In re Waterloo Organ Co.

• Decision Date: 20 December 1904
• Docket Number: 72.
• Citation: 134 F. 341
• Parties: In re WATERLOO ORGAN CO.
• Court: U.S. Court of Appeals — Second Circuit

134 F. 341

In re WATERLOO ORGAN CO.

No. 72.

United States Court of Appeals, Second Circuit.

December 20, 1904

George E. Bartman, for petitioner.

J. N Hammond, for respondent.

Before LACOMBE, TOWNSEND, and COXE, Circuit Judges.

TOWNSEND Circuit Judge.

The Waterloo Organ Company was adjudicated an involuntary bankrupt in 1902. In 1894 it had made a second issue of bonds to the First National Bank of Waterloo, as trustee under a mortgage, and had deposited them with the trustee to be delivered by it upon the orders of the company as the bonds should be disposed of for corporate purposes. In 1891 Bacon the president of said First National Bank, became a subscriber for 10 shares of the capital stock of said corporation, of the par value of $100 each, and afterwards received shares by way of scrip dividends, so that in July 1898, he was the owner of 16 4/5 shares. One Alexander C. Reed, who was practically the founder of the company, and its president, had promised Bacon that at any time when he was dissatisfied he would take his (Bacon's) stock off his hands. On July 16, 1898, Bacon told him he understood that stockholders had sold their stock for the purpose of getting out from under the stockholders' liability, and asked him to make good said promise; and on said day Reed bought said stock, and paid therefor by his note of even date payable to Bacon's order one day after date, for $1,000; and Bacon indorsed the note to the order of the secretary of said organ company, and delivered it to him, and received in exchange therefor an order upon the cashier of said First National Bank, trustee, for two bonds of the corporation, for $500 each, and, upon surrender thereof, received the bonds in question from the bank. Bacon was then president of said bank. On the same day he resigned his position as a director of the organ company. From that time until default by the company, the coupons upon said bonds were regularly collected by said Bacon, through the bank, in the ordinary course of business.

It appears that at the time of said transaction Reed was solvent. He was president of the organ company, and the owner of three-fourths of its stock. Said note was never collected, and was not entered among the bills receivable of the organ company, nor upon its annual inventory, prior to December, 1901; and the two bonds issued to Bacon were not entered upon the account of the bonded indebtedness of the organ company until that date, when the amount was charged to profit and loss. It is asserted, and not denied, that the copy of said order on the bank, and receipt for the bonds, were not entered in their regular place in the copy book of the organ company, but on the last page thereof. From this and other facts it is argued that the transaction between Bacon and Reed was a fraudulent scheme on the part of Bacon to get rid of his stock in exchange for the bonds. The testimony of Bacon is indefinite and contradictory.

The referee, who heard the witnesses, concluded that the facts as proved were insufficient to prove fraud, and especially that they failed to show any knowledge or information of fraud brought home to Francis Bacon, and that, if there was any fraud, it was a fraudulent scheme between the officers of the organ company to relieve Reed from the payment of his note. While we are not entirely satisfied as to the correctness of these conclusions, in view of the foregoing facts, we have not found it necessary to disturb said finding that fraud on the part of Bacon had not been proved.

Counsel for petitioners contends that these bonds are void because issued upon no consideration other than said note.

The statute of New York governing said corporation is as follows:

'No corporation shall issue either stock or bonds except for money, labor, or property actually received for the use and lawful purposes of such corporation. No such stock shall be issued for less than its par value. No such bonds shall be issued for less than the fair market value thereof. ' New York Stock Corporation Law 1892, p. 1835, c. 688, Sec. 42.

It is insisted that this note was not 'property actually received for the use and lawful purposes' of said corporation. It was not property in any practical sense. It was a mere piece of paper unless and until it was collected or otherwise availed of in securing some form of property. That it was not in fact received by the corporation for its use or lawful purposes, or with the intention thus to use it, may legitimately be inferred from the course of the president in failing to provide for its payment, and from the failure of the secretary of the company to enforce its collection or to inventory it among the assets of the company.

But even if it be assumed that this note was technically or potentially property, and that Bacon acted in good faith in the transaction, we think the issuance of the bonds for said note was in violation of the statute. The words 'lawful purposes' are general in character, but would seem to...