Morrow Shoe Manuf'g Co. v. New England Shoe Co.

BAKER, District Judge,

(after stating the facts.) It is contended by counsel for the appellant that the court below erred in dismissing the bill against the appellees for the reason that the evidence clearly shows that the New England Shoe Company and Charles C. Davis, its president, obtained large quantities of goods from the appellant and numerous other parties hv means of false and fraudulent representations, without any intention of paying for the goods so obtained, and that the appellees had actual or constructive notice of the fraudulent acts and intent of the Kew England Shoe Company and of its president. The charges made_ against the appellees Gore, Heimerdinger, and Prouty by the bill of complaint, and the proofs in their support, have no immediate connection with those made against the appellee Peabody. The case against Gore, Heimerdinger, and Prouty was tried in the court below, and bas been argued here by the same counsel; while the case against Peabody was tried in the court below, and has been argued here by counsel solely representing him. It will be most convenient to follow the same course in determining this appeal.

It is suggested, rather than argued, by counsel for Gore, Heimerdinger, and Prouty, that the bill of complaint is not broad enough, even if the evidence justified it, to warrant a decree against them compelling them to account for the proceeds of the goods belonging to the New England Shoe Company which are traced into their possession. The suggestion would have deserved careful consideration if the question had been called to the attention of the court below. If the objection had been presented below, the trial court could, and in furtherance of justice, should, have permitted the bill to be amended to conform to the case made by the proofs upon such terms as were just and equitable. Neale v. Neale, 9 Wall. 1; The Tremolo Patent, 28 Wall. 518; McArtee v. Engart, 13 111. 242. Under the circumstances the bill ought to be treated as amended here, so far as needful, to enable the court to decide the case on its merits. The practice of presenting in the first instance in this court some alleged defect or insufficiency in the bill of complaint or answer which would have been properly amendable in the court below is not to be commended.

There is no serious controversy touching the false and fraudulent representations of Davis, as the manager and president of the New England Shoe Company, in obtaining goods»from the appellant and numerous other parties, nor in regard to his intention not to pay for them, nor that the corporation was insolvent. The systematic frauds of the one and the insolvency of the other are established by the most abundant and convincing-evidence. Indeed, they were not controverted by counsel for appellees, who made no attempt to deny or palliate the criminal conduct of Davis, who, upon the collapse of the New England Shoe Company, fled to Canada, presumably to avoid criminal prosecution. The purchaser who by fraud purchases goods has no protection in law against the party defrauded. The seller, on discovering the fraud, may affirm the sale and sue for the price, or he may disaffirm it, and reclaim the goods, or he may proceed criminally. Donaldson v. Farwell, 93 U. S. 631; Parrish v. Thurston, 87 Ind. 437; Gray v. St. John, 35 Ill. 239; Bowen v. Schuler, 41 Ill. 193; Hanchett v. Kimbark, 118 Ill. 121, 7 N. E. Rep. 491; Sargent v. Sturm, 23 Cal. 359; Titcomb v. Wood, 38 Me. 563; Hill v. Freeman, 3 Cush. 259; Nichols v. Michael, 23 N. Y. 266. A person obtaining goods by fraudulent pretenses is guilty of a tortious taking, and no demand for possession is necessary to enable the person defrauded to maintain replevin for them, unless they have passed to a third person, holding them bona fide for a valuable consideration, without notice. Bussing v. Rice, 2 Cush. 48; Thurston v. Blanchard, 22 Pick. 18; Butters v. Haughwout, 42 Ill. 18; Bruner v. Dyball, Id. 34; Ryan v. Brant, Id. 78. When no questions are asked, no false pretenses and no artifices are resorted to, mere silence is not fraud; but concealment of insolvency, with no reasonable expectation of paying, renders a sale fraudulent, and the seller is entitled to possession as against the purchaser or his voluntary assignee. Davis v. Stewart, 8 Fed. Rep. 803.

