National Hollow Brake-Beam Co. v. Chicago Railway Equipment Co.

Mr. Justice Farmer

delivered the opinion of the court:

The controlling questions for determination are, whether the equipment company has proven that the note of the El Nayal M. & M. Company for $4000,. the draft of the Hammond Manufacturing Company for $5000, and the certificate of the receiver of the Monterey and Mexican Gulf Railroad Company for $4500, called hereinafter the “three items,” were received by the brake-beam company in part payment, to the amount of $13,500, of the rental which fell due December 31, 1898, and whether the Atkins & Milligan notes for $20,000 were received in part payment of the balance of the $106,287.90 theretofore advanced by the brake-beam company to the equipment company. That these notes, the draft and the receiver’s certificate were uncollectible is shown by the testimony, and we think it sufficiently appeared they were each entirely worthless.

The Atkins & Milligan notes, it is claimed, constituted valid re-payment of the amount or sum which the equipment company was not bound to pay until 1908, but on which the lease provided payments in sums not less than $5000 might be made at any time, and when made should reduce the annual rental by an amount equal to the interest on such partial payments at the rate of six per cent. On the theory the notes were transferred to and received by the brake-beam company as such payment, the annual rental due for 1898 was reduced in the sum of $1200, being six per cent on the amount of these two notes. The makers of these notes are insolvent. Leigh testified that Laughlin consented to loaning the money for which the notes were given, and that the notes might be placed among the assets of the brake-beam company as valid payments of the advancement. Laughlin denied he so consented or agreed. Leigh was interested in having these notes paid or used by the equipment company as good notes, for he was responsible to the equipment company for them. Laughlin had no interest in their payment. The master and the chancellor, in view of the direct conflict in the testimony of these two witnesses, regarded the alleged consent as not proven, and, moreover, held that the brake-beam company could not be bound by Laughlin’s consent, even if it were proven he consented. We know of no reason why the testimony of Leigh should have greater weight than that of Laughlin, and think the view of the chancellor should, on this point, have been accepted by the Appellate Court. The paper was worthless, known to be so by both Leigh and Laughlin, and even if they had consented and agreed to foist it on the brake-beam company, of which Laughlin was president and general manager and Leigh was treasurer, such an agreement was not enforcible as a matter of law or of right. Leigh and Laughlin were large holders of the stock of the brake-beam company, but had no power, as stockholders, to act for and bind the company. Hopkins v. Roseclare Lead Co. 72 Ill. 373.

The El Nayal M. & M. Company note, the Hammond Manufacturing Company draft and the certificate of the receiver of the Monterey and Mexican Gulf Railroad Company, with which it was claimed the $13,500 rental due for the year 1898 was paid, were shown by the evidence to be worthless. These “three items” found their way into the treasury of the brake-beam company in the following manner: Leigh became treasurer of the brake-beam company in January, 1899. He was the general manager of the equipment company. Some time afterward, the exact date not being shown with certainty, Leigh, as manager of the equipment company, placed the El Nayal company note, endorsed without recourse, in an envelope with the brake-beam company papers. The receiver’s certificate had been sent to Mexico for collection, and the Hammond company note had been reduced to judgment in Leigh’s name and was on file in the papers of the case in the court where the judgment was entered. Leigh, as treasurer of the brake-beam company, made entries on the treasurer’s books of the brake-beam company to show that the “three items” were transferred by the equipment company to the brake-beam company in part payment for rent which fell due at the close of the year 1898, and without recourse on the equipment company. Leigh again testified that Laughlin, who was president of the brake-beam company, knew of the transfer of these “items” to the brake-beam company at par and without recourse on the equipment company. ■ His testimony was, that Laughlin said to him, “We are going to make the brake-beam company the sewer to take care of these personal matters of ours or these mining matters of ours.” Leigh testified he knew these claims were “bad debts.” It also appeared he had an individual interest in “unloading them” in order to relieve himself of personal liability, as endorser or otherwise, because of their non-payment. Laughlin denies the statement attributed to him. But the “three items” were worthless, were known to the equipment company to be so, and also to Laughlin, and the act of Leigh, as treasurer of the brake-beam company, in receiving them from himself, as manager of the equipment company, and entering them on the books of the brake-beam company as having been received in payment of an indebtedness due from the equipment company, could not receive legal sanction. Nor would the act have any greater validity if the transfer were made, as testified to by Leigh, under an agreement between himself and Laughlin, in their respective official capacities, that the treasury of the brake-beam company should be converted into a sewer for the reception of the “bad debts” of each of them.

But it is insisted that the other stockholders, officers and directors of the brake-beam company knew of the alleged transfer of these “three items” to the brake-beam company in partial payment of the rental due from the equipment company for the year 1898, and also knew of the transfer of the Atkins & Milligan notes, and acquiesced in the transaction, and should be held estopped at this late date to deny the validity of the alleged payment. The Appellate Court accepted this as the correct view and for that reason reversed the decree of the circuit court.

