Opinion
02-11-1901
POMEROY et al. v. NEW YORK SMELTING & REFINING CO.
William Brinkerhoff, for appellant. Sherrerd Depue, for receiver. Warren Dixon and Mr. Moewy, for creditors.
Suit by William C. Pomeroy and others, trustees, against the New York Smelting & Refining Company. From determination of the receiver of defendant overruling claim of Davol, trustee, he appeals. Determination overruled.
William Brinkerhoff, for appellant. Sherrerd Depue, for receiver.
Warren Dixon and Mr. Moewy, for creditors.
EMERY, V. C. Appellant is the holder of two bonds of the insolvent corporation, both dated June 5, 1891, one for $17,000, payable on or before June 5, 1893, with interest at 6 per cent., payable semiannually, and the other for $20,000, payable at the same time, and with like interest. The bonds were each secured by separate mortgages bearing the same date upon the franchises and property of the company. The property covered by the mortgages consisted of the leasehold of its factory in New York City, and its plant and merchandise therein, being personal property only. The $17,000 mortgage was declared to be the first mortgage, and the $20,000 mortgage the second mortgage. The bonds and mortgages were given to three persons as trustees, the appellant Davol, being now the sole survivor, and his claim for the principal of the mortgages, with interest from December 5, 1895, up to which time interest was paid by the company, was proved before the receiver, as a preferred claim. The appellant claimed preference, by reason of the mortgages, out of the funds in the hands of the receiver, which were claimed to be the proceeds of the sale (either by the receiver or under condemnation proceedings taken by the city of New York) of the property covered by the mortgage. The receiver overruled the claim altogether, determining that it was not valid, either as a preferred or an unpreferred claim, and the appellant has appealed from that determination. During the progress of the hearing of the appeal the appellant waived his claim to a preference under the chattel mortgages, and the sole question now presented is as to the validity of his claim under the bonds and mortgages as an unpreferred creditor. The formal execution of the bonds was admitted at the hearing. The principal defenses set up to the claim at the hearing were (1) that the bonds were not authorized to be executed(2) that, under the statutes both of New York and New Jersey relating to chattel mortgages,the mortgages were void against creditors, and against the receiver representing creditors, and are therefore not valid as evidences of indebtedness; and (3) that the bonds were either wholly or in part without consideration.
As to the first point, considering it a question which may be raised after the admission at the hearing of the execution of the bonds, it cannot be entertained for two substantial reasons: First. The stockholders and directors of the company expressly authorized the execution of the mortgages in question for the purpose of borrowing money, and directed the preparation of the mortgages by the counsel of the company. The mortgages, together with the bonds accompanying them, were so prepared, and the mortgages as executed recite the execution and delivery of the bonds, and that the mortgages are given to secure them. This express authority to execute and prepare mortgages, for the purpose of borrowing money, gave, I think, an implied authority to prepare and execute the bond for the payment of the money as one of the usual evidences of a loan, and the execution of the mortgages reciting the bonds ratified this form of evidencing and securing the indebtedness by bonds in connection with the mortgages. Second. The company received the consideration for the bonds (either money or property transferred), retained and used it, and paid interest on the bonds for over four years. The company having the power to execute the bonds, and its proper officers having actually executed and delivered them, the omission of a formal resolution authorizing their execution, if there was such omission, is, under the circumstances, no defense to the bond.
The second defense relates to the effect of the chattel mortgage acts upon the debt purporting to be secured by the mortgage, by reason of the provisions in these acts declaring certain mortgages void as against creditors. As to this, my view is that, even if the mortgages were void under the statute and contained the only evidence or admission of Indebtedness, the statutes in question, declaring the mortgages void, must be consumed as confined to the avoidance of them as conveyances or securities upon the debtor's property, as against creditors who have a Hen enforceable on the debtor's property. This is the object and scope of the laws in question, and this object is fully attained by construing the statute as avoiding them as such conveyances or liens, and the act should not be extended to construe them as void in those respects which relate not to the lien, which was the claim intended to be avoided, but to the effect of the mortgage, as between the mortgagor and mortgagee, in those respects which were not within the scope or object of the acts. The admission of indebtedness made in the mortgage is, as it seems to me, an admission of the mortgagor, to the benefit of which the mortgagee is entitled, as mere evidence of his debt, either against the mortgagor himself or against the receiver. If the statute declaring the mortgages void is effective to the extent claimed, then, being peremptory, its absolute effect cannot be evaded or overcome by any proof showing the bona fides of the transaction, and the consequent previous validity at common law of the recitals or admissions in the mortgage, as acknowledgments of the debt. The statutes in question were not, in my judgment, Intended to avoid the mortgages, as against creditors, except as conveyances or liens, and to the extent necessary to protect the lien of creditors, or those representing them, against liens on the debtor's property attempted to be created by the mortgage. But, in the second place, if the admission of indebtedness in the mortgage be held void for all purposes as against creditors, the indebtedness in this case is sufficiently proved by the bonds, and it is upon them that the debt due from the company to the appellant is established.
