First Nat. Bank of Stevens' Point v. Mcdonald Manuf'g Co.

• Decision Date: 15 May 1886
• Citation: 28 N.W. 225,67 Wis. 373
• Parties: FIRST NAT. BANK OF STEVENS' POINT, WIS., v. MCDONALD MANUF'G CO. AND OTHERS, DEFENDANTS, AND ANOTHER, GARNISHEE. KELLOGG NAT. BANK OF GREEN BAY v. MCDONALD MANUF'G CO. AND OTHERS, DEFENDANTS, AND ANOTHER, GARNISHEE.
• Court: Wisconsin Supreme Court

67 Wis. 373

28 N.W. 225

FIRST NAT. BANK OF STEVENS' POINT, WIS.,

v.MCDONALD MANUF'G CO. AND OTHERS, DEFENDANTS, AND ANOTHER, GARNISHEE.

KELLOGG NAT. BANK OF GREEN BAY

v.MCDONALD MANUF'G CO. AND OTHERS, DEFENDANTS, AND ANOTHER, GARNISHEE.

Supreme Court of Wisconsin.

May 15, 1886.

Appeal from Fond du Lac circuit court.C. W. Felker and Sutherland & Sutherland, for appellants, First Nat. Bank of Stevens' Point, Wis., and another.

E. S. Bragg and Spence & Hiner, for respondents, McDonald Manuf'g Co. and others, Defendants, and another, Garnishee.

ORTON, J.

These two cases were submitted together on the same facts. Suit was brought by the plaintiffs severally against said defendants on claims for borrowed money of over $10,000 each, which occurred before the recording of trust deed hereafter mentioned, and the garnishee summons was served on the tenth day of July, 1884. Judgments were rendered in the suits, in the first, August 2, and in the other, December 27, 1884. The garnishee answered on the thirtieth day of July, 1884, generally, that he had no money in his hands belonging to the defendants, and that he held the property of said company by virtue of a trust deed to him as trustee, dated December 1, 1883, acknowledged January 14, 1884, and recorded and delivered March 15, 1884. Issue was taken upon said answer, and a trial had on evidence in August, 1885.

The main facts in evidence were as follows: The company was incorporated under the general law, and commenced business, in 1877, in the manufacture of farming machinery and implements. The principal machine manufactured was a threshing-machine, horse-power, and separator. In 1879 the company needed money, and executed a trust deed upon its property, or some part of it, to said George P. Knowles, the present trustee and garnishee, to secure the issue of $50,000 in bonds at 8 per cent., which bonds were sold in market. The first threshing-machine made became unpopular by reason of some defect, and many of them were returned. Sales of machinery were made in several of the western states, through agents, on paper of one, two, and three years, and a very large amount of such paper was unpaid. The company changed their machine, and were proceeding to manufacture the new machine, and had many of them completed, and became again embarrassed for want of money, and on the first day of December, 1883, was unquestionably insolvent. It had real estate valued at about $37,000, and patterns valued at about $13,000, and many of the old machines on hand, and a large amount of farmers' notes, most of which had been pledged as collaterals, and they had some new machines, made and incomplete; and, from the first trial balance in evidence of July 9, 1884, the debit and credit were balanced at $412,257.95. The evidence showed conclusively that the property and resources of the company were nominally overrated nearly one-half in value, and the company had no money when the trust deed was made, December 1, 1883, and none went into the hands of the trustee. Aside from the $100,000 of stock and $100,000 of trustee bonds, as near as I can ascertain from the very confused testimony, the company were indebted over $200,000, and one-half of it, at least, above its resources to pay. Very much of its indebtedness had been postponed and renewed from time to time, and its collaterals were nearly exhausted, and the debts were nearly or quite all past due, and their business was continued solely on borrowed money. On the sixteenth day of November, 1883, there was a meeting of the stockholders, and a resolution was passed that the board of directors be authorized “ to issue, and sell or hypothecate, for the use of this corporation in its business, to provide an increase of working capital, called for by an increasing business,” 100 bonds, for $1,000 each, dated December 1, 1883, payable the first day of October, 1893, with interest at 7 per cent., payable semi-annually, on the first days of April and October in each year ensuing the date thereof, upon coupon warrants issued with such bonds, to be signed by the president, under the corporate seal, etc. The president of the company was authorized, at the same time, to make, execute, acknowledge, and deliver a trust deed for the corporation, in the nature of a mortgage, on its property, to George P. Knowles, trustee for the bondholders, to secure said bonds and interest. The trust deed was to have the following conditions: That a failure to pay any installment of interest, for 60 days after the same is due, shall make the whole principal sum due and collectible, as well as the maturing interest, and thereupon, upon request of a majority in amount of the bondholders, it is made the duty of the trustee to proceed, and procure with all convenient speed a decree for the sale of the property conveyed, in some court of competent equity jurisdiction; and it is further declared to be a part of the contract upon which said bonds are sold and put upon the market that in case of default, “and equitable proceedings are taken to enforce the trust deed, the said trustee may, upon the commencement of such proceedings, enter into the possession of the trust property, hold and use the same, carry on the business of this corporation, as the receiver thereof, or otherwise, as in his best judgment the best interests of the bondholders may require.” The trustee may collect all choses in action, and apply proceeds in carrying on the business, etc., pay the expenses, and hold the balance for the bondholders. Upon sale of the property being made in such equitable proceedings after payment of costs, fees, etc., the proceeds are to be applied to the payment of principal and in-interest of the bonds, and, if not sufficient to pay the same in full, to be distributed, share and share alike, without preference. The trust deed was so made of all the property, real and personal, rights, credits, and effects, of the company.

