NATIONAL BANK OF COMMERCE IN DENVER v. ALLEN et al., 90 F. 545

THAYER, Circuit Judge, after stating the case as above, delivered the opinion of tlie court. It is claimed in behalf of the appellees, who were the complainants below, that the Clarke Mercantile Company indorsed the individual notes of A. K. Clarke, which were at the time held and owned by the appellant, the National Bank of Commerce in Denver, without receiving any consideration therefor, and that tlie indorsements in question were for ihat reason ultra vires and void.

On the assumption that the indorsements were without consideration, it seems to be further contended that, when the Mercantile Company discharged its liability to the bank on account of sucli indorsements by paying the notes, it acted wrongfully and in fraud of tlie rights of the appellees, and that tlie money so paid oil account of tlie indorsements can be recovered by them from the bank, notwithstanding the admitted fact that none of the debts now due to tlie appellees were contracted by the Mercantile Company until more than a year after the indorsements were executed.

We think it sufficient to say, concerning this contention of the appellees, that the proof does not support the charge that the indorsements were executed without consideration. The trial court was of the same opinion, and we fully concur in its views on that point.

Tlie record discloses that, at the first meeting of tlie directors of the Mercantile Company, Clarke proposed to sell and convey to said company his entire stock in trade, consisting of liquors, cigars, fixtures, and all other property, provided tlie company would issue to him its entire capital stock as full paid aud nonassessable, and provided, further, that the company would indorse the notes of said Clarke to the National Bank of Commerce'in Denver, in the sum of $77,500, in consideration of the transaction.

The proposition which was made by Clarke obligated him to further secure his notes to the bank by hypothecating a sufficient amount of the capital stock of the Mercantile Company, when the same was issued to him, but it was expressly stated in his proposition to the company that the indorsement of his notes to the bank should form a, part of the consideration for the proposed transfer of his stock in trade to the Mercantile Company.

This proposition on the part of Clarke was accepted; his stock in trade was conveyed to the Mercantile Company; its total capital stock was issued to Clarke, or to such persons as were by him designated to receive it; and two notes of Clarke, one for $50,000 and one for $27,500, which were then held by the bank, were forthwith indorsed by the Mercantile Company.

Moreover, we find no reason to doubt that the bank at that time held, as collateral security, many warehouse receipts for goods which then formed a part of Clarke’s stock in trade, and we think it is most probable that “the bank surrendered such collateral to enable Clarke to transfer his property and business to the Mercantile Company. In view of these facts, we think that the Mercantile Company did receive a valuable consideration for the indorsement of Clarke’s individual notes, and that the contention to the contrary is without merit.

It may be that the creditors of the Mercantile Company, in a proper proceeding, would be able to show that by the transaction in question the par value of its stock was not fully paid, but there is no greater reason for saying that the notes were indorsed without consideration than there would be for asserting that nothing was paid on the capital stock. The transfer of the stock in trade and the indorsement of the notes formed a part of the same transaction, and the former act was the consideration for the latter.

Nor do we perceive that there was any want of power on the part of the Mercantile Company to execute the indorse-ments. It was organized “to carry on a wholesale, retail, and jobbing liquor, cigar, and tobacco business,” which involved the right to purchase the requisite stock of such articles, and it could purchase the same either by paying cash therefor, or by indorsing the outstanding paper of the party from whbm it acquired them, if that method of payment was deemed satisfactory.

The appellees also predicate a right to relief on the ground that the appellant bank conducted a wholesale and retail liquor, cigar, and tobacco business under the name of the Clarke Mercantile Company, for the bank’s exclusive use and benefit, and that while doing so it made certain false and fraudulent representations to the business world concerning the amount that had been paid on the stock of the Mercantile Company, and concerning its assets and liabilities, whereby the appellees were deceived and induced to extend credit to that company.

This charge appears to be based on the following facts, and is in the nature of a legal inference therefrom: When the Mercantile Company was formed, Clarke became, and so long as it was engaged in business continued to be, its president and chief managing officer. Buch purchases and sales as were thereafter made by the company were made under his supervision and direction.

