Blake v. Domestic Manuf'g Co.

Full title: BLAKE v. DOMESTIC MANUF'G CO. BLAKE et al. v. DOMESTIC SEWINGMACH. CO. et…

Court: COURT OF CHANCERY OF NEW JERSEY

Date published: Sep 2, 1897

64 N.J. Eq. 480 (Ch. Div. 1897)

64 N.J. Eq. 480

Opinion

09-02-1897

BLAKE v. DOMESTIC MANUF'G CO. BLAKE et al. v. DOMESTIC SEWINGMACH. CO. et al.

Charles L. Corbin, S. B. Brownell, and Rush Taggert, for complainants. T. N. McCarter, Mr. Doyle, and Mr. Reeve, for National Park Bank and others. R. V. Lindabury and J. C. O'Connor, for Garfield Nat. Bank and others. J. E. Howell, for Andrew Kirkpatrick, receiver.

EMERY, V. C.

Separate bills by David Blake against the Domestic Manufacturing Company and by Eliza A. Blake and others against the Domestic Sewing-Machine Company and others to secure the payment of bonds and preserve the rights of complainants as creditors. Andrew Kirkpatrick was appointed receiver in both actions. Eliza A. Blake and others, bondholders of the Domestic Sewing-Machine Company, appealed from the determination of the receiver allowing the claims of six banks, to wit, the Phœnix National, the Garfield National, the National Broadway, the National Park, the Chemical National, and the First National, against the Domestic Manufacturing Company. Heard on bill, cross bill, answers, and replications, and on said appeals, proof being taken orally. Appeals dismissed, except that as to the claim of the First National Bank, and the rights of complainants determined.

Charles L. Corbin, S. B. Brownell, and Rush Taggert, for complainants.

T. N. McCarter, Mr. Doyle, and Mr. Reeve, for National Park Bank and others.

R. V. Lindabury and J. C. O'Connor, for Garfield Nat.

Bank and others. J. E. Howell, for Andrew Kirkpatrick, receiver.

EMERY, V. C. The litigation in these cases arises out of the failure of two corporations of this state, the Domestic Sewing-Machine Company and the Domestic Manufacturing Company, which were declared insolvent on June 2, 1893, on separate bills, the defendant Hon. Andrew Kirkpatrick being appointed the receiver of each corporation. These two companies had been connected in the manufacture and sale of sewing machines on a large scale since the organization of the sewing-machine company in April, 1891. Previous to this date, and since the organization of the manufacturing company, in 1881, a similar business connection existed between the manufacturing company and the Domestic Sewing-Machine Company, a corporation organized in 1870, under the laws of the state of Ohio. The sewing-machine company of New Jersey was organized to take over the assets and continue the business of the Ohio company, and by deed dated April 22, 1891, the New Jersey company purchased the assets of the Ohio company, and assumed its indebtedness, and also that of the Domestic Manufacturing Company, and to carry out and fulfill all existing obligations and contracts. The deed further declared that the New Jersey company "hereby pledges all the property and assets above conveyed and transferred to it for the payment of the obligations so assumed." At the time of this transfer of its assets from the Ohio company to the NewJersey company the Ohio company had an outstanding bonded indebtedness of about $300,000, which remained unpaid at the failure of the company. This same bonded indebtedness also existed on the part of the Ohio company in 1881 at the time of the organization of the manufacturing company, having been created as early as 1875. The Ohio company owned 1,980 shares of the entire 2,000 shares of the capital stock of the manufacturing company, and upon the organization of the latter company, in 1881, and by deed of trust dated April 21, 1881, the Ohio company conveyed to Eli J. Blake and John Dane, Jr., as trustees, this 1,980 shares of stock to secure these bonds and other obligations specified. The disputes now to be settled arise out of a twofold claim made by the complainants, who are the holders of $291,000 of these bonds. Their first claim is based upon the pledge of the manufacturing company stock to secure their bonds, and also upon their rights as creditors of the sewing-machine company, which is the owner of the stock, subject to the pledge for their benefit. The receiver has allowed or approved claims to the extent of about $300,000, which have been proved against the Domestic Manufacturing Company, by six banks holding notes indorsed, or purporting to be indorsed, by the manufacturing company. The complainants, as such creditors of the sewing-machine company, appeal to this court under the statute— "Corporations," § 82 (1 Gen. St. p. 923)—from the determination of the receiver allowing these claims. The ground of appeal is that the indorsement of the manufacturing company made on these notes was an indorsement by David Blake, the treasurer of the company, without authority, and that the indorsements are not binding upon the company. So far as relates to this dispute, the formal proceeding is that of separate appeals by the complainants from the allowance of the claim of each bank.

A preliminary motion to dismiss the appeals was made upon the ground that the complainants had no interest in the allowance of the claims. This was overruled on the ground that, as the complainants were certainly creditors of the sewing-machine company, even if their claim to a lien was invalid, and the sewing-machine company, as part of its assets, owned the manufacturing company stock, the complainants were directly interested in protecting this latter company against unfounded claims; and, inasmuch as the same receiver represented both companies, and had allowed the claims, the equitable situation was one where the greatest possible latitude should be given to the other creditors of either company in contesting claims against the manufacturing company, supposed to be invalid. The other claim of the complainants is the one upon which their bill in equity is based, and, briefly stated, the nature of this claim is that at the time of the transfer by the Ohio company of its assets to the New Jersey company the Ohio company was insolvent; that the transfer to the New Jersey company was void under the laws of Ohio, and that it was in fraud of the complainants as creditors of the Ohio company, and that complainants have a lien upon all the real and personal assets of the Ohio company existing at the time of the transfer prior to the claim of the creditors of either of the New Jersey companies. If, however, the transfer of its assets by the Ohio company to the New Jersey company should be held valid, then complainants claim that by virtue of the pledge of the existing assets made by the New Jersey company upon the transfer to pay the debts of the Ohio company the complainants, as creditors of the Ohio company, have a lien on this property in the receiver's hands superior to any claim of any creditor of the New Jersey Sewing-Machine Company. The complainants also claim that the patents and trade-marks originally belonging to the Ohio company and assigned to the New Jersey company were specially pledged to secure their bonds, and are so applicable in the receiver's hands to their claims. The bill further specially attacks the validity of the indorsement of the manufacturing company's notes by David Blake, and the allowance by the receiver of the claims of the banks founded thereon, and states that appeals are pending from these determinations, and the receiver and the banks were made defendants to the bill. The claims presented and allowed against the sewing-machine company amount to about $1,500,000, while the claims allowed against the manufacturing company are mainly the claims on the notes held by the banks. The principal asset of the sewing-machine company in the hands of the receiver is the stock of the manufacturing company, and the main dispute between the bondholders, the receiver, and the banks, both in the equity case and on the appeals, is as to the liability of the manufacturing company on the notes indorsed by David Blake as its treasurer. The equity cases and the appeals were therefore heard together, and in the disposition of the cases I will first take up the question of the validity of notes proved against the manufacturing company, leaving certain features of the equity case, not directly connected with this main question (including the matters set up in the answer and cross bill of the receiver) for a further separate statement and conclusion after disposing of the question which is the substantial one in both proceedings.

All of the notes in question purporting to bear the indorsements of the manufacturing company are similar in character, and are notes made by persons who were selling agents of the Domestic Sewing-Machine Company (of New Jersey), and are made payable to the order of the sewing-machine company at its place of business in New York City. They are all indorsed, in the first place, by the Domestic Sewing-Machine Company, by David Blake, vice president; his authority to indorse for this company not being called in question.They are then (with three exceptions, which I will be specially noted hereafter) indorsed in the following form: "Domestic Mfg. Co., David Blake, Treas." Thus indorsed, the notes were received by five of the banks, the Phoenix National, the Garfield National, the National Broadway, the National Park, and the Chemical National, for discount to the credit of the manufacturing company in its account with these banks respectively, and the proceeds of the discounts were by these banks respectively passed to the credit of the manufacturing company. The Second National Bank of Cooperstown purchased in the open market two of the notes, similarly made and indorsed, for full value, before maturity. The First National Bank holds five of the notes (similar in form), amounting to $29,714, as collateral to demand notes of the sewing-machine company, and these notes held by the First National Bank appear to have been so received as collateral in substitution for other notes to which the manufacturing company were not parties, and which were held as collateral to this loan made by the First National Bank to the sewing-machine company. The original loan by the First National Bank to the sewing-machine company of Ohio was made in 1890, and the notes indorsed by the manufacturing company were received by it in substitution for the other collateral in April, 1893. All of the notes held by each bank were duly protested for nonpayment. The purchase of the notes by the Cooperstown Bank in open market, and the receipt of them by the First National as collateral for the sewing-machine company's debt, involve questions not raised in reference to the notes received by the banks discounting for the credit and account of the manufacturing company; but the preliminary question in all of the cases is as to the authority of David Blake to impose the liability of indorser upon the manufacturing company, and this question will therefore be first considered.

The complainants, in their bill and by their petitions of appeal, charge that these indorsements were made without authority from the manufacturing company, and without the knowledge or consent of its board of directors, and were made for the purpose of using the credit of the manufacturing company to borrow large sums of money, in order to enable the sewing-machine company to carry on its business. The banks, in their several answers to the bill and petitions of appeal upon this question of authority, allege that the indorsements were made with the knowledge and consent of the board of directors of the manufacturing company, and in the regular course of the business of the company, with which the directors were familiar; that David Blake, the treasurer of the manufacturing company, was also its general agent and manager, and invested by its directors with the entire management and care of the business, and with the possession and collection of its assets, and the application of their proceeds to its business; and that David Blake, as treasurer, was held out to the world, and to the creditors of the manufacturing company, as authorized to indorse these notes for discount or sale. The five banks discounting the paper further insist that the proceeds of the discounted notes actually came to the use of the manufacturing company and were received for its benefit; and it cannot, therefore, escape liability for the repayment of the money, even if the indorsement was unauthorized. The Cooperstown Bank, in its answers, also alleges that the notes held by it were commercial paper of the manufacturing company, made in the regular course of business, and that this money raised therefrom was used by David Blake, as treasurer, in the business of the company. In answer to the claim of the banks that the money procured by the discount or sale of the notes in question was in fact received by the manufacturing company, and applied to its use, and that the company is therefore liable, even if the indorsement of the treasurer was originally unauthorized, the complainants claim that with the exception of the sum of $10,023.35 of the claim of the National Broadway Bank (to which extent liability is admitted) the entire amount raised by the discount and sale of the notes was used in the payments of debts and obligations of the sewing-machine company, and did not in fact come to the use of the manufacturing company; this application, as well as the discounts, being made without the knowledge or consent of the directors of the manufacturing company, and without their ratification. The issues raised, therefore, in reference to the notes, are as follows: First. Was David Blake, the treasurer, authorized to indorse the notes to the banks? Second. Were the notes accommodation paper of the manufacturing company, and to be so treated as invalid on that account in the hands of the banks? Third. Did the proceeds of the notes, or any of them, come to the use of the manufacturing company in such manner as to charge it with liability either for the notes or the money received thereon?

