Cook v. Am. Tubing & Webbing Co.

• Decision Date: 15 June 1905
• Citation: 65 A. 641,28 R.I. 41
• Parties: COOK v. AMERICAN TUBING & WEBBING CO.
• Court: Rhode Island Supreme Court

65 A. 641

28 R.I. 41

COOK

v. AMERICAN TUBING & WEBBING CO.

Supreme Court of Rhode Island.

June 15, 1905.

Exceptions from Superior Court, Providence County.

Petition in equity by Maurice H. Cook against the American Tubing & Webbing Company to wind up defendant's affairs as an insolvent corporation. On certification by the superior court of exceptions to a master's report. Sustained in part, and overruled in part.

Argued before DOUGLAS, C. J., and DUBOIS, BLOGETT, and JOHNSON, JJ.

Comstock & Canning and Gardner, Pirce & Thornley, for receivers. John G. Milburn, Edwards & Angell, and John A. Tillinghast, for claimants in the first class. Justus P. Sheffield and Burbank & Brown, for Manufacturers' Commercial Co. Charles A. Wilson and Atwater & Cruikshank, for Commonwealth Trust Co. Richard E. Lyman and Cardoza & Nathan, for American Exchange Nat. Bank. Robert D. Murray, for certain creditors.

DOUGLAS. C. J. This case is brought by a stockholder of the defendant, an insolvent corporation, to wind up its affairs and to distribute its assets amongst its creditors. It comes before us by certification from the superior court, under section 338 (page 98) Court and Practice Act of 1905, having been heard for final decree in that court upon exceptions to the report of the master, who had been appointed to consider the validity of claims against the defendant corporation. These exceptions were filed by sundry parties whose claims had been disallowed. The majority of these claims may be classified together, while the claims of the Manufacturers' Commercial Company and of the Commonwealth Trust Company, formerly the Trust Company of the Republic, present features which must be considered separately. The claims included in the first class were based upon drafts drawn by the American Tubing & Webbing Company, in Providence, upon Dresser & Co., New York, payable to the order of, and indorsed by, the drawer and accepted by the drawees. These drafts were discounted by the various claimants for the acceptors or a member of the accepting firm. The master rejects these drafts because he finds that they constituted accommodation paper which the drawer had no legal power to issue, and that the claimants took them with notice of their character, imputed by law, from the fact that they came from the hands of the party primarily liable.

The exceptions are in many cases loosely drawn, some of them being to the argument of the master rather than to his findings, but they raise the questions clearly enough: First, whether these drafts were accommodation paper; secondly, whether such paper was valid against the drawer in the hands of a purchaser with notice of its character; thirdly, whether the claimants, respectively, had actual or presumptive notice of the character of the paper.

In considering the first question it is necessary to know the relations of the parties to this paper and the circumstances in which it was issued. The master's statement of these circumstances does not differ essentially from those made by the counsel for the several parties, and is well supported by the evidence. The firm of Dresser & Co. was composed of D. Leroy Dresser and Charles E. Riess, and conducted a commission business in the city of New York, with an office also in Chicago, a part of this business being the marketing of a large part of the product of the American Tubing & Webbing Company which was a Rhode Island corporation located at Providence and engaged in the manufacture of tubing and webbing. D. Leroy Dresser owned a majority of the stock of the defendant corporation, and had been instrumental in the increase of the business of the company by effecting a consolidation with it of two other manufacturing concerns in which he had been interested. Dresser & Co. also, by an agreement with the company, financed its business and in return therefor had certain rights to commissions on goods sold direct to its own customers and exclusive control of its principal product. The financing of the webbing company by Dresser & Co. was accomplished by Dresser & Co. permitting the webbing company, when in need of funds for its current uses, to draw on them, whereupon they accepted the drafts and returned them to the webbing company, who in turn secured their discount through Wheeler & Jones, note brokers, in Boston. When the drafts accepted under this agreement were sent to the webbing company by Dresser & Co., a debit was made upon their books against the webbing company, and, when the drafts were discounted by the webbing company, Dresser & Co. were given credit therefor on its books. When the drafts of this class became due, the webbing company placed Dresser & Co. in funds to meet them and debited Dresser & Co. with such remittances. Dresser & Co. also paid by way of accepted drafts at stated periods for the merchandise sent to them by the webbing company, and likewise for certain machinery and a stock issue, and, in the case of these drafts, Dresser & Co. paid them at maturity, such drafts being their obligations. The account with Dresser & Co. on the books of the webbing company had always been kept in the name of D. Leroy Dresser, and no distinction was made at any time between Dresser & Co. and D. Leroy Dresser, and no one ever excepted to that method or claimed at any time that there was any distinction between the firm and the individual which required any separation on the books of the webbing company.