He was actively engaged in controlling the daily business transactions of the company .from the date of its organization until January 12, 1895, when the Mercantile Company sold its property and the good will of its business to the Colorado Mercantile Company. On the organization of the Mercantile Company, which appears to have taken place on May 26, 1893, 1,998 shares of stock were issued to Clarke, and 1 share each to Benjamin Harrison and John S. Fowler, who, together with Clarke, became the first board of directors. Clarke immediately transferred 1,988 shares of his stock to ‘William B.

Morrison, who was the appellant’s assistant cashier, as collateral, to secure Ms indi-vidual indebtedness to the appellant hank, and that amount, oí stock thereafter stood in Morrison’s name, with a notation upon the stock ledger that he hold it as “trustee for collateral security.” On September 21, 1893, William F. Dieter* was elected a director of the Mercantile Company in place of Benjamin HVurison, who had resigned.

Dieter thereafter served the company in the capacity of director and bookkeeper, he having been recommended for the latter situation to the president of the Mercantile Company by one of the directors of the apipellant bank. On June 4, 1894, Morrison, who had then acquired in his own right the one share of stock originally issued to John S. Fowler, became a director of the Mercantile Company in lien of said Fowler, but he does not appear to- have taken an active

part in the daily business transactions of the Mercantile Company, which were, in (he main, conducted by Clarke, with the assistance of Dieter, tiie bookkeeper. On April 18, 1895, Morrison resigned from the board of directors, and his resigna (ion was duly accepted. There is testimony in the record which tends to show that on or about June 10, 1893, Clarke stated, in substance, to a representative of B. G-.

Dun & Co., when he was requested to make a statement concerning the assets and liabilities of the Mercantile Company, that its total assets aggregated $146,215.12; that the merchandise indebtedness which had been assumed by the company amounted to $22,559.54; and that he (Clarke) owed individually $76,500, which was secured by the hypothecation of his stock in the Mercantile Company. The testimony further shows that Dieter, the bookkeeper of the Mercantile Company, on March 30, 1894, handed to an agent of K. (1.

Dun & Co. another statement, showing that the total assets of the Mercantile Company at that time amounted to $125,627.93, and its liabilities to $10,000; but there is also evidence to the effect that the agent of B. Gr. Dun & Co., to whom the last-mentioned statement was furnished, well knew that the Mercantile Company was heavily indebted at the time to the appellant bank, and that such indebtedness had not been included in the aforesaid statement of its liabilities.

While the evidence fully warrants the conclusion that the appellees were induced to credit the Mercantile Company on the strength of statements concerning' its means and solvency that were circulated by various commercial agencies, and had been compiled from statements made by Clarke and Dieter, yet; there Is no evidence that such statements were made either by direction, or with the knowledge and sanction, of any of the managing officers of the appellant bank.

The testimony further discloses that, after the Mercantile Company was formed, its business was generally conducted at a loss; that this was particularly the case in the season of 1894; that Clarke failed to induce certain parties, from whom he had been in the habit of purchasing goods, to buy a part of bis stock in tbe Mercantile Company and become interested in its business, as be bad hoped to do when tbe company was formed; that baying failed in tbe latter project, and tbe company being in great financial stress, Clarke, on or about January 1, 1895, resolved to sell tbe stock in trade of tbe Mercantile Company and tbe good will of its business, if be could find a purchaser for the same at a fair price; that be succeeded in finding a purchaser, and conferred with tbe officers of tbe appellant bank, which was tbe largest creditor of tbe Mercantile Company, concerning tbe proposed sale, and was aided and assisted by them to a large extent in the negotiations, which culminated, on January 12, 1.895, in a sale to tbe Colorado Mercantile Company of the property and assets of tbe Mercantile Company for tbe sum of $50,000 in cash; and that tbe money so received by tbe Mercantile Company on tbe sale of its property and good will was deposited by it in the appellant bank, where it was applied, with tbe consent of tbe Mercantile Company, to tbe payment of its indebtedness to the appellant bank, which then amounted to about $78,000, including tbe balance unpaid on tbe individual indebtedness of Clarke, which bad been indorsed by tbe Mercantile Company on tbe organization of that concern.

