Sanford Fork & Tool Co. v. Howe Brown & Co., 157 U.S. 312 (1895)

This was a suit commenced in the Circuit Court of the United States for the District of Indiana by the appellees, creditors of the Sanford Fork & Tool Company, to set aside a mortgage given by such company to secure certain of the directors and stockholders of the company for indorsements made by them of the company’s paper. No proofs were taken, and the case was disposed of on the bill and answer, and a decree entered in favor of the plaintiffs, adjudging such mortgage invalid as against them. The facts disclosed by the pleadings are as follows: The Sanford Fork & Tool Company was a corporation organized under the laws of the State of Indiana, doing business at the city of Terre Haute in that State. Its capital stock at first was one hundred thousand dollars, but was afterwards increased to one hundred and fifty thousand dollars. It commenced business in 1888 and continued as a going concern for about eighteen months and up to May 13, 1890, at which time it failed and its property passed p. 313into the possession of one of the defendants, John W. Davis, as receiver. The plaintiffs were creditors of the company, whose claims all accrued prior to March 17, 1890, at which time the mortgage complained of was executed. The defendants McKeen, Hulman, Nixon, Minshall, Kidder, and Mayer were each stockholders, and the first five constituted the board of directors of the company. Early in its history, and on July 2,1888, the company had executed a deed of trust to one Deming, as trustee, to secure an issue then made of $50,000 of its ten-year negotiable bonds. This trust deed conveyed as security the manufacturing plant of the corporation — a tract of about three acres in the city of Terre Haute, with the buildings and appurtenances.

All the money received from these notes was expended upon and went directly into the property and material of the Tool Company. At the time these directors and stockholders indorsed these notes the Tool Company was a going concern, in full operation, with property and means “ amply sufficient to pay all of its indebtedness if its property was worth what it had cost in cash.” They believed that such property was worth what it had cost in cash, that the corporation was “ solvent and capable of becoming an independent and profitable manufacturing institution as soon as it could win its way to a favorable market for its manufactured products.” As these notes thus indorsed began to mature the directors found that the company was unable to pay them, and required a renewal or an extension. Thereupon, on March 1, 1890, they called a special meeting of the stockholders, which was held on March 15. At this meeting, out of a total of three thousand shares, two thousand two hundred and fifty were represented, and a resolution was passed authorizing the directors to execute a mortgage or mortgages upon all or any part of the property of the corporation, to secure any new indebtedness that might be incurred, or the renewal and extension of any present indebtedness or liability of the corporation. Thereupon, the directors having taken suitable action, the mortgage in controversy was executed conveying to Buena V. p. 315Marshall, as trustee, the property described in the trust deed hereinbefore referred to, to wit, the company’s manufacturing plant, to indemnify the six indorsers for their indorsements of the notes, or renewals thereof, or on account of any moneys thereafter advanced by them. Relying upon such security the indorsers above named either paid or procured renewals of the several notes, and in addition two of them indorsed and subsequently paid other paper of the company to the amount of six thousand dollars. This mortgage was not recorded until May 1, 1890. At the time of its execution and delivery, as at the time of the indorsements hereinbefore mentioned, the company “ was in full operation as a going concern,” with ample means to pay its indebtedness, if the cash cost of its property could be obtained therefor. The indorsers believed that “the property was worth what it had cost in cash, and believed the corporation to be solvent,” and in fact the corporation continued to be “ a going concern, and carried on its business in the usual way, and met all its obligations (other than the notes embraced in the indemnity mortgage) as they matured in the usual course of business,” until the appointment of a receiver on May 13, 1890, during which time it paid out for current expenses and maturing obligations thirty thousand dollars or over. The indorsers “ believed that it was only necessary to tide the corporation over a temporary embarrassment until it could succeed in establishing a favorable footing in the market for the sale of its manufactured products.” They accepted the indemnity mortgage in good faith, with knowledge that all the money obtained by means of the notes upon which they had become liable as indorsers had been properly appropriated to and gone into the property and material of the company.

