Opinion
01-16-1906
WOOD & NATHAN CO. et al. v. AMERICAN MACH. & MFG. CO. et al.
William H. Corbin, for complainants. Spencer Simpson, for defendants.
Bill by the Wood & Nathan Company and others against the American Machine & Manufacturing Company and another. On motion for a receiver. Granted.
William H. Corbin, for complainants. Spencer Simpson, for defendants.
PITNEY, V. C. (orally). I will dispose of this motion now for present purposes. This is a bill filed by a company—Wood & Nathan company—which is composed of two gentlemen, Mr. Wood and Mr. Nathan, against the American Machine & Manufacturing Company, asking for a declaration of insolvency and the appointment of a receiver. The application is contested.
The circumstances developed are these: A Mr. Kavenaugh, who also is a defendant, was in 1904 the owner of some patents for making small printing machines for printing handbills and labels and things of that kind, and to be run by power with great rapidity. He had organized the defendant company, the American Machine & Manufacturing Company, and had put these patents all in as of a certain value, and issued to himself I don't know how much stock—$75,000—which was a patent fraud on the act of the Legislature. He had no money with which to run the company. He was not getting on either with manufacturing or selling. As it was a new thing, it required, confessedly, first, to have the machines manufactured, and have them manufactured under the superintendence, as he had no factory of his own—manufactured under the supervision—of a skilled mechanic; then to have them marketed by selling single ones, by personal application to the parties who would be likely to use them, engaged in printing that sort of thing; then they were to be set up on trial for 30 days to see whether the purchaser liked them. In the meantime they were to be watched by a skilled mechanic to see how they worked. Then, in order to promote the sales, further time was to be given to the party to try them for a while in addition to the 30 days—take them not only on trial, but to pay for them by installments. Now this was a slow business. It required capital. And it is not at all similar to manufacturing an article that sells by the dozen or the hundred, that has an established market; but every single machine has to be sold by personal application in each particular case, and then on the terms I have spoken of.
In this situation of affairs Mr. Kavenaugh fell in with the complainants, men engaged in the business of selling that sort of thing, and incidentally, as it appears, and manifestly as a part of this business, advancingof money for the manufacture and attending to the whole thing on a good commission. The result was that they made a contract, or a series of contracts. In the first place complainant advanced $25,000 hard cash for a little less than half the stock, leaving Mr. Kavenaugh still in control of the stock. Now, I believe there is no doubt they advanced that $25,000 cash. Then they met In New York City and elected officers. Mr. Wood was elected president at large. Mr. Nathan, Mr. Kavenaugh, and a Mr.—somebody, a mere dummy—were elected directors, making the requisite number of three. Then Mr. Nathan was elected treasurer and general manager. An office was opened at No. 1 Madison avenue, New York City. Then they agreed to pay Kavenaugh $70 a week. I did not understand for what, but I think he said it was for looking after the machinery and for standing around and making himself generally useful; not for selling. He was not to do any selling, but he was—I have no doubt, if he had an interest in the thing—to look up purchasers; but the real selling was to be done by the complainants. And he was to have his expenses. They commenced business. They employed a firm in Newark, Richards & Co., to manufacture these machines, and they employed an expert, Mr. Morrison, who had invented part of the machine, to see that it was built rightly. And that was very proper, because, while Mr. Richards might be a first-rate machinist, these machines were of a delicate character and very rapid runners, as I understand. So that, when assembled, they must be adjusted with the greatest nicety, and so they had to have a man there to attend to it. So that the payment to Mr. Richards of the contract price, $400 or $500, whatever it was, was not the whole consideration, by a considerable. Then they commenced to sell, and they sold on the terms above stated one after the other, and in almost every instance there was fault found. This machine did not work in this way and that one did not work in that way. In fact, it was a delicate machine, a rapid-running machine, and I have no doubt that Mr. Nathan (I think it was) told the exact truth when he said that they had to be run by a practical man, a man who was himself something of a machinist. They were liable to get out of order. Complainant had trouble in collecting from the persons to whom they sold the payments as they came due. They found fault, and Mr. Morrison had to run after them and keep the machines going. I state this to show the character of the business. They are not salable at all, in the sense that ordinary merchandise is, at the very best.
Well, the business went on, and the $25,000 is gone. As I understand, Mr. Kavenaugh got about $9,000, something like that, for his $70 a week and expenses, and the concern was out of money. The corporation had given two notes, both payable on the same day and at the same time on their New York bank, for $3,700 each to Messrs. Richards & Co. for work done, as I understand, on goods taken away—because naturally Messrs. Richards, though there was nothing proven about it, would hold their lien on the machines before they were taken away—and the complainants were obliged to indorse those notes because Messrs. Richards would not take them without Wood and Nathan, the complainants, indorsed those two notes. They were given on September 2, 1905, and they were for $3,712.80, including interest, each, and they came due in New York on the 2d day of January at the complainants' bank. Now there they were liable for $7,400. Then the corporation needed more ready money, and on the 16th of November the complainants indorsed the note of the company for $10,000 at four months, payable at their own bank, and got it discounted at their bank, and Mr. Paul Nathan himself individually indorsed it, as well as Mr. Kavenaugh; and that was put to the credit of the corporation at the bank.
