Morrow Shoe Mfg. Co. v. New England Shoe Co.

• Decision Date: 02 October 1893
• Docket Number: 71.
• Citation: 57 F. 685
• Parties: MORROW SHOE MANUF'G CO. v. NEW ENGLAND SHOE CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

57 F. 685

MORROW SHOE MANUF'G CO. v. NEW ENGLAND SHOE CO. et al.

No. 71.

United States Court of Appeals, Seventh Circuit.

October 2, 1893

Statement by BAKER, District Judge:

This suit was brought in the court below by the Morrow Shoe Manufacturing Company, appellant, on its own behalf and for the benefit of all other creditors, against the New England Shoe Company, an insolvent corporation, which was impleaded with George P. Gore, H. H. Heimerdinger, Merrick F. Prouty and Hiram B. Peabody, appellees herein, and certain others not parties to this appeal. The New England Shoe Company, an Illinois corporation, purported to be organized with an authorized capital of $50,000, divided into 500 shares of $100 each, of which 498 shares were owned by Charles C Davis, who was its president and treasurer, one share was owned by his son, Charles A. Davis, who was its secretary and one share was owned by Henry W. Sawyer. These three composed its board of directors. The bill was taken pro confesso against the New England Shoe Company and Charles C Davis, and on final hearing it was dismissed as to the other defendants. The cause was heard and decided on its merits on the facts presented in the record, and the decree dismissing the bill was placed on the ground that notice or knowledge of the fraudulent acts and intent of the New England Shoe Company and of Charles C. Davis had not been sufficiently proven to justify a decree against any of the appellees.

The New england Shoe Company was organized August 29, 1887, with a nominal capital of $50,000. During its business existence, which was a little more than two years, there were only three meetings of the directors, the first for organization, August 29, 1887, and the other two, on March 28 and December 9, 1889, to adopt certain resolutions which C. C. Davis wished to have adopted. The other two directors paid no attention to the business affairs of the company, and acted simply to carry out the purposes of C. C. Davis. The company did a small retail business, under the sole management of C. C. Davis, in a basement on the northwest corner of State and Madison streets, in Chicago. The only other business done by it or them was to make the alleged fraudulent sales and pledge hereinafter mentioned. For about two years its purchases were made mostly, if not wholly, from or through the auction and commission house of George P.

Gore & Co., in Chicago. During this time other purchases than those made from George P. Gore & Co. were made through this firm, which advanced the money to pay for them, and it deducted from the amount paid over to the manufacturer the same commission as on goods consigned to it. For about 12 years, and up to the latter part of 1888, Davis had been in the employ of Gore & Co. as a salesman and solicitor of consignments. In the latter part of 1888 he appeared to have dropped his connection with Gore & Co., and he began to make extensive purchases from manufacturers for the New England Shoe Company, independently of Gore & Co. In order to obtain credit he pretended that $30,000 of the company's capital stock had been paid in in cash, and was then in the business; that its business amounted to over $70,000 a year, and was highly profitable; that its stock on hand amounted to $25,000, and his and the company's debts to $500, all told, and that he was worth individually $38,000. By means of these representations, which were false and fraudulent, made to manufacturers and their agents, either directly or through the reports of commercial agencies, he was enabled to obtain large quantities of goods for the shoe company on credit from numerous manufacturers. Forty-three of them identified goods that they had shipped to it, and which were unpaid for, among those of which the receiver took possession in the Sibley warehouse. These goods, with some others similarly identified, and found in a loft which had been rented by the shoe company, brought at the receiver's sale $20,912.97. These goods had been recently bought, and, with the exception of perhaps $3,000 worth, were wholly unpaid for. The complainant and other intervening creditors have proved unpaid bills to the amount of between $15,000 and $16,000. About the time that the goods so ordered began to arrive, Davis began to dispose of them otherwise than by sales in the basement store. He made these sales with a studied purpose to keep the parties from whom the goods were purchased in ignorance of what he was doing. How many channels he employed for this purpose is not known. Three are clearly shown. Beginning with December 14, 1888, and ending with December 11, 1889, he sold through the auction house of George P. Gore & Co. goods, which, at their auction prices, netted $14,555.48. Prior to June 22, 1889, these sales amounted only to $1,650.94, and were made for account of Charles C. Davis individually. After that date the sales were made for account of the New England Shoe Company, and the bulk of them, amounting to $11,235.75, were made between October 1 and December 11, 1889. A comparison of the checks drawn by George P. Gore & Co. in settlement of these sales with the credit entries in C. C. Davis' bank account shows that he deposited to his individual account in the First National Bank in Chicago $9,610.75 of the proceeds of these sales, and that the payments of $1,200 and $425 in settlement of the last two sales were not deposited there. Besides the proceeds of these sales through Gore & Co., he made other large deposits on his individual account, viz.: October 9th, $1,783.35; November 2d, $2,033.04; November 26th, $2,500; November 29th, $1,978.21; a total of $8,294.60. All of these deposits, except that of November 2d, correspond with payments made to Davis by Heimerdinger, through George P. Gore & Co. These goods were sold almost entirely at auction, along with other and larger consignments, some of which were on account of manufacturers. The prices obtained were fair auction prices, not jobber's nor manufacturer's prices, running sometimes as much as 20 per cent. below the prices at which jobbers ordinarily sold to retailers. The sales were quick, and somewhat forced, and prices corresponded. They were largely below the prices at which retailers could purchase from wholesale dealers.

