Babbitt v. Read

Decision Date16 April 1914
Citation215 F. 395
PartiesBABBITT v. READ et al.
CourtU.S. District Court — Southern District of New York

Hornblower Miller & Potter, of New York City (Charles A. Boston, of New York City, and P. Taylor Bryan, of St. Louis, Mo., of counsel), for plaintiff.

Strong & Cadwalader and Rushmore, Bisbee & Stern, all of New York City (Charles E. Rushmore and George N. Hamlin, both of New York City, of counsel), for defendant Read.

William J. Patterson, of New York City, for defendant Van Brunt. Carter, Ledyard & Milburn, of New York City, for defendants Metropolitan Life Ins. Co., Hegeman, and Hamilton Trust Co.

Harris Corwin, Gunnison & Meyers, of New York City, for defendants Home Trust Co., Brown, and Furness.

Montgomery & Peabody, of New York City, for defendant Tegethoff.

MAYER District Judge.

On May 10, 1907, Mr. Babbitt was duly appointed trustee in bankruptcy of the Randolph-Macon Coal Company, a corporation organized under the laws of Missouri, for the purpose of acquiring and operating coal mines and selling coal. The claims originally proved in bankruptcy aggregated $2,376,041.43 of which $2,149,729.45 represented a deficiency judgment entered in a suit brought by the Central Trust Company of New York as trustee to foreclose a mortgage given to secure an issue of $3,000,000 of bonds. Pursuant to an order of authorization made by the referee in bankruptcy, the trustee brought this suit in April, 1909, against these defendants, who are some, but not all, of the stockholders of the bankrupt company, to recover, upon the theory of a stockholder's liability for unpaid subscriptions, an amount equal to the capital stock of the company, to wit $5,000,000 'or so much thereof as may be necessary for the full payment of all the debts proved and allowed in bankruptcy' against the bankrupt estate, together with cost of collection.

Briefly stated, the plaintiff contends that the Randolph-Macon Coal Company issued its capital stock of $5,000,000 and its bonds to the extent of $1,800,000 for the purchase of property which, it is alleged, did not exceed in value the sum of $1,620,000; that the original so-called subscribers to the entire issue of the stock of the company, who were also the incorporators, paid therefor by the sale and transfer to the company of the property in question, and that in so doing they were acting as the agents of the defendants Read, Gardiner (now executors of Gardiner), and Van Brunt, and that, in view of all of the facts and circumstances hereinafter outlined, these defendants are liable as for unpaid subscriptions. The bill further alleges (paragraph thirty-sixth) that the defendants Seaman, Clark, Metropolitan Life Insurance Co., Hegeman, Gardiner as trustee, and Read as trustee, acquired their shares of stock with full knowledge that the stock was not fully paid, and that Seaman, Clark, Metropolitan Life Insurance Company, and Hegeman are each severally liable for the full amount of shares of stock, severally held by each of them, or so much thereof as may be necessary for the full payment of debts, etc., and that these defendants are jointly and severally liable with Read, Gardiner, Van Brunt, and Kobusch, for the full amount of the par value of the shares of stock standing, respectively, in each of their names, or for so much thereof as may be necessary for the full payment of debts, etc. The trustee sets forth in the bill that he cannot state whether or not the defendants the Home Trust Company, the Hamilton Trust Company, and Tegethoff acquired the shares of stock severally standing in their respective names, with knowledge or notice that the same was not fully paid; but he avers that, if any of these three defendants acquired the stock with knowledge that the amount subscribed therefor was not fully paid, then that they are liable. Substantially the same allegation was made in regard to defendants James N. Brown and Harry P. Furness. George J. Kobusch was not made a party to the suit. James T. Gardiner died after the suit was commenced. After the suit had been at issue and considerable testimony had been taken (and subsequent to the decision in Mackay v. Randolph-Macon Coal Co., 178 F. 881, 102 C.C.A. 115, the trustee filed a supplemental bill, including as creditors entitled to representation in the suit certain holders of bonds of the company aggregating $353,000 at par, these being the only bondholders whose claims had been allowed in the bankruptcy proceeding. The theory of the supplemental bill is that the bonds of these holders (called for convenience the Mackay group) were not merged in the foreclosure judgment, but could be established as claims against such portion of the estate in bankruptcy as might be created by a judgment if obtained herein.

