Summary
In Schultze v. VanDoren, supra, Vice-Chancellor Pitney, in applying the apposite principle said: "The right given to the trustee to foreclose is cumulative, and not exclusive of the right of the bondholders.
Summary of this case from Bullowa v. Thermoid Co.Opinion
05-29-1902
SCHULTZE et al. v. VAN DOREN et al.
Edward A. Day, for complainants. Robert H. McCarter, for defendant. Van Doren. James P. Northrop, for defendants Wilde and the corporation.
Action by Emil Schultze, Jr., and another against Howard J. Van Doren and others, to foreclose a mortgage given by the Bloomfield & Montclair Crystal Ice Company to secure bonds. Decree for complainants.
Edward A. Day, for complainants. Robert H. McCarter, for defendant.
Van Doren. James P. Northrop, for defendants Wilde and the corporation.
PITNEY, V. C. This cause was heard by me on the 29 th of May, 1902, and decided at once, but the decree was not presented for advice until the month of October, and was actually dated on the 28th of that month. An appeal having been taken, I have been requested to give my reasons in writing for the decree so advised.
The bill is filed by the two complainants, Emil Schultze and Leonard Kalisch, as the holders between them of 19 coupon bonds of $250 each,—$4,750 in the aggregate,—given by the defendant the Montclair Crystal Ice Company to the defendant Goodell, as trustee, and secured by mortgage on certain real estate in the county of Essex. The object of the bill is to foreclose that mortgage. It and the bonds, of which there were 48, aggregating $12,000, are dated on the 1st of November, 1891, made payable in 10 years, with interest semiannually. The mortgage is simple in form, and authorizes the trustee to foreclose the mortgage in certain contingencies. The bill was filed shortly before the principal of the bonds became due. The right of action at that time rested on the unpaid interests but the whole matured before the hearing. Several defenses were made: (1) That it appeared by the minutes of the corporation that the resolution of the board of directors which authorized the mortgage was passed at a meeting held in the city of New York; (2) that the complainants, as holders of the overdue bonds, could not maintain the suit, but that it could be maintained only by the trustee; and (3) that the bonds held by the complainants were not shown to have been issued by the authority of the trustee or the officers of the corporation, or for value received. A short history of the enterprise will assist in understanding the strength of these defenses. The certificate of organization of the corporation, as shown by a copy entered in the minutes, is dated April 15, 1890. At and before that time one John F. Maxfield was engaged in erecting upon some land owned by him in Montclair a factory for the manufacture of ice, and had spent a considerable sum of money therein, and was under contract which required the expenditure of still more. In that state of things he induced Mr. Edward Cane, a retired baker, who lived in Brooklyn, to join him, with capital, in the enterprise of finishing his ice plant and the manufacture of ice for sale. The result was the formation of the corporation with a capital of $50,000, of which Maxfield subscribed 428 shares, Cane 50 shares, a Mr. John Wilde,defendant herein, 1 share, the defendant Goodell, as counsel, 1 share, and a Mr. Haring and a Mr. Rand 10 shares each; making in all 500 shares. The shares of Haring and Rand were paid for by Cane, so he swears. The by-laws provided for five directors, and these were Wilde, Cane, Maxfield, Rand, and Haring. Wilde was president, Maxfield vice president, Cane secretary, and Haring treasurer. The latter also at first acted as bookkeeper. Shortly after, however, the number of directors was reduced to three, Rand and Haring being dropped. Haring resigned as treasurer, and Cane then acted as secretary and treasurer. So that the real ownership of the plant was divided between Cane and Maxfield, and Mr. Wilde's interest was nominal, until he began to loan money to the company. By the contract between Maxfield and the corporation, he was to convey the land and plant as it stood, and take pay therefor in stock; the corporation assumed the liabilities of Maxfield for the completion of the plant, and Maxfield and Cane put in each a substantial sum in cash, for which they