Prior to January 12, 1895, it seems that $13,111 bad been paid on Clarke’s individual note of $27,500, which bad been indorsed by tbe Mercantile Company; that said note bad been canceled, and tbe balance due thereon bad been included in another note of $25,000, which was drawn by tbe Mercantile Company and indorsed by Clarke. Tbe note for $50,000, originally made by Clarke and indorsed by tbe Mercantile Company, appears to have been wholly unpaid on January 12, 1895, except such sums as may have been paid thereon in tbe way of interest.

Such, in brief, are the material facts on which tbe claim is based that tbe appellant bank transacted business in tbe name of tbe Mercantile Company, for its exclusive use and benefit, and that tbe representations aforesaid concerning that company’s assets and liabilities were in fact made by tbe bank, and that tbe bank should be held accountable therefor. We are of opinion, however, that tbe claim in question is not well founded.

Tbe Mercantile Company was a distinct legal entity, subject at all times to tbe control of its own officers, and it is clear, we think, that it did not become an agent of tbe bank either because Clarke hypothecated tbe bulk of its stock which be happened to own to secure a debt due to tbe bank, or because Morrison, an employe of the bank, served for a time on tbe board of directors of the Mercantile Company, or for both of these reasons combined.

In a legal sense, a corporation does not become tbe agent of another, be it a corporation or an individual, because tbe latter bolds a part of its stock in pledge to secure a debt; nor is tbe relation of principal and agent established, as between two corporations, because an officer or employé of one is a member of tbe board of directors of tbe other. It has even been held that, where tbe same person is acting as director in two corporations, knowledge acquired by him, while serving in tbe capacity of a director in one corporation, is not imputable to tbe other. Thomp. Corp. § 5214,- and cases there cited.

Moreover, while it may. be conceded that one corporation may act as agent of another in a given transaction, or even in a series of transactions, yet we do not understand it to be possible, for a corporation which has been incorporated to carry on a given bush ness, to transact the whole of that business merely as the agent of, and for the exclusive benefit of, another.

Ordinarily, a corporation is not even the agent of its own stockholders, in such a sense as to render them personally liable upon its contracts or for its wrongful or fraudulent aids, although its stockholders are entitled ultimately to the net profits realized from all corporate venturi's,- and it would be a strange result if the acquisition of slock in a corporation by one of its creditors, to be held as collateral security, or if (he election of one of the credit- or’s einplovds to serve on its board of directors, should be held to place the corporation in the attitude of a mere agent.

Such a conclusion is totally inadmissible. It is doubtless true, as has been suggested, that a large creditor of a corporation or of an individual, by virtue of being such, sometimes has such an influence over his debtor as enables him to control Ms actions in many ways; but this is a moral power, incident to the situation, which the law permits "a creditor to exercise for his own benefit and advantage, even at the expense of other creditors, provided that he does not. direct the doing of acts that are either illegal or fraudulent.

The existence of such an influence, however, falls far short of establishing the relation of principal and agent, even where It is plain that it does exist and has been exercised. In the case at bar, it is obvious that the bank counseled and advised the Mercantile Company, through Clarke, its president, to sell its property and effects, and to apply the proceeds of the sale on the company’s indebtedness to the bank; and it is very probable that the Mercantile Company was induced to a large extent, by such advice, to make the sale and such appro-pria tion of the proceeds.

But conceding this to have been the case, the transaction amounted to no more than a preference among creditors, all of whom had valid claims, and, considered by itself, we do not see that it gives the appellees any legal cause for complaint.

It seems to be well settled in the state where the transaction took place, and in other jurisdictions as well, that a private business corporation, so long as it retains the custody and control of its property, may dispose of the same so as to pay the claims of one or more of its creditors, to the total exclusion of other equally meritorious claims, although it is at the time insolvent. In this respect a private business corporation has the same power to prefer creditors which is possessed by an individual.

Its property and assets not being held in trust for equal distribution among all of its creditors, it may discriminate between them like a natural person, provided it pays honest debts and makes no distribution of its property among shareholders until all legal obligations to creditors have been discharged. West v. Produce Co., 6 Colo. App. 467, 41 Pac. 829; Burchinell v. Bennett (Colo. App.) 52 Pac. 51; Crymble v. Mulvaney, 21 Colo. 203, 40 Pac. 499; Sutton v. Dana, 15 Colo. 98, 25 Pac. 90; Gottlieb v. Miller, 154 Ill. 44, 39 N. E. 992; Henderson v. Trust Co., 143 Ind. 561, 40 N. E. 516; Jewelry Co. v.

