In re Progressive Wall Paper Corp., 77.

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation229 F. 489
Docket Number77.
Decision Date11 January 1916

[Copyrighted Material Omitted]

The Progressive Wall Paper Corporation, hereinafter called the Corporation, is organized under the laws of the state of New York. It was adjudged a bankrupt on December 10, 1914, and Fred H. Justin was appointed trustee of the bankrupt estate and qualified as such. Its debts amounted to about $345,000 and its property, exclusive of real estate, was worth about $79,000.

Thereupon the trustee in bankruptcy filed an answer, in which he alleged that the bonds were illegally issued and not valid and that the Bank was not entitled to hold the same. He asked that the Bank should be restrained from enforcing the lien on the bonds and that they be declared invalid and be returned to the trustee. The Bank appeared, evidence was taken, and the referee made an order adjudging that the bonds were illegal and never lawfully issued; that the claim of the Bank to hold them as collateral security was also illegal; and that the Bank be enjoined from enforcing the bonds and be required to deliver them up to the trustee.

The order of the referee holding the bonds invalid and void in the hands of the Bank was reversed by the court below, and the order for an injunction against a sale of the bonds was modified, so as to provide that the Bank be enjoined from disposing of the same at less than their par value. The District Judge in his opinion said: 'If the Bank will file a stipulation that it will not sell or undertake to sell or dispose of these bonds for less than their par value, and stating that such agreement was a part of the contract of pledge, there may be an order reversing the order of the referee now under review.'

Weeds, Conway & Cotter, of Plattsburgh, N.Y. (Frank E. Smith, of New York City, of counsel), for appellant.

Luther A. Wait, of Saratoga Springs, N.Y. (Edgar T. Brackett, of Saratoga Springs, N.Y., of counsel), for appellee.

Before LACOMBE, COXE, and ROGERS, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

The trustee in bankruptcy seeks a decree adjudging that certain bonds held by the appellee Bank were unlawfully transferred to it by the bankrupt, and that these bonds do not constitute a lien upon the real property of the bankrupt, and that the Bank be required to return the bonds to his possession. This relief has been refused him in the court below, and he has come into this court asking that the order of the District Judge be reversed, and that the order made by the referee in bankruptcy be affirmed.

At the time these bonds were transferred as collateral security to the Bank there was a valid indebtedness due to the Bank from the Corporation which amounted to $7,000. As the Corporation was not ready to pay the note when it matured, and as one of the accommodation indorsers desired to be relieved from indorsing the new note to be given in place of the old one which was to be surrendered, it was agreed that such new note would be accepted without this indorser's signature upon the surrender to the Bank of the bonds now in question to be held as collateral security for the ultimate payment of the note. The validity of this transaction depends upon the construction to be placed upon section 55 of the Stock Corporation Law of the state of New York which provides that:

'No corporation shall issue either stock or bonds except for money, labor done or property actually received for the use and lawful purpose of such corporation. ' Consol. Laws, c. 59.

It is claimed that under this statute the corporation had no power to issue its bonds for an antecedent debt. That a real debt existed, and that the directors authorized the issue of the bonds and the surrender of them to secure the payment of it, is not disputed. The provision in the New York statute is not unusual. It may be found inserted in the Constitutions of some of the states, while in others it exists merely as a statutory prohibition.

The question we have to determine is one of local law. The construction placed upon a local statute by the highest judicial tribunal of the state enacting it will as a rule be followed by the federal courts without criticism or further inquiry. Supreme Lodge Knights of Pythias v. Meyer, 198 U.S. 508, 25 Sup.Ct. 754, 49 L.Ed. 1146 (1905). There are some exceptions to the rule, as where the question involved is of general or commercial law (Presidio County v. Noel Young Bond Co., 212 U.S. 58, 29 Sup.Ct. 237, 53 L.Ed. 402 (1908)), or violates the Constitution or statutes of the United States (Elmendorf v. Taylor, 10 Wheat. 152, 160, 6 L.Ed. 289 (1825)), or where the Supreme Court of the United States has first construed the statute, in which case it may not feel bound to surrender its convictions on account of a contrary subsequent decision of the state court (Pease v. Peck, 18 How. 595, 15 L.Ed. 518).