As to the authority of David Blake, as treasurer, to indorse the commercial paper of the company, it is not disputed that such authority was not directly conferred upon the treasurer, either by the by-laws of the company or by any formal resolution of the board of directors. The only provision of the by-laws relating directly to the treasurer is a section providing for his giving bond for the faithful discharge of his duties. These duties were not specified, nor was there, either from the by-laws or from any resolution of the board of directors, any direct authority to any officer of the company either to make or to indorse its commercial paper in the course of business. Counsel for the banks claim that the treasurer of a manufacturing and trading corporation of this characterhas the right, by virtue of his office, to indorse the business paper of the corporation, and to bind the corporation thereby, and the decisions in some states relating to the implied powers of cashiers and treasurers are cited as supporting this contention. But in my judgment, they do not reach to the extent claimed, and, in view of the general provisions of our statute laws that the business of the corporation is to be managed by the directors, and the numerous decisions of our courts that the powers of the officers of a corporation are simply the powers of agents delegated to them by the board of directors, I am of opinion that the treasurer of a manufacturing corporation is not merely by virtue of his office, and in the absence of any authority delegated to him by the directors, authorized to indorse the company's note for discount or sale. Such delegation of authority, however, may be made by the directors in other methods than by express resolution; and the claim made here by the banks is that by the entire method and course of business of the company adopted by its directors, or under their authority or permission, the treasurer was held out to the public and to the defendants as its general agent for the purpose of indorsing paper of this character, and the company are therefore bound by his indorsements. Such holding out, either to the public or to any of the banks whose claims have been allowed, is denied by the complainants, and is the main question of fact involved in this branch of the case. The evidence relating to this point involves directly the connection and course of business of both companies from the time of their organization, and the principal facts which I find to be established by the evidence are as follows:

The business of manufacturing and selling the sewing machines known as the "Domestic Sewing Machines" commenced with the organization in 1870, under the general laws of the state of Ohio, of "The Domestic Sewing-Machine Company," and this company was organized for the manufacture as well as the sale of sewing machines. Its principal office, designated by its charter, was in the state of Ohio; but the business of manufacturing machines was carried on in Newark, N. J., while the head office of the sales department was located in New York City, at the "Domestic Building." on Union Square, which was occupied under lease. The manufacture of the machines from the date of the organization in 1870 up to 1881 was carried on in or near Newark in different departments, upon property belonging to or controlled by the sewing-machine company, the legal title to the real estate being in Eli J. Blake, as trustee, and the personal property used in the manufacture, including machinery, tools, etc., belonging to the sewing-machine company. A firm— James R. Blake & Co.—leased the entire property (or a considerable portion of it), and manufactured the machines for the sewing-machine company under a contract with the company. Other departments of work connected with the machines were under the control of other persons, and in the spring of 1881 the directors of the sewing-machine company resolved upon the policy of increasing its facilities, and rendering more effective management of the various departments of manufacture connected therewith, by combining under one bead or management the various manufacturing departments, and for that purpose determined to organize under the laws of New Jersey a company to be called the "Domestic Manufacturing Company," to which all machines, plant, stock, and all the personal property of the company (including the leases) were to be conveyed, subject to an existing mortgage for $198,000, given by the sewing-machine company. The sewing-machine company was to receive of the manufacturing company stock as consideration for the purchase,—1,980 shares out of a total of 2,000 shares. The manufacturing company was accordingly organized on or about April 31, 1881, by Eli J. Blake, John Dane, Jr., Robert Blake, and James Blake, four of the five directors of the sewing-machine company. The entire capital stock was fixed at 2,000 shares of $100 each, of which Eli J. Blake, the president of the sewing-machine company, was declared to hold 1,700 shares, and each of the other subscribers 100 shares. The business of the company was to be commenced when $2,000 was paid in, and at a meeting of the stockholders held on April 19, 1881, this amount was paid in proportionately by the four subscribers, E. J. Blake paying $1,700, and each of the others $100, and a resolution was passed by the stockholders for the purchase from the sewing-machine company of all its property used in the manufacture of sewing machines in the city of Newark, and to lease its real estate and assume its leases, and the president, E. J. Blake, was authorized with the treasurer to consummate the purchase subject to ratification by the stockholders. The board of directors of the sewing-machine company, at a meeting held on April 21, 1881, attended by E. J. Blake, James Blake, and John Dane, Jr., three of the four stockholders of the manufacturing company, adopted a resolution setting out the plan and policy adopted, with the reasons therefor, as above given, and directed their president, E. J. Blake, to execute the necessary conveyances to the manufacturing company, and authorized him to receive in payment therefor 1,980 shares of the stock of the manufacturing company, which was to be issued, not to the sewing-machine company, but to Eli J. Blake and John Dane, as joint trustees. A trust deed of the stock for this purpose, executed by the sewing-machine company to the trustees, dated April 21, 1881 (being the trust deed-Schedule D—annexed to the bill of complaint), was approved by the board, and this deed conveyed the stock issued for property of the company to the trustees in order to securethe payment of outstanding bonds of the company, and the accommodation indorsements (existing and contemplated) made by Eli J. Blake and others for the sewing-machine company. The bonds then outstanding were about $300,000, including the $291,000 held by complainants. The amount of Eli J. Blake's then outstanding indorsements does not appear. At a special meeting of the stockholders of the sewing-machine company, held for that purpose on May 5, 1881, at the company's office in Norwalk, Ohio, and attended in person or proxy by the holders of 1,290 of the shares, the action of the directors was approved. 1,284 shares were held by Eli J. Blake (1,050), James Blake (233), and John Dane, Jr. (1). One clause of the trust deed which was thus approved by the directors and stockholders of the sewing-machine company provided that the trustees should have no power to vote on any of the shares of stock held in trust until after one year's default in payment of principal or interest of the obligation secured by the trust deed. The resolution of the directors of the sewing-machine company approving the trust deed did so with the declaration. "It being understood that the said stock shall not be entitled to a vote at any meeting of the stockholders and directors of the company." Whether this resolution was intended to prevent the sewing-machine company itself, as well as the trustees, from voting on the stock issued for its own property, may well be doubted, but this was the construction given by the directors who were carrying out the plan, for at a meeting of the manufacturing company directors, held on April 21, 1881, a resolution was passed, which, after reciting the resolutions of the sewing-machine company appointing E. J. Blake and John Dane, Jr., trustees of the 1,980 shares of stock in trust for the sewing-machine company and certain of its creditors, then directed that this stock so held "shall not be entitled to representation by vote while so held, but shall be deemed and held as inactive stock, as agreed by the resolution of the sewing-machine company, and the shares held by the several individual stockholders as such shall be deemed and considered as active stock, the latter only being entitled to representation by vote at the meetings of stockholders or board of directors"; and it was further resolved that the active stock only of the manufacturing company should be entitled to representation at any meeting, and that a majority thereof should be represented at any meeting of the stockholders or of the board of directors in order to transact business; and, further, that whereever the words "majority of the capital stock" occurred in the by-laws, they should be considered as referring to active stock. Of the whole 2,000 shares of the capital stock, 1,980 snares seem to have been issued to the sewing-machine company for the property purchased, to Eli J. Blake 17 shares, and to the other three directors and subscribers 1 share each, being the amounts paid in by them at the organization and for the original subscription to the shares. The conveyance by the sewing-machine company seems to have been taken as a performance by and discharge of the subscribers. The effect of these resolutions as to active stock, therefore, seems to have been to give on the records the legal management and control of the manufacturing company to the individual stockholders, who owned only $2,000 of its stock out of the total of $200,000, and the virtual control to Eli J. Blake, who owned 17 out of the 20 shares of so-called "active stock," and whose presence at every board meeting was thus necessary. All of these individual owners were at that time directors of the sewing-machine company, constituted a majority of its board, and Eli J. Blake was its president, as well as the president of the manufacturing company. After the formal organization of the manufacturing company in the interest and for the purposes of the sewing-machine company, the course of business between the two companies was as follows:

The manufacturing company as well as the sewing-machine company was incorporated for both the manufacture and sale of sewing machines, and the certificate of the manufacturing company provided that its business was to be conducted in the cities of Newark and New York, in which last-named city the chief wholesale business was to be conducted. The entire business of manufacture and sale was, however, distributed between the two companies, the manufacturing company making the machines, and delivering the entire output of finished machines to the sewing-machine company, which disposed of them though its various agencies located in the principal cities of the United States. Mr. Robert Blake thinks there was originally a written contract between the companies, but none has been produced, and the precise relations of the companies must therefore be inferred from their course of business. This course of business is in its main features disclosed by the oral evidence in the cause, and by the business books of both the companies. These books, which have been put in evidence, were all kept at the one office in New York,—that of the Domestic Sewing-Machine Company, — and were kept by the same persons, who were employes of the sewing-machine company. The business of the manufacture and sale was from the time of the connection of the companies conducted on a very large scale, the average monthly shipment by the manufacturing company of finished machines (and not including other merchandise, attachments, etc., which amounted to several thousand dollars per month) amounting in 1882 to a monthly average of over $120,000, which was still further increased in 1883 and 1884 to a monthly average of over $125,000. These were the years of greatest output, and after this time the average monthly shipments were for 1885 about $90,000; for 1886, $97,500; 1887, $100,000; 1888,592,000; 1889,589,000; 1890, to July, $69,000; July to December, $76,000; for 1891, $71,500; 1892, $66,500; and 1893, to June, $55,000. The cost of manufacturing the machines, according to the books of the sewing-machine company, was about two-thirds of the entire proceeds of sale of the machines on the market. For this expense, including pay rolls, materials, rent, and other proper items, the manufacturing company would, in the absence of contract, be primarily liable, as between it and the sewing-machine company. But from the commencement of the business, the sewing-machine company, which received the entire proceeds of sale, undertook primarily, and as between the companies, the payment of the cost of manufacturing. So far as procuring materials was concerned, this was effected, speaking generally, by having the necessary materials and supplies ordered by the person who was the superintendent of the manufacturing department, on account of the sewing-machine company, on written orders, forms of which were furnished by the latter, and directing shipment to be made to the manufacturing company, the bills to be sent to the sewing-machine company. For the payments necessary for pay roll and other payments at Newark, connected with the manufacture, the sewing-machine company provided at first by sending cash and its checks to the manufacturing company, but afterwards by sending to it for discount its bills receivable, and by accepting sight drafts drawn on it by the manufacturing company in Newark, and deposited to the credit of the latter company in accounts with Newark banks. By the credit of these sight drafts and its discount of the bills receivable the manufacturing company was kept in funds at Newark by banks there in which it carried accounts. Bills receivable were thus sent for discount by the manufacturing company as early as October, 1882 (if not earlier), and the method of supplying funds by sight drafts commenced apparently in 1884. By these sight drafts the sewing-machine company obtained the slight delay of time for raising the funds necessary for the payments made by the manufacturing company from its bank accounts in Newark. The notes sent to the manufacturing company, and by it credited on its books to the sewing-machine company on its current account, were in part the notes given by the purchasers of machines at the various offices of the sewing-machine company, but were to a large extent, especially in the latter years of the business, notes of its general agents in charge of the offices of the sewing-maohine company in the large cities. It was the custom of the sewing-machine company to take from these agents notes of the agents to the order of the company for an amount equal to about one-half or three-fifths of the machines or investment of the sewing-machine company at their offices. These agents' notes were, on their part, either entirely or to some extent, accommodation notes, and were payable to the sewing-machine company at its office in New York, and were taken in order that the sewing-machine company might use them for raising funds by discount. Every month notes were received from the agents to renew the notes coming due during that month for a similar amount, and these notes were discounted by the sewing-machine company in New York banks, or indorsed over to the manufacturing company for discount on its credit in banks at Newark. The use of the credit of the manufacturing company by means of the sight drafts and discount of bills receivable increased apparently after 1885 as the production of machines diminished, and these discounts, beginning with the North Ward Bank in 1884, were also continued in other Newark banks,—the Essex County National, the National Newark Banking Company, the City National Bank. The total amount of such notes discounted by the manufacturing company in the North Ward Bank of Newark alone from November, 1884, to July, 1890, was over $235,000, and the discounts of such notes in all the Newark banks from January 1, 1888, up to the same date, was $839,814.04, and the amount under discount on July 10, 1890, and credited to the manufacturing company's account in the Newark banks, was over $100,000. In its accounts with the sewing-machine company the manufacturing company credited the sewing-machine company with the drafts and notes received, crediting them generally on its accounts, and not applying the proceeds of either as specially made for any particular payments. The principal disbursements of the manufacturing company was its pay-roll account, which averaged $10,000 to $12,000 per week; and the amount received from discount of notes was not, during the period, equal to the amount paid out for pay roll. The statements of Mr. Lewis, complainant's expert accountant, shows that from January, 1888, to June 30, 1890, the total pay roll was over $1,300,000, and the discounts in all of the Newark banks about $840,000. But the payments from its bank accounts by the manufacturing company up to July, 1890, were not confined to payments for pay rolls, and included, to a large amount, other payments properly chargeable to the cost of manufacturing, including materials. Thus, of the entire deposits of over $1,200,000 in the North Ward Bank up to July 10, 1890, nearly $400,000 was paid out by checks on the manufacturing company account for materials, and about $150,000 was transferred to the credit of the sewing-machine company in other banks. And of the total checks given on this account in the North Ward Bank, numbering 2,700 and upwards, over 800 have been produced, which were signed between November, 1884, and July 10, 1890, by F. A. Booth, treasurer, who was during all the time the treasurer of the sewing-machine company, and not an officer of the manufacturing company. All of these payments for materials and transfers so made by the manufacturing company were charged to the sewing-machine company, as well as thetotal shipments of machines, etc., for each month, and the sewing-machine company was credited on the other hand with the drafts as cash, and with the bills receivable (less the discounts), and with the total purchases of materials for the month paid by the sewing-machine company. The balances of the account were stated monthly in the books, and the accounts carried along without any settlement or adjustment between the companies until December 31, 1885, at which time, on its own books, the manufacturing company stood debtor to the sewing-machine company in the amount of nearly $400,000 on this current account. But, on the other hand, the merchandise, stock, and other accounts of the manufacturing company for the same period showed a profit up to this date of over $600,000. The sewing-machine company, under whose direction the general books of both companies were kept, had on its books up to this date, December 31, 1885, treated itself as entitled to the entire profit made from the whole business of manufacture as well as of sale, and the profits were carried to the credit of its Domestic Manufacturing Company stock, and no dividends were paid on the manufacturing company stock" up to this date. In point of fact $2,000 of the manufacturing company stock was owned by Eli J. Blake and others individually, and either for this reason, or for other reasons not disclosed, the question of adjustment of the accounts of the companies was brought formally before both boards. Eli J. Blake, James Blake, Robert Blake, J. W. Blake, and John Dane, Jr., were the five directors of the manufacturing company, and Eli J. Blake and James Blake were also then members of the sewing-machine company board, and it was then agreed that the accounts between the companies should be settled and adjusted up to that date by the sewing-machine company paying to the manufacturing company (as soon as the proceeds in its possession justified) a sum equal to 10 per cent. per annum on the shares of the manufacturing company stock in full settlement to that date, and that all profits of the manufacturing company to that date be assigned to the sewing-machine company. The settlement was accordingly made of the amounts due to the individual stockholders of the manufacturing company, $2,000 paid in cash, and the balance of the dividends for the five years ending 1885, $98,000, as well as the entire profits of the manufacturing company appearing on its books, transferred by appropriate entries to the credit of the sewing-machine company. A similar arrangement or adjustment crediting a 10 per cent. dividend ($20,000) was made yearly thereafter for the business of the years 1880, 1887, 1888. 1889, without any other adjustment or settlement. Of this $20,000, $19,800 was credited to the account of the sewing-machine company, which also received (on the books) all the profits in addition to which the manufacturing company was entitled.

