Thomson-Houston Elec. Co. v. Capitol Elec. Co.

• Citation: 65 F. 341
• Decision Date: 04 December 1894
• Docket Number: 147.
• Parties: THOMSON-HOUSTON ELECTRIC CO. v. CAPITOL ELECTRIC CO. (READ, Intervener).
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

65 F. 341

THOMSON-HOUSTON ELECTRIC CO. v. CAPITOL ELECTRIC CO. (READ, Intervener).

No. 147.

United States Court of Appeals, Sixth Circuit.

December 4, 1894

The original bill in this cause was filed to foreclose a mortgage given by the Capitol Electric Company to secure an issue of $100,000 of negotiable bonds, payable to bearer. Martha M Read, the appellant, intervened, and filed her petition praying the court to decree that four of these bonds, of the par value of $1,000 each, held by her, entitled her to the security of the mortgage, foreclosure of which was being sought. She averred that she did not own the bonds absolutely, but held them as collateral security for the payment of a note for $3,200 signed by one W. W. Morrow dated July 1, 1890, payable one year from date, to A Dahlgren, as trustee, which she, as the real owner, had held since the time of its execution. She prayed that her debt might be recognized and allowed, and that she be paid and satisfied out of the assets of the defendant company together with her reasonable attorney's fees. Her petition was answered by H. M. Doak, the receiver in the cause, appointed by the court and empowered to bring and defend all suits arising out of the settlement of the affairs of the electric company, who averred that the bonds had been put into circulation without the authority of the defendant company, through the fraud of one Dahlgren, an agent of the petitioner, and that she was, therefore, charged with knowledge of their invalidity. The answer further set up that the note which the bonds were pledged to secure was never indorsed to the petitioner, that she, therefore, was not the owner of the legal title either of the note or the bonds, and that all the defenses which could be pledged by the company against the bonds in the hands of A. Dahlgren were available against the claim of the petitioner. There was not substantial dispute in regard to the facts. A. Dahlgren was the nephew and agent of Mrs. Read, the petitioner in Nashville. She had given him $50,000 of her money, to lend it on security. He was the secretary and treasurer and general manager of the defendant, the Capitol Electric Company, which was a corporation chartered under the laws of Tennessee, for the purpose of furnishing electric light and power. In the course of the business of the company, a valid mortgage upon its property of every kind was executed to secure a proposed issue of $100,000 of bonds. Fifty thousand dollars of the bonds were used to buy additional property required in the corporate business; the other bonds of the issue, by resolution of January 26, 1890, were distributed without consideration among the stockholders, in proportion to their stock. Dahlgren had subscribed for $15,000 of the original capital stock, and was entitled, under the resolution, to receive $15,000 of the first mortgage bonds when his subscription should be fully paid. By another resolution of April 12, 1890, the secretary apportioned the bonds according to the holding of the stockholders, and attached them, as collateral security, to the notes of the stockholders given for subscriptions. Under this resolution, Dahlgren received $9,000 of the bonds on account of his paid-up subscription, and $6,000 more of them were attached to his stock note as collateral security. About the 1st of July, 1891, he wrongfully, and without the consent or knowledge of any other officer of the corporation, detached the bonds from his subscription notes, and used them in the manner now to be described. One of his subscription stock notes to the company became due about on the 3d of July, for $2,250. He had no money of his own with which to pay it, but he had money of Mrs. Read in his possession. He wished to take her money, and pledge for its repayment $4,000 of the bonds then attached to his stock notes. He did not wish to have his name appear in the transaction as the real borrower. He procured one W. W. Morrow, a traveling salesman in straitened circumstances, by payment to him of $25, to execute the following note and instrument of pledge:

'$3,200.00.

Nashville, Tenn., July 1, 1890.

'One year after date, I promise to pay to the order of A. Dahlgren, trustee, thirty-two hundred dollars, at the First National Bank, for value received, with interest from date.

W. W. Morrow.' The foregoing note is indorsed:

'The within note is secured by the pledge and deposit of the following securities, to wit, four bonds of the Capitol Electric Company for $1,000 each, Nos. 81, 82, 83, 84; and the First National Bank, or its assigns, may, after the maturity of this note, sell the same for cash or on time, as it or they may deem best, without notice to other party, and appropriate proceeds to the payment of said note; and, in the event of the above-named securities being more than the amount of this note, the same shall be held to cover any other of my indebtedness to the bank, if the latter shall so select; and, should suit be brought on this paper, I agree to pay an attorney's fee, and all other costs of collection.

