Opinion
W. B. Angelo, of Chicago, Ill., for plaintiff Edward Hines Western pine co.
John N. Ott, C. Edward Dahlin, and Homer J. Livingston, all of Chicago, Ill., for defendant First Nat. Bank of Chicago.
Sidney Teiser, of Portland, Or., and Kirkland, Fleming, green & Martin, of Chicago, Ill., for defendant J. D. Meikle, trustee of Fred Herrick Lumber Co.
The findings of fact and conclusions of law were as follows:
Findings of Fact and Conclusions of Law.
This cause coming on for hearing before this court at a regular term thereof held at Chicago, Ill., on the 12th day of November, 1929, and the parties plaintiff and defendant being severally present and represented by counsel, and evidence having been introduced and briefs submitted, and decision having been made thereon, the court makes the following findings of fact and conclusions of law:
Findings of Fact.
(1) That the plaintiff, Edward Hines Western Pine Company, is a corporation duly organized and existing under and by virtue of the laws of the state of Delaware, and is a citizen of the state of Delaware and a nonresident of the state of Illinois.
(2) That the interpleading defendant, the First National Bank of Chicago, (hereinafter referred to as 'defendant bank'), is a corporation organized under the banking laws of the United States and doing business in the City of Chicago, Ill., and is a citizen and has its residence in the state of Illinois.
(3) That the interpleading defendant, J. D. Meikle, trustee in bankruptcy of Fred Herrick Lumber Company, bankrupt, (hereinafter referred to as 'defendant trustee'), is a citizen of the state of Washington, residing at Spokane in said state, and has his office in the city of Pendleton in the state of Oregon.
(4) That Fred Herrick Lumber Company is a corporation organized under the laws of the state of Oregon, and prior to and until its adjudication as a bankrupt, as hereinafter set forth, had its office and principal place of business in the city of Burns, in the state of Oregon, and is a citizen of and has its residence in said state of Oregon, and that on the 15th day of January, 1929, upon its voluntary petition in bankruptcy filed on January 14, 1929, in the District Court of the United States for the District of Oregon, it was duly adjudged a bankrupt by said court, and that the estate of said bankrupt, of which said J. D. Meikle is trustee in bankruptcy, is now in process of administration.
(5) That thereafter said J. D. Meikle was duly appointed and regularly elected trustee of the estate of said Fred Herrick Lumber Company, a corporation, bankrupt, and thereupon duly qualified as such trustee by filing the required bond, which bond was duly approved, and is now acting as trustee in bankruptcy of the estate of said Fred Herrick Lumber Company, a corporation, bankrupt.
(6) That the value of the matter in controversy in this action, exclusive of interest and costs, is in excess of the sum of $3,000, and this court has jurisdiction thereof because the matter in controversy is between citizens of different states.
(7) That on the 4th day of October, 1928, the plaintiff became possessed of the sum of $125,000, the property of said Fred Herrick Lumber Company, which sum was thereafter paid into the registry of this court as hereinafter set forth.
(8) That on March 15, 1929, the defendant trustee, having theretofore instituted ancillary bankruptcy proceedings in this court as case No. 41606 in bankruptcy, filed his petition therein for an order upon said plaintiff to show cause why it should not pay over to him said sum of $125,000. (9) That on March 26, 1929, the defendant bank instituted an action in assumpsit against the plaintiff in the circuit court of Cook county, Ill., for the recover of said sum of $125,000, which suit was thereafter by said plaintiff (defendant therein) duly removed to this court.
(10) That on July 3, 1929, the plaintiff filed its bill of complaint herein, and brought into this court said sum of $125,000, and on said date an interlocutory decree was entered herein as follows:
'1. That plaintiff forthwith turn over and deliver to the Clerk of this Court the sum or fund of $125,000.00, being the sum of money mentioned in its said bill of complaint, and that said sum of money now being so deposited in open court, the action brought against the plaintiff by The National Bank of Chicago and now pending in this Court (No. 37891) be and the same is permanently stayed; that the proceedings brought against plaintiff by the defendant, J. D. Meikle as Trustee, on March 15, 1929, in the matter of Fred Herrick Lumber Company, a corporation, bankrupt, in bankruptcy No. 41606, wherein the said Trustee filed his petition for an order to show cause why this plaintiff should not pay over the said sum of $125,000.00 to him as such Trustee, be and the same is likewise permanently stayed; and the plaintiff be and it is hereby discharged of and from all liability to either The First National Bank of Chicago, or to J. D. Meikle, Trustee, in Bankruptcy of the Fred Herrick Lumber Company, bankrupt, for the payment of said sum of $125,000.00. '2. That said sum of $125,000.00 be deposited by the Clerk of this Court by purchasing a Certificate of Deposit in the name of himself as Clerk of this Court, but for the credit of this action, from The First Union Trust & Savings Bank of Chicago; that it be provided in the deposit agreement with said bank that said sum of $125,000.00 shall remain on deposit for at least three (3) months and draw interest at the rate of at least three per cent (3%) per annum, in accordance with prevailing banking customs in the City of Chicago; and that said deposit be held by him subject to the further order of this Court. '3. That the defendants are hereby directed in their respective answers herein to set up the facts relating to their respective claims to said sum of $125,000.00 paid over as hereinbefore provided, to the Clerk of this Court, and the defendant Trustee shall have and possess as against the defendant bank in his pleadings and upon the trial of the issues herein, every right which he has or might have under and by virtue of the provisions of the Bankruptcy Act of 1898, as amended.'
