Opinion
No. 4638.
October 4, 1932.
Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; James H. Wilkerson, Judge.
Suit of interpleader by the Edward Hines Western Pine Company against the First National Bank of Chicago and another. From the decree ( 1 F. Supp. 550), defendant named appeals.
Affirmed.
The Edward Hines Western Pine Company (hereinafter called the Pine Company) filed its suit of interpleader in the court below against the appellant and the appellee, each of whom claimed $125,000 in the hands of the Pine Company and had instituted proceedings against the Pine Company to recover the same. Under the terms of an interlocutory decree entered in the interpleader suit, the Pine Company paid to the clerk of the court the sum of $125,000, and was released from further liability, and the appellant and appellee were ordered to present their respective claims by answer to the bill of interpleader. Upon trial of the issues thus formed, the court awarded the money to the appellee.
It appears from the record of the trial that the Fred Herrick Lumber Company, now bankrupt (hereinafter referred to as the bankrupt), was organized in 1923, under the laws of Oregon, by Fred Herrick, who, on September 15, 1928, owned all the outstanding shares of stock except fifty shares owned by Frank J. Klobucher, fifty shares owned by James W. Girard, one share owned by Blaine Hallock, and one share owned by E.E. Flood. On said date, and for a considerable period prior thereto, all of said shareholders constituted the board of directors of the corporation, and Fred Herrick was its president.
The preliminary construction work of the corporation, consisting of an elaborate plant and accessories at Burns, Or., had not been completed when its assets were sold in September, 1928. It owned, at one time, a valuable timber contract with the government, which was to furnish raw material for the operation of its plant when completed, but prior to September, 1928, it had lost this contract and the Pine Company had secured it. This situation made necessary the sale of the assets of the corporation, and the Pine Company was the most available purchaser. Negotiations to effectuate a sale to the Pine Company had been under way for some time, and on September 15, 1928, the said Fred Herrick, James W. Girard, and E.E. Flood, president and directors of the bankrupt, accompanied by Richard S. Munter, its attorney, were in Chicago to conclude said negotiations. On that day a preliminary contract was executed by which the bankrupt agreed to sell, and the Pine Company agreed to purchase, all of bankrupt's assets, with minor exceptions, for the sum of $750,000. It provided for immediate drafting and execution of a formal contract covering all details, but it was understood that the formal contract could not be executed by the Pine Company until return to city of its president, Edward Hines. The formal contract was prepared and was executed by the bankrupt, by Fred Herrick, president, on September 15, 1928. It was executed by the Pine Company, by Edward Hines, president, and dated on September 20, 1928.
For many years prior to September 15, 1928, Fred Herrick had operated in a large way as a lumberman in the Northwest. In addition to the bankrupt, he had organized a number of other corporations, among them being three under the laws of Idaho as follows: In 1910, the Milwaukee Lumber Company (hereinafter referred to as the Milwaukee Company); in 1920, the Cœur d'Alene Mill Company (hereinafter referred to as the Cœur d'Alene Company); and in 1923, the Export Lumber Company (hereinafter referred to as the Export Company). He at all times held all the stock, except qualifying directors' shares, in each of these corporations, and was a director and president of each. He also owned a half interest in the Scotch Lumber Company, a corporation doing business in Alabama, and was interested in, or largely owned, certain other companies.
It is apparent from the evidence that Fred Herrick dominated the aforenamed corporations organized by him. While each corporation had its own individual creditors and was heavily indebted, Herrick, as the owner of all the stock except qualifying shares, was apparently looked upon by the officers, directors, and employees of the corporations as the owner of the corporations with the right to do with their assets as he chose.
The plant of the bankrupt being in process of construction, the bankrupt was constantly in need of money, and its officers and directors looked to Herrick to find the money. Because they did not know the source of all the money and credit supplied through Herrick, those in charge of the books of the bankrupt adopted a bookkeeping expedient by which all money, funds, and credits supplied and arranged for by Herrick, with the exception of loans from the local banks, were credited on the books of the bankrupt to an account known as the "Fred Herrick Advance Account." This account ran into figures largely in excess of a million dollars. Large sums credited to this account represented money advanced or materials supplied by the Milwaukee Company and the Export Company by direction of Herrick. While the other officers and directors of the bankrupt did not know the exact amounts coming from those companies, they did know large sums were being thus obtained.