Volfer, 106 Ala. 205, 17 South. 525; Hollins v. Iron Co., 150 U. S. 371, 382, 14 Sup. Ct. 127; Railway v. Ham, 114 .U. S. 587, 5 Sup. Ct. 1081; Graham v. Railroad Co., 102 U. S. 148, 160; Fogg v. Blair, 133 U. S. 534, 541, 10 Sup. Ct. 338; Gould v. Railway Co., 52 Fed. 680.

In concluding the discussion on this branch of the case, it is proper to observe that if the charge was well founded that the appellant bank carried on business in the name of the Mercantile Company, and while doing so made false representations, which were productive of .damage' to the appellees, then it would follow that a court of law could‘afford adequate relief for the alleged ‘wrong, and there would be no occasion for seeking relief in a court of equity.

It is further urged that the decree of the lower court, compelling the bank to pay the appellees’ claims out of the money which it received from the Mercantile Company on the sale of its property and good will, can be sustained upon the theory that the bank had a secret lien on the property of the Mercantile Company, or what was tantamount thereto, which was fraudulent as to its other creditors. This claim is based altogether on the state of facts heretofore detailed.

It is said, in substance, that the bank held 1,988 shares of the stock of the Mercantile Company by a title which authorized it to vote the stock at all corporate" meetings; that Morrison and Dieter, two of the directors of the Mercantile Company, while serving on its board, were subject at all times to the orders of the bank; and that by these means the bank had acquired a control over the Mercantile Company which was as obnoxious to the law as an unrecorded mortgage or bill of sale covering all of that company’s property and assets.

We think, however, that it is an erroneous view that the bank had the right to vote the stock which stood in the name of Morrison on the books of the Mercantile Company. The testimony shows without contradiction that Clarke was the real owner of that stock, and that it had been placed in Morrison’s name merely as collateral security for Clarke’s indebtedness to the bank, without any agreement between Clarke and the bank that while it was so held it should be voted by the latter. Under these circumstances, the right to vote the stock depends upon a local statute of Colorado (1 Mill’s Ann. St.

Colo. §§ 495, 496), which is as follows: “Sec. 495.

No person holding stock in any corporation as executor, administrator, conservator, guardian or trustee, and no person holding such stock as collateral security, shall he personally subject to any liability as stockholder of such corporation, but the person pledging such stock shall be considered as holding the same and shall be liable as a stockholder accordingly, and the estate and funds in the hands of such executor, administrator, conservator, guardian or trustee, shall be liable in like manner and to the same extent as the testator or intestate, or the ward, or person interested in such trust funds would have been if he had been living- and had been competent to act and held the stock in his own name. “Sec. 496.

Every executor, administrator, conservator, guardian or trustee shall represent the stock in his hands at all meetings of any such corporations a.nd may vote accordingly as a stockholder, and every person who shall pledge his stock may nevertheless represent the same at all meetings and vote accordingly.” Beading both, of these sections together, the term “trustee,” as used in

section 496, means, we think, a person who holds the legal title to stock for the benefit of some third party, who is the equitable owner thereof, and entitled to the dividends thereon, and whose property, whether held in trust or otherwise, is chargeable with whatever liability may result from the ownership of the stock. Persons holding stock in trust for married women, minors, insane persons, spendthrifts, a«:d die like would be included by the term “trustee,” as used in

section 496, supra; but a person in whose hands stock is placed by the real owner, to be held merely as collateral security for a debt due from himself to a third person, would not be so included. In cases of the latter soil, the stock involved is really held in pledge, and the right to vote-the same, in the absence of an express agreement to the contrary, remains with the pledgor. Brewster v. Hartley, 37 Cal. 15-25. Such v e understand to be the construction which has been placed upon the Colorado statute by the supreme court of that state, and-similar views have been expressed elsewhere. Miller v.

Murray, 17 Colo. 417, 30 Pac. 46; Vowell v. Thompson, 3 Cranch, C. C. 438, Fed. Cas. No. 17,023; Hoppin v. Buffum, 9 R. I. 513-518; Allen v. Hill, 16 Cal. 113; Com. v. Dalzell, 152 Pa. St. 217, 25 Atl. 535.

