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ing the value of the receiver's services and in rejecting certain claims for alleged expenditures which are said to have been incident to the proper administration of the trust.

We observe, in the first place, that appellate courts are very much disinclined to interfere with the exercise, by courts of first instance, of such a discretionary power as is involved in fixing the compensation of receivers and their counsel. The lower court usually has better knowledge of what services such officers have actually rendered, and better means of determining how valuable such services have been to the trust, and what is a reasonable compensation therefor, than an appellate tribunal can have. For these reasons they are reluctant to disturb the action which has been taken in such matters, by a court of first instance, and will not do so unless there has been an abuse of discretion which has led to an allowance that is manifestly excessive or too small. Our observation leads us to believe that courts are not prone to make allowances for the services of receivers and counsel that are too small. If they err, it is usually in the other direction. Trustees v. Greenough, 105 U. S. 527, 536, 537, 26 L. Ed. 1157; Southern California Motor Road Co. v. Union Loan & Trust Co., 12 C. C. A. 215, 64 Fed. 450; Whitney v. City of New Orleans, 4 C. C. A. 521, 525, 54 Fed. 614; Trust Co. v. McClure, 24 C. C. A. 64, 78 Fed. 209. The largest disallowed item in the receiver's account was a part of his claim for compensation. He claimed compensation for his services as receiver at the rate of $1,500 per month, a sum aggregating $18,000 per year, and succeeded in finding one witness. who, upon the receiver's statement of the character of his own services, valued them at the rate of $25,000 per annum, for acting as receiver of a road which was only 60 miles in length, the volume of whose business was small, and which was in fact operated, during most of the period of the receivership, by a lessee, who, by the terms of his lease, was entitled to all the earnings of the property. The master disregarded the opinion of the latter witness, and allowed the receiver compensation for his services at the rate of $3,000 per year, but, on exceptions to his report, the lower court allowed him, in full for his services, which covered a period of about two years, the sum of $12,000. We feel confident that no injustice was done to the receiver by this allowance. It was as liberal as he had any reason to expect, unless he expected to receive largely more than he had earned. He was appointed receiver in November, 1896; the road was sold, and the sale confirmed to the purchaser, on December 22, 1898. From some time in February or March, 1897, until the road was sold and the purchaser took possession, it was operated by Eaton, as lessee, who had full charge of the same. The receiver was a broker, who resided in Boston, Mass. He does not appear to have been in Kansas, where this short piece of road was located, except on a few occasions, during the receivership, and his services as receiver seem to have been confined to issuing receiver's certificates and negotiating them when he could find a purchaser. The master, in his report, remarks "that the financiering done by Braman as receiver, in regard to the property of the St. Louis, Kansas & Southwestern Railroad Company, does not appear to have been of such a high character as to justify the estimate

placed thereon by Baldwin," who was his principal witness.
We fully
concur in that view. His services in financiering the property do not
appear to us to have been very important or very beneficial to the trust
committed to his charge. In view of all the circumstances, we are
satisfied that the allowance made by the lower court to the receiver
for his services was fully as large as it ought to have been, and that
he has no fair pretense for complaint on that score.

Another large item in the receiver's account which was disallowed is the sum of $2,952.54, for hotel bills which he claimed to have paid in New York while he was in that city, necessarily, on business connected with the receivership. The master disallowed various alleged expenditures, making up the above sum in the aggregate, on the ground that there was nothing in the testimony to show the reason or necessity of such expenditures on the part of the receiver. We entirely agree with that conclusion of the master, and are fully persuaded that these expenditures were not made solely for the benefit of the trust, and that, if they were so made, they were unnecessary expenditures, and ought to be disallowed for that reason. Operated, as this road was, by a lessee, and being a small local road in an impoverished condition, we can conceive of no reason why the receiver should be living, at the expense of the property, in the city of New York, 1,500 miles distant from the property. The necessity of conferring with other railroad companies and being near their principal offices strikes us as being a poor excuse for such outlays. Nor do we regard it as a sufficient reason for the allowance of these hotel bills, or a part of them, that the master did allow the receiver for office rent in the city of New York up to July 1, 1897, when the Eaton lease took effect, since we are of opinion that, in view of all the circumstances, this latter expense for office rent was entirely unnecessary; but, as no appeal was taken from the latter allowance, it will be permitted to stand. Certain it is that the receiver should not have rented this office in New York without the express sanction and approval of the court, which was not obtained. Vault Co. v. McNulta, 153 U. S. 554, 14 Sup. Ct. 915, 38 L. Ed. 819.

