Opinion
12-29-1903
HOLLINS v. AMERICAN UNION ELECTRIC CO.
A. C. Wall, for appellant. Robert N. McCarter and Mr. Curtis, for receiver.
Proceeding by Frank C. Hollins against the American Union Electric Company. From the finding of a receiver for the defendant, refusing a claim filed by the complainant, he appeals. Affirmed.
A. C. Wall, for appellant. Robert N. McCarter and Mr. Curtis, for receiver.
STEVENSON, V. C.(orally). In the case of the appeal of Frank C. Hollins from the finding of the receiver in this case my conclusion is that the finding of the receiver should be approved. The claim was presented by the creditor and stockholder of the corporation, who filed the bill of complaint, and upon which bill the receiver was appointed. Shortly after the appointment of the receiver, which I think was made on October 27, 1902, the complainant, the appellant here, presented two claims under oath. I find that by mistake I have left these papers in my library, but I can state them sufficiently for present purposes. One of these claims presented to the receiver three notes of the corporation, the American Union Electric Company, dated October 24, 1902, to the order of the appellant, Mr. Hollins, and payable, as I recall it, upon demand. These notes were for the respective sums of $25,459.29, $1,000, and $987.07. The other claim presented was, apparently, on open account, the items of which were set forth in the usual form, and were verified by the usual affidavit. Later the appellant withdrew from the consideration of the receiver the account proved, amounting to some $1,000 or $1,800. A little later he withdrew from the receiver the other sworn claim that he made, so far as it presented the two notes for $1,000 and $987.07, respectively. This left as the claim which the receiver was obliged to consider judicially the single alleged indebtedness of $25,459.29 upon a promissory note—the only note with which we have to deal—one of the three notes dated October 24, 1902. The receiver disallowed the claim on this note, and the matter is now upon review before this court after the fashion of an appeal, the case being practically in form here a suit on this promissory note brought by Mr. Hollins, and ordinarily prima facie proved by the proof of the execution of the note.
Before the trial had progressed very far, Mr. Hollins admitted that the note was made for an excessive amount; that items amountingto $1,459.29 were improperly included in the note, and did not constitute any indebtedness from the corporation to him; that the real debt of the corporation to him amounted to precisely $24,000. This admission, of course, greatly discredited the note as having evidentiary force. It is conceded that Mr. Hollins did pay into the treasury of the company this sum of money, $24,000, and he did it in four payments, the first of which was made on September 4, 1902, and amounted to $10,000; the next on September 20, 1902, amounting to $4,000; the third on September 26, 1902, amounting to $9,000; and the last on October 21, 1902, amounting to $1,000. And I may say here, in passing, that among the various puzzles raised in this case by the proofs and by the lack of proofs the status of this $1,000 payment is certainly one. It seems that Mr. Hollins made that advance at the time when, according to all the indications of the testimony, he was preparing to put the company into insolvency, and probably, although not necessarily, after he had received all the stock from the company which he ever possessed. The force of this piece of paper which is produced is diminished not only by the fact that the note was made for more than was due, but by reason of the fact that the proofs indicate, I think, beyond reasonable doubt, that the note, as well as the other two notes upon which Mr. Hollins first made claim, and which he then afterwards withdrew, were made by the officers and directors of the corporation, who were acting really as the agents of Mr. Hollins, as mere dummies—little, if anything, more.
In order to understand the situation of these directors on October 20, 1902, when they held the meeting, or probably held the meeting, which authorized the giving of these notes, and also the status of the same men, as officers of the corporation, who, on October 24th, actually executed the notes, it is necessary to examine a little into the history of this corporation. In the spring of 1902, Mr. Hollins, a financial man of New York City, in the banking business or syndicate business, undertook to effect a combination of companies in the manufacture, for the most part, of electrical specialties of one kind or another. And he also conceived the idea—probably not at the start, but very soon—of combining with his electrical combination the exploitation of certain pattents, mainly for the manufacture of paper out of straw. He, through his agents, and by means of advertisements, I believe, and otherwise, interested men who were controlling three different businesses of an electrical kind. Mr. Fountain, I believe, controlled and managed a little business under the name of the Electric Specialty Company, or something of that sort; Mr. Swoboda and some associates controlled the Falcon Electric Company; and Mr. Morris was the principal man in the Morris Electric Company—the most important of all. With all these men, who were not men of large affairs, who were not men accustomed to large financial transactions, as all the evidence indicates, Mr. Hollins held various conversations. They swear positively as to the drift of those talks, and as to the arrangements that he proposed to them and which they accepted. His testimony, which perhaps has not been fully written out, is not satisfactory on that subject. A little later I shall deal with their story. At present I am referring to the fact merely to show the history of the company or companies which Mr. Hollins promoted, and the manner in which the parties to this litigation and the principal witnesses became related to those companies. The businesses were consolidated at Ampere, in this state, where there was a factory building of one of them—consolidated to a very large extent. The men who ran the businesses were retained in the employ of the consolidation. Naturally, they understood best how to run their plants, and they were retained; and the evidence indicates that in several instances they were promised handsome salaries, and that was one very large inducement for them to deal with Mr. Hollins. Mr. Hollins proposed that a large corporation should be created, with a capitalization of several millions of dollars. One witness says it was four and a half millions, and I have forgotten what the others say, but it was way up in the millions. And in some one of the various ways by which this thing is done all those subsidiary businesses and companies were to be consolidated in this one corporation, and these persons who turned their properties in were to take payment very largely in stock of that corporation. We find that Mr. Hollins, the promoter—because the inference is irresistible that he did it—took pains that the company which be first formed, the Union Railway Power & Electric Company, should be entirely Controlled by persons who had no connection with the business of the company at all. Morris, Swoboda, and Fountain were all excluded from the management; at least they were not allowed to enter into the financial management of the companies in any way whatever. They ran the business, and the companies were apparently organized under the direction of Mr. Hollins and his agents and attorneys, and as I think, in both instances, by means of dummies from the start.
