Dibert v. Wernicke

• Decision Date: 16 June 1914
• Docket Number: 2266.
• Citation: 214 F. 673
• Parties: DIBERT v. WERNICKE.
• Court: U.S. Court of Appeals — Sixth Circuit

214 F. 673

DIBERT v. WERNICKE.

No. 2266.

United States Court of Appeals, Sixth Circuit.

June 16, 1914

Edward Colston, of Cincinnati, Ohio, for appellant.

Murray Seasongood and R. L. Black, both of Cincinnati, Ohio, for appellee.

Before KNAPPEN, Circuit Judge, and McCALL and SANFORD, District judges.

SANFORD District Judge.

This is an appeal by Dibert, a citizen of Louisiana, the defendant below, from a decree in equity perpetually enjoining him from prosecuting an action which he had brought on the law side of the court against Wernicke, a citizen of Ohio, the complainant below, upon a promissory note.

The material facts are these: In 1902 and 1903 the Interstate Trust & Banking Co., of New Orleans, hereinafter called the Trust Co., loaned the Hardwood Export Co., of St. Louis hereinafter called the Harwood Co., $50,000 upon its various notes, with the pledge, as collateral, of $100,000, par value, of the Hardwood Co.'s bonds. Those bonds were part of an issue of $147,000, secured by deed of trust on about thirty thousand acres of lands, timber interests and leasehold estates in Alabama, on which there were three mills, one of which was then in operation. The Trust Co. then believed that these bonds were reasonably worth fifty cents on the dollar.

This loan was several times renewed. In October, 1903, the renewal not being paid, the Trust Co. gave notice that it would take legal action. Thereupon the complainant Wernicke, who was president of the Wernicke Timber Land Co., a corporation which had in the meantime agreed, conditionally, to purchase a majority of the capital stock of the Hardwood Co. and to liquidate two-thirds of its indebtedness, and who was interested in maintaining its credit pending this contemplated purchase, went to New Orleans with one Smith the president of the Hardwood Co., who was also the president of the F. H. Smith Lumber Co., hereinafter called the Smith Co., and urged the Trust Co. to again renew the Hardwood Co.'s loan, representing its property to be valuable.

As a result of these conferences the Trust Co. finally, on October 16th, surrendered the $50,000 Hardwood Co. notes which it then held and accepted in lieu thereof its four new notes for the same aggregate amount. Three of these new notes were for $5,000 each. They matured at intervals on and prior to December 15th, and were endorsed by the Smith Co. The other being the note now in question, was for $35,000. It matured on December 15th, was payable at the banking house of the Trust Co., and was signed on the back by both the Smith Co. and Wernicke as anomalous endorsers. The $100,000 Hardwood Co. bonds previously pledged were retained by the Trust Co. as collateral security for all of these new notes. This $35,000 note recited the pledging of the bonds as security for all of the notes, and provided that on default in payment of any of them at maturity, the Trust Co. might call for additional security or collateral. It also contained the following provision: 'The undersigned hereby gives said trust company * * * full and irrevocable power * * * upon failure to promptly pay at maturity said note or other liabilities * * * to sell such * * * collateral without further notice, demand for payment, or putting in default, and without the intervention of any court of justice and without appraisement or advertisement or other notice, at public or private sale or sales or at any broker's board or stock exchange. If said sale or sales shall be public or at any broker's board or stock exchange * * * said trust company * * * may purchase said property * * * at such sale or sales, without any right of redemption on the part of the undersigned.'

The $5,000 note which first matured was paid shortly after it fell due; and the Trust Co., with Wernicke's consent, thereupon released $10,000 of the collateral bonds. Neither of the other notes were paid at maturity; and all were protested. Both the Hardwood Co. and the Smith Co. executed deeds of assignment shortly before the maturity of the last note; and each proved to be insolvent. The Trust Co. did not, however, at any time make a demand for additional collateral under the terms of the pledge.

