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U.S. Supreme Court

Dickerman v. Northern Trust Co., 176 U.S. 181 (1900)

Dickerman v. Northern Trust Company

No. 83

Argued April 5-6, 1899

Decided January 22, 1900

176 U.S. 181


A mortgage, given to secure a large number of bonds, provided that the bonds should become payable if any execution should be sued out against the property of the company and such company should not forthwith pay the same. A bondholder brought suit before a justice of the peace upon six coupons. The defendant company consented to a judgment and to the issue of an execution, and upon the same day the trustees gave notice that, by reason of such execution's having been unpaid, they declared the principal and interest upon all the bonds to be immediately payable, and at once took possession of the property. Held that while these proceedings were taken by connivance and consent of the parties, they were not collusive in a legal sense, as the debt was honestly due and the plaintiff entitled to the judgment. Held also that, while the judgment was obtained for the obvious purpose of enabling the trustees to declare the mortgage to be due, the court would not inquire into the motives of the parties.

Where a bill is filed to foreclose a mortgage and the answer admits the bonds secured by such mortgage to have been issued, it is not necessary that the bonds should be put in evidence before a decree of foreclosure and sale.

Bonds payable "to the bearer or, when registered, to the registered owner thereof," and declared to be due on or before a certain date, are negotiable, though redeemable by installments determined by annual drawings.

The fact that the mortgagor corporation may have been organized for the purpose of creating a trust or unlawful combination in restraint of trade is no defense to the mortgage.

The fact that such corporation was organized in pursuance of a fraudulent scheme to defraud certain stockholders who had contributed their properties to the capital stock of the corporation is no defense to a foreclosure of the mortgage, so far at least, as the bonds were held by parties innocent of the fraud.

Promoters of a corporation are bound to the exercise of good faith toward all the stockholders, to disclose all the facts relating to the property, and to select competent persons as directors who will act honestly in the interest of the shareholders, and are precluded from taking a secret advantage of other shareholders.

This was a bill in equity filed in the Circuit Court for the Northern District of Illinois by the Northern Trust Company,

Page 176 U. S. 182

a corporation organized under the laws of Illinois, having its principal office in Chicago, and Ovid B. Jameson, a citizen of the State of Indiana, as trustees, against the Columbia Straw-Paper Company, a corporation organized under the laws of the State of New Jersey, to foreclose a trust deed of some thirty-nine papermill properties, leaseholds, and water powers situated in thirty-two different counties and in nine different states. This deed, which was dated December 31, 1892, was given to secure the payment of one thousand bonds of the paper company of $1,000 each, with coupons bearing interest at six percent per annum, payable half yearly. These bonds were issued and delivered to one Emanuel Stein, in part payment for the properties acquired by it from him.

The bill, which was in the ordinary form of a foreclosure bill, averred that, by the terms of the bonds, it was agreed by the paper company that it would redeem, on the first day of December, 1893, one hundred of such bonds, and annually thereafter until December 1, 1901, a similar number, and that the principal of such bonds should become due if the paper company should make default for a period of three months in the payment of any interest, and an election so to do were given in writing; that, by the terms of the mortgage or deed of trust, it should become enforceable, provided default were made in the payment of any one of the bonds which had become due and payable for one month thereafter, or, if default should be made in the payment of interest on any of such bonds or in the performance of any of the covenants or conditions in the bonds or mortgage, and such default should continue for three months after written demand for payment or performance by the trust company, or if a judgment or order should be made, or any effective resolution adopted by the paper company for the winding up of such company,

"or if a distress, attachment, garnishment, or execution be respectively levied or sued out against any of the chattels or property of either company, and such company shall not forthwith upon such distress, attachment, garnishment, or execution being levied or sued out, remove, discharge, or pay such distress, attachment, garnishment, or execution. "

Page 176 U. S. 183

The bill alleged as the only grounds for enforcing the security of the mortgage (1) that the mortgagor had made default in redeeming or discharging the several amounts of bonds designated in the mortgage and bonds for redemption, (2) in failing to pay certain installments of interest, and (3) in failing to pay a certain execution sued out on January 22, 1895, against the property of the company upon a judgment obtained against it by one James Flanagan before a justice of the peace of Cook County, Illinois. That, by reason of such default, complainants had declared the principal and interest of the bonds to by immediately due and payable.

