Court Opinion

ID: 3863588
Source: CourtListenerOpinion
Date Created: 2016-07-06 08:57:07.775276+00
Date Added: 2024-06-11T13:35:21.037842
License: Public Domain

In 1873, the A.  W. Sprague Manufacturing Company, A.  W. Sprague as a firm, Amasa Sprague and William Sprague individually, and Fanny Sprague and Mary Sprague; the first corporation being composed of the firm and individuals subsequently named; in order to fund and secure their indebtedness, executed a trust mortgage of all their property, describing it, dated November 1, but executed on or about December 2, to Chafee, one of the respondents, with provisions to execute promissory notes of various amounts to the whole amount of         which notes were secured by said mortgage and were to be "used and applied to the payment or retiring of such of the outstanding indebtedness and liabilities aforesaid as the holders thereof shall, within nine months from the date of these presents, bring in and surrender and discharge or agree to extend for the term and according to the provisions of said notes." The subsequent assignments do not affect any rights of parties so far as the present suit is concerned.
December 18, 1873, the Quidnick Company, which was composed in part of the foregoing persons and firm, but which was solvent as a corporation, according to a plan agreed upon by the complainant, the A.  W. Sprague Manufacturing Company and *Page 376 
A.  W. Sprague and the creditors made a contract with the A. 
W. Sprague Manufacturing Company, corporation, by which, in order to carry on the business for the benefit of the creditors, the Quidnick Company were, for a commission, to furnish to the A. 
W. Sprague Manufacturing Company, "the necessary means, stock, and supplies for running their mills and print works," the A. 
W. Sprague Manufacturing Company to manufacture and consign them in the name of the Quidnick Company, the goods to remain the property of the latter, and the proceeds to be applied, first to the payment of expenses, commission, and advances, and the remainder to be paid to the A.  W. Sprague Manufacturing Company as a compensation for manufacturing; the contract to be terminable on thirty days' notice.
On the same day Amasa Sprague resigned his place as treasurer of the Quidnick Company, and Chafee, the trustee under the mortgage, was elected in his stead, thus giving Chafee the control of both concerns.
The construction of this contract is one of the important points in this suit.
Now if the Quidnick Company were to furnish stock to the A. 
W. Sprague Manufacturing Company and pay the latter a fixed price for manufacturing, then no debt could arise from the A.  W. Sprague Manufacturing Company to the Quidnick Company, except for damages for negligence or non-performance.
Or, secondly, if the Quidnick Company, willing to take all the risk of loss upon themselves in order to befriend the A.  W. Sprague Manufacturing Company, bought the stock and sent it to the latter to be manufactured, the goods to be sold, and after paying for stock, c., the balance, if any, to go to the latter, then, if this was all the contract, no debt could arise from the latter.
But, thirdly, if the A.  W. Sprague Manufacturing Company, being out of funds, induced the Quidnick Company to assist them by furnishing stock, c., the A.  W. Sprague Manufacturing Company to pay for the stock out of the sale of the goods and the Quidnick Company knowing that if the A.  W. Sprague Manufacturing Company did not do it, the trust estate would be liable for it, then if the goods did not sell for enough to pay advances, the latter would fall in debt to the former. *Page 377 
And this I think was the contract in this case. The consignment in the name of the Quidnick Company was merely for security.
Now if a contract is plain in its terms, the parties must be bound by it, but if it is ambiguous or not plain upon any particular point, then we have a right to consider, first, the state of things at the time, and the circumstances surrounding the parties; and second, the construction put upon it by the parties themselves in carrying it into effect, in order to get at what the parties really meant.
The Quidnick Company was solvent and the A.  W. Sprague Manufacturing Company embarrassed. These corporations were largely, but not entirely, composed of the same persons. So far as William Sprague and Amasa Sprague themselves were concerned, it would in the end make no odds to them what the contract was, but there were other stockholders. In ordinary cases, two corporations may enter into a trade, each expecting a benefit, and each running a risk; but why should the Quidnick Company in this contract take the whole risk; if anything was made the other party to have it, and if the goods sold for less than cost of stock and expenses the Quidnick Company to lose; the Quidnick Company not to make anything in any event.
On the other hand, if the Quidnick Company was to be paid for its advances by the A.  W. Sprague Manufacturing Company, and in any event by the trustee out of the trust property, then it was a reasonable contract for them to make.
In the next place, we have a right to consider the mode in which the parties themselves treated the contract and the construction they put upon it. Very able counsel have argued this case, and they not only have not urged, but have not even suggested in argument, the point upon which the majority of the court decides that there can be no indebtedness under this contract, but have argued it upon the construction I have put upon it.
Now if the books, when examined, show, as the respondents say they will, that there, is no indebtedness, then this point becomes of no consequence; but if there is, and the parties acted on this construction, these considerations, with the others above mentioned, would be almost conclusive as to what the parties intended. *Page 378 
The complainants allege that there is an indebtedness of more than two million of dollars, and the respondents do not deny any indebtedness, but admit that the books show an apparent indebtedness of about one million of dollars, and say that the goods, c., in the hands of the Quidnick Company, if sold at a fair rate without sacrifice, will produce a sum sufficient to cover this apparent deficiency.
So that the examination of the accounts is necessary to ascertain whether there is any indebtedness at all; and whether if there is any the mode of keeping the accounts has any bearing on the construction of the contract.
