Baker Motor Vehicle Co. v. Hunter

• Decision Date: 12 December 1916
• Docket Number: 40.
• Citation: 238 F. 894
• Parties: BAKER MOTOR VEHICLE CO. et al. v. HUNTER.
• Court: U.S. Court of Appeals — Second Circuit

238 F. 894

BAKER MOTOR VEHICLE CO. et al. v. HUNTER.

No. 40.

United States Court of Appeals, Second Circuit.

December 12, 1916

This cause comes here on writ of error to the District Court for the Northern District of New York.

The plaintiffs in error will be referred to as defendants, and the defendant in error will be referred to as plaintiff.

The plaintiff has obtained a judgment in his favor for $10,790.57. The case was tried without a jury.

The action was commenced in a court of the state of New York, and was removed upon petition of the defendants into the District Court of the United States in and for the Northern District of New York.

The Baker Motor Vehicle Company is a corporation organized under the laws of the state of Ohio, and it is hereinafter called the Ohio Company. It is engaged in the business of manufacturing and selling electric motor vehicles.

The C B. Rice Company is a corporation organized under the laws of the state of New York in December, 1906. It is hereinafter called the Rice Company. The Ohio Company caused it to be incorporated, and owned and controlled its stock, and managed, controlled, and directed its business and corporate affairs. It organized it for the purpose of conducting the business of the Ohio Company in New York in selling its automobiles and automobile parts, tools, and appliances. The amount of capital stock authorized was $75,000. The incorporators were Clarence B. Rice, Fred R. White, Robert C Norton, Manfred L. Goss, and Nathaniel Platt.

Prior to the organization of the Rice Company the Ohio Company had maintained an agency in New York City to look after its business in that part of the country. It sent Rice, who had been in its employ as a salesman, to manage the New York business, and paid him a salary of $100 a month and 25 per cent. of the profits. Rice became the president of the Rice Company. White was the general manager and vice president of the Ohio Company, Goss was the secretary of that company, and Norton was its treasurer. Rice testified that the meeting to organize the Rice Company was held in the offices of the Ohio Company at Cleveland, or in those of its attorneys in the same city.

The New York agency maintained by the Ohio Company prior to the incorporation of the Rice Company became indebted to the Ohio Company to the extent of $85,000. So much of the stock of the Rice Company as was issued was issued to the Ohio Company. And Rice, as president of the Rice Company, submitted reports of the condition of the business regularly to the Ohio Company. Asked how often these reports were made, he answered that he did not remember, 'It might have been weekly, and it was at least once a month.'

In January, 1907, the Ohio Company made a written agreement with C. B. Rice to sell him all the stock of the Rice Company for $15,000 in cash and for $50,000 in notes, retaining the stock as collateral to the notes, as well as the right to vote the stock, and as additional security the resignation of Mrs Rice and her brother from the board of directors. The Ohio Company gave the Rice Company an agency agreement for the exclusive sale of its goods in New York, New Jersey, and in a part of Connecticut. The Ohio Company, however, reserved to itself the right to cancel the agency agreement when the management of the business was not satisfactory to it. It was also agreed that the Ohio Company should be permitted to retain 51 per cent. of the Rice Company stock so long as any of the notes remained unpaid. The notes were demand notes given for the stock, and were signed by Rice and his wife.

The Rice Company continued in business some six or seven months only. Then the Ohio Company, asserting that matters were not satisfactory to it, exercised its right to cancel the agency contract, and thus put the Rice Company in a position where it could not get electric cars or parts to sell, and under the agency agreement it could sell no other cars than those made by the Ohio Company. The latter company thereupon caused a circular to be issued to the creditors, stating that the Rice Company had lost the agency agreement and had become insolvent, and asked the creditors to agree to turn all its assets over to a new company to be formed, and which should assume all of its liabilities. It got all of the creditors with the exception of the plaintiff to assent to this arrangement.

Rice testified that just prior to this, and in July, 1907, he had a conference with the officers of the Ohio Company when he was informed that if he would retire from the Rice Company they would form a new company to take over the assets and pay the creditors. He said there were several conversations on the subject, and a demand was made upon him that it must be done or the contract would be canceled, and that he agreed to it.