The resolutions first adopted by both companies in reference to this adjustment are important as indicating the nature of the relations between the companies as then recognized by the officers and managers of each. They recite, among other things, that each company had to some extent acted as agent for the other, and to an extent that prevented a ready and convenient determination of the profits to which they were respectively entitled. The foregoing statement shows the general lines of connection between the two companies up to July, 1890, and the next subject to be noted is the course of business up to this date with special reference to the questions now involved, viz. the officers or agents of the two companies connected with the raising of money by loans, and the practical method adopted for this purpose. The date of July, 1890, is fixed as the important one, for the reason that at that time the control of the sewing-machine company passed from Eli J. Blake by sale of the stock owned or controlled by him (being a majority of all its shares) to David Blake, and one of the main issues between the parties is whether the authority in reference to indorsement for the manufacturing company, which previous to July, 1890, bad been given to or exercised by Robert Blake, the secretary of the company, was after that date conferred upon or properly exercised by David Blake as treasurer. The general management of the sewing-machine company was by its by-laws conferred upon the president and directors, and from June, 1877, Mr. Eli J. Blake, owning or controlling a majority of the stock, had been the president. Previous to that time his brother David Blake, the owner of a large number (over 750) of shares, had been the president. From 1877 until 1890, Eli J. Blake and James Blake were two of the five directors of the Ohio company, and Robert Blake was its secretary from 1879 to 1883, when James Blake became secretary. John Dane, Jr., was also a member of this board from 1879 to 1882, and was treasurer of the company from June, 1879, to January, 1882, when Mr. F. A. Booth was elected, and held the office until the failure of the company. The meetings of the directors of the sewing-machine company were by their by-laws to be held monthly at the New York office, and such monthly meetings appear by the minutes to have been held quite regularly, especially after 1885. On the other hand, the directors of the manufacturing company, although also required by the by-laws-to meet regularly at the New York office, appear by their minutes to have had no meetings until December 30, 1885, with the exception of the meeting on April 27, 1881, above referred to, when the active stock was provided for, and a meeting for an election of officers in March, 1885. At the meeting of December 30, 1885, the resolutions above referred to, relating to a settlement of the accounts between the companies, were passed, and then, after a meeting on January 5, 1886, at which no business seems to have been transacted, ameeting was held in February, 1887, to adjust the accounts between the companies on the same basis, and on March 21, 1888, a meeting for the same purpose and for the election of officers. One other meeting, called "a regular monthly meeting," was held at New York office April 4, 1888, but no action was taken, and on March 13, 1889, at a stockholders' meeting, the provision of the by-laws for monthly meetings of directors was repealed, and a by-law adopted that they would meet at the call of the president (or, in his absence, of any two of the board) whenever it might be thought expedient or necessary, either at the office in Newark or at the office of the sewing-machine company in New York. From this date up to July 14, 1890, the only two meetings of the directors which are recorded on the minutes were on March 14, 1889, and March 12, 1890, for the purpose of passing resolutions relating to the settlement of the business of the previous years with the sewing-machine company.

During the whole period when Eli J. Blake was in control as president of both companies and member of both boards, the general course or policy of business at the factory was controlled at the New York office of the sewing-machine company, and by those who controlled the latter company. The general responsibility for supplying the funds to meet the expenses of manufacturing, including the purchase of materials and supplies and the pay roll, was imposed upon or assumed by the treasurer of the sewing-machine company, who also had charge of the commercial paper of the company, and of the sending of the paper to the manufacturing company for discount. He took charge in this way with the knowledge and sanction of the president, Eli J. Blake, who had general charge and supervision of the business, and was familiar with its course, and who says that this course of sending paper to the manufacturing company for discount was adopted when it was more convenient for the sewing-machine company to furnish paper than money. James Blake, also a director of the sewing-machine company at this time, says that this line of discount of the manufacturing company was to relieve the finances of the sewing-machine company, and to cancel part of the indebtedness of the latter to the former. It was always necessary for the treasurer of the sewing-machine company to provide cash in Newark for the pay roll of the manufacturing company, and from the latter office a statement of the amount necessary for the pay roll was usually sent each week to the New York office. The amount of notes sent to the manufacturing company for discount was, as above stated, considerably less than the amount required for the pay roll, but it was not sufficient usually to pay the current account. These notes, indorsed by the sewing-machine company, were sent to the manufacturing company at Newark, to Robert Blake, the superintendent or manager of the manufacturing department, and who was also secretary of the manufacturing company, as well as one of its directors. He indorsed the notes as secretary of the manufacturing company, and had the proceeds of discount placed to their credit on the account of the Newark banks. He also, as secretary of the manufacturing company, drew checks on these accounts for the pay roll, and his name as secretary was left with the Newark banks as the person authorized to sign. The extent of these transactions in the Newark banks was very large, running into millions of dollars, during the time Robert Blake indorsed the notes. This indorsement of the notes by Robert Blake for discount was known to all the directors of the manufacturing company, as they now testify, but no formal authority was ever given to him either by the by-laws or resolution, and, so far as his agency to indorse for the manufacturing company was exercised, it was confined to an indorsement for discount in the Newark banks of the commercial paper of the sewing-machine company, received by the manufacturing company for credit to its account with that company. But while the amount of commercial paper so received by the manufacturing company was, so far as the sewing-machine company was concerned, regulated either wholly or to some extent by the requirements for the pay roll, there is nothing in the accounts of the companies between themselves or on the accounts of the manufacturing company itself to show that the amounts procured from the discounts were specially appropriated to the pay rolls, or were otherwise treated than as its general funds or assets, or to show that Robert Blake in fact indorsed and discounted paper for the sole purpose of meeting the pay roll, and that either as to the banks or the sewing-machine company his indorsements were limited to cases where the funds were so applied. As to the extent of the agency of Robert Blake for indorsement, my conclusion is that the directors of the manufacturing company permitted him to indorse for discount to its credit the paper appearing to be the regular business or commercial paper of the sewing-machine company, which was by this company, in the course of business, credited to its current account with the manufacturing company, and sent to him for discount. It also appears from the evidence, I think, that this course of transferring paper in the regular business, instead of cash, to the credit of the current account, was, up to July, 1890, adopted for the purpose of relieving the sewing-machine company from the burden of raising all the funds for manufacturing upon its own credit, and to obtain to some extent the benefit of the credit of the manufacturing company by its discounts. For some time previous to July, 1890, the financial condition of the sewing-machine company had become very much embarrassed, and at that time, in addition to its bonded indebtedness of $300,000, and the mortgage debt of $75,000 on the property atNewark, it was indebted to New York banks for loans and discounts alone to the extent of $420,000, of which amount Eli J. Blake had personally indorsed for $100,000. The bonds which had been issued in 1875, and were due in 1875, were in 1880 held almost entirely by Eli J. Blake, who, in July, 1880, transferred them to George Chapin, his brother-in-law, as trustee for Eliza A. Blake, his wife. In 1880 the time for payment was extended to 1885, with the consent of the bondholders, and in 1884 were further extended by like consent to December 1, 1895, with the stipulation that interest should be paid quarterly, and that on 30 days' default in payment of interest the bonds should, at the option of the holders, become due and payable. Default bad been made in the payment of the interest on the bonds due September 1, 1889, December 1, 1889, March 1, 1890, and July 1, 1890, so that in July, 1890, the bonds were all due and payable at the option of the bondholders. The amount due from the sewing-machine company for merchandise and other debts at this date does not appear. Litigation was also pending between David Blake and others of the minority of stockholders against Eli J. Blake and the other directors relating to the management of the company, and the urgency of the banks for the settlement of their loans made the appointment of a receiver imminent. During the spring of 1890 efforts had been made by Eli J. Blake and David Blake, acting with John D. Harrison, to dispose of the entire capital stock and property of the sewing-machine company to an English syndicate, and they gave an option to purchase, based on their ownership or control of the entire stock, for $1,250,000. The property agreed to be conveyed, as appears by the schedule attached to the option, included as property of the sewing-machine company all of the property and assets of the manufacturing company, and the agreement contained a guaranty that those were the property of the sewing-machine company. This option was outstanding on July 7, 1890, when the paper of the sewing-machine company had gone to protest, and the banks became urgent for the settlement of their claims, and threatened application for a receiver. Under this pressure, David Blake having made, as he supposed, arrangements for financial assistance to the extent of $200,000, in case he controlled the management of the company, and Ell J. Blake's credit being apparently exhausted, an agreement was made on July 7, 1890, between Eli J. Blake and David Blake, by which Eli J. Blake agreed to sell to David 1,141 shares of the sewing-machine company stock for $370,825, payable by installments, with interest after January 1, 1891, $5,000 per month till July, 1891, $10,000 monthly till January, 1892, $15,000 monthly till July, 1892, and from that date $20,000 monthly until all were paid, and on 30 days' default in payment of any of the notes the whole became at once due and payable at the option of E. J. Blake. To secure the payment of 1,500 shares of the stock were to be deposited by David Blake with Eli J. Blake as collateral security. It was also provided by the agreement that the $301,000 bonds of the sewing-machine company should be secured by a mortgage upon the real and personal property of the manufacturing company at Newark. The bonds were in the agreement described as "the bonds ($301,000) of the said company now held by E. J. Blake." The agreement contains no provision whatever relating to the manufacturing company stock held by Eli J. Blake individually or as joint trustee with Dane under the agreement of April 21, 1891, to secure the bonds. This may have been due to the fact that the agreement secured the bonds by a mortgage lien on the actual property of both companies, instead of a pledge on the stock of one company, which would be subject to its debts, and by this arrangement the security was much improved. It was further provided that, in case David Blake should be unable to carry out the purchase, there should be no responsibility for loss on his part, other than the forfeiture of the collateral stock. This scheme of purchase was, in the then situation, dependent on the attitude of the banks, and on July 9, 1890, another agreement was made, to which the parties were: First, Eli J. Blake, individually and as trustee of the sewing-machine company, holding title to its lands in Newark; second, David Blake; third, the sewing-machine company; fourth, the manufacturing company; and, fifth, the Third National Bank of New York, a creditor to the extent of $260,000, being the principal bank creditor. This agreement embraced a general scheme for the extension and security of the outstanding bonded and loan indebtedness of the sewing-machine company, and a provision for the future conduct of the business and financial affairs of both companies. In addition to being executed by all of the parties named, it was also consented to by stockholders of the sewing-machine company representing 1,635 out of the total of 1,850 shares outstanding, and by 1,998 out of the total 2,000 shares of the manufacturing company. John Dane, Jr., and Eli J. Blake, signed as trustees and holders of the 1,980 shares of the manufacturing company stock, and Eli J. Blake as owning 17 shares, and John Dane 1 share. This agreement of July 9, 1890, recited the agreement of July 7, 1890, between Eli J. and David Blake; the indebtedness of the sewing-machine company to the banks of $420,000, of which Eli J. Blake had indorsed $100,000; the indebtedness to George Chapin, trustee, of $50,000, which Eli J. Blake had also indorsed; the inability of the sewing-machine company to pay its indebtedness as it matured, and that in the interest of all parties an extension was desirable; and in reference to the relations between the two companies it further recited that the property belonging to the manufacturing company was in reality held by it as trustee for the benefitof the sewing-machine company, and consisted of machinery and other personal property connected with real estate held by Eli J. Blake in his name as trustee for the sewing-machine company. As to the extension and security of the debts, the agreement then provided that the sewing-machine company should give its note for $150,000, payable January 15, 1801, to one John W. Sterling as trustee, in exchange of notes for the same amount to be surrendered by the Third National Bank, the payment of this note to be secured by a mortgage on the real estate held by Eli J. Blake as trustee, subject to an existing $75,000 mortgage. Provisions for extension of this note for six months further were made, and that the note and mortgage were to be held by the bank as additional security for the indebtedness of the sewing-machine company. As to the bonds and the indorsements of Eli J. Blake, it was provided that the manufacturing company should execute a mortgage to Eli J. Blake, John W. Sterling, and a third person to be nominated by Sterling, as trustees for their payment, and that as additional security for these Eli J. Blake should execute a further mortgage on the real estate subject to the $75,000 and $150,000 mortgages, and it was agreed that upon the execution and delivery of the said chattel and real-estate mortgages the 1,980 shares of manufacturing company stock should be transferred by the trustees or their successors to the sewing-machine company, and the agreement of July 7, 1890, as to the mortgage to be given, was to be considered modified; this modification being that, instead of being a prior mortgage on the property of both companies, it was the prior lien only on the personal property of the manufacturing company, and a subsequent lien on the real estate of the sewing-machine company.