Complaint is made because the master and lower court disallowed the sum of $3,000 which the receiver claimed to have paid to an attorney in New York for legal services rendered to him as receiver. The facts attending this transaction appear to be that Roger Foster, an attorney residing in New York, presented to the receiver a bill in the sum of $6,000, which appears to have been a bill for legal services rendered at the instance of the receiver in various matters, some of which had no legitimate connection with the receivership. The receiver says that he paid this bill with the proceeds of discounted receiver's certificates, and charged $3,000 to the account of the St. Louis, Kansas & Southwestern Railroad Company. The master found that the services rendered in behalf of the latter company, by the attorney in question, were not worth to exceed $1,000, which sum was allowed, and in that view we concur. This transaction, as explained by the receiver, is on its face exceedingly sus

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picious, and we very much doubt whether he should have received any allowance on account of money paid to the attorney.

Exceptions are alleged to various other disallowances, but we do not deem it necessary to speak of them in detail, although they have each been carefully examined. We find no occasion to disturb the action of the lower court as respects any of them. As the master well remarks, "Braman never kept any books in the ordinary acceptation of the term;" that is, books showing in detail his receipts and expenditures on account of the trust, as it was his plain duty to have done. His accounts were kept mainly in memorandum books and bank book stubs, and his vouchers consist in part of receipts and in part of his own checks, drawn to cover items contained in his reports. Because of his failure to keep proper accounts, the master observes that, "It was with great difficulty that anything could be sifted out from it which would aid, * * * to any great extent, in arriving at a proper conclusion." The receiver seems to have acted upon the theory that he could manage the property committed to his charge as if it was his private property, and not a public trust, keeping no accounts other than such as he found it convenient to keep for his private information. For that reason, if the rule applicable to such cases was strictly applied, he could be denied any compensation for his services. The master, however, took a more liberal view, resolving, as he says, every question in favor of the receiver, when he was in doubt whether an item claimed as an expenditure should be allowed or disallowed. We have no doubt that the allowances made in behalf of the receiver, both for compensation and for expenditures, were fully as great as they ought to have been, and the order made below is accordingly affirmed.

(114 Fed. 22.)

CHICK et al. v. FULLER et al.

(Circuit Court of Appeals, Seventh Circuit. January 21, 1902.)

No. 682.

1. CORPORATIONS-LIABILITY OF DIRECTORS-NEGLIGENCE IN PERFORMANCE OF

DUTY.

Directors of an insolvent manufacturing corporation cannot be held individually liable to creditors either on the ground of negligence in the discharge of their duty or under the statute of Illinois because they declared and paid a dividend to stockholders when the company was insolvent, and permitted the creation of indebtedness exceeding its capital stock, where it is not satisfactorily shown that in the exercise of ordinary diligence they should have known that the company was insolvent when the dividend was declared, or that the indebtedness was being created; and the evidence is insufficient to charge them with notice of such facts where it shows that the president, who was the active manager of the business, deliberately wrecked the company, and defrauded both stockholders and creditors by embezzling the proceeds of goods sold and substituting fictitious notes, purporting to have been given by customers therefor, and by falsifying the books, which failed to show indebtedness for materials purchased on credit, but, on the contrary, showed the company to be solvent, and the business prosperous, and it does not appear that the directors had any reason to suspect the

president's integrity until after the dividend had been declared and the indebtedness created.1

2. SAME-VALIDITY OF MORTGAGE-PREFERENCE OF DIRECTORS AND STOCK

HOLDERS.

A mortgage given by a corporation to secure bonds issued to pay its indebtedness to two banks, in which directors and stockholders of the corporation were large stockholders, at a time when the corporation was in fact insolvent, and shortly before it suspended business, held, under the evidence, to have been given in good faith, while the corporation was a going concern, and in the expectation that its business would be continued, and to be valid, the directors and stockholders who were secured thereby being ignorant of the company's insolvent condition.

Grosscup, Circuit Judge, dissenting.

Appeal from the Circuit Court of the United States for the Northern Division of the Northern District of Illinois.

The bill was by appellants, judgment creditors of the Northwestern Shoe Company, and in behalf of all other creditors of that company who might join in the suit against the appellees, (a) to set aside certain alleged preferences said to have been made by the directors and officers of the Shoe Company to the appellees, Allen C. Fuller, the First National Bank of Belvidere and the Second National Bank of Belvidere; (b) to hold the directors and officers (Allen C. Fuller, John J. Foote, David D. Sabin, and Calvin D. May and Steven D. May, as executors of Ezra May, deceased, being the only ones involved in this appeal) responsible to appellants for alleged negligence in the management of the assets and property of the company; (c) to hold the directors liable for assenting to and paying a dividend when the corporation was insolvent; and (d) to hold the directors liable for assenting to the incurring of indebtedness in excess of the capital stock of the corporation. Upon the filing of the respective answers of appellees, and the replication, the court below referred the cause to a master, who found, in substance, as follows: (a) That the directors were liable to the complaining creditors for negligent discharge of their duties; (b) that the directors were liable for the declaration and payment of a dividend when the shoe company was insolvent; (c) that the directors were liable for assenting to indebtedness of the company in excess of its capital stock; and (d) that the payments made to the First and Second National Banks of Belvidere and Allen C. Fuller from the avails of the twenty-five thousand increase of stock, and the issuance and delivery of the fifty thousand dollars of bonds (hereinafter set forth more at large), were in the nature of a fraudulent preference, and should be vacated, and the mortgage set aside.

