Rickerson Roller-Mill Co. v. Farrell Foundry & Machine Co.

LURTOX, Circuit Judge, after making the foregoing statement of facts, delivered the opinion of the court. The first defense made by the Messrs. Fox to their liability as unpaid subscribers to the capital slock of the Riclcerson Roller-Mill Company is that they never were in fact subscribers for said stock, but that it was in reality issued to S. B. Rickerson and his associates as a further consideration for the patents theretofore applied for, and such as should thereafter be obtained, pertaining to roller-mill machinery, and that they purchased this stock, as fully paid up stock from Rickerson and his associates, who had received it in consideration of the property sold and transferred to the corporation. This defense is unsupported by the circumstances. Rickerson had theretofore agreed to transfer to this corporation all pending applications, as well as all applications which he should thereafter make, for and in consideration of the entire capital stock, of $100,000. The increase of stock was solely for the purpose of obtaining additional capital, to the end that the business of the company might he increased, and put on such a footing as would give the project some hope of success. The increase stock was, by resolu — 558 — tion, treated as treasury stock, and ordered to be sold by the treasurer of the company. It was thus sold, and the proceeds, instead of being paid over to Eickerson and his associates, were paid into the treasury of the company, as capital stock of the company. The assignment by Bickérson, of March 1, 1883, heretofore set out, was in accordance with the agreement originally made with him, and was no broader than originally contemplated. The second defense is that this increase of stock was for the purpose of restoring the imparted capital of the Eickerson Eoller-Mill Company; that the case was that of a going, active corporation, whose capital had become impaired, and whose stock was, on the market, worth only 50 cents on the dollar; and that, as the stock was actually sold in good faith for its actual market value, neither the corporation nor its creditors are injured, and neither can call upon such a purchaser for the difference between the sum actually paid and the par of the stock. For this counsel cite Handley v. Stutz, 139 U. S. 417, 11 Sup. Ct. 530; Clark v. Bever, 139 U. S. 96, 11 Sup. Ct. 468; Fogg v. Blair, 139 U. S. 118, 11 Sup. Ct. 476; Morrow v. Steel Co., 87 Tenn. 262, 10 S. W. 495; Young v. Iron Co., 65 Mich. 111, 31 N. W. 814. Were the circumstances such as to enable a purchaser of these increased shares to buy them from the company at less than their par value without incurring a liability to the creditors for the difference between the par of the stock and the price actually paid? The case for decision certainly differs most materially from Clark v. Bever and Fogg v. Blair. These shares were not, as in those cases, the shares of an insolvent corporation, received by a creditor, in payment and discharge of his debt, at less than par, and at a value in excess of the actual market value. In neither of the cases above referred to was the stock taken in any sense as an investment, or for the purpose of enabling the company to enlarge or increase its business, but was accepted by the creditor, in each instance, as the best settlement obtainable from an insolvent corporation. JSJeither is this the case of a going corporation, whose capital stock had become impaired or diminished by losses or misfortunes. It is true that in some sense this corporation had been doing business in a small way for a month or more before this new stock was issued, but there is no evidence that its capital stock had been impaired by losses. Upon the contrary, the Messrs. Fox were admitted as shareholders in consequence of the necessity for increasing the capital stock of the company, and enabling it to begin the business for which it had been organized. Their purchase of these shares was in accordance with the original scheme of the promoters, and they were bought as an investment in a manufacturing corporation which had not yet acquired a plant, or begun the business for which it had been organized. The arrangement by which they were to buy these shares from the corporation, and pay but 50 per cent, of the par value of the stock, was subject to the contingency that they would be liable, in the event of the insolvency of the corporation, to creditors who should become such in ignorance of the arrangement, and who had a right to suppose that this increased stock had been paid in full, or was subject to call. The stock taken by — 559 — Rickemm and Ms original associates stands upon a very different footing'. That was issued in payment for the Rickerson patents, upon a value estimated by the parties to be fair and reasonable. When full-paid stock is issued by a corporation having power to receive property in payment for stock subscriptions, there must be actual fraud in the transaction, to authorize creditors of the corporation to call upon