(11) That pursuant to said interlocutory decree, said sum of $125,000 was thereupon turned over and delivered by the plaintiff to the clerk of this court, and thereupon deposited by said clerk in the First Union Trust & Savings Bank of Chicago in accordance with the terms of said decree, and is now on deposit in said bank.
(12) That on the 15th day of September, 1928, and for some time immediately prior thereto, said Fred Herrick Lumber Company was insolvent, and ever since has been and now is insolvent, and that all of its assets, including said sum of $125,000 on deposit herein, as aforesaid, is not sufficient to pay the claims of creditors whose claims have already been filed and allowed in the matter of the estate of said Fred Herrick Lumber Company, bankrupt.
(13) That for many years prior to September 15, 1928, Fred Herrick operated as a lumberman in the West, and in the year 1910 organized the Milwaukee Lumber Company, an Idaho corporation, located at St Maries, Idaho and on or about the year 1920 organized the Coeur d'Alene Mill Company, an Idaho corporation, located at Coeur d'Alene, Idaho, and in the year 1923 organized the Export Lumber Company, an Idaho corporation, located at Harrison, Idaho, in all of which companies he at all times held all of the stock except qualifying directors' shares, and was President and a director of each.
(14) That on November 5, 1923, said Fred Herrick organized the Fred Herrick Lumber Company, an Oregon corporation, with principal offices at Burns, Or., and on September 15, 1928, owned and held all of the outstanding stock of said company with the exception of fifty shares of stock owned by Frank J. Klobucher, fifty shares of stock owned by James W. Girard, one share of stock owned by Blaine Hallock, and one share of stock owned by E. E. Flood, and that on said date the parties named were all of the stockholders of said company, and were its directors, and that Fred Herrick was then president of said company.
(15) That in May, 1926, a line of credit was extended by the defendant bank to the Coeur d'Alene Mill Company in the sum of $1000,000, which line was increased so that at about the end of October, 1927, there was an outstanding banking indebtedness from the Coeur d'Alene Mill Company to the defendant bank in the sum of $250,000; that the notes Evidencing this indebtedness at that time matured one by one from October 27, 1927, to November 14, 1927, and were renewed in the form of three demand notes totaling $250,000; that on August 17, 1928, an additional thirty-day note to the defendant bank in the sum of $5,270 to cover an overdraft in the account of the Coeur d'Alene Mill Company on the books of the defendant bank was outstanding and unpaid on September 15, 1928, and was covered by two continuous guaranties, one -executed by Fred Herrick and Anna Herrick, his wife, and the other by one E. W. Eller and H. Kipp Eller, his wife, the first of said guaranties being dated April 17, 1926, and the other dated May 1, 1926, and which guaranties by their terms were made in favor of the defendant bank and not in favor of the defendant bank or its assigns.
(16) That on the 15th day of September, 1928, and for a time immediately prior thereto, Fred Herrick, president and director of said Fred Herrick Lumber Company, and two other of its corporate officers and/or directors, were in the city of Chicago, Ill., attempting to complete a sale on behalf of said Fred Herrick Lumber Company of substantially all of its assets to the plaintiff for the sum of $750,000, and the assumption by said plaintiff of certain obligations of said Fred Herrick Lumber Company, and on September 14, 1928, entered into a preliminary contract in the form of a written offer and acceptance covering the entire transaction, except for details which were to be worked out in a final contract to be executed by said Fred Herrick Lumber Company and the plaintiff; that on September 15, 1928, the contract whereby said sale was to be made to the plaintiff was drawn and executed by the Fred Herrick Lumber Company, and left on that date with the plaintiff for execution, which execution, on behalf of the plaintiff, it was understood between the parties would not and could not take place for several days because of the absence of the executing officer of the plaintiff from the city of Chicago, and which contract was finally executed by the plaintiff through its president, Edward Hines, on September 10, 1928, and bears that date.
