Franklin Trust Co. v. Rutherford, B. S. & C. Elec. Co.

PITNEY, V. C.

Bill by the Franklin Trust Company against the Rutherford, Boiling Springs & Carlstadt Electric Company and another to foreclose a mortgage. Decree of foreclosure granted.

William H. Corbin, for complainant.

Addison Ely, for defendants.

PITNEY, V. C. This is a bill to foreclose a mortgage given by the defendant corporation to the complainant corporation to secure an issue of 50 bonds of $1,000 each. The complainant corporation is organized under the laws of the state of New York, and located at Brooklyn, in said state. The defendant corporation is located in Bergen county, in the state of New Jersey. The mortgage covers the defendant corporation's electrical plant, situate in the neighborhood of Rutherford, in said county. It bears date May 1, 1893, acknowledged June 26, 1893, by the mortgagor, and by the mortgagee, complainant, on June 27, 1893, and was recorded on June 28, 1893. The bonds are payable in 20 years after date, with semiannual interest coupons annexed at 3 per cent. each; and the mortgage and the bonds also provide that each year thereafter the defendant corporation shall pay to the complainant, in addition to the interest, the sum of $2,000, with which it shall purchase and cancel two of the bonds; and it also contains a provision that in case of failure for three months so to do the whole of the bonds shall become due and payable. The complainant, by its bill, alleges that all the $50,000 of bonds were issued and negotiated by the defendant corporation, and came to the hands of the defendant Charles C. Southard; that the sinking fund for the spring of 1894 and of 1895 was provided, and that 4 of the bonds were paid therewith, leaving 46 outstanding, all in the hands of the defendant Southard; that the sinking fund for 1896 and 1897 was not provided; that the interest for May 1, 1897, was not paid in full, and that the interest for November 1, 1895, May 1, 1896, November 1, 1896, was only paid in part; whereupon, at the request of the defendant Southard, the holder of the bonds, the complainant declared the whole mortgage due, and filed its bill to foreclose on the 14th of June, 1897. Afterwards, on July 28, 1897, Interest to the extent of $1,080 was deposited with it by the defendant corporation, but whether accepted by Mr. Southard or not does not appear. The defense by the defendant corporation is: First. That the bonds and mortgage were executed and delivered in pursuance of a written contract entered into between the defendant corporation and one George H. Southard, by which said Southard agreed to advance certain sums of money on account thereof at certain specified times; and that said contract and the mortgage, though executed by the officers of the company, never received the sanction of a proper meeting of the board of directors, or a proper meeting of the stockholders of the corporation, as required by law, and are therefore void. Second. Usury, in that the bonds were sold by the defendant corporation at a usurious rate to George H. Southard, who is the brother of Charles C. Southard, and who was at the time the president of the complainant corporation; and that Charles C. Southard is not a bona fide holder of the bonds. Third. That, if the bonds are not usurious, then that Southard never did, in fact, advance the money according to his contract, and that the contract was, in its terms, so grossly unfair and extortionate on the part of Southard, as to be a fraud upon the stockholders in general of the company, and that Southard is not entitled to declare the bonds to be due at this time, because, after charging him with the amount that he actually extorted from the company at the start, there is no default in the letter of the contract.

There is little dispute as to the actual facts in the case. The circumstances are these: On the 1st of May, 1893, the electric company's affairs were in this condition: It had nominally $30,000 of stock, divided into 3,000 shares of $10 each. The books do not show distinctly how that stock was held, as no stock ledger was kept; but as to 500 of the 3,000 shares there can be no doubt that they were held as follows; By a Mr. Brunner,

