KOHESAAT, Circuit Judge
(after stating the facts as above). [1] The question presented is, whether the placing of the bonds under consideration as collateral to the indebtedness of appellee existing prior to the issue thereof was obnoxious to the terms of section 1753 of the statutes of Wisconsin aforesaid. Concretely stated, did the issue and application of the bonds in suit as collateral security to existing indebtedness constitute the issue and application' of bonds for money or labor or property ?
“The object of the statute,” says Chief Justice Dyon in Pfister et al. v. Milwaukee Electric Railroad Company, 83 Wis. 86, 53 N. W. 27, “is to protect stockholders and bona fide creditors from the improvident issue of its bonds by the corporation.' * * * When a corporation puts its bonds beyond its control by hypothecating them as security for loans, or for any other purpose, or in any other manner, it issues them within the meaning of the statute.”^
To the same effect are Hinckley v. Pfister, 83 Wis. 64, 53 N. W. 21, and Memphis, etc., R. R. Co. v. Dow, 120 U. S. 298, 7 Sup. Ct. 482, 30 L. Ed. 595.
[930]*930Undoubtedly the plain intention of the statute is that corporation's shall get the benefit of at least 75 per cent, of the face value of the bonds so issued.
There are two ways in which property interests may be enhanced. One consists in the increase of the quantity, and the other in the increase of the quality. In either case the benefit arising from the application of the bond issue or the proceeds thereof inures to the owner. Had the bonds been applied in satisfaction of appellee’s indebtedness pro tanto, there would undoubtedly have been a compliance with the statute. Assuming that the bonds were pledged for 75 per cent, of their face value, what was the legal effect of the acceptance thereof as collateral? It is clear that the creditors took them with the obligation either to return same or to account for them at 75 cents on the dollar. If the creditor chooses to dispose of his bonds at a price less than 75 cents, the loss is his. Here the creditors are asking that they be charged with the bonds at the rate of 75 per cent, of their face. Thus it appears that the issuing corporation got 75 cents on the dollar for its bonds, and the spirit at least of the statute was complied with.
But, says appellee, quoting tlie language of Judge Ross at the circuit, “the money paid, labor done, or property actually received, must be paid, performed, or received, as the ease may be, on account of the issuance of the bonds; and any bonds issued contrary to this provision are of course illegally issued. The provision does not mean, and cannot be held to mean, that such bonds may be issued as collateral security for any sort of pre-existing indebtedness.”
The language of the statute does not, in our view of it, justify the conclusion arrived at in the case just quoted. If it be that an increase of the interest of the corporation in its assets is equivalent to the acquirement of property to the amount of such increase, and it be further true that the agreement of the creditors to accept the bonds at a valuation of 75 per cent, of their face upon their several claims results in the reduction of the unsecured indebtedness in a sum equal to 75 per cent, of the face of the bonds, why does not the placing of the bonds as collateral result in the enhancing, to that extent, of. the interest of the appellee» in its property just as advantageously as though appellee had acquired that much more property and incurred the bonded debt, as well as its unsecured indebtedness? How can it then be said that the issue of bonds was not made for money or labor or property at its true money value actually received? The statute is not in its terms technical. It does not attempt to say how the money, labor, or.property shall be procured. It is said in Nelson v. Hubbard, 96 Ala. 238, 11 South. 428, 17 L. R. A. 375.
“And we do not think that such pledge [to secure debts already contracted], if made without fraud, and solely for the bona fide purpose of satisfactorily securing the payment of corporate debts, can properly be regarded as effecting a fictitious increase of indebtedness, or as not issued for money, labor done, or money or property actually received.”
This case is cited approvingly by the United States Circuit Court of Appeals for the Fourth Circuit in Firth Co. v. S. C. Loan & Trust Co., 122 Fed. 575, 59 C. C. A. 73, and in Illinois Trust & Savings Bank v. Pacific Ry. Co., 117 Cal. 332, 49 Pac. 197.
[931]*931The United States Circuit Court of Appeals for the Second Circuit held, in Re Waterloo Organ Co., 134 Fed. 345, 346, 67 C. C. A. 327, where a bond issue was transferred to a bank to secure accrued and future indebtedness, that the transaction complied with the requirements of the New York statute which provides that:
“No corporation shall issue "either stock or bonds except for money, labor or property actually received for the use and lawful purposes of such corporation.”
The court says in Hoskins v. Seaside Ice Mfg. & Cold Storage Co., 68 N. J. Eq. 476, 59 Atl. 645:
“Nor does the fact that some of these bonds were taken as collateral security for an existing debt make the holder any less a bona fide holder for value than if he was a purchaser for cash.”
In Cook on Corporations (5th Ed.) § 763, it is said:
“A constitutional provision against the issue of bonds except for money, labor, or property, does not prevent the corporation from pledging its bonds.”
That a bond may be collateralized to secure an existing debt is the conclusion of the New York court in Duncomb v. N. Y., etc., R. R. Co., 84 N. Y. 190.