The principal objection to the appellant's claim is the third one, viz. that the bonds are wholly or in part without consideration. Without going into the evidence in detail, I will state my conclusion upon this point, reached after reading over and considering again the evidence taken at the hearing. According to the form of proceeding adopted by the parties at the time of the execution of the bonds and mortgages, the transaction was a loan of money by the mortgagee trustees to the company, and the resolutions of the stockholders and directors authorized the execution of the mortgages to secure loans of money. As part of the same transaction, however, the property covered by the mortgages and other property was conveyed by the trustees to the company, and the money thus loaned to the company was so loaned for the purpose of paying, in part, for the property purchased. The trustees had originally purchased the property covered by the mortgages at sheriff's sale in New York under judgments against a New York company of the same name, of which the trustees and their cestuis que trustent were creditors, and the New Jersey corporation was organized as part of a plan of reorganization for the benefit of creditors of the New York company. The property was purchased at the sheriff's sale for about $17,000, and the entire property so purchased was conveyed to the new company for $38,450.82, and the substantial result of the whole transaction was that $37,000 of the entire purchase money of this portion of the property conveyed to the company is represented by the mortgages in question. Upon the organization of the new company, some of the creditors of the old company, who were interested in the purchase of the assets of the old company, and the continuance of its business until taken over by the new company, also contributed(through the trustees) $20,000, for which the trustees received stock of the new company to that amount. Two mortgages were given because ail of the creditors of the New York company, who contributed to the purchase at sheriff's sale, did not subscribe for stock in the new company, and the $17,000 mortgage was made the prior mortgage. The question raised by the receiver and objecting creditors is whether the entire series of transactions—the purchase of the property, the issue of the stock, and the execution of the bonds and mortgages—were not substantially either an arrangement by which the subscribers to the stock received the mortgage for $20,000 to secure the return of the money paid for their stock, or an arrangement by which they received the mortgage for $20,000 without consideration. In form it certainly was not a transaction of either character, but was a loan of money, and whether any other transaction can fairly be held to have been the real purpose of the parties depends materially upon the question of the value of the property transferred, and the intention of the parties, by a fraudulent overvaluation of the property conveyed, to use the form of a bond and mortgage to repay their stock subscriptions in fraud of the statute, or to receive a mortgage without consideration. Upon the material point as to the value of the property conveyed to the company, no evidence has been offered by the respondents, and the only evidence relied on at the hearing is the amount of the purchase at the sheriff's sale in New York City. Under the circumstances which appear in the evidence, this is not such indication or proof of its value as to make the valuation of about $38,000, which was agreed upon between the parties at the time of the transfer, a fraudulent overvaluation, such as would make either of the bonds and mortgages void as given without consideration, or as devices for fraudulently securing the return of the capital stock paid in. Unless such fraudulent overvaluation is shown, the bonds must, as against the company and its receiver, be held valid as evidences of indebtedness. This results from the fact that, in the absence of fraud, the parties of the transactions, being the company as purchaser and borrower, and the trustees as vendors and lenders, are themselves both bound by the contracts made. Bickley v. Schlag (Err. & App.; 1890) 46 N. J. Eq. 533, 535, 20 AtL 250.
In order to avoid the conclusiveness of such a transaction, and so long as the sale or contracts of loan stand, the creditors, or those representing them, must show either that their statutory right to require the capital stock to be fully paid up, for the purpose of satisfying its indebtedness, has been fraudulently evaded by the execution of the mortgages, or that the bonds and mortgages are void, either wholly or in part, as based on a fraudulent overvaluation of the property, which was the consideration of their execution. For the purposes of this decision, I assume that this question of fraudulent overvaluation, in either aspect above stated, is within the issues raised upon an appeal from the proof of the indebtedness on the bonds, which have not been set aside, and I do this because this has been the theory upon which the case has been tried and argued upon both sides, without objection. The evidence does not warrant the conclusion of a fraudulent overvaluation, and the transaction, so far as relates to the indebtedness of the company upon the bonds, must therefore stand as agreed on by the parties at the time.
In reference to the purchase at the sheriff's sale, it should be further stated that it is urged that of the judgments, amounting to I about $17,000, upon which the sheriff's sales were made, one judgment for $3,000 was not against the company, but against other persons, and therefore the whole consideration paid on the mortgages, so far as the creditors of the New Jersey company were concerned, was really only $14,000. But the question on this inquiry, rather, is what the credjitors of the New York company in fact paid for the property which they received at the sale, and, inasmuch as this judgment of $3,000 against other persons was purchased by the creditors of the New York company in connection with the purchase of the other judgments, and as if it were a liability of the New York company, and was so carried by the trustees, the purchasers had certainly a right, on their sale of the property purchased to the new company, to consider the entire price paid by them, including this judgment of $3,000, as one element of value, and therefore the question whether the vendors were in fact bound to pay the judgment of $3,000 is immaterial to the creditors of the purchaser, the new corporation. A decree will be advised overruling the determination of the receiver, and allowing the claim of the appellant as an unpreferred claim.