Phoenix Finance Corporation v. Iowa-Wisconsin Bridge Company
| Decision Date | 18 March 1940 |
| Citation | 14 A.2d 386,40 Del. 500 |
| Court | Delaware Superior Court |
| Parties | PHOENIX FINANCE CORPORATION, a corporation of the State of Delaware, v. IOWA-WISCONSIN BRIDGE COMPANY, a corporation of the State of Delaware |
Superior Court for New Castle County, No. 39, November Term 1938.
Case heard by the Court without a jury.
This is an action brought by the plaintiff to recover the amount of two notes, both bearing interest at 8%. One note is for $ 2,000.00, dated December 15, 1932, and due June 15, 1933, and the other for $ 3,125.00, dated January 20, 1933, and due July 20, 1933. Both notes were executed by the defendant to the plaintiff, the present holder.
The sole controversy in this case arises from the plea of res adjudicata.
The defendant to sustain its plea of res adjudicata has introduced a lengthy record of a proceeding in the United States District Court for the Northern District of Iowa and being No. 220 in Equity in said Court, the proceedings being entitled "First Trust and Savings Bank (formerly Bechtel Trust Company) and A. S. Schubert, as Trustees, v Iowa-Wisconsin Bridge Company, defendant."
The present case, by stipulation was tried by the Court without a jury, and the questions are presented by two motions of the plaintiff, (1) that the exhibits offered by the defendant in support of his plea of res adjudicata be stricken from the record, and (2) that regardless of the action of the said exhibits final judgment be entered for the plaintiff.
Judgment entered in favor of the plaintiff and against the defendant.
James R. Morford (of Marvel and Morford) for plaintiff.
Daniel F. Wolcott (of Southerland, Berl, Potter and Leahy), Fred A. Ontjes (of Mason City, Iowa) and William C. Green (of St. Paul, Minnesota) for defendant.
OPINION
It shall be our endeavor to so compress the facts in this case in such a narrow compass as not to unduly recite the long and sordid story of financial manipulation and mismanagement which has characterized the history of the defendant to such an extent that we wonder that their recital has been confined to reports of civil or equitable proceedings. Great masses of detail are summarized in Bechtel Trust Co. v. Iowa-Wisconsin Bridge Co., (D. C.) 19 F. Supp. 127, and First Trust & Savings Bank v. Iowa-Wisconsin Bridge Co., (8 Cir.) 98 F.2d 416. We shall content ourselves with such statements of fact as may be necessary to make clear our legal conclusions.
The defendant was incorporated in 1928 under the Laws of Delaware, for the purpose of erecting a bridge across the Mississippi River, between the States of Iowa and Wisconsin. After a preliminary period of exploitation by other parties one John A. Thompson, about October, 1930, became interested in the bridge through the instrumentalities of two corporations owned or controlled by him, Thompson & Company and Phoenix Finance System, Inc. After a period during which the building of the bridge was in progress, and on March 19, 1931, the Board of Directors of the Bridge Co., controlled by Thompson, and of which he was President, authorized the Vice-President and Secretary to borrow $ 50,000.00 from the Phoenix Finance System, Inc., with interest at 8%, and to execute a mortgage as security therefor. The mortgage was duly executed and delivered, and book entries made to have the appearance that the consideration of $ 50,000.00 was received by the Bridge Company, but it has been judicially determined (19 F. Supp. 137) that no such payment was, in fact, made. The bridge was opened on June 17, 1931, and shortly thereafter steps were taken to further complicate the elaborate financial transactions of the company. On December 22, 1931, a bond issue of $ 200,000.00, secured by a Deed of Trust, was authorized, and from this point of the distribution of these bonds the facts became acutely material to the legal questions of this case.
At about the time of the distribution of the bonds the Phoenix Finance Corporation, the present plaintiff, became incorporated and, with the same officers as the Phoenix Finance System, Inc., took over all the assets of the old corporation.
Upon the distribution of the bonds it appears that $ 177,600.00 of the $ 200,000.00 issue were held by Phoenix Finance Corporation, either by issue to that corporation or to its predecessor, Phoenix Finance System, Inc.
