Farrow v. Holland Trust Co.

Seldom is the court called upon to pass upon a record containing so many and conflicting questions of fact as are here necessary to be resolved in order to determine whai relief, if any, should be accorded to the plaintiff. Such a determination, involving an examination into the transactions of individuals, and their relations to a company projected for the purpose of fostering a large land scheme, renders it impossible to reduce the facts into anything like a brief statement. Starting out with fair prospects of success, the company met with misfortunes until such time as the money of the original projectors was exhausted, when resort was had to divers plans to raise funds, to secure which required the making of notes, the execution of mortgages, and the marketing of the same, in order to keep the enterprise alive ; and all of which, when catastrophe has come, are now the subject of inquiry and question, demanding, that they may be understood, the examination of a most voluminous record. Apart, moreover, from the loss of money involved, much more important is the loss of character, which, if the charges made could be sustained, would result to some of the individuals and corporations who became interested in the enterprise. ■ The importance of the case, therefore, not only in a monetary sense, but from the charges made of fraud, abuse of trust, arid conspiracy, could alone justify a tiresome recital of facts which we are compelled to enter upon.

The record shows that the plaintiff in 1886 was the owner of 4,076 acres of land in Ocean county, IST. J., the title to 2,566 of which had been transferred .in July, 1889, to John B. Larner, a lawyer, of Washington, D. 0. A portion of Larner’s land, containing 311 acres, known as “Barnegat Park,” had been surveyed and laid off in streets by plaintiff under Larner’s employ, and lots sold to various parties, when in August, 1889, the Barnegat Park Company was organized as a corporation under the laws of Hew Jersey, with a capital stock of $300,000. Larner became president, and plaintiff secretary and treasurer. In October, 1889, the portion of Barnegat Park remaining unsold, viz., 303 acres, was conveyed by Larner to the companjr, Larner taking in full payment of the land 2,996 shares of the stock (all of the stock of the company except four shares). By various deeds of conveyance the company also obtained title to about 6,000 acres of land, including that formerly owned by plaintiff, and, in addition, the company holds quitclaim deeds to certain other land which has never been surveyed, but which plaintiff states contains about 8,000 acres, the title to which has never been traced on the public records. Larner wishing to retire from the presidency, Marcus W. Conkling,- the plaintiff’s partner, came in as president, and Larner sold all his stock to plaintiff and Conkling, retaining only a small mortgage interest in the company, under an unrecorded mortgage dated March 14, 1890. Plaintiff was an officer in the United States army. Conkling, as president, and plaintiff, as secretary and treasurer, continued the business of the company, which was selling lots. An hotel called “The Pines ” was built and opened, and efforts were madq to sell lots to officers in the army and navy, the design being to make the park an army and navy resort. They

“I inclose the $1,125 note, previously referred to, for consideration. It has occurred to me that I might open a personal account with Holland Trust. I could then, from time to time, submit to you items which I personally receive on sales of lots for individuals; not company sales. For instance, I have to-day sold for Capt. Snyder lot No. 9, block 25, and on this sale I have a 4 mos. note, $500. I have this note, subject to a 10 per cent, off the face. On all this paper I can divide the discount, making it 5 per cent, off on such as you can conveniently handle. I have heretofore used this paper in Baltimore. If you think well of this idea, let me know, and I will send you some funds, and open account.”

April 22, 1890, Van Siclen replied:

“Lieut. B. S. Farrow—My dear Sir: In regard to your personal account, we can, from time to time, take some of those notes as indicated by you in yours of 21st. I understand that they will always be notes of officers of army and navy, and the first lien on property .sold, and for not over half the prices actually received from sales. So you can, if you please, open such account.”

April 26, 1890, Van Siclen wrote to plaintiff:

“Yours of 24th received, with three notes inclosed, which I have discounted, and placed $1,145.36 net amount to the credit of your personal account. I will occasionally take notes of civilans, where at least one-half cash has been paid upon the property; but you must always give me lot and block numbers, prices, and correct address of maker."