(17) That on September 15, 1928, the defendant bank obtained information that said Fred Herrick Lumber Company was consummating a sale of all of its assets, as above set forth, and knew that Fred Herrick, its president, owned a large majority of the capital stock of the Coeur d'Alene Mill Company and was in control of said companies, and insisted that the aforesaid notes of the Coeur d'Alene Mill Company held by it be forthwith paid, or the interest of Fred Herrick in certain stock held by him in another company alleged to have been turned over to the First National Bank of Portland, Or., as security for the payment of his individual debt to that bank be retransferred and all stock owned by him be pooled for the benefit of all his creditors.
(18) That, after such demand by defendant bank, said Fred Herrick Lumber Company did on the same day enter into an agreement with the defendant bank whereby it agreed to purchase from the defendant bank and the defendant bank, agreed to sell to said Fred Herrick Lumber Company, the four promissory notes of the Coeur d'Alene Mill Company evidencing the indebtedness of $255,270 and interest then owing the defendant bank, together with the written guaranties of said Fred Herrick and wife and E. W. Eller and wife for the sum of $125,000 to be evidenced by a purchase-money note of that date to be executed by said Fred Herrick Lumber Company and payable on October 5, 1928, to the order of the defendant bank in the sum of $125,000, without interest.
(20) That, at the time of the making of the aforesaid tentative agreement, the defendant bank well knew that said Fred Herrick Lumber Company was disposing of substantially all of its assets and contemplated a suspension of its business, and also well knew that the main business of the Fred Herrick Lumber Company was the purchase of timber and the milling thereof and the sale of lumber.
(21) That on said 15th day of September, 1928, after the aforesaid tentative agreement had been reached, there was prepared by defendant bank and submitted to counsel for Fred Herrick Lumber Company an instrument denominated 'Memorandum of Purchase,' which was thereafter signed in the name of Fred Herrick Lumber Company by Fred Herrick, its president, and also by the defendant bank, which 'Memorandum of Purchase' is in words and figures as follows, to wit:
'September 15, 1928. 'Memorandum of Purchase.
'This Memorandum evidences the terms and conditions on which the Fred Herrick Lumber Company has this date purchased from the First National Bank of Chicago, the following:
'A note of the Coeur d'Alene Mill Company, payable to the First National Bank of Chicago, dated October 27, 1927, in the sum of Eighty- Five Thousand ($85,000) Dollars.
'A note of the Coeur d'Alene Mill Company, payable to the First National Bank of Chicago, dated November 7, 1927, in the sum of One Hundred Thousand ($100,000) Dollars.
'A note of the Coeur d'Alene Mill Company, payable to the First National Bank of Chicago, dated November 14, 1927, in the sum of Seventy-five Thousand (75,000) Dollars.
'A note of the Coeur d'Alene Mill Company, payable to the First National Bank of Chicago, dated August 17, 1928, in the sum of Five Thousand Two Hundred Seventy ($5,270) Dollars.
'In respect of which there is now due and payable, Two Hundred Fifty-five Thousand Two Hundred Seventy ($255,270) Dollars with interest on the first three mentioned notes from April 30, 1928 at the rate of Six Per Cent (6%).
'A written guaranty of the payment of said notes dated April 27, 1926, signed by E. W. Eller and H. Kipp Eller.
'A written guaranty of the payment of said notes dated May 1, 1926, signed by Fred Herrick and Anna Herrick.
'The Fred Herrick Lumber Company has paid for said notes and guaranties, the sum of One Hundred Twenty-five Thousand ($125,000) Dollars, evidenced by its note, payable October 5, 1928 without interest.
'As further consideration the Fred Herrick Lumber Company has signed an order directing Edward Hones Western Pine Company to pay to the First National Bank of Chicago, for account of the Fred Herrick Lumber Company the sum of One Hundred Twenty-five Thousand ($125,000) Dollars, out of the purchase price stipulated in a certain contract dated September 15, 1928, between the Edward Hines Western Pine Company and the Fred Herrick Lumber Company, covering the purchase of certain assets, owned directly or indirectly, of the Fred Herrick Lumber Company. This payment, if and when made, is to be applied to the payment of said purchase money note.
'As a further consideration and to secure the payment of said purchase price evidenced by said note, the Fred Herrick Lumber Company has pledged with the First National Bank of Chicago, said notes and guaranties so purchased, and has authorized the First National Bank of Chicago to retain said notes and guaranties as collateral for said purchase price.
'The First National Bank of Chicago, in the event said purchase money note is not paid on or before October 5, 1928, may rescind at its election in its sole discretion, this purchase.
