Court Opinion

ID: 8866371
Source: CourtListenerOpinion
Date Created: 2022-11-26 18:07:01.717758+00
Date Added: 2024-06-11T17:06:01.001690
License: Public Domain

BROWN, Circuit Justice
(dissenting). On January 6, 1896, the corporation known as C. H. Fargo & Co. was in desperate financial straits. To avoid an immediate collapse, and to procure the money necessary to continue the business, it entered into an arrangement with its two principal creditors by which the latter undertook to> lend §50.000, and the Fargo Company to execute three judgment notes, not only to secure the $50,000 advanced, but $45,000 owing to Candee & Co., and $140,000 to the United States Rubber Company, with a further stipulation to assign its accounts and bills receivable, should it become necessary for it to suspend business. There was a further stipulation that it should not give any judgment notes to other creditors. To secure the performance of this, five of the directors of the Fargo Company were to retire from the hoard, in favor of five persons elected upon the nomination of the preferred creditors.
The general creditors liad no knowledge of this arrangement, although the Metropolitan National Bank was subsequently informed of it.
The master found that this arrangement was “for the purpose of giving preferential security to the rubber companies, and that the matter was kept secret in order to allow the Fargo Company an opportunity of getting through embarrassments apparently temporary, *906but not with a fraudulent intent as to the other creditors of the company,” and that the only purpose and object of changing the board of directors as aforesaid, and of amending the by-laws so as to prevent the giving of judgment notes except by vote of the board, was to protect the rubber companies against the giving of judgment notes to other creditors.
This arrangement continued until August 6, 1896, during which time the Fargo Company continued its business as before, and reduced its general indebtedness and its indebtedness to Candee & Go. to a considerable extent, when it was forced to suspend.
The district judge was of opinion that, although the giving of the judgment notes was not unlawful, the arrangement by which the matter was kept secret while the corporation devested itself of power to give like' notes to other creditors, and continued to carry on its business as before, rendered the whole device a constructive fraud upon its creditors. In this we all agree.
To make it actually fraudulent, such as to require the claims of those preferred creditors to be postponed to the claims of the general creditors, I think it should clearly appear either that the preferred claims were not bona fide, of which there is no pretense, or that the arrangement was entered into, not for the purpose of tiding the company over its immediate crisis, enabling it to continue business, and at the same time to secure the preferred creditors, but for the purpose of ultimately winding it up, and in the meantime of giving it credit, and enabling it to purchase additional goods which the preferred creditors would thereby be able to seize and subject to their own debts.
I find no testimony to satisfy me that an actual fraud upon the general creditors was intended. The device of changing the directors was evidently not for the purpose of giving up control of the business, but only to secure the arrangement that no other judgment notes should be given, and as a matter of fact the new directors did not interfere with the business of the company as conducted by the Far'gos. Indeed, no meeting of directors was held after the. change was made. No new creditors were induced to give credit to the company upon the faith of their continuing the business, as the evidence shows that with few exceptions the same persons were creditors in January and in August.
Of the alleged misrepresentations of the Fargos to the Dixon Bank and to the Pfister & Vogel Company that no judgment notes had been given, it may be said that they are not admissible as against the claims of the rubber companies, unless there be evidence of a conspiracy between them to defraud their creditors, of which there is no evidence aside from the agreement itself, and that in any event none but the Dixon Bank and the Pfister & Vogel Company could have been injured by these .representations. Such representations might be used as a basis for giving them priority, but they would not inure to the benefit of other general creditors. Upon the whole, it does not seem to me that such a ease of fraud is made out as authorizes the court to postpone the claims of the preferred creditors to those of the general creditors, and thereby practically to *907confiscate them, and that there is no sound reason for departing from the genera] rule laid down by the supreme court in White v. Cotzhausen, 129 U. S. 329, 9 Sup. Ct. 309, and Streeter v. Bank, 147 U. S. 36, 13 Sup. Ct. 236, wherein the preferred creditors were permitted, after their security had been set aside, to stand upon an equality with the general creditors. See, also, Comer v. Tabler, 44 Fed. 467; Brown v. Stove Co. (Tenn. Ch. App.) 42 S. W. 161.
The evidence satisfies me that there was a bona fide attempt to assist the Fargo Company in continuing its„ business, with the hope of ultimately pulling it through, and that, if this attempt had been successful, it would have redounded greatly to the interest of the general creditors. It was natural, at least, that in making this attempt the rubber companies should have endeavored to secure themselves, not only for their immediate outlay of §50,000, but for their prior debts. In palliation of the secrecy, which was held to make this constructively fraudulent, it may be said that publicity doubtless would have destroyed the entire scheme of raising money to carry on the business.