April 28, 1890, plaintiff replied:

“My dear Mr. Van Siclen : Yours of the 26th at hand this morning. I will, from time to time, send you some items of paper made by civilians for lots bought from me personally. I have a large quantity of this paper wliich will soon be within 4 mos. of maturity. I am not in need of the proceeds of these discounts’ therefore when I send you such items you need not trouble to submit them to the board, unless you think your board at such times would desire them. I will always reinvest the proceeds of such discounts in Park Company paper or in company lots, which

I can either hold until maturity or rediscount at a profit, when such paper comes within 4 mos. limit. These lots I can always sell for cash and good notes.”

And on April 30, 1890, plaintiff wrote to Van Siclen:

“ I inclose some notes for personal account. Take any you may desire, and either return me the balance or keep them until such time as you might desire them. * * * The inclosed Stanton notes are 1 civilian ’ notes. Stanton has just purchased the two cottages opposite the hotel, and is to-day moving into same for permanent residence.”

Besides notes given for genuine sales of land, what plaintiff calls “ accommodation notes,” with the accompánying vendor’s lien, w$re prepared, signed by employes of the Barnegat Company, laborers, and others of no responsibility. In July, 1890, one Orson Adams became connected with the company, and August 13th was made president, on the strength of representations that he would bring into the company $50,000; and Conkling became vice-president. Plaintiff claims that he never negotiated any of the so-called accommodation notes himself, but that he prepared the deeds accompanying some of them, and sent them to the New York office, where loans were obtained upon them. As to others, where he did not know the makers, and assumed they might be accommodation makers, he prepared the deeds, but did not deliver ' them; but that on every note of that character made to his knowledge he now holds the deed in trust. As against this he testifies that all such paper made to his knowledge was irltended for Holland Trust Company .only, because that was the only place where such paper was understood to be acceptable, and that for every accommodation note legitimately discounted by Van Siclen or Holland Trust Company he delivered with the note the vendor’s lien deed, but that they got some notes they did not legitimately discount, and for them they have not got the deeds. It would appear that'the difference between legitimately and not legitimately discounting a note lay in the fact whether plaintiff or some other person — as, for instance the president of the company—presented the note. As to particular accommodation notes called to his attention, he says they were prepared with his full knowledge and consent; that the amount was designated by defendant Van Siclen, who received a bonus of fifty dollars each on their discount.’ If plaintiff is to be' believed, Van Siclen was not as particular about the high grade of the notes he or his company discounted as his letters indicate, but he knew that many of the notes received from plaintiff were accommodation notes, the makers of which had merely gone through the form of buying lots, and had paid no money down, and were not expected to pay the notes attheir maturity; a bonus was attached to each note of that kind which Van Siclen was to get, and the more there were of them the better Van Siclen was suited. Though most of the so-called accommodation notes representing fictitious sales of land were marketed subsequent to the connection of Adams with the Barnegat Company in July, 1890, it is a significant fact, as shown by plaintiff’s own evidence, that

These statements of plaintiff and Conkling are flatly contradicted by the terms of an agreement dated December 18, 1890, to which they were parties, and which bears their signature, which recites that the $35,000 mortgage “ is the first mortgage on the property of the company, and the same is duly recorded ; ” and the first stipulation of said agreement is that the $500,000 trust, mortgage shall be placed of record. The inconsistency between their statements as to the order in which the mortgages were to-be recorded and this evidence furnished by the written agreement is nowhere satisfactorily explained, thus leaving the record in that condition that the conclusion is forced upon us that both Farrow and Conkling knew or were'in a position to have known before they made the statements that their evidence was false. Conlding also testifies that after the bonding plan was agreed upon, Murphy and Simmons suggested that, as it was necessary to raise money immediately, and as the Holland Trust Company was one of the largest creditors of the park company, in order to-protect itself it should be induced or forced to advance $35,000 on mortgage, to pay off the pressing creditors, and avoid disasters ~ that he and plaintiff agreed to it; that Van Siclen refused to advance the $35,000, or to allow his company to do so, but an arrangement was made for the trust company to advance $10,000, which was done, and a chattel mortgage given on the hotel for $10,000 ; that a few days later, not satisfied with $10,000, these-men forced the trust company to make it $35,000, and the mortgage was executed. Van Siclen’s testimony on this subject is that the Holland Trust Company first advanced $10,000, and afterwards the amount Was increased to $35,000, to pay off lienorson the hotel; that the Barnegat Park Company’s note was taken for $35,000, and a mortgage on the real estate furnished for $35,-000 as security for the note, and a chattel mortgage for $10,000 on the furniture also given as joint collateral. In connection with this $35,000 mortgage, a statement of the condition of the com