Concerning the charge that Morrison and Dieter, while; serving on the board of directors of the Mercantile Company, were mere agents of the bank, we deem it sufficient to say: First, that both of these persons were duly qualified to serve as members of the board by their ownership, in their own right, of one share each of the stock of the Mercantile Company; and, in the second place, that we fail to find any evidence in the record which would justify a finding that Dieter was a special representative of the bank on the board of directors, and that: he was unduly or unlawfully swayed by its influence.

He was the bookkeeper of the Mercantile Company, and was employed for that purpose by its president. He devoted all of his time to its service, and was paid for his services by the company. In short, he bore no such, relation to the bank as would indicate that it could or did control his actions in an unlawful manner. Indeed, when the facts of the case are fully analyzed, it will be found, we think, that the control which the bank exercised over the Mercantile Company was mainly due to the fact: that it had made advances to the company and was its largest creditor.

It was a moral influence, due to this circumstance, which the bank seems to have exerted over the Mercantile Company, rather* than any legal power that it had acquired to control its actions or business policy. The directors of the Mercantile Company seem to haw; retained the power at all times to transact the corporate business as they deemed best, and two of them, at least (Clarke and Dieter), did not occupy such a relation to the bank as disabled them from exercising an independent judgment, or acting at all times as they thought proper.

We have already stated, in substance, that the evidence does not support the contention that the bank should be held responsible to the appellees for the statements which were made by Clarke and Dieter, relative to the financial condition of the Mercantile Company, and on this branch of the case it is proper to observe, further, that the testimony does not warrant the conclusion that the bank wrongfully concealed its relation as a creditor of the Mercantile Company, or resorted to any artifice to prevent such relation from becoming known.

Ho statute of the state of Colorado, and no business usage of which we are aware, made it obligatory on the bank to give public notice of the amount of its claim against the Mercantile Company; and it goes without saying that, in the absence of such a statute, its full duty was discharged by refraining from making any false statements or spreading any false ’ reports concerning the amount of such indebtedness.

In point of fact, the existence of the debt, and the proximate amount thereof, was known to some of the appellees as early as March 22, 1894; since the evidence shows that on that day some of the appel-lees were .furnished with a statement by Bradstreet’s Commercial Agency, which contained the information that the Mercantile Company owed a local bank in Denver about $80,000, and that the stock of the Mercantile Company was hypothecated to secure such indebtedness, and was virtually owned by the pledgee.

In view of these .considerations, we are unable to discover any reasons which will warrant a ruling that the control which the bank exercised over the Mercantile Company was tantamount to a secret lien on its property and for that reason fraudulent. Such influence as it exercised over the Mercantile Company it had acquired by means which the law esteems lawful. It concealed no fact which the law required it to make known.

Moreover, it had no legal power to -control the corporation, since the majority of that company’s directors were under no obligations to the bank which can be assumed to have Tendered them unduly subservient to its wishes. In support of the proposition which is now under consideration, the appellees have invited our special attention to the case of American Oak-Leather Co. v. C. H. Fargo & Co., 77 Fed. 671, which seems to .have controlled the action of the trial court in rendering a decree in favor of the appellees.

In that case it appeared that an insolvent business corporation had executed judgment notes in favor of three of its creditors, and had agreed that it would not execute like notes in favor of any of its other creditors. To make the latter agreement effectual, and for no other purpose, its president and secretary and the majority of its directors resigned, and their places were' filled by clerks of the attorneys for the favored creditors who had concocted the scheme.

The corporation was thus left bound in the hands of the favored creditors who had been vested with power to make the potential liens actual liens at any moment. It was held, in substance, that .judgment notes'executed under such circumstances had all the vices of a secret lien. The facts disclosed by the present record, as heretofore detailed, are, in our judgment, materially different from those last recited. The bank held no obligation of the Mercantile Company which it could transform at will into an actual lien upon its property; neither did it have a like power to control the action of the debtor company.

The result is that, if we give to the case cited its full weight, we fail to discover, in the facts upon which it was predicated, anything which will serve to alter the conclusions heretofore announced. One further question affecting the jurisdiction of the trial court is presented by the record which deserves notice.