The courts have held that where the Legislature of one state enacts a provision taken from a statute of another state, in which the language of the act has received a settled construction, it is presumed to have intended that such provision should be understood and applied in accordance with such construction. See Ryalls v. Mechanics' Mills, 150 Mass. 190, 22 N.E. 766, 5 L.R.A. 667; Rhoads v. Chicago, etc., R. Co., 227 Ill. 328, 81 N.E. 371, 11 L.R.A. (N.S.) 623, 10 Ann.Cas. 111. But if this provision of the statute of New York has been adopted from the legislation of some other state, and had received a settled construction in that state prior to its enactment in New York, the fact has not been brought to our attention by counsel on either side.

The question now presente to this court is one upon which the New York decisions afford little light. In the Matter of Snyder, 29 Misc.Rep. 1, 59 N.Y.Supp. 993 (1899) the question was as to the right to use the bonds not as collateral security for an antecedent debt but for the actual payment of the debt, the outstanding notes being surrendered. The right to use the bonds as payment was sustained. The court said:

'The company's creditors who received its notes had already given either money or property to the company; so that the substitution of bonds for their notes was equivalent to the issue, in the first instance of bonds for money or property actually received for the use and lawful purposes of the company.'

In Haule v. Consumers' Park Brewing Co., 150 A.D. 582, 586, 135 N.Y.Supp. 900, 902 (1912), Judge McLaughlin stated that:

'The corporation could issue its stock only for money paid or property received. It could not issue it as collateral security for money borrowed or for the future delivery of bonds.'

We passed on this provision of the New York statute in Re Waterloo Organ Co., 134 F. 345, 67 C.C.A. 327 (1904), and held the bonds in that case validly issued. The facts in that case were that the corporation already indebted to the bank desired further credits which the bank was unwilling to grant except upon further security. Under those circumstances the company issued the bonds to the bank as security for past and future advances and under an agreement that the bank would account for them at their par value. We said that, as the company had actually received a consideration equal to the full value of the bonds and had enjoyed the benefits thereof, it should not be permitted to escape payment therefor by alleging the invalidity of the bonds, and we affirmed the decision of the court below. The case was again before this court. 154 F. 657, 83 C.C.A. 481 (1907). The mortgage given to secure the payment of the bonds had been foreclosed and the question was upon the distribution of the proceeds of sale. We held that the bank which held the bonds was not entitled to share in the proceeds of sale of the mortgaged property unless it first surrendered the notes which it had taken for the advances made when or after it received the bonds.

The foregoing cases do not go to the question involved in the present case, and we shall therefore examine the cases elsewhere decided to see what the courts have held respecting similar constitutional or statutory provisions.

The Constitution of California (article 12, Sec. 11) has a provision very similar to the New York statute. It reads:

'No corporation shall issue stock or bonds except for money paid, labor done or property actually received.'

This was construed in the United States Circuit Court for the Southern District of California in Farmers' Loan & Trust Co. v. San Diego Street Car Co., 45 F. 518 (1891), in a proceeding to foreclose a mortgage upon the property of the railroad company given to secure the payment of certain bonds which had been pledged to secure the payment of antecedent indebtedness and, at least in some cases, to obtain an extension of time. The court held that none of the bonds were ever legally issued. In its opinion the court said:

'This constitutional and statutory inhibition is plain, and has but one meaning-- the money paid, labor done, or property actually received must be paid, performed, or received, as the case may be, on account of the issuance of the bonds; and any bonds issued contrary to this provision are of course illegally issued. The provision does not mean, and cannot be held to mean, that such bonds may be issued as collateral security for any sort of pre-existing indebtedness. Now none of the bonds in question are, or ever were, issued or held for money paid, labor performed, or property actually received on account of their issuance. On the contrary, all of them were delivered and are held as collateral security in part for pre-existing indebtedness of the defendant corporation, and in

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