the subscriber for the difference between the actual value and that at which it was received. Coit v. Amalgamating Co., 119 U. S. 343-345, 7 Sup. Ct. 231; Young v. Iron Co., 65 Mich. 111, 31 N. W. 814. A gross and obvious overvaluation of property would be strong evidence of fraud. Coit v. Amalgamating Co., cited above; Boynton v. Hatch, 47 N. Y. 225; Kelley v. Fletcher, 94 Tenn. 1-6, 28 S. W. 1099. A creditor seeking to compel a subscriber who has received nonassessable stock in payment for property transferred must, in his pleadings, distinctly aver the colorable character of the transaction. Jones v. Whitworth, 94 Tenn. 602, 30 S. W. 736. So a stockholder paying his slock subscript ion in property at an agreed value is not liable in equity to a creditor of the corporation, who had knowledge of and assented to the transaction at the time when it: took place, solely upon the ground that t.he rea.1 value turned out to be less than was agreed upon. Bank v. Alden, 129 U. S. 372, 9 Sup. Ct. 332. In Handley v. Stutz, heretofore cited, the facts were that (he capital of a going concern had. by losses, become impaired so that both its actual and market value were much below par. The court in that case held that under such circumstances the sale of increase stock, in good faith, at its actual value, operated neither as a fraud upon the corporation nor upon existing or future creditors. In the subsequent case of Camden v. Stuart, 144 U. S. 104, 113, 12 Sup. Ct. 585, Justice Brown, -who announced the opinion of the court in Handley v. Stutz, reasserted the doctrine— "That the trust, arising in favor of creditors by subscriptions to the stock of a corporation cannot be defeated by a simulated payment of such subscription. nor by any device short of an actual payment in. good faith.” Touching the case of Clark v. Bever, 139 U. S. 96, 11 Sup. Ct. 468, and Fogg v. Blair, 139 U. S. 118, 11 Sup. Ct. 476, and Handley v. Stutz, 139 U. S. 417, 11. Sup. Ct. 530, the learned justice said that nothing was said in those cases— “Intended to overrule or qualify in any way the wholesome principle adopted by this court in the earlier cases, especially as applied to the original subscribers to stock. The later eases were only intended to draw a line beyond which the court was unwilling to go in affixing a liability upon those who have purchased stock of the corporation, or taken it in good faith in satisfaction of their demands.” The opinion in Handley v. Stutz carefully excludes a sale of stock under the circumstances we have here to deal with, by saying: “The liability of a subscriber for the par value of increased stock taken by him may depend somewhat upon the circumstances under which, and tlie purposes for which, such increase was made. If it bo merely for the purpose of adding to the original capital stock of the corporation, and enabling it to do a larger and more profitable business, such subscriber would (And pradically upon the same basis as a subscriber to the original capital. But we think that an active corporation may, for the purpose of — 560 — paying its debts and obtaining money for the successful prosecution of its business, issue its stock, and dispose of it for the best price that can be obtained.” On the facts of this case, we hold that this increase of stock was merely for the purpose of increasing the capital and. enabling the corporation to do business, and that this was well understood by the Messrs. Fox when they agreed to purchase the same. We see no reason why it should not stand upon the footing of original stock. It is next said, that the Farrell Foundry Company had full notice of the terms and conditions of the sale of this increased stock to the Messrs. Fox, and extended credit thereafter with such knowledge, and are therefore not entitled to call upon them to contribute towards the payment of the debt thus created. The evidence establishes that early in February, 1884, the creditor corporation received full notice of the fact that $100,000 of the stock of this corporation had been issued to Rickerson and his associates in payment for their patent rights, and that the increase of $50,000 had been issued to the Messrs. Fox, as paid-up stock and nonassessable, for $25,000. Being thus fully cognizant of the fact that the actual capital of this corporation consisted in patent rights of unknown value, and $25,000 in money, they continued to extend credit to it. When credit, is extended to a corporation with full knowledge of special arrangements between the corporation and purchasers of the stock whereby nonassessable stock has been issued for less than its par value, it cannot be said that such credit has been extended in reliance that the stock has been fully paid, or is subject to further calls by the corporation. In the absence of statutory or charter provisions, such as approyed in Morrow v. Steel Co., heretofore cited, requiring original stock subscriptions to be paid in full, there is no reason why the corporation should not be concluded by its contract to receive less than par in full payment