Page images
PDF
EPUB

should, that each package of gum is the fair commercial equivalent of 5 cents; but there is the prospect of obtaining very greatly disproportionate gains. The indicator may show a package of gum when the player deposits his nickel, and this he will get when he works the lever, but at the same time the indicator may present for the next play either one of the numbers ... . . representing checks of the value of 5 cents each. If, for example, the number shown is 20, the player, by depositing 5 cents, will obtain twenty checks worth $1. So, for the other numbers. The lure is the opportunity of winning from 10 to 100 cents by the deposit and expenditure of 5 cents. There must be at least one play before any of the numbers mentioned is shown on the indicator, and there may be many, and it is not known which number will appear, nor at what time, nor after how many plays. In case the checks are shown on the indicator, the owner of the machine stands to lose on that play the difference between 5 cents and the denomination of the check which the machine may show; that is, a loss of from 5 cents to 95 cents. We may assume that the dealer makes some profit on each package of gum, and that the profits thereon, and the profits on the goods to be sold in exchange for the checks, will show an ultimate profit for him on all the contents of the machine, and this, whether the contents be exhausted by one player, or by many successive players. So there will be no ultimate loss to him. However, there is always a chance that any single player, by the expenditure of 10 cents, through making two plays of 5 cents each, may obtain not only a package of gum worth 5 cents, but checks worth from 10 to 100 cents, and so in proportion for many plays, and a corresponding loss to the owner of the machine on such individual deals. The player is induced to continue by the fact that he is getting 5 cents' worth of gum for each play, with always the chance just ahead that the next presentation of the indicator will give him the opportunity of making a profit of from 100 to many

times that per cent. We think this shows the machine is a gambling device. It is not essential that there should be the chance of loss to the players, as well as of extraordinary or greatly disproportionate gain."

Byk v. Enright (1924) 203 N. Y. Supp. 296 (holding such a machine not to be a gambling device), was reversed in (1924) 209 App. Div. 823, 204 N. Y. Supp. 897, on the law, without opinion, upon the authority of Green v. Enright (1924) 208 App. Div. 819, 203 N. Y. Supp. 932, which was decided without opinion on the authority of People ex rel. Verchereau v. Jenkins (1912) 153 App. Div. 512, 138 N. Y. Supp. 449.

-

And in Rex v. Stubbs (1915) 9 Alberta L. R. 26, 24 Can. Crim. Cas. 303, 25 D. L. R. 424, reversing (1915) Alberta L. R. -, 24 Can. Crim. Cas. 60, 21 D. L. R. 541, the court said: "These machines, however, differ from all the slot machines and devices which have been held by the courts to be games of chance, in one important particular, viz., that they plainly inform the persons proposing to operate them, before depositing their nickels or trade checks, what the result of the operation will be; that is, whether they will receive a package of chewing gum alone, or, in addition thereto, a certain number of trade checks, that information being given by a notice appearing on the face of the machine. While I am

strongly inclined to the view that the machines in question are not designed or used merely for the purpose of vending chewing gum, and that they are also intended as an incentive and a lure to induce persons to continue to operate them with hope that upon some future operation they may receive in return something more than a package of chewing gum, I am nevertheless of opinion that their operation. does not constitute a game of chance, but, on the contrary, is a game the result of which is an absolute certainty. Each operation of the machine is, in itself, a game, and the fact that the inducement is held out that in some future game the operator may receive something more than an

adequate return for his money does not introduce the element of chance into any game which may be played upon the machine, and therefore, while it may be open to question whether the machines adhere to the spirit of the law, they do not violate its letter, and, this being a criminal charge, the latter question is the only one to be considered."

Nor is the machine rendered unobjectionable because there is displayed upon it a notice to the effect that the proprietor may stop any player at any time. Rex v. Gerasse (1916) Manitoba L. R., 26 Can. Crim. Cas. 246, 29 D. L. R. 527. It was there said: "I am much inclined to believe that this notice is a mere subterfuge, never intended to be acted upon, but framed to keep within the letter of the law, while violating its spirit. The fact that the machine is there to be played, whether the proprietor is present or not, would indicate that such was its purpose. But, assuming that the notice was bona fide placed there with the intention of being acted upon, it does not eliminate the element of chance, but rather increases the hazard of the player. Without the notice he would be entitled to play the machine, if he chose, until he won 100 cents' worth of trade checks. Now, by the terms of the notice, he is exposed to the hazard of the proprietor stepping in and stopping his further play, just as the indicator showed that by another play he could make a profit, thus preventing him from getting what, by his previous play, he had earned. This by no means takes away the element of chance, but adds, as another element, the chance of the proprietor interfering."