The Milwaukee Company, controlled by Herrick, charged all moneys withdrawn from it by him or paid out for the benefit of the bankrupt on his orders, to an account known as "Fred Herrick Advances," and kept no account of the portion thereof that went to the use of the bankrupt. An examination of other records, memoranda, and canceled checks of the company disclosed that checks in the sum of $109,200 were drawn by the Milwaukee Company to the order of the bankrupt, and that $318,622 was paid out by the Milwaukee Company to cover Fred Herrick's individual checks payable to the order of the bankrupt. Other identified items paid out by the Milwaukee Company, approximating $100,000, were traced through its records to the bankrupt.
The Export Company of Harrison, Idaho, borrowed $100,000, and from this sum made advances for the benefit of the bankrupt in excess of $60,000, and also furnished bankrupt large quantities of ties and other merchandise, all of which were credited to the "Fred Herrick Advance Account" on the books of the bankrupt.
The managing officers of the bankrupt treated all funds credited to the "Fred Herrick Advance Account," including the funds and material from the Milwaukee and Export Companies, as personal advances made by Fred Herrick, and freely paid from and charged against said account personal bills of Fred Herrick and wife, and also charged against it the shares of stock in the corporation issued to him. A large credit appearing in the account in favor of Herrick in February, 1928, steps were taken by the bookkeeper, with the assent of certain directors, to issue to Fred Herrick, at a par value of $100 per share, 10,202 additional shares of capital stock in the corporation, charge the same against the "Fred Herrick Advance Account," and credit his stock subscription account therewith. The said charge and credit were made on the books of the bankrupt, but the stock was never actually issued or delivered.
In May, 1926, a line of credit was extended by appellant, the First National Bank of Chicago, to the Cœur d'Alene Company, which line of credit was increased from time to time. In the autumn of 1927 all the different notes evidencing this indebtedness were renewed in the form of three demand notes of the Cœur d'Alene Company, totaling $250,000. The entire indebtedness of the Cœur d'Alene Company to the appellant, on September 15, 1928, including a thirty-day note for $5,270 given appellant August 17, 1928, to cover an overdraft, amounted to $255,270. This indebtedness was secured by two continuous guaranties, one executed by Fred Herrick and Anna Herrick, his wife, and the other by E.W. Eller and H. Kipp Eller, his wife. The appellant claimed an understanding with Fred Herrick and his financial advisor, E.E. Flood, whereby Herrick's individual interests, particularly his equities in the various corporations in which he was interested, were to be kept free and unpledged for the equal protection of all his personal obligations, including his guaranty of the Cœur d'Alene notes to the appellant. The appellant had come to look upon, and had classified, the Cœur d'Alene notes as slow, inactive paper, and relied heavily upon Herrick's guaranty. In April or May, 1928, Herbert P. Snyder, one of appellant's vice presidents, went to the offices of the Cœur d'Alene Company in Idaho to talk over the financial condition of the company with said J.W. Girard, who was then in active charge of the company. Girard told Snyder then that the company was strictly up against it, could not meet the interest on its general obligations, and that the payment of the notes to appellant out of the assets of the Cœur d'Alene Company was an impossibility. He told Snyder at the same time that Herrick had valuable assets and they hoped to pay most of the debts. Subsequently Snyder became suspicious that Herrick's equities were not being kept free, but that he was preferring certain creditors.