“We would add that the hotel property and furniture is insured for $70,000, the policy for which will also be handed over to you, it being resolved by the company to make you its trustee in the matter of a mortgage bond issue of $500,000 to be arranged for. It is further understood that any moneys advanced by you are to be paid, if not sooner, from the first sales of the bonds which are to accompany said mortgage as per previous arrangements.”

From this documentary evidence it would appear that the $500,000 trust mortgage was a transaction arranged subsequent to the, $35,000, contradicting Gonkling’s oral evidence on this point, and confirming defendant’s contention that the $35,000 was understood to be a prior lien, created to meet immediate necessities, and to be paid off out of the proceeds of the first sales of bonds under the $500,000 trust mortgage. The trust mortgage for $500,000 was,drawn, dated November 1, 1890, with the Holland Trust Company as trustee, with the object of issuing bonds thereunder, from the proceeds of sale of which the creditors of the company should be paid, and the company set on a sound footing. Before the trust mortgage was recorded, however, and on December 20, 1890, a directors’ meeting of the Barnegat Park Company was held, at which were present Adams, Farrow and Coniding. By virtue of a resolution passed at said meeting, mortgages were prepared by Murphy, as attorney for the Barnegat Company—one to plaintiff for $32,000; one to Kaufman Simon for $Í5,000; one to New York Improvement Company for $22,000; and a trust, mortgage, with Conkling as trustee, in favor of certain creditors, to wit:

Ladenburg, Thallman & Co..... „................. $21,000

Southern National Bank.......................... 8,000

Holland Trust Compay........................... 40,000

E. S. Farrow.................................... 45,000

Aaron Raymond................................. 6,000

People’s Trust Company.......................... 6,000

R, I. Harrison................................... 4,000

Edward Wetmore................................ 5,000

E. W. Lancaster................................. 1,000

G. W. Van Sielen................................ 5,000

Lord & Taylor................................... 6,000

St. Rep., Yol. LYH. 22

On December 30,1890, Adams, by request, resigned as president of the company. The plaintiff at the same time resigned as treasurer, retaining the office of secretary. E. B. Eoosevelt, Jr., succeeded as president, and defendant Schramme as treasurer; and on January 7,1891, Eoosevelt, Jr., Farrow, Conkling, and James L„ Phelps—the latter a clerk in plaintiff’s employ—were elected directors. Simon, in accordance with the agreement of December 18th, executed a satisfaction piece of his mortgage, and delivered it to Van Siclen as trustee, receiving from the trustee a receipt therefor, with the condition inserted in the receipt that if the mortgage was not paid within a reasonable time the satisfaction piece should be returned to him. Simon testifies that when his mortgage was given to him he was told there were three or four other mortgages, and that on his suggestion it was agreed between himself, Conkling, Farrow, Murphy, and Simmons, that 1ns (Simon’s) mortgage should be a second lien and the other concurrent mortgages third,—the $35,000 being a first lien; that then, his mortgage being second, he proposed to the Holland Trust Company either to buy the $35,000 mortgage from them, or that they buy his $15,000 mortgage, and that several weeks after the tender they agreed to take his mortgage, and paid him $15,000 for it. For some reason it was objectionable to plaintiff that Simon should buy the $35,000 mortgage, for on January 1, 1891, he wrote to Van Siclen as follows :

“Look out for Simon. He wants to pay you the$35,000. He now has the money on hand to do it, and he will do his best to get control.”

January 14, 1891, plaintiff wrote to Van Siclen as follows:

“ If Messrs. Eoosevelt and Schramme will contribute $12,500 each at once to the treasury of B. P. Co., give them each $25,-000 of the first mortgage bonds of the company; also $15,000 Simon bonds. A resolution to this effect will at once be passed. As soon as this $25,000 is paid in the B. P. Co., pay off the Simon mortgage, $15,000, pay E. D. Murphy $5,000, and expend the remaining $5,000 for pressing company bills. When the

Simon $15,000 is paid off, return to Farrow & Conkling the $11,700 belonging to Farrow & Conkling, now held by Simon as. collateral. Also recover for B. P. Co. $2,600 worth of diamonds likewise held by Mr. Simon as collateral.”

