General Finance Corporation v. Keystone Credit Corp.

• Decision Date: 17 June 1931
• Docket Number: No. 3084.,3084.
• Citation: 50 F.2d 872
• Parties: GENERAL FINANCE CORPORATION et al. v. KEYSTONE CREDIT CORPORATION et al.
• Court: U.S. Court of Appeals — Fourth Circuit

50 F.2d 872 (1931)

GENERAL FINANCE CORPORATION et al. v. KEYSTONE CREDIT CORPORATION et al.

No. 3084.

Circuit Court of Appeals, Fourth Circuit.

June 17, 1931.

A. W. Patterson and M. J. Fulton, both of Richmond, Va., for appellants and cross-appellees.

Hartwell Cabell, of New York City, and Murray M. McGuire, of Richmond, Va. (Cabell, Ignatius & Lown, of New York City, McGuire, Riely & Eggleston and Shewmake & Gary, all of Richmond, Va., M. B. Ignatius, of New York City, John S. Eggleston, Oscar L. Shewmake, and J. Vaughan Gary, all of Richmond, Va., on the brief), for appellees.

Joseph S. Clark, of Philadelphia, Pa. (Gerald F. Flood, of Philadelphia, Pa., Brockenbrough Lamb, of Richmond, Va., Clark, Clark, McCarthy & Wagner, of Philadelphia, Pa., and Christian & Lamb, of Richmond, Va., on the brief), for appellee and cross-appellant.

Before PARKER and NORTHCOTT, Circuit Judges, and GLENN, District Judge.

PARKER, Circuit Judge.

For some time prior to the year 1926, the National Credit Corporation, hereafter called the National Company, and the Virginia Mortgage & Finance Corporation, hereafter called the Virginia Company, both being corporations organized under the laws of Virginia, were engaged, in the city of Richmond, in the business of discounting paper secured by mortgages and liens on automobiles. In that year the stockholders of these corporations entered into contracts with Hare & Chase, Inc., a corporation of Pennsylvania, under the terms of which they exchanged their holdings of stock for stock in Hare & Chase, these contracts being made upon the faith of certain statements of the officers of Hare & Chase as to the financial condition of that corporation. After the transfer of stock, the National and the Virginia Companies, whose stock was then owned by Hare & Chase, were kept alive as active corporations and were operated by officials chosen at corporate meetings controlled by Hare & Chase.

The stock of the National and Virginia Companies came into the possession of the Keystone Credit Corporation, hereafter called the Keystone Company, under the following circumstances: In January, 1927, it was discovered that the financial condition of Hare & Chase was very precarious as the result of investment in certain taxicab paper which had been discounted for a corporation of Indianapolis. A meeting was thereupon had between its officers and representatives of the Royal Indemnity Company, a corporation which had guaranteed the payment of paper which it had discounted and deposited under a trust agreement with the Equitable Trust Company to procure certificates used as a basis of credit. At this meeting was represented also the Royal Insurance Company of Liverpool, which owned the stock of the Royal Indemnity Company, and which, for the purpose of saving Hare & Chase from receivership, agreed through its representatives to advance to that corporation at once the sum of $1,000,000 and further sums later, as same should be needed. Hare & Chase on its part agreed to execute its notes for the sums so advanced and to assign as collateral thereto certain stocks and other securities, including the stock which it owned in the National and Virginia Companies. Pursuant to this contract, the advancements were made by the Royal Insurance Company, and notes were given evidencing same, and the securities agreed upon, including the stock of the National and Virginia Companies, were assigned to one Fortington, agent and financial representative of the Royal Insurance Company in the United States. Shortly thereafter he and other representatives of the Royal Insurance Company caused the Keystone Company to be organized under the laws of Pennsylvania, and transferred to it the notes of Hare & Chase executed for the advancements as well as the securities which had been delivered as collateral thereto, including the stock in the National and Virginia Companies.

Among the assets of the Virginia Company were certain notes amounting to about $115,000 secured by mortgages on personal property other than automobiles. After the transfer of the stock of that company to Hare & Chase, a Virginia corporation was organized under the name of the General Finance Corporation, hereafter referred to as the General Company, to take over this paper and handle same and paper of similar character. One S. R. Brame, who was made president of both the National and Virginia Companies after the transfer of their stock to Hare & Chase, was made president of the General Company also; and the $115,000 of paper of the Virginia Company was transferred to the General Company by him under circumstances hereafter more fully explained.

