World Manufacturing Co. v. Hamilton-Kenwood Cycle Co.

Moore, J. The printed record and briefs in this case consist of nearly 1,000 pages. The pleadings occupy nearly 200 pages. In disposing of the case, we do not think it would be profitable to state in detail what is contained in the record, but will content ourselves with a general statement of the material questions involved, and our conclusions in relation thereto. In December, 1896, a contract was made between the complainant company and the Hamilton-Kenwood Cycle Company for the manufacture by the latter company of 1,000 bicycles. Forty dollars each was to be paid for the wheels. Settlements were to be made on the 1st of the month for all wheels shipped during the prior month. This contract was afterwards modified so that the wheels were to be held by the cycle company subject to the order — 622 — of the "World Manufacturing Company. Invoices were sent by the cycle company to the complainant company. Payments were made by the complainant company, in cash or notes, aggregating upwards of $20,000. The notes of the complainant company were indorsed by the complainants Stokes, and were discounted by the cycle company. At the time this proceeding was commenced, three of them were held by the National City Bank of Grand Rapids, and one by Jennie W. McKibben. It is the claim of complainants that these notes were forwarded to the cycle company upon the representation that the wheels for which the notes had been given were completed, and set apart as the property of the complainant company, when as a matter of fact the wheels had not been so set apart. It is claimed that in June, 189?, the complainant company learned of this fact, and telegraphed the manager of the cycle company to come to New York, when an arrangement was made between the managers of the respective companies that the notes were to be surren- ' dered to the complainant company and the contract ended. Within a few days after this alleged agreement, the cycle company made a mortgage upon all its property to secure its creditors. This mortgage was made to Mr. Baars, as trustee. He was at this time a stockholder in the cycle company. He was also cashier of the National City Bank. Mrs. McKibben was his client, and it was through him that she bought the note held by her, made by the World Manufacturing Company. After the mortgage was given,. proceedings were had in court for the purpose of closing up the affairs of the company, of which it will not be necessary to speak in detail. The assets of the company have been converted into money, and are awaiting a disposition by the court. It is the claim of complainants that the notes were obtained by fraud, that the relation of Mr. Baars to the cycle company and the other parties was such that the taint of fraud followed the notes held by the bank and Mrs. Mc-Kibben, and that by reason thereof they cannot be said — 623 — to be bona fide, good-faith holders of the notes. The bill in this case was filed to have the notes canceled, and for other relief. Answers in the nature of cross-bills were filed. A hearing was had in open court. A decree was entered denying to complainants any relief, and one was entered in favor of defendant bank and Jennie W. Mc-Kibben for the full amount of the notes held by them, respectively.- From that decree the complainants have appealed. The solicitors for the complainants make the following claim: ‘ ‘ The questions of fact to be considered on this record are: “1. Are the bank and Mrs. McKibben bona fide holders of the paper of complainants ? “2. Are the complainants entitled to prorate with the other creditors in the third class in the mortgage ? “3. Are the complainants entitled, with the other third-class creditors, to a division of the fund arising from the sale of the property bought and disposed of by the wheel company, the new" organization ? “4. Is the bank bound, on account of the fraud of the stockholders of the cycle company in its organization, to resort to the Sligh Furniture Company’s stock to pay its claim, before participating in the fund arising under the mortgage and assignment of accounts, even though the furniture company’s stock was deposited with the bank to secure the indorsements of Sligh and Case upon the cycle company’s paper ? “5. Are the complainants entitled to an accounting for the frames set apart for the World Company by the cycle company, and converted by the trustee under the mortgage?” We agree with the circuit judge that the first of these questions should be answered in the affirmative. We are not satisfied from the evidence that any fraud was practiced in obtaining these notes. It is true, the wheels for which the notes were given when the invoices were sent were not completed; but the record discloses that, after the original contract was made, a new arrangement was made, —that the wheels were to be held subject to the order of — 624 — complainant. It is evident from the record that it would not be known what sized sprocket-wheels or what kind of tires would be required until the order was received. The record also indicates that the frames were set apart as the property of the complainant, and that the other parts were, in the main, kept on hand, and could quickly be assembled after the receipt of the order. Even if it should be conceded that the wheels were not completed as was contemplated by the complainant, there is nothing to indicate that Mr. Baars knew of that fact, or that he had any knowledge which ought to put him upon inquiry. It is true, he was a stockholder in the cycle company; but he was not an officer of the company, and had nothing to do with its management. He testified that, when the notes were discounted by the bank and Jennie W. McKibben, they paid full value for the notes, and that he and they had no knowledge of any fact which would tend to invalidate the notes. This testimony is uncontradicted. We agree with the circuit judge that the second and third questions propounded by the solicitors should be answered in the negative. The mortgage clearly indicates that it was not intended to secure the complainants, but, on the contrary, attached to it was a list of the debts due the cycle company which were mortgaged to the trustee, and among them was a balance claimed to be due from the complainant company. The complainants are not willing to be subrogated to the rights of the mortgagee. We are content with the disposition of this feature of the case made by the circuit judge. We think the circuit judge made a proper disposition of the claim arising under the fourth question of the solicitors. The cycle company claimed to have a capital of $100,000. This was largely made up of a consolidation of two going concerns then engaged in the manufacture of bicycles, the property of which was turned into the new organization. It is true that, when the assets were converted into money, the assets of the cycle company did not realize a large sum; but it is also true that the failure of — 625 — the cycle company occurred at a time when companies of a similar character were failing all over the country, so that the market for such assets was oversupplied, and the machinery and other assets would not sell for anything near what it would cost to duplicate them. It does not appear that the capital stock of the cycle company influenced the complainant company in the least in making its contract. As to the fifth question presented by the solicitors, we think the circuit judge was in error. There can be no question from the record but that 250 frames were set apart for the complainant company. These frames made a part of the consideration for which the notes were given. They belonged to the complainant company. They passed into the possession of the trustee, and were used by him to make completed bicycles, which were sold. Part of the fund now on hand consists of the amount realized from the conversion of these frames. It is claimed that the complainant company relinquished its title to any wheels in the possession of the cycle company. The managers of the respective companies are not agreed as to what occurred in New York in June. Taking the version of either of them, it is clear that the arrangement was not so far completed as to devest the title to the frames. The complainant asks that the frames be accounted for upon the basis of $15 apiece. We do not think that ought to be done. There is difficulty in fixing the value of these frames. They inventoried at less than $4 each. Completed wheels (such was the state of the market) were sold, after the fullest publicity was given, at $14 each. Considering all the proofs -in the case, we think it would be equitable to treat these frames as worth $4 apiece, and they will be so treated. The complainant company asks for a decree against the cycle company for the amount of its overpayments. We think it is entitled to such a decree. The amount will be fixed upon the settlement of the decree. The record is unnecessarily voluminous. The complain — 626 — ants are entitled to the costs of this court as against the trustee, but the amount thereof will be decided upon the settlement of the decree. The defendants as to whom the decree is affirmed will recover their costs against the complainants. In other respects the decree of the court below is affirmed. The other Justices concurred.