Court Opinion

ID: 9639553
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:23:01.275182+00
Date Added: 2024-06-11T18:10:19.814996
License: Public Domain

WILBUR, Circuit Judge (dissenting).
It is a familiar doctrine of equity that, where all the stock of a corporation is owned by an individual, equity will look through the corporate form to the actuality and hold the corporation to be merely the alter ego of the stockholder.
This is a suit in equity involving the affairs of a number of corporations in which Fred Herrick was sole owner of the capital stock. He handled the affairs of these corporations very much as though they wore his own, no shares of stock being outstanding except qualifying shares. Each corporation, however, had large interests and conducted large operations and maintained a system of books of account which purported to show the affairs of the corporation. Money was borrowed by these corporations from banks upon their credit. Among these corporations was the Milwaukee Lumber Company, located at St. Maries, Idaho; the Coeur d’Alene Mill Company, an Idaho corporation located at Coeur d’Alene; the Export Lumber Company, an Idaho corporation located at Harrison, Idaho; the Tuseor Lumber Company, the Red Collar Steamship line of Coeur d’Alene Lake. He was also the owner of 50 per cent, of the stock of the Scotch Lumber Company in Alabama, and also the Interior Lumber Company in Mississippi.
The question involved in this ease, according to the appellant, is whether or not the Fred Herrick Lumber Company (hereinafter called the Herrick Company), was insolvent at the time of the alleged preferential payment of $49,446.56 to the Exchange National Bank of Spokane. This depends upon the validity of the claim of the Milwaukee Lumber Company (hereinafter called the Milwaukee Company) for $500,000 against the Herrick Company. Fred Herrick owned all the stock of both companies. According to appellee, while the primary question is the alleged indebtedness to the Milwaukee Company of over $500,000, there is also the question of whether or not the Herrick Company was insolvent by reason of indebtedness owing to the Export Company, amounting to $60,000, and Fred Herrick personally, in the sum of $90,000, the contention of the ap-pellee being that notwithstanding the fact that the court may hold that there is no obligation owing from the Herrick Company to the Milwaukee Company nevertheless the indebtedness to Fred Herrick personally and to the Export Company is clearly established, amounting in all to about $131,000. In other words, abandoning the corporation cloak *182worn by Fred Herrick in tbe business of the Milwaukee .Company, of the Export Company, and of the Herrick Company, the question resolves itself into this: Was Fred Herrick insolvent because of the money he owed himself? This question involves an obvious absurdity. The complications in this case arise in large measure because of the fact that after a lumber mill costing over $2,000,000 had been erected by Mr. Herrick in his capacity as the Fred Herrick Lumber Company, the timber which was expected to be used by the mill was withdrawn from use by the Secretary of Agriculture. Consequently, Mr. Herrick arranged to sell the mill and all the property owned by the Herrick Company for $750,000 and to disburse that property to the creditors of the Herrick Company. In connection with the transfer of the mill to the purchasers a statement .of the indebtedness of the Herrick Company was furnished them and it was arranged that the purchase money was to be paid directly to these creditors. It was the obvious intention of both Mr. Herrick and the purchaser that the affairs of the Herrick Company should be completely liquidated and all its debts paid in this manner. After the transfer, however, Mr. Herrick, finding himself in financial difficulties, made a common-law assignment to the Spokane Merchants’ Association of all his stock in the Herrick Company, the Milwaukee Company, and in the Export Lumber Company. Thus the Spokane Merchants’ Association obtained control of all the personal assets of Fred Herrick, and all the assets of the corporations in which he owned all the stock. In short, they stepped into his shoes and thus became clothed with his rights and obligations in the corporations in which he owned all the capital stock. In pursuance of this new ownership the Spokane Merchants’ Association caused a petition in bankruptcy to be filed by the Herrick Company and Mr. Meikle to be elected trustee in bankruptcy thereof. He also became treasurer of the Milwaukee Company.
Mr. Meikle, the trustee in bankruptcy, in his capacity as common-law assignee, also as trustee in the voluntary bankruptcy of the Herrick Company, and also as sole stockholder in the Milwaukee and Export Companies, having control thereof by reason of the assignment of stock to him, is thus standing in the shoes of Fred Herrick. Still assuming, for the purpose of discussion, that the Milwaukee Company, the Export Company,' and the Herrick Company, the only ones involved in this litigation, are in fact nothing more nor less than Fred Herrick personally, complications in the case arise from the fact that, by erecting these corporate entities, the defendant has become bound in his relation with others to the consequences naturally flowing from such corporate organization, so that the primary question in dealing with the matters involved in a court of equity is the effect upon others of the facts established. It seems clear then that, inasmuch as each corporation has a set of books set up for the purpose of reflecting the transactions of that corporation and all these books were under the control of Fred Herrick, the creditors who dealt with each corporate entity in its corporate capacity are entitled to rely upon the facts as shown by the corporate books, and that Fred Herrick, having caused these entries to be made either by his own personal order or by the officials he had placed in office, could not justly insist upon modifying the effect of the book entries by oral testimony inconsistent therewith. With these general observations in mind we will turn to the specific facts as shown by the..evidence and particularly as testified to by Fred Herrick.