And see the reported case (STATE v. CERTAIN GAMBLING INSTRUMENTS, ante, 71).

In a number of cases, the machine

was so constructed that, upon the deposit of one of the metal trade checks which it had dispensed with the merchandise, it would operate in the same manner, with the exception that it would not deliver any merchandise, as when a coin was deposited. This feature, however, while condemned by nearly all the courts, has apparently not been considered as of controlling importance, the vice of the machine. resulting primarily from its operation with the coin. Brockett v. State

(1924) Ga. App. - 125 S. E. 513; Ferguson v. State (1912) 178 Ind. 568, 42 L.R.A. (N.S.) 720, 99 N. E. 806, Ann. Cas. 1915C, 172; Moberly v. Deskin (1913) 169 Mo. App. 672, 155 S. W. 842; Zaft v. Milton (1924) - N. J. Eq.

[ocr errors]

126 Atl. 29; People v. Nahmias (1913) 146 N. Y. Supp. 856, 29 N. Y. Crim. Rep. 310; Griste v. Burch (1919) 112 S. C. 369, 99 S. E. 703; Rex v. Gerasse (1916) Manitoba L. R. 26 Can. Crim. Cas. 246, 29 D. L. R. 527; Rex v. O'Meara (1915) 34 Ont. L. Rep. 467, 25 Can. Crim. Cas. 16, 25 D. L. R. 503; Bareham v. Rex (1916) Rap. Jud. Quebec 25 B. R. 354, 26 Can. Crim. Cas. 211, 31 D. L. R. 431.

However, in Rex v. Langlois (1914) 23 Can. Crim. Cas. 43, the court, in reply to the objection that the playing of the machine with checks created a hazard, said: "We must not forget that the checks have cost nothing to the player; he may do what he likes with them; buy tobacco, or keep them, or throw them away. (He) cannot lose more than the profits he has realized; when he has exhausted his checks, if he wishes to continue to play, he must start again with the

coins, for which he receives packs of gum." And the same machine was involved in Rex v Stubbs (1915) 9 Alberta L. R. 26, 24 Can. Crim. Cas. 303, 25 D. L. R. 424.

M. F. L.

(298 Fed. 223.)

T. S. STUART, Trustee, etc., of Farmers' Co-operative Elevator & Trading Company, Bankrupt, Appt.,

V.

HANS T. LARSON et al.

United States Circuit Court of Appeals, Eighth Circuit – April 7, 1924.

[blocks in formation]

1. Directors of an insolvent corporation cannot grant themselves preferences or advantages to secure payment of their claims over other creditors.

[See note on this question beginning on page 90.]

[ocr errors][merged small][merged small][merged small][merged small]

APPEAL by complainant from an order and decree of the District Court of the United States for the District of North Dakota (Miller, J.) dismissing the complaint in an action brought to annul a certain note and mortgage held by defendants. Reversed.

The facts are stated in the opinion of the court. Argued before Stone and Kenyon, dustrial Exposition, 79 Minn. 488, 50 Circuit Judges, and Phillips, District Judge.

Messrs. George P. Homnes and C. E. Brace, for appellant:

The directors are personally and individually liable, both to the corporation and to its creditors, for excess indebtedness.

J. L. Mott Iron Works v. Arnold, 35 R. I. 456, L.R.A.1917D, 1029, 87 Atl. 17. Where directors, in violation of their duty and in betrayal of their trust, secure their own debts by mortgage, to the injury of the stockholders and creditors, the mortgage is void.

Koehler v. Black River Falls Iron Co. 2 Black, 715, 17 L. ed. 339; Lippincott v. Shaw Carriage Co. 25 Fed. 577.

Directors of an insolvent corporation, who are creditors of the company, cannot secure to themselves any preference or advantage over the creditors in the payment of their claims.