The minutes of the first corporation, the Union Railway Power & Electric Company, were finally put in evidence, as well as the minutes of the American Union Electric Company and the stock books of the latter company en bloc. I took these books to my library, and made some careful examination of them. The first company, the Union Railway Power & Electric Company, was organized in April, and Mr. Nelson R. Vanderhoof, Mr. Norman Green, and Mr. EdwardCuddy, who appear to have been the incorporators and subscribers in the certificate, were constituted the board of directors of the company. Who these men are we do not know. They do not appear to have had any connection with the business of these companies. They do not appear to have had any financial interest of any kind, and they very shortly disappear from view. The minutes are typewritten. The indications are plain that in many instances, if not in all, the minutes were written up before the meetings were held, and before it could be ascertained which of the three directors would be present, or whether the president would preside, or some one in his place. On the 2d of May, 1902, a special meeting of the board of directors of this Power Company was held at the ollice of Niles & Johnson, who I understand to have acted also as attorneys for Mr. Hollins, at No. 11 Wall street, at which number Mr. Hollins had his office, as well as these attorneys. There were present two of these mysterious directors, Messrs. Green and Cuddy; and Mr. Cuddy called the meeting to order. A proposition was then read from Philip K. Green, whoever he was, offering to the company, in consideration of 59,900 shares of its stock, par value $5,990,000, to transfer certain properties which are specified here. The list embraces the entire capital stock of the Falcon Electric Manufacturing Company, organized under the laws of the state of New Jersey; 53 shares (a large majority) of the capital stock of the Electric Motor Specialty Company, organized under the laws of the state of New York; 1,145 shares (a large majority) of the capital stock of the Morris Electric Company, a corporation now doing business in New Jersey; also the application of L. K. Bohm for letters patent of the United States for an improvement in refrigerating of cars and stationary refrigerating plants; also nine patents, or applications for patents, which are specified and described here, both domestic and foreign patents—the most, if not all, of which appear to relate to the manufacture of paper from straw. Apart from the patents, the entire properties of the three companies do not appear to have been worth $100,000 net. Messrs. Green and Cuddy thereupon accepted this proposition, valued this property, if they followed the laws of New Jersey, at $5,990,000, and directed the stock to be delivered for it. On September 18, 1902, the three directors appear to have met at the Jersey City office. The minutes appear to have been prepared before they met. The interlineations indicate that beyond a doubt. And they authorized the delivery of $57,000 of bonds—their bonds—secured by a mortgage, which had been authorized at a previous meeting, held in about the same way, to the American Union Electric Company. The inference is clear that that action was taken to enable the American Union Electric Company to turn over the $57,000 of bonds to Mr. Hollins, which was done. A little later—this Power Company was organized in April—I think early in June, Mr. Hollins seems to have reached the conclusion that the Power Company, with its six millions of capital stock, was not sufficient. At any rale, he seems to have promoted another corporation, called the American Electric Union Company, which is the insolvent here in court now; and that corporation was organized on the 10th of June, 1902. The incorporators appear to have been elected directors and officers—Mr. Howard Marshall, Mr. Kenneth K. McLaren, and, the third, Mr. John J. Cunneen. In the certificate of incorporation these gentlemen give their address as 15 Exchange Place, Jersey City, and I think it appears from the testimony that Mr. Kenneth McLaren is an officer or clerk in the employ of the Corporation Trust Company. They were manifestly dummies for the creation of this corporation. At a meeting held shortly after—within two or three days—Messrs. Cunneen, Marshall, and McLaren took the preliminary step to increase the authorized capital of their corporation from $100,000 to $7,000,000. All these minutes are typewritten. A little later a meeting was held, at which it was announced (this was on the 14th of June, and the meeting was held at No. 11 Wall street, New York) that Mr. Cunneen had transferred a portion of his subscription, to wit, two shares, to P. K. Green; Mr. Marshall made a similar transfer of two shares to T. Irving Wood; and Mr. John J. Cunneen made a similar transfer of two shares to T. P. Edwards; and thereupon two, I believe, of this original dummy board, disappear from the scene, and the board was constituted of Mr. Kenneth McLaren, Mr. T. P. Edwards, and Mr. T. Irving Wood. They took upon themselves to accept the resignations of the two directors, and elected successors. At the next meeting, held at No. 11 Wall street, on the 17th of June, 1902, Mr. Kenneth McLaren was elected to fill a vacancy (he was elected at the prior meeting), and the board then became constituted of Mr. McLaren, Mr. Edwards, and Mr. Wood; and at that meeting an offer was made by J. F. Pierson, Jr., & Co., in writing, in the form of a letter, to sell 90 per cent. of the shares of stock of the Union Railway Power & Electric Company to this American Union Electric Company in consideration of $6,999,000, par value, of the capital stock of the latter company. How Messrs. Pierson & Co. obtained these stocks we can readily see. They appear here as the owners, but manifestly the firm was acting as agent for the parties who were the beneficial owners of the stock of the Power Company. And thereupon, presumably, these directors, Messrs. Edwards, Wood, and McLaren, performed their duty under the New Jersey statute, and made a bona fide valuation of the stock of the Power Company?certainly a very difficult work to do—and authorizedthe exchange of their stock, nearly seven millions in par value, for 90 per cent. of the stock of the Power Company; and then practically the American Union Electric Company took the place of the Union Railway Power & Electric Company, and the arrangement that was made between Mr. Hollins and Messrs. Swoboda, Fountain, and Morris, by which those gentlemen were to receive stock in part payment of their property, was transferred and now related to the stock of the American Union Electric Company, instead of to the stock of the Union Railway Power & Electric Company. The way in which this thing was done is made manifest by Mr. Swoboda, who brought into court the certificate or voucher which he received from Mr. Hollins. When he made the arrangement with Mr. Hollins he received a certificate which would entitle him to stock in the Union Railway Power & Electric Company. When that company was displaced by the larger one, the American Union Electric Company, the present insolvent, Mr. Swoboda surrendered his certificate to Mr. Hollins, as was entirely proper, and received one in its place, which he produced, and which reads as follows: "11 Wall Street, New York, June 20, 1902. H. O. Swoboda, Esq., N. Y. City—Dear Sir: We are to receive for your account 2,000 shares of stock on or before July 5, 1902, of the American Union Electric Company, with a capital of $7,000,000, par value $100 each, organized under the laws of the State of New Jersey, and we will deliver said shares of stock to you in such proportions as you may direct. Yours very truly, F. C. Hollins & Co." And I believe that a similar transaction was had with both, or at least with one, of the other contracting parties with whom Mr. Hollins made his deal. Thus early in June these men who had put all their property into this consolidation received these certificates from Mr. Hollins, which would entitle them to this stock, which must come to them, as the certificate shows, through) Messrs. F. C. Hollins & Co. It is perfectly plain that Messrs. Pierson & Co. acted as the agents of Mr. Hollins. They made this offer in order to get the whole stock of this new corporation; and then they were, plainly, to account for that stock with Mr. Hollins, and Mr. Hollins was to account for it with the various parties with whom he had dealt. That is the plan which is exposed beyond all doubt by an examination of the minutes here and the stockbook.
