Consolidated Tank-Line Co. v. Kansas City Varnish Co.

• Decision Date: 09 February 1891
• Citation: 45 F. 7
• Parties: CONSOLIDATED TANK LINE CO. et al. v. KANSAS CITY VARNISH CO. et al.
• Court: U.S. District Court — Western District of Missouri

45 F. 7

CONSOLIDATED TANK LINE CO. et al. v. KANSAS CITY VARNISH CO. et al.

United States Circuit Court, W.D. Missouri, Western Division.

February 9, 1891

Henry Wollman, for complainants Tank Line Company and Health &amp Milligan Manufacturing Company.

Harwood & Meredith, for National Linseed Oil Company and L. C Gillespie, intervenors.

Lathrop Smith & Morrow, for defendants L. V. Harkness, W. F. Wyman L. D. H. Russell, William Peet, James W. White, and Charles N. Howard.

J. L. Wheeler, for defendants Kaw Valley Paint & Lead Company, Nellie F. Benton, and Robert E. Benton.

Cunningham & Dolan, for defendants Kansas City Varnish Company, O. H. Brown, and David C. Howey.

Haff & Van Valkenburgh, for defendants German American Bank.

PHILIPS J.

The question to be decided is as to the right of an insolvent business corporation to make a deed of trust for the benefit of certain of its creditors, to which debts the directors sustain the relation of indorsers, and especially whether the directors may thus prefer themselves when they know, or should know, that the corporation is insolvent, and the effect of the deed is to suspend the functions of the directors in the management of the entire assets, by turning them over to a trustee to dispose of summarily, when the fact is that the assets are barely sufficient to pay off the preferred creditors. A brief review of the history of the debtor corporation will show that its business from the outset of its career was more or less fictitious, and its financial condition was never healthful and prosperous. It was organized under the general corporation laws of the state of Missouri as a business corporation in 1886. Its capital stock was $3,000. The evidence shows that at least one of its subscribers, in violation of the statute, gave his note for his shares,-- say for $800,-- which has never been paid, and the subscriber is insolvent. In January, 1887, an increase of stock was voted for $16,000, and in 1889 an additional increase to $30,000 was voted. From that time forth the company held itself out to the public as having such amount of capital stock. It is true, as contended by counsel, that the statute did not require that this increment of stock should be actually paid up. Yet the public deals with such concerns on the faith of such capital in esse, and it is that which chiefly gives it credit. It is to be imputed to these directors and stockholders that they pretended and claimed all along that the stock subscribed by them was paid up, and it was among the difficult facts at this trial to develop how much had been paid, or rather how much had not been paid, and who are the delinquent constituents. The only subscriber who did pay up his subscription is Mr. Benton, who was admitted on the nominal increase to $30,000, and he paid under the impression that others had done likewise. The older stockholders, on the assumption that the concern was making money, claim to have in part paid up their stock in supposed dividends, and by charging the new takers with what they are pleased to term 'the good-will of the company;' whereas, as a matter of fact, if a correct estimate of profit and loss had been timely made after the first year of its life, the fact would have appeared that the company had made no profit; and, although the fact was studiously concealed, and developed at this trial only after rigid inquiry, it further appears that, for so much of the increased stock as was not covered by the assumed dividends of profit and 'good-will' of the concern, the subscribers, except Benton, executed their notes to the company. These notes were then placed with the bank as collateral security for money borrowed by the company, where they remained for some time, when they were surrendered to the company and destroyed, or in some fashion made way with by the secretary. While the debts represented by these stock notes constitute a part of the consideration of the very claim of the German American National Bank which this deed of trust attempts to prefer, by this device the directors so mingled their individual indebtedness to the company with that of the company to the bank that it is quite difficult on the proofs now made to determine the relative proportion; so that the directors by this deed of trust are not only attempting to protect themselves as indorsers of the company's paper, but to prefer debts owing directly by them to the company. Such a transaction bears its own comment.