In the meantime some disputes arose between them, and Mr. Kavenaugh was asked to transfer to complainants the half of certain patents which by his contract he had agreed that he would transfer to the company, or that the company held at the date of the contract, and the complainants found that the company did not own them, and they further found they were chargeable with interference by a company that did own a patent of that kind, something about the delivery of the printed sheet after it had passed through and been printed. And that that is so is pretty clear—not only not denied by Mr. Kavenaugh, but Mr. Morrison swears that he went to Boston and prepared changes in the machinery for delivery to attach to the machines—the one they had sold there—to prevent an interference with this very patent. That is what I understood him. At any rate, they had a dispute because Mr. Kavenaugh did not deliver this particular patent which he had made a sworn statement belonged to the company. And by and by Mr. Kavenaugh blurts out "You are not officers, anyhow." Now it was a part of the contract that those gentlemen, the complainants, should have control. Perfectly plain. They were not disposed to put their money into that concern and take the responsibility of running it and selling the machinery, unless they had control, and although Mr. Kavenaugh retained a majority of the stock, yet at the election of the directors these two gentlemen were put in substantial control of the company, handled its money, and so protected themselves against a variety of disasters which are liable to overcome one of those companies.
Now, I say that in the month of December last disputes arose, and some hard feeling arose between Kavenaugh and the complainants. The result was that Mr. Kavenaughtold them, declared verbally that they had not any rights, they were not officers, that the election in New York was void, and that he was the master of the whole concern. And that was, according to the evidence of Mr. Wood, after this $10,000 note was signed and indorsed. Well, there is their position. They were indorsers for $10,000 on paper of this company in their bank for cash lent, and they were indorsers on $7,400 more of paper that had been given to the Richards Company, the manufacturers. That makes $17,400 of liabilities, and they are coolly told by this Mr. Kavenaugh, who is, as far as appears, practically impecunious, that he is the master of the corporation, and they have no standing. Now, the letter to that effect was written by Kavenaugh December 30th, but before that date Mr. Wood swears—and I do not recollect, but think that Mr. Nathan swore to the same thing—Kavenaugh had spoken of it personally. Now, let us see what that letter is, dated December 30, 1905, which I think the evidence warrants me in holding to be an echo, a reiteration in writing, of what he had previously stated orally. Now, the company had been writing letters, I think, and all that sort of thing, dated at the office. Yes, they had their shingle out, and all that, at No. 1 Madison avenue, New York City; but here is a letter which says: "Principal Office, 325 Federal Street, Camden, New Jersey." That shows that the office of the company had been changed from No. 1 Madison avenue, New York City. But it also says: "New York, December 30, 1905. H. A. Wise Wood and Paul Nathan, 1 Madison Ave., New York—Sirs: As president of the American Machine and Manufacturing Company"—now, mind you, Mr. Wood was the president of the company—"I hereby notify you that the meeting of the stockholders which you pretended to hold in New York City November 20, 1904, was illegal and not in accordance with the laws of New Jersey, as all stockholders' meetings must be held in the state of New Jersey, and that your pretended appointment as president, treasurer, and general manager"—there is an admission that they had been appointed president, treasurer, and general manager—"is null and void; and therefore as president of such company I give you notice that I demand possession of all property, contracts, papers, and effects of said company, and hereby warn you not to interfere in the management or business of said company, either as president, treasurer, or general manager, or otherwise. And I further give notice that we shall hold you amenable to the law by any acts done by you to the affairs of the company and its capital. Joseph T. Kavenaugh, president"
Now, I repeat, I shall consider that as a simple reiteration of what he had said to them verbally before that. Now, with that kind of talk—no matter that that election in New York City was good as to strangers and would bind that company in giving all these notes in the bank, and giving the notes to the manufacturers; grant that they could not repudiate these notes—yet as between these people who were parties to the transaction a different question arises, and that was a very disagreeable and inequitable threat to make to complainants. And the question was, what were they to do then? Why, one of the statements of complainants' counsel—I do not know that it was supported by proof—was that before this letter was written they had gone to the company office and demanded to see books, etc., and they would not show them to them. That was the statement made here yesterday when a motion was made. I think it is in the petition on file here. I think that states that on a particular day, some time before December 30
Mr. Simpson: "We went to inspect the books."