The stockbooks are not present, but I may say that immediately upon the transaction of this business by which this exchange of stock was to be made all of the stock of the American Union Electric Company, excepting the qualifying shares, was at once issued to J. F. Pierson, Jr., & Co.; and after that we find, through two voluminous stock certificate books, that Pierson & Co. effected distribution of the stock, or distribution, perhaps, I should say, was effected by Mr. Hollins mainly through a person, apparently acting as a dummy, named Donelon; and I may say here that this same Donelon had held a certificate for 54,000 shares of the stock of the Power Company, and he had, therefore, been used in the issue of stock in that company. Here he did not act as the party to whom the stock was to be issued in the first instance. I do not suppose he did in the case of the Power Company. Presumably the stock of the Power Company was issued to Green, and transferred by Green to Donelon. Here it was all issued to Pierson & Co., and Pierson & Co., then, through all the stock certificate books, are constantly assigning shares Ԃ100-lot shares of stock mainly—to this man Donelon, and then Donelon transfers his certificates for 100 shares each to Morris and to other parties who were originally interested. Mr. Hollins says in his bill of complaint, and in his testimony, I believe, that he holds $1,000,000 in stock. He does not appear on the stockbook as a stockholder. Ho says, though, that he got the stock from Pierson. It does not appear that he got it direct from Pierson. Presumably his $1,000,000 of stock consists of these Donelon 100-lot certificates transferred from Pierson to Donelon, and apparently, so far as the record shows, remaining in Donelon. But, if Donelon was a mere dummy, undoubtedly all those certificates, amounting to millions of dollars of stock, which stand in the name of Donelon on the stockbook, are in the hands of other persons, and presumably $1,000,000 worth, paper value, are in the hands of Mr. Hollins.
Now, then, in order to find out what the situation of affairs was on the 24th of October, 1902, when this note was made, or on the 20th of October, when the meeting was held which authorized the making of the note, it may be well to turn to the history of the American Union Electric Company as disclosed in the minute book. After this action was taken for the exchange of stock, by which practically all the stock of the American Union Electric Company was "got out," to use the common phrase, and after the board had been changed in its personnel, the meetings appear to have boon held mainly at No. 11 Wall street. On the 19th day of September, however, a meeting was held at the office of the company—the New Jersey office of the company—at 15 Exchange Place, Jersey City. The minutes of this meeting beyond doubt were written out before the meeting was held. The places for the names of the directors are left blank. The draftsman of the minutes said that the president called the meeting to order, but, the president not being at the meeting, the minutes were corrected, and the word "President" was stricken out, and the word "Secretary" written in. Other interlineations here show beyond doubt that the most important action that was taken at this meeting was planned before the meeting was held. The important action consisted in a resolution that the treasurerof the company be requested to require from the Union Railway Power & Electric Company the payment of $57,000 cash, advanced by this company to the Union Railway Power & Electric Company, and that he be authorized to accept in payment $57,000, face value, first mortgage bonds of the Union Railway Power & Electric Company, and give a receipt for the cash advanced upon such payment. At the next meeting, held also in Jersey City, apparently on the 19th of September—possibly the prior meeting was upon the 17th of September—but at the next meeting, on the 19th of September, Messrs. McLaren and Wood were present Their names are, as usual, written in a blank space which was left. The draftsman of the minutes, probably reminded of his failure to foresee who would preside, did not state in typewriting who did preside, but wrote in that Mr. McLaren presided at the meeting. Further down, however, where certain very important statements are made, the draftsman had it read that "the president then stated to the company," etc. He was obliged to strike out the word "president" and write in "the chairman of the meeting" in two instances. Those statements related to the claim of Mr. F. C. Hollins for $57,235.55, and to the proposition of Messrs. Hollins & Co. to accept Union Railway Power & Electric Company bonds to the extent of $57,000 in payment for those advances. Thereupon a resolution was adopted authorizing and directing the company that the $57,000 in bonds be delivered to Mr. Hollins in payment of his advances to that amount. A comparison of the minutes of this meeting with the minutes of the meetings of the Union Railway Power & Electric Company to which I heretofore referred held the day before—September 18th—seems to indicate that the whole thing was a single transaction, devised by a single mind, and the minutes were probably prepared under the direction of the same agents or attorneys, acting presumably for Mr. Hollins. The next meeting, I think, in point of time to the one I last mentioned, at which Mr. Hollins got his $57,000 of bonds, was the meeting which appears to have been held on October 20, 1902, the minutes of which, including the date and down to the signatures of the president and secretary, are in typewriting. The meeting was held at No. 11 Wall street The following preamble and resolution were adopted: "Whereas, commencing September 3, 1902, there have been, from time to time, certain sums of money advanced to this company by Messrs. F. C. Hollins & Co., amounting to $27,440.30; and whereas this company agreed at the time of accepting said sums to issue notes in such amounts as may be convenient for this company to issue; said notes amounting in the aggregate to $27,440.36; therefore be it resolved, that the president and secretary and treasurer of this company be authorized to sign and deliver demandnotes of this company to the said P. C. Hollins & Co. for the following amounts: One note dated October 24, 1902, for $987.07; one note dated October 24, for $1,000; one note dated October 24, for $25,459.29." And that is the last meeting, according to the minutes, that was ever held of this company. The notes were made on the 24th of October. On the evening of the 24th Mr. Hollins swore to the bill of complaint in this case, and, within two or three days after, the corporation was adjudged insolvent, and the receiver appointed by this court.
