Albert Lea Foundry Co. v. Iowa Sav. Bank

• Decision Date: 10 August 1927
• Docket Number: No. 7735.,7735.
• Citation: 21 F.2d 515
• Parties: ALBERT LEA FOUNDRY CO. et al. v. IOWA SAV. BANK OF MARSHALLTOWN, IOWA.
• Court: U.S. Court of Appeals — Eighth Circuit

21 F.2d 515 (1927)

ALBERT LEA FOUNDRY CO. et al. v. IOWA SAV. BANK OF MARSHALLTOWN, IOWA.^*

No. 7735.

Circuit Court of Appeals, Eighth Circuit.

August 10, 1927.

Joseph N. Moonan, of Waseca, Minn. (H. H. Dunn, of Albert Lea, Minn., Ray Moonan, of Waseca, Minn., and Fowler, Carlson, Furber & Johnson, of Minneapolis, Minn., on the brief), for plaintiffs in error.

J. F. D. Meighen, of Albert Lea, Minn. (Meighen, Knudson & Sturtz, of Albert Lea, Minn., and C. H. E. Boardman, of Marshalltown, Iowa, on the brief), for defendant in error.

Before KENYON, Circuit Judge, and JOHN B. SANBORN, District Judge.

KENYON, Circuit Judge.

Defendant in error was plaintiff in the trial court, and for convenience we will so designate it in this opinion. Plaintiffs in error will be designated as defendants.

Plaintiff brought action against defendants in the United States District Court on two promissory notes executed June 1, 1921, in the sum of $5,000 and $10,000, respectively, by the Albert Lea Foundry Company, by R. H. McDowell, president, payable to Imperial Furnace Company, R. H. McDowell, trustee, or order, representing the purchase price of certain personal property sold by the furnace company to the foundry company. One note was by the furnace company to the foundry company. One note was due June 1, 1924, the other June 1, 1925. Payment of said notes was guaranteed by defendants A. C. Erickson, Henry J. Harm, and Oscar Subby. Plaintiff at the time of commencement of the action held said notes for the benefit of the creditors of the Imperial Furnace Company of Marshalltown, Iowa.

Defendants Erickson, Harm, and Subby were heavy creditors of the Albert Lea Tractor Company. A written contract was entered into between them and R. H. McDowell, which resulted in defendant Albert Lea Foundry Company (hereinafter designated the foundry company) being organized as successor to the tractor company. This contract was taken over by that company when organized, McDowell accepting stock in the foundry company for the contract. He was to receive a salary of $500 a month for his services in managing the foundry company and confine his work to that corporation and the Central Foundry Company at Marshalltown, Iowa, with which he was connected. The Imperial Furnace Company of Marshalltown (hereafter designated the furnace company) being financially involved, a plan of liquidation was evolved, and McDowell was made trustee for the creditors, and placed in charge of the property, with authority to secure from it what he could for the benefit of the creditors. For his work he was to receive 15 per cent. of any amounts collected on the creditors' claims. Among the creditors was the Central Foundry Company of Marshalltown, Iowa, in which company McDowell was a substantial stockholder. At the time of the execution of the two notes involved in this suit, McDowell was president of the foundry company, and trustee for the creditors of the furnace company. Erickson, Subby, and Harm were all directors in the Albert Lea Tractor Company, and became directors, together with Charles Westberg, R. H. McDowell, John T. Basham, and W. B. Wood (the last three named being from Marshalltown), in the new foundry company; McDowell owning nearly all the shares of stock of this company. McDowell repeatedly attempted to have the directors arrange to buy the business and personal property of the furnace company at Marshalltown and make them part of the assets of the foundry company. In due course arrangements were made, authorizing McDowell, for the foundry company, to buy the business of the furnace company for $15,000; Erickson, Subby, and Harm to guarantee the payment thereof. This purchase was made, and on June 1, 1921, the foundry company executed the notes in suit. The notes apparently were made to the Imperial Furnace Company, trustee, and the name R. H. McDowell was inserted, presumably by him, without the knowledge of Mr. Erickson, who wrote the notes. This was done prior to plaintiff's acquisition thereof. A bill of sale was made and delivered June 1, 1921, by R. H. McDowell, as trustee, to the foundry company, covering all merchandise, good will, patterns, bills, and accounts, and all property of the furnace company. The inventory of this stock and machinery, taken from the books of the furnace company, show a value of $17,353.76. The property of the furnace company was delivered to the foundry company at Marshalltown, Iowa, and shipped by it to Albert Lea, Minnesota. An entry was made June 30, 1921, on the daily journal of the foundry company by its bookkeeper, Mr. Green, as follows:

"Debit, $15,000.00; bills payable, credit, $15,000. * * *

"Notes given June 1st, 1921, to R. H. McDowell, trustee for Imperial Furnace Co. # 4 — 4 years @ 5% $10,000. #5 — 3 years @ 5%, $5,000.00."