'On the payment of said purchase money note in the sum of One Hundred Twenty-five Thousand ($125,000) Dollars, the First National Bank of Chicago will deliver said notes to the Fred Herrick Lumber Company, endorsed in blank without recourse in any event, and will deliver said written guaranties, and if requested by the Fred Herrick Lumber Company will make proper assignment of said guaranties. It is understood that the First National Bank of Chicago assumes no liability in respect of the legality or enforceability of said guaranties.
'Fred Herrick Lumber Company, 'By Fred Herrick, Pres. 'First National Bank of Chicago, 'By H. P. Snyder, V. Pres.'
(22) That, pursuant to the terms of the aforesaid memorandum of purchase, a purchase-money note for the sum of $125,000 was executed by Fred Herrick Lumber Company and delivered to the defendant bank, which note is in words and figures as follows:
'Chicago, Ill., Sep. 15, 1928 $125,000.00 'On Oct. 5, 1928-- after date, the undersigned promises to pay to The First National Bank of Chicago or its order, at the office of The First National Bank of Chicago in the City of Chicago, for value received One Hundred Twenty Five Thousand Dollars without interest. 'To secure the payment of this note, and of any other liability or liabilities of the undersigned to the holder hereof, due or to become due, or that may be hereafter contracted or existing, howsoever acquired by said holder, the undersigned has transferred, pledged and delivered to The First National Bank of Chicago the following property, to wit: 'Promissory note of Coeur d'Alene Mill Co. dated 10/27/27 for . . . $85,000. #690
Balance due . . . $75,000. Promissory note of Coeur d'Allene Mill Co. dated 11/7/27 for . . . 100,000. # Promissory note of Coeur d'Alene Mill Co. dated 11/14/27 for . . . 75,000. #697 Promissory note of Coeur d'Alene Mill Co dated 8/17/28 for . . . 5,270 #629
'Guaranty of E. W. Eller & H. Kipp Eller dated 4/27/26
'Guaranty of Fred Herrick & Anna Herrick dated 5/1/26 (the market value of which is today $--) and now agrees that upon breach of any of the promises herein contained or upon failure to pay any of said other liabilities when due said Bank or the holder hereof may thereupon, or at any time or times thereafter, sell the said property or any part thereof, and any substitute therefor and any addition thereto, at any Brokers' Board, or at public or private sale, without notice, advertisement, or demand of any kind, and may apply the net proceeds after deducting all costs and expenses for collection, sale, and delivery, to the payment of this note or of any or all of said liabilities, returning the residue to the undersigned on demand. Said Bank or the holder hereof may purchase any of said property at any such Brokers' Board or public sale. In case of decline in the market value of said property or any part thereof, the holder hereof may demand the pledge and delivery of additional property of quality and amount satisfactory to said holder; and the failure on the part of the undersigned to deliver such additional property on demand shall cause this note to become due payable on demand. In case of the insolvency of the undersigned, any indebtedness due from the holder hereof to the undersigned may be appropriated and applied hereon at any time, as well before as after the maturity hereof.
'Fred Herrick Lumber Co. 'By Fred Herrick, Pres. 'By E. E. Flood, Treas.,'
-- and that thereupon the four notes of the Coeur d'Alene Mill Company, payable to the defendant bank, in the total sum of $255,270 were indorsed without recourse and pledged as collateral security to said purchase-money note, together with the written guaranties of said E. W. eller and wife and said Fred Herrick and wife, and are now in the possession of the defendant bank.
(23) That, as provided in said memorandum of purchase, the Fred Herrick Lumber Company, by Fred Herrick, its president, did on said 15th day of September, 1928, deliver to the defendant bank a certain order drawn upon the plaintiff, in words and figures as follows, to wit:
September 15, 1928. 'Edward Hines Western Pine Company, Chicago, Illinois. 'Gentlemen: Under authority of a resolution of the Directors of the Fred Herrick Lumber Company duly passed at a duly convened meeting, you are hereby authorized and directed to pay to the First National Bank of Chicago, for the account of the Fred Herrick Lumber Company, the sum of One Hundred Twenty-Five Thousand ($125,000) Dollars, out of the amount payable by you to the Fred Herrick Lumber Company under the terms and conditions of the contract between your Company and our Company, dated September 15, 1928, covering the purchase of certain assets of our Company. To the extent of said One Hundred Twenty-Five Thousand ($125,000) Dollar payment to the First National Bank of Chicago, you are hereby relieved from the conditions between your Company and our Company calling for the payment of the full amount at Burns, Oregon. 'The receipt of the First National Bank of Chicago in respect of the payment to it of said One Hundred Twenty-Five Thousand ($125,000) Dollars, shall be a sufficient release to you and receipt for such pro tanto payment of the purchase price to us. 'Very truly yours, 'Fred Herrick Lumber Company, 'By Fred Herrick, Pres.'
