Nichols v. Waukesha Canning Co.

• Decision Date: 02 April 1912
• Citation: 195 F. 807
• Parties: NICHOLS v. WAUKESHA CANNING CO.
• Court: U.S. District Court — Eastern District of Wisconsin

195 F. 807

NICHOLS v. WAUKESHA CANNING CO.

United States District Court, E.D. Wisconsin.

April 2, 19, 1912.

Bloodgood Kemper & Bloodgood and Miller, Mack & Fairchild, for First Nat. Bank of Milwaukee, First Savings & Trust Co., and others.

Merton Newbury & Jacobson, for receivers and others.

Markham & Markham, for M. G. Madson Seed Co.

F. A Geiger, for Hogg & Lytle.

T. W Haight, for W. H. Grenell.

Bundy & Wilcox, for First National Bank of Rice Lake and others.

Kading & Kading, for Lowell Canning Co.

Tullar & Lockney, for Joseph J. Klock.

Jas. H. Dyer, for John L. Hamilton, surviving trustee, and others.

SANBORN District Judge.

This suit is a stockholders' bill brought for the winding up of defendant, the marshaling of its assets, and proper distribution among its creditors, on the ground of its insolvency and inability to further carry on its business. Receivers were appointed and have been in possession since May 18, 1910.

The questions now presented are raised by a cross-bill filed by the First Savings & Trust Company and the answers thereto. The cross-bill prays for the foreclosure of a trust deed made by defendant February 15, 1910, to secure its issue of bonds for $150,000, of which $123,500 are now outstanding. The answers of the defendant and the receivers allege that the bonds were issued and delivered without consideration, and in violation of section 1753 of the Wisconsin Statutes, reading as follows:

'No corporation shall issue any stock or certificate of stock except in consideration of money or labor or property, estimated at its true money value, actually received by it equal to the par value thereof, nor any bonds or other evidence of indebtedness except for money, labor, or property estimated at its true value, actually received by it equal to seventy-five per cent. of the par value thereof; and all stocks and bonds issued contrary to the provisions of this section and all fictitious increase of the capital stock of any corporation shall be void.'

About three months before the execution of the trust deed, meetings of all the creditors and the principal stockholders of the Waukesha Canning Company were held at Chicago, at which time the financial situation of the company was discussed and considered; at which meeting William Moore, W. H. Nichols, and Temple were appointed a committee to represent the creditors. William H. Nichols was made the spokesman of the committee, was to act in the matter under the direction of the committee and the directors of the Waukesha Canning Company, in providing ways and means to finance the operations of the company for the coming season. Pursuant to the understanding reached at these meetings, Merton, Newbury & Jacobson, counsel for the Waukesha Canning Company, were directed to take the necessary legal steps to authorize the execution of the mortgage on the real property of the company, as security for a bond issue of $150,000; the bonds to be used for the purpose of retiring the indebtedness, or to obtain extensions through collateralizing the bonds. Pending the disposition thereof, the American Appraisal Company was selected to appraise the property, and appraised the real property at substantially $400,000. Mr. Frank T. Stare, and Mr. C. S. Crary, who had been president and vice president respectively, and who had had the negotiations with the principal bankers to whom the company was indebted, were active in these negotiations leading up to the final consummation of the bond issue.

There was a preferred stock issue, and it was necessary to get the consent of three-fourths of the holders of the preferred stock. Such consent was obtained and provided that the bonds could be 'either sold or used as collateral security' by the proper officers of the company under the direction and authority of the board of directors for the purpose of refunding the present indebtedness of the company or to provide new funds with which to prepare for the coming season's business. Thereafter and at an annual meeting of all the stockholders a resolution was adopted in substance as follows:

'That it is necessary that a large portion of the present indebtedness of this company be refunded and secured, and in order to refund such indebtedness and secure necessary extensions thereof, it is necessary that security therefor be given.'

Therefore a mortgage was authorized in the sum of $150,000, 'the terms, provisions and conditions, number and amount of such bonds, to be determined and fixed by the board of directors * * * to be either sold or used as collateral security by the proper officers of the company, under the direction and authority of the board of directors for the purpose of refunding present indebtedness of the company or to provide new funds with which to prepare for the coming season's business.'