On September 15, 1928, J.W. Girard went to appellant's bank in Chicago to cash a check, and while there casually disclosed to said Herbert P. Snyder that the bankrupt was that day consummating a sale of its assets to the Pine Company. At Snyder's request, Girard discussed the whole situation with Snyder and E.E. Brown, first vice president of appellant. Girard was told of appellant's suspicions that Herrick's personal assets were not being kept free for all his creditors. Girard, after some figuring on a pad of paper, expressed an opinion that not more than 50 or 60 per cent. could be realized on the Cœur d'Alene paper, including Herrick's personal guaranty of the same. The other guaranties were apparently considered of little or no value. Immediately following this conversation, Brown and Snyder sought out Fred Herrick and E.E. Flood. Through conversation with them, their suspicions were confirmed that appellant was not being kept on an equal footing with some of Herrick's other creditors, and they learned that Herrick's stock in the Scotch Lumber Company, which was considered valuable, had been pledged as security to the First National Bank of Portland, Or. Thereupon, after a heated discussion, Brown, on behalf of appellant, insisted that the notes of the Cœur d'Alene Company to it be forthwith paid or the stock held by Fred Herrick in the Scotch Lumber Company be retransferred to him and all stock owned by him be pooled for the benefit of his creditors. Brown stated to the representatives of the bankrupt that, if his demands were not met, appellant would start its attorney for the West that night to investigate, and, if nothing was done about the preference to the Portland bank, then Fred Herrick would have to be thrown into bankruptcy to set aside the preference. To prevent such action on the part of appellant, the representatives of the bankrupt, on the same day after repeated negotiations with appellant, entered into a written agreement with the appellant designated as "Memorandum of Purchase," wherein the bankrupt agreed to purchase from appellant, for the sum of $125,000, the notes of the Cœur d'Alene Company evidencing the indebtedness of $255,270 and interest, together with the written guaranties of said Fred Herrick and wife and E.W. Eller and wife.
"September 15, 1928.
Pursuant to the terms of the agreement, on September 20, 1928, a letter signed by the bankrupt, by Fred Herrick, president, was delivered to the Pine Company, directing the Pine Company to pay to the appellant, for the account of bankrupt, the sum of $125,000 out of the amount payable to the bankrupt under the terms and conditions of the contract of sale between the bankrupt and the Pine Company. Receipt of this letter and directions therein contained was, on the date of its delivery, and after the execution of the sale contract, acknowledged and accepted in writing, by the Pine Company.
William S. Bennett, vice president of the Pine Company, went to Burns, Or., to pay for and take over the assets of the bankrupt, and on the 4th day of October, 1928, the bankrupt, pursuant to its contract, conveyed to the Pine Company substantially all of its property. It also furnished the Pine Company with a bulk sales affidavit purporting to itemize its debts, showing a total indebtedness of $729,266.33. The Pine Company then stood ready to pay to the bankrupt the agreed purchase price of $750,000, but, instead of taking said sum into its possession, the bankrupt, by corporate resolution, directed the Pine Company to pay directly to creditors of the bankrupt the amounts designated in a list furnished by the bankrupt. The total amount directed in said list to be paid was $740,302.47 to creditors and a balance of $9,697.53 to the bankrupt. Among the payments directed by said list was $125,000 to the appellant, $30,319.84 to the Milwaukee Company, and $40,441.71 to the Export Company. At the time of the delivery to the Pine Company of the aforesaid list on October 5, 1928, however, a separate agreement was entered into between the bankrupt and the Pine Company reciting that, whereas certain creditors, represented by Fabian B. Dodds, desired to investigate the claim of James D. Lacey Co. for $24,661.81 and that of First National Bank of Chicago for $125,000, it was agreed that the Pine Company hold such sums as trustee and not pay them to any one except with the written consent of Richard S. Munter and Fabian B. Dodds, and, if they cannot agree, said sums only to be paid pursuant to the decree of a court of competent jurisdiction. Joint consent of Dodds and Munter not then or thereafter being given, the Pine Company withheld payment to appellant, and appellant began suits against the bankrupt and against the Pine Company to recover the sum in controversy.
On October 26, 1928, Fred Herrick and wife assigned their assets to Spokane Merchants' Association for the benefit of creditors. The creditors thus came into control of the bankrupt, elected a new board of directors, and on January 14, 1929, the newly elected board of directors authorized and caused to be filed on behalf of bankrupt a voluntary petition in bankruptcy in the United States District Court in the District of Oregon, resulting in an adjudication on January 15, 1929. In due time J.D. Meikle was appointed and qualified as trustee.