Now, it seems to me to be quite manifest that the action of this company taken on the 20th—certainly not earlier than the 20th, and possibly on the 21st—of October, 1902, was brought about by Mr. Hollins, the payee of the notes. He had the power to do what be pleased, and the persons who controlled the corporation were ready to obey him; and this note, as an instrument to prove a debt, is practically without evidentiary value. But the note is further discredited by the fact that the same board of directors and the same officers gave the two notes at the same time to Mr. Hollins for other amounts which Mr. Hollins admits the corporation did not owe to him; and, as I said before, it is discredited further by the fact that a part of this note for $25,459.29 is also admitted by Mr. Hollins not to have been a debt of the corporation to him. We may therefore practically lay aside the note. But we have to deal with the fact that from September 4, 1902, to October 21, 1902, during that period, in four separate payments, Mr. Hollins did. as is conceded here, contribute to this corporation the sum of $24,000; and the question is, what was the legal effect of that payment? Was that a loan to the corporation, or was it the payment of a debt to the corporation, or was it a payment of money to the corporation as a consideration of some contract? The mere fact of payment proves nothing. A payment may create a debt. A payment may extinguish a debt. A payment may create a liability, but not a debt—a liability of the payee to the payor. Now, that is what we have to investigate—the legal character of these contributions of money. There are two theories—no, there are four, perhaps, I may say, theories—presented. Three of them were distinctly presented at the opening, and one at a very late stage of the case. At the opening it was alleged on behalf of Mr, Hollins that these four contributions constituted advances, and thus created a debt. And, as I understood it, on the part of the defendant receiver, it was claimed that this money was paid by Mr. Hollins to the corporation on account of the purchase of Federal stock, on account of the purchase of stock in a corporation which the American Union Electric Company proposed to promote and to capitalize, and of which the American Electric Company would hold a large part of the capital stock. I understoodthat it was alleged on behalf of the receiver that these moneys were paid in in pursuance of that sort of a contract. It was also said that possibly, instead of an agreement to pay money and receive stock, there was an agreement to pay money as the price of certain of these patents which I have mentioned, and which were controlled by the American Union Electric Company; that Mr. Hollins, and certain persons associated with him, agreed to buy these patents, and to put large sums of money in—in all, I think, $66,000—and these payments amounting to $24,000 were on account of that bargain. It was further claimed—and this was the second theory, as I understood it, advanced by the receiver; the third theory which I have enumerated so far upon which the payment of this money is to be accounted for—that, even if there was no such bargain between Mr. Hollins and the corporation, he caused, or at least acquiesced in, certain entries being made upon the books of the corporation, and in the preparation and publication to the credit agencies of a statement of its affairs in which it was made to appear that this money was paid in on account of Federal stock; and that, therefore, even if in fact it was not so paid in, yet still Mr. Hollins was estopped as against the creditors; and it is also said, as against the stockholders, to take any other position than that which he had thus published to the world, and published principally to the creditors and would-be creditors of the company.
I followed closely a large mass of testimony without taking any notes, for a long time, before ascertaining that there was a further theory which the receiver presented, which was that Mr. Hollins paid this money into the corporation in pursuance of an original agreement between the promoters—himself and Messrs. Morris, Swoboda, and Fountain—by which he (Hollins) was to supply the proposed corporation with necessary capital, and take stock at the rate of $8 per share. They were to put in their property, and some of them got some cash, and some did not; but all were to take very substantial blocks of that stock of the Power Company and then of the Union Company. For instance, Mr. Morris put in about $50,000, at the outside, of property, and he was to have $900,000, par value, of this stock. It was alleged in behalf of the receiver that the original arrangement was that, as these men put in their property and took out stock, so Mr. Hollins agreed that for his cash contributions he would take out stock at the rate of $8. One witness I believe made it $14, another made it $8.
Those constitute all four of the theories to account for the payment of this money: First, the appellant's theory that it was an advance, which created a debt; and then the three theories of the receiver which made the money, first, a payment on account of property to be sold and conveyed by the corporation to Mr. Hollins and his associates; secondly, the theory that estops Mr. Hollins to deny that it was so paid, whether it was so paid or not; and, thirdly, the theory that he paid the money in on account of his stock subscription; that is what it amounted to. I shall not undertake to deal at length with the theory that this money was paid in on account of either stock or patents to be purchased by Mr. Hollins. I do not find any support in the testimony for the claim that Mr. Hollins paid it in on account of the patents. It was argued strenuously on behalf of the receiver that the receiver would like to turn these patents over, and credit Mr. Hollins and his associates with the $24,000, and receive about $40,000 of balance that would be due. But no one identified the patents. Nobody said that this particular set of patents enumerated in the minutes and upon which the stock issue was partly based was the definite subject-matter of any bargain of purchase between Mr. Hollins and the corporation—nothing of the kind. The evidence indicated that Mr. Hollins may have made some inchoate arrangement to have this Federal Specialty Company organized, and have a stock issue based on these patents, and then get such stock issue, or a portion of it, for this money. But he never got anything. There was an absolute failure of consideration. I do not think there is any evidence in this case that would justify finding that Mr. Hollins paid this money in as the purchase price or part of the purchase price of anything, either patents or stocks.
In regard to the claim that, whatever the fact may have been, Mr. Hollins was estopped to set up that the money so paid in was a loan, when he had represented to the creditors that it was not a loan, but a payment of the purchase price of something, the answer, I think, is absolute that there is no proof here at all that anybody, stockholder or creditor, was misled or changed his position in any way whatever. That essential element of an estoppel is entirely lacking; and therefore, if I should find—which I do not—that Mr. Hollins joined in the gross fraud of Mr. Young in preparing this scandalously deceptive statement, and publishing it to the credit agencies, there would not be an estoppel made out against Mr. Hollins.
The important question, which gives the greatest difficulty in this case, is to ascertain from this imperfect testimony whether this money was paid in as a loan, or whether it was paid in on account of what amounts to the stock subscription of Mr. Hollins. In reaching the conclusion that for the purposes of the case it must be held that Mr. Hollins did not pay the money in as a loan—as an advance—but paid it in on account of his stock subscription, I meet with a great deal of difficulty. I may say, perhaps, I find greater difficulty in stating the reasons for my conclusion than in coming to the conciusion itself. During the greater part of the time that was occupied in taking the testimony, the defense which I here mention was not disclosed to the court During that time the witnesses gave a great deal of testimony in relation to this theory that the money was paid in on account of purchase of property, and also to substantiate the claim of au estoppel. I have concluded, however, that I would not subject the parties to the very great expense of having this great mass of testimony written out merely in order to search through it carefully to be sure to avoid any error in endeavoring to give my reasons for the decision in this case. I have no doubt that a careful examination of the testimony would enable me to explain in a more satisfactory way than I can do now the reasons which have brought me to my conclusion in favor of the receiver.
