71 F. 797 (6th Cir. 1896), 341, Germania Safety-Vault & Trust Co. v. Boynton

Docket Nº:341.
Citation:71 F. 797
Case Date:January 07, 1896
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 797

71 F. 797 (6th Cir. 1896)




No. 341.

United States Court of Appeals, Sixth Circuit.

January 7, 1896

This bill was filed by C. W. Boynton, a citizen of the state of Illinois, against the Kentucky Malting Company, a corporation of the state of Kentucky, and others, for the purpose of enforcing for his benefit a mortgage upon the property of the malting company, made in 1882, to secure an issue of 120 bonds, for $500 each, bearing interest payable semiannually. The malting company was a corporation organized in 1876, under the general laws of Kentucky, for the purpose of buying and selling malt, grain, and supplies needed by distillers and brewers. The mortgage in question, and the bonds executed thereunder, were authorized by proper action of the board of directors, taken in October, 1882, and the bonds matured in October, 1892. Prior to September, 1885, these bonds were used from time to time by the malting company as collateral security for loans obtained from banks at Louisville, Ky. The complainant, Boynton, claims that in September, 1885, the entire issue of these bonds was delivered to him by E. W. Herman and J. H. Pank as collateral security for a note for $55,000 executed by J. H. Pank & Co., a firm composed of E. W. Herman and J. H. Pank, and by Herman and Pank individually. That note bore interest at the rate of 7 per cent., payable semiannually, and was payable in four years. Subsequently, by

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payments, the debt was reduced, and 40 of the bonds, together with all past-due coupons, were first canceled by him, and then surrendered to Herman and Pank. Thus the suit now involves only the remaining 80 bonds, with interest since January, 1892. The malting company made a general assignment in 1892 to the appellant the Germania Safety-Vault & Trust Company for the benefit of all its creditors. Subsequently a suit was begun by one J. N. Struck, in a court of the state of Kentucky, against the malting company and its assignee, claiming to be a creditor secured by a statutory mechanic's lien under the law of Kentucky. Boynton made defendants to his bill the Germania Safety-Vault & Trust Company (assignee aforesaid), J. N. Struck, and William Tillman (trustee under the mortgage sought to be enforced). The defense made to the relief sought by Boynton is that the bonds were never delivered by the Kentucky Malting Company, and are not its obligations, but that they were misapplied by Herman and Pank, officers of the corporation, and used by them as security for their private debts, with the knowledge and connivance of the complainant, Boynton. This defense was not sustained by the circuit court, which gave Boynton a decree according to the prayer of his bill. The Germania Safety-Vault & Trust Company (as assignee), J. N. Struck, and William Tillman (as trustee) have appealed from this decree, and duly assigned error.

Otto A. Wehle, for appellants.

A. P. Humphrey, for appellees.

Before TAFT and LURTON, Circuit Judges, and HAMMOND, J.

After stating the facts as above, the opinion of the court was delivered by LURTON, Circuit Judge.

The conceded facts are that these bonds were used by Herman and Pank as collateral security for their individual debt to Boynton. Herman and Pank were both officers of the Kentucky Malting Company, and as such their possession of these corporate securities was presumably the possession of the corporation. Boynton knew that Herman was the president, and Pank the secretary and treasurer, of the corporation whose bonds they proposed to give him as security for their individual debt. Under these circumstances, it was his duty to inquire as to their title to these bonds, or their authority to use them for their private purposes. If he took them without informing himself as to their right to dispose of them, he cannot stand as a bona fide purchaser of negotiable securities for value, if it should turn out that they had no right to use them as security for their own debt. The general presumption in favor of such officers of a corporation might support a disposition of the securities for any apparent corporate purpose, but that presumption does not extend so far as to justify one who accepts such securities in payment of, or as security for, the private obligation of the officer. There is no presumption that even a general agency will support a transaction by which the agent is to profit at the expense of his principal. The dealing between Boynton, on the one side, and Herman and Pank, on the other, was concerning their individual matters, in which the corporation was not concerned. When, therefore, Herman and Pank proposed to use securities of the corporation in which they were officers for their private purposes, the knowledge of Boynton that they were officers of the corporation issuing the bonds was notice to him that they had no authority to use them