On April 23, 1929, claims were filed and allowed against the bankrupt in the United States District Court in Oregon as follows:
Milwaukee Lumber Company ...... $ 20,319.84 Milwaukee Lumber Company ...... 506,445.02 Price, Waterhouse Company ... 5,418.42 Export Lumber Company ......... 91,593.39.
The Export Lumber Company claim has since been amended and now stands allowed for $73,843.39.
Other related adjudications in bankruptcy were as follows: Fred Herrick, on February 9, 1929; the Milwaukee Company and the Cœur d'Alene Company on April 30, 1929; all in the United States District Court in Idaho.
In due time J.D. Meikle, trustee of the bankrupt, began ancillary proceedings in bankruptcy in the United States District Court in Chicago, and filed his petition for an order to show cause why the Pine Company should not pay over the said sum of $125,000 to him as such trustee, which proceeding was pending when the Pine Company began its suit of interpleader.
The court below filed, in writing, detailed findings of fact in substantial accord with the foregoing statement, and made certain additional findings in the nature of conclusions of fact in substance as follows:
That on September 15, 1928, long prior thereto, and thereafter, the bankrupt was insolvent; that its assets, exclusive of those sold to the Pine Company, did not exceed $25,000 in value, while its liabilities, exclusive of those directed to be paid out of the proceeds of the sale of the Pine Company, were in excess of $600,000; that on said date, and for a considerable time prior thereto, the Export Company and the Milwaukee Company each had valid and subsisting claims against the bankrupt in the sum of approximately $70,000 and $526,764.86, respectively.
That the officers, directors, and stockholders of the bankrupt knew, or should have known, on September 15, 1928, of the insolvency of the bankrupt.
That the purchase agreement made by the bankrupt with the appellant and the transfer or assignment of the aforesaid sum of $125,000 by the bankrupt to the appellant as the purchase price of the notes of the Cœur d'Alene Company and said guaranties held by appellant was made within four months prior to the filing of the petition in bankruptcy, 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 appellant 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 the bankrupt for the notes of the Cœur d'Alene Company, and how much for the benefit which was to accrue to Fred Herrick, individually, and that appellant 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 1898 as amended ( 11 USCA § 107(e).
That, at the time the bankrupt agreed to purchase from the appellant the Cœur d'Alene notes with the guaranties of Herrick and Eller and their wives, the appellant knew that the bankrupt was disposing of substantially all of its assets, and contemplated a suspension of its business, and knew that the main business of said company was the purchase of timber and the milling thereof and the sale of lumber.
The trial court also filed conclusions of law, among them being, in substance, the following:
That the agreement between the bankrupt and appellant whereby the bankrupt agreed to purchase the Cœur d'Alene notes with their guaranties, and the transfer or assignment of the sum of $125,000 by bankrupt to the appellant as the purchase price of said notes and guaranties, were null and void as against the creditors of the bankrupt and the appellee, under the provisions of section 67e of the Bankruptcy Act of 1898 as amended.
That the said agreement and all things done pursuant thereto were beyond the charter purposes of the bankrupt, and were not necessary or convenient to carry into effect the objects of its incorporation, and therefore were ultra vires and of no force and effect.
"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: [Description of instruments sold.]"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 to the First National Bank of Chicago, bearing this date, in the principal sum of One Hundred Twenty-Five Thousand ($125,000) Dollars, payable October 5, 1928, without interest.
"As further consideration the Fred Herrick Lumber Company has signed an order directing Edward Hines 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."
John N. Ott and Homer J. Livingston, both of Chicago, Ill., for appellant.
Sidney Teiser (of Teiser Keller), of Portland, Or., and Joseph B. Fleming and Adrian L. Hoover, both of Chicago, Ill., for appellee.
Before ALSCHULER and SPARKS, Circuit Judges, and WHAM, District Judge.
Section 67e of the Bankruptcy Act of 1898, as amended ( 11 USCA § 107(e), provides that, if a debtor, within four months of the filing of the petition in bankruptcy, makes any transfer or assignment "with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them," such transfer or assignment shall be null and void except as to purchasers in good faith and for a present fair consideration, and it shall be the duty of the trustee to recover the same.