It will be seen that the sole purpose, stated in the deed, of the issue of these bonds, was to sell or hypothecate them to raise money “to provide an increase of working capital, called for by an increasing business;” “it is declared to be a part of the contract upon which said bonds are sold and put upon the market,” etc. On the face of the deed, and that part of the resolution copied into it, there is no other purpose, apparent or expressed, than to raise means to be used in carrying on the business, by selling the bonds for cash in the market. This would appear to be a fair and legitimate transaction of a solvent manufacturing corporation, beneficial to itself and its creditors. But a part of the resolution was not copied into the bond, viz.: “That the present issue of bonds, of the amount of $50,000, be called in or paid up, and that the $100,000, above provided for, shall be issued in their place.” This, of course, has reference to the issue of $50,000 of bonds in 1879, and discloses quite a different purpose, for at least half of the $150,000 of bonds, than that appearing in the trust deed, and it appears that this part of the resolution was carried out by passing over $50,000 of the bonds to take up that amount issued in 1879, and outstanding to the holders thereof. This trust deed is attacked for being fraudulent and void as to the plaintiffs and other creditors of the corporation, and that was the real issue on the answer of the garnishee.

We have seen that the corporation was badly insolvent at the time it was made, and the character and terms of the deed. We may now inquire what it was possible for the corporation and trustee to do under it, and what they probably would do, and what they actually did under it, with a view of ascertaining what was the intent with which it was made, and its legal effect.

When the remaining bonds were disposed of by the company does not very clearly appear. There is no evidence that any of the bonds except one was ever sold for cash or part cash. They were delivered to divers creditors as security or in payment of their claims, and some of them, over $10,000 in amount, were delivered to officers of the corporation as collateral security for money that had been advanced previously by them for the company, and $14,000 in amount of the bonds were delivered, by order of the directors, to divers creditors, on the ninth day of July, the day when the trustee took possession of the property under the trust deed. On the tenth day of July, 1884, the day the garnishee summons was served, the directors had a meeting, and passed a resolution ratifying and confirming the delivery of bonds Nos. 58 to 100, inclusive, to various parties, and as collateral security to creditors, and on the same day the stockholders held a meeting, and made the same ratification thereof. It is quite probable that few, if any, of the $50,000 of the bonds remaining, after taking up the old $50,000 of bonds, were negotiated or delivered to any one before the first day of April, 1884, the time when the first semi-annual interest became due, for default in the payment of which the trustee took possession of the property.

It appears from the trial balance that all that installment of interest had been paid on all the bonds except the sum of $604.85 before July 9, 1884. In November, 1884, the trustee made out written requests for him to take such measures as he deemed best in managing the property in his possession under the deed, and sent them to the bondholders, and many of them--probably a majority--signed and returned them, and on the ninth day of July the officers and directors of the company requested him to do so, and turned the property over to him. There were then about 200 machines on hand, completed and unfinished, and the company had no means with which to continue the business. The garnishee summons was served the next day. Since that time, until the trial, the trustee has been in full possession of everything the company...