for stock subscribed or sold. Such an agreement, though binding upon the corporation, is not valid as to creditors who become such in actual or presumed reliance that the capital stock is in fact what it is represented as being. Sawyer v. Hoag, 17 Wall. 610; Scovill v. Thayer, 105 U. S. 143. The ground upon which such special arrangements between a corporation and its stockholders are invalid as against creditors was thus stated in Scovill v. Thayer: “But the doctrine of this court is that such a contract, though binding on the company, is a fraud, in law, on its creditors, which they can set aside; that when their rights intervened, and their claims are to be satisfied, the stockholders can be required to pay their stock in full. The reason is that the stock subscribed is considered in equity as a trust fund for the payment of creditors. It is so held out to the public, who have no means of knowing' the private contracts made between the corporation and its stockholders. The creditor has therefore the right to presume that the stock subscribed has been or will be paid up, and, if it is not, a court of equity will, at his instance, require it to be paid.” In the subsequent case of Handley v. Stutz, heretofore cited, the court held that none but subsequent creditors could call upon such a special subscriber to pay the difference between his actual payment and the par value of his stock, “since it is only they who could, — 561 — by any legal presumption, have trusted the company upon the faith of the increased stock.” First Nat. Bank of Deadwood v. Gustin Minerva Consol. Co., 42 Minn. 327, 44 N. W. 198; 2 Mor. Priv, Corp. §§ 832, 833; Coit v. Amalgamating Co.. 14 Fed. 12; Young v. Iron Co., 65 Mich. 111, 31 N. W. 814; Whitehill v. Jacobs, 75 Wis. 474, 44 N. W. 630; Walburn v. Chenault, 43 Kan. 352, 23 Pac. 657; Robinson v. Bidwell, 22 Cal. 379; Beach, Priv. Corp. § 119. But it is said that the items of indebtedness for which the complainants'' judgment was rendered consist in large part of debt contracted prior to notice of the terms and conditions upon which the Messrs. Fox acquired their shares, and that for this reason the decree against them should be affirmed. The items upon which the judgment was rendered were three in number, as follows: (1) A balance due upon open, general account, of §1,000; (2) a note made May 23, 3887, for §1,065; (3) a note made August 18, 1887, for §670. Confessedly, the last note was made for the last five items of account, and represents credit, extended in June and July, 1887. This part of the judgment was therefore properly held not to be collectible from the Messrs. Fox as holders of unpaid shares. Do the other items represent credit: extended prior to February, 1884? The account against the Bickerson Company, as it appears on the books of both corporations, is a continuous, running account, embracing a large number of distinct purchases of rolls used in the construction of the Bickerson Boiler Mills. This account began in May, 1883, and I Ik1 last item of charge is of July, 3887. The aggregate of the debit items is $61,148.31. The credit items do not consist of money payments on account, as might be supposed, but of notes and drafts made in partial settlement from time to time. The aggregate of these credits is $60,148.31. The difference between the two sides of the account is §1,000, and this dehit balance constitutes one of the items which entered into the judgment obtained by the Farrell Company. The note of May 23, 1887, for §1,065, is one of the credit items in the account we have referred to. The contention now is that this note, and the §1,000 due by open account, represent credit extended, mot at the foot of the account, nor at the head of the account, but credit extended just before January 1, 3884. In other words, the contention is that payments by note and draft were so applied upon the current account as that all of the account originating after notice of the terms of the stock sale to Messrs. Fox has been paid off, and that which remains unpaid consists wholly of items originating just prior to such notice. The face of the book accounts of neither of the corporations indicates any such settlements or applications of payments as claimed. The evidence outside of the book entries does, however, tend to show that about March 38, 1884, Mr. Cliarles Fox took personal charge and management of the business of the Bickerson Company. The account of the Farrell Company shows that at that date there was a balance due from the Bickerson Company of §17,773.70. The evidence also tends to show that from the time Fox assumed the management this balance of debt, in the correspondence and dealings between the parties, was referred to as the “old account.” Bo it seems to be shown that Fox — 562 — undertook to support the credit of the company, after it came under his management, by promptly meeting new engagements, and that the purchases thereafter made were sometimes spoken of as the “new account.” After March 18, 1887, new purchases were settled for by notes or drafts executed