The manufacturing business in which the corporation was engaged was a new enterprise. It had been carried on for only about eighteen months. In that business had been invested nearly $300,000, and the property possessed by the corporation was at its cost price equal to the entire indebtedness. It thus appears that there had been no waste, mismanagement, or loss. Not a dollar of the indebtedness was held by any director or stockholder, but the personal credit of the six directors and stockholders had been loaned to the company to the extent of $69,000. The corporation was still a going concern. There was no purpose of abandoning the business. The indorsers believed that if the corporation could be tided over its temporary embarrassment it could be made successful. The stockholders authorized the mortgage. It was given only upon part of the property, and that part already encumbered by a fifty thousand dollar trust deed. The value of this property was, according to the subsequent appraisement, much below the sums secured by the trust deed and the mortgage. In addition the corporation had nearly $90,000 of unencumbered property to apply in satisfaction of the claims of its creditors. The mortgage was not given simply as security for a past indebtedness, but to induce the p. 317indorsers to obtain for the corporation a renewal or extension of its obligations, and to make further indorsements. In reliance upon this mortgage the indorsers secured renewals or extensions, or themselves took up the notes they had indorsed, and at the same time lent the credit of their names to new paper of the company. Thus they prevented a suspension of the business and enabled the corporation to continue its operations, and did so believing that by such continuance the corporation would be enabled to work itself out of its temporary difficulties. All this was done in the utmost good faith.

But, passing from the relations of directors to the p. 318corporation and its stockholders, it is one of the vexed questions of the law as to how far the duty of a corporation and its directors to creditors interferes with the otherwise conceded power of a debtor to prefer certain of his creditors. Into a discussion of this question in its length and breadth we deem it unnecessary now to enter, for the facts of this case remove many of the embarrassments that often attend such questions. This is not like the case of Sutton Manufacturing Co. n . Hutchinson, 63 Fed. Rep. 496, decided by the United States Court of Appeals for the Seventh Circuit, in which the directors of a corporation, insolvent and intending to discontinue business, gave a mortgage to secure certain of their number who happened to be creditors, and thus attempted to secure a preference in behalf of themselves. Nor is it the case of the directors of a corporation in fact insolvent, though continuing and expecting to continue in business, executing a mortgage on the property of the corporation to simply secure themselves for a past indebtedness ; for here the corporation, although insolvent within the rule which declares that insolvency exists when a debtor has not property sufficient to pay his debts, was still a going concern and intending to continue its business, and the mortgage was executed not simply to secure directors and stockholders for past indebtedness but to induce them to procure a renewal or extension of paper of the company then maturing or about to mature, and also to obtain further advances of credit.

But even that is not this case, for here the corporation was p. 319a going concern and intending to continue in business, and the mortgage was given with, a view of enabling it to so continue, and to prevent creditors whose debts were maturing from invoking the aid of the courts to put a stop thereto. Can it be that, if at any given time in the history of a corporation engaged in business, the market value of its property is in fact less than the amount of its indebtedness, the directors, no matter what they believe as to such value, or what their expectations as to the success of the business, act at their own peril in taking to themselves indemnity for the further use of their credit in behalf of the corporation ? Is it a duty resting upon them to immediately stop business and close up the affairs of the corporation? Surely, a doctrine like that would stand in the way of the development of almost any new enterprise. It is a familiar fact that in the early days of any manufacturing establishment, and before its business has become fully developed, the value of the plant is less than the amount of money which it has cost, and if the directors cannot indemnify themselves for the continued use of their personal credit for the benefit of the corporation, many such enterprises must stop in their very beginning.