The bargain or arrangement between the original promoters of this corporation—and we may pass over the episode of the Power Company and deal with the American Union Electric Company as the original corporation which the parties had in view?the original bargain between Mr. Hollins and these other gentlemen who were running their little shops and managing their little corporations, is sworn to by several witnesses. Mr. Morris and Mr. Swoboda I am quite sure testified most positively that their agreement was that they were to put their business in, and their property. They were tempted by a large slice of stock that they were to receive. They were also tempted by large salaries, or substantial salaries, which they were to receive. But they swear positively that Mr. Hollins agreed that he would supply all the capital that was necessary, and that he would take his pay in stock at the same rate at which they got theirs. That is their testimony. And I was strongly impressed with the sincerity of these men and their truthfulness. They know nothing about stock operations. They relied upon this wealthy Wall street man of high connections, and they put themselves largely in his hands; and any one who has had any experience with consolidations knows how readily sometimes even most suspicious persons will at the end commit themselves to a great consolidation in which they get a large mass of stock and bonds, when they do not understand, and perhaps cannot understand, precisely what their final position will be, and how it will compare with their original position. The idea prevails to a large extent that something is created out of nothing to an enormous extent by a consolidation, and that large numbers of persons can be enriched with stocks and bonds without making the transactions expensive to the parties who really contribute the elements which are combined. Now, then, they say that that was their arrangement; and any other arrangement certainly would have been very singular; and, if any other arrangement was made, Mr. Hollins ought to show what it was. It is certainly a most curious thing, indeed, if these men were to put in all their property, only some of them receiving any money, and that a mere trifle, while Mr. Hollins was to put in over $100,000 altogether—it seems about $134,000 in money—and then stand as a creditor for the amount of his advances. They did not stand as creditors for the value of the property they put in. It would be a very curious and one-sided arrangement if Mr. Hollins was to stand as a creditor for the full amount of his contributions in cash, while these men imperiled their all as capital. They knew that the corporation was based upon their assets, and, in addition to their assets, the only thing besides was a list of domestic and foreign patents, mostly for making paper out of straw, the value of which neither Swoboda, nor Fountain, nor Morris could possibly have had any idea of; and there is not the slightest evidence that they made any effort to find out. There was probably little reason why they should, if Mr. Hollins was going to take out stock for his cash at the same rate they took out stock for their property; but if they were putting in their property for stock, and if Mr. Hollins was putting in his money as a debt, which would stand secured as a debt, then it was of the utmost importance for them to know upon what this stock rested, in addition to their assets that were combined. Their conduct is consistent with the theory that they intended to put in their property as against Mr. Hollins' money and patents, and then that all parties should take out stock at the same rate, and the balance of the stock would with exact equity remain in the treasury of the company.
Now, let us see what Mr. Hollins did. He produces in court a book (unfortunately it is not here) in which the items of his expenditures or contributions are noted down. It is a ledger. There are three or four pages of these items, and they run from April, 1902, to October 21, 1902. There is no title to this account whatever. It is not an account with anybody. It is left in such shape that at any time the same clerk who made the entries, and who is not produced on the stand as a witness (Mr. Hollins' clerk, however), could write over it a line which would make it an account with a syndicate, or with a corporation, or with any person. It is a schedule of items; and the first one is the $15,000 that Mr. Hollins paid in April to Mr. Swoboda and his associates; and the next is $5,000 which he put into the treasury of Mr. Swoboda's corporation; and the account then embraces all the contributions that Mr. Hollins made of every kind. It includes, evidently, the $57,000 for which he took out the bonds; it includes all four of these items, amounting to $24,000, included in this note; and it includes all the items which Mr. Hollins admits the corporation didnot owe him; and the aggregate is $134,000. Mr. Hollins does not explain in a satisfactory way why he kept his schedule in this form; nor does he explain how much of this account, or of these listed disbursements—they are checks I believe, all of them—how much of them did not constitute a debt from the corporation to him. That a part of it did not constitute such indebtedness he admits, because he has withdrawn these claims, stating that they were not debts; yet they are in his schedule here, and we find this schedule includes the $57,000, it includes the $24,000—that would be $81,000—and the balance of the schedule, some $40,000 or $50,000, is not explained. What those contributions were we do not know. We know that some of them were not payments to the corporation which created an indebtedness—Mr. Hollins so admits. But why that is true in many instances, we cannot tell. Nobody has explained why it is the $1,000 note which Mr. Hollins withdraws was not as much an indebtedness of the corporation to him as the $10,000, or the $9,000, or the $4,000, or the other $1,000, which make up the $24,000 for which he makes this claim. There was a bill also of the Coe Brass Manufacturing Company of October 3d for $987.07; no one explained why that did not constitute an indebtedness. The only conclusion that can be drawn from this testimony is that the whole of the excess of these scheduled expenditures—these checks aggregating $134,000 over and above the $81,000—constitute no debt from the corporation to Mr. Hollins. That is the only conclusion that can be reached, because it does not appear that any part of that constituted such indebtedness.
It seems that in September, 1902, Mr. Hollins procured the payment of $57,000 in bonds on account of his advances, and then, just before he put the corporation into insolvency, he went to work—he or his clerk?to find out how much more of indebtedness was due him, and the result was these three notes and the open account which he proved. And it would seem, therefore, as if we must assume, for the consideration of this case, that up to the time of the failure of this company the only valid indebtedness of the company to Mr. Hollins was the $57,000 paid in bonds, and the $24,000 now in litigation, if, in fact, any of those payments did constitute an indebtedness. I find a difficulty in severing the $24,000 from the $57,000. I see no distinction between the two aggregations of items. The items that aggregate $57,000, from an inspection of these papers, appear to be precisely the same in character as the aggregation of the four items that were put in this note. There is strong ground for believing that in September, there being 57 bonds available, Mr. Hollins appropriated the 57 bonds for the payment of so much indebtedness, and that left a further indebtedness, the amount of which he was uncertain about, but which was putin the form of notes immediately before the company was put into insolvency; and I incline to think that the open account for fifteen or sixteen or nineteen hundred dollars, that was made the subject of a separate claim, was discovered later by Mr. Hollins, or it would probably have been put in the form of a note.