It appears from his testimony that he used the Milwaukee Company as a depositary for funds derived by him from his various enterprises; that these assets were carried upon the books of the Milwaukee Company in a special account called the Fred Herrick advance account. As moneys were derived from other corporations owned by Fred Herr rick, they were paid at his request to the Milwaukee Company and carried as a credit to him upon the books of the Milwaukee Company. As he drew out money from this fund for his various enterprises it was charged to this account. During the period involved in this litigation more than $2,500,000 was credited to this Fred Herrick advance account and less than two million was withdrawn therefrom. The money withdrawn from this account and paid to or 'for the account of or in connection with "the transactions of the Herrick Lumber Company are those claimed by the appellee to establish a liability from the Herrick Company to the Milwaukee Company, or if not in favor of the Milwaukee Company, at least in favor of the Fred Herrick or the Export Company. The theory upon whieh the trial court decided this ease was that, inasmuch as the funds advanced to or in the interest of the Herrick Company were derived from the possession of the Milwaukee Company, therefore, it would be presumed from this possession that the funds were owned by the Milwaukee Company, and being owned by that company that an im*183plied obligation to repay the company arose from the transaction. This view, however, seems inconsistent with the fact that the Milwaukee Company did not claim that this money belonged to it. It was treated npon the hooks of the company as the money of Fred Herrick, and when money was advanced to Fred Herrick or upon his order it was charged to this account in which there was most of the time, if not always, a balance in favor of Fred Herriek. No charge was set up in the boobs of the Milwaukee Company against the Herrick Company. If suit had been brought hy the Milwaukee Company against Fred Herrick, the hooks of the company would be admissible in evidence against it as an admission on its part that the money advanced to Herrick was not claimed hy it but was by the boobs of the company shown to be the property of Herriek.
The entries in the books of the Milwaukee Company are consistent with the testimony of Fred Herrick that the Milwaukee Company was utilized merely for convenience as an agency for receiving and disbursing his funds, and that the funds so received and so disbursed were in fact his own funds derived from other enterprises. Whether or not upon close analysis of the business of each corporation the moneys derived from the several corporate enterprises were in faet the property of Fred Herrick as distinguished from that of the corporation from whose funds the property was derived, is not ■ascertainable from the evidence and is not germane to the question involved here because the claim set up to establish the insolvency ■of the bankrupt corporation is that of the Milwaukee Company and not some other corporate or individual source from which the funds were derived. The Milwaukee Company which, it should be observed is merely another name for Fred Herriek, is not claiming that there is any indebtedness due it from Fred Herrick personally or from the Herriek Company. The claim is being made by the trustee in bankruptcy of Herriek Company, in his capacity as such trustee, and by him also on behalf of the Milwaukee Company, after the bankruptcy of Fred Herrick had thrown the Milwaukee Company into his hands as trustee for the Spokane Merchants’ Association.