“ 1st. It was error of the court to charge the jury as follows: ‘ Now a word further as to what is meant by this idea p. 322of constructive presence. I have already told you that the test is if a man is so near to the place, no matter how far in feet or yards he may be away, if from the circumstances and from the character of the act done and the way it is done he is so near to where it is actually done as to be able to render assistance or to contribute to the production of that act, and he is there actually to do so, or is there ready to do so wilfully, and intentionally present in pursuance of a previous agreement, and he confederated to render aid and assistance, he is then present in the law. As an illustration take the case decided in Nevada, where the man was 30 odd miles away from the place where a stage was robbed; he built a fire on the top of a mountain to signal to his confederates the approach of the stage, they being down in the valley waiting to rob it. He was arrested as a principal in that crime, although as a matter of fact at the time of the robbery he was 32 miles away, or 30 odd miles away, but the law said he was present, because the test of the law as to what is meant by presence is fully satisfied, because the proof showed that he was able to render assistance that looked toward the completion of it — towards the execution of it. Another case: If a man goes to a store kept in the country and decoys away the clerk who slept in the store, decoys him to go to a dance some miles distant from the store, and detained him at the dance while his confederate robbed the store.’

“ 2d. It was error to charge the jury as follows: ‘ If the presence of the defendant in this case at the place where the proof shows he was, was by previous agreement or concert with Sam Woodard, and it was the purpose on his part to assist, aid, or abet the killing of Sherman Russell, and he was there wilfully and knowingly for the purpose, if it should be necessary, of assisting Sam Woodard in killing Sherman Russell, and the knowledge on the part of Woodard of the presence of the defendant at the place where he was for the purpose of assisting him in the killing of Sherman Russell emboldened his purpose and encouraged his heart, or afforded him hope or confidence in his enterprise, or spurred on his mind to do the act, or nerved or strengthened his arm p. 323to fire the pistol shot, then the defendant would be present aiding and abbetting the killing. He may not have done any actual physical act, but if his relation to the act was of the character that I have just named, the relation was a criminal relation upon his part; it was a relation that sprung out of a preconceived design between Woodard and defendant to take the life of Sherman Russell, and if such a presence for the purpose of aiding or assisting or abetting, should it become necessary, exerted a mental influence upon Woodard, so that he the more readily or quickly executed the act, the defendant would then be present at the crime whether he was really and actually at the place or whether he was so near to the place, as by the means I have described to exert an influence of that character upon the mind of Sam Woodard, he would then be present at the crime and he would be an actual participant in it. If at the time- Sam Woodard shot and killed Sherman Russell the defendant was constructively present at the place of the killing, and he was at such place with the intent to knowingly and wilfully assist Sam Woodard in killing Russel], should it become necessary to consummate the deadly purpose, but that such aid was not necessary, as Woodard did the killing without such help, then such constructive presence with such purpose would be a legal presence and would make the defendant a participant in the killing.’

“ 8th. It was error to charge the jury as follows: ‘ The p. 324defendant goes upon the stand before you and he makes his statement; tells his story. Above all things, in a case of this kind you are to see whether that statement is corroborated substantially and reliably by the proven facts; if so, it is strengthened to the extent of its corroboration. If it is not strengthened in that way, you are to weigh it by its own inherent truthfulness, its own inherent proving power that may. belong to it.’

The assignments of error question the correctness of the instructions given to the jury, first, on the subject of a constructive, as distinguished from an actual, presence at the p. 325scene of the murder ; secondly, as to the effect to be given to the absence of proof of motive; and, thirdly, as to the weight to be attached to the testimony of the defendant in his own behalf.

Complaint is made of the instruction as to the weight to be given to the defendant’s personal testimony. That instruction was in the following terms : “ The defendant goes upon the stand before you and he makes his statement ; tells his story. Above all things in a case of this kind you are to see whether that statement is corroborated substantially and reliably by the proven facts ; if so, it is strengthened to the extent of its corroboration. If it is not strengthened in that way you are p. 326to weigh it by its own inherent truthfulness, its own inherent proving power that may belong to it.”