The Xew England Shoe Company, and Davis, its president, according to the undisputed evidence, obtained possession tortiously and wrongfully of the goods which subsequently came into the possession of the appellees. Unless the goods came into their possession bona fide, for a valuable consideration, without notice, their possession was wrongful, and they must return the goods, or account for their reasonable value. The appellees assert that they were bona, fide purchasers for value, without notice, and that, consequently, they acquired an unimpeachable title to the goods. It: is not enough that the appellees (were purchasers for value. They must also be innocent purchasers. Trie law raises this presumption in their favor, and casts the burden on the appellant to show that the appellees were guilty of participation in the fraudulent acts of Davis. The law justly imposes on every person the duty of (Exercising- ordinary care and prudence in his business transactions. It imputes to him notice or knowledge of every fact which an ordinarily cautious and prudent man, in the same situation, would naturally have observed. He may not, except at; his peril, purposely or negligently omit to give heed to what is audible and visible bv the exercise of ordinary care. He must not fail i.o make such inquiries as an ordinarily cautious and prudent man, under the same circumstances, would have made. It follows that the appellees will be affected by the fraudulent, acts and intent of Davis, if they had knowledge of them, or of the existence of such facts and circumstances as were naturally and justly calculated to awaken suspicion in the mind of an honest; man of ordinary care and prudence, and lead him to inquiry. The law is well stated by Chancellor Zabriskie:

“Any salo in which the object of the debtor that prompts and determines him to make it is to hinder, delay, or in any way put off his creditors, is void if made to any one having- knowledge of his intent; and this knowledge need not he by actual positive information or notice, but will be inferred from the knowledge, by the purchaser, of facts and circumstances sufficient to raise such suspicions as to put him on hiquiry.”

Atwood v. Impson, 20 N. J. Eq. 156; Clements v. Moore, 6 Wall. 299; Bardes v. Gibson, 17 Fed. Rep. 293; The Holladay Case, 27 Fed. Rep. 830; Ringer v. Jacobs, 11 Fed. Rep. 559; Walker v. Collins, 4 U. S. App. 406, 1 C. C. A. 642, 50 Fed. Rep. 737.

Gore, Heimerdinger, and Proufcy had long been intimately associated together, all occupying and doing business iu the same rooms, and with and through each, other. All their business was carried on through the hooks of George P. Gore & Co. They were well acquainted with O. O. Davis, who had been employed as a salesman and solicitor of consignments in the auction house of Gore & Co. for fully 12 years. They were acquainted with, the basement store of the New England Shoe Company, and its business as. conducted and managed by Davis. Mr. Prouty was the general manager of Gore & Co. and had almost exclusive control of the shoe business conducted by it. Heimerdinger and Prouty knew, as’ early as September, 1889, that Davis was storing large quantities' of goods in an out-of-the-way loft on State street. They say that Davis gave as a reason why he had bought and stored in the loft such large quantities of goods that he had arranged for a grade store on State street, which he had been disappointed in securing. He gave this as the reason for selling in the course of about 60 days before the failure, to or through Gore, Heimerdinger, and Prouty, at prices below their cost, goods which netted over $23,000. This story of a grade store was accepted without inquiry or question as a sufficient explanation for the purchase and storing in the loft of goods which certainly aggregated more than $50,000 in value. They knew of the purchase and storing of these goods. They knew that Davis was selling at Gore’s auction house, or to them personally, goods in large quantities, and at prices below the price for which he could obtain them from wholesale dealers. These sales were made to or through them in large quantities and in rapid succession, so that they knew, or ought to have known, that they were being made by a man anxious to convert the goods into money. Heimerdinger gave a false and fabricated account of his dealings with Davis. Prouty received letters from Davis under circumstances of suspicion, and failed to produce them, or to give any explanation of their contents.. There is no evidence that Davis arranged for or engaged a large storeroom on State street, and the story was evidently devised as a. part of his scheme of fraud. These facts and circumstances, with many others disclosed in the statement of the case, which were within the knowledge of these parties, were clearly sufficient to have put them on inquiry. The mind cannot well avoid the conclusion that 'if they did not know of the fraudulent purposes of Davis it was because they were willfully blind. Such facility of belief, it has been well said, invites fraud, and may justly be suspected of being its. accomplice.