Now we find, leaving out the $1,000 that was put in on October 21st, and about which there is a great deal of mystery to my mind, that Mr. Hollins apparently has contributed $80,000 to the corporation—$80,000 in cash—which either constituted a loan for which he had a right to take the 57 bonds—I say he had a right to take it, although that may have been a preferential payment in any case, which would have been void against this receiver—but, passing that, he had a right to take the 57 bonds in payment, and he had a right to take the note for the balance, and possibly he may have been uncertain about the exact extent of that note. That is one theory. And another theory is that Mr. Hollins paid $80,000 on account of his original stock subscription, in pursuance of the bargain that he had with all these gentlemen.
Now it is a very curious fact that Mr. Hollins has a million dollars in stock, and that, if he paid $80,000 into the treasury of this company on a bargain that he was to take stock in payment at $8 a share, as Mr. Swoboda swore, that is precisely what he got; he got a million dollars in stock for a contribution of $80,000 in cash. I think, when Mr. Swoboda testified to that figure, he had not in view the amount which Mr. Hollins contributed, and I do not think that be had the means of discovering what that amount was. It may be that Mr. Hollins received his stock on account of the unexplained portion of that $134,000; but he does not say it; he makes no such claim. And Mr. Hollins, in the face of this testimony that he had agreed with these men to take stock in payment of his cash, with the fact proved that he had paid this large amount of cash in, and the fact proved that he stood as a stockholder to the extent of a million dollars, made no effort to show by what means he got a single share of that stock. Did he get it for nothing? He says he got it from Pierson & Co., and Pierson & Co., as I have pointed out, were the agents who made the offer of property to the corporation, for which the corporation was to issue to Pierson & Co. practically the entire seven millions of dollars of stock, and Pierson & Co. received this stock manifestly on behalf of the beneficial owners for what they put in, namely, the Power stock; and Mr. Swoboda testified that he was to get his share of the stock, but he did not get his stock at all; Mr. Morris received his share of the stock; and the stock was distributed through this dummy, Donelon, and Donelon appears on the books of the company, as Isaid, as holding an enormous amount of this stock in certificates of 100 shares. Why, the inference appears to me to be unavoidable that Mr. Hollins got his stock from Pierson by the same title that Mr. Morris did, and by the same title that Mr. Swoboda would have received his stock if the bargain had been carried out with him, if the delivery of the stock had not been delayed, so that, as a matter of fact, the company went into insolvency before he received his certificates.
I find, upon the whole case, that there is a strong presumption established here against Mr. Hollins' view, and in favor of the view that the stock which he holds—a million dollars—he holds in execution of the agreement which Mr. Swoboda and Mr. Morris, and I think others, at least these two gentlemen, positively swear to. I recognize the fact that this conclusion may be erroneous. There has been very far from a full disclosure of all the financial dealings of Mr. Hollins with this corporation. Such an examination, it seems to me, would have to deal with the whole of this schedule of $134,000; would have to deal, also, with all the items that went into the $57,000 for which Mr. Hollins took these bonds. The trial of the case has been confined to a large extent to the items which aggregate $24,000, and to the entries that were made in the books with regard to those items. But the burden, in my judgment, was on Mr. Hollins to show by what title he got this stock, in the face of this direct positive testimony. His note is impeached so as to be practically without value as an instrument of evidence. He must stand upon the fact that he paid this money into the treasury of the company; he paid it in in four installments; but we find installments beginning in April and ending in October, and amounting to $134,000, and a large part of those installments are not explained in any way whatever. Several of them, which appear to be just as directly the basis of a debt from the company to Mr. Hollins as these four that he makes claim on, he admits never created any such debt at all. Now, upon that showing, and with Mr. Hollins remaining silent and not explaining or trying to explain how he got this stock, I think the inference must be drawn against him that he got this stock in pursuance of the bargain that these gentlemen swear to, and that therefore his debt should be disallowed.
I may say that if Mr. Hollins had affirmed the charge, or one of the charges, made on behalf of the receiver, that he paid this money in on account of Federal stock, or on account of patents even, certainly if be said that he paid it in on account of Federal stock, we might have a failure of consideration, and Mr. Hollins would be entitled to stand in that case as a creditor to the amount of the money which he bad paid in. The receiver certainly could not deliver the goods. If the bargain related to patents, and the patents had been identified, perhaps the receiver could; but if the bargain involved the delivery of stock by the corporation to him, stock which the corporation was practically to create, the receiver would not be able to discharge that contract; there would be a total failure of consideration, and then Mr. Hollins might say, "This stands as a debt, and was not paid in on account of a stock subscription, that is, on account of the bargain between myself and Swoboda by which I was to pay money in and take stock, but was paid in on account of a separate transaction between myself and the corporation that was not within the terms of the original bargain." If he had taken that position, it would seem as if the $24,000 might stand as a debt. But he swears positively that such was not the case; that he did not pay it on any such bargain; and I very strongly incline to believe that the whole testimony sustains his position that he did not pay it in on account of any property, patents, or stock; and that if there was any fraud perpetrated by him, or intended by him, in making the statement furnished to the credit agencies, which falsely made it appear that this money was paid in on such a bargain, there was no estoppel against him, for the reason that I have indicated.
This case has been tried, as I have already intimated, with too narrow a regard to the circumstances directly connected with the four sums which make up the $24,000 in dispute. The status of the $24,000 can hardly, I think, with safety be determined without exploring thoroughly the status of the $57,000, and also the balance of the moneys which make up the total of $134,000 expended by Mr. Hollins. And, further, the status of these moneys seems necessarily to involve the status of all the capital stock of the company which was issued.
