purpose of continuing the business, and was reinforced by fresh money contributed by the stockholders in good faith to the same end. This unquestionably would bring this case clearly within the distinctions pointed out in Sandford Fork & Tool Co. v. Howe, Brown & Co., supra, as sustaining the mortgage there in question. In addition to this, the majority of the Court are of the opinion that the fact that two of the five directors of the shoe company, or that certain of its stockholders, were likewise either directors or stockholders of one or the other bank, receiving the security-all being free from knowledge of the true state of affairs as heretofore indicated-cannot in any view operate to invalidate the security in favor of the banks, accepted in good faith, where a large proportion of the banks' shareholders are not shareholders in the shoe company; nor, can the further fact, that directors or stockholders of the shoe company were guarantors of any part of the indebtedness of that company to the banks impugn that security thus given, as the case is not thus within the rule against the preference of corporate indebtedness to a director. Rockford Wholesale Grocery Co. v. Standard Grocery & Meat Co., 175 Ill. 89, 93, 51 N. E. 642, 67 Am. St. Rep. 205; Sandford Fork & Tool Co. v. Howe, Brown & Co., supra. As held in Hollins v. Iron Co., 150 U. S. 371, 382, 14 Sup. Ct. 127, 37 L. Ed. 1113 (approved in Manufacturing Co. v. Hutchinson, supra), the doctrine is well settled in the federal courts "that the property of a private corporation is not burdened with. any specific lien or direct trust in favor of general creditors" and prior to the Bankrupt Act of 1898 it was the established rule in Illinois that an insolvent corporation is at liberty to prefer creditors not officers of the company. Blair v. Steel Co., 159 Ill. 350, 364, 42 N. E. 895, 31 L. R. A. 269, and cases cited. In this judgment the writer of this opinion would concur were he able to see that the directors and stockholders of the bank receiving the security were at the time free from knowledge of the shoe company's true state of affairs.

I cannot, however, bring myself to see the facts, centering around the preference transaction, as the majority of the Court have seen them, and feel that it may be excusable to state my own conclusions in this respect.

July 1, 1892, the board of directors of the shoe company consisted of John J. Foote, Barnett Graff, John Hannah, E. L. Lawrence and D. D. Sabin. On this date Foote was a stockholder in both banks, and a director of the First National Bank; and Sabin was a stockholder, director and vice-president of the Second National Bank. Allen C. Fuller, a director of the shoe company from January 11, 1892, until March 8, 1892, was, during that period, and until after the failure of the company, the largest stockholder in both banks. Ezra May, director of the shoe company from February 13, 1891, until January 11, 1892, was, during this period, and on July 1, 1892, a stockholder and director in both banks, and president of the Second National Bank. All the stockholders in both banks were stockholders in the shoe company, at different times. Fuller was the holder approximately of twenty-two thousand dollars of the cap

ital stock of the two banks, or a little less than one seventh. His subscription to the twenty-five thousand dollar increase stock was six thousand two hundred and fifty dollars, which, after deducting something over thirty-five hundred dollars paid to himself, left two thousand seven hundred and fifty dollars to go upon the payment of the debts-or a little over one ninth of the whole sum paid in as increase capital stock. Foote was the owner of thirty-eight hundred dollars of the capital stock of the two banks, or about one thirty-ninth, and his subscription to the increase capital stock was four hundred dollars, or about one sixtieth. Sabin was the holder of the stock of the two banks to the amount of two thousand one hundred dollars, or about one seventy-first thereof, and his subscription to the increase capital stock was one hundred dollars, or about one two hundred and fiftieth thereof. May was the holder of stock in the two banks to the amount of six thousand five hundred dollars, or about one twenty-third thereof, 'and his subscription to the increase capital stock was six hundred and seventy-five dollars, or about one thirty-seventh thereof. It is thus apparent that if the avails of the increase capital stock went to the banks to pay off the liability on the fictitious notes, each of these men, considering the notes as otherwise worthless, received from the subscription a benefit considerably greater than his contribution.

The testimony shows that the bond issue of fifty thousand dollars, and the avails of the twenty-five thousand dollars increase capital stock, (except the thirty-five hundred going to Fuller) went to the two banks, to lift the so-called customer's notes, and certain notes of the shoe company itself, then held by the banks; that, after March 25, 1892, the First National Bank discounted no further paper of the shoe company, and that, after June 5, 1892, the Second National Bank discounted no further paper of the company. It is not clear what business was done by the shoe company from July 1, 1892, until the failure in September. The question is whether these transactions show that on July 1, 1892, the appellees were apprised of the insolvency of the company, and took these steps-the execution of the mortgage and the increase of stock-to obtain for their banks an advantage over the other creditors.