The pressing indebtedness being thus provided for, the future conduct of the financial affairs of both the companies was arranged as follows: It was agreed that the "financial affairs of the two companies shall be subject to the supervision and control of an advisory committee," to be appointed one by each of; three banks named, "which committee shall have power to supervise and control all the financial operations and transactions of the said two Domestic Companies," and that "the said committee shall generally direct and control the financial policy of each of the said companies." To insure the consent of the stockholders to this arrangement, it was provided that all of the stock issued to David Blake pursuant to the agreement between him and Eli J. Blake, should be issued subject to this agreement, and that a note thereof should be issued upon all certificates thereafter issued by either company, and that the holders of the certificates should, as often as required during the continuance of the agreement, vote for such persons as directors of the said companies as the advisory committee might nominate. For the protection of stock holders during this control of the advisory committee it was provided that any stockholder or creditor of either of the companies might call the attention of such committee to any supposed irregularities or mismanagement, and the committee should thereupon have full power to direct the action of such company in relation thereto, and any action or line of conduct in relation to any such matters should be carried out by such company. And a further special clause was added (section 5) that Eli J. Blake should have full and free access to the books and factories of the two companies for the purpose of obtaining any reasonable information which might be necessary to protect his interests as a creditor of the said companies, or either of them. At a special meeting of the stockholders of the sewing-machine company held on July 11, 1890, at which were present either in person or by proxy all the shareholders of the company, the existing board of directors, including Eli J. Blake and James Blake, retired, and a new board, consisting of nine members, was elected, including David Blake, John Dane, Jr., and John D. Harrison. The by-laws of the company were amended so as to constitute the president and three other members of the board, together representing a majority of the stock, to be selected by the president as an executive committee, whose duty it should be to conduct all the affairs of the company, and control the action of all its officers and employes, and they were authorized to vacate the offices, and fill the same in their discretion. At the meeting of the new board, John Dane, Jr., was elected president, James Blake secretary, and David Blake treasurer; the agreement of July 9, 1890, was ratified and approved; and David Blake, John D. Harrison, and H. A. V. Post were appointed members of the executive committee. There was no formal meeting of the stockholders of the manufacturing company held to carry out the agreement, but on July 14, 1890, a meeting of the directors was held, at which all of the directors were present, including James Blake, Robert Blake, and James W. Blake, who had not signed the consent to the agreement of July 9th, as well as Ell J. Blake and John Dane, Jr., who had signed. At this meeting the execution of the chattel mortgage upon the property of the company, dated July 10, 1890, and which was drawn to carry out the agreement, was ratified by all the stockholders of the company. E. J. Blake resigned as president, John Dane as treasurer, and John Dane was elected president, and David Blake treasurer, being the same offices to which they had been elected in the sewing-machine company. No change was made at this time in the board of directors of the manufacturing company, nor until its annual meeting in March, 1891. The principal object of the meeting seems to have been to retire Eli J. Blake as president, and to elect David Blake as treasurer; and David Blake says that by the agreement with Eli J. Blake, made in orderto carry out the agreements of July 7th and July 9th, he (David) was to be elected treasurer of the manufacturing company in order to carry its accounts at the banks. Eli J. Blake denies this to have been the object, but states, however, that the election as treasurer was made at David's request. The other directors (except Robert, who does not recall anything about it) also understood that this election of David Blake was at the latter's request, and they all state that with the change in the ownership of the stock of the sewing-machine company it was expected that the active connection of all the other brothers (Robert, James, and James W.) with the companies would cease, and their salaried positions would be vacated. David's statement as to the object of his election as treasurer of the manufacturing company is further supplemented by his statement that immediately after his election he made an appointment with Robert Blake, who had been carrying the accounts as secretary of the company, to visit the Newark banks for the purpose of being introduced by him (Robert) as the treasurer, who was to carry the accounts in future; and that within a day or two he did so visit the Newark banks with Robert, was so introduced by him, and left his signature as treasurer of the company with the banks, to take the place of Robert Blake's as secretary. Robert Blake says he has no recollection of making any such arrangement with David, or of going to the banks with him; but David's statement is corroborated by Mr. Rockwood, the cashier of the Newark Banking Company, one of the banks in which an account had been running since 1887, and who on July 15, 1890, made a memorandum in the signature book that David Blake, as treasurer, was introduced by Robert Blake as the officer to sign for the manufacturing company. In the Essex County National Bank, where the account has been running since 1887, Robert Blake, secretary, indorsing, the signature of David Blake was left before July 29, 1890, but the circumstances are not shown. At the North Ward Bank, in which the account ran from 1884, David Blake, as treasurer, was substituted for Robert Blake; but the officer who had charge of the entries in 1890 is dead, and the circumstances of the change are not proved. These seem to be the banks in which the accounts of the manufacturing company were then standing, and from this date all the notes discounted in these banks for the credit of these accounts were indorsed by David Blake as treasurer, and none by Robert Blake as secretary. Robert was taken ill a few days after July 14, 1890, and never afterwards was employed in the manufacturing company, his previous position as superintendent of the factory being taken by Mr. Davis, who had been his assistant. The general direction of the business of both companies hereafter, so far as related to the manufacturing as well as the sale of the machines, was directed by the sewing-machine company board or officers, David having the immediate practical management under the executive committee, who met regularly, and to whom he reported. In relation to the financial control or supervision, which had been provided for by the management of July 11, 1890, an advisory committee was appointed, which, from November, 1890, was composed of John W. Sterling, Henry V. A. Post, and Caleb B. Knevals, all of the members, however, being practically nominated by the Third National Bank, or in its interest. The two latter named members (Post and Knevals) were elected members of the board of the sewing-machine company at about the same time. The mortgage for $150,000 to Sterling as trustee for the Third National Bank was duly executed and recorded, but the other mortgages, although executed, were not recorded. This failure to record was in pursuance of an agreement made between the parties at the time, in order that the credit of the companies might not be impaired, David Blake stating that he would not be able to carry through the transaction if these mortgages were recorded; and it was agreed that they should be retained from record until necessary in order to protect the debts they were given to secure, of which necessity it was understood that notice should be given. And Eli J. Blake, who held the actual custody of the 1,980 shares of manufacturing company stock, did not, at the time of the execution of the mortgages, surrender this stock, but continued to hold it, and still holds it. David Blake failed to procure financial assistance to the extent anticipated, and reported this failure to the board of the sewing-machine company in the fall of 1890; and the fact that he had not put in new capital was also known by this time to Eli J. Blake and to John Dane, Jr., the president of both companies, two of the members of the manufacturing company board. James Blake and J. Woodruff Blake, two additional members of the board, also heard (probably from E. J. Blake) of this failure of David to put in any new capital, and John D. Harrison, who, together with these four, constituted from March, 1891, the manufacturing company board of directors, also knew that no new capital had been put in. From the time of the change in management the raising of funds to carry on the business in the absence of new capital was therefore necessarily carried on as before, viz. by the discount of the paper of the sewing-machine company, representing its assets and accounts in the hands of its selling agents, this discount being on its own account in New York and also in Newark banks, and also by indorsing the notes over to the manufacturing company on account of its indebtedness or on current account as before, and charging the manufacturing company with these notes less the discount. Nor did the organization of the sewing-machine company (of New Jersey) in April, 1891, and the transfer to it by the Ohio company of all its assets at that time, makeany change in the manner of conducting the; business with the manufacturing company, or any change in its books of account; for the transfer by the. Ohio sewing-machine company was ratified in May, 1801, by the unanimous vote of its stockholders, and the New Jersey company, under one of the provisions of the agreement, was allowed to adopt the same name with the Ohio company for the purpose of continuing the business, and the accounts with the banks and with dealers were continued as if no change had been made. The current account of the sewing-machine company in the manufacturing company's ledger at and after this period of transfer continues on the book as the same account of the "Domestic Sewing-Machine Company." In the Newark banks the accounts of the manufacturing company were continued after the organization of the New Jersey company in 1891, until February, 1892, when the last account closed, and the total amount of discounts in these banks from July 11, 1890, when David Blake commenced indorsing as treasurer, to February, 1892, was over $425,000. At the latter date the manufacturing company closed its last accounts in the North Ward Bank of Newark, and the Newark City Bank, and the Essex County Bank, but the sewing-machine company still retained accounts in Newark banks. The books of the manufacturing company during all this time from July 14, 1890, showed that these discounts of notes passed over by the sewing-machine company were being made. The account current, especially, balanced every month, showed these credits for the notes to the sewing-machine company, and also the) counter charges for payments made to or on account of the sewing-machine company; and the examination of this single book, and any month of it, would have disclosed the continuance of the method adopted previously to July, 1890, of helping out the sewing-machine company's finances, and of fulfilling its obligation to provide money for the manufacturing company by turning over its agents' notes for discount on the credit of the manufacturing company. From March, 1892, to August, 1892, inclusive, no discounts seem to have been made, but in September, 1892, the manufacturing company opened an account with the Phœnix National Bank in New York City, and on September 20, 1892, discounted for its credit nine of these agents' notes, amounting to over $25,000, indorsed by the sewing-machine company and by the manufacturing company, both by David Blake as treasurer. On September 22, 1892, it discounted 8 of the notes similarly indorsed, amounting to about $26,000. At the time of this discount by the Garfield Bank, David Blake was introduced as the treasurer and officer authorized to indorse, by Mr. Knevals, who was then a member of the advisory committee of the Ohio company, originally appointed in the fall of 1890, and was also a director of the New Jersey company. These indorsements and discounts were followed during the fall of 1892 by like discounts at the Phoenix Bank, October 10, 1892, of 4 notes for over $13,000, on December 5th of 12 notes for $38,200, and in the Garfield Bank of 10 notes on December 21st for about $29,000; making up to January 1, 1893, a total of 53 notes. These notes and discounts were all regularly entered in the manufacturing company books, and by it credited in the current account to the sewing-machine company. On January 7, 1893, the 8 notes discounted at the Phoenix Bank in September, 1892, were paid by the proceeds of discount of 14 similar notes amounting to over $46,000; and in January, 1893, similar payments and new discounts were made at the Garfield Bank, and the account was continued in the same manner with these banks up to the failure of the companies.