took stock. These facts were sworn to mainly by Mr. Maxfield, and confirmed by Mr. Cane; and Mr. Wilde, who was called for the defense, did not dispute them. The business progressed, but the amount of cash capital advanced by Maxfield and Cane proved insufficient and resort was had to borrowing. Mr. Cane swears, and the books sustain him, and he is not contradicted, that he borrowed from his friends from time to time large sums, which he loaned to the corporation. Mr. Wilde also advanced $2,700 to the company. Finally, in the fall of 1891, the mortgage in question was agreed upon by the three directors at a meeting in the city of New York, and it was duly prepared, executed, and recorded. The bill states that of the $12,000 of bonds executed and duly signed by the trustee about $9,000 were actually issued to bona fide purchasers, and that the remaining $3,000 were handed to the F. W. Wolfe Company, a creditor, to satisfy its claim of that amount, and that it refused to accept them, but sued in the federal court, obtained judgment, and in the year 1893 the premises were sold at marshal's sale, and bought by the defendant Van Doren. Further, that the $3,000 of bonds which had been handed to, but not accepted by, the judgment creditor, were transferred by him to Van Doren, and that the same remain in Van Doren's hands, and that he is not entitled to hold them as a debt secured by the mortage. These facts are not seriously his-by Van Doren or by Wilde. The andenies the allegations as to the $3,000 delivered to Wolfe & Co. and by Van Doren, but the defendants of evidence about it. With regard to of bonds which the bill alleged out in actital circulation, $2,750 to Mr. Wilde for moneys borrowed for or had advanced out of his own funds to the corporation, and were at the hearing admitted to be in the hands of Mr. Van Doren, having been delivered to him by Wilde. Mr. Maxfield swore, and it is not disputed by either Mr. Van Doren or Mr. Wilde, that the property was bought in at marshal's sale by Van Doren for the benefit of the corporation, and that Van Doren actually ran it a short time as a sort of agent for the corporation or for Wilde, at Wilde's expense, and that finally Wilde turned the whole thing over to Van Doren, and gave him the $2,750 of bonds which he (Wilde) held as above stated. Mr. Cane, a highly respectable old gentleman, whose evidence, so far as he recollected, struck me as entirely reliable, swore that he from time to time borrowed money from his friends, and advanced the same to the corporation, and lodged bonds with them as security,—just how many he does not recollect, —but was finally obliged to redeem them all, and passed them away; just how or to whom does not appear. But according to his account the corporation had every dollar of the amount so negotiated by him in cash. Just how many he so negotiated does not, as I have observed, clearly appear. Mr. Wilde, called for the defense, states that he understood Mr. Cane had advanced $4,000 for the corporation, and that he was entitled to have $4,000 of these bonds for his security, and an entry to that effect is found in the minutes; and it abundantly appears by the books, which were produced by the defendants on complainants' call, that a balance of over $4,000 was due to Mr. Cane for cash actually advanced. Besides that, there is found on one page of the ledger a statement which indicates that $(5,000 were placed in his hands to meet not only what he himself had advanced, but as collateral to some other indebtedness to outside parties. But besides that, Mr. Cane swears that the corporation was indebted to the late L. J. Lyon, a boiler maker in Newark, for work done for the corporation, to the amount of over $1,250, on which he (Cane) was security, and that Lyon obtained a judgment against the corporation for the amount, and that he negotiated it to Mr. Kalisch, who was solicitor for Mr. Lyon, $1,250 face value of these bonds. This accounts for $5,250 of bonds issued for value, besides the $2,750 issued to Wilde, an aggregate of $8,000. All the books of account at the failure in 1893 were turned over to Mr. Wilde, and were in the possession and under the control of the defendants at the opening of the case, and it does not appear that the complainants had had access to them for the preparation either of their bill or of their cause for trial.