On May 2, 1927, suit was instituted against Hare & Chase in the law and equity court of Richmond, Va., by Brame and four other stockholders of the National Company, in behalf of themselves and other persons similarly situated, alleging that the exchange of stock between the National stockholders, on the one hand, and Hare & Chase, on the other, had been secured by fraudulent representations, and asking that the contract be rescinded and set aside, and that their rights in the National Company be restored to them. This suit was duly removed into the federal court by Hare & Chase, and, on June 13th following, that corporation, together with the Keystone Company, filed an independent suit in that court against the National, Virginia, and General Companies and S. R. Brame, alleging that Hare & Chase was the owner of the stock in the National and Virginia Companies, that same had been assigned to the Keystone Company, and that Brame was diverting the assets of both of these companies to the use and benefit of the General Company. The bill prayed that a receiver be appointed for all three companies, that an accounting be had, and that the usual incidental injunctions be granted.

The defendants in the suit last mentioned filed answer alleging that the stock of the National and Virginia Companies had been acquired by Hare & Chase through fraud, and that the Keystone Company had taken the assignment of the stock with actual or constructive knowledge thereof. They consented to the appointment of a receiver for the National and Virginia Companies, but asked damages by way of counterclaim for the destruction of the business of these companies by Hare & Chase. At the same time the stockholders of the Virginia Company filed an intervening petition setting up fraud on the part of Hare & Chase in acquiring their stock and asking that the exchange be rescinded and their stock returned to them. A receiver was thereupon appointed for the National and Virginia Companies and an order was entered consolidating the two suits for the purpose of joint hearing. Thereafter a compromise was entered into between the Virginia stockholders, on the one hand, and Hare & Chase and the Keystone Company on the other, by the terms of which all matters in difference between them were settled upon the agreement that 55 per cent. of the proceeds of the assets of the Virginia Company should be distributed among its former stockholders and the remaining 45 per cent. should go to Hare & Chase or the Keystone Company.

The consolidated causes were referred to a special master who heard much testimony and filed a number of reports with the court as to the matters in controversy. After considering these in the light of the evidence, the learned judge below held: (1) That there was fraud on the part of Hare & Chase in securing the stock of the National Company from its stockholders; (2) that rescission of the contract and return of the stock could not be decreed because the stock was held by the Keystone Company, which the court found to be a holder for value not affected with notice of the fraud; (3) that, not being able to grant rescission, the court would award damages to such of the National stockholders as were shown to have parted with their holdings in that company because of reliance upon the fraudulent representations of Hare & Chase; and (4) that the transfer of assets from the Virginia Company to the General Company was void and of no effect, and that such assets were to be treated as the property of the Virginia Company. The assignments of error challenge the jurisdiction of the court to entertain the claims of stockholders amounting to less than $3,000 and the correctness of the holdings of the trial court with respect to the matters enumerated. We shall consider, first, the jurisdictional question and then the other questions in the order named.

The Question of Jurisdiction.

Neither the original bill of the National stockholders nor the amended and supplemental bill, filed after removal to the federal court, contained any allegation as to the amount in controversy. The petition for removal filed by Hare & Chase, however, alleged that the amount in dispute exceeded the value of $3,000, exclusive of interest and costs. The proof showed that three of the complainants in the original bill, Brame, Maurice, and Hill, owned stock in the National Company of a value largely in excess of $3,000 each, and the amended and supplemental bill brought in as complainants a large number of other stockholders with holdings in excess of that amount, although the holdings of many of complainants were less than $3,000. The suit, however, whether tested by the original or by the amended bill, was not one in which the individual complainants sought each for himself to set aside the transfer which he had made and to recover the stock with which he had parted. Its purpose was to rescind the contract made by the National stockholders collectively with Hare & Chase and to restore to them collectively the rights in the National Company with which they had parted under that contract. While each stockholder had made a separate transfer of his stock, he had done this pursuant to the provisions of the contract which he together with the other stockholders had entered into, and...