Sanford v. First Nat. Bank

• Decision Date: 11 November 1916
• Docket Number: 4586.
• Citation: 238 F. 298
• Parties: SANFORD v. FIRST NAT. BANK OF MARYSVILLE, KAN., et al.
• Court: U.S. Court of Appeals — Eighth Circuit

238 F. 298

SANFORD v. FIRST NAT. BANK OF MARYSVILLE, KAN., et al.

No. 4586.

United States Court of Appeals, Eighth Circuit.

November 11, 1916

Rehearing Denied January 15, 1917.

E. H Gamble, of Kansas City, Mo., for appellant.

D. R Hite, of Topeka, Kan. (D. W. Mulvane and C. E. Gault, both of Topeka, Kan., on the brief), for appellees.

Before SMITH and CARLAND, Circuit Judges, and AMIDON, District Judge.

AMIDON District Judge.

On June 13, 1902, the Siloam Springs Cold Storage & Ice Company was regularly incorporated under the laws of the state of Arkansas. Its capital stock was $50,000, divided into 2,000 shares, of the par value of $25 each. Its powers were to do a general ice and cold storage business. It purchased a seven-acre tract of ground at Siloam Springs, Ark., and erected thereon an ice and cold storage plant, and equipped and operated the same. The stockholders were various persons of Siloam Springs.

June 11, 1909, W. O. Craig and E. F. Pumphrey bought the entire capital stock of the corporation from R. S. Morris, as trustee, and new certificates for 500 shares each were issued to them and their wives.

July 20, 1910, Theodore H. Polack acquired the stock formerly owned by Pumphrey and wife. The new certificates were issued as follows: 597 shares to Florence E. Polack (wife of Theodore) and 402 shares to Theodore H. Polack. One share was issued to F. E. Davey to qualify him.

During the two or three weeks immediately succeeding his acquisition of this stock, Mr. Polack negotiated with several parties for the sale of the same. Among these was Mr. W. O. Craig, the owner of the other half of the capital stock. An agreement of sale was made between Craig and Polack shortly prior to September 3, 1910. The purchase price was $15,000. Mr. Polack then said to Mr. Craig that, since Mr. Craig's entire interests were centered in the Siloam Springs Cold Storage & Ice Company, he thought the sale should be made to the corporation, and the corporation should secure with its property the payment of the purchase price. To this Mr. Craig assented. Accordingly, on September 3, 1910, a resolution was unanimously passed at a stockholders' meeting of the corporation, at which the entire stock was present, authorizing the purchase of the Polack stock. In payment therefor two notes were given, for $8,750 each, payable in one and two years, with interest at 6 per cent., making an aggregate of $17,500. The $2,500 over and above the $15,000 purchase price for the stock consisted of a $2,500 note owing by the corporation to the Marysville Bank for a loan of money, payment of which was assumed by Polack. The notes were secured by a second mortgage on the entire property of the corporation, and the same was immediately filed for record. The certificate of stock for 597 shares standing in the name of Mrs. Polack was assigned to the corporation and pasted on the stub of the certificate, and has ever since remained in this stockbook. The certificate for 402 shares issued to Polack himself were assigned to the corporation, but were then redelivered to Mr. Polack as additional security for the notes, and the certificate is now attached to the unpaid renewal note still outstanding. This transaction left Craig and wife the sole owners of the stock of the corporation, and from that time on Craig treated the corporation as his alter ego for business purposes. Its name was soon thereafter changed to the 'W. O. Craig Manufacturing Company.'

Immediately after receiving the notes and mortgage, made in the month of September, 1910, Polack sold and transferred the same, by an unrestricted indorsement and for their face value, to the firm of Fulton & Hohn. Fulton at the time had knowledge of the fact that these instruments had been given by the corporation in payment of the purchase price of its stock.

October 15, 1910, Fulton, representing the firm of Fulton & Hohn, sold to the First National Bank of Marysville the $8,750 note due in one year, for its face value. At the time of this transaction Fulton was cashier of the bank, and acted in its behalf in purchasing the paper. He thus acted in a dual capacity. On the one hand he represented the firm of Fulton & Hohn in the selling of the paper, and on the other he represented the bank as its cashier in its purchase. No other officer or agent of the bank had any notice or knowledge that the note had been given by the Storage Company as a part of the purchase price of its stock. Fulton's interest being adverse, his knowledge would not be imputed to the bank. This disposes of one of the notes, and places it in the custody of the bank as a good-faith purchaser in the sense that that term is used when applied to property. Counsel for appellant, however, insists that the bank cannot be given the rights of a good-faith purchaser of negotiable paper, because the note contains conditions which render it nonnegotiable. Kobey v. Hoffman, 229 F. 486, 143 C.C.A. 554. But, without deciding the question, we shall dispose of the case upon the assumption that counsel's position is correct.

In December, 1910, the plant of the Siloam Springs Cold Storage & Ice Company was partially destroyed by fire. Insurance was collected in the amount of $54,356.56. Out of this the corporation paid all its general creditors, excepting three, holding claims aggregating $430.33; it also paid the note for $8,750 held by Fulton & Hohn, in full, with interest. It paid $1,750 upon the note held by the Bank of Marysville. It has subsequently made payments upon that note until the principal has been reduced to $4,500. The debt is now held by the bank for that amount in the form of renewal notes. After making the payments above referred to, at the time it collected the insurance money, the corporation was clearly solvent. Its only indebtedness was the $7,000 which it owed the bank, as a balance on the $8,750 note, and the $430.33 due to general creditors. It had on hand cash, $19,749.37, and salvage on the plant, and real estate of the value of $15,000, and $5,000 bills receivable. It rebuilt its plant. The new plant had double the capacity of the one that was burnt, and was, in the opinion of the master and the trial court, too large for the business of the community in which it was located. It was completed in May, 1911, and down to that time the corporation continued to be solvent. It afterwards gave a mortgage for $30,000 upon its entire property. The holder of that mortgage in July, 1912, brought suit for its foreclosure, and caused a receiver of the estate of the corporation to be appointed. July 27, 1912, the corporation was adjudicated a bankrupt, and the plaintiff herein was elected trustee.

The present action was brought against the First National Bank of Marysville, Kan., E. R. Fulton, and H. A. Hohn, Theodore H Polack, and Florence E. Polack, to recover, with interest, all sums paid by the corporation on account of the notes given to Polack as the purchase price of the stock. The case was referred to a master, who made elaborate findings of fact. His conclusion was that judgment should be entered in favor of plaintiff for the $430.33 owing to creditors who were such at the time the stock transaction occurred, and that the action should be dismissed as to the balance of the claim. Exceptions were filed, and the cause was heard before the trial court upon the report and...