Hooper v. Central Trust Co.

McSherry, J., delivered the opinion of the Court. On March the twenty-first, eighteen hundred and ninety, the Maryland Ice Company was incorporated under the laws of the State of New Jersey. On the following fifth of April the Company acquired certain property situated in Baltimore City from the executors of the estate of the late William E. Hooper, deceased; and it acquired this property under an agreement previously made between the executors and Ormond Hammond, Jr., who contracted for himself and his undisclosed associates. The circumstances attending this acquisition of property will be stated later on.

The price agreed to be paid was one hundred and fifty thousand dollars in cash (of which five thousand dollars were paid when the agreement was executed) and one hundred thousand dollars in second mortgage bonds of a company to be formed thereafter, which company, when, formed, was the Maryland Ice Company. ⁵⁷⁰ In the contract of purchase, which bore date" February the twenty-eighth, eighteen hundred and ninety, there were stipulations requiring the construction by the purchaser and his associates of certain Betterments and ice manufacturing machinery upon the premises, to the value of one hundred and thirty to one hundred and fifty thousand dollars, to be erected by a designated time and to have a prescribed ice-producing capacity. Simultaneously with the execution of the deed by the executors conveying the property to the Maryland Ice Company the latter placed upon record two mortgages to the Central Trust Company of New York, each dated on the first of March and acknowledged on the third of April, and each covering the property so conveyed to the Maryland Ice Company by the Hoopers, and also covering all additions thereto and all machinery thereafter to be placed thereon. The first of these two mortgages secured an issue of two hundred and fifty thousand dollars of the Maryland Ice Company’s bonds, and the second secured an issue of one hundred and ten thousand dollars of other bonds of the same company. These latter were delivered to the executors ; one hundred thousand dollars of them in part payment of the purchase money as provided in the contract of February the twenty-eighth, and ten thousand dollars of them in settlement of another' transaction which has no connection with the pending controversy.

Prior to the incorporation of the Maryland Ice Company, Ormond Hammond, Jr., and Thomas Sturgis, acting for and in behalf of the promoters of the enterprise which finally culminated in the formation of the Maryland Ice Company, entered into a contract with the Arctic Ice Machine Manufacturing Company for the construction of three ice manufacturing machines to be placed upon this property. In the contract so executed oh March the fifteenth, 1890, there was a clause expressly reserving to the Arctic Company the title in these machines, and the right to. reclaim and remove them if the purchase price should not be paid when due. This contract was assigned to ⁵⁷¹ the Maryland Ice Company after its incorporation. The machines were, after some delay, finally erected, but were not fully paid for.

The Maryland Ice Company having made default on September the first, 1891, in the payment of the interest coupon due that day on its first mortgage bonds, the Central Trust Company, representing and acting for the holders of those bonds, filed on the following day, in the Circuit Court of Baltimore City, a bill for the foreclosure of the first mortgage, and for a sale of the property, including the machines constructed by the Arctic Company, and which had not been fully paid for by the Maryland Ice Company. With the bill there was filed the unsworn answer of the Maryland Ice Company, consenting to a sale, and agreeing that a receiver be forthwith appointed. On the same day a decree was signed appointing O. Hammond, Jr., receiver, and enjoining the Maryland Ice Company and all persons from selling or disposing of any of the company’s property. This whole proceeding, though ostensibly between different parties, occupying opposite sides of the docket, was, in fact, conducted by the same individuals, who, under other names, controlled both sides of the apparent controversy, because the Trust Company, the plaintiff, acted at the instance and in behalf of the first mortgage bondholders, and the Maryland Ice Company, the defendant, represented its stockholders, who were the same identical bondholders and their agents and co-projectors of the original undertaking.

After the appointment of the receiver the Arctic Company intervened by petition, and asserted under the contract of March the fifteenth, 1890, made with Hammond and Sturgis, its ownership of the machines erected by it, but which had not been fully paid for. This claim was resisted by the first mortgage bondholders, on the ground that they were bona fide purchasers of those bonds, without notice of the unrecorded conditional sale made by the Arctic Company of the three ice-manufacturing machines. Whilst that controversy was pending, no further steps were taken with reference to ⁵⁷² the foreclosure and sale. Ultimately the point at issue between the first mortgage bondholders, represented by the Central Trust Company, and the Arctic Company, reached this Court, and the case is reported in 77 Md. 202 .