When the complainant learned that a few shoes, which it had sold to the New England Shoe Company, had been sold by it through Gore & Oo.’s auction house to a shoe dealer in Indianapolis for less than their cost, it created such suspicion of fraud that an attorney was sent from Boston to Chicago to investigate the matter. This single fact was sufficient to create suspicion in the minds of the eastern creditors of Davis, and to cause inquiry. The numerous facts calculated to excite suspicion known to the appellees were disregarded on the pretense of Davis that , he had failed to secure the storeroom which he claimed to have - arranged for or engaged. When the facts and circumstances are such as to put a reasonably prudent and cautious man on inquiry, that obligation is not satisfied by an inquiry addressed to the chief actor in the suspected fraud, who has every motive for' concealing ihe truth, when better and more reliable sources of information are open to him. Whether these parties were guilty of actual participation in die fraudulent scheme of Da'vis or not, they certainly did deal in the goods obtained by fraud recklessly, and with guilty knowledge, or, which, is the same thing, with knowledge of such facts and circumstances as would have put prudent and cautious men on inquiry. Tleimerdinger and Lb-outy bought the goods of rue Yew England Shoe Company, through Davis, under such circumstances as to charge them with knowledge of the fraud of die shoe company and its predion!. On the plainest principles of equity they are chargeable with the value of the goods obtained by them from Davis and the shoe c; mpanv, and which they have converted to their own use. Aliliou ii they may have paid the full value, and the property may have pa :-vd beyond the reach of the process of the court, equity regards them as trustees, and charges them accordingly. The cardinal principle in all such cases is that the property obtained by fraud shall not be placed beyond the reach of the party defrauded, either by the fraudulent vendee or others chargeable with the knowledge of the fraud. To permit it would be to allow the party to profit by his fraud. Clements v. Moore, 6 Wall. 299.

(tore intermeddled with these goods by selling them for Davis as an .auctioneer, under such circumstances as to charge him with notice that they had been obtained by fraud, and the question remains whether such agent and auctioneer, who has sold goods and accounted for the proceeds to the guilty principal in the fraud, can be compelled to account to the parties defrauded for the goods or their value. That such auctioneer can be compelled to account to the extent of the commissions received and retained by him is settled by authority, arid is not open to debate. Can he be compelled to account to the parties defrauded for the proceeds of the goods after* he has accounted to the party from whom he received them? On principle, he ought to be held to account. Having sold the goods, and put them beyond the reach of the parties aggrieved, with notice of the fraud, he occupies no better situation than his bailor. He is chargeable on the principle that he knowingly aided and assisted the fraudulent vendee in depriving the vendor of the opportunity to reclaim Ms property. He thereby becomes a partieeps criminis with the fraudulent vendee, and is liable for the value of the goods equally with Mm.