W. W. Morrow.'

The circumstances show that this transaction was completed about the time that Dahlgren used the money of Mrs. Read to pay his note due the defendant the Capitol Electric Company. On August 25th, Dahlgren transmitted to Mrs. Read an account current of his agency or trusteeship covering the period from February 8 to August 20, 1890. In this letter he inclosed the Morrow note, and in the account charged her with the money paid out on the same. The circuit court held that Mrs. Read was not charged with the knowledge of A. Dahlgren as to the wrongful issue of the bonds, because in the transaction he was engaged in an attempt to deceive and mislead her for his own purposes. But the circuit court further held that, as she was only the equitable owner of the note which the bonds were pledged to secure, she had only an equitable title to the bonds, and could not, therefore, enjoy the advantages of a bona fide purchaser for value; that she took the bonds subject to all the equities growing out of their issue; and, as they were admitted to be invalid except in the hands of a bona fide purchaser for value, her petition was dismissed. This is an appeal from the decree dismissing the petition.

Granbery & Marks, for appellant.

Vertrees & Vertrees, for defendants.

Before TAFT, Circuit Judge, and BARR and SEVERENS, District Judges.

TAFT Circuit Judge, after stating the facts as above, .

We do not think that, under the circumstances of this case, Mrs Read can be charged with notice of the facts which Dahlgren knew concerning the issue of these bonds. As a general rule, the principal is held to know all that his agent knows in any transaction in which the agent acts for him. The Distilled Spirits, 11 Wall. 356. This rule is said to be 'based on the principle of law that it is the agent's duty to communicate to his principal the knowledge which he has respecting the subject-matter of negotiation, and the presumption that he will perform that duty. ' Such a presumption cannot be indulged, however, where the facts to be communicated by the agent to the principal would convict the agent of an attempt to deceive and defraud the principal. The truth is that where an agent, though ostensibly acting in the business of the principal, is really committing a fraud, for his own benefit, he is acting outside of the scope of his agency, and it would therefore be most unjust to charge the principal with knowledge of it. In Allen v. Railroad Co., 150 Mass. 206, 22 N.E. 917, the plaintiff bought shares of stock in the defendant railway through a broker who was treasurer of the company. He fraudulently filled a blank certificate, and delivered it to her. It was sought to impute to her the broker's knowledge of the invalidity of the certificate in an action by her for damages for refusal to transfer the stock. The court held that this could not be done, because the legal effect of the fraudulent act of the broker was to cheat his principal. See, also, Kennedy v. Green, 3 Mylne & K. 699; Espin v. Pemberton, 3 De Gex & J. 547; Rolland v. Hart, 6 Ch.App. 678; Cave v. Cave, 15 Ch.Div. 639; Kettlewell v. Watson, 21 Ch.Div. 685, 707; Innerarity v. Bank, 139 Mass. 332, 1 N.E. 282; Dillaway v. Butler, 135 Mass. 479; De Kay v. Water Co., 38 N.J.Eq. 158; Frenkel v. Hudson, 82 Ala. 158, 2 So. 758. Counsel for appellee attempt to distinguish the case at bar from the cases cited by contending that Mrs. Read is seeking to reap the fruits of the fraud committed by Dahlgren, and, if she will have the benefit of his act, she must take it with the burden of his knowledge. If it were true that Dahlgren had used the bonds fraudulently issued for the benefit of Mrs. Read, it would certainly follow that in an action to recover on them she would be charged with knowledge of the methods by which Dahlgren obtained possession of them. But there is nothing in the case to show this to be the fact. It appears that before Dahlgren used the money of Mrs. Read he had drawn the Morrow note, and had abstracted the bonds. His own letter, which is admitted as evidence by consent, shows that he intended the execution of the note and the delivery of the bonds to be contemporaneous with his use of Mrs. Read's money. He paid his stock note on July 3d, and Morrow's note was dated July 1st. When he abstracted the bonds, therefore, he was not taking them for Mrs. Read; he was taking them for himself, so that he might use them to obtain money from Mrs. Read. He was not abstracting them for the benefit of Mrs. Read, any more than for the benefit of any stranger to whom he might have sold them for value. In the delivering of these bonds to Mrs. Read, Dahlgren was actually dealing with...