(24) That thereafter, on September 20, 1928, the date of the execution by the plaintiff of the contract between it and the Fred Herrick Lumber Company pertaining to the sale to the former of the assets of the latter, as above set forth, the defendant bank caused the order so drawn by said Fred Herrick Lumber Company upon the plaintiff to be presented to the plaintiff through one Walter A. Graff, and thereupon the plaintiff, by William S. Bennet, its vice president, delivered to said Walter A. Graff a letter in words and figures as follows:
'September 20, 1928. 'Mr. Walter A. Graff, Baker, Fentress & Company, Chicago, Illinois. 'Dear Mr. Graff: We acknowledge receipt of a letter from Fred Herrick Lumber Company to Edward Hines Western Pine Company, dated September 15, 1928, directing the payment to the First National Bank of Chicago, out of the proceeds of the contract between us and Fred Herrick Lumber Company, of One Hundred and Twenty Five Thousand Dollars ($125,000.00), such sum to be deducted from the full amount due under the contract: also letter from Fred Herrick Lumber Company to you dated September 15, 1928, directing the delivery of the first described letter. 'There are certain liens of record on the property of the Fred Herrick Lumber Company but this is the first order received by us for the payment of money out of the contract price mentioned in the contract between the Fred Herrick Lumber Company and ourselves, and we acknowledge it to you as such. 'Very truly yours, 'Edward Hines Western Pine Company, By William S. Bennet, 'Vice-President,' -- which letter said Walter A. Graff thereafter delivered to the defendant bank.
(24 1/2) Said purchase agreement was consented to on September 15, 1928, in Chicago, Ill., by Fred Herrick, James W. Girard, and E. E. Flood, and a few days afterwards approved by Blaine Hallock and Frank J. Klobucher, the remaining two directors and stockholders, at Burns, Or.
(25) That on or about the 4th day of October, 1928, at Burns, Or., said Fred Herrick Lumber Company, pursuant to the contract of purchase and sale above referred to, conveyed to the plaintiff substantially all of its property, and said plaintiff then stood ready to pay over to the Fred Herrick Lumber Company the cash consideration set forth in said contract, namely, the sum of $750,000, but, instead of taking said sum into its possession, said Fred Herrick Lumber Company, by resolutions then passed at special meetings of its stockholders and directors, at which all were present, directed said plaintiff be, and it was thereupon, authorized to make payment of said sum of $750,000 in various amounts to certain individuals, firms, and corporations named in a list attached to the minutes of such meetings, which list was thereupon delivered to said plaintiff; that the total of the payments so directed made, including a balance of $10,264.02 payable to the Fred Herrick Lumber Company, aggregated said sum of $750,000, and that appearing on said list was the name of the defendant bank for the sum of $125,000, the amount in controversy herein.
(26) That, at the time of the delivery to the plaintiff of the aforesaid list, an agreement was entered into between the plaintiff, through William S. Bennet, its vice president, and the Fred Herrick Lumber Company, through its president, Fred Herrick, authorizing the plaintiff, inter alia, to withhold the payment to the defendant bank of the sum of $125,000 alleged to be due it from the Fred Herrick Lumber Company, and providing that the same should not be paid except with the written consent of Richard S. Munter and Fabian B. Dodds, and, if they should not agree, then only pursuant to the decree of a court of competent jurisdiction, which agreement is in words and figures as follows, to wit:
'Whereas, the undersigned Edward Hines Western Pine Company has purchased certain properties from the Fred Herrick Lumber Company, and a portion of the purchase price is claimed by said Fred Herrick Lumber Company to the due as follows: James D. Lacey & Co. . . . $ 24,661.81 First National Bank, Chicago . . . 125,000.00 'And whereas, certain creditors represented by Fabian B. Dodds desire to investigate the status of such claims it is agreed that the Edward Hines Western Pine Company may hold said sums and each of them as Trustee and that the same or either of them shall not be paid anyone except with the written consent of Richard S. Munter and Fabian B. Dodds, provided, that if they cannot agree said sums shall only be paid pursuant to the decree of a court of competent jurisdiction. 'Dated October 5th, 1928. 'Fred Herrick Lumber Company, 'By Fred Herrick, President. 'Edward Hines Western Pine Company, 'By William S. Bennet, 'Vice-President,' -- which agreement was entered into without the knowledge or consent of the defendant bank and was never acquiesced in by it.