There was an agreement between Leigh and Laughlin that certain notes, of which a written list was made, should be transferred from the equipment company to the brake-beam company, to be taken as payment on rental. Laughlin endorsed his consent to the acceptance of these notes on the written list of them. This list was not produced, and the evidence of Leigh and Laughlin as to whether the “three items” in dispute, or the Atkins & Milligan notes, were included in it is in conflict. In February, 1900,—perhaps about the 8th,—Leigh rendered to Laughlin a statement of the assets of the hollow brake-beam company, among the items being the Monterey and Mexican Gulf Railroad Company, $25,158.48, El Nayal M. & M. Company, $4000, and Hammond Manufacturing Company, $7353-8i. At this time Laughlin had obtained control of the greater part of the stock of the brake-beam company, and regarded himself as practically entitled to all the assets of the company under the operation of the “rent reduction” contract which Laughlin entered into with the equipment company and brake-beam company, under which he purchased the greater part of the stock of the brake-beam company. This report was rendered for the personal information of Laughlin. Laughlin, within a short time after receiving the statement, wrote Leigh for information as to the El Nayal notes of $4000, and said further, “I think I am sufficiently familiar with the other items to enable me to figure intelligently.” Laughlin insists he repudiated the El Nayal note as soon as he was advised as to it. It seems certain he did not consent that it constituted a part of the assets of the brake-beam company. He also denied that the Hammond item constituted part of the assets of the brake-beam company. Laughlin knew the brake-beam company held claims against the Monterey and Mexican Gulf Railroad Company to the extent of more than $20,000,—indeed, to probably $25,000 if interest should be' computed thereon. But this contested item of $4500 was older in date and earlier in maturity than any of such of those claims of which he had knowledge, and the account did not disclose that it had been included in the total of the items as found in the statement. If it was included, then it is clear the statement did not include interest on the other of the claims against the Mexican company, which it is conceded on all hands belonged to the brake-beam company and which were interest-bearing obligations. We do not think it can be declared from this statement it should be held Laughlin had notice of the inclusion of the contested Monterey and Mexican Gulf Railroad Company item as part of the assets of the brake-beam company and acquiesced therein.

It is urged the 'entries made by Leigh on the treasurer’s books of the brake-beam company, a report made by the auditing committee of that company on November 7, 1890, certain “trial balances” of the assets of the brake-beam company January 18, 1899, February 1, 1900, and October 1, 1901, should be held to show knowledge and acquiescence on the part of Laughlin and the brake-beam company to the alleged transfer of these “three items” under consideration to the brake-beam company. In the master’s report, which was approved by the chancellor, we find the following statements: “I do not give these book entries and documents the same weight as estopping the defendant company as such book entries would usually have, because of the extraordinary relations of Leigh and Laughlin, the latter leaving everything to Leigh, and because Mr. Leigh remained at all times in the custody of all these books and papers and of the notes themselves, the other corporation officers giving no heed to the contents of the books or to the actual condition of the assets. * * * I find that the entries in the books, trial balances and records of the defendant concerning these last three items were made by Leigh or under his directions, and that the extraordinary confidence and lack of business checks between Leigh and Laughlin in all these transactions, the fact that Leigh had sole custody of all books and documents and sole control of all details, and the fact that all details of management in the defendant company were left solely to him, takes away from these records and documents their weight as evidence against the defendant company and prevents their acting as an estoppel. These entries may well have been made in good faith and still they could not bind the corporation. Any statements that Judge Laughlin acquiesced to the transfer of these three last items are denied by him. He denies that he had any knowledge of the transfer or that the books showed the items.” The trial court found and recited in its decree, as abstracted: “The entries were made without- the knowledge of the brake-beam company and its proper officers, and the acts of Leigh were done in the interest of Leigh and the complainant and could not be of benefit to the brake-beam company. None of these acts of Leigh were approved and ratified by the brake-beam company, and the assumed transfer was not, in law, a transfer of the title and not binding upon the brake-beam company, and was not a return of the sum of $20,000.”

After an investigation of the record we think these findings of the master and chancellor are correct conclusions to be drawn' from the proofs. Neither knowledge nor. acquiescence on the part of the brake-beam company of the alleged transfer to it of the worthless “three items” in payment, in part, of the obligation of the equipment company being proven, no estoppel to repudiate the same could arise, hence we conclude that the decree of the chancellor was correct and should have been affirmed by the Appellate Court.

The judgment of the Appellate Court is therefore reversed and the cause will be remanded to the superior court, with directions to enter a decree finding there is due to the brake-beam company from the equipment company the sum of $19,624.50, together with interest on that amount at five per cent per annum from the date of the former decree rendered in that court, and decreeing the payment thereof within thirty days, and that in default the injunction be dissolved.

The judgment of the Appellate Court is reversed and the cause remanded to the superior court, with directions.

Reversed and remanded.