Atherton v. Beaman, 1417.

• Decision Date: 15 April 1920
• Docket Number: 1417.
• Parties: ATHERTON et al. v. BEAMAN.
• Court: U.S. Court of Appeals — First Circuit

264 F. 878

ATHERTON et al. v. BEAMAN.

No. 1417.

United States Court of Appeals, First Circuit.

April 15, 1920

Lee M Friedman, of Boston, Mass. (Friedman & Atherton, of Boston Mass., on the brief), for appellants.

William D. Turner, of Boston, Mass. (Reginald Foster, George Hoague and Foster & Turner, all of Boston, Mass., on the brief), for appellee.

Before BINGHAM, JOHNSON, and ANDERSON, Circuit Judges.

JOHNSON Circuit Judge.

This is an appeal from the final decree in a bill in equity brought by the appellants as trustees in bankruptcy of the Parsons Manufacturing Company, a Massachusetts corporation, organized in 1898 with a capital of $10,000, which was afterwards increased to $30,000, of which $20,000 was preferred and $10,000 common stock.

In 1914 the appellee, Nathaniel P. Beaman, owned all the preferred and a large part of the common stock. The other stockholders were: Henry Gerrish, Jr., who owned ten shares of the common stock, and a brother of the defendant, who owned one share. Mr. Beaman's health was impaired, and he sold his interest in both the common and preferred stock of the company to Mr. Gerrish for the par value of the preferred stock. Mr. Gerrish interested two other parties with him in the purchase, and each of these parties paid the defendant $5,000, which was loaned by the defendant to the company, and its note taken for the same, dated September 4, 1914. For the balance of the consideration for the transfer of the stock the defendant received the notes of Mr. Gerrish, indorsed by other parties. When the note was given to the defendant by the company, it had in storage with the Eastern Storage Company at Chelsea, Mass., lumber which had been received by the Storage Company in 68 carload lots, and each carload had been piled separately in its yard and marked with a tag which had on it the number of the car from which it had been unloaded and also the initials 'P.M. Co.'

To secure the defendant's loan the company gave him the following order: 'Eastern Storage Company, Chelsea, Mass.-- Gentlemen: You will please place fifty (50) cars of the lumber which this company has on storage with you subject to the order of Nathaniel P. Beaman, who is to hold the same as collateral for security for the loan made by him to the company. The company is to have the right to use any and all cars of lumber with you, including those covered by this order, so long as it substitutes other cars for those so used, so that there shall always be on storage with you, subject to the order of said Beaman, fifty (50) cars of lumber.'

This order was accepted by the Storage Company.

A written agreement was also executed by the parties in which, after reciting the loan to the company, it agreed--

'to keep with the Eastern Storage Company of Chelsea sufficient number of cars of lumber at the average value of two hundred dollars ($200) per car to equal the amount of Beaman's loan to the corporation; and said corporation has this day executed and delivered to the said Beaman an agreement placing fifty (50) cars of said lumber subject to his order.'

On December 9, 1916, an involuntary petition in bankruptcy was filed against the Parsons Manufacturing Company.

The defendant filed a bill in equity in one of the superior courts of Massachusetts, asking that the Eastern Storage Company be enjoined from delivering to the trustees in bankruptcy such lumber as he claimed to hold by virtue of the above order; and the trustees filed this bill, seeking to restrain Beaman from further prosecuting his bill in equity in the state court, and asking that the right, title, and interest of the trustees in bankruptcy in and to the lumber claimed by the defendant be determined, and also that Beaman be ordered to pay over to them certain sums paid to him by Gerrish from the assets of the Parsons Manufacturing Company in part discharge of the notes given by Gerrish to Beaman. In the bill it was also alleged that the defendant, as the treasurer, director, and owner of a majority of the outstanding capital stock of the company, had caused to be paid to himself certain sums of money as dividends on stock held by him, without any vote or authorization by the stockholders of the company, and that also, while treasurer of said company, he had wrongfully and illegally permitted certain stockholders and employes of the corporation, in particular one Henry Gerrish, Jr., to withdraw large sums of money from the treasury of the company, and an accounting was prayed for.