It is firmly settled that if an agent delivers to his principal money or property after demand and notice that they belong to another, he will be compelled to account therefor to the true owner. Payment after* demand and notice is wrongful. Garland v. Bank, 9 Mass. 408; Jefts v. York, 10 Cush. 892, 12 Cush. 196. Having knowledge that the goods had been obtained by fraud, it became the duty of Gore not to meddle with them, or, having received them, to retain them or their proceeds for the benefit of tlie trae owners. Equity regards the fraudulent vendee as holding the goods in trust for the party defrauded. It has been held, where an agent aids a trustee in making or procuring the conversion or uuauthorized transfer of property held in trust, .that he is liable for the loss sustained by the cestui que trust, although he acted in the matters of the agency Without benefit or profit to himself. Cauibins v. Gaslight Co., 85 Tenn. 683, 4 S. W. Rep. 287. A fortiori, the agent who, with notice of the fraud, 'aids the fraudulent vendee in putting the property beyond the reach of its true owners, ought to be liable for the value of the property thus wrongfully diverted. Hoffman v. Carow, 20 Wend. 22; Id., 22 Wend. 285; Mechem, Ag. § 915. This case does not fall within the principle which ruled the ■ cases of Lamb v. Stone, 11 Pick. 527; Wellington v. Small, 3 Cush. 145; Bradley v. Fuller, 118 Mass. 239; Tasker v. Moss, 82 Ihd. 62, and Blair v. Smith, 114 Ind. 114, 15 N. E. Rep. 817. These cases hold that a creditor who has no interest in nor lien upon the property of his debtor cannot maintain an action at law against a person wrho has accepted a conveyance of the debtor’s property for the purpose of defrauding the creditor,, after such fraudulent grantee has conveyed the property to another at the instance and for the benefit of the debtor, without retaining any portion of it, or receiving any benefit from it In such cases it is held that the injury complained of is too remote, indefinite, and contingent. The property belonged to the debtor, and the creditor had no special property or interest in nor claim on the property fraudulently conveyed which could be injuriously affected or destroyed by the act of the fraudulent grantee. The most that the creditor can claim in such a case is that he intended to attach or levy on the property, and that the wrongful act of the fraudulent vendee has prevented him from executing his intention. This is an injury so remote, uncertain, and contingent, that it affords no ground for relief in an action at law. In the case at bar the property had been obtained by fraud from the creditors who are prosecuting this bill, and Gore, with knowledge of that fact, accepted it, and for his own profit sold the goods at auction, thus placing them beyond reclamation. Here the creditors in equity and good conscience remained the owners of the property, which he wrongfully sold and converted. While the bill is filed by a single creditor, the suit is brought and prosecuted for the benefit of all the creditors whose property was obtained by fraud; and in this property thus obtained the creditors have such special title and interest in common as to enable them to charge every person as trustee who has wrongfully dealt with it with knowledge of the fraud. Gore must, therefore, account for the goods received by him from Davis on account of the New England Shoe Company, which were sold by him as auctioneer.

