CHAVELLE v. WASHINGTON TRUST CO.; WASHINGTON TRUST CO. v. WASHINGTON STEEL & BOLT CO., 226 F. 400

ROSS, Circuit Judge (after stating the facts as above). [1] Under repeated rulings, the trust company was justified in resorting to both appeal and petition to bring up for review the rulings of which it complains, in order to avoid a mistake in its remedy. In re Worcester County, 102 Fed. 808, 42 C. C. A. 637; Lockman v. Lang, 132 Fed. 1, 65 C. C. A. 621; Fisher v. Cushman, 103 Fed. 860, 43 C. C. A. 381, 51 L. R. A. 292; Collier on Bankruptcy (8th Ed.) 434-436. The motion to dismiss is denied.

The findings of fact and evidence show, among other things, that the $23,300, par value, of the bonds issued to McPhaden, were issued to him by the Steel & Bolt Company in payment of money he had theretofore advanced to the company, and that McPhaden was then a stockholder, director, and the president of the company; and that the $2,900, par value, of the bonds issued by the Steel & Bolt Company to Pike were issued to him by the Steel & Bolt Company in payment of money he had theretofore advanced to the company; and that Pike was then a stockholder, director, and the secretary and treasurer of the company.

It is true that.the deed of trust declared that none of the bonds should be sold or disposed of directly or indirectly at a greater discount than 5 per cent, of their face value, and that the bonds above mentioned were issued to McPhaden and Pike at 90 cents on the dollar; but it is also true that in the resolution of the board of directors of the company providing for and authorizing the issuance and sale of the bondsit was provided that: “A commission of five per cent, of the face value of the bonds of said company be allowed to any agent, officer, or trustee of the company purchasing or selling any of said bonds of said company,” and that “the accounts of A.

McPhaden and A. G.

Pike for money loaned to .the Washington Steel & Bolt Company to (the then) date be settled by giving them bonds of the Washington Steel & Bolt Company, allowing them a discount of five per cent, on said bonds, and a commission of five per cent, for selling the same, and authorizing the trustee to issue to them bonds of said company in proportion to the amount of the claims due each as shown by the books of the company.” It was under and pursuant to the resolution of the board of directors of the Steel & Bolt Company and upon the certificates that have been set out, that the trustee certified and issued to McPhaden bonds in the amount of $23,300, and to Pike similar bonds in the amount of $2,900.

The record shows that subsequently and on the 30th of April, 1909, at a meeting of the directors of the company, the Bank of Montreal was made a depository of the company’s funds, and its banking business directed to be transferred to it from the State Bank of Edmonds, and a resolution adopted authorizing the president and treasurer of the company “to negotiate loans from time to time as they deem necessary to further the interests of the company,” and directing its secretary “to notify the Washington Trust Company to deliver to A.

McPhaden bonds of the Washington Steel & Bolt Company to the amount of $20,000.00, or any part thereof, upon presentation of said A. McPhaden’s note to the amount of the bonds delivered, less five per cent, of the face value of the bonds, and five per cent, commission; said note to draw eight per cent, interest, payable on the date when interest on the bonds falls due.” The last-mentioned resolution purported to authorize the sale of an additional $20,000 of the bonds at 90 cents on the'dollar to Mc-Phaden on credit.

The evidence, as well as the findings of the referee, however, shows that after the advances made by him and by Pike, for which $23,300 and $2,900 of the bonds were respectively issued to .them, McPhaden made to the company further advances of money for which were issued to him $11,200 of bonds at 90 cents on the dollar. Subsequently, the company still needing money, McPhaden went to the T3ank of Montreal to borrow it, the manager of which bank inquired about the condition of the company, and McPhaden explained to him the number of bonds outstanding and by whom owned.

After an examination of the company’s plant by the manager of the bank, he agreed to' advance to the company $20,000 át different times, upon the individual notes of McPhaden and Pike, secured by the bonds of the company that had been issued to them. And that arrangement was consummated; the aggregate loans to the company being made at four different times and in four different amounts, at the rate of 8 per cent, interest per annum.

It appears from the evidence that McPhaden received no salary, as an officer of the company, but did receive -5 per cent, commission on all of the bonds that were issued to him under and pursuant to the resolution of the board of directors of the company which has been set out, in a credit to him at the time of such issue; and that Pike received a like commission in a like manner at the time of the issuance to him of the $2,900 of bonds.

Subsequently, the bank demanded of the company additional security, under which demand the minutes of the board of directors of the Steel & Bolt Company show this proceeding: “Edmonds, Wash., March 20, 1911. “Meeting of the Board of Directors, Washington Steel & Bolt Co. “Pursuant to notice given March 16, 1911. “Meeting called to order by vice president. “The following directors were present: W. It. Ammon, H. W. Hall, A. G. Pike. “Minutes previous meeting read and approved. “Motion made by A. G. Pike seconded by R. W.

Hall that $25,000 of the company's unsold bonds be placed with the Bank of Montreal as collateral on a $20,000.00 loan that this company owes, and an order be given the Washington Trust Company to deliver same to the bank. Carried. “Motion made by A. G. Pike to send a copy of these minutes to Dr. J. W. Cosford and Austin Ready for their consideration (they not being present). Seconded by H. W. Hall. Carried. "There being no further business meeting adjourned. “[Signed] A. G. Pike, Sec’y & Treasurer. “W. R. Ammon. “II. W. Hall. “.1. W.

Cosford, President. “Austin Ready.” In. respect to that resolution, the findings of the referee, approved by the court below, and which, in view of the evidence, we must lake to be true, are as follows: "That on, or about, the 20th day of March, 1911, a purported resolution of the board of trustees of Washington Steel & Bolt Company was prepared and sent to A. G. Pike, secretary and treasurer of said corporation, for adoption by said board. That said board of trustees at that time consisted of seven members.