Bearing in mind that the precise question controverted between the contending parties to that appeal was whether the holders of the first mortgage bonds were in fact bona fide purchasers thereof,-without notice or knowledge of the title set up by the Arctic Company to the three machines erected by it under the contract made by Hammond and Sturgis on March the fifteenth, 1890, the pertinency of the conclusions reached on that subject in that case to the questions involved in the pending áppeal, will be apparent. After a full, able and elaborate argument at the bar, we held that the London and New York Investment corporation and Poor & Greenough, who, it then appeared, together owned two hundred’ and forty-five thousand of the -two hundred and fifty thousand dollars of the first mortgage bonds of the Maryland Company, and who, it now appears, between them own the entire issue, were in fact with Hammond and Sturgis the actual promoters of the scheme which resulted in the purchase of the property from the Hoopers, the making of the contract with the Arctic Company, the formation of-the Maryland Ice Company - and the issue of its first and second mortgage bonds. It was distinctly decided that the London corporation and Poor & Greenough had notice and knowledge of the provisions of the contract between the executors of Hooper on the one hand and Hammond on the other, wherein the latter agreed in behalf of himself and his associates that the betterments, to cost from one hundred and thirty to one hundred and fifty thousand dollars, should be placed upon the property; that they knew how and by what means the Hoopers were to be paid the amount of the agreed purchase money, and that they further knew the provisions of the contract between Hammond and Sturgis and the Arctic Company, which was subsequently assigned to the Maryland Ice Company. And ⁵⁷³ they were held to have known these facts because, in the opinion of this Court, the London and New York Investment Corporation and Poor & Greenough were the real parties to these several contracts executed in their behalf by their accredited agents, Hammond and Sturgis. “ It was,” we said in 77 ■Md. 231, “for the London corporation, and at its instance, that Hammond negotiated the purchase with Hooper, and it was for it and for its benefit that he incurred the obligation to erect the three additional machines thereon ; and it was to advance its interests that he and Sturgis entered into the contract with the Arctic Company.

He and Sturgis were, ■therefore, in fact the agents of that corporation employed to develop the project for it, and the attempts to disguise their real connection with the London corporation are, whilst numerous and adroit, none the less transparent and obvious. ***** The priority asserted by the Central Trust Company for the holders of the Maryland Ice Company’s first mortgage bonds is a priority claimed in behalf of the very persons whose agents and associates purchased the machines and contracted for the preservation of the vendor’s lien thereon. The London corporation and Poor & Greenough, who are stockholders of the Maryland company, claim, as creditors of the very company which they organized and control, and whose obligations they were aware of, a priority over the vendor of the machines, notwithstanding the knowledge and information which they had and were chargeable with when they took the bonds, and notwithstanding the fact that the very priority which they are now seeking to defeat was one created by their own agents even before the bonds were issued. No Court has ever yet held that parties thus situated could successfully maintain such a position. It is the worst of bad faith.” * * “ As bondholders they have no standing to destroy or to impair the lien which, as projectors of the company, they through their own agents established in favor of some one else.” Page 234.

Under the contract between Hammond and the Hoopers, ⁵⁷⁴ of February the twenty-eighth, 1890, it was stipulated that Hammond should furnish a guaranty from Poor & Greenough, bankers, of New York, that the betterments and additional machinery provided for would be placed upon the property on or before. the first day of the succeeding July. The object which the Hoopers had in view in insisting on these betterments is obvious. They desired to add to the security of the second mortgage bonds, which, in consideration of these betterments and improvements being made, they agreed to take as part of the purchase price for the property. And the object which the purchasers obviously had in view in giving the guaranty was to induce the vendors to waive their lien for the unpaid purchase money, so as to let in the first mortgage as a prior lien.

