Emmert v. Drake

• Decision Date: 15 August 1955
• Docket Number: No. 15272.,15272.
• Citation: 224 F.2d 299
• Parties: D. U. EMMERT et al., Appellants, v. Lawrence DRAKE, Appellee. Hugh F. WALSH, Appellant, v. D. U. EMMERT et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

224 F.2d 299 (1955)

D. U. EMMERT et al., Appellants, v. Lawrence DRAKE, Appellee.

Hugh F. WALSH, Appellant, v. D. U. EMMERT et al., Appellees.

No. 15272.

United States Court of Appeals Fifth Circuit.

June 30, 1955.

Rehearing Denied August 15, 1955.

J. Hart Willis, Stanley M. Kaufman, Willis & Willis, Robert S. Strauss, Dallas, Tex., for appellants Emmert, Aldredge, Coffee, Mohrle, and Oster.

Chandler Lloyd, Joe W. Matthews, Biggers, Baker, Lloyd & Carver, Dallas, Tex., for appellant Walsh and appellee Drake.

Before RIVES, Circuit Judge, and DAWKINS and DE VANE, District Judges.

DE VANE, District Judge.

This is an appeal by H. R. Aldrich, Jr., Roy C. Coffee, C. A. Mohrle, H. M. Oster and D. U. Emmert and cross-appeal by Hugh F. Walsh from a judgment of the United States District Court for the Northern District of Texas, Dallas Division, entered the 16th day of July, 1954. The original suit was brought by Lawrence Drake and Hugh F. Walsh, hereinafter sometimes referred to as plaintiffs, against appellants on two promissory notes signed by D. U. Emmert, President, on behalf of Metals & Chemical Corporation and attested by its Secretary, M. R. Warlick. The corporation which executed the two notes was not made a party to the litigation nor was any relief sought against the corporation, but appellants were sued individually and jointly as Directors of the corporation. Two Directors, W. L. Moody, III, and Stewart M. Wyeth were not made parties to the suit.

The complaint alleged that the corporation duly executed two notes, each due six months after date, one in the principal sum of $10,000.00, dated April 25, 1952, in favor of Drake and the other in the principal sum of $6,000.00, dated April 29, 1952, in favor of Walsh, for money which the corporation had borrowed from these parties. Each of the two notes contained an identical provision as follows:

"It is expressly understood and agreed that this note will be payable out of the proceeds of the first public financing through the public sale of the corporation stock, should such public financing occur within the aforesaid six months. It is also understood and agreed that the foregoing provisions are not intended to extend in any manner the due date of this obligation beyond its primary six months."

Prior to the delivery of these notes the corporation passed a resolution as follows:

"Resolved: That the President of the corporation is hereby empowered and directed to borrow $100,000.00 for and on behalf of the corporation and to issue and execute therefor proper notes of the corporation with payments on or before six months from date, to bear five (5) percent interest per annum and to provide for payment thereof out of the first proceeds of any funds received by the corporation as a result of the public offer of its stock."

This resolution bore the date of May 2, 1952, which was subsequent to the date appearing on the face of the notes, but the notes were not delivered to plaintiffs until the resolution had been adopted and a copy thereof was transmitted to plaintiffs along with the notes.

At the time the corporation borrowed the money from plaintiffs it planned a public issue of its stock. In pursuance of this plan the corporation filed a registration statement with the Securities & Exchange Commission which disclosed the obligation of the corporation to pay these notes in addition to others out of the first proceeds of any funds received through the public sale of the corporation stock. Said public sale began on July 21, 1952 and the corporation received from said sale of its stock a total of $221,044.20 by November, 1952.

Instead of using such money to pay the notes of plaintiffs the corporation caused the sum of $112,500.00 to be transferred as a loan to a subsidiary corporation; used $49,870.70 to pay a note of the National City Bank of Dallas, Texas; $5,000.00 to a creditor in repayment of an advance; $19,069.93 to pay various general creditors for services rendered and used the balance for other corporate purposes. The stock issue did not succeed in its entirety and was withdrawn in December, 1952. The corporation was insolvent when this suit was instituted.

The case was tried to the court without a jury. At the conclusion of the trial the court, in an oral statement, found in favor of the two plaintiffs for the amount due on each note, with interest and attorney's fees, but in the final judgment entered on June 16, 1954 the court ordered that plaintiff Drake recover from the appellants, jointly and severally, in the amount due him, but ordered that plaintiff Walsh have and recover nothing of and from the appellants. Appellants have appealed to this court from the judgment against them in favor of Drake and Walsh has filed a cross-appeal from the judgment against him.

The Drake Judgment

Appellants have assigned five specifications of error. The first three deal with the question of the liability of directors of a corporation in cases where no charge is made against them of fraud or misappropriation of funds. The fourth specification of error is an objection to the introduction of the resolution of May 2, 1952 on the ground that it varied or changed the terms of the note sued upon and the fifth specification of error objects to the use of the registration statement filed with the Securities & Exchange Commission in support of plaintiff's claim on the ground that it also had the effect to change or vary the terms of the note sued upon. The first three specifications of error will be considered together. Specifications four and five will also be considered together.

In their brief filed in behalf of appellants counsel predicated their argument in support of the first three specifications of error primarily upon the following statement of law which is taken from their brief:

"It is well settled that if

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