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for such purposes. If he took them without ascertaining their title or authority, he did so at the risk of losing them, if in fact they had abused their trust. These principles are well settled. West St. Louis Sav. Bank v. Shawnee Co. Bank, 95 U.S. 557; Mc Lellan v. File Works, 56 Mich. 583, 23 N.W. 321; Claflin v. Bank, 25 N.Y. 293; Wilson v. Railway Co., 120 N.Y. 145, 24 N.E. 384; Garrard v. Railway Co., 29 Pa.St. 154; New York Iron Mine v. First Nat. Bank of Negaunee, 39 Mich. 650; Moores v. Bank, 111 U.S. 165, 4 Sup.Ct. 345; Farrington v. Railway Co., 150 Mass. 406, 23 N.E. 109; Bank of New York Nat. Banking Ass'n v. American Dock & Trust Co., 143 N.Y. 559, 38 N.E. 713; Board v. Sinton, 41 Ohio St. 504-513. Neither is it sufficient, under such circumstances, to inquire of the officer himself, as to his authority. When acting apparently outside the general scope of his authority, and for himself, the declarations of the agent are not admissible against his principal. Herman and Pank were engaged, to the knowledge of Boynton, in a personal and private transaction, and they could make no declarations concerning their authority to act for their corporation which would bind the Kentucky Malting Company. Moores v. Bank, supra; Farrington v. Railroad Co., supra; Bank of New York Nat. Banking Ass'n v. American Dock & Trust Co., supra; New York Iron Mine v. First Nat. Bank of Negaunee, supra. But it is said for Boynton that if the duty of inquiry was, under the circumstances, thrown upon him, he did inquire, and was shown a resolution of the directors and stockholders of the corporation, passed September 8, 1885, by which it appeared that Herman and Pank had become the purchasers of these bonds, and that the had a right to rely upon the truth of the action therein recited. That resolution is in these words:

'September 8th, 1885. Called a meeting of directors and stockholders of the Kentucky Malting Company, held at their office this 8th day of September, 1885, all members being present. Mr. Herman offered the following resolution, which was unanimously adopted: 'Whereas, the board of directors of the Kentucky Malting Company authorizes the president and secretary to issue 120 mortgage bonds, of $500, each, to bear 6 per cent. interest, dated September 30, 1882, and due in ten years from date, and said bonds having been issued accordingly, but not disposed of; and whereas said company has now received a bid for said bonds from E. W. Herman and J. H. Pank,-- we unanimously recommend and agree to accept said bid, and hereby authorize and instruct the president to deliver said bonds to the said E. W. Herman and J. H. Pank, upon their complying with the terms and conditions of their said bid.' (Signed) E. W. Herman. J. H. Pank. Frank Senn. Adam Stumpff. F. Reidhar.'

That resolution is found on the minutes of the corporation, and it was signed by every one then owning shares. It did not, however, speak the truth, and was, on the evidence of Pank himself, a fraud and a deception. No bid was ever made by Herman and Pank, or either of them, or intended to be made. No bonds were sold to them, or intended to be sold. The bonds then belonged to the corporation, and were in its treasury. Herman has not testified. He is silent, and silence, under the circumstances, is significant. Pank, a witness altogether in sympathy with appellee, has been examined

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as a witness by Boynton, and for the purpose of presenting a defense to the presumptions arising out of the circumstances affecting Boynton's good faith. Pank, in substance, says that he and Herman explained to the stockholders that they proposed to use these bonds as collateral security to their own note in a private transaction with Boynton, and explained how it was to the interest of the Kentucky Malting Company that it should lend their credit to them in the way desired, and that the bid mentioned was only a form adopted to authorize them to pledge the bonds effectually for their individual debt. Thereupon the resolution was passed, and the minute signed. Reidhar, one of the stockholders present, died before this controversy arose. We cannot, therefore, know whether he understood the deceptive character of the resolution, or the explanation said to have been made. He was a very old and infirm man, and probably understood little or nothing about the matter. The other two stockholders assenting were Senn and Stumpff. They held comparatively little of the stock, and took little or no interest in the conduct of the corporation business. Both these men have testified. They are Germans, speak English badly; are, as they put it, 'poor scholars,' and are, manifestly, dull men,--very easily imposed upon and deceived. They have no interest apparently in the result of this suit, the malting company being insolvent in any event. There is nothing in their evidence which induces us to suspect their honesty or candor. They both say that they did not understand the resolution to...

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