That no meeting of said board was called, nor did said board of trustees meet; nor did they adopt said resolution. That said Pike signed said purported resolution; that two of the other trustees — Ammon and Hall — were telephoned to to come to the office of the company to sign it. That Ammon went to the office and signed it without any other trustee being present. That afterwards Hall came there and signed it in presence of Ammon only of the trustees, and that it was taken to, and signed by two of the other trustees— Cosford and Ready — without any other member of the board of trustees being present.

That said purported, resolution provided that $25,000 of 'unsold' bonds be placed with the Bank of Montreal as collateral on a $20,000 loan that this company owes.’ That upon the strength -of said purported resolution, and not otherwise, there was issued and delivered to the Bank of Montreal $25,000 of the bonds of Washington Steel & Bolt Company, the bankrupt, which Said $25,000 of bonds are a part of the bonds now held by said bank, and upon which the. trustee, the Washington Trust Company, is seeking to foreclose said trust deed, or mortgage.

That the only debt owed by said bankrupt to said bank at the time said $25,000 of bonds was issued to it, as aforesaid, was that evidenced by said $20,000 notes, and there was no other or different consideration for the issuance of said $25,000 of bonds, or any of them.” In respect to the $25,000 of the bonds so issued and delivered to the bank, we have no difficulty in agreeing with the court below that they were issued without authority, and are void; that the purported resolution of March 20, 1911, was invalid; and that those bonds were issued contrary to that provision of the Constitution of the state of Washington (section 6 of

article 12) prohibiting any corporation of the state from issuing “any bond or other obligation for the payment of money, except for money or property received or labor done,” and contrary to the provisions of the trust deed itself. But in respect to the $26,200.00 of the bonds that were issued to McPhaden and Pike respectively, and by them assigned to the bank as collateral security for the $20,000 loaned by it to the Steel & Bolt Company, and in respect to such other of the bonds as were issued to McPhaden and by him sold for value to C. F. Chapin, Meta McFlroy, J. H. Osborne, and Thomas S.

Burley respectively, we are of the contrary opinion. It is not necessary to consider how those bonds should be regarded in the hands of the original holders, for it is not questioned that they were assigned by them to the respective transferees in good faith and for value, and we think it clear that they were negotiable instruments. They were bonds of a series of bonds expressly designed and authorized both by the resolution of the company providing for their issue, well as by the trust deed executed by it to secure their payment, to be put upon the market and sold to raise money for the needs of the company.

Upon their face it was provided, among other things, that they should pass by delivery. There is nothing in the findings of fact made by the referee and approved by the court below, nor in the evidence, tending to show any fraud in respect to those bonds even on the part of McPhaden or Pike, and certainly nothing tending to show any fraud on the part of either of the transferees.

The only ground upon which it is claimed that the bonds were not negotiable instruments grows out of this clause: “All payments upon this bond, both of the principal and interest, shall be made without deduction for any tax or taxes that said Washington Steel & Bolt Company may be, required to pay or to retain therefrom by any present or future laws of the United States of America, or of the state of Washington, said Washington Steel & Bolt Company hereby covenanting and agreeing to pay any and all such tax or taxes.” It is said that thereby the amount to become due on the bonds was rendered uncertain, and the decision of the Supreme Court of Washington, in the case of Bright v.

Offield, 81 Wash. 442, 143 Pac. 159, is cited in support of the contention.

The decision there made in respect to the promissory note there in question is correctly stated in the fourth subdivision of the syllabus to that case, which is as follows: “K note, secured by a mortgage, provided that if the maker should, allow the taxes or any other public rates and assessments on the mortgaged property to become delinquent, or should do any act whereby the value of the mortga;.' od property should be Impaired, or in case any taxes or assessments shou'd bo levied against the holder of the note on account thereof, then on the happening of any of such contingencies the whole amount secured should at once become due and payable, and the mortgagee might collect the debt and foreclose the mortgage and sell the mortgaged property, or so much thereof as should be necessary to satisfy the debts, interest, and costs, and all taxes, public rates, or assessments that might be due thereon, etc.

Hold, that by necessary implication the maker was bound to pay any such taxes, the provision being analogous to one authorizing the holder of the note to declare it due at any time he deemed the debt insecure, and destroyed the note's negotiability.” It is manifest that the clause in the promissory note there involved and considered is wholly unlike the clause contained in the bonds' here under consideration, which expressly declares that “all payments upon this bond, both of the principal and interest, shall be made without deduction for any tax or taxes that said Washington Steel & Bolt Company may be required to pay or to retain therefrom by any present or future laws of the United States of America, or of the state of Washington,” and contains the further express covenant and agreement on the part of the obligor “to pay any and all such tax or taxes” ; in effect an express promise to pay both principal and interest of the bonds in full, without any deduction on account of any tax or taxes and an express covenant of the mortgagor to itself pay all such taxes.

It is clear therefore that the bonds here involved are not thereby rendered in any respect uncertain as to the amount or time thereby prescribed for the payment of either principal or interest. 'i'he case is remanded to the court below, w,ith directions to modify its judgment in accordance with the views above expressed, with cost to the petitioner and appellant trust company. Amendment of Judgment. PER CURIAM.

It is ordered that there be and hereby is added to the. judgment heretofore entered herein the words: “And with a provision to the effect that the holder of any of the bonds adjudged by this court to be valid be allowed to pay by such bonds any accepted bid by such holder for the mortgaged property at any sale thereof.”