(27) That during the course of the day on October 4, 1928, at Burns, Or., title deeds to all of the property of the Fred Herrick Lumber Company were duly delivered by the Fred Herrick Lumber Company to William S. Bennet as vice president of the plaintiff, and checks were drawn by the plaintiff in favor of the individuals, firms, and corporations set forth in the list above referred to, with the exception of the payment directed to be made to James D. Lacey & Co., of the sum of $24,661.81, which payment was thereafter in December, 1928, made to said Lacey & Co., with the approval of said Richard S. Munter and Fabian B. Dodds, and with the exception of the payment of the sum of $125,000 directed paid to the defendant bank for which no check was issued and no payment made.
(28) That at the time of the making of the last-mentioned agreement Fabian B. Dodds was attorney for certain creditors of the Fred Herrick Lumber Company and others of the companies controlled by Fred Herrick, and Richard S. Munter was attorney for the Fred Herrick Lumber Company, and that said Fabian B. Dodds and said Richard S. Munter have not jointly consented to the payment of said sum of $125,000 to the defendant bank in writing or otherwise, nor has said money been directed to be paid to the defendant bank pursuant to the decree of a court of competent jurisdiction.
(29) That on October 18, 1928, the defendant bank instituted an attachment suit in the municipal court of Chicago against the Fred Herrick Lumber Company, as case No. 1419999, on the purchase-money note for $125,000 executed by the Fred Herrick Lumber Company to the defendant bank, and caused garnishment process to be issued against the plaintiff, and filed in said cause certain general interrogatories to be answered by the plaintiff as such garnishee, among which is the following interrogatory:
'Were you, at the time of the service upon you of the Writ issued in this cause, or since that time, indebted to said Fred Herrick Lumber Company, a corporation? If so, state the amount thereof, when the same is due and payable, and the nature of such indebtedness,' and that thereafter the plaintiff made answer to said interrogatories and as to the foregoing interrogatory answered as follows: 'Yes. In an amount exceeding $125,000. Some of the money is held under stipulations, and some is subject to the order of the Fred Herrick Lumber Company. The indebtedness arose from the purchase of property from the Fred Herrick Lumber Company in Oregon. ' That said suit was subsequently removed by said Fred Herrick Lumber Company to this court as case No. 37696, and remained pending in this court (1) until after the defendant trustee instituted ancillary proceedings in this court, and in this court as a court of bankruptcy filed a petition to require the plaintiff to turn over and deliver to him, as such trustee, said sum of $125,000 held by it as the property of said Fred Herrick Lumber Company, upon which petition an order to show cause was issued by this court, sitting as a court of bankruptcy, against said plaintiff; and (2) until after a certain other petition was filed by the defendant trustee praying that said defendant bank be enjoined from prosecuting the suit in assumpsit referred to in paragraph 9 hereof and instituted by it on March 26, 1929, against the plaintiff to recover a judgment for said sum of $125,000, which it is alleged the plaintiff had agreed and promised to pay to it based on its letter of acknowledgment set forth in paragraph 24 hereof, upon which petition an order to show cause was issued against the defendant bank.
(30) That the defendant bank on April 15, 1929, and while the matters last above referred to were pending before this court as a court of bankruptcy to recover said sum of $125,000 as the property of the defendant trustee, and to enjoin the defendant bank from interfering with the jurisdiction of said court of bankruptcy by bringing suit in relation to the subject-matter then pending before said court, dismissed the attachment suit above mentioned upon its own motion and at its own costs; said dismissal being taken without the affirmative consent of the Fred Herrick Lumber Company and/or of the plaintiff as garnishee therein.
(31) That on September 15, 1928, and for a considerable time prior thereto, the Export Lumber Company and the Milwaukee Lumber Company each had valid and subsisting claims against the Fred Herrick Lumber Company in the sum of approximately $70,000 and $526,764.86, respectively, and said claims, and each of them, remained unpaid and have been filed and allowed in said amounts in the bankruptcy proceedings in the District Court of Oregon now pending in the matter of the Fred Herrick Lumber Company, a corporation, bankrupt.
(32) That on September 15, 1928, and for a long time prior thereto, and at all times since, said Fred Herrick Lumber Company has been and now is insolvent, in that its assets, exclusive of those sold to the plaintiff, did not on said date and do not now exceed the sum of $25,000, and its liabilities on said date and at all times subsequent thereto, exclusive of those directed paid out of the proceeds of the sale of those assets sold to the plaintiff, have been in excess of $600,000.
(33) That the defendant bank never filed its appearance in the District Court of the United States for the District of Oregon in the matter of the estate of said Fred Herrick Lumber Company, bankrupt, and never filed any claim therein.
(34) That on September 15, 1928, the said Fred Herrick Lumber Company was contemplating discontinuing its business and disposing of all of its assets, but had not at the time of the filing of its voluntary petition in bankruptcy and its adjudication in bankruptcy on January 15, 1929, had not disincorporated.