Bonney v. Tilley, 109 Cal. 346, 42 Pac. 439; Janney v. Minneapolis In

L.R.A. 273, 82 N. W. 984; Taylor v. Mitchell, 80 Minn. 492, 83 N. W. 418; 2 Morawetz, Priv. Corp. 3787; Conover v. Hull, 45 Am. St. Rep. 833 and note (10 Wash. 673, 39 Pac. 166); Olney v. Conanicut Land Co. 16 R. I. 597, 5 L.R.A. 361, 27 Am. St. Rep. 767, 18 Atl. 181; Haymond v. Lincoln Lumber Co. 64 Wis. 639, 26 N. W. 184; Bradley v. Farwell, Holmes, 433, Fed. Cas. No. 1,779.

The transaction is one that a court of equity will examine very closely to see that it is wholly free from fraud and unfair dealing; and it is therefore incumbent upon defendants, the directors, both to plead and prove such facts as will remove all suspicion from the transaction.

Fletcher, Cyc. Corp. § 2326; Scott v. Farmers & M. Nat. Bank, 97 Tex. 31, 104 Am. St. Rep. 835, 75 S. W. 7; Haywood v. Lincoln Lumber Co. 64 Wis. 639, 26 N. W. 184; Curtin v. Salmon River Hydraulic Gold Min, & Ditch Co.

130 Cal. 345, 80 Am. St. Rep. 132, 62 Pac. 552; Minnesota Loan & T. Co. v. Peteler Car Co. 132 Minn. 277, 156 N. W. 255; Sweeny v. Wheeling Grape Sugar & Ref. Co. 30 W. Va. 443, 8 Am. St. Rep. 88, 4 S. E. 431; Chouteau v. Allen, 70 Mo. 290; Rickerson RollerMill Co. v. Farrell Foundry & Mach. Co. 23 C. C. A. 302, 43 U. S. App. 452, 75 Fed. 554.

Messrs. E. J. McIlraith, for appellees:

The trustee in bankruptcy is not the proper party in interest, and has no right under the Bankruptcy Act, or any other act, to bring an action against the directors, or to take advantage of the penalty provided.

Black, Bankr. § 149, p. 368; Woodman, Bankr. p. 110, § 82; Brandenburg, Bankr. 3d ed. p. 271; Collier, Bankr. 5th ed. 1905, p. 65.

Assuming that the trustee in bankruptcy has the proper authority and is the proper party in interest to take advantage of the penalty provided by statute, nevertheless, he must bring a direct action against the directors, as defendants, based upon the statute, and for the purpose of determining their liability, and to secure a money judgment. He cannot take advantage, collaterally, of the penalty provided therein in an action to declare a chattel mortgage null and void.

7 R. C. L. pp. 510 et seq.; Knower v. Haines, 31 Fed. 513; Cameron v. Seaman, 25 Am. Rep. 217, note; Savage v. Shaw, 12 Ann. Cas. 808, note; Whitney Arms Co. v. Barlow, 63 N. Y. 62, 20 Am. Rep. 504; Lockhart v. Van Alstyne, 31 Mich. 76, 18 Am. Rep. 156; Patterson v. Stewart (Patterson v. Minnesota Mfg. Co.) 41 Minn. 84, 4 L.R.A. 745, 16 Am. St. Rep. 671, 42 N. W. 926.

The statutes do not make either the contracts or attempted contracts by which this excess indebtedness was created either void, invalid, or unenforceable.

Underhill v. Santa Barbara Land, Bldg. & Improv. Co. 93 Cal. 300, 28 Pac. 1049; Sioux City Terminal R. & Warehouse Co. v. Trust Co. of N. A. 27 C. C. A. 73, 49 U. S. App. 523, 82 Fed. 125; Sells v. Rosedale Grocery & Commission Co. 72 Miss. 590, 17 So. 236.

Even assuming, which it was not, that the corporation was insolvent at the time this mortgage was given, nevertheless the plaintiff has not made out such a case as would warrant any

court in declaring the mortgage to be null and void.

Stevens v. Meyers, 14 N. D. 402, 104 N. W. 529.

The directors of a corporation have a legal and moral right to contract with the corporation, subject to the right of the corporation and its stockholders to disaffirm or ratify the contracts. They can loan the corporation money, guarantee its indebtedness, and take security therefor, and, upon default, enforce the security.

Minnesota Loan & T. Co. v. Peteler Car Co. 132 Minn. 277, 156 N. W. 256; 7 R. C. L. § 452, p. 47; Marsters v. Umpqua Oil Co. 49 Or. 374, 12 L.R.A. (N.S.) 825, 90 Pac. 151; Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. ed. 328, 3 Mor. Min. Rep. 688; 10 Cyc. 807.