Accordingly, before the delivery, and as a condition of the delivery by the vendors of the deed to the Maryland Ice Company, which had just been substituted in the executors’ report of sales to the Orphans’ Court as purchaser of the property in the place and stead of Hammond and his associates, who made the contract of purchase in contemplation of the incorporation of the company ; and before the grantors waived their vendor’s lien in favor of the first mortgage bonds, a guaranty in the words hereinafter set forth was signed by Poor & Greenough and was given to the Hoopers. Having determined in 77 Md. that the holders of the first mortgage bonds (who together with Sturgis and Lane are also the holders of the stock of the Maryland Ice Company) were not bona fide purchasers of those bonds without notice of the claim or lien of the Arctic Company, and that they were accordingly bound by the provisions in the latter company’s contract of March the fifteenth, 1890, and were subordinated to the vendor’s lien asserted by that company ; the case was remanded for further proceedings and proof respecting another branch of the controversy. It came here twice afterwards. 79 Md. 103 , and 80 Md. xviii ; and when the amount due to the Arctic Company was finally and defi ⁵⁷⁵ nitely settled, a portion of it was paid and fifty thousand dollars of it were advanced by the London corporation, which took from the Arctic Company an assignment of the latter company’s decree to that extent. Whether this decree in the hands of the London corporation under the assignment from the Arctic Company is a prior lien to that of the second mortgage, is one of the questions involved in the pending appeal.

From the day the original bill was filed down until about the sixth day of June, 1893, various sums were borrowed by the receiver on certificates issued under authority conferred by the Circuit Court. The money, aggregating over ninety thousand dollars, was furnished by the London corporation. The Hoopers, who held then and still hold the second mortgage bonds, never assented to the issuing of these certificates. Whether these receiver certificates held by the London corporation are a prior lien to the second mortgage, is another of the questions now before us for decision.

After the controversy between the Arctic Company on the one side, and the holders of the first mortgage bonds and the Maryland Ice Company on the other side, had been finally disposed of as above stated, the Hoopers, still holding the one hundred and ten thousand dollars of second mortgage bonds, came into the foreclosure proceeding case by petition and were finally made parties defendants. They obtained leave to file and did file a cross-bill, and they also answered the original bill. They incorporated the averments and statements of the cross-bill in their answer as parts thereof; and by both answer and cross-bill they insist that the holders of the first mortgage bonds are not entitled to a priority over the holders of the second mortgage bonds, for reasons to be stated later on; and they further claim that before the holders of the first mortgage bonds shall be allowed any part of the proceeds which may arise from a sale of the mortgaged premises they, the first mortgage bondholders, shall, as stockholders of the Maryland Ice ⁵⁷⁶ Company, pay to the receiver thereof the sum which the par value of the stock held by them amounts to in excess of the sum due to them on the first mortgage bonds. And these are the other questions presented on this appeal.

The cross-bill concludes with a prayer for general relief, and it was answered by the Central Trust Company, by the Maryland Ice Company and by Hammond, the receiver. Considerable testimony was taken, and thereafter the cross-bill was dismissed by a pro forma decree, from which the pending appeal was taken. At the outset, it is insisted that the relief sought by the cross-bill is so foreign to and irreconcilable with that which the original bill invoked, that the pro forma decree should, for that reason, be affirmed. It is undoubtedly true that a subject which is not germane to a pending controversy cannot by means of a cross-bill be injected into the litigation.

A cross-bill is a mere auxiliary suit, and a dependency of the original. Story Eq. PL, sec. 399. Where a decree on the plaintiff’s bill will not determine the litigation, the imperfection may be remedied by one or more dross-bills filed by one or more of the defendants against the plaintiffs; and if this has not been done and the difficulty appears at the hearing, the cause may be directed to stand over for the purpose.

Adams' Eq., side-page, 402. The cross-bill may set up additional facts not alleged in the original bill- where they constitute part of the same defence, and relate to the same subject-matter. Underhill v. VanCortland, 2 Johns C. R. 355. And though its allegations must relate to the subject-matter of the original bill, it is not restricted to the issues under it.

Nelson v. Dunn, 15 Ala. 501 . It is generally considered as a defence, or as a proceeding to procure a complete determination of a matter already in litigation in the Court, and therefore the plaintiff is not, at least as against the plaintiff in the original bill, obliged to show any ground of equity to support the jurisdiction of the Court. Adams' Eq., side page 405 ; Story Eq. Pl., sec. 399; Mitf.