The bill contained the usual prayer for foreclosure and sale, and for a receiver and an injunction against disposing of any of the mortgaged property. The trustees having taken possession of the property, a receiver was appointed by consent of the company upon the same day the bill was filed.

The answer of the paper company admitted the material allegations of the bill, averred its inability to pay its debts, and asserted that the property covered by the mortgage was worth much more than the amount of the bonds and the indebtedness of the company.

A few days thereafter, Dickerman, together with others, filed a petition setting forth that they, with other stockholders of the defendant company, had been injured by the wrongful and fraudulent manner in which its securities had been issued; that the defendant and its defense were under the control and direction of the bondholders and their trustees; that the directors were not fitted to conduct the suit by reason of their adverse interests, and prayed to be made defendants and be allowed to plead, answer, or demur to the bill, and to file a cross bill. This was allowed.

Thereupon petitioners filed their answer admitting the execution of the bonds and mortgage, but denying that the bondholders were entitled to the benefit of the trust created by the mortgage; denied that all of the one thousand bonds were duly issued, negotiated, and sold, or that they were outstanding and valid obligations of the mortgagor, and also denied that all of such bonds and coupons had come into the possession

Page 176 U. S. 184

of, or were held by, persons who had become the owners thereof in good faith and for a valuable consideration.

They further set forth in great detail the manner in which the combination had been formed in the summer of 1892, to purchase seventy paper mills with their plants, appliances, and goodwill by means of securing from their respective owners option contracts whereby each owner agreed to sell his property to the combination for a stated sum in cash, and the residue in the capital stock of the corporation to be organized, to which the seventy paper mills, with their properties, etc., were to be conveyed; that the corporation so to be formed was to be capitalized at $3,000,000 of common and $1,000,000 of preferred stock, to be issued at par, in part payment for the mills at the option prices so obtained, until the whole amount was exhausted, and that in such contingency the corporation so to be organized was to have the power to issue $1,000,000 of its bonds to complete the payment for said mills; that after options had been obtained upon thirty-nine mills, the total purchase price of which was $2,788,000 in cash, stock, and notes, the parties met to consider them, and decided that it would be necessary to provide $1,000,000 to purchase the property and furnish the running capital; that the combination thereupon caused the option contracts to be transferred to one Emanuel Stein, and then arranged to divide up and to fraudulently appropriate to themselves $2,113,000 of the capital stock of the proposed corporation, which would not be required to pay for the thirty-one mills which were left out of the combination.

That after having arranged how many of the one thousand mortgage bonds of the new corporation each member of the combination was to receive for an equal amount in cash, and how many shares of preferred and common stock each was to receive gratuitously with bonds, they caused articles of incorporation to be filed December 6, 1892, in the State of New Jersey, to organize the paper company with a capital stock of $4,000,000, with themselves and their agents as directors. That on December 14, 1892, they procured Stein, who held the option contracts for the purchase of the thirty-nine mills,

Page 176 U. S. 185

to present to the stockholders a proposition to secure the titles to the thirty-nine mills, and to convey the same to the new corporation for $5,000,000, as follows: $1,800 in cash; $1,000,000 in first-mortgage bonds; $1,000,000 in preferred and $2,998,200 in the common stock of the new company; that this proposition was accepted by the stockholders and also by the directors, and the property conveyed to the company; the bonds and capital stock divided among the members of the combination, as had been previously arranged, and that such persons still owned and were still liable for their capital stock in a much larger amount than the bonds of the company, and that the latter were owned by the same persons, who were liable on their stock. That the Columbia Straw-Paper Company, having been organized for the purpose of taking such conveyances, and thus consolidating said mill plants, their contention was that, by reason of fraudulent overvaluation of the various mill plants and properties upon which options of purchase had been taken, a defense in the nature of a set-off existed in favor of the company against such bondholders as were also stockholders to the extent of the unpaid part of the stock held by them.