We are therefore of the opinion that in agreeing to take the bonds in question as collateral at the rate of not less than 75 per cent, of their face value upon their past-due claims, and in extending time of payment of the same, the present bondholders afforded to the corporation a valid property consideration equal to 75 per cent, of the face of the bonds, and are therefore satisfying the demands of the Wisconsin ■ statute above set out, provided, of course, the creditors had agreed to accept the bonds on that basis. As to this proposition, all the creditors, excepting perhaps American Appraisal Company, are in the same situation. Unless there was such an agreement, the collateralized bonds are invalid. Pfister et al. v. Milwaukee Electric R. R. Co., 83 Wis. 86, 53 N. W. 27; Hinckley v. Pfister, 83 Wis. 64, 53 N. W. 21; National Foundry & Pipe Works, Ltd., v. Oconto Water Co. et al. (C. C.) 52 Fed. 29; Mowry v. Farmers’ Loan & Trust Co., 76 Fed. 39, 22 C. C. A. 52; Haynes v. Kenosha Elec. Ry. Co., 139 Wis. 227, 119 N. W. 568, 121 N. W. 124.
In Re Waterloo Organ Co., supra, it was said:
“The record fails to show any written agreement fixing the value at which the bonds were issued. It is agreed that their par value was their fair market value.
Free access — add to your briefcase to read the full text and ask questions with AI
KOHESAAT, Circuit Judge
(after stating the facts as above). [1] The question presented is, whether the placing of the bonds under consideration as collateral to the indebtedness of appellee existing prior to the issue thereof was obnoxious to the terms of section 1753 of the statutes of Wisconsin aforesaid. Concretely stated, did the issue and application of the bonds in suit as collateral security to existing indebtedness constitute the issue and application' of bonds for money or labor or property ?
“The object of the statute,” says Chief Justice Dyon in Pfister et al. v. Milwaukee Electric Railroad Company, 83 Wis. 86, 53 N. W. 27, “is to protect stockholders and bona fide creditors from the improvident issue of its bonds by the corporation.' * * * When a corporation puts its bonds beyond its control by hypothecating them as security for loans, or for any other purpose, or in any other manner, it issues them within the meaning of the statute.”^
To the same effect are Hinckley v. Pfister, 83 Wis. 64, 53 N. W. 21, and Memphis, etc., R. R. Co. v. Dow, 120 U. S. 298, 7 Sup. Ct. 482, 30 L. Ed. 595.
[930]*930Undoubtedly the plain intention of the statute is that corporation's shall get the benefit of at least 75 per cent, of the face value of the bonds so issued.
There are two ways in which property interests may be enhanced. One consists in the increase of the quantity, and the other in the increase of the quality. In either case the benefit arising from the application of the bond issue or the proceeds thereof inures to the owner. Had the bonds been applied in satisfaction of appellee’s indebtedness pro tanto, there would undoubtedly have been a compliance with the statute. Assuming that the bonds were pledged for 75 per cent, of their face value, what was the legal effect of the acceptance thereof as collateral? It is clear that the creditors took them with the obligation either to return same or to account for them at 75 cents on the dollar. If the creditor chooses to dispose of his bonds at a price less than 75 cents, the loss is his. Here the creditors are asking that they be charged with the bonds at the rate of 75 per cent, of their face. Thus it appears that the issuing corporation got 75 cents on the dollar for its bonds, and the spirit at least of the statute was complied with.
But, says appellee, quoting tlie language of Judge Ross at the circuit, “the money paid, labor done, or property actually received, must be paid, performed, or received, as the ease may be, on account of the issuance of the bonds; and any bonds issued contrary to this provision are of course illegally issued. The provision does not mean, and cannot be held to mean, that such bonds may be issued as collateral security for any sort of pre-existing indebtedness.”
The language of the statute does not, in our view of it, justify the conclusion arrived at in the case just quoted. If it be that an increase of the interest of the corporation in its assets is equivalent to the acquirement of property to the amount of such increase, and it be further true that the agreement of the creditors to accept the bonds at a valuation of 75 per cent, of their face upon their several claims results in the reduction of the unsecured indebtedness in a sum equal to 75 per cent, of the face of the bonds, why does not the placing of the bonds as collateral result in the enhancing, to that extent, of. the interest of the appellee» in its property just as advantageously as though appellee had acquired that much more property and incurred the bonded debt, as well as its unsecured indebtedness? How can it then be said that the issue of bonds was not made for money or labor or property at its true money value actually received? The statute is not in its terms technical. It does not attempt to say how the money, labor, or.property shall be procured. It is said in Nelson v. Hubbard, 96 Ala. 238, 11 South. 428, 17 L. R. A. 375.
“And we do not think that such pledge [to secure debts already contracted], if made without fraud, and solely for the bona fide purpose of satisfactorily securing the payment of corporate debts, can properly be regarded as effecting a fictitious increase of indebtedness, or as not issued for money, labor done, or money or property actually received.”