"The Court: Yes. That shows what the situation was. They were being threatened by holders of a majority of the stock with entire repudiation of their rights. Now, what was their situation? Why, I say they were on the paper of the corporation for $17,500. Of the proceeds of that note which had been discounted, put to their credit, there still remained in the treasury of the company to their credit in the bank $7,500. Now, clearly, complainants had a lien on that money in equity, in my judgment. Under that threat it did not lie in the mouth of Mr. Kavenaugh to say: "I have got the advantage of you. You have, with my knowledge and consent, indorsed the paper of that corporation for $10,000, and have put the proceeds in the treasury, and you cannot draw it out because you are not treasurer, and you cannot help yourself. We have got $10,000 out of you. We stuck you as an indorser for $10,000, and we have got you stuck as indorser for $7,500 on the company paper; and according to my view I have a right to draw that money. I have a right to take that $7,500 out of the bank and put it in my pocket and leave you to pay the other $10,000 and $7,500 that you are indorsers on to the bank and the manufacturers of Newark." Now, a gentleman that would take that ground was not too good, if he could do it, to get that $7,500 out of the bank and put it in his own pocket and leave the complainants to pay the whole $17,400. Now, in my judgment, they were perfectly justified in equity, while the money was under their control, in taking it and satisfying the debts of the company as far as they could. And it makes not a particle of difference how they did it; for if they had held that $7,500 and applied it to the payment of those two notes that matured January 2, 1906, they would still have been liable on the $10,000, and so it is only a question of time.
Counsel says: "Why, that $10,000 is not due until March 16th," and by their own acttheir debt is not clue. But it la a debt in presenti solvendum in futuro. And there are other debts. There are debts that are past due to the manufacturing company, and I think there are other debts sworn to by the complainants. They are small, to be sure. But in my judgment the complainants had a right to change that transaction, and go right back to November 16th, and put the affairs right back to their original position, and repudiate the whole thing. If Mr. Kavenaugh proposed to repudiate their rights, they had a right to repudiate, on their side, what they had done. Therefore, in my judgment, they are entitled to stand here as creditors for the $7,400 which they had paid on the Richards note, and for $2,500 on the $10,000 which they were obliged to pay out of their own pocket in order to take up the note. That makes $10,000. Now, I forget how much the other little debts amounted to—$1,000 or $2,000 I believe. If the only debt was that $1,000 or $2,000, probably this court would not grant the motion. But, on the other side, what are the assets? Not a dollar in money, or not a dollar that is available. I cannot treat these two or three dozen machines here as available, for the reasons I have already stated. But, in addition to that, they are acknowledging the defects of those machines by inventing improvements to put on them, and they are held now from sale for the purpose of adding $100 or $200 or $300 to each one by some new attachment in order to make them more salable and more desirable, more liable to be kept and used after they are put up for trial. The trouble with them is that people who take them for trial are not satisfied with them and do not keep them. I am satisfied the evidence on that subject of Mr. Nathan is reliable—borne out somewhat by proofs. The result is that they are not available assets. They may become available by somebody coming in, who is willing to put in $10,000 or $15,000. They may be made security for that. But in order to accomplish that you must get somebody that has faith in them. It is an individual transaction, and I do not see that Kavenaugh has turned his hand over one particle to try and raise the money since the break with the complainants.
I therefore adjudge—though I will not sign my name to anything at present—that this company is in a condition of insolvency, which justifies the appointment of a receiver. Now, right there, it is not necessary that it should be absolutely insolvent in order to throw it into insolvency. It is sufficient if it cannot go on. Now in its present condition I am satisfied it cannot, and that these complainants have a proper standing in court. I have spoken of them as creditors, but they are also stockholders. They have a right to intervene as such, and their standing as stockholders under the circumstances of this case is much higher than it is as creditors. I will not enlarge on that, because I think the other is sufficient; but their standing as stockholders is much higher than that of creditors. They are entitled to the greatest consideration as stockholders, because they put all there is of value in the enterprise. They put in $25,000 in cash, besides the $10,000 that they have also advanced as creditors. In effect that makes $35,000. They say the present is a situation which ought not to go on any further. The two positions support each other. I will, though, postpone the appointment of a receiver, continuing the injunction for one week, or rather until next Tuesday, and if in the meantime Mr. Kavenaugh has shown that he is taking sensible—not flighty, but real sensible—means of raising this money, indemnifying these gentlemen, and will get somebody to give them a bond—I do not suppose they want the money, and I would not make them; I would not countenance them in demanding the money if a good bond was offered, or something of that kind—why, I will consider whether I will give them any more time, but I will not make any promise beyond next Tuesday. In the meantime the injunction stands. I say this: I will not go beyond next Tuesday. The proposition is not stated in the presence of Mr. Corbin, who has left the court, and I do not wish to do anything to affect the case without having the benefit of his argument.
Whatever settlement takes place will be done by approval of the court. The court will let up the injunction far enough to allow you to carry it through.