Exceptions were filed by the appellees, and sustained by the court below, and the bill dismissed. From this decree the appeal is prosecuted.

The further facts are stated in the opinion of the court.

The opinion of the circuit court by JENKINS, Circuit Judge, was as follows:

"I have given to this case a careful consideration of the evidence and the arguments of counsel, but am compelled to state the conclusions to which my mind is forced without elaboration or special argument. The case presents itself in four aspects: (a) General liability of the directors for negligence; (b) their liability under the statutes of Illinois for assenting to the incurring of indebtedness beyond the capital stock of the corporation; (c) their liability under the statutes of Illinois for assenting to and paying a dividend when the corporation was insolvent; and (d) invalidity of the trust deed executed July 1, 1892.

"The general principles by which to judge the liability of directors for negligence are authoritatively established by the decision in Briggs v. Spaulding, 141 U. S. 132, 11 Sup. Ct. 924, 35 L. Ed. 662, and are also well

1 Personal liability of directors of corporations for negligence, see notes to Robinson v. Hall, 12 C. C. A. 680; Warner v. Penoyer, 33 C. C. A. 230.

stated in Association v. Childs, 82 Wis. 460, 52 N. W. 600, 33 Am. St. Rep. 57. The statute of Illinois imposing liability upon directors for assenting to indebtedness in excess of capital stock is paragraph 16, c. 32, p. 1007, 1 Starr & C. Ann. St. (2d Ed.), and provides that a director, assenting to the incurring of indebtedness by a corporation in excess of its capital stock, shall be personally and individually liable for such excess to the creditors of such corporation. This statute, as I think, clearly implies that the director assenting must do so knowingly, or be guilty of such gross negligence with respect to informing himself of the conditions of the corporation, when prudent action would readily have informed him of its condition, that the law will presume knowledge. The liability imposed by statute upon directors with respect to the declaring of dividends under certain conditions is paragraph 19 of the same chapter, and implies the same assent and knowledge upon the part of the director in declaring a dividend when the company is insolvent, or which would render it insolvent, or which would impair its capital stock.

"The fraud which wrecked this corporation was artful, bold, and cunningly concealed. Graff, the president, and his co-conspirators, purposely omitted to rep rt to and concealed from the bookkeeper and directors, and purposely omitted to enter upon the books of the corporation, all of the purchases made, so that much of the indebtedness of the corporation for goods purchased was concealed from the bookkeeper and from the directors. Graff caused to be shipped to Chicago to fictitious consignees a large amount of manufactured goods, sold them there for cash, and appropriated the proceeds. He returned to the company fictitious or forged notes as the avails of the property sold; these pretended sales, of course, being reported by him and appearing upon the books of the corporation. These notes were discounted by Graff for the corporation with the banks at Belvidere, and furnished the means by which the business was conducted. I fail to find in the evidence any actionable negligence upon the part of the directors, who have excepted to the master's report. When the citizens of Belvidere first became interested in the Graff concern, and procured its removal to Belvidere, they subscribed for and paid in in cash $15,000 to the capital stock, and the donation in addition of $7,500. The inventory of the property put in by Graff and Harris was procured to be made by those citizens of Belvidere who had interested themselves in the concern, and it was valued at $25.000, the amount invested or supposed to be invested by Graff and Harris, who were the active conductors of the business. They appeared to the citizens of Belvidere as active, energetic business men. There was nothing to suggest that Graff and Harris were not as honorable as they were energetic. It is said that the directors failed to have examination of the books. If this be true, with respect to any particular period of the time, such examination would have disclosed nothing of the fraud, and would have led to no result. These directors, who are sought to be charged with liability for negligence, acted certainly in entire good faith. In the early part of 1892, they took the unissued stock of $10,000 at par or over, advancing their own money to aid the concern. As late as the 28th of June, to the 1st of July, 1892, they increased the capital stock by the sum of $25,000 to relieve the corporation from what they supposed to be temporary embarrassment arising from attempting to do too large a business on a capital of $50,000, and paid in their own money into the concern. When Harris became obnoxious, for some reason, to the directors, or some of them, they purchased his stock at above par, and, as they supposed, got him out of the concern. They certainly acted in entire good faith, and evidenced their confidence in the corporation by their constant investment of money. They had no interest to subserve except to protect the corporation, its creditors, and themselves. I have been unable to see any one act of neglect upon their part during the time they respectively held their offices as directors, which resulted in injury to the creditors. Under the decisions referred to I am of opinion that they are not liable for negligence. I may add with respect to the director (May) wh› departed this life before the report of the master, and whose executors have been substituted in his place, that in my judgment the action for such negligence, irrespective of statutory liability, does not survive the death of the

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