Board of Commerce of Ann Arbor, Mich., v. Security Trust Co.

Decision Date30 June 1915
Docket Number2587.
Citation225 F. 454
PartiesBOARD OF COMMERCE OF ANN ARBOR, MICH., v. SECURITY TRUST CO. In re CLIMAX SPECIALTY CO.
CourtU.S. Court of Appeals — Sixth Circuit

[Copyrighted Material Omitted]

The appellant, Board of Commerce of Ann Arbor, Mich., is a corporation of that state. Its articles of incorporation are not in evidence and its powers appear only as disclosed by the testimony of its secretary, who was the only witness called in the case. He said, without objection, that it was organized for the purpose of promoting the growth and welfare of the city of Ann Arbor and that the articles so stated that it was not a corporation for gain, but was allowed to hold property; that the articles were drawn broad enough so that it could make money for the city, if it had a chance to do so. Its members were mostly merchants of the city and it had a subscribed industrial fund of $40,000, of which not more than $10,000 were payable in any one year. This fund was to be used-- a part of it had been used-- to bring manufacturers and manufacturing companies to Ann Arbor. The result of this, no doubt, would be the upbuilding of the city to which he referred, through increased business activity and population, with the benefits and advantages of various kinds to the community naturally and necessarily resulting therefrom, if such companies carried on their business after coming to the city.

The industrial fund was raised by subscription of individuals payable to a trustee on assessment of not more than 25 per cent. in any one year, made by a committee of 15 of the members of the Board, and upon the recommendation of the Board.

When the subscriptions were paid, the trustee deposited the money in bank and it was checked out by the Board. The money must necessarily have been deposited in the name of the Board. The industrial fund was subscribed for the purpose of carrying out the work of the Board by citizens, most of whom were members of the Board, but some were not. 'As an additional check, besides the Board of Commerce, as to whether or not an assessment should be made,' the committee of 15 was organized to decide that question. The purpose of this was that subscribers who did not belong to the Board would have 'also something to say about it ' The fund was regarded as a fund of the Board, and the only control the committee of 15 had over it was to order an assessment.

The only limitations on the Board in spending the fund were that the expenditure should not be more than 25 per cent. of the subscribed fund in any one year, and that the committee should approve the assessment and get the money. The industrial fund had an auxiliary fund raised by a committee of the Board. The Board had a membership of from 200 to 225, with annual dues of $4. The subscriptions were not made to the Board directly, 'because it was intended to be used entirely for the purpose of bringing manufacturing companies there. ' In addition to this fund, the Board raised money and spent it in a variety of ways outside of bringing in manufacturing corporations.

Prior to the advent of the Climax Specialty Company, whose contract with the Board furnishes the subject-matter of this controversy, the Board had, in pursuance of its purposes, built a plant for the Newton Ladder Company, which had moved to Ann Arbor, having furnished to it the money for moving and for its factory, and there had been returned to the Board some of the money advanced by it out of the industrial fund to the Haggerty Ladder Company.

The Climax Specialty Company, a corporation of New York, doing business at Rochester, had a factory there, presumably upon its own land, and, on January 26, 1910, entered into the contract with the Board of Commerce set forth in the margin [1]; the italicized parts within brackets being interlineations inserted before the contract was executed. It was drawn by the president and secretary of the board, the interlineations relating to contingencies of strikes, labor difficulties, etc., and other causes beyond the control of the company, being inserted at the request of the president of the company, or his agent; the interlineation, 'as liquidated damages,' being inserted by those who drew the contract, one of whom, the secretary, testified without objection: 'We did that ourselves, our object being-- we knew we were spending $10,000; we knew that. ' In answer to the question, 'State whether or not when this sum of $10,000 was put in the contract you then had in mind these expenditures, and that it was possible that the Board of Commerce might lose an amount in the neighborhood of $10,000,' he said, 'We expected that the expenditures would be about $10,000.'