in settlements from time to time, although the book accounts, on their face, show no such separation of the account. If we assume that a line was drawn between the account prior to the change in management of March, 1884, and the subsequent account, and that payments were thereafter applied sometimes to -the “old account,” and sometimes to the “new account,” how will the matter stand?, The contention of the complainants is that thereafter all of the “new account” was paid, except so much thereof as is represented by the note for $670, heretofore mentioned, and that all of the “old account” was paid, except $2,065. If we assume that this is ma.de out satisfactorily, we are then confronted with the question as to whether this balance of $2,065 belongs to the head or foot of this “old account.” If to the head, then it stands for credit extended before notice of the terms of the stock sale to the Messrs. Fox; while, if it is a balance at the foot of that account, it is for rolls sold after such notice. This conclusion is based upon the assumption that the Farrell Company obtained information as to the terms of stock sale to the Messrs. Fox as early as the 13th of February, 1884. The purchases made between February 13, 1884, and March 18, 1884, amounted to more than $5,000, and the balance due would presumptively be for the last items in this “old account.” To escape this dilemma, counsel have contended that the particular items represented by the balance unpaid on the “old account” stand neither at the head nor foot of the “old account,” but consist in credit extended just prior to January 1, 1884; being the items at the foot of an account ending January 1, 1884. Where payments are made upon an open, running account, and the parties at the time make no application of such payments to particular items of the account, the law will apply them to the oldest items of the account; that is, such payments will be applied to the head, rather than the foot, of the account. Devaynes v. Noble, 1 Mer. 597-608; U. S. v. Kirkpatrick, 9 Wheat. 720; Crompton v. Pratt, 105 Mass. 255; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 20 N. E. 632. As we have before stated, the book entries of neither of the corporations show any distinction whatever between the accounts before and after the change of management in March, 1884. Neither do the books give any countenance to the claim now advanced, that payments upon the “old account” were applied in so arbitrary a way as now suggested. No conceivable reason exists why items of indebtedness originating between January 1, 1884, and March 18, 1884, should be carefully paid off by note or draft, leaving both antecedent and subsequent parts of the same account unpaid or unsettled. To support the theory that the balance which is due originated before January 1, 1884, counsel have made use of certain pencil memoranda found on the margin of the ledger account kept by the Bickerson Company. With the aid of these unexplained, penciled figures, and by transferring certain credit items from January, 1884, to December, 1883, a — 563 — correspondence lias been found between the aggregate of the purchases between January 1, 1884, and March 18, 1884, and certain notes executed in March and April, 1884. The coincidence and correspondence resulting from this manipulation of certain parts of this account are not satisfactory, and, in our judgment, do not overcome the presumption that payments made on the “old account” were intended to be applied, and were applied, to the head of the “old account.” There was ho reason for such an arbitrary mode of applying a payment. To say the least, it is remarkable that a creditor should say, “The sum you owe me is not the balance at the foot of the account:, neither is it a balance from the head of the account, but is for items found neither at: the head nor foot, but for credit extended a¡: a particular period of the account just before I learned certain facts vvhlcii preclude me from looking to you for credit extended after the particular time and place in the account where I now locate my claim.” The burden to establish such a peculiar balance rests very heavily upon the creditor, and in this case has not been met. We are more satisfied with this conclusion from the fact that: the original bill, for the evident purpose of getting the benefit of an admission as to unpaid stock found in the annual statement of the Rickerson Company filed in January, 1880, averred that the balance of debt now in. controversy accrued after the filing of that statement. The exigencies of the'ease have compelled a shifting of the date of origin, and, while not disposed to treat the averment of the bill as a technical estoppel, it must: add much weight to the presumption against so> erratic an application of payments as that now urged. The claim is much like that presented by Clayton’s case1, in Devaynes v. aSToble, 1 Mer. 008, where the rule of application of payments to a running banker’s account “was sought to be evaded so as to leave a balance due as originating at a time