We now turn to the affairs of the bankrupt corporation. It is unquestioned that the entire capital of this corporation was furnished to it by Fred Herriek. The corporation was first capitalized for $500,000 and this money was paid into the treasury hy Fred Herrick who took all the stock. Later additional funds were needed and steps were taken to increase the capital of the company to $2,000,000. Fred Herrick not only advanced the initial $500,000 necessary to construct the lumber mill of the Herrick Company, hut he also advanced, through the medium of the Milwaukee Company, and other companies, $1,200,000 in addition thereto. He testified that these advances were intended as capital advancements; that he did not intend to create an obligation on the part of Fred Herriek Company to him for that amount, but intended that stock should issue to him in consideration of his advances. It is true that he did not sign any formal stock subscription. 500,000 shares of the initial issue were issued to him and in addition thereto a stock certificate for 1,200,000 shares was executed by the officers of the corporation, but the name of the stockholder was not inserted in the blank space intended therefor, and the stock certificate was allowed to remain in the hooks. Mr. Herrick testified that the reason why this stock was not issued was that he anticipated that the stock would be broken up into smaller blocks and issued when requested by him. The moneys received from Fred Herriek were credited to him on the hooks of the corporation. No evidence whatever of the indebtedness was issued to him. No credit was given to the Export Company or to the Milwaukee Company on the hooks of the Herrick Company for such moneys so advanced. A creditor examining the hooks of the Herrick Company for the purpose of ascertaining whether to extend credit to it would find no credit therein in favor of Fred Herrick or of the Milwaukee Company or of the Export Company. So far as the hooks of the corporation showed the Herrick Company owed them nothing. The advance made by Herriek to the company was fully covered by the certificate of stock disclosed by the corporate records and would fully account for the funds received by him and was in effect a declaration that such money was paid in as capital. The appellant hank, now in the hands of a receiver, extended credit to the Herrick Company in the sum of $49,446.56 and in so doing was entitled to rely upon the hooks of the corporation as disclosing its true financial condition. There is nothing on the face of the books of the corporation to indicate that it was insolvent at the time it secured the money from this bank, and it is clear that the loan would not have been made to an insolvent corporation if it were known to be such. It should be stated in this connection that the Herrick Company also had an account called the *184Fred Herrick advance account, similar to that of the Milwaukee Company.
It is difficult to see how we could better ascertain the intent with which these various transactions were arranged and carried out than by the testimony of Fred Herrick as to his intent, for at the time of these transactions he was the Milwaukee Company, the Export Company, and the Herrick Company. It is difficult to see how these different companies could have an intent different from that of their owner, assuming that he was, as in fact he was, at all times in the active control and dominating the affairs of each of these corporations. There is no suggestion by the attorneys that Mr. Herrick was not testifying to the truth as he saw it when he stated that his advances to the Herrick Company were intended as capital. The indications in the record are that he did so intend. He testified that the money in the Fred Herrick advance account on the books of the Milwaukee Company was his own individual money, and this is not disputed. The appel-lee, however, says that this broad statement is somewhat modified by the statement of Mr. Herrick to the effect that the money in the Fred Herrick advance account was received from these various corporations. Mr. Herrick testified with reference to the advance account on the books of the Milwaukee Company, as follows:
“The reason for putting the money in in that way was that Mr. Palmer did the collecting for me in these accounts and the money came in there and if I wanted it paid out to any individual company he paid it out. The money that went in was my money and I was given credit for it in my personal account and as it was spent I had Mr. Palmer issue cheeks for it and it was charged to me. During those years there were many hundred of thousands of dollars handled that way, and during the latter part of the term I was sole owner of all of the stock of the Milwaukee Lumber Company and the other companies except the qualifying shares.
“The Fred Herrick Lumber Company was started in 1923. I furnished the money and subscribed for the original stock subscription. The capital stock was increased from $500,000 to two million dollars because I had put in more money than the $500,000'. The arrangement from the inception was that I was to take stock for the monéy I put into the concern and that continued until the company was finally sold. During all these years from the beginning of the company until the sale to the Edward Hines Company I was continually putting money in, exclusively for stock, never for a loan.”
The appellant claims that more than $3,-000,000 was credited to the Fred Herrick advance account on the books of the Milwaukee Company, and that $2,217,216.44 had been disbursed from that account of which $500,-000 was for the Herrick Company. Appel-lee, on the contrary, contends that the Fred Herrick advance’ account on the Milwaukee Company’s books showed a transfer to that account of $2,953,000 of which $923,000 was made up of surplus account and capital stock account, which appellant asserts are mere bookkeeping entries, leaving only $2,000,000 in the account, of which he claims $446,000 is another mere bookkeeping entry, transferring of credit from the Export Company, and that no cash was involved. In short, that the total amount of credits in this account was $1,500,000 and that this account was overdrawn $200,000 in excess of the $500,000 advanced to the Herrick Company. This contention is based upon the evidence of an expert accountant, M. D. Wells, employed by the trustee in an attempt to unravel the affairs of these various corporations. He