In re Watertown Paper Co.

• Decision Date: 16 March 1909
• Docket Number: 165,166.
• Parties: In re WATERTOWN PAPER CO.
• Court: U.S. Court of Appeals — Second Circuit

169 F. 252

In re WATERTOWN PAPER CO.

Nos. 165, 166.

United States Court of Appeals, Second Circuit.

March 16, 1909

On Rehearing, April 13, 1909.

Elon R Brown and Geo. S. McCartin, for appellants.

Frederick M. Boyer, for appellees.

Before LACOMBE, COXE, and NOYES, Circuit Judges.

1. The Claim of the Pulp Company.

NOYES Circuit Judge.

The statement of the Pulp Company's claim as presented embraced items of 'merchandise' furnished at various times from September 30, 1904, to November 16, 1905 amounting to $72,755.45. The affidavit to which the statement was annexed stated that the consideration of the debt was 'wood pulp sold and delivered.' It appears from the books of the corporations, however, that said amount was really the balance of the running accounts between said corporations extending over a long period. It also appears that the accountant, in preparing the claim, took this balance from the books and sufficient of the late sales to amount thereto, and stated the one as the consideration of the other.

It is urged at the outset that the claim should be rejected because it was improperly presented. It was presented in irregular form. Other items than merchandise entered into the account. Payments had been made and should have been shown. When the proof came in, showing that the claim was for a balance of account, instead of for merchandise sold, it should properly have been amended. Still the whole matter of the account between the two corporations was fully inquired into before the special master, and, if the claim had been amended so as to conform to the proof, the inquiry would have been in no way changed.

The amount was correctly stated. Wood pulp sold did in fact constitute the consideration of a large part of the indebtedness. The District Court apparently rejected the claim upon other grounds than those of form. Under all the circumstances, we think that the technical objection of defective presentation should not be sustained.

In considering the claim of the Pulp Company upon its merits, we must start with the assumption that, if the Paper Company were not a bankrupt, the claim would be valid and enforceable in the courts. The books of the corporations show that the balance in favor of the Pulp Company is the amount stated in the claim as presented. Indeed, the appellees say in their brief:

'No question is made in the proofs by contestants that the pulp mill did manufacture and deliver to the paper mill pulp to the extent and amount of vastly more than $72,775.45. Nor is any question made but that said last-mentioned sum represented the balance of the running account kept between the two mills and included all items from the organization of the Pulp Company in 1887 to the date of adjudication, whether of money, credits, or pulp.'

The contention of appellees, however, is that the claim is unenforceable against the bankrupt estate of the Paper Company because-- as they allege-- the Pulp Company and the Paper Company are not two separate corporations, but one. 'There is no such claim'-- they say-- 'unless, indeed, the bankrupt can be said to have a claim against itself. ' In other words, they claim that the Pulp Company was merely an adjunct or branch of the Paper Company. It is necessary, therefore, before considering the legal questions, to examine the facts appearing in the record with respect to the organization, existence, and relations of the two corporations.

The bankrupt-- the Paper Company-- was organized in 1864 with a capital stock of $14,000, which was afterwards increased to $20,000. Prior to 1886 its entire capital stock was owned by Hiram Remington and Edward W. Remington. At that time Hiram Remington gave 20 shares to each of his three daughters, and the ownership remained the same down to the time of his death in 1905. The Pulp Company was organized in 1887 with a capital stock of $20,000, of which $10,000 was taken by Hiram Remington, $9,500 by Edward Remington and $500 by Nellie Remington, wife of Edward Remington. The stock of the Pulp Company was paid for by Hiram Remington and Edward Remington in the following manner: They both had credits of considerable sums upon the books of the Paper Company, which by their direction advanced the necessary funds to the Pulp Company and charged the advancements to their accounts. In 1902 the stock of this company was increased by a stock dividend to $128,000, all of which was held by the same stockholders. In March, 1905, Hiram Remington died, and his shares in the two corporations were distributed among his children. Prior to that time there had also been some changes in the holdings of Edward Remington and his wife in the Pulp Company. It may be broadly stated, however, that during the entire existence of the Pulp Company prior to November, 1905, when John B. Taylor acquired the shares of the two corporations, the ownership of their stock had been in Hiram Remington and Edward Remington and their families.