As might well have been anticipated, a concern aspiring to a business representing a capital of $30,000, with little over one-third paid up, if that much, without phenomenal success, found itself doing a strained, precarious business; and it is quite apparent from the developments at this trial that, but for the personality of its president, Mr. Peet, and the money he constantly advanced and borrowed on his indorsement, the unduly inflated concern would have collapsed long ago. This is justified by the fact, as testified to by Mr. Peet, that when he could no longer, in justice to his other business operations, divert money therefrom, nor would longer obtain money from the bank for the varnish company, this deed of trust, or some similar resort, became inevitable. The evidence further shows that in the two years prior to January, 1890, the company had lost from $10,000 to $12,000,-- a sum equal to its actual paid-up capital; that from June, 1889, to the time of making the deed of trust, August 25, 1890, the total amount of sales was $71,818.81, while the expenses were $17,599.66,-- equal to about 25 per cent.,-- whereas the testimony of competent experts is that it should have made 25 per cent. on its sales, gross, to have sustained a successful business.

It is true, as much paraded by the secretary and directors on this hearing, that the company had credit in commercial circles such as would have enabled it to obtain goods on credit. But this credit was predicated of a suppressed condition of its actual affairs. It is not too much to say that no competent business man or house would have sold this company a dollar of goods on credit had it made known the true state of its capital and profits and losses. It is true the company had credit at the banks, provided, however, that Mr. Peet, or other good surety, indorsed for it.

But the real question is, what was its actual financial condition just prior to the execution of this trust-deed? In June and July it was unable to meet its maturing obligations. Extensions were obtained in some instances by the well-phrased assurances of the secretary that he would soon be able to make payments. He could make no collections on the motley character of its notes and accounts to meet these pressing demands. Mr. Peet needed all the funds he could, with safety to his other enterprises, afford to borrow. In august, a crisis was imminent. The secretary, when urged by one of the creditors, promised that the directors would hold a meeting on the 22d to devise ways and means for raising money. It had overdrawn its account in bank. It gave checks on the bank where it had no money, which failed to pass the clearinghouse. It is idle now to pretend, as claimed by counsel, that, had a certain officer of the bank been present, those checks would not have been thrown out. This is wholly problematical, and, had he so acted, it would have been in ignorance of the extreme condition of the company's affairs. But the fact remains that its fictitious credit did not avail it in the emergency culminating. This state of affairs doubtless impelled the president to call for an inventory to be taken, which was completed on the 23d of August. Owing to its limited deposits and lack of daily balances, the bank refused to give it credit shortly before this at a less rate of interest than 10 per cent., whereas it had, in common with other reputable business concerns, been obtaining loans at 8 per cent. interest. It had then in bank paper for about $17,000, drawing 10 per cent. interest. According to their ascertainment, the stock of supplies amounted to about $15,000, and, allowing a most liberal price for second-hand fixtures, $1,000 more might be added. These goods were inventoried by the receiver appointed by this court at $12,500. And as best proof of its actual cash value, after the most earnest efforts of the receiver for months to make sale, the best price he could obtain was from Mr. Peet himself, at $8,700. But, grant that $15,000 was a reasonable apparent value, what else had this company? As shown by the receiver's inventory, there were in notes and accounts, in round numbers, $19,000, and in money turned over to him by the trustee on account of sales made by him after taking possession under the deed of trust, $626.48, making a total aggregate of $34,626.48. The amount of liabilities thus far disclosed were then, in round numbers, $35,000. This estimation of assets assumes that the bills receivable are collectible. Such, however, is not the fact. The secretary of the company himself, when requested by the receiver, on taking charge, to mark what were bad debts, good, and doubtful, at once marked over $9,000 as bad, and the court is justified from the evidence in concluding that not over 50 per cent. of the $19,000 can ever be collected; so that, accepting the valuation placed by the secretary on the goods, when he was under pressure to make as good showings as possible of his administration, and $24,000, or less, was what the company had to meet $35,000 of liability, and, as the sequel shows, not enough to meet the sum of the preferred debts.

It is suggested by one of the counsel that the amount of the unpaid capital stock owing by the stockholders should be added to the sum of the apparent...