Plaintiff says he was coerced by Van Siclen to write this letter ; that he wrote it Van Siclen’s dictation, in the office of the Holland Trust Company. The $25,000 was advanced by the Holland Trust Company and Ladenburg, Thallman & Co., and the money expended as indicated in the letter. January 7, 1891, the Barnegat Park Company adopted at a directors’ meeting a resolution that, in order to fulfill a former agreement, this company at once pay to Mr. George W. Van Siclen $25,000 in first mortgage bonds of the Barnegat Park Cofnpany and $25,000 in cash ; and as at the present time there is not sufficient cash in the treasury to pay said amount, to give him $50,000 in first mortgage bonds of the Barnegat Park Company as collateral to secure s&id payment, of $25,000 in cash. By agreement, dated January 17, 1891, the agreement of the 18th of December, 1890, wherein Van Siclen, as trustee, was recited as the party of the second part, and certain creditors as party of the third part, was rescinded by the creditors in said agreement named, and January 20, 1891, at a directors’ meeting of the Barnegat Park Company, a resolution offered by Conkling, seconded by the plaintiff, -was unanimously passed that said agreement, so far as Barnegat Park Company was. concerned, was rescinded and annulled, Mr. Van Siclen assented thereto. In and by virtue of the same resolution the Barnegat Park Company was empowered to execute an agreement wherein the company was named as the party of the first part, and Van Siclen and Schramme as the party of the second part, and said agreement was accordingly entered into, by which' it was agreed by said company, in order, if possible, to avoid the necessity for foreclosure of the existing mortgages against the company, that there should be created two descriptions of bonds, to wit, (1) first mortgage bonds to the amount of $800,000, and (2) income bonds to the amount of $200,000 for both of which classes of bonds the Holland Trust Company was to be trustee, said bonds to be sold at a price thereafter to be agreed upon, and five per cent, to be paid or allowed Van Siclen and Schramme therefor; and Van Siclen and Schramme agreed to advance the following sums on the following terms and conditions: (1) $15,000 to procure an assignment of the Simon mortgage, together with all his collat.e2'al thet’efor; (2) $5,000 to be paid to Murphy, and to procure an assignment of his claim therefor, together with all collateral security held by him ; (3) $5,000 to be advanced to the company for the purpose of carrying on its future business, out of which sum $1,000, said to have been heretofore advanced by Van Siclen for account of the company, was to be paid him. It was further agreed that $50,000 of the first mortgage bonds shall be forthwith delive2'ed "by the Holland Trust Company to Van Siclen arid Schramme in compensation for their services in the matter of this agreement; that $5,000 of first mortgage bonds be delivered to Van Siclen in

Although the parties differ as to whether what are described as the concurrent mortgages were to be placed on record prior to the $500,000 mortgage or subsequent thereto, it is evident that, with knowledge of all the facts as to the actual order in which they were recorded, this agreement of January 17, 1891, was entered into. An attempt to carry out its terms was made, and the failure resulting hastened the collapse of the company. Each one was left to protect his particular interests in the best way that he could, and the first step seemingly taken was that of January 23, 1891, in a suit brought by Schramme and Van Siclen to foreclose the $32,000 mortgage, which, according to its terms, had been assigned by plaintiff as collateral security for his indebtedness. Subsequently, creditors meetings were held, a report of the condition of the company presented, and an effort made to induce the creditors and those holding mechanics’ liens on the property to extend the time of payment, and to take notes secured by first mortgage bonds as collateral. This effort was likewise abortive, and again the affairs of the company were thrown into inextricable confusion. The causes of this last failure to effect a settlement with creditors are said to have been, not only the existence of prior purchase-money mortgages amounting to about $6,000, which antedated the first mortgage of $35,000 given to the Holland Trust Company, but the inability of the company to prove title to more than about 13,000 acres of land, and the unwillingness of those holding mechanics’ liens to cancel the same. It is unnecessary forus to determine the cause, the result being that a settlement was not effected; and then followed a series of litigations by the Holland Trust Company and by Van Siclen and Schramme against the Barnegat Company and the plaintiff, as well as this action by the plaintiff, which was brought in July, 1891, directed principally against the Holland Trust Company, Schramme, Murphy and Van Siclen, charging a conspiracy on their part to wreck the Barnegat Company, and defraud it, and to deprive the plaintiff and other creditors of their property by trick and device, by resorting to various means to obtain the property of the Barnegat Company free and clear of all mortgages and judgments. The learned trial judge concluded that these charges were in the main sustained ; that the various transactions in which the defendants took part were in furtherance of a scheme or conspiracy to defraud the plaintiff-and the other creditors of the Barnegat Company; and