But it also appears that the several stockholders had different interests in the two corporations and that some owned stock only in one corporation.

The affairs of the two corporations were closely intermingled. For some years after the organization of the Pulp Company the Paper Company manufactured its own pulp; but in 1891 and thereafter it procured its supply from the Pulp Company and took substantially all that it produced. This it made into paper and sold it in the market. The corporations gave each other commercial paper and indorsed for each other. Separate books of account were kept for the two corporations; but the business was conducted from the office of the Paper Company. The Pulp Company had no bank account; all its bills being paid by the Paper Company and charged to its account. All credits of the Pulp Company were collected by the Paper Company and credited to it. A certain proportion of the office expenses was charged to the Pulp Company.

The case thus presented is one in which the stockholders of two corporations are largely the same, in which both corporations have been under the same management, and in which their affairs have for years been involved and intermingled; and the legal question is whether these relations prevent the one corporation from enforcing against the bankrupt estate of the other a claim which, in case the latter corporation had remained solvent, would have been both valid and enforceable. It must be clearly borne in mind that this is not a case in which a creditor is suing a corporation upon the ground that it has so held itself out in connection with another corporation as, upon principles of estoppel, to render it responsible for a particular debt of the latter. Any legal principle which would prevent the Pulp Company from collecting its claim from the estate of the Paper Company would permit all the creditors of the Paper Company to look to the Pulp Company for the payment of their demands--would, in effect, extend the jurisdiction of the bankruptcy court over the Pulp Company's property.

Now, it is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations with which it may be connected. The fact that the stockholders of two separately chartered corporations are identical, that one owns shares in another, and that they have mutual dealings, will not, as a general rule, merge them into one corporation, or prevent the enforcement against the insolvent estate of the one of an otherwise valid claim of the other. As said by the Supreme Court of Arkansas in Lange v. Burke, 69 Ark. 85, 88, 61 S.W. 165, in holding, in a case where two corporations were practically controlled by the same stockholders and had had intimate business relations, including the employment of the same bookkeeper, that a claim of one corporation would be enforced against the insolvent estate of the other:

'A corporation is an artificial being, separate and distinct from its agents, officers, and stockholders. Its dealings with another corporation, although it may be composed in part of persons who own the majority of the stock in each company, and may be managed by the same officers, if they be in good faith and free from fraud, stand upon the same basis, and affect it and the other corporation in the same manner and to the same extent, that they would if each had been composed of different stockholders and controlled by different officers.'

And as said by the Circuit Court of Appeals for the Sixth Circuit in Richmond, etc., Const. Co. v. Richmond, etc., R. Co., 68 F. 105, 108, 15 C.C.A. 289, 34 L.R.A. 625:

'The contract company was a legal corporation, wholly distinct and separate from the railroad company. The fact that the stockholders in each may have been the same persons does not operate to destroy the legal identity of either corporation. Neither does the fact that the one corporation exercised a controlling influence over the other, through the ownership of its stock or through the identity of stockholders, operate to make either the agent of the other, or to merge the two corporations into one.'

See also, Waycross, etc., R. Co. v. Offerman R. Co., 109 Ga. 827, 35 S.E. 275; Crane v. Fry, 126 F. 278, 61 C.C.A. 260; Watson v. Bonfils, 116 F. 157, 53 C.C.A. 535; Fitzgerald v. Missouri Pac. R. Co. (C.C.) 45 F. 812; Goodwin v. Bodcaw Lumber Co., 109 La. 1050, 34 So. 74; Ex parte Fisher, 20 S.C. 179; White v. Pecos, etc., Co., 18 Tex.Civ.App. 634, ...