Baker v. Bankers Mortgage Company

• Decision Date: 28 May 1926
• Citation: 133 A. 698,15 Del.Ch. 183
• Court: Court of Chancery of Delaware
• Parties: MATHIAS H. BAKER, v. BANKERS MORTGAGE COMPANY, a corporation of the State of Delaware, ALFRED SOHLAND and DORA SOHLAND, and THE HARRISBURG CORPORATION, a corporation of the State of Delaware, and SAMUEL FISHMAN

133 A. 698

15 Del.Ch. 183

MATHIAS H. BAKER, v. BANKERS MORTGAGE COMPANY, a corporation of the State of Delaware, ALFRED SOHLAND and DORA SOHLAND, and THE HARRISBURG CORPORATION, a corporation of the State of Delaware, and SAMUEL FISHMAN

Court of Chancery of Delaware, New Castle

May 28, 1926

BILL TO CANCEL SHARES OF CAPITAL STOCK. The cause was before the Chancellor on another occasion (14 Del.Ch. 427, 129 A. 755) upon a motion to dismiss the bill. The shares i n question were issued by the Bankers Mortgage Company to Alfred Sohland and Dora Sohland, his wife. Bankers Mortgage Company was incorporated April 5, 1922.

Briefly stated, the material facts are that Alfred Sohland was the owner of a controlling stock interest (sixty-three per cent.) in a concern known as the Harrisburg Foundry & Machine Works. He contracted to sell this stock interest to another concern the Harrisburg Corporation, a corporation of this State, one of the defendants herein. The Foundry & Machine stock was never transferred to the name of the Harrisburg Corporation. Sohland was president of the Harrisburg Corporation.

On June 16, 1922, the minutes of the meeting of the board of directors of the Bankers Mortgage Company show the following offer to the Bankers Mortgage Company by the Harrisburg Corporation:

"To the Bankers Mortgage Company:

"We hereby make application to your company for a loan in the sum of $ 125,000. We will agree to pay 6 per cent. interest per annum for such term as may be mutually agreed upon. We offer you the corporation note with collateral security as follows 63 per cent. of the common or voting stock of the Harrisburg Foundry & Machine Works. The strong financial condition of this company which has been in operation in Harrisburg for many years is well known.

"We are submitting herewith, for your consideration, a financial statement of the Harrisburg Foundry & Machine Works.

"The Harrisburg Corporation, looking toward liquidation of this loan, will agree to hold in its treasury of its 6 1/2 per cent. debenture bonds, a sufficient amount that, with proper deductions for commissions, etc., will net the amount of the said loan, these debenture bonds to be delivered to your company and sold by you, and the proceeds used for the liquidation of the said note, at such time or times and in such proportions as you may direct.

"Requesting your favorable action upon this application, we are.

"Sincerely yours,

"The Harrisburg Corporation,

"Per Howard M. Binghaman, Counsel."

Action on this offer was taken in the following form:

"The chairman further stated that he had made inquiries as to the reputation and financial standing of the directors and officers of the Harrisburg Corporation, that he had visited and inspected the property of the Harrisburg Foundry &amp Machine Works, and that he had examined their financial statement, all of which proved satisfactory.

"On motion of N. B. Skinner, seconded by A. E. Kimmel, it was unanimously resolved that the application of the Harrisburg Corporation be accepted, and that they be notified that the loan would be negotiated upon the terms suggested, as soon as the financial condition of the Bankers Mortgage Company would, in the opinion of its directors, justify investment."

At the same meeting the minutes further show the following announcement by Paul F. Skinner, the then president of the Bankers Mortgage Company:

"The chairman further reported that, since the last meeting of the stockholders and directors of the company, he had been in conference with a number of reputable business men in Harrisburg and vicinity, looking toward their becoming identified with the management of the company, and suggested that these gentlemen be at this time called into conference. This meeting with the approval of the directors, a recess was declared for the purpose stated."

