Childs v. N.B. Carlstein Co.

• Decision Date: 01 January 1896
• Docket Number: 3.
• Citation: 76 F. 86
• Parties: CHILDS et al. v. N. B. CARLSTEIN CO. et al.
• Court: U.S. District Court — Eastern District of Michigan

76 F. 86

CHILDS et al. v. N. B. CARLSTEIN CO. et al.

No. 3.

United States Circuit Court, E.D. Michigan, Northern Division.

1896

Complainants are residents of Cleveland, and citizens of the state of Ohio, and co-partners in business at that place; and the defendant the N. B. Carlstein Company is a corporation organized and existing under the laws of the state of Michigan, having its principal office at Bay City, and, prior to the filing of the bill, was engaged in the business of selling, at wholesale and retail, dry goods, clothing, and other merchandise, at Bay City, and at the village of Standish, in Arenac county, Mich., having stores at said places. The defendant Miller was prior to December 28, 1894 a stockholder and president of said the N. B. Carlstein Company, and is a citizen of Michigan and resident of Bay City. All of the other defendants are citizens of Michigan and residents of Bay City, and with the exception of Frank S Pratt, who is a trustee in the mortgage executed by the Carlstein Company, hereinafter mentioned, are creditors of said company and beneficiaries under said mortgage. The claim of the complainants against the N. B. Carlstein Company is for merchandise sold and delivered by complainants since July 1, 1894, to the amount of about $3,684.27. For the recovery of this sum, complainants had commenced their suit at law in this court, and issued a writ of garnishment in aid of the same against Frank S. Pratt, trustee, William H. Miller, and the banks above named.