when a deceased partner might be held liable. Mr William Grant, M. R., said of such a claim: "In such a caso there is no room for any other appropriation than that which arises from the order in which the receipts and payments take xilaee. and are carried into the account. Presumably, it is the sum first paid in that is first drawn out. It is the first item on the debit side of the account that is discharged or reduced by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. Upon that principle all accounts current are settled, and particularly cash accounts. When there has been a. continuation of dealings, in what way can it be ascertained whether the specific balance dim on a given day lias or hafs not been discharged, but by examining ‘whether i>aymexits to the amount of that balance appear by the account to have been made? You are not, to take the account backward, and strike the balance at the head instead of the foot of it. A man’s bank breaks, owing him, on the whole account, a balance of 1,000 pounds. It would surprise one to hear the customer say: T have been fortunate enough to draw out all that I paid in during the last four years, lmt there is 1,000 pounds, which 1 paid in five years ago. that 1 hold myself never to have drawn out; and therefore, if I can find anybody who was answerable for the debts of Die banking house, such as they stood live years ago, I have a right to say that it is that specific sum which is still due to me, and not the 1,000 xiounds that I paid in last week.’ This is exactly the nature of the present claim. Mr. Clayton travels back into the account, till he finds a balance for which Mr. Devaynes was responsible; and then he says: ‘That is a sum which 1 have never drawn for. Though standing in the center of the account, it is to be con — 564 — sidoreci as set apart, and left untouched. Sums above it and below it have been drawn out, but none of my drafts ever reached or affected this remnant of the balance due me at Mr. Devaynes’ death.’ What boundary would there be to this method of remolding an account? If the interest of the creditor required it, he might just as well go still further bach, and arbitrarily single out any balance, as it stood at any time, and say it is the identical balance of that day, which still remains due to him.” The decree must be reversed so far as the Messrs. Fox are held liable for any part of the debt due to the Farrell Company as holders of shares not fully paid up. This brings us to the second ground upon which a decree against C. E. and Charles Fox is sought, namely, that they should account for certain corporate assets in their possession, which they claim under assignments by the corporation to them, either to protect them against liability as indorsers upon corporation paper, or in part payment for corporate liabilities paid off by them as indorsers. It is said that the allegations of the bill in respect to this aspect of the relief sought are not sufficient to support the decree. The bill, after stating that the assets of the corporation had been sold by the defendants Fox, charged, upon information and belief— “That 1lie proceeds of the assets so sold and disposed of were by said defendants Fox applied to their own use and benefit, either by direct conversion, or by applying the same upon debts upon which they were personally liable; but the extent and particulars of such application your orator is not able at this time to state.” The prayer is that they account for all such assets so applied to their individual use. The answer sets out the circumstances under which the individual defendants had become possessed of the proceeds of the sale of the corporate property, and subsequently of the uncollected claims due to the corporation. These facts have been already stated, and need not be repeated. The pleadings sufficiently involve the title and right of the Messrs. Fox to the corporate assets in their possession, and, under the evidence, it devolves upon us to determine whether they shall be permitted to appropriate these assets to their exclusive benefit. That they were, at the time of the assignment of these assets, creditors of the corporation, we have no doubt. The question is, are they entitled to retain the preference thus secured? As we have already stated, the directors securing the preference of the 10th of October, 1887, did not then incur any Dew liability, or extend in any way the life or business of the. company. They were already liable ás indorsers upon company paper which had gone to protest. The new note was indorsed and discounted to obtain means to pay off the protested notes. Thus, no new liability was incurred, and no new benefit moved to the corporation. It was at that time in process of liquidation, and owned no property save this stock, and some uncollected accounts of little or no value. What was done, therefore, by the directors, was to prefer three of their own members as creditors of an insolvent corporation, which had ceased to do business, and had disposed of its property for the purpose of winding up. It