The first discount of the disputed notes made by the Broadway Bank was on April 12, 1893, at which time it discounted 4 notes for about $11,500, and at the time of this discount the notes of this character which had been indorsed to the New York banks, and paid by new discounts, were 23 notes at the Phoenix Bank and 9 notes at the Garfield. Between April 21 and May 19, 1893, 18 other notes were discounted by the Garfield. On April 19, 1893, when the National Park Bank commenced discounting, the notes of this character which had been made to the above-named New York banks, amounted altogether to 85 notes, amounting to $240,000, of which 32 notes, amounting to $103,000, had been paid, mainly by the discount of other notes. The Chemical Bank was the last of the banks to discount the notes for the manufacturing company on May 1, 1893, at which time the total of like indorsements which had been made in the New York banks was 96 notes, amounting to over $300,000, of which 37, amounting to over $110,000, had been paid mainly, if not entirely, by other discounts. At the time of its second and last discount (May 19, 1893) 23 additional notes, amounting to $74,000, had been previously indorsed and discounted at other banks in New York City. And when the Cooperstown Bank purchased its notes on the market on May 2, 1893, the number of such indorsed notes discounted by banks and passed to the credit of the manufacturing company was about 100, aggregating over $310,000. These detailed statements of the situation of each bank seem to be necessary for the reason that, if a general agency to indorse paper of this character can be established by proof of a multitude of instances, in which the agency has been in fact exercised, then those of the banks whose discounts or purchases were later in time are in a position of advantage as to nature and character of proof. During all the time these discounts by David Blake's indorsement were made the entries of the notes were made in the current account of the manufacturing company, which gave the sewing-machine company credit for them, the entries generally or often stating specially the banks in which the creditsfor the discounts were obtained. During the whole of the time from March 11, 1891, up to the failure, no meeting of the board of directors of the manufacturing company was held, nor does any one of the five directors seem to have given the slightest attention to the business of the manufacturing company as a business distinct from that of the sewing-machine company, or to have examined its books. John Dane, the president and director, and John D. Harrison, secretary and director, were both directors of the sewing-machine company (of New Jersey), and the latter was its president. The last meeting of the directors of the manufacturing company was on March 11, 1891, after their election, and the only business transacted besides the election of the officers, Dane president, David Blake treasurer, and Harrison secretary, was the adoption of a resolution requesting the directors to settle with the sewing-machine company for the payment of such dividends as might be due the active stockholders of the manufacturing company upon its business for the year 1890 upon the basis of settlements in the past years. From this date (March 11, 1891) there was no meeting either of the stockholders or directors of the company until after the appointment of a receiver, in June, 1893, when a directors' meeting was called by the president, John Dane, Jr., apparently for the sole purpose of repudiating the action of David Blake in indorsing for the manufacturing company. John D. Harrison and John Dane, Jr., two of the directors of the manufacturing company, were directors of the sewing-machine company (of New Jersey) from about the time of its organization, and had direct access to all of the books of the manufacturing company as well as of the sewing-machine company, in which these accounts appeared; and Eli J. Blake, the president of the manufacturing company, and the owner of nearly all of its "active" stock, had an office in the sewing-machine company building, and does not seem to have once examined or asked to see the accounts of the manufacturing company, either under his right as president or director of that company or under the special clause for his protection inserted in the agreement of July 7, 1890. The two other directors of the manufacturing company, James Blake and J. Woodruff Blake, paid no attention to the business of either company after David Blake's control commenced. All of the five directors now testify that they had no knowledge of David's indorsements in any capacity, either in the Newark or New York banks, until after the failure of the companies. But, accepting these statements of their actual ignorance of the indorsements as true, I think there can be no doubt, under the evidence of the cause, that as directors of the manufacturing company they ought to have known it, and might have ascertained it by examination and inquiries of the easiest and simplest character. The account current of the manufacturing company with the sewing-machine company as I have above explained, which has always been kept between the companies, and was continued after David Blake took control, showed the sources from which the manufacturing company received the payment for its shipments, and that this was constantly received in notes which were discounted for the credit of the manufacturing company. This was notice direct that these notes of the company were being discounted for its benefit, and there could have been no difficulty in ascertaining what person or officer was the indorser and discounter. Whether directors are, in cases like this, chargeable with notices of matters appearing on their books which are not readily apparent, and could only be arrived at after thorough, and perhaps expert, examination, it is not necessary to determine; but in this case the information was easily accessible, and it was simply information, from the current account, that the business of indorsement of the paper received from the sewing-machine company on its accounts was continued after David Blake took charge in the same manner, and in entries of the same character, which had appeared on the books under the previous management. The explanation made by all of the directors for their absolute failure to look after the business of the manufacturing company is that they understood that David Blake was to put in $200,000 new capital, and that this capital would relieve the manufacturing company from Incurring any obligations of this character. David Blake denies any such agreement but, even admitting that the directors so understood it, and therefore did not discharge their duties as directors, this excuse evidently admits the failure to look after the business, and only explains the inattention, without legally excusing it; and it does not prevent the creditors, and the company through them, from being charged with knowledge of facts, if such knowledge is to be imputed by reason of the duty of the directors to know the facts. And it should further be noticed in reference to this explanation that it appears that all the directors (or at least E. J. Blake, Harrison, and Dane) knew as early as the fall of 1890 that David Blake had not put in, up to that time, any such new capital; and from this time, which was long previous to the discount of the notes now in question, the explanation certainly could have no operation as an excuse either to the directors or the company. Eli J. Blake, moreover, had a large personal interest in allowing the management of the sewing-machine company's affairs, and with it the manufacturing company's business, to continue with as little friction and interference as possible, in order that the new management in its continuance of the business might relieve him from the $150,000 indorsement of its notes, or perhaps a much larger indorsement (for he says it was over $300,000), and more especially that David Blake might be able to meet his notes for the stock ($370,000), payment of which was to commence in January, 1891, and to continue until about April, 1893, when all were to be paid.

The sewing-machine company, under the new management, although not able to secure new capital or to fund its indebtedness, as was attempted, nevertheless was able to carry the large existing indebtedness, and apparently to make profits for dividends, which were in 1891 and 1892 declared and paid over by the New Jersey company to the Ohio company (the holders of the New Jersey company stock) for division among the stockholders of the Ohio company. By an agreement made in 1875 between the Ohio company and its bondholders, the latter company could not, so long as these bonds were outstanding, declare a dividend except by consent of two-thirds of the bondholders, and on the condition that the dividends declared on David Blake's stock, which Eli J. Blake held as collateral (at first 1,500 shares and then 1,200 of the total 1,850), should be paid to Eli J. Blake on account of the notes, instead of to David Blake, a written consent to the declaration of dividends was given by Eli J. Blake and George Chapin, the trustee, who held the bonds for the complainants. These dividends were regularly paid to Eli J. Blake on account of these notes up to the dividend declared about July, 1892, after which time the dividends on David's stock seem to have been retained on the claim of David that he was not liable on the notes. No dividends, so far as appears, had been paid on the Ohio sewing-machine company stock for some time previous to the transfer. The notes of David Blake given for the purchase were paid to Eli J. Blake to the amount of $200,000 (being the notes due up to July 1, 1892), after the change in management. The extent to which he has been relieved from the indorsements of $150,000 outstanding in July, 1890, does not clearly appear, but from a memorandum made by him on April 9, 1891, it would seem that the amount then secured by the stock had been reduced to $59,700. And while Eli J. Blake, who held the manufacturing company stock as trustee for these indorsements and the bonds, failed to comply with the request of David Blake and of the sewing-machine company to transfer the stock, yet he did not in any capacity oppose the reorganization of the company proposed in 1891, and professed in a letter of June 4, 1891, replying to a request to make a deed to the New Jersey company, that he desired to comply with the wishes of the managers of the proposed reorganization so far as it could be done safely. From the time of the change in management efforts were made from time to time to reorganize the sewing-machine company on a basis of paying off the existing indebtedness, including, the bonds and the debts secured by Eli J. Blake's indorsements, and both Dane and Eli J. Blake knew of these efforts. Eli J. Blake, as president of the manufacturing company, had, as such officer and director, the right at any time to inspect all its books, and the sole right by its by-laws to call its directors together. He was, both individually and as trustee, holding its stock inpledge for the benefit of his wife and family and also of himself, very largely interested in the conduct of its business; and under the whole circumstances of the case his ignorance that the credit of the manufacturing company was used in continuing its business, and, if so, by whom it was used, would seem to have been the result of gross negligence, if it was not the result of an intentional omission, to make proper inquiries.