On December 31st, the Trust Co. telegraphed Wernicke: 'Hardwood note protested. Must take immediate action. Advise at once by wire. ' To this Wernicke replied, by telegram: 'Exhaust your resources on the makers and collateral before looking to me as endorser. Am unable to pay without shifting claim, which is made impossible by recent action of principals. ' On January 4, 1904, the Trust Co. telegraphed Wernicke: 'We look to you for payment Hardwood bearing your endorsement. Must take immediate action. ' To this Wernicke replied, by letter: 'I am not able at present to take it up, and if you feel that you must commence action to protect yourself, you must proceed against the makers, as well as well as endorsers, and also exhaust your collateral;' adding that he was satisfied that the Trust Co. would recover the amount due more speedily, and at less expense, by proceeding leniently than by 'adopting more stringent methods'; that he understood the Hardwood Co. and the Smith Co. were solvent, but needed time to realize upon their assets, so as to pay everybody in full; and that he himself could do more if allowed a free hand than if the Trust Co. were immediately to begin suit.

On January 7th, Wernicke wrote the Trust Co. that it might be necessary to ask for a receiver of the Hardwood Co. to protect its property for the bondholders; that on account of his interest as indorser he would like to be informed as to the Trust Co.'s views and intentions; and that it seemed to him the bondholders and parties interested in the bonds as collateral should get together and decide upon some course of action, if this had not been already done.

On January 16th, the Trust Co. wrote Wernicke that it was holding the bonds as collateral and not as an investment, and at the price it held them, in addition to the endorsers, it seemed that it should have no loss, but that its directors wished the matter closed as soon as possible and had decided to take action against the endorsers; and suggested that it would be better if he should take up the notes, with the collateral, so that he could protect himself against the endorsement in case the concern did not work out as expected, and that by taking such course he would be 'absolutely protected.' In reply Wernicke wrote, on January 19th, that he expected to visit St. Louis shortly and would look into the situation, and might also visit New Orleans with a view of arranging a plan to protect his contingent interest as endorser in the bonds; that he thought he could interest some acquaintances to assist him in acquiring control of a majority of the bonds; and that if the Trust Co. should commence suit at once it might prevent him from carrying out the plan he had in mind. This letter should have reached New Orleans, in due course of mail, on the night of the 20th.

In the meantime, however, the Trust Co. had sent its attorney to St. Louis in an effort to collect the notes or to sell the notes and collateral bonds. And this effort having been unsuccessful, it had, as testified by its president, at some time prior to January 20th, not precisely shown, turned over the Hardwood Co.'s notes and bonds to its attorney 'to take ownership of the pledge which had been held as collateral,' that is, 'to become owner of the bonds which it had heretofore held as collateral, in the proper legal manner,' or, 'in other words to foreclose the pledge. ' His purpose in foreclosing the pledge was, as testified by him, 'so as to have ownership' of the collateral; and in turning over the notes and bonds to the attorney he told him that what he wanted done was to 'take possession and ownership of the collateral,' what 'he wanted to accomplish' was to 'secure the ownership of that collateral.'

In pursuance of these instructions the Trust Co.'s attorney employed a broker to sell the bonds for the Trust Co. on the New Orleans Stock Exchange. He gave this broker no information as to the character or value of the bonds, other than what appeared on their face; and instructed him to employ another broker to buy in the bonds for the Trust Co. at the sale, commencing with a bid of $1,800, and, if necessary, bidding the full amount of the debt. And although the rules of the Exchange required that the selling broker should charge for selling one-fourth of one per cent. of the par value of the bonds, irrespective of the price brought, which would have been $225, he agreed in advance with this selling broker that his compensation should be only $50, out of which he should also pay the compensation of the broker whom he should employ to do the buying.

In accordance with the instructions thus given by the attorney, the selling broker instructed the broker whom he employed to do the buying, that he was to make the first bid for the bonds at $1,800, that is, at the rate of two cents on the dollar, and that if any one raised his bid, he should go higher and remain the highest bidder up to the full amount of the debt due the Trust Co.

In carrying out these instructions the bonds were sold on the New Orleans Stock Exchange, at the afternoon session, on January 20, 1914. No notice of this sale had been given to either the Hardwood Co., the Smith Co. or Wernicke. Nor had the sale of the bonds been previously advertised in any newspaper or posted on the Exchange; neither such advertisement nor posting being, however, customary in the sale of securities on the Exchange. At the time of the sale the usual number of brokers, about forty or fifty, were present, with perhaps some 'visiting members,' that is,...