(35) That the articles of incorporation of the Fred Herrick Lumber Company state the purpose for which it is organized to be as follows: 'The enterprise, business or pursuit for which this corporation is formed is for the purpose of engaging in the general lumber, timber, milling and allied interests, together with the building of such railroads, logging roads and other things necessary in the full and complete operation thereof,' and said articles of incorporation further provide that said corporation shall have power 'to purchase, acquire, hold, dispose of the stock, bonds and other evidences of indebtedness of any corporation, domestic or foreign, and to issue in exchange therefor its stocks, bonds, or other obligations and while owner of such stocks, bonds, or other obligations, to possess and exercise in respect thereto, all the rights, powers and privileges of individual owners or holders thereof, and to exercise any and all voting powers thereon,' and section 6862 of the laws of Oregon provides that, upon the filing of the articles of incorporation, the incorporators are 'authorized to carry into effect the objects specified in the articles * * * with power * * * to purchase, possess, and dispose of such real and personal property as may be necessary and convenient to carry into effect the objects of the incorporation.'
(36) That the officers, directors, and stockholders of the Fred Herrick Lumber Company knew, or should have known, on September 15, 1928, of the insolvency of Fred Herrick Lumber Company.
(37) That the purchase agreement made by the Fred Herrick Lumber Company with the defendant bank and the transfer or assignment of the aforesaid sum of $125,000 by said Fred Herrick Lumber Company to the defendant bank as the purchase price of the notes of the Coeur d'Alene Mill Company held by the defendant bank was made within four months prior to the filing of the petition in bankruptcy of said Fred Herrick Lumber Company, and was made with the intent and purpose on its part to hinder delay, or defraud its creditors, and for the purpose of benefiting Fred Herrick personally by the acquisition of his personal guaranty to the defendant bank of said notes, and that it is impossible for the court to determine how much of the purchase price of $125,000 was paid by said Fred Herrick Lumber Company for the notes of the Coeur d'Alene Mill Company and how much for the benefit which was to accrue to Fred Herrick individually, and that said defendant bank, as such transferee, is not a purchaser in good faith and for a present fair consideration within the meaning of section 67e of the bankruptcy Act of 1808 as amended (11 USCA § 107(3).
Upon and because of the foregoing findings of fact, the court makes the following
Conclusions of Law.
I. That the agreement mentioned in paragraphs 18 and 21 of the foregoing findings of fact and the acts and things done pursuant thereto, including the transfer or assignment of the aforesaid sum of $125,000 by said Fred Herrick Lumber Company to the defendant bank, as the purchase price of the notes of the Coeur d'Alene Mill Company held by the defendant bank, are null and void as against the creditors of said Fred Herrick Lumber Company, bankrupt, and/or the defendant trustee under the provisions of section 67e of the Bankruptcy Act of 1898 as amended.
II. That the aforesaid agreement and the acts and things done pursuant thereto, including the purchase by said Fred Herrick Lumber Company of the notes of the Coeur d'Alene Mill Company, were and are beyond the charter purpose of said Fred Herrick Lumber Company, and were and are not necessary or convenient to carry into effect the objects of its incorporation, and therefore were and are ultra vires and of no force and effect.
III. That the 'Corporate Trust Fund' doctrine of the state of Oregon, unaided by the provisions of section 67e of the Bankruptcy Act of 1898, as amended, and unaided by the doctrine of ultra vires above mentioned, is not sufficient, standing alone, to sustain a finding in favor of the defendant trustee.
IV. That, as between the defendant bank and the Fred Herrick Lumber Company, the assignment of said sum of $125,000 by the Fred Herrick Lumber Company out of the purchase price of $750,000 to be paid by the plaintiff to said Fred Herrick Lumber Company was a valid and enforceable equitable assignment of said sum, but, as between the defendant bank and the defendant trustee, the same is not valid and enforceable because of the provisions of section 67e of the Bankruptcy Act of 1898 as amended and/or the doctrine of ultra vires above referred to.
V. That the defendant bank did not waive any of its rights herein by the institution of the attachment suit against the Fred Herrick Lumber Company in which the plaintiff was served as garnishee, nor by the institution of the suit in assumpsit against said plaintiff.
VI. That a determination of the question of duress raised by the defendant trustee as having been exercised by the defendant bank upon said Fred Herrick Lumber Company at the time of the making of the agreement mentioned in paragraph 16 of the foregoing finings of fact is not necessary to a decision of this case.