D. Leroy Dresser was the president of the webbing company until the annual meeting of the corporation in 1902, and a member of its board of directors up to the time of its failure. The executive officers at the time of the failure were Alfred Caldwell, who was president and general manager, and Grenville M. Thurlow, who was treasurer. The last-named two men had a practical knowledge of, and attended to, the manufacturing end of the business of the webbing company, but submitted themselves to D. Leroy Dresser for advice and direction in regard to the finances of the corporation, considering that they were compelled thereto by reason of Mr. Dresser's supposedly greater familiarity with such matters and by the pressure of his predominance in the control of the corporation by which they were employed.

In addition to the drafts used for the benefit of the webbing company, whether under agreement of Dresser & Co. to finance the webbing company or by way of payment for goods, machinery, and stock issue, there were a large number of drafts used exclusively for the benefit of Dresser & Co., as follows: Dresser & Co., or Mr. Dresser, being interested in large, and sometimes speculative, enterprises in New York, were often in need of money, and to secure such amounts as were needed Caldwell and Thurlow were requested to send drafts to Dresser & Co. for their acceptance and use. Caldwell and Thurlow, while recognizing fully that there was no legal obligation on their part requiring them to accede to such requests, still felt obliged to do so, for the reason that, as Caldwell says, he was getting his living out of the corporation and felt that he could rely on Mr. Dresser, and, as he implies, because he did not wish to cross him by a refusal. These drafts were sent to Dresser & Co., generally, in blank as to amount, were in the same form as the genuine obligations of the webbing company, were never entered on the books of the webbing company, were never carried on the books of Dresser & Co., other than on the bills payable book, and were never placed to the credit of the webbing company on any books of Dresser & Co. All parties, therefore, apparently concurred in treating them as transactions outside of the regular course of business. These drafts were discounted on presentation by Dresser & Co., the acceptors, and they received the proceeds of the discount, except in the case of the American Exchange National Bank, which on the face of the paper discounted the drafts for the benefit of D. Leroy Dresser, but the proceeds were checked out to Dresser & Co., the acceptors. Upon the failure of Dresser & Co., and the webbing company, a large number of these drafts were outstanding, not having matured, and it is upon these drafts that the claims now under consideration are based.

Upon these facts we must agree with the master that the drafts were accommodation paper. It is certain that, as between the original parties, they represented no contract whatever. In form they were promises by Dresser & Co. to pay money to the webbing company, or its order, which the webbing company could not have enforced. Nor, if Dresser & Co. had paid the drafts at the request of the webbing company to some subsequent holder, could they have charged such payment to the webbing company's account. The paper first came into life as representing a real contract when it was discounted; as between the original parties it was without consideration.

It is urged that there was a valuable consideration for these drafts in the class of drafts first mentioned, which were of similar tenor and were discounted in Boston for the webbing company. Those were likewise accommodation paper in the strict sense of the word, for they represented no contract between the original parties, the acceptance in one case being without consideration as the making and indorsement were in the other. It does not appear, however, that these two classes of drafts had any relation to each other in amount or date of issue or in the contemplation or intention of the parties. The first class were accepted by the firm in pursuance of its obligation to provide funds for the use of the corporation, and the second class constituted a plain loan of the credit of the corporation to the firm to enable the latter to procure funds for any of its numerous undertakings. The argument of the claimants hardly denies that the drafts we are considering were accommodation paper, but urges most strenuously that it was such...