Eq. Pl., by Jeremy, 80-83. But the answer ⁵⁷⁷ specifically relies, by way of defence to the original bill, upon the same matters set forth in the cross-bill, and these, if sustained, present an insuperable bar to the relief prayed in the original bill filed by the Central Trust Company, in so far forth as respects the alleged priority of the first mortgage bonds. With a single exception which will be adverted to hereafter, the relief sought, or the defence relied on in the cross-bill, is necessary to a complete determination of the relative priorities of the several liens now asserted; and that issue as to these priorities, which is of vital importance in the controversy, cannot be adjusted under the original bill, unaided by the cross-bill.

As we have stated, the original bill was filed to procure a foreclosure of the first mortgage, and it prayed that the proceeds of the foreclosure sale might be applied to the payment of the principal and interest unpaid upon the first mortgage bonds, together with interest on overdue interest down to the time of sale ; and then, if there should be any surplus, that it should be applied to the payment of the second mortgage bonds. Now, the defences set up and. relied on by the appellants present insuperable obstacles to the granting of so much of this relief as would give the first mortgage bondholders a preference over the second mortgage bonds. These defences, set up in the cross-bill and in the answer, assail the priority of the receivers’ certificates, the priority of the Arctic Company’s decree in the hands of the London Corporation, and finally the priority of the first mortgage bonds in the hands of that corporation, and in the hands of Poor & Greenough. If the holders of the first mortgage bonds by any fraudulent device procured for their own benefit the execution and delivery of the deed by the Hoopers for the mortgaged property, and by the same means and for their own advantage secured a waiver by the grantors of their lien for the unpaid purchase money so as to let in the first mortgage as the first lien ; then, upon the plainest principles of natural justice, they will not be allowed in a Court of Equity to en ⁵⁷⁸ force this lien of their own creation in their own favor to the prejudice of, or even in preference to, the lien of the vendors for the purchase money represented by the second mortgage bonds ; even though the second mortgage bonds on their face declare that issue to be subject to the lien of the first.

It is scarcely necessary to cite adjudged cases in support of a proposition so plain and self-evident as this. Courts of Equity will never allow the mere form in which a transaction is clothed or disguised by the parties who have projected it for their own gain, to control or defeat the legal or equitable rights of others ; particularly where an adherence to form and a disregard of substance would result in the successful consummation of a palpably fraudulent scheme. 1 Pom. Eq., sec. 379. To fully appreciate the relevancy of the defences made by the cross-bill and by the answer, we must rapidly sketch the further connection of these first mortgage bondholders with the Maryland Ice Company enterprise, and trace them through its various developments down to the present period.

After the contract of February the twenty-eighth, 1890, had been made, containing the stipulation respecting betterments and additional machinery, and the further stipulation providing for the guaranty by Poor & Greenough; and there had been inserted in the deed of April the fifth a recital with regard to the contemplated betterments, which recital, embodying the agreement in this particular of the projectors, became, in fact, a part of the consideration of the conveyance; the further organization and. development of the Maryland Ice Company was progressed with. The London corporation, Poor & Greenough and Sturgis, fixed the capital stock of the company at five hundred thousand dollars, not one dollar on which has ever been paid by them or by any one else, except possibly one thousand dollars for ten shares put in the names of five individuals on March the twenty-fourth, 1890, for the purpose of effecting a formal organization. As one of the methods re ⁵⁷⁹ sorted to for the purpose of concealing or cloaking the real transaction, an agreement was entered into between Hammond and the London corporation, on the fourth of March, eighteen hundred and ninety, whereby he contracted to turn over to the Maryland Ice Company, when formed, the property purchased four days previously from the Hoopers; and to so turn it over for two hundred and fifty thousand dollars of first, and one hundred and ten thousand dollars of second mortgage bonds and five hundred thousand dollars of stock; but not one of the bonds went into his hands or was ever intended to go there, and a certificate for four thousand nine hundred and ninety shares of stock remaining after ten had been issued as just stated, was nominally issued to him, but in fact was merely handed to him with a request that he sign a transfer in blank on its' back. This transfer he signed as directed, and it now appears filled out as an assignment of one thousand shares to the London corporation; four hundred and forty 'shares to Poor & Greenough; one thousand shares to Greenough, trustee; eight hundred and fifty shares to Sturgis; eight hundred and fifty shares to W. C. Lane, and eight hundred and fifty shares to Hammond.