That the assignment by the bankrupt to the appellant of the sum in controversy was made within four months prior to the filing of the petition in bankruptcy is admitted and not in controversy. That the bankrupt was insolvent on said date cannot be questioned, if the claims of the Export Company and the Milwaukee Company filed and allowed against the estate of the bankrupt in United States District Court of Oregon, were valid claims. Appellant, being in no way a party to that proceeding and not having intervened or entered its appearance therein, is not bound by the allowance of the claims in that court, but the burden in this case rests upon appellee to prove the validity of those claims against the bankrupt before they can be considered here as affecting the solvency of the bankrupt. Gratiot County State Bank v. Johnson, 249 U.S. 246, 39 S. Ct. 263, 63 L. Ed. 587.
Appellant insists that the evidence shows that the bankrupt had no debts to the Milwaukee Company and the Export Company aside from those of $30,319.80 and $40,441.71, respectively, which were paid from the proceeds of the sale to the Pine Company, and that the bankrupt was, in fact, solvent on September 15, 1928; that the transactions upon which are based the claims for the additional sums of $526,764.86 and $70,000 which the court below found to be due from the bankrupt to the Milwaukee Company and the Export Company, respectively, were transactions, not between those companies and the bankrupt, but entirely between said companies and Fred Herrick, individually; that the money, funds, and credits represented by said sums were advanced to Fred Herrick individually by said companies, and he, solely, is liable therefor to the Milwaukee and Export Companies; that, if he advanced such money, funds, and credits to the bankrupt, or caused the same to be used for its benefit, he did so after the same had become his individual assets and the bankrupt became indebted solely to him; that the bankrupt has paid Fred Herrick in full for the moneys and funds so advanced by him.
The appellant's contentions in this respect are not upheld by the facts disclosed by the evidence. Fred Herrick owned substantially all the stock in, was president of, and dominated each of said three corporations. Taking advantage of this situation, he used, or caused to be used, the funds of the Milwaukee Company and the Export Company to pay the expenses of and carry on the construction work of the bankrupt. The assets sold by the bankrupt to the Pine Company were paid for in no small measure by the money thus diverted to the bankrupt from those companies. Not only did Fred Herrick, as president of bankrupt, divert the funds from said companies to the bankrupt, but the other officers of the bankrupt had sufficient knowledge of the source of the funds to put them on notice that they were not in fact the personal funds of Fred Herrick, but were being diverted by him from the Milwaukee Company and the Export Company. The situation disclosed by the evidence is well stated by the court below, as follows: "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."
The corporation receiving the benefit of the wrongfully diverted funds became the debtor of and liable for such funds to the corporations from which the funds were diverted. Brown v. Pennsylvania Canal Co. (D.C.) 229 F. 444, affirmed 235 F. 669 (C.C.A. 3); McMillan v. National Wool Warehouse Storage Co., 28 F.2d 793 (C.C.A. 9); Guay v. Holland System Hull Co., 244 Mass. 240, 138 N.E. 557; Corey et al. v. Independent Ice Co., 226 Mass. 391, 115 N.E. 488.
The fact that the bankrupt gave credit on its books to Fred Herrick for the funds at the time they were used for its benefit and subsequently permitted him to use or withdraw part or all thereof for personal uses cannot affect bankrupt's liability to the corporations from which the funds were wrongfully diverted for the bankrupt's benefit.
The contention that the claims were barred by the laches of the Milwaukee Company and the Export Company cannot be maintained, in view of the fact that the actions of those companies were at all times controlled by Fred Herrick who, for his own selfish purposes, diverted the funds in question from them to the use of the bankrupt. Young v. Columbia Land Co., 53 Or. 438, 446, 99 P. 936, 101 P. 212, 133 Am. St. Rep. 844.
The claims in question, approximating a total of $600,000, being valid subsisting claims against the bankrupt on September 15, 1928, the bankrupt was unquestionably insolvent and the officers and directors of the bankrupt, knowing or having had notice of the indebtedness, must be held to have had knowledge of the bankrupt's insolvency.