Several of the appel-lees who intervened in the suit which was commenced by Paris, Allen !.& Co., and who became co-complainants after that suit was instituted, did not have claims against the Mercantile Company amounting to as much as $2,000, exclusive of interest and costs, and with respect to those claims it is contended by the appellant that (.lie circuit court did not have jurisdiction, although said claims had been severally, reduced to judgment.

The jurisdiction of the trial court over the action brought by Paris, Allen & Co. is conceded, since that firm had obtained a judgment against the Mercantile Company in the sum of $3,249.42.

The question, therefore, is not whether several judgment creditors whose claims are each less than 82,000 can aggregate them and bring a joint suit for the purpose of maintaining a creditors’ bill in the federal court, but the precise question at issue is whether certain judgment creditors whose judgments were each less than $2,000 had the right to intervene after another creditors’ bill had been lilcd in the federal court over which that court had undoubted jurisdiction. This question, we think, should be answered in the affirmative.

The original bill was exhibited for the purpose of reaching a specific fund alleged to be in the hands of the appellant bank, and subjecting the same to the payment of judgments against the Mercantile Company,, on the theory that the bank had acquired the fund in fraud of the-rights of creditors; and while it is true that the court ultimately rendered a money decree against the bank requiring it to pay specific sums of money to each of the several complainants, yet, in the progress/ of the case, it might have found it necessary to have appointed a receiver of the fund, or to have required its payment into court for the purpose of distribution.

Had the property proceeded against been land or goods and chattels, it would probably have found it necessary to have appointed a receiver. The suit was clearly one to reach a specific fund, and subject it to the payment of debts of the Mercantile Company, and. being a suit of that nature, the court in which such bill was first filed acquired the right to administer the fund without let or hindrance on the part of any other court, according to the principles announced by this court in the cases of Merritt v. Barge Co., 49 U. S. App. 85. 93, 24 C. C. A. 530, and 79 Fed. 228, and Gates v. Bucki, 12 U. S.

App. 69, 4 C. C. A. 116, and 53 Fed. 961. We think, therefore,, that after the original bill had been filed, and the fund proceeded against had thereby been brought within the jurisdiction of the court,/ in such a sense; that if it thought, proper it could have taken the fund.' into its own custody, other judgment creditors had the right to intervene for the protection of their interests, even though their judgments were severally less than 82,000.

If they had been, compelled to file bills in the courts of the state to reach the same fund and subject it to the payment of their judgments, such a course of procedure might eventually have led to a conflict of jurisdiction.

Besides, we do not understand that the provision of the judiciary act limiting the right to sue to cases which exceed $2,000, exclusive of interest and costs, has any application to cases like the one at bar, where a judgment creditor intervenes and becomes a party to a creditors’ bill already filed, which was exhibited by a judgment creditor whose judgment exceeded the jurisdictional amount, and which was filed for his own benefit and for the benefit of others similarly situated who might come in and contribute to the expense of prosecuting the suit.

The right oí a, judgment creditor to file a bill in behalf of himself and other judgment creditors who may elect to join in the proceeding and contribute to the •expense, has been recognized from time immemorial by courts of equity, cliiefiy because such practice lessens litigation and is also convenient.

It is hardly probable, therefore, that the provision of the judiciary act last referred to was intended to change the established practice so as to prevent a judgment creditor from intervening in a proceeding already brought to collect a judgment in excess of $2,000, excluding interest and costs, if his own claim happened to be less than that sum. The cases chiefly relied upon by the appellant’s counsel to sustain a contrary view (Gibson v. Shufeldt, 122 U. S. 27, 7 Sup. Ct. 1066; Seaver v. Bigelows, 5 Wall. 208; Ex parte Baltimore & O. R. Co., 106 U. S. 5, 1 Sup. Ct. 35; Clay v. Field, 138 U.

S. 464, 479, 11 Sup. Ct. 419) are cases where the right of appeal to the supreme court was denied in consequénce of the amount involved in the appeal, and, in our judgment, they are not in point on the question at issue. The objection to the jurisdiction 'of the trial court is accordingly overruled, but, as the decree appealed from was erroneous, the same will be reversed, and the cause will be remanded for further proceedings in accordance with this opinion.