is said, in support of the title of the Fox brothers to these corporate assets, that although the corporation was not a going concern, and was in process of liq — 565 — nidation, the corporation was still in the actual possession of these assets, and had the same dominion over them that it at all times had had, and that if the corporation, at any time before a general assignment, or the seizing of the assets under a general creditors’ bill, choose to pay one creditor and leave another unpaid, or prefer one creditor over another, it may do so as freely as an individual could. This general proposition may be conceded, without settling the question here presented. The preference here given was to the individuals owning practically the entire stock, and constituting three-fourths of the board of directors.' The votes of the directors thus preferred were essential to consummate this preference. There was no submission of the matter to the shareholders as such. Possibly, this is unimportant, inasmuch as the shareholders, at the date of these preferences, were identical with the directors, as the latter, with one minor and nominal exception, were identical .with the creditors preferred. In the case of Brown v. Furniture Co., 16 U. S. App. 221, 7 C. C. A. 225, and 58 Fed. 286, this court had occasion to consider the validity of mortgages made by an insolvent corporation of the state of Michigan, which gave a preference to directors who were guarantors and indorsers for the corporation. The mere fact that the corporation was insolvent, and the mortgagees were directors, was held not necessarily to render the preference invalid, under either general principles of law, or tlie law of Michigan, the state in which the mortgages were made. Bank of Montreal v. J. E. Potts Salt & Lumber Co., 90 Mich. 345, 350, 51 N. W. 512. This court: has not adopted the theory that the assets of a corporation become a trust fund in the hands of its directors, for equal distribution among all creditors upon the occurrence of insolvency. If creditors choose to permit the officers and directors of an insolvent corporation to remain in possession and control of the assets, we do not see upon what principle the mere fact of insolvency is to operate as an injunction against any creditor from obtaining a preference through legal processes, or by agreement with the corporation. ,if such a corporation may prefer a stranger who is a creditor, it may likewise prefer one of the corporators. In the latter case, however, tlie utmost good faith must appear, not only in respect of the bona lides of the debt paid or secured, but in regard to all the steps taken (o secure the preference. In the case before us the preference is given to persons who at the time constituted three-fourths of the. directors who assented to tlie arrangement. These directors had been allowed to remain in possession of the corporate assets under veiy peculiar circumstances. The Farrell Company had been an indulgent creditor. But in the spring of 1886 it became impatient, and by a letter dated March 1, 1886, threatened to place its claim in process of collection. To this the Rickerson Company replied, under date of March 4, 1886, as follows: "Wo note wliat you say ill regard to sending the account here to be collected, and can simply state that we would very much regret any such action on your part. However, if it is your firm determination to do so, we see no way in which we can prevent you. Neither do we see any way whereby you could any sooner obtain your money. If you consider that you can — 566 — obtain your money any sooner by taking the rolls we have on hand, we would be perfectly willing that you should do so. We, however, cannot see any way to pay you the amount until the rolls we have on hand are turned into money. This we have made arrangements to do, as we wrote you before; having made a contract with responsible parties to manufacture our machines, and parties who will use them themselves, from twenty to thirty machines a month easily, upon which we make a good profit, and which will enable us to turn our present stock so that we will be able to get ready money wherewith to pay our indebtedness. We hope you will take such a view of the matter as will cause no inconvenience or loss to yourselves or ourselves, as we cannot see any good results that will come through such action.” To this, among other things, the Farrell Company, under date of March 8, 1886, replied by submitting the following proposition: “Let us have your paper for one-half the amount at ninety days, and we will agree to let the rest run along until that is cared for, or for longer; say, four to six months, if necessary. We want something, and want it now. It is asking too much to expect us to hold off on the entire thing in this way. We will do what is fair and right, only we want you to do something for us now. Please advise its at once what you will do about it, and oblige.” Under date of March 17, 1886, the Riekerson Company, through, a letter written by the defendant Charles Fox, replied, among