The Ohio Corporation then organized in August, 1907, the Baker Motor Vehicle Company of New York, hereinafter called the New York Company. The new company had a nominal capital stock of $20,000 with only $10,000 issued and only $500 paid in. The Rice Company, acting under the control of the Ohio Company, voted to transfer all its property to the New York Company for the sole consideration of the latter's agreement to pay the debts, and did so transfer them in August, 1907. The New York Company entered on its books the assets thus taken over as $116,657.07, and the liabilities which were assumed as $79,831.98. The New York Company also possessed the agency agreement which the Ohio Company gave to the president of the New York Company, and which he transferred to the latter to pay for all its stock that was issued, which was, as heretofore stated, $10,000.

The certificate of incorporation of the New York Company provided that the directors need not be stockholders. The number of directors was fixed at five. Fred R. White, the general manager and vice president of the Ohio Company, was one of the five. George H. Kelley of Cleveland was another. The testimony shows that he was the attorney of the Ohio Company, and was, at the time his testimony was given, the general manager of the truck department of the Ohio Company, having been appointed to that position in October, 1909. He drew the papers incorporating the Rice Company, and prior to the transfer of the assets of the Rice Company to the New York corporation he had been sent to New York by the Ohio Company with full authority to handle the matters relating to the two companies absolutely as he pleased. He spent six weeks in New York in adjusting the business. Another of the trustees was Nathaniel Platt, who had served as treasurer of the Rice Company. The other two trustees were lawyers in New York City who represented creditors of the Rice Company; James J. Allen, who does not seem to have held any stock, and James D. Lang, Jr., who held one share.

In October, 1908, one year after the assets of the Rice Company had been transferred to it, proceedings in bankruptcy were instituted against the New York Company. Prior to the institution of the proceedings Hunter had commenced an action in the New York court against the Rice Company on the paper which he held against it, and the action was on the day calendar and was about to be reached. The receiver in bankruptcy asked for an injunction staying all proceedings in Hunter's action, and it was stated in the moving papers that the transactions between the Rice Company and the New York Company (the alleged bankrupt) were such that the latter 'is or may be ultimately liable in case a judgment is obtained against said C. B. Rice Company in said suit. ' The injunction was obtained on the ground that the receiver wished to examine into the action. Before steps could be taken to dissolve the injunction the term came to an end, and the court was adjourned to the following January.

An order was later obtained, authorizing the receiver of the New York Company to sell its assets in bulk, which he promptly did to the Ohio Company for $18,000, although a short time before, two months after the receiver had been appointed, the receiver's attorney had informed the plaintiff, who was considering buying the business, that no offer of less than $40,000 for the assets would be considered. It will be recalled that one year before the New York Company had acquired the assets of the Rice Company at a valuation of $116,657.07, subject to liabilities of $79,831.98. This sale of the assets to the Ohio Company was conditioned on the latter company's giving a surety company bond to the plaintiff herein in the sum of $15,000, which bond was to be conditioned that the Ohio Company should pay the plaintiff such sums as he might be found entitled to in his action then pending in the Supreme Court of New York against the Rice Company.

On February 4, 1909, the plaintiff obtained a judgment of $8,329.75 against the Rice Company in the above-mentioned action. An execution was taken out and returned unsatisfied, and this action was commenced on the bond.

Willard P. Jessup, of New York City (Clifton P. Williamson, of New York City, of counsel), for plaintiffs in error.

Elisha B. Powell, of Oswego, N.Y. (Robert B. Knowles, of New York City, of counsel), for defendant in error.

Before COXE, ROGERS, and HOUGH, Circuit Judges.

ROGERS, Circuit Judge (after stating the facts as above).

This is an action at common law to recover on a bond given on November 25, 1908, by the Ohio Company as principal and the American Bonding Company of Baltimore as surety. The bond recites that Hunter claims to be a creditor of the New York Company in the sum of $7,500, that the company is in bankruptcy, and then continues as follows:

'That if the Baker Motor Vehicle Company (of Ohio) shall pay or cause to be paid to the said

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