I find, therefore, as facts in the case, that from July, 1890, to the failure of the manufacturing company, David Blake, as its treasurer, in fact acted as the agent of the company in the indorsement and discount for its own credit of notes received by it from the sewing-machine company to the credit of its current accounts with that company, and that these indorsements and discounts by David Blake were made in such a multitude of instances and to such an extent as to be sufficient to make him the agent of the company for the purpose of indorsing and discounting paper of this character, if an agency for such purpose could be constituted by the directors negligently permitting the agent to hold himself out to the world or public. I also find, for the reasons above given, that the directors of the company did not, in fact, know of these indorsements in the Newark banks or the New York banks, which are relied on as establishing this agency to indorse, but that they might have known of them, and by the exercise of a slight degree of diligence. The further relevant fact to be noted is that it does not appear that the New York banks, or any of them, knew at the time of making their discounts or purchasing the notes that David Blake had been previously making the indorsements in the Newark banks, nor does it appear that those of the New York banks who made discounts or purchases subsequent to the others knew of the previous indorsements or discounts to the other New York banks. Upon these facts, the question of law arises whether the agency of David Blake to indorse is sufficiently proved by its exercise in the multitude of instances before the indorsements in question, which should have been known to the directors, and the company is therefore liable, or whether actual knowledge by the directors of the previous indorsements is necessary in order that the company may be bound by their holding out the agent to the public, and whether it must also appear that the banks receiving the notes in question took them on the faith of such previous indorsements, and relying on them. Counsel for the banks on this branch of the case contend that the agency to indorse was itself here created by the continued exercise of the authority to indorse, which should have been known to the directors; that, as to the public, or those dealing with the company in similar transactions, the proof that the agent has in a multitude of instances exercised the power creates a general agency for that purpose as against the principal, where the principaleither knows or ought to have known that the power is being exercised. It is contended, on the other hand, by the complainants, that where, as here, no actual authority to indorse for the company was given, and the liability of the company is based upon the apparent or implied authority which arises from a holding out of the agent to the public, then the liability does not arise unless, in the first place, the directors had actual knowledge that the agent was so holding himself out, and unless, secondly, the indorsements and discounts in question were made by the banks in reliance upon such holding out or previous indorsements. These contentions are based upon the view that the liability in such cases of ostensible authority rests upon the theory of ratification, which admittedly presupposes and requires previous knowledge on the part of the directors; and also, in addition, upon that of estoppel, which also requires knowledge of the course of dealing upon the part of the creditors, and reliance upon the course of dealing. Very elaborate and able arguments have been submitted to sustain these views, with a citation and discussion of many cases involving the question of agency, in some of which questions of ratification and estoppel were also involved. I shall not review or recite these cases or those cited by counsel for the banks in detail, but state the conclusions I reach after an examination of these and other authorities which I have examined. The precise question now involved, as I understand the case, relates to the effect against the company of an agent's holding himself out to the public as authorized to indorse for discount and for the company's credit the business paper of the company without the directors' actual knowledge, but when they ought to have known of the agent's discounting for their credit; and the point to be resolved is whether the exercise of the authority under such circumstances creates the power as to the public, or whether the power is only created as against the company by reason also of the actual knowledge of the directors, and of the actual reliance upon the previous holding out to the public by the person dealing with the agent. The solution of the question depends, in my judgment, upon the application of principles relating to the law of agency, which are now too firmly settled to be called in question. In the first place, a distinction between special and general agents is firmly settled in the law, which has also recognized general agencies, either to transact a business or to perform a particular act or class of acts for the principal. And in reference to the creation of these general agencies, either for a particular class of acts or the transaction of a business, the principle established is that such general agencies are in fact created against the principal by reason of his conduct in permitting the agent to hold himself out to the public as having the authority. In Whitehead v. Tuckett (1812) 15 East, 400, Lord Ellenborough, in reference to the distinction between a particular and a general authority (for a particular class of acts, as to sell sugar), says (page 408) "that a general authority does not import an unqualified authority, but that which is derived from a multitude of instances." This distinction between a general and special agency or authority, as thus stated by Lord Ellenborough, has been adopted by other cases and authorities, and is the distinction which Mr. Justice Story (Story, Ag. § 19) gives as the distinction generally recognized. In Smith v. McGuire (1858) 3 Hurl. & N. 554, the question of the effect towards the public of permitting another to act as a general agent was directly involved, and the particular question involved was whether the agent, who in the transaction of the business of the principal had constantly chartered vessels, but always or usually under special instructions, had a right to charter a vessel without such instructions, so as to impose a liability upon the principal for not taking a cargo. Pollock, C. B., says (page 560): "I think that questions of this kind, whether arising on a charter party, a bill of exchange, or any other commercial instrument, or on a verbal contract, should be decided on this principle: Has the party who is charged with liability under the instrument or contract authorized and permitted the person who has professed to act as his agent to act in such a manner and to such an extent that, from what has occurred publicly, the public in general would have a right to reasonably conclude, and persons dealing with him would naturally draw the inference, that he was a general agent? If so, in my judgment, the principal is bound, although, as between him and the agent, he takes care on every occasion to give special instruction." In this case the holding out to the public, by permitting the continued and general acts, itself, as to the public, created the general agency to bind the principal by the act in question, although the actual authority as created between the principal and agent would not have permitted the act. The same principle that a general agency to do a particular act (e. g. to indorse paper and make loans) may be created by a holding out to the world, is also recognized in our own decisions. In Fifth Ward Sav. Bank v. First Nat. Bank (1885) 47 N. J. Law, 357, 1 Atl. 478, the treasurer of the plaintiff, a savings bank, obtained a loan of the defendant in the name of the plaintiff, and ostensibly for its use, pledging securities of the savings bank for its repayment. The treasurer fraudulently misappropriated the funds to his own use, and the savings bank brought an action of trover for the value of the securities. On verdict for the plaintiff, and application for a new trial, Chief Justice Beasley said (page 358, 47 N. J. Law, and page 479, 1 Atl.), the treasurer not having express power to make the loans or pledge the bonds, "the only open point of inquiry on this question was whether or not the plaintiffhad put its treasurer in such an attitude before the public or before the defendant, as to have warranted a reasonable inference that he was its general agent, and had the right to execute the transaction in question." In this same case on error—Fifth Ward Sav. Bank v. First Nat. Bank (1886) 48 N. J. Law, 513, 7 Atl. 318—Mr. Justice Depue, delivering the opinion of the court (page 527, 48 N. J. Law, and page 326, 7 Atl.), said that "when, in the usual course of the business of a corporation, an officer has been permitted to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to transact its business, and that in such cases the authority of the officer does not depend so much upon his title, or on the theoretical nature of his office, as on the duties he is in the habit of performing." The careful and precise statement in the above case by the learned chief justice of the question to be left to the jury in such cases distinguishes, it will be noticed, between the holding out to the world and the holding out to the defendant; and this distinction, as it seems to me, touches directly one of the questions now involved, viz. whether the general agency in such cases arises from estoppel. If there was a holding out to the defendant, but not a holding out to others, or to the public as well, then the agency in such case might well be said to depend upon the estoppel of the principal to deny the agency which he had held out to the creditor, and which the creditor had relied on. But it is clear, I think, that in commercial transactions, which must be carried on largely by means of general agencies to do particular acts, there is an agency which is created by the general and public exercise of an authority with the permission of the principal; and where this general agency in fact exists as arising from this source it is not necessary for the creditor to show further that it was previously known to him, and that he acted in reliance on it. Where the agency is a general agency, provided by the continued exercise of the authority towards the public by the permission of the principal, and there is an estoppel to the public, the law presumes that the public knew of the holding out by the principal, and acted on it. The principle of technical estoppel as between parties is not at all involved in such cases, and, as it seems to me, could not be. for the reason that an estoppel of the principal towards the third person dealing with the agent must depend upon the representation by the principal made to the creditor. A representation to others could not, generally speaking, give rise to a technical estoppel at all, and the holding out to others or to the public, if it is to have any legal basis at all, must be by creating of itself, and whereever it is proved to exist, a general authority as to the public for the particular act. For this reason, as it seems to me, the distinction as stated by the chief justice must be taken as the true one, viz. whether the holding out as general agent is to the public or to the particular dealer only. If the latter only, estoppel is the basis, but not in the former cases. The distinction is expressly made in a late case,—Fifth Nat. Bank of Providence v. Navassa Phosphate Co. (1890) 119 N. Y. 256, 23 N. E. 737. Here a company's note was indorsed by its president. There was no proof of direct authority, and the only evidence from which authority could be inferred was numerous former indorsements, and the fact that the company's apparent obligations were satisfied. The plaintiff knew nothing of these former indorsements in discounting the note. Some of the former notes were indorsed to plaintiff, but in so few instances that no estoppel between the parties was created. In the court below the complaint was dismissed upon the ground that the indorsement in question was not made in reliance on the former indorsements. On appeal the point was distinctly raised that knowledge of the previous indorsements to others was not necessary to be proved, and the court of appeals, reversing the judgment below, held (Finch, J., page 260, 119 N. Y., and page 738, 23 N. E.) that the question whether the directors knew that the president was creating obligations against the company, and gave him authority by acquiescing in its exercise, should have been submitted to a jury, and that it was not necessary in such cases for the plaintiff to show in addition that its officers knew in advance of this exercise and ratification (by acquiescence). "As to the plaintiff," says Pinch, J., (page 262, 119 N. Y., and page 739, 23 N. E.), "it becomes an actual authority." In a late decision of the court of errors and appeals-Insurance Ass'n v. Jones (1890) 53 N. J. Law, 189, 21 Atl. 458, and 23 Atl. 166—a certificate of stock was signed in the principal's name, and was accepted by the assignee, supposing that the signature was in fact the principal's signature. The trial judge overruled evidence of numerous acts by the agent for the principal with other persons, offered by the assignee for the purpose of showing that the agent was in fact authorized, as the general agent of the principal, to make this assignment of stock. The reason for overruling the evidence was that the assignee had not relied on the agency. All of the judges agreed that the refusal to admit the evidence was error if the evidence was sufficient to show the agency in fact to make the transfer, and they differed only as to the effect to be given to this evidence. The decision seems to be a direct and controlling authority to the point that the powers of an agent may be proved by the exercise of previous acts with other persons, with the permission of the principal; and that, if these previous acts establish or tend to establish the agency, not only is not actual reliance on them in the transaction in question not required to be proved, but this agency, arising from this source, may be established and relied on at the trial, even if thecontract in question was not supposed to be a contract of the principal by an agent, but a direct contract of the principal himself. A similar conclusion as to the effect of proof of general agency was reached in the early case of Williams v. Mitchell, 17 Mass. 98, where a sale was made upon the faith of an express written authority to buy, apparently executed by the principal, but which was forged by the supposed agent. It was held that, notwithstanding the express reliance of the vendor on this forged authority alone, he could show the agent was in fact a general agent to purchase goods for the principal, and recover, on the proof of such authority, although this fact of general agency has not been relied on or even known. The doctrine is established beyond question that where any particular officer of a corporation, with the knowledge and assent of the directors, is held out to the public as having authority to indorse its regular business paper, such holding out to the public creates the authority for the purpose, and in the great mass of cases enforcing this rule the application of the rule is not limited to cases where it can be shown that the paper was received with actual knowledge of the previous holding out, and in reliance on it. I refer to a few of the leading authorities on this point, stating the rule without any such limitation: 17 Am. & Eng. Enc. Law, 139; Abbott, Tr. Brief, §§ 107, 108, citing cases. Olcott v. Railroad Co. (1863) 27 N. Y. 546, Selden, J. (page 558): "The powers of the agent of a corporation are such as he is allowed by the directors or managers of the corporation to exercise within the limits of the charter, and the silent acquiescence of the directors or managers may be as effectual to clothe the agent with power as an express letter of attorney;" citing numerous cases. Lester v. Webb (1861) 1 Allen, 34, Chief Justice Bigelow (page 36); Prescott v. Flinn, 9 Bing. 19, where general authority of clerk to indorse was inferred from previous indorsements, and no limitation was made that plaintiff should have knowledge. In the New Jersey cases above referred to no such limitation was attached to the statement of the rule, and the cases relied on by complainant are mainly cases where the liability depended upon an estoppel by holding out to the party rather than on a general agency arising from a holding out to the public.