1 share; Mr. Alyea, 5 shares; Mr. Mada, 10 shares; Mr. Soley, 15 shares,—in all 31 shares, of the par value of $310, which were held by parties not in the management of the com-pary. The other shares actually issued at that time were, to a Mr. Apple ton, 182 shares; to a Mr. Jordan, 182 shares; to a Mr. Burrows, 50 shares; and to a Mr. Buys, 55 shares,—making 469, and, with the 31 before mentioned, 500, shares. Appieton and Jordan were, respectively, the president and treasurer, and Burrows and Buys were employes, of the company. On May 15, 1893, 1,000 shares were issued to the wife of Jordan, and 1,000 shares to the wife of Appleton. Whether they had been previously regularly allotted to them, so that they were the substantial owners at any time prior to the 15th of May, does not appear. Adding those, we have the total stock issued $25,000. In addition, there was, on the 15th of May, 1893, a certificate made out to Mr. George H. Southard for 500 shares, making up the whole 3,000. But, as will appear hereafter, Mr. Southard was not at that time entitled to the issue of that stock to him, and for present purposes I shall hold that he was not the holder of it at that time.

The plant of the company was then subject to a previous mortgage, given to a New Jersey trustee, to secure 15 bonds of $1,000 each, which were held by various persons in different parts of the United States. Appieton, as we have seen, was the president, Jordan the secretary and treasurer, and Buys and Burrows employes. Those four constituted the whole, or a majority, of the directors. Mr. Appieton, the president, claimed that the company was indebted to him for cash advanced to the extent of $14,000. Of this alleged claim there is no proof. In that situation, Mr. Appieton, who, as well as Mr. Jordan, lived in Brooklyn, applied to Mr. George H. Southard, the president of the complainant company, who also lived in Brooklyn, to advance some money to the company, and the result was an agreement in writing, dated the 3d of May, 1893, purporting to be between the defendant corporation, executed by its president, Mr. R. Ross Appieton, and Mr. George H. Southard as an individual, which witnessed that the defendant corporation agreed to sell to Mr. Southard $40,000, being part of an issue of $50,000 of first mortgage 6 per cent. gold bonds, secured by a first mortgage to the Franklin Trust Company, complainant, upon all the plant of the defendant company, and also to sell to him $5,000 at par of fully-paid stock of said company, all for the sum of $33,000, payable as follows: May 9, $6,000; July 1, $6,000; July 15, $6,000; August 15, $5,000; September 1, $5,000; and October 1, $5,000; the bonds to be dated May 1, 1893, payable 20 years after date; the mortgage to provide for a sinking fund of $2,000 annually, to be paid to the trustee, and used by it in redeeming $2,000 of the bonds in each year; providing for the drawing of the bonds to be canceled by lot if the same could not be purchased at par; the remaining $10,000 of bonds to be issued only for extensions and betterments; and the defendant corporation agreed that part of theproceeds of the sale of the $40,000 of bonds should pay off and cancel the $15,000 of mortgage bonds outstanding against the property. The contract also provided that the corporation should submit, within 10 days of the date of the contract, a resolution to the action of its board of directors approving the contract, and authorizing the issue of the bonds; and also a similar resolution to the vote of its stockholders at its annual meeting to be held May 16, 1893. The mortgage and bonds were to be ready for delivery on or before the 1st of July, 1893, and Southard agreed to make the stipulated payments for the $40,000 of bonds and $5,000 fully-paid stock upon delivery to him of $7,000 of the old issue on May 9th, and $8,000 of the old issue on July 1, 1893, together with the whole $40,000 of the new bonds; and the defendant corporation agreed to deliver to Southard, for cancellation, all of the old issue of $15,000 on or before the 1st of July, 1893. That agreement was submitted to a meeting of the board of directors on the 16th of May, 1893, and unanimously approved; and also to a meeting of the stockholders on that day, with a like result. The proofs do not show how the meeting of stockholders was called. They do show that the four stockholders Appleton, Jordan, Burrows, and Buys—representing in their own right 469 shares of the stock—were present. The minutes do not show that their wives were present, or that any proxies were presented for them. The proofs tend to show that Messrs. Appleton and Jordan represented their wives; and Mr. Buys, who acted as secretary, swears that they did present the proxies of their wives, and voted on their stock. The validity of this meeting is attacked on the ground that the by-laws require that five-eighths of the stock should be represented at every stockholders' meeting, and that the proxies are not produced. It appears that in the summer of 1894 or 1895 Appleton and Jordan, and, I believe, Burrows and Buys, sold out their stock to a Mr. Ferree, who at present owns most of the stock of the concern, and is promoting this defense; and all their books and papers were passed over into his possession. The proxies in question were not produced when called for by the complainant, and the counsel of defendant corporation denies all knowledge of them. I hold, upon the evidence, that if the issue of the shares of stock to Mrs. Appleton and Mrs. Jordan on the day before this annual meeting of stockholders constituted them stockholders, then that the evidence satisfies me that they were present by their husbands, who acted as their agents and as their proxies. Besides, before the Appletons and Jordans and Mr. Burrows and Mr. Buys assigned their stock to Ferree, the contract of May 3d, as ratified by the directors and stockholders on May 16th, was many times recognized and ratified. So much for the lack of authority of the officers of the corporation to execute the mortgage and the bonds.