By his answer the defendant claimed a valid lien on 50 carloads of lumber stored with the Eastern Storage Company, and admitted that, as treasurer, director, and owner of a majority of the stock of the company, he caused certain sums of money to be paid to himself as his proportionate share of the net profits of the business, but denied that such payments were wrongfully or illegally made. He also admitted that he permitted certain payments to be made to Henry Gerrish, Jr., and W. W. Crosby, but denied that said payments were wrongful or illegal, and claimed that all payments made, either to himself or to said Gerrish or Crosby, were made with the knowledge and consent of the stockholders and directors of the company and duly entered upon its books, and that the company was, at all times during which such payments were made, amply solvent, and that there are no creditors represented by the plaintiffs who were injured thereby or have any right to inquire into or complain of such payments.

The case was referred to a special master, who has found that the defendant had a valid lien on the lumber claimed by him, and that the withdrawals of money by the defendant and payments made to him by Gerrish, on account of his indebtedness to Beaman, were ratified, and that there was nothing irregular in the payments made by the Parsons Manufacturing Company to the defendant of his interest on his loan to the company. The District Court has approved the master's report, except so much of the same as relates to jurisdiction, which question, because of an express waiver, has become immaterial.

We think it unnecessary to discuss at length the questions raised in regard to the dividends paid to Beaman or to Gerrish, when they were the owners of all the stock of the corporation but one share, which was held by Beaman's brother, and the beneficial interest in which was in Beaman. Although there was no vote of the directors authorizing the payment of dividends, the master and the District Court have found that the company was solvent when they were made, and that their payment was the mode devised by the parties in interest for making a distribution of profits in which they alone were interested, and was ratified by the stockholders and directors. McDonald, Receiver, v. Williams, 174 U.S. 397, 19 Sup.Ct. 743, 43 L.Ed. 1022; Ratcliff v. Clendenin, 232 F. 61, 68, 146 C.C.A. 253. See, also, opinion of the Supreme Court of Massachusetts, dated February 27, 1920, in Beaman v. Gerrish et al., 126 N.E. 352.

In regard to the payments made to Beaman by Gerrish from funds of the company on account of the private indebtedness of the latter to the former, the District Court has found that, while the presumption is against the regularity of such payments, nevertheless--

'On all the evidence, and giving due weight to the presumption, it does not appear that, in using the funds of the Parsons Company to pay his personal debt to Beaman, Gerrish was acting in fraud of other persons interested in the company.'

This finding of fact, as also that in regard to the payment of dividends, included the finding of good faith upon the part of Beaman, and we think both are fully sustained by the evidence and the inferences that may be fairly drawn therefrom.

The only other question raised by the assignment of errors is: Was Beaman's claim secured by a valid pledge of lumber? We think the following language of the court in Barnes v. Alexander, 232 U.S. 117, 120, 34 Sup.Ct. 276, 277 (58 L.Ed. 530), is applicable to the situation presented here:

'We start, however, with the principle that an informal business transaction should be so construed as adopting whatever form, consistent with the facts, is most fitted to reach the result seemingly desired.'

The result desired by the parties in the present case was to secure Beaman for his loan to the company, and also to allow the company to use the lumber pledged as it might need it, provided it substituted other lumber equal in amount and value. The Storage Company became the agent of both parties by its acceptance of the order, and agreed to hold 50 carloads of lumber for Beaman, or, if payments were made on account of his loan, to hold sufficient lumber to cover the balance, deducting one carload for each $200 that might be paid; and there was testimony that it did not accept any other orders until it was certain that it could do so after setting apart 50 carloads of lumber to be held as security for Beaman. We also start with the finding of the court that the whole transaction was entered into and carried out in good faith, and that there are no intervening claims whose priority is disputed by Beaman, and that no one, except the trustees of the Parsons Company, contests the right of Beaman to hold the lumber which he claims as security for his loan.

The District...