Upon these considerations, I reach the conclusion that the previous indorsements of David Blake of the business paper of the company for discount to its credit, if made with the permission or consent of the directors, were of such a character as to entitle the banks discounting the paper in question to hold the corporation liable on the indorsements, as made by their general agent for that purpose, although the paper was not received or discounted by them, on the faith of such previous indorsements, but simply on the belief that he was the agent of the company for the purpose of indorsement and discount; and the next question of law to be decided is whether the permission and acquiescence of the directors, in relation to these indorsements of David Blake in the Newark and New York banks, is sufficiently established by showing that, although the directors may not in fact have known of the indorsements, they ought to have known of them, and by the exercise of a moderate degree of diligence might have known of them. So far as relates to questions involving general agencies established by evidence of this character, and arising between the principal and third persons, who have dealt with the agent in good faith as being the agent, the authorities seem to establish that, so far as such third persons are concerned, the principal is bound by the acts of the person acting as his general agent, if he ought to have known that the agent was so acting, as well as in cases where he had actual knowledge. Thus, in Davidson v. Stanley (1841) 2 Man. & G. 721, the action was upon bills of exchange drawn and indorsed by a farm bailiff, who was agent for the defendant, and without express authority for that purpose, and the question submitted to the jury was whether the circumstances of the case (proof of previous indorsements by the bailiff and other facts) were sufficient to establish a general authority. The jury found for the defendant and an application for new trial was denied, Tindall, C. J., saying (page 728) that it was not shown that the defendant knew, or had the means of knowing, that his name had been previously used by the agent. In Martin v. Webb (1883) 110 U. S. 7, 3 Sup. Ct. 428, the authority of a cashier to cancel certain notes secured by trust deeds was involved, and, there being no express authority, his previous cancellation of many previous notes was one of the circumstances relied on as establishing a general authority for this purpose. Actual knowledge by the directors of these transactions was not proved, but on this point of the duty of the directors to know of the course of business, and the effect of their negligence as charging the company with knowledge, it was said that that which directors ought by proper diligence to have known as to the general course of business they may be presumed to have known in any contest between the corporation and those who are justified by the circumstances in dealing with it upon the basis of that course of business. In Conover v. Insurance Co. (1848) 1 N. Y. 290, the policy issued by the company prohibited an assignment "unless by the consent of the company, manifested in writing." A consent was signed by the secretary. No express authority was proved, and the course of business was relied on as showing that the secretary was the officer who uniformly gave the consent, and that he made regular entries of the assignments on the books of the company. For the defense it was insisted that these acts of the secretary were never brought to the knowledge of the directors, or received their formalratification, but it was field on this point (Johnson, J.; page 292) "that the directors were bound to know the uniform course of business pursued by their sole agent for the transaction of their business at their office, especially where regular entries of his acts were made in their books; and they must be held responsible on the ground of a tacit assent and approval, unless they can show that by a strict vigilance and scrutiny into his acts they were unable to ascertain the course he was pursuing, and could not, therefore, arrest it, or put the public upon their guard." And with reference to the special obligation resting upon directors of incorporated companies, with reference to general authority exercised by their agents towards the public, it was said (page 292): "Incorporated companies whose business is necessarily conducted altogether by agents should be required, at their peril, to see to it that the officers and agents whom they employ not only know what their powers and duties are, but that they do not habitually, and as part of their system of business, transcend those powers. How else are third persons to deal with any degree of safety? They can have no access to the by-laws and resolutions by the board, and no means of judging in the particular instance whether the officer is or is not within the prescribed limits." The same doctrine of imputing to a company knowledge of and acquiescence in acts of an officer acting as a general agent was applied in the late case of Hanover Nat. Bank of City of New York v. American D. & T. Co. (1896) 148 N. Y. 612, 43 N. E. 72. In this case negotiable merchandise certificates were issued by an officer to himself without express authority. The fact that he had several times issued these to himself was, with other facts, relied on as establishing a general authority to issue to himself. The directors did not actually know of these issues. Vann, J., says (page 623, 148 N. Y., and page 75, 43 N. E.): "While it does not appear that the directors actually knew of these transactions, it was a question of fact for the jury to say whether they ought not to have known under all the circumstances, as their ignorance was no excuse, unless they were reasonably diligent in supervising the method and details of the business under their control." And as to the special effect of knowledge that could have been derived from an examination of the books, the court further say (page 623, 148 N. Y., and page 75, 43 N. E.): "Whatever the entries in the books of the defendant, made in the ordinary conduct of its business, would have disclosed, the jury would have been warranted in finding had come to the knowledge of the directors, who were charged with the duty of reasonable inspection of the books and reasonable supervision of the conduct of the officers."

The doctrine of these cases imputing to the directors actual knowledge of a fact which in the reasonable performance of their duty they ought to have known, and establishing the rights of third persons against the company, the principal, upon the same basis as if actually known and assented to, is in harmony with the rules applied in other cases, both at law and in equity, as to the means of knowledge being equivalent to actual knowledge. The general rule as to charging notice or knowledge of a fact is "that whatever puts a party upon inquiry amounts, in judgment of law, to notice, provided it becomes a duty, as in the case of purchasers and creditors, and would lead to the knowledge of the requisite fact by the exercise of ordinary diligence and understanding." 4 Kent, Comm. p. 179; Hoy v. Bramhall (1868) 19 N. J. Eq. 563, 572. The decisions cited above seem to be an application of this general principle, and in cases like the present the rule should be applied strictly, rather than relaxed; and in my judgment the directors of the manufacturing company must, on the facts of this case, be charged with knowledge that David Blake, as their treasurer, was indorsing the paper received by the company from the sewing-machine company for credit to its current account, and with the tacit or implied consent to these indorsements. With these views as to the legal rules applicable to the case, I hold, therefore, as the result of the evidence, that the banks have established by sufficient proof a general authority in David Blake as treasurer of the manufacturing company to indorse and discount the business paper of the company received from the sewing-machine company for credit on its account, and that reliance by them on this general authority previously exercised need not be shown or proved in order to recover.

I have in my above conclusions limited the finding of authority to indorse to the business paper of the manufacturing company received from the sewing-machine company in the regular course of business; for, if the paper was accommodation paper, and so known to be by the banks receiving it, then the authority to bind the corporation does not exist, for, as is well settled, the corporation has no authority to give accommodation paper. Bank v. Young (1896) 41 N. J. Eq. 531, 538, 7 Atl. 488. But in reference to the liability of a trading or business corporation, such as the manufacturing company, on accommodation paper, the rule as settled by this case (page 538, 41 N. J. Eq., and page 491, 7 Atl.) is that the title of the holder for value before maturity can only be defeated by proof of such circumstances as show that he took the paper with knowledge of some infirmity in it, or with such suspicion with regard to its validity as that his conduct in taking it was fraudulent. It was not claimed by the complainants at the hearing that such proof had been made in this case as to any of the banks, and the whole defense against the notes was put upon the ground of want of authority to indorse. But, in order to rely on or rebut a claim of liability imposed by reason of the actual receipt by the manufacturing company of the benefit of the proceeds of discount by the manufacturingcompany, a large amount of testimony has been taken for the purpose of showing whether the proceeds of discount went ultimately to the benefit of the sewing-machine company, and not of the manufacturing company. There is no dispute that the proceeds of discount of the notes in suit were, in the first instance, deposited in the respective banks to the credit of the manufacturing company, and that all of the payments out were made by the banks on the checks of the manufacturing company; but the complainants claim that with the exception of about $10,000, which went directly to the manufacturing company, the entire balance of the proceeds of discount was for the benefit of the sewing-machine company. Complainants did not, however, either at the trial or on the hearing, claim that the banks were chargeable with fraudulent conduct in taking the paper, or that this was established by the evidence. My conclusions on the whole evidence relating to this point of the receipt of the proceeds are: First, that the manufacturing company actually received the proceeds of the discounts to a large extent, and that as to the balance of the proceeds of discount, which seem to have gone ultimately to the credit of the sewing-machine company, the paper was not, in view of the relation between the companies, and on the whole circumstances of the case, accommodation paper; and, secondly, that even if it was in fact accommodation paper, there is not evidence to warrant the inference that the banks took the paper fraudulently. On examining the evidence and statements of the accountants upon this subject, it appears, however, that there are certain features relating to the application of the proceeds of discount by the banks, respectively, to which attention should be given. And, as they were not specially referred to by counsel on either side, it seems to me necessary to state here somewhat in detail the facts which appear in relation to the application of the proceeds of the notes now claimed by each of the banks, as bearing upon the question whether, if the paper was in fact accommodation paper, some of the notes were taken under circumstances that charged the banks with fraudulent conduct in taking the paper. Taking up first the notes proved by the Broadway Bank, and omitting therefrom three notes which were indorsed by George Blake, assistant treasurer, which notes will be specially considered hereafter, the statements of the expert accountants who have been called by the parties show that from the proceeds of the notes discounted by the Broadway Bank from April 12, 1893, to May 17, 1893, which amounted to $51,356.06, the sum of $28,259.21 was ultimately used for the pay roll of the manufacturing company in the following manner: Checks on the account were given by the manufacturing company to the order of the sewing-machine company for the amount of the pay roll, and deposited to the credit of the latter company in other New York banks than the Broadway Bank, and the sewing-machine company then gave to the manufacturing company checks for similar amounts on its own accounts in the Newark banks, which were supplied for the purpose by checks on the New York banks. From four notes in suit discounted by the Broadway Bank on May 24, 1893, for $10,244, it is admitted that $10,023.25 went directly to the payment of the pay rolls, and the liability of the manufacturing company on these is not disputed by complainant. Substantially, therefore, the proceeds of all the notes discounted by the Broadway Bank are shown to have been ultimately applied to the pay roll of the manufacturing company, except the sum of about $20,162.50 of the proceeds of discount of the notes discounted May 19th (or May 17th). $19,814.50 of this amount seems to have been drawn out by checks of the manufacturing company to take up agents' notes of a similar character which had been previously discounted by the bank for the sewing-machine company, and not appearing to be indorsed by the manufacturing company. Whether the check of the manufacturing company was given direct to the bank or to the sewing-machine company, and by it indorsed to the bank, does not appear. Proof of this would be of some importance, because in the latter case the transaction would, in view of the actual business relation between the two companies, be less liable to any suspicion of fraudulent use of accommodation credit. If the companies had been conducting their business as independent companies, this payment from funds of the manufacturing company of notes on which it was not liable, if made directly to the bank itself, would seem on the face of it not to constitute the bank a bona fide holder for value to this extent. But, in view of the manner in which the business of the two companies had been conducted, their intimate and complicated relations, and their joint interest in the ultimate payment of the agents' notes, pending the formal adjustment of accounts between the two companies, a different conclusion must be reached.