In the same book for the same day, page 166, ledger entry, appears the following:

"Imperial Furnace Co. a/c, debit $15,000. Assets and equipment (bills payable) $15,000.00. * * *

"Gave two notes June 1st, 1921, to R. H. Mc______, trustee for creditors of Imperial Furnace Co. One for $10,000.00 4 yrs. @ % — one $5,000.00 for 3 yrs. @ 5%."

The notes were delivered by McDowell to the plaintiff, to be collected for the benefit of the creditors of the Imperial Furnace Company. This plaintiff gave a receipt therefor as follows:

"This is to acknowledge receipt from R. H. McDowell, trustee of the Imperial Furnace Company of Marshalltown, Iowa, of the following notes, which are to be held for collection, and when collected both principal and interest are to be turned over to R. H. McDowell, trustee, or to his successor, for the purpose of distribution as provided in the trust agreement among the creditors of said Imperial Furnace Company, viz.:

"Note of five thousand dollars due three years after its date and note of ten thousand dollars due four years after its date, both notes bearing vice per cent. interest bearing date June 1st, 1921, and given by the Albert Lea Foundry Company to R. H. McDowell, trustee, and indorsed by A. C. Erickson, Henry Harm, and Oscar Subby.

"Done at Marshalltown, Iowa, this ______ day of June, 1921.

"Iowa Savings Bank "W. H. Arney, Pres."

At the bottom of the receipt is this:

"In division McDowell gets 10% and Boardman gets 10%, by agreement between McDowell and Boardman and agreement with creditors. 1917 — Creditors were to pay McDowell 15% — Boardman 5%."

The Albert Lea Foundry Company entered into the business of manufacturing and selling Imperial furnaces, sold some of the furnaces purchased from the furnace company, and collected some of its accounts. In May, 1922, McDowell sold his stock, and from that time on had no connection with the foundry company. Mr. Trow became its president. June 30, 1922, defendants paid the interest on the two notes in suit to plaintiff. The second check for interest was for some reason held up and not paid. October 18, 1923, Mr. C. H. E. Boardman, an attorney of Marshalltown, representing creditors of the defunct furnace company, wrote the foundry company, explaining to it fully how the money collected on the notes was to be used, and stating that McDowell and he were each to have a commission of 10 per cent. on the moneys received by the creditors of the furnace company. This was the first intimation defendants had of any agreement for a commission to McDowell. November 20, 1923, defendant foundry company served a notice of rescission on Boardman and plaintiff as follows:

"To R. H. McDowell, Trustee, C. H. E. Boardman, and Iowa Savings Bank of Marshalltown, Iowa:

"You are hereby notified that the undersigned, Albert Lea Foundry Company, hereby rescinds that certain sale and transaction entered into between the undersigned and said R. H. McDowell, trustee, in the month of May, 1921, whereby said R. H. McDowell, as trustee, sold and delivered to the undersigned, Albert Lea Foundry Company, certain goods, wares, and merchandise, and received in payment therefor two certain promissory notes, one for $5,000.00 and one for $10,000.00; and the undersigned hereby tenders back to the said R. H. McDowell, trustee, all and singular, the said goods, wares, and merchandise, and stands ready and willing to deliver and turn the same over to the said R. H. McDowell, trustee; and the undersigned hereby demands that the said promissory notes and both of them be returned and delivered up to the undersigned, and that they have immediate possession thereof; and that said entire transaction be rescinded and set aside, and the parties restored to the same position they were in before said sale and transaction.

"The reasons for this rescission are that said sale and transaction were tainted with fraud, misrepresentation, and bad faith, and that the undersigned were deceived and defrauded thereby, and that the goods, wares and merchandise were not as represented and warranted.

"Dated this 20th day of November, 1923.

"Albert Lea Foundry Company.

"H. H. Dunn, Attorney for Albert Lea Foundry Company, Home Investment Building, Albert Lea, Minn."

This notice was not served on McDowell.

Upon the trial, at the close of defendants' evidence, the court instructed a verdict for plaintiff for the full amount of the notes, with interest. The court had some difficulty, apparently on account of the condition of the pleadings, in ascertaining the exact position taken by defendants, as appears from the following portion of the record:

"The Court: As I understand this action — I don't know as I have read the pleadings carefully — you are not basing it wholly on rescission; you are setting up a defense that you are damaged?

"Mr. Meighen: No; there is not anything of that sort.

"Mr. Moonan: If the court please, the answer sets forth the facts, and then asks for various types of relief, under the answer.

"The Court: What is your theory?

"Mr. Moonan: Under the law now, since Congress passed the act of 1916, where you can set up equitable...