Let us look a moment at the broad outlines of this whole plan: Mr. Hollins proposes the scheme to these manufacturers, Messrs. Swoboda, Morris, and Fountain. This case seems to turn entirely upon the question what the bargain or arrangement, whether loose or definite, was that Mr. Hollins made with these men who contributed their property and business to the enterprise. Was Mr. Hollins to loan money for the maintenance of the business of the new corporation—moneys which he might demand at any time, and thereby force the corporation into insolvency? Did Mr. Swoboda and his associates consent to such an unbusinesslike and improvident arrangement? Or did Mr. Hollins agree, as these men testify, to contribute the necessary capital up to a large sum and take stock therefor, precisely as they took stock to a very large extent as the price of the property which tbey sold to the corporation? It can hardly be claimed that Mr. Hollins took his million dollars in stock as the price of the unappraised patents whichbe contributed, or of his interest therein. It does not appear that Mr. Swoboda and his associates knew anything about the value of these patents, or had any means of finding out what their value was. Mr. Hollins does not pretend that the value of these patents or of his interest in them was ever in any way the subject of appraisal or agreement between him and his associates, or that anybody ever allotted any stock to him as the price or value of these patents.
It is unnecessary, however, to discuss the possibility that Mr. Hollins' stock or some of it might represent specifically these patents or his interest therein, because it is proved in the case that the combined properties of Messrs. Swoboda, Fountain, and Morris and these patents constituted a unit which was offered to the first corporation, the Power Company, as property to be purchased by the issue of its entire authorized capital stock, $6,000,000, par value, less a few qualifying shares. Thus practically the entire capital stock of the Power Company, 59,909 shares, was issued as fully paid-up stock, and became nominally the property of the dummy or agent, Philip K. Green. The inference is irresistible that this enormous overissue of stock did not in fact become the property of Green, and the probabilities are that Mr. Hollins or his firm stood, in part at least, as trustees of this stock for the benefit of those persons who owned the property which it represented. It would seem that Mr. Hollins held this stock subject to the bargain, whatever it was, in pursuance of which he and his associates, Messrs. Swoboda, Fountain, and Morris, had, through the agency of Mr. Philip K. Green, converted their contributions of property as a unit into this immense block of stock. If the bargain warranted Mr. Hollins in so doing, undoubtedly he could have paid over the portion of the stock agreed upon to Messrs. Swoboda, Morris, and Fountain, and then have appropriated to his own use the entire residue.
But let us take a step further in dealing with the transaction in a broad manner. A few weeks later, through the instrumentality of the agent or dummy J. F. Pierson, Jr., & Co., nine-tenths of this Power stock, which presumably was controlled by Mr. Hollins, was sold as property to the new corporation, the American Union Electric Company, for practically its entire issue of stock, $7,000,000, par value. It may be noted that about one-tenth of the value of the property of Messrs. Swoboda, Morris, and Fountain, plus the unknown value of these patents, was in some way kept out of the new deal, and in whose hands this block of power stock remained, or who claims it now, is not disclosed, although presumably Mr. Hollins could throw a good deal of light on this subject. Whether Messrs. Swoboda, Morris, and Fountain assented to this feature of the new deal when they assented to exchange their receipts or warrants for Power stock for similar receipts or warrants for Union stock, I do not think was in any way shown. But leaving this matter aside, let us see what the situation was when this $6,999,000, par value, of the capital stock of the American Union Electric Company was issued to J. F. Pierson, Jr., & Co. This stock represented, as we have seen, nine-tenths of the contributions which all these men so far had made to this consolidation. Mr. Hollins plainly controlled the entire issue, unless he had partners in the patents who in secret were acting with him. If he had, he stands in this case as acting for himself, and as the representative of his undisclosed partners. Mr. Hollins was obliged to make good his bargains with Messrs. Swoboda, Morris, and Fountain, and transfei to them the portions of stock which they had agreed to take as their share. Although Mr. Hollins does not make the claim, so far as I can recall his testimony, yet his position seems to be this: that he could honestly, in pursuance of the arrangement made with these manufacturers, pay them their relatively small shares of this immense amount of stock, and appropriate for himself, or for himself and his secret partners, the entire residue as the value of the patents, and perhaps also the compensation for his services as promoter. Mr. Hollins' claim goes further and includes the proposition that the corporation should be dependent for working capital upon loans from him, Mr. Hollins, and that inasmuch as large amounts of money would have to be supplied, as they were in fact supplied, Mr. Hollins would have practically the option at any time, or certainly after the first few months of corporate existence and activity, to wind up the corporation as insolvent, with the probable result in such case that it would take the proceeds of all the assets which these manufacturers had contributed, together with these patents, to pay Mr. Hollins' debt. That Messrs. Morris, Swoboda, and Fountain were not able to comprehend financial schemes of the complexity and magnitude of those which Mr. Hollins could easily devise, can be admitted without supposing that they could be hoodwinked into a scheme so grossly unfair to them, and so improvident. These three men, Morris, Swoboda, and Fountain, would be contributing all the assets of the corporation excepting these patents. Already one-tenth of the combined value had been abstracted in the form of the 590 shares of Power stock in which they had no share. The remaining nine-tenths would be divided, according to the scheme which we are now considering, in the proportion of about one-sixth (I am making a very rough calculation, but sufficient for the purpose)—one-sixth to Messrs. Morris, Swoboda, and Fountain for their electrical assets and business, and five-sixths to Mr. Hollins for these marvelouspatents. Is it conceivable that these men would have entered into such an arrangement?
In connection with this subject a most significant fact appears, which stands by itself entirely without explanation. Mr. Day, the receiver, testifies that after his appointment he received, through a messenger whom he understood came from J. F. Pierson, Jr., & Co., a certificate for $1,500,000 par value of stock of the American Union Electric Company as the treasury stock—the stock lawfully issued for property purchased and fully paid up, according to the legal theory of these gentlemen, but voluntarily returned to the corporation so that it could be sold for the benefit of its treasury. Who determined the amount of this stock issued for these combined properties which was so to be returned to the treasury? The position, assumed to be that of Mr. Hollins, to the effect that he was to own all of the $6,999,000 in stock which was not required to make good the deliveries agreed upon to Messrs. Swoboda, Morris, and Fountain must be apparently qualified, or else we must suppose that Mr. Hollins made a voluntary present of this enormous block of stock to the treasury of the corporation for the pro rata benefit of all the stockholders. The contribution of this stock certainly gives some color to the contributions of cash. Can it be supposed that Mr. Hollins carefully loaned the $24,000, or the $57,000, or any part of the $134,000 which he expended in this great scheme, while he gratuitously dropped into the treasury of the company $1,500,000 par value of stock?