The bill recites that two of the complainants visited Bay City October 12th, and there had an interview with defendant Miller, president of the company, in which the latter stated that its credits had been too largely extended, and therefore the company would be obliged to have an extension of time for the payment of its debts to complainants; that it was solvent, and that none of its creditors would ever lose by it, and also that the company was considerably indebted to Miller, and other statements were then made, as the bill charges, for the purpose of inducing complainants to extend the time for the payment of their debt, and to obtain further goods on credit; and that, by these representations and statements, complainants had been diverted from demanding and obtaining the negotiable notes of the company, secured by the indorsement of Miller, which he refused to give, on the ground that he had never indorsed the paper of the company. Allegations are made upon information and belief of other matters which are put forward by complainants as the inducements upon which they acted in accepting unindorsed notes of the company, for the indebtedness then due, and for granting an extension on indebtedness of the company to complainants, which fell due December 1, 1894, and by which complainants were led to sell and deliver additional goods in November and December, 1894. The bill avers that October 12 1894, the N. B. Carlstein Company was indebted to the Commercial Bank of Bay City, the Old Second National Bank and the First National Bank of Bay City, defendants herein, for an amount exceeding $40,000, for the greater part of which defendant Miller had become personally responsible to said banks as indorser, guarantor, or by giving his personal obligations in some other form; that said company was also indebted to the H. B. Claflin Company, of New York, to the amount of several thousand dollars, and to other parties, for goods, sold and delivered, to the amount of at least $25,000, and that October 12, 1894, said N. B. Carlstein Company was insolvent, to the knowledge of defendant Miller, its president; that on the 28th of December, 1894, there was executed and delivered to defendant Pratt, as trustee, for the H. B. Claflin Company, the Commercial Bank of Bay City, the old Second National Bank of Bay City, the First National Bank of Bay City, and defendant Miller, a chattel mortgage to secure indebtedness amounting, in the aggregate, to $92,235.12, and covering all of the goods, mortgages, and other property of the N. B. Carlstein Company; that on the 29th day of December, 1894, said the N. B. Carlstein Company executed and delivered to defendant Miller another chattel mortgage upon its goods, merchandise, and personal property, to secure an alleged additional indebtedness to said Miller of $12,895.68; that said banks had, prior to the giving of said mortgage, collateral security for the indebtedness secured thereby, which was partly the property of the mortgagor, and the balance that of defendant Miller, who, the bill charges, is also responsible to each of said banks for the payment of said indebtedness to it as indorser, guarantor, or by reason of a personal obligation in some other form, and that the greater part of said indebtedness to said banks was incurred before July 1, 1894, and has been secured from its inception by Miller's personal undertakings; that the Pratt mortgage and that to Miller were executed by the mortgagor, by its vice president and its secretary; that said Miller fraudulently concocted the scheme to appropriate to his own benefit the assets of said the N. B. Carlstein Company, and for the purpose of giving that company a fictitious credit, and for that purpose procured the sale to the company, on credit of the greater portion of the goods, included in the mortgage; that defendant Pratt, the trustee in said mortgage, has taken possession of the mortgaged property at Bay City and Standish, and has been selling the goods at those places, and converting the same into cash; that Miller has taken concurrent possession with Pratt by virtue of the second mortgage, with the intent to sell the property in bulk, and to bid the same in at said sale, which is to be had subject to said first mortgage, the result of which will be that Miller will become the purchaser of the property for a nominal consideration, and that it is the purpose and intent of Miller and Pratt and of the N. B. Carlstein Company to use the proceeds of the sale of property made by Pratt for the purpose of paying such part of the indebtedness to the banks as is necessary to obtain a release of Miller's obligations and the collateral security by him given to said banks, and then for the payment of other secured indebtedness, the effect of which will be to absorb the assets of the mortgagor for the benefit of secured creditors; that on the 6th of February, 1895, complainants commenced an action at law against the N. B. Carlstein Company for the recovery of its indebtedness to them, in this court, and simultaneously instituted garnishment proceedings against the defendants in this cause, charging that each of them has in its hands, custody, or control the personal property of said the N. B. Carlstein Company, and making the other statutory allegations necessary to sustain such suits in garnishment, which, the bill claims, give the complainants the status of judgment creditors of the N. B. Carlstein Company. The prayer is that the court will decree the mortgages and the contracts and obligations of the N. B. Carlstein Company to Miller to be fraudulent and void as against complainants and the other unsecured creditors of the company; for an accounting of the amount due complainants, and marshaling of the assets of the Carlstein Company for their benefit; that the banks may be compelled to resort for payment of their claims to the collateral held by them, including the securities owned by Miller; and that the claims of Miller against said company may be postponed to complainants and those of the unsecured creditors of the company; and that the complainants' claims may be decreed to be a first lien upon the property of the Carlstein Company, except such as has been lawfully pledged as collateral before the issue and service of the writs of garnishment. A receiver is also prayed, and the court is asked to enjoin Miller and Pratt from selling, disposing of, or in any manner interfering with the property covered by the mortgages, and from foreclosing the mortgages, and for other relief.

The bill does not waive an answer under oath. A temporary restraining order was granted, in pursuance of its prayer. Since then each of the defendants have filed their separate answer under oath, denying positively and unequivocally all of the allegations of fraud made in the bill, and all the material matters upon which the prayer for relief is predicated, and further averring that the mortgages mentioned in the bill and all the transactions had between the N. B. Carlstein Company and its co-defendants, the banks, and Miller, which the bill seeks to avoid, were founded upon full consideration, and made in good faith, to secure advances and liabilities of the mortgagor corporation, and were had and done in the exercise of the lawful rights of the parties.

Brooke & Spalding, for complainants.

T. F. Shepard, E. A. Cooley, C. L. Collins, and J. C. Weadock, for defendants.

SWAN District Judge (after stating the facts).

The answers of the defendants so fully repel the charges of fraud made by the bill that the only matters remaining for examination are the legal questions which govern the case. The obstacles to the maintenance of this bill are many and insuperable. Its scheme and theory are founded on two propositions, both of which must be established to sustain it. The first is that the assets of a corporation constitute a trust fund for the benefit of its creditors, of so sacred a nature that any disposition of those assets to secure an antecedent indebtedness in favor of one or more of its officers, even if made in the life of the corporation, and while it is still a going concern, although financially embarrassed, if the same results to the determined of its general creditors, may at...