Kenyon, Circuit Judge, delivered the opinion of the court:

This is an appeal from an order and decree of the district court of the United States for the district of North Dakota, western division, dismissing, for want of equity, the complaint of appellant, trustee in bankruptcy of the estate of the Farmers' Co-operative Elevator & Trading Company, asking the court to annul a certain note and mortgage held by appellees. On account of the paucity of evidence in the record the exact facts are not satisfactorily apparent. The Farmers' Co-operative Elevator & Trading Company is a corporation of North Dakota. It is alleged in the amended complaint that its authorized capital stock was $20,000; that by article 7 of the articles of incorporation "the highest amount of indebtedness to which this corporation shall at any time subject itself is the sum of $10,000." Prior to July 8, 1918, the directors had, for the corporation, incurred indebtedness to the Equity Co-operative Exchange in excess of $25,000, and had indorsed a note or notes to the Equity Co-operative Exchange representing this indebtedness. seems to be assumed in the briefs and arguments that the indebtedness of the corporation on July 8, 1918, exceeded the subscribed capital stock. On said date appellees,

It

(298 Fed. 223.)

who were the directors of the corporation, made and executed to C. E. Erickson, also a director, as trustee for them, the promissory note of the corporation in the sum of $25,000, and also a chattel mortgage to secure the same, upon all the property and assets of the corporation, the purpose being thus to save them harmless from any liability on the notes of the corporation to the Equity Co-operative Exchange which they had indorsed.

In May, 1921, a petition in voluntary bankruptcy was filed by the corporation, and it was adjudged a bankrupt on the 16th of May, 1921. Appellant, T. S. Stuart, was elected trustee, is now acting, and brings this action. Appellees filed the $25,000 note and mortgage as a claim against the bankrupt. The corporation continued in business after said mortgage was given and incurred indebtedness. At the time of the giving of the mortgage other indebtedness existed. The only witness examined was R. W. Frazier. He was one of the defendants, was secretary of the bankrupt corporation, and one of the parties who held the chattel mortgage given by the corporation for the benefit of the individual members of the board of directors. He testifies that on June 30th, a few days prior to the giving of the mortgage, the corporation was owing the Equity Co-operative Exchange $27,596. He further testifies that the value of the assets of the corporation at that time was $23,988.09, that at the time of giving the mortgage there were debts owing to the Houpt Coal Company in the sum of $508.90, and that there were other smaller debts. It is evident that the debts exceeded the assets by a very considerable amount, and we consider the proposition fairly established by the meager evidence that, at the time of giving the mortgage, the corporation was insolvent.

Section 4543, Compiled Laws of North Dakota 1913, provides that directors of corporations must not create debts beyond the subscribed

38 A.L.R.-6.

capital stock, and § 4544 makes them individually liable to the corporation and to the creditors thereof, in the event of its dissolution, to the full amount of the debts so contracted. The evidence discloses that the amount of subscribed capital stock was $7,400. So the case presents this situation: Directors of an insolvent corporation, having guaranteed the indebtedness of said corporation, a portion of which was illegal, and which they were probably personally liable for, gave to themselves a chattel mortgage on all the property and assets of the corporation to secure them as indorsers on the notes given by the corporation for such indebtedness, and claim the right in the bankruptcy proceeding to have their claim, by virtue of said mortgage, established in preference to other creditors. That this situation is novel, unusual, and peculiar is quite apparent. It raises some interesting questions of law and burden of proof.

The authorities are not altogether uniform as to the power of directors of insolvent corporations to protect themselves. Transactions between directors, made in the capacity of officers of the corporation, and themselves as individual entities, are closely scrutinized by the courts, and if there is any element of bad faith the courts are quick to remedy the situation. Courts have quite generally held that there is no sound reason why directors should not assist a corporation in need of assistance, by lending money or credit, and taking security therefor. Directors are not compelled to wait and see a corporation go down, where they are not able to secure credit elsewhere, and are willing, for the sake of the corporation, and to keep it a going concern, to advance money thereto and take security therefor. If the advances are personal ones, to be used by the corporation as an assistance in its emergency, and with the expectation that it will continue in business as a going concern and meet its obliga

« PreviousContinue »