The firm of Gore & Co. consists of George P. Gore alone, but Prouty and Heimerdinger respectively conducted, at Gore's store, business at his expense for storeroom, clerk hire, and capital, and at his risk for credit, every transaction including somewhere in its course a sale by Gore & Co. on commission. Prouty had the general management of Gore & Co.'s business, giving special attention to boots and shoes, and personally directed most of these sales. He drew a fixed salary as manager, and at the end of each year had an accounting with Gore & Co., as the result of which frequently an additional allowance was made to him on a basis which he was unwilling or unable to explain.

Besides the $14,555.48 of sales made through Gore & Co.'s auction house, Davis, in the name of the New England Shoe Company, sold directly to Prouty, in Prouty's branch of the business, within two weeks of the failure, goods for which he received in advance $4,692.95. One purchase, consisting of 171 cases of shoes, was made by Prouty November 26th or 27th, for which he gave $3,858.48, after some bickering, in which an auctioneer of Gore & Co. was employed to make the final bargain; and the last purchase, of December 5th, within a week of the collapse, consisted of 258 cases of rubbers, for which Davis received $1,103.47. Both sales were made at low prices, and were paid for December 7, 1889. Heimerdinger, in his branch of the business carried on at the auction house of Gore & Co., made five purchases through Davis of the New England Shoe Company's goods, beginning September 17 and ending November 30, 1889, paying in all $7,310.38. Heimerdinger intimates that these purchases belonged to that class of his business which consisted in buying 'bankrupt lots, and lots that go at sacrifice prices.' Heimerdinger and Prouty were well acquainted with Davis, and knew the place and nature of his business. In October, November, and the first few days of December, 1889, Davis thus sold at low prices to or through Heimerdinger, Prouty, and Gore goods of the New England Shoe Company which netted him $23,509.08, and for which the company evidently was indebted in a much larger sum. To the books of account, which appear to have been of the most meager and imperfect character, no one had access except Davis himself, and they disappeared when he did. Once during the latter part of October, and again in November, 1889, for several days on each occasion, he employed Edward Stephenson, an accountant, to write up the books. On the occasion of his first service, Stephenson entered between 10 and 15 invoices of goods bought on credit, and again in November he entered 20 or more additional invoices for larger amounts than those which he had entered in October, and about two-thirds from parties who did not appear to have dealt with the company before. He estimates that these invoices amounted to between $50,000 and $60,000. All the purchases which Stephenson found there were on credit, while all the sales made by Davis were for cash. The reason assigned by Davis for making such large purchases of goods was that he intended and was endeavoring to rent a storeroom on the grade of the street, and failing to accomplish this, it became necessary to make sale of the goods.

From the Morrow Shoe Manufacturing Company, complainant, Davis bought on behalf of the New England Shoe Campany, in November, 1889, $2,418 worth of goods, which were shipped to it on the 12th and 18th of November; and they have...