Warfield v. Adams
| Decision Date | 16 September 1913 |
| Parties | WARFIELD et al. v. ADAMS et al. (three cases). |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
OPINION TEXT STARTS HERE
Appeal from Supreme Judicial Court, Suffolk County.
Consolidated bills in equity by Carlos Warfield and others against A. D. F. Adams and others. From decrees dismissing the bills, complainants appeal. Affirmed on condition.
Walter I. Badger and Adler, Barker & Wood, of Boston, for appellants.
C. W. Rowley, of Boston, for appellee Adams.
Eugene M. Schwarzenberg, of Boston, for appellees Shawmut Commercial Paper Co. and L. E. Demelman.
Henry F. Hurlburt, Jr., of Boston, for appellee Barnum.
A. K. Cohen and H. A. Mintz, both of Boston, for appellee Bloom.
Whipple, Sears & Ogden, H. W. Ogden, and Henry Herrick Bond, all of Boston, for appellees F. W. Mason and A. A. Potter.
Boyd B. Jones, of Boston, for appellee Gale. Geo. W. Anderson, of Boston, for appellee Gould.
David E. Gould, of Boston, pro se.
This consolidated cause was begun by three bills in equity which as amended are brought by or in behalf of one Heinze, primarily to redeem certain securities pledged by Heinze as collateral for ten promissory notes in the aggregate sum of $300,000. These notes were dated between November 20, 1908, and April 5, 1909. Two of them were renewed at maturity, and with a possible exception of one note (about which there seems to be some doubt on the master's report) none were due when these bills were filed on September 13, October 13, and November 15, 1910.
The allegations of the three bills are much the same. It is alleged in them that at the time of making the loans Adams was insolvent and procured the pledge of the securities here in question for the fraudulent purpose of converting them to his own use. Joined with Adams as co-defendants are 13 individuals, firms or corporations who furnished Adams with the $300,000 (or some of it) which was lent by him to Heinze, and who it is alleged conspired with Adams to carry the above fraud into effect and to share in the plunder. The secondary relief sought by the bills is for an accounting of the profits derived by the defendants through the fraudulent conspiracies with Adams.
The case was sent to a master to hear and determine the merits on all the issues raised by the pleadings and to report to the court his findings of facts, his rulings of law and so much of the testimony as in his opinion might be necessary to a proper understanding of his rulings of law. The master's report was confirmed and a decree was entered dismissing the bill with costs as against all the defendants except Adams, and as against Adams the bill was dismissed without costs and without prejudice, the plaintiffs' counsel having told the master that in view of Adams's bankruptcy they did not care for a statement of the account against him.
The suit is here on an appeal taken by the plaintiffs from that decree.
It will not be necessary to state at length all the facts found by the master. For the purpose of deciding the questions raised by the plaintiffs' appeal the following are the facts which we deem material: Heinze was a large operator, particularly in mining stocks, and had promoted and ‘financed’ the Davis-Daly Copper Company, the United Copper Company and the Ohio Copper Company. He managed and controlled these companies, and with his associates he owned their capital stock and bonds. The companies were known on the street as ‘Heinze companies,’ and their securities as ‘Heinze securities.’ The stocks of all three were ‘non-dividend paying curb stocks.’ In the autumn of 1908 and winter of 1909 Heinze had need of large sums of money for his various enterprises. Before that time he had been borrowing money in various parts of the United States and sometimes had had to pay interest at the rate of 2 to 5 per cent. per month, and in one instance at a higher rate still. His credit had been greatly impaired.
Under these circumstances, wishing to borrow $50,000 on stock of the United Copper Company and of the Davis-Daly Company, he applied to a New York note broker, Dresser by name, for his assistance. Dresser suggested to Heinze that he apply to the defendant Adams to see if he ‘could negotiate such a loan.’ Adams was known by Dresser, but not by Heinze. He had come from New York to Boston in 1906, without capital, and had conducted the business of lending and borrowing money on collateral. In addition he bought and sold some stocks in a small way. In October, 1909, ‘he went into bankruptcy.’ The master goes into a detailed statement of the business methods employed by Adams in his three years' business career in Boston. He states his methods before the first of the loans which he made to Heinze and then states that they remained the same during the ten Heinze loans. The money which Adams lent to his customers was obtained by him from others including the co-defendants, by repledging the securities pledged with him, and by paying for the money borrowed by him interest which ‘averaged from 2 to 5 per cent. a month on monthly loans and renewals, and somewhat more than that on loans and renewals for a shorter time,’ in a few instances paying 2 per cent. a week and 1 per cent. a day.
In lending money Adams used a form of note substantially like that passed upon by this court in Commonwealth v. Althause, 207 Mass. 32, 93 N. E. 202,31 L. R. A. (N. S.) 999. The clause in Adams's note was in these words: ‘In consideration of the loan hereby made the borrower agrees that the holder or holders of this obligation shall have the right to make use of the collateral security herein named as they may desire, subject only to their obligation to deliver to said borrower collateral of the same amount and kind as that mentioned above upon the payment of this note at maturity.’ In borrowing money, however, Adams used an ordinary collateral note which gave the holder a right to sell the collateral on breach of the agreements contained in the note, but not otherwise.
Adams lent Heinze $300,000 on the following ten notes secured by the following collateral:
The first two notes were signed by Heinze. The next seven and the last one by Warfield and Joyce respectively. The first two were renewed for six months at maturity, and ‘with these two exceptions none of the plaintiff's loans were renewed.’ It follows that no notes were due when these bills in equity were filed unless it was the third note. If that was a note for three months it was long overdue when the bills were filed. But throughout the report it seems to have been assumed that no notes were overdue at that time.
The ten promissory notes given by Heinze, Warfield and Joyce bore interest at 6 per cent. per annum. On the first two notes Adams was paid in addition a commission of 2 per cent. But on the other eight he was not paid, nor was he entitled to receive, anything beyond interest at 6 per cent. per annum.
In addition to the general statement that all the money lent by Adams to Heinze was borrowed from the co-defendants in these suits and from others who did a similar business of lending money at from 2 to 5 per cent. a month, the master stated at length from whom Adams procured the $300,000 lent to Heinze. From this it appeared that by borrowing at the high rates of interest paid by him, Adams succeeded in not having to use by way of re-hypothecation all the securities pledged to him by Heinze. The securities thus freed Adams used as collateral for money borrowed by him for his own use, or sold them, using the proceeds in the same way. The final finding of the master on Adams' intent is in these words:
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