The business of the manufacture and sale of sewing machines was, in point of fact, carried on by the two companies as one entire business, in which both companies were dependent for their continuance upon the realization of the proceeds of sale of the finished product finally paid over to the sewing-machine company. This ultimate source of payment was for years largely represented by the notes of customers and agents, which were required to be discounted in order that the funds necessary for the continued manufacture as well as sale might be provided. The companies, although nominally separating the business into that of manufacturing and selling, each acted to a certain extent as agent for the other, and by reason of the course of business pursued by both during the entire period the connection was so close and complicated that it was found impracticable to settle or adjust accounts betweenthem, and the only method of settlement ever adopted was that the sewing-machine company, after making an agreed dividend to the small stock interest on the manufacturing company, outside of its own stock, took the entire residue of the profits without accounting. The last adjustment of this character took place in 1890 for the business of 1889 between the companies. No settlement or adjustment of any kind has since taken place, and the manufacturing company, pending any such settlement, has received from the sewing-machine company the notes in question, and credited the latter with them on its accounts. As between the two companies, the sewing-machine company was entitled to these credits, and the manufacturing company was entitled to and did hold the notes as its business paper, and not as accommodation. Under the circumstances of this case, I think, therefore, that the notes discounted by the Broadway Bank were not in fact accommodation paper, even to the extent to which the proceeds were used eventually to retire notes previously discounted by it for the sewing-machine company. And my further conclusion is that the Broadway Bank cannot, on the proofs in the case, be charged with having received and discounted these notes, and applied part of the proceeds under such circumstances as to show, within the rule stated in Bank v. Young, 41 N. J. Eq. 538, 7 Atl. 488, that they took the paper with knowledge of some infirmity on it, or with such suspicion with regard to its validity as that its conduct in taking it was fraudulent.

Of the National Park Bank notes discounted on April 19, 1893, for $9,286.08 the sum of $9,236.80 was applied ultimately for the pay roll in the manner above indicated as to the Broadway Bank, the sewing-machine company receiving a check deposited in another bank for the latter amount, and giving its check on the Newark banks to pay the pay roll. For the remaining notes discounted on May 3, 1893, and amounting to $16,479.08, notes previously discounted for the sewing-machine company by the Park Bank to the amount of $16,492.53 were retired. These were similar agents' notes, but had not been Indorsed by the manufacturing company. As to these latter payments to the bank itself out of these proceeds of discount, the same conclusion as in relation to the Broadway Bank note is reached, and the evidence does not entitle me to hold that the circumstance of discounting for this purpose shows any fraudulent conduct on its part. The Chemical Bank on May 3, 1893, discounted five notes for $10,892.34, and of this $8,006.39 ultimately went for pay roll in the manner above described, and $2,693.61 to the credit of the manufacturing company on the account current. On May 19th, from discounts amounting to $23,013.72, a check of $23,000 was deposited to the credit of the sewing-machine company in the same bank, from which notes held by the Chemical Bank to the amount of $22,988 were paid. These notes do not seem to have been indorsed by the manufacturing company, but in reference to the bona fide character of these payments the same conclusion is reached as in relation to the Broadway and Park Banks.

As to the proceeds of the discounts of the notes now held by the Garfield National Bank, the abstract or statement of the accounts submitted shows that the notes now held by this bank were discounted in two lots,—one of 10 notes on December 21, 1892, for $28,967.89, and another of 8 notes on January 17, 1893, for $25,264.88—and, so far as I am able to ascertain from the examination of this statement, none of these proceeds were paid to the bank itself, except to take up notes which had been previously discounted by the bank for the manufacturing company itself. The proceeds of discount were, indeed, drawn out largely in favor of the sewing-machine company, and deposited by the latter to its credit in accounts with other banks, but knowledge of this indirect application of the funds to the use of the sewing-machine company is not chargeable on the Garfield Bank, which was bound to honor the checks of its depositors. There is, therefore, no question, as I think, about the bona fide character of their entire claim.

The notes now held by the Phoenix Bank were all discounted on and after February 7, 1893, and none of the proceeds of discount seem to have been used for payments to the bank itself, except to retire notes previously discounted on the credit of the manufacturing company. It appears, however, from the evidence as to the accounts of this bank that its discounting for the manufacturing company commenced on September 20, 1892, and that on December 31, 1893, the entire discounts to that date were $76,521.16, which with checks of the sewing-machine company and other credits made the whole credit to that time $88,121.16. Out of this payments were made to the bank itself of $39,311, on December 5, 1892, by check of the manufacturing company to the order of the sewing-machine company, and by it indorsed to the bank to take up the notes to that amount discounted for the sewing-machine company in August, 1892. This shows that ultimately the benefit of the discount on the credit of the manufacturing company was received by the bank itself to this extent, but for the reasons above set out in reference to the four other banks the receipt from the sewing-machine company of the check drawn to it upon these funds arising from previous notes cannot be considered as preventing the bank from being considered as a bona fide holder of the notes now in suit. The above statement shows the application of the proceeds of the discount of the special notes now unpaid, so far as I have been able to make them out from the accounts and statements submitted by the expert accountants on either side, and which were prepared mainlywith the view of showing the general nature of the application of the proceeds of discounts during the entire period of discount by the New York banks from September, 1892, to the time of the failure. These statements agree substantially, except with relation to one item, and show that the whole discounts amounted in this time to $162,801.52, and that deposits in addition were made by the sewing-machine company to the credit of the manufacturing company's accounts in different banks to the amount of $64,484; the total being $542,262.13. $14,911 of the proceeds of the total discounts and deposits were transferred to the manufacturing company's accounts from one of these banks to the others, reducing the total proceeds of discounts and deposits to $527,351.13. Out of this amount $184,656.94 was paid for bills receivable which were indorsed by the manufacturing company, but on which the sewing-machine company was first liable, being agents' and customers' notes of the character above set out. The sum of $5,840.83 was paid by checks of the manufacturing company on the Phoenix and Garfield Banks for materials furnished direct to the manufacturing company. Complainants claim that, inasmuch as in the accounts between the two companies this amount was credited to the manufacturing company and charged to the sewing-machine company, they are therefore to be treated as payments on account of the sewing-machine company alone. But on the question of following funds to the manufacturing company, and holding it liable on this account, the substantial question is whether it got the proceeds; and, if it did, liability on this account cannot be affected because of its right to charge the sewing-machine company with the amounts in its final settlement. It is conceded that $10,023.25 was directly applied to the pay roll, and the only remaining item of dispute between the expert accountants in reference to the application of the proceeds is the Item of $80,856.62, which the banks claim was used for pay roll. These pay rolls were paid, not directly by the manufacturing company drawing its own checks for the pay rolls, but, as above stated, by giving its checks to the sewing-machine company for the amounts, and receiving from it checks on its accounts on the Newark banks for substantially similar amounts. This, as I take it, was the substantial character of these transactions, although the use of the separate bank accounts of the two companies for their mutual convenience sometimes involves other deposits and credits in arranging for this general method of payment. All the above payments, including the $184,000 of notes indorsed by the manufacturing company, may, so far as the present question with the banks is concerned, be considered as payments made on account of the manufacturing company, and of which it received the benefit; for, although the sewing-machine company was, as between itself and the banks, first liable on the notes indorsed and discounted by the manufacturing company, these notes were still obligations of that company to the banks which discounted on its credit. The principal remaining payments out of the total proceeds of discounts as ultimately disposed of, were as follows: Notes of sewing-machine company not indorsed by manufacturing company, about $140,000; transfers to sewing-machine company's accounts in other banks, about $175,000; and other accounts of the sewing-machine company amounting to about $12,000. Complainants' contention is that all of these payments were for the sole benefit of the sewing-machine company, and were the result of the use of the manufacturing company's credit purely for the accommodation of the sewing-machine company. But, in view of the relation between these companies in carrying on the business, and the unsettled accounts between them, the simple fact that these proceeds were used by the sewing-machine company is not sufficient to establish that the payments were made for the benefit of the sewing-machine company alone, and not for the manufacturing company. And even if, as between the companies, the payments could be held as accommodation payments, this is not sufficient to invalidate the paper in the hands of the banks discounting and purchasing the paper. As to these fraudulent conduct in taking the paper must be shown, and, in view of the actual relations between these companies now disclosed by the evidence, and shown by their own books and discounts, it cannot be held that the conduct of the banks in their discounts and purchases of this paper was of such a fraudulent character as to impeach the validity of their title.

The principles of these conclusions as to the notes indorsed by David Blake as treasurer and discounted for the account of the manufacturing company, and actually drawn out by it on its checks, apply also to the notes of the manufacturing company held by the Cooperstown Bank, and purchased by the latter bank in open market, for full value, on May 2, 1893. As to this bank, the holding out of David Blake as the general agent was the course of dealing permitted with the New York banks up to that date, as well as the previous course of dealing in the Newark banks; and nothing has been shown to cast any infirmity on their title to the paper, within the rule as laid down in Bank v. Young (1886) 41 N. J. Eq. 531, 538, 7 Atl. 488. But these conclusions do not cover the case of the First National Bank. The notes amounting to $29,714 held by this bank, as appears from the proofs in the case on this point, which are somewhat meager, were received by the First National Bank as collateral, and in substitution for other notes, to which the manufacturing company were not parties, and which were held as collateral to a loan made by the First National Bank to the sewing-machine company, and still outstanding. The loan was made to the Ohio company in 1890, and, inasmuch as by the agreement of transfer made by theOhio company in April, 1891, the New Jersey company assumed all the obligations of the Ohio sewing-machine company as well as of the manufacturing company, the note was purely the New Jersey sewing-machine company's debt. The note or indorsement of the manufacturing company as collateral to this debt would, therefore, on the face of the transaction, seem to be purely accommodation on its part, and the First National Bank not a bona fide holder of the accommodation paper, for value, before maturity. If this is the correct status of their claim on these notes, then it would seem to be questionable whether their claim is valid, but, inasmuch as the point was not raised at the hearing, I will hear further argument on this point, if counsel desire.

Nor do the above conclusions apply to three notes included in the claim of the National Broadway Bank, and which were indorsed, not by David Blake as treasurer, but by George A. Blake as assistant treasurer, of the manufacturing company. These notes were also notes of the agents of the sewing-machine company, payable to the order of the sewing-machine company at its New York office, and, after the indorsements by the sewing-machine company, were indorsed by George Blake as assistant treasurer of the manufacturing company for discount to the credit of that company in the National Broadway Bank. They were of the following amounts and dates: April 24, 1892, one for $2,786; one April 29, 1893, for $3,886; and one May 1, 1893, for $2,630. The total of the notes was $9,302, and on May 9, 1893, they were discounted together as a single transaction, the proceeds of discount ($9,115.09) being placed to the credit of the manufacturing company. The balance to the credit of the manufacturing company before this discount was $1,861,06, and on the day following—May 10th—the manufacturing company gave a check on this account for $9,383.37, which is charged to the pay roll on their books, and not charged to the sewing-machine company in the books of either company. The check was in fact drawn to the order of A. Fahs. cashier of the Union Square Bank, and deposited there to the credit of the sewing-machine company, which on the same day gave to the manufacturing company checks on its accounts in two Newark banks for the same amount, and from these latter checks the pay roll of the manufacturing company was paid. The latter company therefore has received the proceeds of these three notes so discounted, and must, for this reason, be held liable, even if the indorsement be unauthorized; and the liability of the company for these notes is put upon this ground alone.

The appeals from the allowance of the claims by the receiver are therefore dismissed, except the appeal from the claim of the First National Bank, which will be reserved for further argument if counsel desire.

In the equity case I will at the present time state the conclusions reached, leaving a further statement and opinion to be filed hereafter, if desired:

First. The bonds held by complainants are still secured by the trust deed of April, 1881, conveying the 1,980 shares of the Domestic Manufacturing Company stock, and have not lost the security of this deed by reason of the agreements of July 7, 1890, and July 9, 1890, and the action of their trustees thereunder.

Second. The conveyance by the Ohio company to the New Jersey company, in April, 1891, of the assets of the former company, must be held valid as against the complainants and their trustee, George Chapin, under whom they claim.

Third. The complainants, as bondholders, are creditors of the New Jersey company, but they have no equitable lien which can now be enforced against the assets of the New Jersey company in reference to its other creditors except as to the lien on the Domestic Manufacturing stock under the trust deed of 1881.

Fourth. The bill of the receiver for specific performance of the agreement of July 9, 1890, by conveyance of the stock to him, must be dismissed.