The company moved to Ann Arbor. Its expenses for that purpose, about $7,500, were paid by the Board by its checks, and a site for its new factory was furnished by the Board at a cost of $2,500. It is fairly to be inferred that the Board did sell for the company the $75,000 in bonds, as agreed, and complied in all respects with its promises.

The evidence does not show when the company began operations at its new location, or their extent, or the amount of its pay roll. It does not appear from the record that the company ever actively prosecuted its business at Ann Arbor. In one of his opinions, the referee said: 'It is undisputed that there was no breach of contract prior to the filing of the petition in bankruptcy. ' In view of this statement and the fact that counsel in their arguments and briefs make no point to the contrary, it may be assumed that the factory was operated up to the date, May 10, 1911, the petition in bankruptcy was filed; but as the contract was made January 26, 1910, and the pay roll was to be maintained for the certain years beginning January 1, 1911, it may fairly be inferred, since a new plant must be constructed, that its active operations did not begin a considerable length of time before January 1, 1911.

The company was adjudged a bankrupt by its consent July 24, 1911. Thereupon the Board filed with the referee its 'Proof of Claim' against the bankrupt's estate, asserting an indebtedness of $10,000, for which the consideration was alleged to be set forth in its contract and in which its claim was definitely described as follows: '* * * That said claim is for the liquidated damages of ten thousand dollars ($10,000.00) provided for in said contract, and that said Climax Specialty Company did not, as provided for in said contract, maintain a pay roll, exclusive of the salary of the manager or superintendent and salesmen on the road, at their factory in Ann Arbor, of fifty thousand dollars ($50,000.00) for the first year after January 1, 1911, and that there have been no strikes, labor difficulties, fires, acts of the elements, panics or other causes beyond the control of said Climax Specialty Company to prevent it from maintaining said pay roll.'

On objections by the trustee in bankruptcy, the referee found the designated sum to be a penalty; that the Board was not and could not be financially injured by reason of the failure of the bankrupt to maintain its pay roll; that no moneys, if recovered by the Board, would be repaid, in whole or in part, to any of the parties contributing to the fund; that no damages had been proved by the plaintiff; that the proof of claim based on the breach of contract does not prove itself and is in the nature of unliquidated damages; can only be allowed after proper proof and is not entitled to allowance under section 57d of the Bankruptcy Act (Comp. St. 1913, Sec. 9641), because the claim is not provable; that the contract could be enforced, if at all, only to the extent that actual damages are proved; that the debts of the estate were large and the assets only nominal; that the claim was not based on any actual damages sustained upon any moneys expended; that the moneys of the estate should not be paid upon such claims unless established and sustained by clear and convincing evidence and by rules of law that are unquestioned; that under Zavelo v. Reeves, 227 U.S. 625, 33 Sup.Ct. 365, 57 L.Ed. 676, Ann. Cas. 1914D, 664, the claim could not be filed and allowed, since it did not exist at and before the filing of the petition in bankruptcy; and that therefore the claim was not provable.

The referee rejected the claim, his action being affirmed by the District Court.

In the assignments of error, it is claimed the court erred in sustaining the objections of the trustee based upon the grounds that: (1) The bankrupt was not indebted to the claimant; (2) the contract was against public policy; (3) the contract was lacking in mutuality; (4) the claimant had not performed its obligations to be performed; (5) the claimant had not suffered any damage by reason of the failure of the bankrupt to maintain a pay roll of $50,000 for the year beginning January 1, 1911; (6) if there was any damage, it was speculative in character; (7) the stipulated damage was a penalty; (8) the bankrupt was prevented, by causes beyond its control, from complying with its contract; (9) the bankrupt was prevented from fulfilling its contract in large measure by labor difficulties and panics which were causes beyond its control; and (10) the claimant had not a provable claim.

The second, third, fourth, eighth, and ninth assignments may be disposed of by the statement that no reason is given-- and none appears-- why the contract is against public policy, or is lacking in mutuality, or was not performed by the Board of Commerce according to its terms, or compliance by the company was prevented by any causes beyond its control.

The other assignments are now dealt with upon a consideration of the three questions, whether or not: (1) The claimant has sufficiently proved...

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