If we accept the testimony of Messrs. Morris and Swoboda in regard to the character of the contributions of capital which Mr. Hollins was to make to the corporation in which these manufacturers were about to embark practically all their property, the bargain between Mr. Hollins and themselves at once becomes far less improvident, and to many minds might appear to be reasonable or even fair. They were to get a very small proportion of the stock which was based so largely upon their property, but, on the other hand, this rich banker from Wall street was to supply the necessary working capital up to a large sum, and take stock in payment therefor. Moreover they were to have permanent positions, because the permanency of the business of the company seemed to be established, at substantial salaries. Whether the capital was to be supplied by contributions in cash directly from Mr. Hollins, or whether Mr. Hollins would supply the treasury with a large amount of his stock which might be sold for cash, would not be a matter, perhaps, of very great consequence to the minds of these somewhat unsophisticated manufacturers. What makes the alleged bargain between these three men and Mr. Hollins so grossly improvident is the fact that they put in so large an amount, according to their ideas at least, of valuable tangible property, together with a going business, against a list of patents mostly for making paper out of straw, about which they knew nothing, and the value of which, apparently, was never in any way ascertained; then they allow Mr. Hollins to appropriate about five-sixths of the value of the aggregate contribution, while the consolidated enterprise thus established is to derive its working capital from loans from Mr. Hollins, who at any time would have the power to wind up the corporation as insolvent, and appropriate the assets to the repayment of the capital which he had loaned. When it is claimed that three sane men entered into that sort of a contract, the court will look about to see whether the evidence will not warrant some other inference more in accord with common sense and the observed phenomena of human conduct.
It is true that what I have said about the status of these stock issues as a whole may be infected with error, but, if so, it is because I am obliged to draw inferences in the absence of testimony which it is perfectly plain Mr. Hollins could readily give. Messrs. Swoboda, Morris, and Fountain plainly knew nothing of the issue or distribution of the stock. It does not appear that they knew that a million dollars and a half of the stock had been returned to the treasury.
It is worth while to note that, while we have discovered from the books the origin and basis of all the stock which was issued in this enormously inflated enterprise, the history of the stock, the present location of it, the persons in whom its beneficial title is vested, are matters left largely undisclosed and unexplained by Mr. Hollins, although the direct defense against his claim necessarily involves these matters. The total outstanding stock, assumed by these promoters to be fully paid up and nonassessable, and all based on not more than $100,000 of appraised or appraisable assets, together with these convenient patents of apparently unknown value, is exactly $7,600,000, par value. Of this great total, $600,000, par value, is Power stock, and $7,000,000 American Union Electric stock. Messrs. Morris, Swoboda, and Fountain got, or were to get, only 11,500 shares of this stock. Fifteen thousand shares turn up in the treasury. Mr. Hollins admitted that he owns 10,000 shares. The balance of this so-called paid-up stock, ap-proximately three and a half million dollars par value, which certainly neither Green nor Pierson & Co. beneficially owned, is unaccounted for, except so far as the stock certificate books of the American Union Electric Company give us information. These books show large transfers of stock directly from Pierson & Co., or through the dummy, Donelon, to various new parties. No owner of this stock is in sight except Mr. Hollins, unless it represents the interest of his secret partners, if he had any, in the patents. Who, in fact, owned this stock? Who got the proceeds ifthe stock was sold for cash, and was not merely transferred to its equitable owners? Is the $900,000 of stock due to Mr. Swoboda included in this so-called treasury stock, or in some of these outstanding certificates standing in the name of Donelon or some other mysterious person? All these questions, and others of the same kind relating to the status of Mr. Hollins' stock as a part of the whole issue, might be answered if Mr. Hollins bad testified on the subject as far as he could, and produced Green, Donelon, Pierson & Co., and other parties, who appear as conducting the transactions which included the issue and transfer of all this stock.
In answer to a direct question from the court during the argument, the counsel for Mr. Hollins frankly admitted that the evidence does not disclose the origin of the stock, about a million dollars par value (the exact amount, I believe, was not proved), which Mr. Hollins admits he now holds. The testimony of Messrs. Morris and Swoboda shows just how Mr. Hollins got title to this million dollars in stock, and how he may have got title to five or six million dollars more.
There are a number of circumstances, to some of which 1 do not think I have referred, which strongly corroborate the view that these moneys, the $24,000 as well as the $57,000, were not paid into the treasury of this company by Mr. Hollins under such circumstances that now they can stand as a debt of the corporation to him. We have seen that the resolution of the board of directors authorizing the giving of the three notes adopted at the meeting of October 20, 1902, and probably drawn by an agent or attorney of Mr. Hollins, is manifestly false in stating that the company had agreed, at the time of accepting the sums of money included in the notes, to issue notes therefor. Mr. Hollins does not prove any such original promise, but, on the contrary, as I recall his testimony, he undertook to prove that his advances, or some of them, were based upon a promise on the part of Mr. Young, or some other agent of the company, that bills receivable should be assigned or deemed in some way as security for the moneys advanced. No action of the board of directors in regard to this matter appears to have been taken. The proof of this bargain is to my mind entirely unsatisfactory.
What seems to me to very greatly discredit Mr. Hollins' claim that any of these moneys were advanced by him to the company as a loan is the absence of any account in his own books, over which he had absolute control, and the absence of any account in the books of the American Union Electric Company which distinctly indicates the relation of debtor and creditor between Mr. Hollins and the company. Moreover, the very peculiar schedule of items in Mr. Hollins' ledger raises a serious suspicion that Mr. Hollins purposely avoided opening an account with his company presenting these payments of money as loans made to the company, charged against the company in usual way.
It is unnecessary to discuss any questions in regard to the liability of Mr. Hollins and his associates to the creditors on account of this enormous overissue of stock, inasmuch as such questions are not in any way involved in this proceeding. The only matter for determination now is whether this sum of money ($24,000) constitutes in law or in equity a debt from the corporation to Mr. Hollins, and my conclusion from the testimony as it stands is that it does not.