For clearness, therefore, it is desirable to consider: First. The questions of fact and law which arise on the issues suggested by the original bill; secondly: (a) Those which are presented because of the partial defense as to the 'no recourse' clause in the mortgage set up by defendants Read, Gardiner, Seaman, Clark, Metropolitan Life Insurance Company, Hegeman, and Hamilton Trust Company; and (b) those which are at issue because of the special position claimed to be held by the owners of the Mackay group bonds.

The Original Bill.

There is in Randolph and Macon counties in the eastern part of the state of Missouri a large field of bituminous coal. In 1904 this coal, although its existence and extent were well known, had been but little exploited, and there were few mines in operation in this field. The properties, whether consisting of rights or land (not now using the words technically), were held in different ownerships, and from the practical and commercial standpoint the mining had gone on in a comparatively small way. The defendant Van Brunt had been associated with railroad interests in St. Joseph, Mo., and elsewhere, and knew of the existence of this coal territory, and believed that it had great possibilities. He interested George J. Kobusch of St. Louis, Mo., who was then the president of the St. Louis Car Company, and together they acquired 23,000 acres (in round numbers), together with a mine thereon that was then in operation. They organized, under the laws of Missouri, a corporation which was called the Randolph County Coal Mining Company. Believing, however, that the situation warranted the creation and development of an even larger enterprise, Van Brunt and Kobusch, working through agents, procured, from time to time, options for the purchase of a more extensive area, including certain other existing mines. They were two years in acquiring the control, by option and otherwise, of these properties. They realized that such a project needed capital and the co-operation of men of financial ability and standing. Van Brunt was favorably known to the defendant Read, who was a member of the then banking house of Vermilye & Co., of New York City, and in December, 1904, Van Brunt called upon Read and succeeded in attracting Read's interest. Read, however, desired the opinion of some expert of repute. He knew that the old and well-known banking house of Spencer Trask & Co. had frequently been engaged in placing bonds of coal properties in the East, and he asked their aid in procuring the services of the right kind of an expert. Spencer Trask & Co. recommended Mr. James T. Gardiner, who undoubtedly was at that time one of the great coal experts of the country. Read had no previous personal acquaintance with Gardiner, and there is no reason to doubt that the subject-matter was presented to and undertaken by Read in perfect good faith and in the manner in which capable men seek to satisfy themselves as to the merits of a proposed business enterprise. Read requested Gardiner to make a careful examination of the property and its commercial possibilities and to report to him. Gardiner went to Missouri in the early part of January, 1905. He visited the property, inspected such mines as were open and in operation, and, in brief, procured such data and made such study of the situation as would enable him to arrive at a judgment upon which he was willing to rest, and which he was willing to submit to Read. He reported to Read and, in due course, stated his views in writing. Letters of January 11 and 14, 1905. Read consulted his counsel, and he (Read) and Gardiner agreed with Van Brunt and Kobusch to take part in the proposed enterprise. agreements dated January 14, 1905, and known throughout the case as Exhibits 24 and 25, or the Promotion Agreements. These agreements are as follows:

'Exhibit 24.
'Agreement, made this fourteenth day of January, 1905, by and between W. T. Van Brunt, of the city of New York, and George J. Kobusch, of St. Louis, Missouri, parties of the first part, James T. Gardiner, of the city of New York, party of the second part, and William A. Read, of the city of New York, party of the third part, witnesseth: Whereas, the said Van Brunt and Kobusch have acquired the ownership or control of certain mineral lands and properties in the counties of Randolph, Macon and Howard, state of Missouri, and are desirous of securing the aid of the parties of the second and third part in the organization and development of said properties; now, therefore, it is agreed as follows:
'First.-- That there shall be organized under the direction of the party of the third part of corporation under the name of 'Randolph-Macon Coal Company,' or some other appropriate designation, pursuant to the laws of the state of New Jersey, or some other state approved by the said party, having appropriate powers.
'Second.-- The said Van Brunt and Kobusch agree to cause to be transferred to the said corporation the following properties, to wit: All the
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