Knickerbocker Trust Co. v. Evans

• Decision Date: 19 May 1911
• Docket Number: 888-893.
• Citation: 188 F. 549
• Parties: KNICKERBOCKER TRUST CO. v. EVANS.
• Court: U.S. Court of Appeals — First Circuit

188 F. 549

KNICKERBOCKER TRUST CO. v. EVANS.

Nos. 888-893.

United States Court of Appeals, First Circuit.

May 19, 1911

John G Milburn and Julien T. Davies (Julien T. Davies, Jr., Harold McCollom, Davies, Stone & Auerbach, and Gaston, Snow &amp Saltonstall, on the brief), for plaintiff in error.

Felix Rackemann and H. E. Bolles (George L. Huntress, C. A. Tyler O. D. Young, and Samuel C. Bennett, on the brief), for defendants in error.

Before COLT and PUTNAM, Circuit Judges, and ALDRICH, District Judge.

ALDRICH District Judge.

Here are six writs of error to review six judgments of the Circuit Court for the District of Massachusetts. The six cases were tried by jury, practically as one case, under the direction or order of the Circuit Court to that end. This course was adopted by the court on its own motion; but no question is raised against the validity or propriety of such trial. The issues are the same in all the cases, and the same considerations and principles apply to them all. The cases were argued together in this court as one case, and will be dealt with accordingly; and it is understood that consideration given to the questions involved, and the result reached as well, apply to each of the particular cases.

The questions involved concern a situation in which the defendants became subscribers for certain shares of preferred and common stock in the American Silk Company, which was about to increase its capital stock and to take over certain other corporations and properties. In order to launch and carry through the business proposition, it was necessary to raise money with which to pay for the properties to be acquired and turned into the American Silk Company; and the necessary working cash capital was sought to be obtained through marketing for cash enough of the preferred and common stock to pay for the properties which were to become assets of the enlarged silk company.

To advance the enterprise, there was created what is called an 'underwriting agreement,' which undertook to set out the purposes of the parties interested in the general enterprise, and to establish certain rights and limitations in respect to the interests of the parties concerned. The underwriting agreement contemplated and provided for syndicate managers as a necessary and important working instrumentality. The promoters, the Bennett Company, the subscribers, and the syndicate managers, so called, were parties to the agreement.

It will become important to inquire whether the relations of the stock subscribers to the general enterprise were such as to make them principals, and thus bring them within the rules of law which govern primary obligations, or whether their relations were those of guarantors with collateral and secondary liability; in other words, whether their contracts or agreements, to which we have alluded in a general way, had reference to what was in substance their own indebtedness, or original undertakings, or to a situation in which their agreements made them simply guarantors of the indebtedness of others.

Under the view which will be stated more fully later on, we look upon the solution of this question as in effect controlling; and this is so because, if the subscribers were guarantors merely, with only secondary liability in respect to the obligations of others, they are entitled, at least on certain phases of the questions, to invoke the rules strictissimi juris; while, if they were in substance and effect principals, and their obligations primary, their rights would be ascertained and established on less technical rules and considerations.

The first count of the amended declarations proceeded upon the idea of direct liability of the subscriber created by the underwriting agreement in favor of whoever should make the contemplated loan.

The second count of the amended declarations was upon an assignment to the lender of the rights created in behalf of the Bennett Company by the underwriting agreement.

The loan contemplated by the enterprise at its inception and provided for by the underwriting agreement, and which as claimed amounted to a sum in the neighborhood of $850,000, was made by the Knickerbocker Trust Company, the plaintiff.

As the trial upon the first count terminated, there remained no question of fraud or bad faith on the part of the trust company which loaned the money; indeed, good faith was conceded, so far as concerned the trial upon the first count. There was, therefore, as a result of this, no question of fraud to be submitted to the jury under the first count, because the alleged fraud of the Bennett Company was inadmissible as a defense against the theory of direct liability from the subscribers to the trust company, acting in good faith.