states that the credit items on the Fred Herrick advance account included a transfer from the surplus account of the Milwaukee Company of $323,495.65, also a transfer from the capital stock account of $600,000 apparently based, he states, upon a cancellation of stock held in the Milwaukee Company by Fred Herrick, and a corresponding reduction of the capital in- the Milwaukee Company’s account. He states there were, however, credits to Mr. Herrick of money which he undoubtedly got either from his other operations or borrowings from the bank, and various other sources, such as the Export Company and various associated companies. The principal credit items objected to by him in this account were that of the $323,495 from the surplus earnings of the Milwaukee Company which is credited to Fred Herrick without the formality of resolution of the board of directors declaring a dividend, and that of the transfer of $600,000 from the capital stock account of the company upon the surrender and cancellation of that amount of stock held in the Milwaukee Company, and that of the transfer of $446,000 from the funds of the Export Company to the Milwaukee Company: It is not claimed that any of these entries were fraudulent or dishonest in any sense. There was a reasonable basis for the credit to the sole stockholder of *185the surplus earnings of the company and also for the credit to him of the value of stock surrendered by him, even if we assume that the Milwaukee Company could recover that amount from him for the benefit of its creditors, if any (there being no other stockholders to be affected thereby). The question here, then, is this: Can the Milwaukee Company follow the funds which it has thus credited to Herrick on its books as his funds, as its own funds in the hands of those to whom he directed it to be paid or to whom he transferred it? In other words, can it be said that the Herrick Company owes money to the Milwaukee Company when the books of that company show that the money was paid to Herrick, and when in fact it was paid out on his order? The corporation commingled all these funds credited to Herrick. If we deduct from the advance account the credits under discussion it would follow that the Fred Herrick advance account was overdrawn, but it does not follow that any of the money derived from the two items improperly credited to Herrick’s account was diverted to or went into the coffers of the Herrick Company. There was in addition to these sums nearly $2,000,000 paid by the Milwaukee Company from the Fred Herrick advance account. In any event all moneys in this account were paid out to or upon the order of Fred Herrick, and the corporation accepted his obligation to replenish that account as the consideration for the advance. So long as the corporation was solvent and Fred Herrick was the sole stockholder nobody was concerned in the regularity of the corporate proceedings, and the most the creditors were entitled to would be the repayment by Herrick to the company of any moneys advanced to him in excess of the amounts due the corporation. The Milwaukee Company was fully advised as to the destination of the moneys paid from Fred Herrick advance account. The funds were disbursed directly by the officers of the Milwaukee Company to the final recipient. Some of this money was advanced to the Herrick Company directly, and some of it was paid to creditors of that company. In neither event was any charge made on the books of the Milwaukee Company against these creditors or against the Herrick Company, nor was any corresponding entry made upon the books of the Herrick Company showing an advance to it by the Milwaukee Company. On the contrary, although the books of both corporations were under control of Fred Herrick they are both consistent with the claim of Fred Herrick that the money he paid in the Herrick Company or paid out on its behalf was upon an obligation assumed by him to purchase the entire stock of the Herrick Company and as a part of the purchase price thereof, and that the advances made by the Milwaukee Company were made to him personally and not to the Herrick Company. In view of this situation there is no basis for the contention that there was an implied obligation from the Herrick Company in favor of the Milwaukee Company that the relation of debtor and creditor arose between the Milwaukee and the Herrick Company. If there were a pri-ma facie presumption to that effect arising from the fact that the money paid to it for the Hcri-ick Company was deriyed from the Milwaukee Company, it is overcome by the showing that the money was not advanced to the Herrick Company but was advanced to Fred Herrick personally and paid by him into the Herrick Company as a part of its capital to be evidenced by certificate of stock in the corporation issued to him.
With reference to the amount ox indebtedness, $60,000, claimed to bo due from the Herrick Company to the Export Lumber Company, we have substantially the same situation. Of this amount $50,000 was advanced by the Export Company to the Herrick Company and was represented by a deposit to the credit of the Herrick Company in its bank account at Burns. The othqr $10,-000 represented payment on behalf of the Herrick Company of a note held by the Washington National Bank at Ellensburg.
These moneys were advanced by the Export Company on the order of Fred Herrick and were charged upon the accounts of that company to Fred Herrick personally in conformity with the practice of the Milwaukee Company. In other words, they were treated as an advance, not to the Herrick Company, but to Fred Herrick personally. The claim of the indebtedness of $91,000 to Fred Herrick personally is also answered by the testimony of Fred Herrick that the money was paid to the Herrick Company in pursuance of his intention to purchase stock and as a part of the purchase price thereof.
The testimony of J. C. Palmer, an officer of the Milwaukee Company, and of James W. Girard, an officer of the Herrick Company, is consistent with the proposition that the money advanced by the Milwaukee Company to the Herrick Company was advanced to Fred Herrick and not to the Herrick Company, and that such money was paid into *186the Herrick Company on account of the purchase price of the capital stock of that company by Fred Herrick. For these reasons I am satisfied that the Fred Herrick Company was not insolvent at the time of the payment made by it to the Exchange National Bank.