Court Opinion

ID: 3602058
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:48:17.806628+00
Date Added: 2024-06-11T09:36:06.114017
License: Public Domain

The Hartman Manufacturing Company was incorporated under the laws of the state of Pennsylvania with a capital stock of $250,000, consisting of $100,000 of preferred stock and $150,000 of common stock. In the spring of 1901 Frank A. Umsted purchased from the *Page 77 
owners all of the capital stock for the sum of $110,000. Thereupon he arranged with William L. Kiefer, a lawyer, to take a third interest therein, and together they applied to and obtained a loan of $125,000 from the defendant, the City Trust Company, upon their promissory note, payable in six months, secured by a pledge of the certificates representing the entire capital stock of the company. To induce the trust company to make the loan, it was represented by Umsted and Kiefer that the loan was desired to enable them to pay the balance due from them to the persons from whom they had purchased the stock, the price of which was $350,000; that there were no claims, liens or incumbrances against the property of the company and that the cash assets, consisting of bills receivable, cash, open accounts, raw materials and unfinished stock, exceeded the total liabilities by at least $40,000; that the business was very prosperous and that dividends had been paid on the stock of the company ranging from fourteen to twenty-three per cent per annum, the dividend for the last year having been nineteen per cent. After acquiring the stock of the company Umsted was elected its president, and by resolution he was placed in charge of the property of the corporation and made the general manager thereof, and all checks, notes, contracts and other obligations of the corporation were required to be made and signed by the president or by the secretary and treasurer. On the second day of August thereafter Umsted applied to the Hanover National Bank for a loan to the Hartman Company of $200,000 to be secured by the promissory note of that company indorsed by himself and Kiefer, and in making such application he stated to the Hanover National Bank, for the purpose of procuring the loan, that the Hartman Company needed additional banking credit for the character and extent of the business; that it desired to enlarge its business and increase its capital stock; that Kiefer and he had borrowed of the City Trust Company $125,000 for the Hartman Company on their promissory note secured by a pledge of the capital stock of the company, and he asked the Hanover *Page 78 
National Bank to give him as a part of said loan a cashier's check for $125,000 with which to pay said loan at the trust company. Thereupon the Hanover National Bank made a loan in accordance with the offer and delivered a cashier's check to Umsted for $125,000, with which Umsted went to the City Trust Company, indorsed the same and delivered it to the trust company in payment of the loan made by that company to himself and Kiefer and procured a surrender to him of all of the stock of the corporation which the trust company held as security for the loan. This payment was made with the knowledge and consent of Kiefer, who, in writing, approved of the payment out of the loan made by the Hanover National Bank, and inasmuch as Umsted and Kiefer were then the owners of all of the stock of the corporation, it follows that the payment was made with the consent and approval of all the stockholders. This, to my mind, disposes of all of the questions raised and discussed with reference to the authority of Umsted to make the payment in question. His authority was, in effect, the same as if he had been expressly authorized so to do at a meeting of the board of directors. It, consequently, follows that the question remaining for consideration pertains to the rights of the creditors of the corporation existing at that time. As to such creditors we have the representations made by Umsted and Kiefer to the trust company, at the time the $125,000 was borrowed, the financial condition of the Hartman Company, its prosperity, earnings and dividends declared, to which attention has already been called, and the further fact that so far as the Hanover National Bank is concerned, it was expressly informed at the time the application for the loan was made that it was for the purpose in part of enabling Umsted and Kiefer to take up their promissory note and the stock pledged by them for its payment, to the end that they might enlarge the business of the company and increase its capital stock, and that the loan from the trust company was made by Umsted and Kiefer upon their personal promissory note. The findings are to the effect that the City *Page 79 
Trust Company believed these representations to be true at the time it made the loan to Umsted and Kiefer and that it had no knowledge that the company had subsequently become insolvent, and that in accepting the cashier's check of the Hanover National Bank in payment for the note held by it and the surrender thereupon of the stock of the company, it acted in good faith, and, consequently, became a bona fide holder of the cashier's check for value.
Again, this is an equitable action, brought for the purpose of obtaining purely equitable relief, in which the plaintiff demands the payment to him by the trust company of the $125,000 received by it through the payment of the cashier's check of the Hanover National Bank. It appears from the findings that, after the trust company had surrendered the capital stock of the Hartman Company to Umsted and Kiefer upon the payment of its promissory note, Umsted and Kiefer procured an increase of the capital stock to be made from $250,000 to $2,500,000, and that they had purchased the property of the Shelby Steel Tube Company at Newcastle, Penn., at a cost of $80,000, which was less than its real value and had also purchased the entire capital stock of the Cuyahoga Steel and Wire Company for $250,000, on which they had paid the sum of $125,000 and had expended a large sum of money in substituting new machinery in the plants purchased. It further appears that after trouble had arisen with reference to meeting the obligations of the corporation as they matured and became due, a meeting of the creditors was held and at such meeting a committee of such creditors was appointed, consisting of William Logan of the Hanover National Bank and others, to reorganize the Hartman Company and the Cuyahoga Steel and Wire Company and that, thereupon, at the request of the committee, Umsted and Kiefer transferred all of the capital stock of the Hartman Company to the persons designated by the committee, and such new stockholders, in the interests of the committee of the creditors, authorized a sale of the property of the corporation, other than the claim *Page 80 
now in suit, and that the same was bought in by the plaintiff in this action, to whom the claims of these creditors had been previously assigned, for the sum of $238,000. It thus appears that, by reason of the transfer of the stock of the corporation to the committee appointed by the creditors, they were enabled to vote the stock, elect new directors and control and manage the affairs of the company. They were enabled not only to direct the sale of the property, but also to prescribe the terms of the sale and arrange for its transfer to their own assignee, deriving therefrom a material and substantial benefit to themselves, thereby depriving the trust company of the protection that it otherwise would have had, had it still held and controlled the stock of the corporation. To hold that these creditors, including the Hanover National Bank, whose claims are represented by the plaintiff, may now recover from the defendant the amount of this claim, after they have reaped the benefit derived from the control of the stock of the corporation, which had been surrendered by the trust company, would, to my mind, be most inequitable and unjust.
I, therefore, favor an affirmance of the judgment.
CULLEN, Ch. J., WERNER, HISCOCK and CHASE, JJ., concur with VANN, J.; GRAY, J., concurs with HAIGHT, J.
Judgments reversed, etc.