In all this the learned judge seems to have lost sight of the very prominent part which the plaintiff took in every transaction excepting the actual placing by Adams and Simmons of some of the spurious notes with the trust company, proved to have been fraudulent. He it was who cunningly laid the plan by which, working upon the cupidity of Yan Siclen, he induced him to forget the duty which he owed to the trust company, of which he was an officer, and to advance its moneys upon false securities. The result is that the trust company now holds worthless notes to the amount of about $46,000, which it purchased from the park company, some with and some without plaintiff’s indorsement. The makers of such notes were either myths or totally irresponsible persons; and these were secured by pretended vendor’s liens, which were fictitious and sham. In this way, the trust company, by Farrow and those who can be justly regarded as his accomplices, has been swindled out of that amout of money.

In this condition of the record, we are unable to conceive how any relief could be accorded to one standing in the position of this plaintiff, coming, as he has done, into a court of equity, his hands soiled with his fraudulent acts resulting in injury to third parties. It has ever been a salutory principle of courts of equity that suitors must come therein with clean hands, and the application of this principle to the facts here appearing should-have impelled the trial. judge to turn the plaintiff out of court. As shown, from the very formation of the Barnegat Company down to the time that it passed into the receiver’s hands, its affairs were dishonestly conducted by Farrow and Conklin and those whom they associated with theln in the control of the company; and that this is true is shown by the plaintiff’s own answers to the questions put to him with respect to the very beginning of the company’s operations, wherein he admits that the sales and notes given even in those early days were not always bona fide. When it was impossible to sell lots, and there were no notes to dispose of, this in no way prevented those in charge of the affairs of the company from getting clerks and laborers in their employ and men working at the lifesaving stations to sign such notes, which were sold under representations that they were the notes of army officers, given in part payment for lots purchased. These, to the amount of $100,000 at least, were sold, and banks and financial houses as well as the Holland Trust Company were thus victimized. It is true that plaintiff insists that it was Simmons and Adams who put such paper upon the market, and he claims that it was stolen from the office of the Barnegat Park Company; but be does not deny that he knew of the existence of such paper, and no explanation is

If, however, we were to assume that the plaintiff ought not to be turned out of court, but had the right to present his grievances and those of the company to a court of equity, there are many other serious objections to the judgment entered. The complaint sets forth two separate and distinct causes of action—one for grievances of the plaintiff individually, and another for injuries inflicted upon the Barnegat Company. The judgment decrees relief upon both causes of action. The cause of action in favor of plaintiff was predicated upon the theory that by false representations he was induced to assign without consideration two mortgages, together with certain certificates of stock of and claims against the Barnegat Company, to certain of the defendants. One of these mortgages, namely, the one for $32,000, which it is stated was assigned as collateral security only, it is alleged in the complaint has been since assigned to another by the plaintiff, subject to the said assignment as collateral. With respect to this mortgage, we fail to see by what right the plaintiff can bring an action and obtain a judgment directing that the same should be reassigned to him. So as to the second cause of action, with respect to injuries inflicted upon the Barnegat Park Company, in the absence of proper allegations excusing the failure of the Barnegat Company to bring a suit on its own behalf, the plaintiff is in no position to sue or obtain a judgment on behalf of such company. The complaint and the proof are entirely barren of any facts showing that the company has been requested to bring such a suit, or that the situation of the company with respect to its control is such that the plaintiff, as a stockholder, is entitled to maintain such an action on its behalf. It will be noticed, moreover, that the plaintiff does not claim to sue on behalf of the company, and yet be is permitted on its behalf to have judgment nullifying and declaring void its corporate acts.