Following this announcement, the minutes show a reconvening after recess of the board, the resignation of Paul F. Skinner and the other two directors (being the entire board), the election of Sohland, Coble and Webbert to the vacancies in the board thus created, and the election of Sohland as president, of Webbert as treasurer, and of Coble as secretary.

On June 14, 1922, membership of the board of directors was increased to five. Two new members, Kines and Nisely, were then elected, and Miller was chosen to fill the vacancy created by the resignation of Webbert as director and secretary.

On August 2, 1922, the board was again enlarged by the election of six additional members--Greybill, Bricker, Barker Wildermuth, Allen and Becht.

The minutes of said meeting of August 2 disclose the following action taken which lies at the foundation of the present suit:

"Reference was made to action in a meeting of the board of directors held June 16, 1922, at which time an application was granted to the Harrisburg Corporation for a loan in the sum of $ 125,000.00 duly recorded on pages 43 and 44 hereof, with the further provision that the loan be made by the issuance of stock in the Bankers Mortgage Company in the amount and number of shares required. The motion was unanimously agreed to.

"Mr Wildermuth moved, seconded by Mr. B. F. Barker, that the executive committee be and is hereby authorized to make the above-mentioned loan to the Harrisburg Corporation."

On August 14 following, the Harrisburg Corporation gave its note for $ 125,000 to the Bankers Mortgage Company, together with the shares of stock of the Harrisburg Foundry & Machine Works as collateral, the certificate evidencing said shares being in the name of Alfred Sohland. Thereupon the Bankers Mortgage Company drew its check for $ 125,000 to the order of the Harrisburg Corporation. At the time this check was delivered, the Bankers Mortgage Company had only $ 1,220.48 to its credit in the trust company upon which the check was drawn.

As a part of this same transaction the Harrisburg Corporation subscribed for $ 150,000 of the capital stock of Bankers Mortgage Company. In addition to the $ 150,000 which it needed to pay on its stock subscription, the Harrisburg Corporation also was under agreement to pay to the Bankers Mortgage Company $ 12,500 as bonus and advanced interest on its loan. It therefore had a total obligation to the Bankers Mortgage Company of $ 162,500. It paid this amount by two checks drawn on the same trust company upon which the Bankers Mortgage Company had drawn its check covering the loan. The first check was for $ 150,000, and the second one for $ 12,500. At the time it had only $ 4,190.72 on deposit in the trust company, on which the two checks were drawn. The Bankers Mortgage Company's check for $ 125,000 covering the loan was insufficient by $ 37,500 to meet the two checks of the Harrisburg Corporation, totaling, as stated, $ 162,500. But this deficiency was provided for by another check of the Bankers Mortgage Company for $ 37,500, which was drawn to the order of one Webbert, a stock salesman, as representing commission on the sale of the $ 150,000 of Bankers Mortgage Company's stock going to the Harrisburg Corporation. This check to Webbert was indorsed by Webbert and stamped "For deposit only" in Security Trust Company of Harrisburg (the trust company hereinbefore referred to) to the credit of the Harrisburg Corporation. This deposited check, together with the one to the Harrisburg Corporation from the Bankers Mortgage Company for $ 125,000, brought the former's deposit in the trust company up to an amount equal to the amount of its two checks before referred to, viz. $ 162,500.

The next step in the transaction was for the Bankers Mortgage Company to issue the $ 150,000 of its stock subscribed for by the Harrisburg Corporation. But the stock was not issued to that corporation. It gave instructions to issue the stock, and it was so issued, as follows: 7,750 shares of preferred stock and 9,000 shares of common stock to Alfred Sohland, and 5,000 shares of preferred stock to Dora, his wife. The preferred stock had a par of $ 10 and the common was of no par value. The preferred was issued at its par of $ 10; and the common, according to Sohland, at $ 2.50 per share for the entire 9,000 shares, but according to the complainant and his witnesses at $ 5 per share for 4,500 share thereof with 4,500 shares thrown in as a bonus.

Thus at the end of these transactions, the Bankers Mortgage Company came out holding the note of the Harrisburg Corporation for $ 125,000 secured by sixty-three per cent. of the...