The fact that the banks, largely owned by these officers, directors, and stockholders of the shoe company, were the beneficiaries of the mortgage, covering every species of the shoe company's property, is in my opinion a circumstance sufficient to put the court upon inquiry. "Courts of equity" say the Supreme Court, considering a transaction similar to this, (Richardson v. Green, 133 U. S. 30, 10 Sup. Ct. 280, 33 L. Ed. 516), "regard such personal transactions of a party in either of these positions, not perhaps with distrust, but with a large measure of watchful care; and unless satisfied by the proof that the transaction was entered into in good faith, with a view to the benefit of the company as well as of its creditors, and not solely with a view to his own benefit, they refuse to lend their aid to its enforcement." The circumstances of the transaction, in my opinion, put the burden of explanation, upon the appellees.

51 C.C.A.-42

The explanation is that the rapidly increasing business of the shoe company made it desirable that the pending indebtedness to the banks should be liquidated, so that the banks could, in the future, carry the shoe company's current financial needs, including the discounting of customers' paper. This might be satisfactory, if it were not in conflict with the sequel. Either the shoe company had further financial needs, in which case, contrary to the explanation, the banks did not, in fact, come to its help, or, what seems more probable, the business of the shoe company was already collapsing, in which case, the explanation is shown to have been false. The explanation, indeed, is no explanation. It only intensifies the suspicion aroused by the circumstances of the transaction.

The judgment of the Circuit Judge, hearing the case below, and of the majority of this Court, seems to have been influenced by the fact that the stockholders and directors of the shoe company, at the time the mortgage was executed, subscribed and paid for the increased capita! stock; and that this constituted satisfactory evidence that they did not then realize or suspect the failing condition of the shoe company. But this argument is shorn of its force, when it is remembered that the money thus going out of their pockets, as stockholders of the shoe company, came back, with increase, into their pockets, as stockholders of the banks; and that on the whole, not even taking into account the fifty thousand dollars bond transaction, that was wholly for the benefit of the bank, this transfer from one pocket to the other was to their financial advantage. I cannot escape the conviction-looking at their conduct both preceding and following the transaction of July, 1892-that the parties above named, directors or stockholders of the bank, had reason to know at the time of the execution of the mortgage of July 1, 1892, that the shoe company was insolvent. I cannot bring myself to believe that the mortgage was given in good faith by a going concern to obtain financial assistance to keep the company upon its feet. It seems much more probable to me that the whole transaction was a device, in view of coming failure--a failure that came in fact without any further attempt to keep going to enable the banks to obtain a preference in the distribution of the company's assets. Nor does the fact that Fuller and May, the chief stockholders in the First and Second National Banks, ceased to be directors of the shoe company in January, 1892, prevent the rule stated from applying. They continued directors and officers of the bank. Foote and Sabin, small stockholders and officers in the banks, were put upon the directory of the shoe company. The rule that creditors thus situated shall not be permitted to obtain a peculiar advantage to themselves over others goes to the core of the transaction, and is not intended to be defeated by a mere technical alignment of officers. I have no doubt, in view of this record, that Foote and Sabin, directors of the shoe company, were controlled in this transaction by Fuller and May, their associates and superior officers in the bank. Nor is this view changed by the fact that there were other stockholders of the bank. For the purposes of this transaction the men named were the representatives of the others.

In this view of the facts, this case is, in all material respects, similar to Manufacturing Co. v. Hutchinson, supra. In that case, the Hopper Lumber and Manufacturing Company, being insolvent, and having no purpose to further continue its business, executed a mortgage to the Sutton Manufacturing Company, covering its entire stock, and every article and thing used in its business, to secure the payment of drafts to the amount of eighteen thousand dollars, drawn at different times during the preceding two months by the Hopper Company upon the Sutton Company. Of the six hundred shares capital stock of the Hopper Company at the time of the mortgage, five hundred and ten shares were held by James S. Hopper, the president; thirty shares by Henry S. Hopper, secretary and treasurer, and a director; twenty shares by Fannie E. Hopper, a director; and forty shares by Elizabeth Sutton, mother of Fannie E., and mother-in-law of James S. Hopper.

