Burnes Nat. Bank v. Mueller-Keller Candy Co., 10654.

• Decision Date: 13 November 1936
• Docket Number: No. 10654.,10654.
• Citation: Burnes Nat. Bank v. Mueller-Keller Candy Co., 86 F.2d 252 (8th Cir. 1936)
• Parties: BURNES NAT. BANK v. MUELLER-KELLER CANDY CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

86 F.2d 252 (1936)

BURNES NAT. BANK v.MUELLER-KELLER CANDY CO. et al.

No. 10654.

Circuit Court of Appeals, Eighth Circuit.

November 13, 1936.

O. E. Shultz, of St. Joseph, Mo. (Stephen K. Owen and Shultz & Owen, all of St. Joseph, Mo., on the brief), for appellant.

Richard L. Douglas, of St. Joseph, Mo., for appellee.

Before GARDNER, SANBORN, and FARIS, Circuit Judges.

GARDNER, Circuit Judge.

This is an appeal from an order of the lower court confirming and approving an order of the referee in bankruptcy which rejected and disallowed appellant's claim against the Mueller-Keller Candy Company, a corporation, bankrupt.

The claim is in the form of a promissory note for $7,000, dated January 1, 1932, payable to the order of Fred M. Keller, at sight, with interest at 6 per cent., and signed, "Mueller-Keller Candy Company, by F. M. Keller, President."The trustee filed objections to the allowance of the claim, alleging that (a) the note was without consideration and was acquired by claimant after maturity and with knowledge of the absence of consideration; (b) the note was signed by Fred M. Keller as president of the bankrupt, payable to his own order, without consideration and without authority of the bankrupt's board of directors, when he was heavily indebted to the bankrupt, and such facts were known to claimant when it acquired the note; (c) at the time the purported note was executed, the payee named therein was indebted to the bankrupt in a sum exceeding $87,500; that said note was executed by the payee without authority from or knowledge of the board of directors, and he was indebted to the bank in sums greatly in excess of $7,000 on January 1, 1933, when he executed and delivered to himself the promissory note; that all said facts were known to claimant before it acquired and attempted to become the owner of said promissory note.

The claim was rejected and disallowed by the referee, who filed findings of fact and conclusions of law sustaining the contentions of the trustee.On review, the lower court approved and confirmed the order of the referee, and in doing so said: "I concur in the views and reasoning expressed by the learned referee in connection with his order disallowing the claim of the Burnes National Bank."

On this appeal it is urged by appellant(1) that the referee erred in finding and concluding that the note was without consideration; (2) that as against claimant, the indorsee of the note, there was no right of set-off because only equities that are connected with the note itself constitute a defense; (3) the referee erroneously held that the note was a "sequel" to Keller's debt created by his unlawful appropriations, and hence a set-off was not allowable; (4) that Keller's withdrawals and their satisfaction by delivery of stock did not deprive him, as president and business manager of the company, of the power to make a valid contract for a lawful purpose; and (5) that the trustee is estopped to deny that Keller's debt to the company was paid by delivery of stock.The findings of the referee which were approved by the court are not seriously challenged on this appeal, although the inferences drawn therefrom are urged to be unwarranted by appellant.

It appears from these findings and conclusions (1) that the execution of the note already described was not authorized by any action of the board of directors; (2) that prior to its execution Fred M. Keller, president and business manager of the company, had advanced to the company, from money borrowed on his life insurance, various sums from January 2, 1932, to September 15, 1932, amounting in the aggregate to $7,000; (3) that prior to these advancements, and beginning in the year 1926, Keller, without authority from the board of directors, borrowed or advanced to himself various sums of the company's money, with which he purchased from other stockholders their stock in the company, the amount of said debt amounting on July 1, 1926, to $25,619.56, and increased to $85,772 on December 31, 1929; (4) that during these years, and until 1930, the sums so borrowed from the company were charged to Keller's open account on the books of the company, in which account he was credited with his salary as president, and debited with his withdrawals; (5) that about January 1, 1930, the account was increased to $87,500, and by direction of Keller to the cashier and bookkeeper, and without authority from the board of directors, it was segregated as a separate account of Keller under the heading "F. M. Keller, Special," to distinguish it from Keller's active account.On the active account he owed, on January 1, 1932, over $2,000; (6) that on January 1, 1932, Keller still owed the company $87,500 on this special account, and thereafter, in July, 1932, without authority of the board of directors, he then directed the cashier and bookkeeper to close out this special account of his indebtedness as of date January 2, 1932, and to charge capital stock with said amount, thus "by such nunc pro tunc entry" causing the books of the company to show that said indebtedness had been wiped out by the transfer of said stock when the advancements of the $7,000 began.These advancements, totaling $7,000, were then carried on open account as a charge against the company until January 1, 1933, when they were by Keller as president, without authority from the board of directors, put in the form of the company's note, which is the basis of appellant's claim; (7) that at subsequent annual meetings of the stockholders and adjourned sessions thereof, held in January and February, 1933, it was contended that Keller still owed the company this $87,500, and had no right to turn in said stock in payment thereof, and that the company had no authority to purchase it, and at this time "three trustees, who were elected directors, though requested by Keller to do so, refused to recognize this $7,000.00 note"; (8) that members of the board of directors of the company and officers of the Burnes National Bank had knowledge of said controversy in January and February, 1933, the president of the bank and one of the bank's directors being in attendance at said stockholders' meeting; that about a month prior to the time the $7,000 note was delivered by Keller to the bank, pursuant to direction of some one assuming the right to speak for the company, the cashier and bookkeeper charged back to Keller's account the $87,500 previously charged off; (9) that the Burnes National Bank knew of said debt of Keller and his attempted stock payment thereof, and of the absence of authorization and of the criticism of the transaction, when, in May, 1934, it acquired from Keller the note in question; that it was at said time turned over to claimant in payment of his debt owed by and then due from Keller to the bank.

The referee concluded that claimant was not a holder of the note in due course, but that it took with knowledge of its infirmities; that the note was not a separate transaction divorced from the transactions by which Keller unlawfully withdrew and appropriated to his own use the funds of the company, and that the claimant stood in no better position than did Keller, and that the transfer of said note to claimant did not defeat or have the effect of cutting off the right of set-off.The referee entered still other conclusions which, in our view of the...