The sweeping character of the judgment is further evidenced when we consider its bearing upon the Simon mortgage for $15,-000, which was transferred^to the Holland Trust Company. The'

It will be seen that we are also unable to agree with the judge below in his opinion that the record fails to disclose any action or representation of the plaintiff calling for condemnation by the •court. Far from regarding him blameless, we think his plan for raising the money necessary for “the development of his ideas” by procuring the discount of worthless notes pretended to be given in part payment for lots was a canker which so gnawed the roots •of the enterprise as that disaster was inevitable, and might have been reckoned upon with the inception of such methods. In addition, there are many errors in the findings, some of which only it will be necessary to point out. Although the evidence was uncontradicted, the court refused to find that there were prior mortgages covering parcels of the land, which were created prior to the ownership of the Barnegat Company. And in the finding that the notes on which the Barnegat Park Company obtained money from the trust company are usurious the error is apparent when we recall the rule of law that, no mdtter what the discount, usury cannot grow out of buying paper from a corporation, even where the paper is made for the corporation’s accommodation.

It is unnecessary for us to discuss the numerous findings and conclusions, because we regard one salient feature, which pervades the whole record, and which has already been alluded to, as fatal to the interlocutory judgment. This consists of the effort to try two separate and distinct causes of action, one in favor of plaintiff and one in favor of the Barnegat Park Company, in a suit brought by this plaintiff; and in such an action not only to accord to the plaintiff such relief, ás he might upon the evidence have been entitled to, but also, in effect, to destroy all the corporate acts of the corporation, and adjudicate as to the amounts and priorities of claims against it which by the interlocutory judgment are directed to be tried before a referee. The Barnegat Park Company is a Hew Jersey corporation, now in the hands of a receiver appointed by the court of chancery of that state. It is not claimed that it has any assets in this state, its property consisting exclusively of lands in Hew Jersey. Yet by the judgment, in the absence of the receiver us a party to the action, and at the suit of a plaintiff who has no

Follett, J., concurs.

I concur in the conclusion reached by Mr. Justice O’Brien. It is difficult to see upon what basis the learned court below arrived at the judgment which was entered in this action. It appears from the evidence in this action, established beyond contradiction, that very early in the history of this enterprise the plaintiff began the manufacture of fraudulent securities, because, as far back as March, 1890, and shortly before the plaintiff opened his individual account with the defendant, the Holland Trust Company, we find that fictitious notes were issued, stating over the plaintiff’s own signature that a large part of the purchase price of certain lots had been paid by the maker of the note, and who, the plaintiff testified, had simply gone through the ceremony of buying the lots without paying a cent. It further appears that the plaintiff made and negotiated (although he denies the latter fact, yet it is proved beyond peradventure) notes made by the employes and laborers of the Barnegat Company, which notes were represented to be the notes of purchasers of lots who had paid part of the purchase price, and that the company held vendors’ deeds as security for the notes. This is the class of securities which the cupidity of the Holland Trust Company and its secretary induced them to take without making the slightest investigation in regard to their validity; the whole course of business being of a character which savored rather of the methods of reckless speculation than of those which are supposed to belong to a so-called trust company. We find further, upon an examination of this record, that the testimony of the plaintiff, standing by itself, is totally unworthy of credit, because in so many instances is he contradicted by the plaintiff and the Barnegat Company being robbed through a conspiracy, it would seem that the Holland Trust Company and others were swindled to a large extent by means of these fraudulent securities. And when they attempt to recover by some means the money which they had advanced through the fraudulent and false representations of this plaintiff, it is held in this action to have been part of a conspiracy to rob the Barnegat Company, and to deprive the plaintiff and their creditors of their property by trick and device. It cannot be doubted that the Holland Trust Company had the right to attempt to enforce the securities given it for a portion of the money which it advanced, since which money had been advanced in the vain hope of that which had al*

Follett, J., concurs.__