At the conclusion of the plaintiff's case, or soon after, the court directed a verdict for the defendants on the first count, upon the ground that the loan was not such a loan as the defendants had agreed to guarantee. We understand the order directing the verdict was because of a supposed variance between the agreement of the subscribers and the proofs in respect to the terms of the loan as disclosed by the loan agreement and the note; and it would seem from the record that, upon the question of variance, the court considered the agreement simply a guaranty, or 'a conditional agreement to pay somebody else's debt.'

The supposed variance upon which the defendants rely is based upon certain provisions in the agreement which are urged as safeguards inserted for the protection of the subscribers with respect to the contemplated time loan.

The agreement provided for the payment of 5 per cent. of the par value of the preferred stock at the time the agreement was executed, and 15 per cent. on call of the syndicate managers on five days' notice. It also provided that:

'Payment of the remainder with interest at 6 per cent. shall be deferred for one year or more from the date fixed for the payment of the 15 per cent. installment.'

Again, and what is perhaps more pertinent, the following:

'Provided that each such loan shall be for the period of one year or more, and provided the interest with which the subscribers are chargeable shall not exceed the rate of 6 per cent. per annum.'

A note dated April 11, 1907, for $843,050, signed by the Bennett Company, and payable to the Knickerbocker Trust Company, with interest at the rate of 6 per cent. per annum, payable semiannually, which referred to certificates of preferred stock, amounting to $1,211,500 par value, and common stock, amounting to $605,800 par value, and the underwriting agreement, which were deposited as collateral security, was introduced in evidence in connection with the transactions in question. The note in terms was expressly made payable 'one year after date,' but it contains the following provision:

'In case the undersigned shall be adjudged a bankrupt, or shall file a voluntary petition in bankruptcy, or shall make a general assignment for the benefit of creditors, this note shall become forthwith due and payable.'

The supposed variance is based upon the idea that interest, being payable semiannually, offends that part of the agreement which provides that interest shall not exceed the rate of 6 per cent. per annum; that the deduction of a commission upon the loan puts the amount actually received by the syndicate managers and the Bennett Company at variance with the amount of the note; the more substantial contention being that the note, though on one year's time, was at variance with the agreement of the subscribers, because, in a certain contingency, that of bankruptcy or general assignment, it might 'become forthwith due and payable.'

Apparently the learned judge at the trial looked at the question of variance as one not founded upon substance, but as one involving a technical departure, not to be looked upon with favor, because, as appears by the record, he characterized the point as one based upon 'a very small hole,' and, further remarking in respect to it, said:

'Therefore, without making the slightest reflection on any defendant, I say that, so far as this particular point is concerned, I have labored hard to see if I could reach a decision favorable to the plaintiff, because, so far as the case is now presented to me, the justice of the case is with the plaintiff.' Seemingly the question of variance was dealt with and disposed of upon such considerations and upon such strict rules as would doubtless properly apply to situations which involve the strict and ordinary relations of guarantor or surety to the obligations of another. If the defendants sustained the relationship of guarantors in the sense in which that legal obligation is ordinarily accepted, the variance, although technical, and one more of the letter than of the substance of the agreement, would perhaps be fatal to the trust company's right of recovery. It is true the terms 'guaranty' or 'guarantees' were used in the provision of the agreement in respect to the obligations of the stock subscribers; and it is quite natural, in a jury trial, where questions of law are imperfectly presented, that it should have been accepted as properly describing their relations to the transactions involved; but upon a more complete presentation through the formal and elaborate arguments of counsel before us we are persuaded that, in substance and effect, the relationship of the subscribers to the enterprise was not at all that of either sureties or guarantors, because, aside from the fact that the Bennett Company was more actively promoting an enlargement of the American Silk Company through bringing about an increase of its capital stock and the taking over of outside properties, the subscribers were equally

...