The information upon which the bill was founded seems to have been derived from Mr. Maxfield. who was sworn as a witness, and gave a part of his testimony before he had an opportunity to examine the books. His evidence was much to the same effect as thatof Mr. Cane, who was subsequently sworn, and he, speaking apparently entirely from memory, swore that $2,750 of the bonds were issued to Mr. Wilde for money loaned by him. Then that $2,000 of the bonds were given to a Mr. Roberts, of Brooklyn, as security for $1,500 advanced by him, and $500 more advanced on the same batch by Mr. Cane. Another $1,000 was paid to the Chemical National Bank of New York to secure that much money borrowed from them, or rather money which was paid by the bank to a Mr. Deane, from whom he (Maxfield) and Cane had borrowed $2,000 upon their note, secured by stock of the company as collateral, and that they paid to the bank $1,000, and handed the cashier $1,000 in bonds as security for the remaining $1,000. Further, that $1,000 was borrowed of a Mr. "Van Brunt, and that the company paid him something on account of it, and the balance was paid by Mr. Wilde, and formed a part of his loan of $2,750; that $500 of bonds were handed to the firm of Klein & Moore, coal dealers, to whom they were indebted for coal; and the bill alleges that $500 of the bonds are in the hands of Mr. Moore, who is made a party defendant. That $1,250 of bonds were passed to the late L. J. Lyon, a boiler maker of Newark, for a claim which he held against the company, and on which Mr. Cane was liable in some way as security. Those bonds were handed to Mr. Kalisch, as the attorney of Mr. Lyon, and are part of the bonds in suit. Mr. Maxfield further swears that Mr. Cane gave $500 of bonds to a Mr. Ferris, from whom the company borrowed money. That list accounts for $9,000 of the bonds. After Mr. Maxfield had given that evidence, a ledger of the company, produced by the defendants, was shown him, and in pencil marks on page 38, under the account of Mr. Cane, a list of the bonds outstanding, and the persons in whose hands they were, is given, which corresponds pretty well with Mr. Maxfield's list. It is as follows: "Chemical Bank, $1,000; Van Brunt, $1,000; Roberts, $1,500; Stevenson, $1,500; Phillips, $750, Ferris, $500; Wilde, $2,750; $3,000 not disposed of,—making $12,000." Cane swears that the bonds so in Stevenson's hands were later on transferred to another person. On the same page is a memorandum that $6,000 of bonds are in the hands of Mr. Cane to secure the balance of his account, which is shown to be $4,158.87. The minutes show that $4,000 were set apart to pay Mr. Cane and $2,750 to pay Mr. Wilde. Both Mr. Maxfield and Mr. Cane were subjected to a severe cross-examination, and an attempt was made to show that the Deane debt was their private debt. But this attempt entirely failed, and a careful re-examination of the evidence, in connection with the books, satisfies me that the bonds presented by the complainant were all issued for cash which came to the treasury of the company, or for goods which the company actually received. The evidence thus accounts for all the bonds, except $1,000, which were probably held by the Chemical Bank. It appears that the treasurer, Mr, Haring, during his term, and after him Mr. Cane, were not living in Montclair, where the business of the company was carried on, and spent very little time there; that, while the company kept an account in the Montclair Bank, it was inconvenient for Mr. Maxfield, who made the actual disbursements,—paid the debts and current expenses,—to make use of the bank account of the company in Montclair for that purpose; and hence he used his own private account, placed the funds of the company in large sums to his credit in bank, and drew against the same. His check books and vouchers were turned over to Mr. Wilde when the company failed, and some of them were produced in court by Mr. Wilde; and they show that the bank account was handled, so to speak, by the bookkeeper of the company; checks were filled up by him, and signed by Mr. Wilde; and after the failure of the company Mr. Maxfield made up an account between himself and the company, showing all the moneys he had received and all the bills he had paid, entered it upon one of the books of the company, and showed thereby that the company was largely in debt to him.