The next question is as to the defense of usury. The answer sets up usury under the laws of New Jersey, and makes no affirmation as to the laws of New York. The proofs show that all the negotiations were had between Appleton, as president of the corporation, and George H. Southard, as proposed purchaser of the bonds, and that those negotiations took place in the state of New York. There is no proof that Mr. Southard was present at either the directors' or stockholders' meeting in New Jersey, or that he ever was in New Jersey except once, to examine the plant. The mortgage and bonds were all executed in the state of New York, and I am constrained to hold that this is a New York contract, and that its validity must be determined by the laws of the state of New York. As there was no allegation of those laws in the answer, the defendant corporation is cut off from the defense of usury. But, had it been set up in the answer, it would not have availed as a defense, because it was admitted substantially at the hearing that by the laws of New York a corporation cannot set up the defense of usury, and, if that statute had been proven, it is well settled that this court must apply it.

Third. The next point is the extortionate character of the contract, and that Mr. George H. Southard never advanced the money that he agreed to advance. In the regular course of business he was entitled to have the old issue of $15,000 delivered up and canceled, so that the complainant corporation could certify on each of the new bonds that it was secured by a first mortgage. That the new mortgage was intended to be a first mortgage is not open to dispute. Appleton undertook to hunt up these old bonds, and to arrange with the holders to send them to the Franklin Trust Company to be redeemed, and Mr. Southard agreed to pay for them as fast as they came in, and in advance of his strict legal obligations to do so under the contract of May 3, 1893. Mr. Appleton did so, and the bonds were sent in in batches, from different holders, accompanied with drafts from distant points, through a New York bank, and those drafts were met and paid by Mr. Southard. It may be inferred, although there is no positive proof of that fact, that Mr. Appleton succeeded in getting the whole $15,000 of bonds for the sum of $12,000, that being the amount, approximately, of the drafts accompanying the same which Mr. Southard paid; but he also paid $2,000 directly to Mr. Appleton, making $14,000 in all paid out for the $15,000 of bonds. Six thousand dollars of that was paid some considerable time prior to the date fixed by the contract, and by an arrangement between him and the corporation it allowed him 2 per cent.—$120—for such prior payment, which, added to the amount paid upon drafts directly to the holders of the bonds and $2,000 paid to Mr. Appleton,to carry it out, and obtained leave to file an amendment to its bill, by which it sets out that agreement, and offers to submit to such terms with regard to it as the court shall think are just and equitable under the circumstances. That contract was, I think, eminently just and fair, and its adoption by the court will eliminate the charges of extortion and unfairness in the original contract. The security for the loan was of doubtful value, and the loan a risky one. The money was advanced at a period of great financial stringency. The actual borrowers—the persons then owning and controlling all the stock of the defendant corporation—were amply able to take care of themselves in the transaction, and are not now complaining of it. The parties now defending purchased the stock with full notice of the mortgage, and hence do not occupy the position of being directly oppressed. For these reasons, my conclusion is that the complainant is entitled to relief, and that, under the circumstances, it is just and equitable that it should have a decree for $35,000, viz. $1,000 less than fixed by the compromise agreement, with the arrears of unpaid coupons on 35 bonds, and a decree of foreclosure, in which a provision shall be made for the extension of the principal according to the terms of the original mortgage, provided the interest and costs are paid.