This case is cited approvingly by the United States Circuit Court of Appeals for the Fourth Circuit in Firth Co. v. S. C. Loan & Trust Co., 122 Fed. 575, 59 C. C. A. 73, and in Illinois Trust & Savings Bank v. Pacific Ry. Co., 117 Cal. 332, 49 Pac. 197.
[931]*931The United States Circuit Court of Appeals for the Second Circuit held, in Re Waterloo Organ Co., 134 Fed. 345, 346, 67 C. C. A. 327, where a bond issue was transferred to a bank to secure accrued and future indebtedness, that the transaction complied with the requirements of the New York statute which provides that:
“No corporation shall issue "either stock or bonds except for money, labor or property actually received for the use and lawful purposes of such corporation.”
The court says in Hoskins v. Seaside Ice Mfg. & Cold Storage Co., 68 N. J. Eq. 476, 59 Atl. 645:
“Nor does the fact that some of these bonds were taken as collateral security for an existing debt make the holder any less a bona fide holder for value than if he was a purchaser for cash.”
In Cook on Corporations (5th Ed.) § 763, it is said:
“A constitutional provision against the issue of bonds except for money, labor, or property, does not prevent the corporation from pledging its bonds.”
That a bond may be collateralized to secure an existing debt is the conclusion of the New York court in Duncomb v. N. Y., etc., R. R. Co., 84 N. Y. 190.
We are therefore of the opinion that in agreeing to take the bonds in question as collateral at the rate of not less than 75 per cent, of their face value upon their past-due claims, and in extending time of payment of the same, the present bondholders afforded to the corporation a valid property consideration equal to 75 per cent, of the face of the bonds, and are therefore satisfying the demands of the Wisconsin ■ statute above set out, provided, of course, the creditors had agreed to accept the bonds on that basis. As to this proposition, all the creditors, excepting perhaps American Appraisal Company, are in the same situation. Unless there was such an agreement, the collateralized bonds are invalid. Pfister et al. v. Milwaukee Electric R. R. Co., 83 Wis. 86, 53 N. W. 27; Hinckley v. Pfister, 83 Wis. 64, 53 N. W. 21; National Foundry & Pipe Works, Ltd., v. Oconto Water Co. et al. (C. C.) 52 Fed. 29; Mowry v. Farmers’ Loan & Trust Co., 76 Fed. 39, 22 C. C. A. 52; Haynes v. Kenosha Elec. Ry. Co., 139 Wis. 227, 119 N. W. 568, 121 N. W. 124.
In Re Waterloo Organ Co., supra, it was said:
“The record fails to show any written agreement fixing the value at which the bonds were issued. It is agreed that their par value was their fair market value. In case of doubt as to the character of a transaction, or as to the proper construction and interpretation of a contract, and the determination of the respective rights and obligations of the parties thereto, such doubts may be resolved, and the intention or understanding of the parties thereto may be determined, by a consideration of their relations, the objects they respectively had in view, their declarations at the time of the transaction, and their acts then and thereafter done.”
In that case the court says further:
“In view of the amount then due, and the immediate increase by the bank of the company’s line of discount until the direct liability alone of the company exceeded the fair market value or par value of said bonds, we think it may fairly be inferred that the company was in need of further funds in order [932]*932to carry on its corporate business; that the bank was unwilling to grant further credits, except upon receipt of further security, and that the agreement between the parties was that said bonds should be issued at their fair market value, * * * and that they were actually issued for property in the nature of advances, loans, discounts, credits, etc., received for the use and lawful purposes of said corporation; and that said issue, therefore, was valid.”
The court found further evidence that the bonds were issued for par in the fact that the holders were, by the terms of the transfer instrument, authorized to sell- the bonds to others at par and account for the proceeds.
“Under this arrangement,” says the court, “the bank was bound to account for said bonds at their par value.”
[•2] So here, there was every reason why the creditors should obey the statute in taking the collateral. They were advised by the officers of the appellee corporation as to what the statute was, and that any attempt on their part to receive said bonds on a basis of less than 75 per cent, of their face would invalidate the issue. Appellee was in need of leniency and extension of its business liabilities. It was obliged to conciliate its creditors. The latter were placed in a somewhat better position as aghinst future indebtedness of the appellee than before, while appellee was in no sense injured by the arrangement. No one can read the testimony of Crary without being impressed with his anxiety to impress upon the creditors the necessity of complying with the statute in respect to the 75 per cent, clause thereof. In addition, in no case were bonds turned over as collateral on a basis of less than 75 per cent, of their value. These creditors are now in court asking that they be permitted to proceed to avail themselves of that arrangement. It is incredible that, under the circumstances hereof, there should have been any hesitancy in accepting the plan proposed by Crary and his co-officials. We have no trouble in deducing from the facts presented an agreement between the appellee, through its officers, attorneys, and representatives, and the several creditors, that the bonds should be accepted by the latter on the basis of 75 per cent, of their face value.
We are therefore of the opinion that the District Court erred in dismissing the cross-bill and in ordering that the mortgage be satisfied and the bonds secured thereby canceled. The decree of the District Court is reversed, with directions to grant the prayer of the cross-bill and make such further orders as may be necessary in the premises.