Of the one thousand shares of the Sutton Manufacturing Company, one share was held by James S. Hopper; two hundred and fifty-nine shares by Fannie E. Hopper; one hundred and twenty shares by Henry S. Hopper; two hundred and four shares by Benjamin F. Sutton (a director in the Hopper Company); seventy-six shares by Mary J. Adams; one hundred and twenty shares by Walter A. Hopper; and two hundred and twenty shares by Elizabeth Sutton. Neither of the last three were officers or directors in the Hopper Company, and had no relation to the Hopper Company, other than that Mary J. Adams was his sister, and Elizabeth Sutton the mother, of Fannie E. Hopper, and Walter A. Hopper was the son of James S. Hopper by a former wife.

The court held the mortgage void, laying down the rule that when a corporation becomes insolvent, and does not expect to make further effort to accomplish the objects of its creation, its managing officers and directors came under a duty to distribute its property or its proceeds ratably among the creditors; and that, because of the existence of this duty, the law will not permit them, although crcitors, to obtain any peculiar advantage for themselves to the prejudice of others.

Recognizing the fact that the mortgagee was a corporation, and not the individual directors, of the Hopper Company, and that some of its stockholders had no pecuniary relation with the Hopper Company, the rule is, notwithstanding, applied, because, as stated, two of the directors of the insolvent Hopper Company owned nearly four hundred shares out of the one thousand shares of the Sutton Company; wherefore, the mortgage had the effect to protect their interest, and to withdraw the property mortgaged from its primary liability for the debts of the mortgagor company. "The case presented" say the court "is consequently one in which an insolvent corporation, recognizing its inability to further prosecute its business, and with no hope of recovering from its financial embarrassments, gives a preference by mortgage of its property to some of its directors, being also creditors. According to the principles we have announced this could not be rightfully done."

The Illinois cases (Gottlieb v. Miller, 154 Ill. 44, 39 N. E. 992;

Blair v. Steel Co., 159 Ill. 350, 42 N. E. 895, 31 L. R. A. 269; State Nat. Bank of St. Joseph v. Union Nat. Bank of Chicago, 168 Ill. 519, 48 N. E. 82), in essence, are not in conflict with this ruling. In all these cases it is held that creditors of an insolvent corporation, who are, also, directors, can not secure preference of their claims, at the expense of other creditors; that in such a case, as distinguished from a case where the directors apply the assets of the insolvent corporation to the payment of a debt due a third person, there is a trust.

The mortgage, in my judgment, comes under the ruling of Manufacturing Co. v. Hutchinson, supra, and should, as to the complaining creditors, be declared void, and the estate should be administered according to that theory; but overruled in this particular phase of the case, as I am, by the judgment of my associates, the decree of the Circuit Court must be affirmed.

(114 Fed. 34.)

WENGER et al. v. CHICAGO & E. R. CO.

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

No. 753.

1. RAILROADS-REORGANIZATION-INVALIDITY FOR FRAUD AS AGAINST Creditors. The sale of railroad property in foreclosure proceedings to a committee of reorganization, by whose plan the stockholders of the mortgagor appear to obtain some benefit in the purchasing company, is open to the closest scrutiny where general creditors of the mortgagor are left unprovided for; but where the foreclosure is instituted and carried on in the ordinary course for the honest purpose only of enfor ing the rights of the bondholders against the property, the mere fact that stockholders of the old company may, under the purchasing arrangement, be given some interest in the securities of the new in exchange for their stock, while it may be indicative of fraud, does not render the sale fraudulent per se, and a general creditor of the old company cannot successfully attack such sale without showing actual fraud, and that property of such company, exceeding in value the mortgage debt, has, by reas n of such fraud, been placed beyond his reach on execution.

2. SAME-SUIT TO CHARGE PROPERTY-PARTIES.

To a suit in equity by a creditor of a railroad company to enforce his claim against the property of such company, which has been sold in foreclosure proceedings, and passed into the hands of a reorganized company, on the ground that such sale and purchase were fraudulent, a corporation which owns all the stock of the new company and the trustee for its bondholders are both necessary parties, and a bill which neither joins them as parties nor shows that they cannot be made defendants is demurrable.

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

The bill was originally filed by appellants, citizens of Illinois against appellee, a corporation, organized under the laws of the State of Indiana, in the Circuit Court of Cook County, in the State of Illinois, and was by appellee removed to the Circuit Court of the United States for the Northern District of Illinois, Northern Division, on account of diversity of citizenship. Thereupon, an amended bill was filed. To this, appellee demurred, and the demurrer having been sustained by the Court below (105 Fed. 796) this appeal is prosecuted.