Not only was the bankrupt insolvent at the time of the assignment in controversy with the knowledge of its officers and directors, but they authorized and made the assignment, not for the benefit of the bankrupt, but for the personal benefit of Fred Herrick, president of the bankrupt. In the transaction their sole purpose was to gain control of Fred Herrick's personal guaranty of the Cœur d'Alene notes held by appellant to forestall threatened action thereon against Fred Herrick. The evidence shows that the notes of the Cœur d'Alene Company in themselves were of little or no value, and the officers and directors of the bankrupt knew this. The financial condition of the Cœur d'Alene Company had been steadily growing worse, its plant had been or was about to be closed down, its assets were mortgaged to the approximate limit of their then value, and as early as April or May, 1928, J.W. Girard, an officer and director of the bankrupt and active manager of the Cœur d'Alene Company, had informed H.P. Snyder, a vice president of appellant, who had gone to Idaho to investigate the possibilities of collecting the notes, of the desperate financial condition of the company, and that the notes held by appellant could never be paid by the company. They also knew that Fred Herrick was financially embarrassed, could not pay all of his debts, and that he would be in control of his guaranty of said notes if acquired by the bankrupt. The inevitable effect of the assignment by the bankrupt of $125,000 in cash for the notes and guaranties on September 15, 1928, under the circumstances, was to hinder, delay, and defraud the bankrupt's creditors. Its officers and directors having authorized and made the assignment with knowledge of the facts and circumstances disclosed by the evidence as above set forth, it must be held to have intended the necessary consequences of their acts, which were to hinder, delay, and defraud its creditors. Dean v. Davis, 242 U.S. 438, 443, 37 S. Ct. 130, 61 L. Ed. 419; Lovett v. Faircloth, 10 F.2d 301 (C.C.A. 5).
To render null and void under section 67e of the Bankruptcy Act a conveyance, transfer, or assignment made by a bankrupt with intent to delay, hinder, or defraud its creditors, except as to purchasers in good faith and for a present fair consideration, it is not necessary to prove that such intent was shared by the transferee. Bankruptcy Act, § 67e, 11 USCA § 107(e); Sherman v. Luckhardt, 67 Kan. 682, 72 P. 277; In re Brown (D.C.) 291 F. 430, 433; Remington on Bankruptcy (3d Ed.) vol. 4, § 1931, pp. 775, 776; Collier on Bankruptcy (13th Ed.) vol. 2, p. 1559.
The burden was on the appellant, if it would save the transaction under said section 67e, to prove that it was a purchaser in good faith and for a present fair consideration. Remington on Bankruptcy (3d Ed.) vol. 4, §§ 1931, 1933. Appellant has failed to meet this burden. It deliberately created the immediate situation that caused the formation of the fraudulent intent on the part of the officers and directors of the bankrupt. After the fraudulent intent on their part became apparent to the appellant by their offer wrongfully to purchase the Cœur d'Alene notes and guaranties with funds of the bankrupt for the protection of Fred Herrick, personally, appellant knowingly participated in the plan.
The chief consideration passing from appellant to the bankrupt in the transaction was Fred Herrick's guaranty purchased by the bankrupt, as appellant knew, for the personal benefit of Fred Herrick. As pointed out by the trial court, personal benefit to Fred Herrick was not a proper consideration, under the circumstances, for the transfer of the bankrupt's property, and "it is impossible to determine how much of the $125,000 was paid for the Cœur d'Alene notes and how much for the benefit that was to accrue to Fred Herrick." Furthermore, pending actual receipt of the money, appellant by the terms of the "Memorandum of Purchase" retained, as security, both the notes and the guaranties. It still has all that it ever had.
Under the circumstances disclosed by the record, the assignment in question must be held to be wholly null and void as against creditors under the provisions of section 67e of the Bankruptcy Act.
Was the purchase by the bankrupt of the Cœur d'Alene notes, with their guaranties, under the facts disclosed by the evidence, within its charter powers?