VII. That the defendant trustee is the owner of and entitled to the immediate possession and delivery of said sum of $125,000 and accrued interest now on deposit to the credit of the clerk of this court in the First Union Trust & Savings Bank of Chicago, Ill., and the defendant bank has not right, title, claim, or interest therein.
WILKERSON, District Judge.
This transaction in question, in the opinion of the court, must be held invalid under that portion of section 67e of the Bankruptcy Act 1898, as amended (11 USCA § 107(3), which provides: 'All conveyances, transfers, assignments, or incumbrances of his property or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this title within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration. * * * '
The Herrick Lumber Company was insolvent at the time of the transaction. The Milwaukee Lumber Company and the Export Lumber Company had valid claims against it for the moneys diverted through Herrick from them to the Herrick Lumber Company. The contention that the Herrick Lumber Company is not to be charged with Herrick's knowledge as to the source of the money cannot be accepted. The rule which would enable the Herrick Lumber Company to receive through its president this money which he had taken wrongfully from other companies controlled by him and obtain the benefit of the use of the money without being chargeable with the president's knowledge as to real ownership of the funds so diverted is repugnant to equity. Moreover, aside from the president's knowledge, the real character of the transactions with the Milwaukee and Export Companies was brought home to the Herrick Lumber Company by circumstances which put it on inquiry and precluded it from closing its eyes and saying that it did not know what could easily have been found out.
If the claims of the Milwaukee and Export Companies are valid, the Herrick Lumber Company was admittedly insolvent, and, upon the record, it must be held that the transfer of the $125,000 to the First National Bank was made with intent to hinder, delay, and defraud the creditors of the Herrick Lumber Company. Dean v. Davis, Trustee, 242 U.S. 438, 444, 37 S.Ct. 130, 61 L.Ed. 419.
It cannot be held, on this record, that the transaction with the First National Bank was in good faith and for a present fair consideration. Quite independent of the question of duress, it is prefectly clear that the transaction with the bank was more than the mere purchase of the notes of the Coeur d'Alene Mill Company. Herrick was a guarantor of the notes. The bank gave notice that it intended to proceed against Herrick in bankruptcy. Inextricably interwoven as a part of the consideration for the deal was the protection of Herrick. It is impossible to determine how much of the $125,000 was paid for the Coeur d'Alene notes and how much for the benefit which was to accrue to Herrick. Benefit to Herrick was not a proper consideration, under the circumstances, for the transfer of the property of the Herrick Lumber Company. It cannot be said, therefore, that the purchase of the notes was a good-faith transaction and for a fair consideration.
The court is of the opinion that the objection of ultra vires is well taken. The charter of the Herrick Lumber Company states definitely the purpose for which it is organized as follows: 'The enterprise, business or pursuit for which this corporation is formed, is for the purpose of engaging in the general lumber, timber, milling and allied interests, together with the building of such railroads, logging roads and other things necessary in the full and complete operation thereof.'
The laws of Oregon (Code Or. 1930, Sec. 25-208) provide that, upon the filing of the articles of incorporation, the incorporators are 'authorized to carry into effect the objects specified in the articles, * * * with power * * * to purchase, possess, and dispose of such real and personal property as may be necessary and convenient to carry into effect the objects of the incorporation.'
To be sure, the articles of incorporation of the Herrick Lumber Company, after stating the purpose for which the corporation is organized, contain an elaborate enumeration of the powers which it is asserted the corporation can exercise. This enumeration of powers, however, must be read in connection with the statutes and the statement of corporate purpose in the articles of incorporation. It is not an amplification of the purpose for which the corporation is organized. It is an enumeration of powers to be exercised when they are 'necessary and convenient to carry into effect the objects of the incorporation.'
Protecting Herrick was not germane to the purpose for which the Herrick Lumber Company was organized. Diversions of corporate funds for the benefit of an officer of the corporation are generally held to be ultra vires. The transaction must be held to be beyond the charter prowers of the Herrick Lumber Company.
The trust fund rule, which it is claimed is the law of Oregon, is invoked by the trustee. That rule, however, unaided by the bankruptcy statute, above cited and applied, and the doctrine of ultra vires, does not assist the trustee. If the transaction with the bank was within the power of the Herrick Company, it cannot be said that the company at the time of the transaction had ceased to do business. There is much uncertainty about this trust fund doctrine, and, standing alone, it is not sufficient to sustain a finding in favor of the trustee.
As to the other points relied on by the trustee, the findings on the facts and the law are in favor of the bank. As between the bank and the Herrick Company, the intention of the parties is clear; and, but for the objections of fraud and ultra vires, there would have been an equitable assignment of the fund.
The bank did not waive any of its rights by the institution of either the attachment or the assumpsit suit. For the reasons above stated, the fund on deposit with the clerk should be turned over to the trustee.