These proceedings were approved by the creditors' committee; of which two members, Mr. Moore and Mr. Nichols, were directors. Mr. Crary had been largely instrumental in obtaining the loans from banks that were then outstanding, and the duty devolved upon him to conduct the negotiations with these banks. All of these banks were pressing the company for their money, were calling their loans, and refusing to renew them, and insisting upon payment or additional collateral security. With some of these banks, after it had been decided to issue the bonds, and pending the preliminaries necessary to accomplish the issue, Mr. Crary had agreed to put up bonds as collateral. Mr. Stare and Mr. Crary had consulted with Mr. Newbury, counsel of the company, prior to the issuance of any of the bonds, and prior to the delivery of any by the trust company to Mr. Stare, they had been advised of the statute in reference to putting out bonds for less than 75 per cent. of their par value. Mr. Crary and Mr. Nichols had been negotiating with Mr. Ingram, of Eau Claire, to make a sale of some of the bonds, and had other negotiations along this same line, but they were not able to promptly consummate them. Mr. Crary represented to the banks in personal interviews just what the situation was, and asked them to take the bonds at par, and in no instance at less than 75 per cent. of par, and he hoped to be able to take these down and pay up the loans; that they were well worth par, and that his understanding of the situation was that the parties to whom he gave the bonds would have to account for them at least at 75 per cent. of their par value; that they so understood the situation, although the parties with whom he negotiated, other than Mr. Bigelow of the First National Bank, were not familiar with the Wisconsin Statute; that his (Mr. Crary's) understanding was, and he thought the understanding of all the parties that he dealt with was, that he would have the right to take the bonds down at any time for the amount of what was due them, but they could not dispose of them for less than 75 per cent. of par.

Mr. Stare and Mr. Crary were president and vice president of the company, respectively, up to the 17th of March, 1910; and prior to that time, and pursuant to Mr. Crary's understanding of the matter, had delivered bonds to the Corn Exchange National Bank, the First National Bank, the State Bank of Hampshire, John L. Hamilton for the Citizens' State Bank, Lowell Canning Company, and Lewis E. Gary, of Chicago. At that date it was decided to put Mr. Nichols in control as president and manager. Mr. Stare and Mr. Crary wanted their acts in connection with the bonds put out formally ratified, and the situation was explained to Mr. Newbury and was approved by the directors and by the creditors' committee, and thereupon, and on the 17th of March, a resolution was adopted by the board of directors, under the terms of which the action of the officers in giving the bonds to the banks and parties named 'as collateral security covering certain indebtedness is hereby ratified and approved'; and further that Nichols, as president, was specially authorized and empowered '(a) to dispose of the bonds of the company heretofore authorized for the benefit of the company and in such way and manner as he shall deem for the best interests of the company; (b) to liquidate, refund, renew or secure as the case may require or he shall deem for the best interests of the company, any or all of the present indebtedness of the company'; and that the specifying of the powers 'shall not be considered or construed as in any way limiting the rights, power and authority of the said W. H. Nichols as president and general manager, as conferred and given him under the first paragraph.'

After the adoption of the resolution of March 17, 1910, and in order to carry out the agreement that Mr. Crary had entered into prior to that time, Mr. Crary obtained from Mr. Nichols and caused to be delivered bonds to the Streator National Bank of Streator, to one Hamilton on behalf of the National Bank of Pawnee, People's Trust & Savings Bank of Streator; and pursuant to the same understanding and authority, either through Mr. Crary, Mr. Stare, or Mr. Nichols, bonds were delivered to Hogg & Lytle, City National Bank of Duluth, Columbus Canning Company, Columbus, Wis., Lowell Canning Company, Normanna Savings Bank, First National Bank of Columbus, Joseph J. Klock, Waukesha, W. H. Grennell, Saginaw, M. G. Madson Seed Company, Manitowoc, Wis., and also to D. M. Ferry & Company, Detroit (for which in this instance claim was made by D. M. Ferry Company that there was a present consideration), and to the American Appraisal Company, in which instance it is claimed that the bonds were taken in payment.

The First National Bank of Rice Lake filed a preferred claim for $11,313.98, on promissory notes of defendant. It is alleged on behalf of...