."
Morawetz on Corp. sec. 546;
New Sombrero Phosphate Co. v.
Erlanger, 5 Ch.Div. 73;
Brewster v. Hatch, 122 N.Y.
349;
Simons v. Vulcan Oil & Mining Co., 61 Pa. 202;
Twycross v. Grant, L.R. 2 C.P.Div. 469, 503;
Whaley
Bridge Calico Printing Co. v. Green, L.R. 5 Q.B. Div. 109,
111; Thompson on Liability of O. & A. 218, sec. 20.
Page 176 U. S. 205
It is true that the options were taken from each owner of the
thirty-nine mill plants severally, and that no mention was made of
the number that were to be taken into the new corporation. But each
option contract showed that it was the purpose of Beard and
Ramsdell to organize one or more corporations with a capital of one
million preferred and three millions of common stock, and with a
bonded indebtedness of one million dollars. This clause, of itself,
as well as the whole scheme of the contract, indicates that a large
number of similar options were to be obtained, and that one or more
large corporations was to be organized to conduct the business. It
goes without saying that it never could have been contemplated that
any one or any small number of these mills, which were
comparatively insignificant affairs, were to be reorganized with a
capital stock of $4,000,000. The oral testimony indicates that it
was the understanding that all the straw-paper mills in that
section of the country, some seventy in number, were to be
consolidated into the new corporation, and such, upon the testimony
before us, would appear to be the fact. Now if it were understood
by the owners of these thirty-nine mills, who received in cash and
stock $2,788,000 for their plants, that Beard and Ramsdell, who
held themselves out in the option contracts as promoters of the new
corporation, were to transfer these options to Stein, and that the
latter was to set himself up as a purchaser and resell these
properties to the new corporation for $5,000,000, it is impossible
to suppose that they would have consented to the arrangement. Bound
as these promoters were to deal fairly and honestly with the
stockholders in the new corporation, they were guilty of apparently
inexcusable conduct in excluding the mill owners from all
participation in organizing the new corporation, putting in their
own clerks as directors, and paying off the mill owners in stock
which was really of little more than half the value they must have
expected to receive. If they were unable to obtain options upon
only thirty-nine out of the seventy mills, they should have made
known this fact, or at least given these mill owners the benefit of
the surplus stock. Of course, they were entitled to charge
Page 176 U. S. 206
a reasonable sum for their services and expenses, but the
parties who represented the substantial interests in the new
corporation were entitled to be informed of the steps taken. We
think that no acquaintance with legal principles was necessary to
apprise these parties that they were not dealing fairly with the
owners of the mills in concealing from them the facts connected
with this purchase, and in dealing with the property as if they
themselves were the only parties in interest.
It is difficult, however, to see how justice can be done by a
reversal of the decree appealed from. This is a decree ordering a
foreclosure and sale of the property to pay the bonds, to which the
bondholders are clearly entitled. It finds that all the bonds were
duly issued, negotiated, and sold, and that they are outstanding
and valid obligations of the company, and that they are now held by
a large number of persons who have become the owners thereof for a
valuable consideration. These bonds must ultimately be presented
for redemption from the proceeds of sale, and we see nothing in the
decree appealed from to prevent an inquiry being instituted as to
their validity in the hands of their present holders. We are
clearly of opinion that, so far as they were purchased for a
valuable consideration by innocent holders, they are not subject to
the set-off claimed. The question whether, so far as they are held
by parties cognizant of the alleged fraud, they are subject to a
set-off is not one which properly arises in this case, where the
bonds must be treated as an entirety, but is a defense applicable
to each individual bondholder. Whether the corporation, or those
who sue in its behalf, may hold them liable for the par value of
the stock or are confined to a rescission of the transaction is a
question upon which we express no opinion.
We are therefore of opinion that the decree of foreclosure
and sale appealed from must be affirmed.
MR. JUSTICE SHIRAS and MR. JUSTICE PECKHAM concurred in the
result, but were of opinion that the question of fraud was
irrelevant to the issue.