The complainants allege that so much of this indebtedness as arose under the contract was incurred for the carrying on or preservation and benefit of the mortgage trust, and for the benefit of and approved by the creditors. They further allege that said Chafee used the earnings of the Quidnick Company from this contract, and their funds accruing from other sources, to pay the creditors holding the mortgage notes, and to preserve and carry on the business of his assignors for the sole benefit of the creditors and to the loss of the Quidnick Company, and they claim a lien on the trust estate therefor.
As a further defence the respondents deny that, by virtue of any relation whatever, the Quidnick Company has any lien for advances; but contend that the contract of the Quidnick Company was only with the A.  W. Sprague Manufacturing Company, that their only claim is against them and as simple contract creditors of the latter.
This is to suppose that the Quidnick Company were fools enough to make large advances without security to a possibly insolvent corporation, whose whole property had been assigned for the benefit of its creditors, and if the same persons were, as it seems was the case, managers of both corporations, then they were rogues also. For persons holding a controlling interest in one corporation to contract with another, of which they are sole owners, to the advantage of the latter and the disadvantage of the former, would be a fraud upon the former. We cannot without evidence believe any such fraud was intended; but, on the contrary, it is evident from both bill and answer that the contract was *Page 379 
at the time deemed by the trustee and creditors a great benefit to the trust estate, in fact the most feasible and almost the only mode of carrying on the business and saving the creditors from great loss, executed, as the answer admits, with the consent of the creditors, and that therefore, while the name of the A. 
W. Sprague Manufacturing Company was used, it was in reality made by Chafee and the creditors for their own benefit, and the A. 
W. Sprague Manufacturing Company was only their agent in carrying it out. And Chafee, having control of both corporations, might put his own construction on the contract, and there was no one to question it.
If then there is an indebtedness from the trust estate, either from the contract as made or construed, or from the use of the Quidnick funds for the benefit of the trust estate, I think it must be considered as a part of the expenses incurred for the benefit of the trust and entitled to priority in payment.
In considering the present case we all leave out of consideration the ownership of the stock of the Quidnick Company. No question relating to that arises upon the papers in this case. It must be decided upon the papers as presented.
The complainants also allege that Chafee has used trust funds to buy up a judgment of the Bank of Commerce. If so, it must be held in equity to belong to the trust estate. A trustee cannot be permitted to speculate in the trust estate, nor for his own benefit to buy up debts against it either directly or indirectly through others. He can only in his own accounts be allowed what he has paid for them. So that such purchases may operate for the benefit of the creditors, and in some cases for the benefit of the assignors. So if he has bought stock or other property of either corporation. So if he has used Quidnick funds to buy up debts of the A.  W. Sprague Manufacturing Company, the former might be entitled to a lien or to a subrogation according to the equity of the case.
It is also alleged that a large manufacturing property has been sold under the direction of a committee of the creditors, at much less than its fair value, to a firm, one of whose members was at the time "an active and influential member" of the creditors' committee. The answer avers that neither the committee nor *Page 380 
Chafee knew that the firm were to be bidders. This denial is not as full as it should be.
The right of creditors to bid and buy, and for several to associate for that purpose, cannot be denied. But if they are also managers of the trust, the doctrines of equity in regard to trusts and trustees apply to the case, and it is the duty of the court to take care that their power is not exercised for their own benefit to the injury of smaller or other creditors.
The bill prays for an account and declaration of lien, and that the Bank of Commerce judgment be decreed to be a part of the trust estate, and that the respondents be enjoined from selling the trust estate except under the direction of the court.
We all agree that no sale should be made except under direction of the court.
This would enable the court to see that all interests are protected, to prevent the trust property from being thrown upon the market in such amounts as to necessitate a sacrifice; to reserve from the sale or from the proceeds of sales enough to satisfy any liens that may be ascertained; to withhold from present sale any portion of the estate the title to which is so clouded as that it would not sell for a fair value, until the difficulties are removed; to prevent secret bidding; or to provide for a sale by a master of the court, all which may be done upon proper proceedings to be advised by counsel and approved by the court. And in the mean time an account might be taken between the Quidnick Company and the A.  W. Sprague Manufacturing Company and the trustee.
October 29, 1881, forms of decrees were submitted by both complainant and respondents and counsel were heard upon them.
November 5, 1881, the court ordered the following decree to be entered:
This cause came on to be heard before the full court, andwas argued by counsel for the respective parties, and thereupon,upon consideration thereof, it is ordered, adjudged, and decreed:
First, That the A.  W. Sprague Manufacturing Company is notindebted to the Quidnick Company under the contract datedDecember 18, 1873, in the pleadings referred to.
Second, That the complainant is entitled to an account and *Page 381 repayment of all sums which said defendant Chafee, by virtue ofhis position as treasurer of said Quidnick Company, has used ofthe moneys of or belonging to said Quidnick Company, for thepayment of creditors holding the mortgage notes of said A.  W.Sprague Manufacturing Company, secured under the trust mortgagefrom the A.  W. Sprague Manufacturing Company to said Chafee, astrustee in the pleadings mentioned, or for the benefit of histrust estate under said mortgage, for purposes not within orunder said contract of December 18, 1873; and it is referred toSamuel W. Peckham, Esq., as master, to take and state theaccounts between said parties in respect thereof.
Third, It appearing that said property cannot be held toawait such account, except at great and ruinous expense, saidChafee is hereby directed to proceed and advertise and sell thesame, and deposit the net proceeds of each and every sale he maymake in the Rhode Island Hospital Trust Company, in Providence,upon its participation account, in his name as trustee, not to bewithdrawn except by order of this court, or some justice thereof,and either party may from time to time apply to the court for anydirections to said trustee in relation to such sales.
Upon this matter of a decree, POTTER, J., dissented from the action of the majority of the court as follows: