In re Lance Lumber Co.

• Decision Date: 30 June 1915
• Docket Number: 4666.
• Parties: In re LANCE LUMBER CO.
• Court: U.S. District Court — Eastern District of Pennsylvania

224 F. 598

In re LANCE LUMBER CO.

No. 4666.

United States District Court, E.D. Pennsylvania.

June 30, 1915

J Arthur Keppelman, of Reading, Pa., for petitioner.

Joseph R. Dickinson, of Reading, Pa., for trustee.

DICKINSON District Judge.

This case presents the phenomenon observed in those ingeniously devised advertising signs which show the form of different letters and in consequence convey a different meaning according to the viewpoint of the observer. The metal or other substance of which they are composed is fixed and certain. The reading varies as the position of the observer changes. The real facts in this case, as distinguished from the deductions and inferences made and drawn therefrom, are these:

J Cameron Lance bought of the George F. Lance Company a stock of lumber, for which he gave his promises to pay in the form of promissory notes. The purchase was made with the avowed plan in mind to form a lumber company, which, when formed was to take over the stock of lumber thus bargained for and be substituted as the purchaser. Such a corporation was organized under the name of the Lance Lumber Company, and its notes were exchanged for those of the purchaser in accordance with the original plan. These corporate notes were executed by the same J. Cameron Lance as treasurer. They were renewed from time to time for reduced amounts. The payments made were by checks of the corporation, likewise signed by J. Cameron Lance as its treasurer, as long as he was connected with the company. The later notes and checks were signed by his successor in office. The transaction in all of its successive steps was made the subject of formal corporate action by the George F. Lance Company. The original sale was duly authorized and the novation of the debt accepted by resolution of its board of directors, which was duly entered upon its minutes. The stock of lumber remained stored on the premises of George F. Lance Company and was taken therefrom by the new company. The Lance Lumber Company having gone into bankruptcy, the George F. Lance Company presented the unpaid last note in this series as a claim against the bankrupt estate.

The meaning which the trustee extracts from these facts is this:

J Cameron Lance, being indebted to George F. Lance Company, and being also treasurer of the Lance Lumber Company, fraudulently issued the notes and checks of the latter company in payment of his individual debt. The George F. Lance Company had knowledge of this fraud, in that they knew the notes which they originally held were the debt of J. Cameron Lance, and that the corporation notes and the checks first given were signed by him as treasurer. This inference of fraud is based upon the further fact that the Lance Lumber Company passed a resolution to purchase this stock of lumber from J. Cameron Lance by issuing to him full-paid certificates for all the shares of its authorized capital stock and the negative fact that no corporate action appears by its minutes to have been taken by the Lance Lumber Company in assumption of the J. Cameron Lance note indebtedness.

The position taken by the bankrupt estate, and the argument in support of it deduced from these facts, is this:

The debt started as the debt of J. Cameron Lance. It was known to the holder of the notes to be his debt. The Lance Lumber Company could not, because it lacked the legal power so to do, assume and pay the debt of another. On the very face of the transaction this was what it was attempting to do, even if what was done had been in fact the act of the corporation. The real fact, however, is that what was done was not the act of the corporation, but was wholly the fraudulent act of one of its officers in issuing the notes of the corporation to pay his individual debt. The argument seeks, therefore, to place George F. Lance Company between the horns of this dilemma: If the transaction is taken for what it appeared to be, the corporation was attempting to do what it lacked the legal power to do. If the transaction is to be viewed as what it really was, then the giving of the corporation note was the fraudulent act of J. Cameron Lance, and of him alone. The argument meets the anticipated observation that a denial of the claim would under the circumstances work a hardship to George F. Lance Company by the statement that the latter had the means of the verification of the facts at hand, and if they chose to accept of the representations of J. Cameron Lance, without inquiry as verity, they are visited with the consequences. The inference is also intimated, if not expressly drawn, that George F. Lance Company knew that the corporate notes had been issued without authority, or through the fraud of its treasurer, because George F. Lance Company at first declined to accept the corporation notes in payment for the lumber and to give up the individual notes of J. Cameron Lance which it at the time held. The referee accepted this view and rejected the claim of George F. Lance Company.

From the viewpoint of the holder of the notes the situation is this:

The original sale as made contemplated the doing of the very thing which was done. The transaction on its face was in the regular course of business. The thing done was well within the legal power of the corporation to do. It was incorporated to engage in the lumber business. The purchase of lumber was in the regular course of that business. J. Cameron Lance had to the knowledge of the George F. Lance Company lumber to sell. The Lance Lumber Company had full legal power to purchase lumber and issue its notes in payment therefor. When, therefore, the notes were passed over to George F. Lance Company in apparent good faith and in the regular course of business, the latter was justified in like good faith in accepting them, and, having given consideration, thereby acquired a valid claim against the maker of the notes. Whether a fraud committed upon the corporation by one of its own officers would or would not be a defense to paper regularly issued would turn entirely upon the good faith and knowledge of the person with whom the officer dealt, and as George F. Lance Company had acted in good faith and without notice of the fraud, and had parted with value, it is in a position to hold and enforce the payment of the corporate obligations received by it. The acts and conduct of the corporation for the length of time during which this series of notes was in process of part payment and renewal, both before and after the severance of all relations between J. Cameron Lance and the corporation had ceased, are further urged as strengthening the position of the claimant, and as evidence that the corporation had given the notes in purchase of the lumber which it had received.

The decision of the case turns upon a question of fact, or of presumptions of fact, rather than upon any question of law. Whatever difficulty is presented arises, not out...