The bankrupt is a corporation organized under the general corporation laws of the state of Oregon. It has only such powers as are given by the laws of that state. Thompson on Corporations (3d Ed.) vol. 8, § 6582; Chicago, etc., Ry. Co. v. Union Pac. Ry. Co. (C.C.) 47 F. 15; Canada Southern Ry. Co. v. Gebhard, 109 U.S. 527, 3 S. Ct. 363, 27 L. Ed. 1020; Oregon Railway Navigation Co. v. Oregonian Railway Co., 130 U.S. 1, 9 S. Ct. 409, 32 L. Ed. 837. This is true, even though powers in excess of those authorized by the laws of Oregon be expressed in the bankrupt's articles of incorporation. Oregon Railway Navigation Co. v. Oregonian Railway Co., supra; State of Oregon v. Portland General Electric Co., 52 Or. 502, 95 P. 722, 98 P. 160; Wemme v. First Church of Christ, 110 Or. 179, 219 P. 618, 223 P. 250; Haberer Co. v. Smerling, 307 Ill. 191, 138 N.E. 675.
Section 25-205 of the Oregon Code provides that the articles of incorporation of a corporation shall specify, among other things, "the enterprise, business, pursuit, or occupation in which the corporation proposes to engage."
Section 25-208 thereof provides that, upon filing the articles of incorporation "as herein provided," persons subscribing the same shall be deemed a body corporate "authorized to carry into effect the objects specified in the articles," with power, among others, to sue and be sued, to contract and be contracted with, and (paragraph 4) "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." Except in those instances where the buying and selling of property is specified as an object of the incorporation as provided in said section 25-205, no power is given a corporation by the laws of Oregon to buy and sell property save the limited power given in paragraph 4 of said section 25-208 to purchase, possess, and dispose of such as may be necessary to carry into effect the objects of the incorporation.
The articles of incorporation of the bankrupt 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. * * *"
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. * * *"
The argument advanced by appellant that the power to purchase and sell stocks and bonds expressed in the bankrupt's articles of incorporation as a power may properly be considered as an object of the incorporation cannot be accepted without ignoring the plain language of the articles when read in the light of the sections of the Oregon Code above discussed. The right to buy and sell securities of other corporations given in bankrupt's articles of incorporation must be considered, not as an object of its incorporation, but as a power limited by paragraph 4 of section 25-208 of the Oregon Code to the purchase and sale of such securities as may be necessary and convenient to carry into effect the objects of the incorporation.
It appears from the evidence that the purchase by the bankrupt of the Cœur d'Alene notes was neither convenient nor necessary to carry into effect any of the objects of its incorporation as set forth above. The real purpose and effect of its acquisition of the notes and guaranties was to protect the personal interests of Fred Herrick, the president of the corporation, and not to promote the objects of the corporation. The purchase for said purpose of promissory notes in which the bankrupt had no proper interest and which were in no way calculated to further the objects of the incorporation was more than an abuse or misuse of a corporate power. It was an act entirely beyond the charter powers of the bankrupt. The Oregon Railway Navigation Co. v. Oregonian Railway Co., supra; Calumet Chicago Dock Co. v. Conkling, 273 Ill. 318, 112 N.E. 982, L.R.A. 1917B, 814; Twohy Brothers Co. v. Ochoco Irrigation District, 108 Or. 1, 210 P. 873, 216 P. 189; Central Transportation Co. v. Pullman's Palace-Car Co., 139 U.S. 24, 11 S. Ct. 478, 35 L. Ed. 55; Best Brewing Co. v. Klassen, 185 Ill. 37, 57 N.E. 20, 50 L.R.A. 765, 76 Am. St. Rep. 26; Union Pacific Ry. Co. v. Chicago, etc., Ry. Co., 163 U.S. 564, 16 S. Ct. 1173, 41 L. Ed. 265.
The appellant was charged by law with notice of the limited powers of the bankrupt under its charter and the general corporation laws of the state of Oregon, and cannot plead ignorance of such limitations in avoidance of the defense of ultra vires. Pearce v. Madison, etc., R.R. Co., 21 How. 442, 16 L. Ed. 184; Davis v. Old Colony Railroad Co., 131 Mass. 258, 41 Am. Rep. 221; National Home Building Loan Association v. Home Savings Bank, 181 Ill. 35, 54 N.E. 619, 64 L.R.A. 399, 72 Am. St. Rep. 245; Best Brewing Co. v. Klassen, supra; Steele v. Fraternal Tribunes, 215 Ill. 190, 74 N.E. 121, 106 Am. St. Rep. 160; Citizens' Marine Bank v. Mason, 2 F.2d 352 (C.C.A. 4). Appellant actually knew that the bankrupt was selling out, was no longer seeking to carry out the objects of its incorporation, and was offering to purchase the notes and guaranties from appellant for the personal interest and protection of Fred Herrick.
