Dickerman v. Northern Trust Co.

• Decision Date: 24 May 1897
• Docket Number: 344.
• Citation: 80 F. 450
• Parties: DICKERMAN v. NORTHERN TRUST CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

80 F. 450

DICKERMAN v. NORTHERN TRUST CO. et al.

No. 344.

United States Court of Appeals, Seventh Circuit.

May 24, 1897

This is a suit brought by the Northern Trust Company, a corporation organized under the laws of Illinois, and doing business at Chicago, and Ovid B. Jameson, a citizen of the state of Indiana, as trustees, against the Columbia Straw-Paper Company, a corporation organized under the laws of New Jersey, to foreclose a trust deed covering various paper-mill properties given by the Columbia Straw-Paper Company to the appellees, to secure the payment of 1,000 first mortgage gold-bearing bonds of the company for the sum of $1,000 each payable to the bearer or registered owner thereof in gold coin and bearing interest at 6 per cent, per annum from the 1st day of December, 1892, payable half yearly; the interest on the bonds being secured by coupons in the usual manner attached to the bonds. At the commencement of the suit the Columbia Straw-Paper Company was the only defendant. During the progress of the cause Harry W. Dickerman and other persons, minority holders of stock in the Columbia Straw-Paper Company, upon petition to the court, were allowed to come in and answer and to file a cross bill. Answers were filed setting up collusion and fraud on the part of the Columbia Straw-Paper Company, and the controlling stockholders, and especially in overvaluing the various mill plants and properties upon which options were taken and which were transferred to that company in exchange for its capital stock; such Columbia Straw-Paper Company having been organized for the purpose of taking such conveyances, and thus consolidating the plants upon which options had been taken for that purpose. There were, it seems, some 70 of these paper-mill properties, situated in Illinois and other states. With the purpose of reducing expenses, and more economically carrying on the business, the idea was conceived by some of the owners of consolidating the various plants under one organization. To that end options were taken running for six months, and a new company, to be called the Columbia Straw-Paper Company, was organized with a capital stock of $4,000,000, with preferred stock of $1,000,000, to receive conveyances of the various plants from the person of persons taking the options, in exchange for the stock of the new company. The business, as it had been carried on by the separate mills, each with a full set of officers and managers, had not been profitable, and the purpose of the scheme was to reduce expenses by a consolidation of various interests, and by the organization of a single management. More capital was also needed to carry on the business, and this was to be provided by the issuance by the new company of $1,000,000 of gold-bearing bonds to be secured by a first mortgage upon the consolidated properties of the new company. The plan is fully set forth in the option contracts given by the mill owners. One hundred thousand dollars of the bonded indebtedness was to be retired annually. The mill owners were to be paid according to their options, partly in cash and partly in the common and preferred stock of the company. The money to pay for the mills, and provide the working capital to organize the new company and carry into effect all the details of the plan, including negotiations with mill owners and paying preliminary expenses, was to be furnished by the party taking the options. This party was to procure and convey to the company a good title to the property named in the options, and give the new company a working capital of $200,000, and the company in return was to transfer to the party so taking the options all the stock and bonds of the company. This arrangement was perfected and carried out by written contract between the company and Emanual Stein contained in the record. Some or all of the options in the first instance were given to Philo D. Beard and Thomas T Ramsdell, both of Buffalo, who transferred them to Stein. Stein, according to the contract, transferred all of the options to the company in exchange for its stock; but the stock called for by the options, and which was to go to the various companies who had given the options, was delivered by the company to the mill owners upon the order of Stein. All the other stock was delivered by the company to Stein, who converted the bonds, and from the proceeds made the cash payments for the mills and $200,000 to the company. Some of the stock was used in paying for the mills as agreed, some was used in payment for assistance to promoters of the enterprise in obtaining options, and some to pay commissions on sale to third parties of bonds, to lawyers for services, and to pay traveling and incidental expenses. In disposing of the bonds it was found necessary