Peabody invokes for his protection the claim that he received the warehouse receipts covering from $35,000 to $40,000 worth of goods in good faith to secure a loan of $20,000 made by Mm to the New England Shoe Company. The evidence shows that Peabody was a man of large and varied business experience. At different times in his life he had been eng’aged in dealings in bucket shops, in buying boots and shoes, in purchasing jewelry from failing concerns and at bankrupt sales, while at and for some time before the transactions in question he was a capitalist engaged in loaning money. He had been acquainted with Davis for 20 years. He had visited the basement store of tbe New England Shoe Company, and did not know of its having any other. He testifies that at one time he had loaned Davis $5,000, hut. previously, in an 'interview sought by him with the receiver of the New England Shoe Company, he denied that he had ever previously loaned Davis any money. He arrived in Chicago on the 10th day of December, 1889, and went immediately to his office, where he found Davis awaiting him. Davis had visited .Peabody's office a number of times witbin a few days preceding his return, and in conversation with his confidential clerk and bookkeeper had expressed anxiety to see Peabody. Davis at once told Peabody that he wanted to borrow some money, and he exhibited the nine warehouse receipts on which he asked a loan of $20,000. After a little conversation, Peabody asked his bookkeeper if he had that amount to spare, and, on being informed that, he had, he took the receipts, and with, his bookkeeper went to the warehouse, and inspected the cases of goods, and returned to his office. The goods were in the original cases, and the names and marks had all been recently scraped off from the cases. The evidence shows that, the scraping was fresh, and plainly apparent, and must have been observed by any one giving the least attention. In about five minutes after his return to his office, Davis called again, and the loan was at once agreed on. The bookkeeper wrote the check for $20,000, payable to the order of the shoe company. Davis took the check, and gave the shoe company’s note for 90 days at 7 per cent., pledging the receipts as security, and indorsing the note as guarantor. The note authorized its holder to sell the receipts before its maturity if, in his opinion, the securities had depreciated, and to apply the proceeds to the payment of the note and expenses. Peabody was present at the hank when Davis drew $20,000 in currency on the check. When Davis applied for the loan he told Peabody that he wanted it to avail himself of a large discount which some of his creditors had offered him if he would cash their claims. Peabody told the receiver that when Davis was asking for the loan he stated that some of his creditors were pressing him. Before making the loan he made no inquiry concerning the business or condition of the shoe company. T-Ie asked Davis how he happened to put his goods in a warehouse, and claims that Davis told him that he had engaged a, large store on State street, and had been disappointed in getting it, and so had put them in the warehouse. The foregoing facts, with others disclosed in the statement of the case, raise a strong suspicion against the bona lides of the transaction between Davis and Peabody. His statement to the receiver that he had never loaned Davis money on any former occasion is proved to have been untrue by his own admission under oath. A false statement. is always suggestive of fraud. He knew that Davis was being pressed by his creditors, and was urgent to secure money by pledging goods, which he knew were not paid for. The large quantity of goods, the place of their deposit, the defacing of all marks from the original packages, the pretense of Davis that he had engaged a large storeroom, which he had failed to secure, the transfer of nearly $40,000 worth of goods on such terms as precluded their ■ redemption, and the failure to make any inquiry are a few of the circumstances, calculated to create a strong doubt of the 'integrity of the transaction between Davis and Peabody. “They threw on Peabody the duty of making a full explanation, and the burden of proof to sustain it.” Clements v. Moore, 6 Wall. 299, 315; Piddock v. Brown, 3 P. Wms. 289; Wharton v. May, 5 Ves. 49; Zook v. Simonson, 72 Ind. 83. He has wholly failed to produce any evidence to relieve the transaction of the strong doubts of its integrity which surround it. The title of his pledgor was fraudulent and voidable, and, if Peabody is to be permitted to defeat the prior rights of the parties defrauded by Davis, it can only be done when on the whole evidence it is made to appear that he was a bona fide purchaser for value-. If, on the whole case, strong doubts of the integrity of the transaction exist, the prior rights of Davis’ creditors will prevail.

The evidence makes a casé which fully satisfies us that the proceeds arising from the sale of the goods pledged by Davis must, so far as necessary, be applied to the payment of the appellant’s claims. It is urged that the exigencies of business in great commercial centers justify less inquiry into the title and ownership of personal property offered for pledge or sale than would be exacted elsewhere. If good faith and honest dealings are to be maintained, if business is not to degenerate into robbery, the courts must with unflinching hand strip the mask of hypocrisy from the face of fraud, whether practiced in city or hamlet. The transactions of great commercial centers furnish abundant facilities for the practice of fraud, and courts ought to scrutinize them with a jealous solicitude to defeat the wrong, and to vindicate the right.

The bill fails to allege that the plaintiff had prosecuted its claim to judgment, and had issued an execution thereon, and had the same returned nulla bona. For this reason the bill of complaint is insufficient within the doctrine of Scott v. Neely, 140 U. S. 106, 11 Sup. Ct. Rep. 712, and Gates v. Allen, 149 U. S. 451, 13 Sup. Ct. Rep. 883, 977.

It is therefore adjudgéd that the decree herein be reversed, but at the costs of the appellant, and that the cause be remanded to the, court below, with leave to the complainant to amend its bill of complaint within 30 days after the judgment herein shall be certified to tire court below; and, if the complainant shall fail to amend its bill of complaint within the time herein allowed, the same shall be dismissed without prejudice.