The answer also contained an averment that the judgment and execution in favor of Flanagan before a justice of the peace was a fraudulent and collusive act on the part of the managers of the defendant company in order to give the trustees the right to begin this foreclosure proceeding; that, in pursuance of this, the directors had fraudulently neglected and refused to pay six interest coupons on the bonds owned by Flanagan, in order that a suit might be instituted thereon; that the defendant corporation appeared upon the return of the summons, consented to an immediate trial, made no defense, but allowed judgment to be entered and an execution to issue on the same day, and that the firm of lawyers who had devised this proceeding acted as solicitors for the trustees in filing the bill of foreclosure. It was denied that the straw-paper company was insolvent, and was averred that the complainants and others had combined to wreck the company and defraud the defendant stockholders by withdrawing from

Page 176 U. S. 186

the treasury of the company bonds and stock to the value of $3,000,000, which the complainants held in trust for the company, and that the same are assets and not liabilities, as in the bill of complaint alleged.

Defendants also filed a cross-bill for an accounting in respect of the transactions complained of, especially in reference to the issue of the alleged mortgage bonds and the preferred and common stock, and if, on such accounting, anything should appear to be due from any of the defendants to the straw-paper company, a decree might be entered for the payment of the same, and that the receiver theretofore appointed might be removed and a proper and practical person be appointed receiver in his stead, with power to take possession of the property, as well as of the books, papers, and writings of the Columbia Straw-Paper Company, and that an injunction issue restraining the officers and directors of the company from interfering with his possession. The cross-bill was subsequently stricken from the files.

Defendants later amended their answer, alleging that the bonds and mortgage were part of an illegal scheme to create a monopoly, regulate prices, and prevent competition among the mills purchases, who had, prior to the consolidation, been in active competition with each other.

The case was referred to a master to take proofs and report the testimony. He reported that the material allegations of the bill were sustained by the proofs; that all of the one thousand bonds set up in the bill were negotiated and sold and were outstanding and valid obligations of the company; that the company made default in redeeming the first one hundred bonds maturing December 1, 1893, as well as one hundred and five bonds maturing December 1, 1894; that the company also made default in the payment of interest upon its bonds due June 1 and December 1, 1894, though the same was duly demanded; that, by reason thereof, and of the execution obtained by Flanagan, the complainants declared the principal and interest of the entire issue to be immediately due and payable; that they had been requested in writing by the holders of more than one-third of the bonds to enforce the provisions of

Page 176 U. S. 187

the deed of trust; that the company had been for some time and was still insolvent; that at the date of the report, there was due upon the bonds, principal and interest, $1,249,632.86; that the contention of the defendants that the bonds were not issued and outstanding was not supported by the testimony; that the contention that the stock of the company, which passed into the hands of Emanuel Stein by virtue of his contract with the company, was not fully paid-up stock was also not supported; that as a matter of fact such stock was received by Stein as fully paid stock, and that as a matter of law no question in regard to it between the stockholders of the company could be inquired into in this proceeding. He further found that there were no creditors of the company except those represented in this suit.

The defendant stockholders, who were complainants in the cross-bill, filed exceptions to this report, which, upon a hearing by the court, was overruled, and a decree of sale nisi entered in favor of the original complainants. Northern Trust Co. v. Columbia Straw-Paper Co., 75 F.9d 6. On appeal to the Circuit Court of Appeals for the Seventh Circuit, the decree of the circuit court was affirmed. 80 F.4d 0. Whereupon the appellants applied for and were granted a writ of certiorari from this Court.

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