to give the purchaser of each $1,000 a bonus of $200 in addition of the preferred stock, and $400 in the common stock, of the company. All the bonds were sold in this way to any one who would buy them. The sum of $200,000 of the proceeds was handed over by Stein to the company, and the balance used in paying for the plants. Of the $1,000,000 preferred stock, $629,000 went to the mill owners and $200,000 to the purchasers of bonds. Of the common stock, $1,258,000 went to the mill owners, and $400,000 to purchasers of bonds. Some of the remainder went to Stein for services, and some was retransferred to the company under a modification agreement between him and the company. In this way the company acquired title to 39 mill plants out of 70 then in existence in the district covering the new enterprise. As before stated, the appellants are minority stockholders in the Columbia Straw-Paper Company, having in the aggregate 785 of the 10,000 shares of the preferred stock of the company and 1,070 of the 30,000 shares of the common stock. The answer of appellants to the original bill for foreclosure admits that 1,000 bonds of the company were sold and paid for at par, $1,000 for each bond, by the parties who purchased from Stein. This is also shown by the evidence. These are the bonds in suit, and to secure which the company gave its deed of trust for the various mill properties conveyed to it, which it was the purpose of the suit to foreclose. After the new enterprise was launched, the panic and hard times came on, business was interrupted and broken up, and the company unable to meet its obligations. Default was made in the payment of the principal and interest of the bonds. Indeed, no portion, either of principal or interest, has ever been paid. The proofs are quite voluminous, but perhaps the above statement will be sufficient for the purposes of this opinion. As stated, the Columbia Straw-Paper Company was the only defendant in the original bill to foreclose. Its answer virtually admitted the facts set out in the bill, and confessed its inability to pay. Subsequently Dickerman and the other stockholders who are here as appellants came in by petition and obtained leave to defend. The theory of their answer was that there was a fraudulent overvaluation of the property transferred to the company; that all the bondholders had acquired stock of the company without payment therefore, or that they were assignees of the bonds with notice of these facts; that they were still indebted to the company for the stock; and that the court should ascertain the amount of such indebtedness, and set off the same against the bonds. Substantially the same matters were set up by cross bill. The case was referred to Henry W. Bishop, master in chancery, to take the proofs and report to the court, which he did. By this report the master found all the issues in favor of the complainant and against the defendants; that the bonds had been made and delivered as alleged; that they are valid obligations against the company; that default had been made by the nonpayment of principal and interest; that the defendant company was insolvent and unable to pay its debts; that on or about January 22, 1895, an execution was duly sued out against the property of the company upon a judgment against the defendant by one James Flanagan, before George W. Underwood, justice of the peace, which still remained undischarged; and that by reason of the premises, and as provided in the deed of trust, the complainants had declared the principal and interest secured by the said 1,000 bonds, of the aggregate face value of $1,000,000, to be immediately due and payable and that they had been requested in writing by the owners of more than one-third of the bonds to enforce the provisions of the deed of trust and the security created thereby. The report further finds that the contention of the defendants, who are now the appellants, that the procurement of the Flanagan judgment was the result of collusion with the company, is not supported by the testimony. All the other issues were found in favor of the complainants. This report was filed on April 15, 1896, and two days after the opinion of the court was rendered, and a decree signed overruling the exceptions to and affirming the master's report, and ordering a foreclosure and sale in accordance with the prayer of the bill.

Otto Gresham and John S. Cooper, for appellant.

Charles A. Dupee, for appellees.

Before WOODS and JENKINS, Circuit Judges, and BUNN, District Judge.

BUNN District Judge (after stating the facts as above).

Upon a careful perusal of the record and testimony, we find no error in the conclusions of law or fact, and think that the decree of the circuit court should be affirmed. The defendants seem to have failed wholly in making good the allegations contained in the answer. The principal questions discussed, and on which the case turned in the court below, seemed to be: Whether there was any fraud or...