other-things, as follows: “We expect to be able to settle your account due you, and we intend to do so. We cannot say just when that will be, as that depends upon how soon we can realize upon,the stock of rolls and machines which we have on hand; but, as we told you before, we shall reduce your claim as fast as we realize upon said stock. All we owe of any consequence is to you and the bank. The bank obligations have been carried some time, and have some personal indorsements, and it is our intention and desire to settle your claim before we pay those of the bank. We wish to treat you fairly in every way, and we think this is certainly the fairest thing we can do. We feel very grateful towards you for the accommodations you have granted us, and we do not wish to see you lose a dollar through this company. It appears to us that we can realize on the rolls and machinery which we have on lia.nd to better advantage by continuing the business than could be realized if the business should- be stopped or closed up on any execution, as this class of machinery is not such as could be sold to any advantage whatever at public sale. We should dislike very much to have you bring suit against us for your account, as it would embarrass the institution still further, and work disa.dvantageously to all interested, in every way. We realize that this matter is somewhat unbusinesslike, and extremely tedious; to say the least; but our personal experience has' been that it is often better to nurse a lame duck than to crowd it too hard, and more profitable in the end. We hope you will still feel as though you could nurse this duck for a while longer, and we will keep you posted in the affairs of the institution as you may desire from time to time, so that you may know that your interests are not being jeopardized by allowing the business to continue. Hoping that we shall hear from you, we remain, yours, very truly.” The Farrell Company replied as follows: “Ansonia, Conn., March 20, 1886. “The Riekerson Roller-Mill Company, Grand Rapids, Mich. — Gentlemen: Your favor of the 17th inst. is to hand, and noted. Do we understand that you have already perfected arrangements for continuing the building of your mill? The arrangements you had in mind have fallen through, we believe. We refer to the one you had in mind when the writer was West. If you have already made arrangements to continue the business, we would perhaps be willing to wait a while longer; that is, if you can see any likelihood that the matter will be closed up within a few months. We are no more anxious to have any trouble than you are yourselves, and would request that, you enlighten us on this point. We remain, yours, truly.” — 567 — In reply the Rickerson Company, under date of March 27, 1886, said, in substance, that they had made arrangements with a firm at Sandusky to manufacture their machines, using in them the rolls owned by the Bickerson Company in stock. The hope of thus utilizing material on hand profitably induced an expression of opinion that their prospects were good for being able to pay for that material within a reasonable time. This closed the correspondence. The Farrell Company did not further press its claim. It in fact extended further indulgence, in the natural belief that the hank obligations, “with personal indorsements,” would not be paid or preferred after a direct statement that it was “the intention and desire to settle your claim before we pay- those of the hank.” The bank obligations referred to in this letter of March 17, 1886, were the claims upon which Charles and E. O. Fox were .personal indorsers. Those claims, by renewals, were kept alive until October 10, 1887, when these indorsers, taking advantage of their continued possession of the corporate assets, had assigned to themselves all the assets of the company, to secure them as indorsers of the very claims which they had represented should he postponed to the claim of the Farrell Company. That the Farrell Company did not embody the proposition to pay its claim in preference to this “bank claim” in a contract, or did not, in so many words, say, “We extend time upon condition that you will do as you propose,” seems to us not to be an answer to the insistence ihat these directors could not in good faith prefer themselves after inducing forbearance by assurances of the utmost fairness in the use of the corporate assets to pay outside creditors. Under such circumstances, it is not enough for directors taking a preference out of the assets of an insolvent corporation to establish the fact of the debt due to themselves. They secured the opportunity to prefer themselves by assurances that they would not do so.’; Their doing so in violation of the moral trust they solicited was bad faith, and the assets thus secured should he ratably administered among all the creditors; including, however, the preferred directors. This meets the justice of the case, upon the peculiar facts of this record. The decree upon this branch of the case will he affirmed. The costs of appeal will be equally divided.