Only a few days subsequently a certificate for eight hundred and fifty shares was presented to Hammond by Sturgis with a request that he assign that also in blank, which was done, and it was then returned to Sturgis, and Hammond never saw it afterwards. No money or other consideration of any kind was paid to Hammond for this stock by the parties wlm received it; nor did Hammond ever pay or give to the Maryland Ice Company anything for it himself. As in fact the stock, with the exception of the ten shares before alluded to, all went to the promoters of the concern precisely as it was intended that it should go from the beginning, there was nothing due to Hammond for it, and consequently nothing was paid or given him. So completely was he a mere figurehead that even the five thousand dollars paid to the Hoopers when the contract of February the twenty- ⁵⁸⁰ eighth was made, was paid through Sturgis by the London corporation.

The stock purports to be full-paid, non-assessable stock, and professes on its face to have been “issued for property purchased.” The property, however, was purchased for two hundred and fifty thousand dollars through Hammond, but by the very parties who procured the stock; and the stock was not issued for the purchase at all, and no part of it was used therefor. The purchasers -of the property — the London corporation, Poor & Greenough and Sturgis — through their selected representatives, who held the ten shares, voted that the stock be issued to Hammond, merely that he might immediately transfer it back to them; and this he did. Thus in effect they issued it, through a crafty device, to themselves as full-paid, non-assessable stock, though they paid nothing for it at all. They consequently owe the Maryland Ice Company for this stock, and by no subterfuge or artifice, however cunning, can they evade their liability in this respect when that liability is sought to be fastened upon them by a party entitled to resort to it to secure payment of a claim due by the Maryland Company. “It has again and again been decided that the unpaid subscriptions to the capital stock of a corporation constitute a trust fund for the benefit of the general creditors of the corporation ; and that this trust cannot be defeated or the fund impaired by a'simulated or pretended payment for the stock taken, nor by any device short of actual payment in good faith.

Any arrangement, therefore, among the stockholders or those in charge of the affairs of the corporation, by which the stock is but nominally paid for, whether in money or property, the corporation not, in fact, getting the benefit of the price in good faith, will be regarded as a sham, and not a valid payment, as against the creditors of the corporation, however it may be regarded as between the corporation and the subscribers.” Crawford, Bixler et al. v. Rorer, 59 Md. 604 ; Camden v. Stuart, 144 U. S. 105 ; Floyd v. Preston, 146 U. S. 630 ; Washburn v. Green, 133 U. S. 30 ; Hatch v. Dana, 101 U. ⁵⁸¹ S. 205 . As against a creditor of the Maryland Ice Company, this acquisition of alleged full-paid, non-assessable stock, without the payment of a single cent, would be grossly fraudulent; and to permit holders of such stock, who, as promoters of the company, occupied the position of agents in procuring for the projected company the property upon which its mortgages were afterwards fastened, to claim and recover in the capacity of first mortgage bond-holding creditors of that company, from that company, an amount equal to the sum due by them to the same company, and due in their capacity of stockholders for stock actually issued, but not paid for, without requiring them first to pay what they themselves owe, would be a flagrant injustice to the vendors of the mortgaged property, if the lien of the latter for unpaid purchase money were thereby put in jeopardy. It is true as a general principle that to render a stockholder individually liable to the extent of his unpaid subscription, at the suit of a creditor of the corporation upon a debt due by the corporation to the creditor, the stockholder must have been such at the time the debt was contracted. Weber v. Fickey, use of Lanahan, 47 Md. 196 ; S. C. 52 Md. 500 ; Handly v. Stutz, 139 U. S. 417 ; First Nat.

Bk. of Deadwood v. Gustin-Minerva Cons. Mining Co., 42 Minn. 327 , S. C. 6 L. R. A. 676; Hahn & Bros. Appeal, 5 Cent. R. 187 ; Morawetz on Corp., secs. 832, 833.

But we are not confronted with that question, because no decree is asked against the stockholders to require them to pay the second mortgage bonds ; but merely a decree directing the receiver to collect the unpaid subscriptions to be applied by the Maryland Ice Company, when collected, to the extinguishment of the first mortgage bonds. Nor, for the same reason, does the provision in the second mortgage bonds to the effect that no liability on that bond shall ever be enforced against the individual estate of any stockholder of the Maryland Ice Company, interpose any difficulty as the case now stands. If