The mortgage was duly executed and acknowledged, the bonds were all properly sealed and certified by the trustee, Mr. Goodell, and the mortgage was duly recorded, long-before the judgment was obtained under which the defendant Van Doren claims title. So that the only objection that can be possibly urged to the mortgage is that the resolution for its execution and issuance was adopted at a meeting of the three directors held in the city of New York, instead of New Jersey. I do not deem it necessary to go into the learning of the law upon the subject of the power of a corporation of this state to hold a meeting of directors out of the state, where the by-laws do not—as they do not in this case—provide for meetings of the directors out of the state. Much might be said in favor of the position that, if such action is unwarranted by the strict rules of law, it can only be taken advantage of by some member of the corporation by means of a direct proceeding for that purpose. Here the action was taken substantially by the sole owners of the corporate property. The corporation had the benefit of the bonds issued under that mortgage, and under those circumstances the law is sufficiently settled in this state that the mortgage is valid and binding upon the corporation; and, if valid and binding upon the corporation, then it is good against a judgment creditor of the corporation who had notice by the record of its existence. The public, who take and pay for the securities so issued, are entitled to presume that all necessary preliminaries not required to be a matter of public record have been properly performed. 7 Thomp. Corp. §§8317, 8321, 8322. In this case the defect relied upon does not appear on the face of the mortgage, and there is nothing shown in the case which should have put the investors on inquiry as to it. It would, in my judgment, be a most dangerous doctrine to hold that a corporation may be permitted to solemnly execute a mortgage and divers bonds secured thereby, and set to each its corporate seal, and record the mortgage, and issue to innocent holders its bonds for value received, and, after having received value therefor, set up that there never was any resolution of the board of directors authorizing the making of that mortgage and the issuing of those bonds. Water Co. v. De Kay, 36 N. J. 548, headnote 8. At page 566 the learned judge who spoke for the court of errors and appeals says: "In the courts of this country it may also be considered as settled law that, * * * where the corporation has power, under any circumstances, to issue negotiable securities, a bona fide holder has a right to presume that they were issued under the circumstances which give the requisite authority; and they are no more liable to be impeached for any infirmity in the hands of such a holder than any other commercial paper." And see Kuser v. Wright, 52 N. J. Eq. 825, 31 Atl. 397.
This disposes of two of the defenses, and leaves only the point that the suit cannot be maintained by one or more bondholders, but should have been brought in the name of the trustee. I do not find in the mortgage any warrant for that position. It does, indeed, provide that a suit may be brought by the trustee under certain circumstances, but it does not forbid a suit by a bondholder. And it is to be observed that the right of the bondholders in this case does not depend upon any action by the trustee in the way of declaring that the whole principal has become due before its maturity by reason of the nonpayment of interest. The bondholders had a right, at the time they filed their bill, to ask the aid of this court to collect the unpaid coupons; and when they formally, in writing, applied to the trustee to bring suit, he intimated in his reply that there might be a dispute between several bondholders, and that he wished to keep himself in the position of standing indifferent between them, and that he would require proper indemnity for his costs and expenses in conducting the suit, and intimated that he would: not permit the counsel of the complainants to conduct it in his name. It is evident from his letter, which is quite lengthy, that the trustee fancied that it was necessary, in order to justify a bill, that there should be a declaration by him, founded on a default, as provided for under the terms of the mortgage. This, as I have said, was not at all necessary in order to enable the complainants to proceed. That a single bondholder, or several combined, holding bonds secured by a mortgage given to a trustee, may maintain such a suit in his or their own name or names, although the mortgage provides for a suit by the trustee, is well settled. The right given to the trustee to foreclose is cumulative, and not exclusive of the right of the bondholders. Their rights arise out of the fact that they are the parties beneficially interested in the mortgage security. It is primitive and fundamental in its character, and can be taken away only by some provision, express or implied, found in the instrument itself. McPadden v. Railroad Co., 49 N. J. Eq. 176, 22 Atl. 932, where will be found an exhaustive consideration of the subject by Vice Chancellor Green. And see, on page 184, 49 N. J. Eq., page 935, 22 Atl., his extract from the opinion of Justice Matthews, speaking for the supreme court of the United States in Railroad Co. v. Fosdick, 106 U. S. 47, 68, 1 Sup. Ct. 10, 27 L. Ed. 47. And see, also, Johnes v. Outwater, 55 N. J. Eq. 398. In the present case the trustee did not positively decline to act, but he imposed terms which I think the complainants, under the circumstances, were not bound to accept, and were quite justified in falling back on what I think was their primitive right. The concentration, in a single batch, of a large number of the bonds in the hands of the complainants, and the location of nearly all the remainder in the hands of one or two other parties, who are made defendants, the making of the trustee a defendant, produces a case which prevents any danger of inconvenience to result from multiplicity of suits, and which furnishes a ready and convenient mode of litigating the only substantial questions arising out of the circumstances. Every bondholder, except one to the extent of $1,000, was represented.
The decree which I have advised gives an opportunity for settling the validity of the bonds held by the defendant Van Doren in a contest over the proceeds of the sale, and in that contest proper advertisement will, of course, be made to bring in the $1,000 of bonds whose location is not actually known.