The contention has been advanced that the purpose and effect of the purchase of the notes was to benefit the bankrupt by eliminating the possibility of interference by the appellant with the pending advantageous sale to the Pine Company of the bankrupt's assets as part of its plan to sell out and quit business. Such a benefit is too remote from the objects of its incorporation to authorize the bankrupt to enter into a transaction that was otherwise clearly beyond its corporate powers. Calumet Chicago Dock Co. v. Conkling, supra; National Home Building Loan Association v. Bank, supra.
The strict doctrine of ultra vires is that an ultra vires contract is wholly void, cannot be ratified, and no performance on either side can give it any effect. Thompson on Corporations (3d Ed.) vol. 4, §§ 2828, 2847; McCormick v. Market National Bank, 165 U.S. 538, 17 S. Ct. 433, 41 L. Ed. 817; Union Pacific Ry. Co. v. Chicago, etc., Ry. Co., supra; Central Transportation Co. v. Pullman's Palace Car Co., supra.
A modification of this strict rule is generally recognized which, in effect, is that a corporation that has received the benefits of an ultra vires contract will not be permitted to retain the benefits and at the same time rely upon the defense of ultra vires to avoid performance of its obligation under the contract. Bowen v. Needles National Bank, 94 F. 925 (C.C.A. 9); Thompson on Corporations (3d Ed.) vol. 4, § 2847; Corpus Juris, vol. 14A, 319. But, where the ultra vires contract has not been executed by either party, the law is that neither can enforce it and its ultra vires nature may be relied upon as a defense against its attempted enforcement. Nassau Bank v. Jones, 95 N.Y. 115, 47 Am. Rep. 14; Fletcher, Encyclopedia of Corporations, vol. 3, § 1530, p. 2594; Corpus Juris, vol. 14A, 317; Thompson on Corporations (3d Ed.) vol. 4, § 2846.
Under the evidence in this case, the agreement as contained in the "Memorandum of Purchase" remains, in effect, unexpected. Neither party has received the actual fruits and benefits of the transaction. Appellant has all that it had before the transaction, having retained both the notes and the guaranties as security for the actual payment of the purchase price by the bankrupt. Since the ultra vires agreement remains unexpected, the defense of ultra vires may rightfully be urged against appellant's claim to the sum in controversy. Dalles Lumber Mfg. Co. v. Wasco Woolen Mfg. Co., 3 Or. 527; Twohy Brothers v. Ochoco Irrigation District, supra; California National Bank v. Kennedy, 167 U.S. 362, 17 S. Ct. 831, 42 L. Ed. 198; Fletcher, Encyclopedia of Corporations, vol. 3, § 1530, p. 2594; Thompson on Corporations (3d Ed.) vol. 4, § 2847; Bowen v. Needles National Bank, supra.
The bankrupt was insolvent at the time the ultra vires agreement was made. The effect of the agreement, if carried out, would be to deplete the assets of the bankrupt to the detriment of its creditors. The transaction was in fraud of the bankrupt's then existing creditors. The right of the trustee in bankruptcy to rely upon the ultra vires character of the contract in resisting appellant's claim cannot be doubted. Washington Mill Co. v. Sprague Lumber Co., 19 Wn. 165, 52 P. 1067; Brent v. Simpson (C.C.A.) 238 F. 285; Pittsburg Carbon Co. v. McMillin, 119 N.Y. 46, 23 N.E. 530, 7 L.R.A. 46; Corpus Juris, vol. 14A, 336, 337; Thompson on Corporations, vol. 4, § 2910.
For the reasons expressed in this opinion, the decree of the lower court must be affirmed, and it becomes unnecessary to consider other questions discussed in briefs of counsel.
Affirmed.