Default having been made in the payment of interest the Phoenix Finance Corporation requested the Trustees, Bechtel Trust Company (afterwards the First Trust and Savings Bank) and A. S. Schubert, to foreclose the mortgage or Deed of Trust. This proceeding was brought in the United States District Court for the Northern District of Iowa, the Trustees being residents of Iowa and the bridge company being a corporation of the State of Delaware. Subsequently other stockholders were allowed to intervene and become parties to the action, and in December, 1933, the Phoenix Finance Corporation, a corporation of the State of Delaware, was brought in as co-plaintiff with the Trustees. The admission of Phoenix Finance Corporation, a Delaware Corporation, as plaintiff against the Bridge Company, a Delaware Corporation, as defendant, gives rise to the question as to the defeat of diversity of citizenship and the consequent loss of jurisdiction of the Federal Court, and around this question cluster some of the difficulties hereinafter discussed.
The questions surrounding the foreclosure of the mortgage were referred to a Master who, after lengthy hearings, made his report. In the report the Master found the only valid bonds amounted to $ 27,125.00, and that $ 177,875.00 were invalid. Of the $ 27,125.00 held valid by the Master $ 15,000.00 were held by persons unconnected with this litigation and need not be further considered. The balance of $ 12,125.00 held by Phoenix Finance Corporation will be hereinafter briefly mentioned. It appears that the Phoenix Finance Corporation had three holdings of the bonds, $ 60,500.00; $ 97,000.00 and $ 20,100.00. As to the $ 60,500.00 holding, the Master held it invalid in its entirety, as involving an unlawful sale to the corporation of 517 shares of Class A Preferred Stock. Of the holding of $ 97,000.00 the Master held $ 88,000.00 invalid, and this included the claim of the $ 50,000.00 mortgage hereinbefore referred to, but held $ 9,000.00 valid as representing an amount paid in discharge of a mechanic's lien. Of the remaining holding of $ 20,100.00 the Master held $ 16,975.00 invalid, but held valid $ 3,125.00, represented by one of the notes herein sued upon. The $ 9,000.00 item and $ 3,125.00, amounting to $ 12,125.00, were the only bonds held valid in the hands of Phoenix Finance Corporation.
Comprehensive and detailed exceptions were taken to the Master's report, and the Phoenix Finance Corporation expressly objected that in the invalidation of $ 16,975.00 as part of the holding of $ 20,100.00 the Master had overlooked the validity of the note for $ 2,000.00 now sued on in this action, and as collateral for which bonds were given, while he, the Master, had sustained the validity of bonds of $ 3,125.00 given for the other note herein sued on.
The findings of the Master were confirmed by the District Court ( Bechtel Trust Co. v. Iowa-Wisconsin Bridge Co., (D. C.) 19 F. Supp. 127) with the exception of the bond items of $ 9,000.00 and $ 3,125.00, which had been held valid by the Master, in the hands of Phoenix Finance Corporation. As to these two items the Court held the Master's conclusions erroneous, and these bonds were also by it held invalid. The Court held that the Phoenix Finance Corporation was charged with the equities existing against its predecessor, the Phoenix Finance System, Inc., and the items were on this ground disallowed.
The decree of the District Court was affirmed by the Circuit Court of Appeals (8 Cir., 98 F.2d 416) and writ of certiorari denied by the Supreme Court, Phoenix Finance Corp. v. Iowa-Wisconsin Bridge Co., 305 U.S. 650, 59 S.Ct. 243, 83 L.Ed. 420; Id., 305 U.S. 676, 59 S.Ct. 356, 83 L.Ed. 437.
The foregoing facts must be considered in the light that the sole plea in the present case is res adjudicata. In other words, we are to determine whether the action of the Court in the foreclosure suit which resulted in the invalidation of bonds necessarily passed upon the validity of the promissory notes for which bonds were ostensibly issued as collateral.
The defendant plausibly argues that the bonds given for the promissory notes were held invalid solely because the debts for which they purported to be given were without consideration and invalid, and that the invalidity of the bonds was only based upon the invalidity of the notes, and that therefore the invaladity of the notes has been directly adjudicated in a court of competent jurisdiction.
The plaintiff with equal plausibility argues that as to the promissory notes it has never had its day in any court of competent jurisdiction. It contends that in the proceedings in Iowa, which allegedly passed upon the notes it, the defendant, either was or was not a necessary or indispensable party; that if it was not a necessary party, but merely a formal party in connection with the bonds, then its rights as to the promissory notes could not have been legally adjudicated; that if it was a necessary party for the adverse adjudication of rights arising from the promissory notes, then the inclusion of the plaintiff, a Delaware corporation, as party plaintiff, defeated the jurisdiction of the court by reason of diverse citizenship, because the defendant, Iowa-Wisconsin Bridge Company, was also a Delaware corporation.
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