FEDERAL .

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vol. 64.

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F.lL\UD-

et a1. v. NATIONAL Court, E. D. Pennsylvania.
No.<16.

BONDS."

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BOND & INVESTMENT CO. December 13, 1894.)

N. Co. was Organized for the. purpose of "Issuing and selling bonds monthly instaUments,and paY!1ble from the redempt;ion and reserve fund," ostensibly int,ended to assist perSons of moderate means to invest theft savings to advantage. The system .of Investments Which it devised 8J).d'lllIt in practlcewlls such that'an, Investor, receiving no special adcould never get back eV'ellai1' he had put in; but a chance was by anticipated redemption' of some of the bonds, to obtain an li!;ol'1;n'tant premium at the expeIl,$eof other investors. Held, that such a SCheWe ,was deceptive.and and, in its nature, simply gam,that a bondholder. who. ha(l 'pllld money into the. treasury of the was entitled to havell,receiver of the assets of such corporatlbn. to fraud,lUld preserve the subject of litigation, determination of the rights of all bondholders.

:Mutual Bond & Investmel)t Company for an injunction and receiver. Hearing upon bill and. answer. El'IiestL.Tustin, for complainants. John J. Ridgway, for defendant.

',1.'4m,Wasa suit by George W.McLaughlin and others against the

DALLAS; Oircuit Judge. Upon the filing of this bill, and before answer,a motion for injunction and for the appointment of a receiver was made, which was refused, because no necessity for making an order'involving such serious consequences, in advance of the formal presenttitlon of the defense, was perceived. The cause has, however, been since fully :heard on bill and answer, and is now for decision; bnt two incidental matters will be first disposed of. Oharles A. OhaBe'nlUl applied for leave to intervene as a partyplainti:ff. This applieatioh is. supported by affidavit that he is one of the class oil whoseb'ehalfthe bill was filed. I do not recall that his right -to intervene'was disputed. At all events, it appears to be unquestiouable, and he will be allowed to exercise it. The defendant has moved that certain affidavits which were filed on behalf of theplainti:ff on NovembeJ.' '8, 1894, be stricken from the record. These affidavits were filed without leave of court, arid under the impression that they would be foreonsideration on final hearing. This was a mistake; 1 have not 'considered them, and the defendant's motion will be granted. , The deferidabt:1s a .corporation created under the law of the state of West; Virginia !lforthe purpose [as stated in its certificate of incorporation] of Lissuing and, bonds· upon monthly installments, and payable from: the redemption and reserve fund, made up of the appropriaition ola eettain part of the installments paid in(according to tables which Insure perfect equity to both large and small investors; theadvantageiof the association being to encourage and assist persons ofriloderateimeans to systematic saving, and by advantageous cc>-Oj)eratiop'to1lealize larger profttsthanthey could by investing in savings banks or huilding association"." In pursuance of this de-

M'LAUGHLIN 11. NATIONAL MUTUAL BOND & INVESTMENT CO.

909

clared purpose of its creation, the defendant issues what are designated as "Installment Bonds," and which are in form certificates of its agreement to pay $1,000 to the person named in each of such bonds respectively. No definite time is specified for making this payment, but it is therein provided that the "bond shall become due and payable at the office of the said company on its surrender, when the monthly installments thereon, together with its proportionate share of the reserve fund, shall equal its face value." This undertaking to paJ at a time not fixed, but made contingent upon the operations of the company, is subject to "the following express terms and conditions": There shall be paid to the company "monthly installments" oUour dollars each, and "quarterly dues" of one dollar each; and any default in either of these shall wholly release the company from obligation to pay at any time,-"shall work a forfeiture of the bond." The instrument further provides that upon forfeiture of the bond "all previous payments" made by its owner shall likewise be forfeited; that when forfeiture occurs "a new bond in the regular order of issue at the date of surrender" of the forfeited bond can be obtained; and that if the bond shall have been "kept in force by its terms and conditions for three years," "the monthly installments made thereon, together with interest at the rate of two per centum per annum," will be refunded upon its surrender. To this point the meaning of the agreement plainly is that the company, in consideration of the payment to it of four dollars per month and one dollar quarterly, will (subject to the terms and conditions which have been mentioned) pay $1,000 to the owner of the bond when the monthly installments paid by him, together with his "proportionate share of the reserve fund," shall amount to $1,000; or, in the alternative, will refund him the amount of his monthly installments, with interest at the rate of 2 per cent., at or after. the expiration of three years, if all the prescribed monthly and quarterly payments shall have been duly made. If it had been proposed merely to return to the holders of these bonds the sum of their monthly installments when they should respectively amount to $1,000, it is scarcely conceivable that any sane man could have been induced to part with his money. He would have no security for it; it would bear no interest; it would be withheld from him for 250 months, or about 20 years; and, to accomplish this, he would pay an additional sum of $80. Of course, any misguided person who might be led into such a transaction would, on perceiving its character, hasten to withdraw from it, even at the sacrifice of payments already made, or would await only the expiration ()f the period of three years to claim the refund provided for. But nothing he could do would profit him. Even if the company should be able to, and should in fact, refund him his monthly installments with the interest stipulated, he would not be repaid in full. At the of three years he would have paid as monthly installments $144, and this, with 2 per cent. interest added, would make $146.88, the amount to be refunded; but his "quarterly dues" for the same period would be $12, which, being added to his monthly installments, $144, would make a· total of $156; and hence the so-called "refunding" would consist in returning to him, after three years of waiting, '10.88

less thanJherhadactuaIly-,pMd'm.Manifestly, the1'e would'be:nothing ': persona', of: moderate: means to systematic' saving" and, by advantageous co-opera{ionto.realize larger could bY, investing in savings banks or building associations,"', The enticing feature of. real and only allurement ,it presents to induce contrib'u:tion to it-is to be found in thatprQwisii>n, of the fourth ,clause of thebdnd ,which appropriates and deto its possessor "its pro]lor.1tionate share of the reserve claresthat:"it is ,subject,llow:ever, to redem.ptidn by the company at anytime before itBmaturity, afteriall bonds of a lower number been canceled,',or terminated. of this' series:
If so:

If so

$336 00 the 2ndliear,i,the holder shall receive. .······ 440 00 If the ,?rq 561 33 It sored'e me(l llurtngtbe, 5th, ei"J»l¥l,,' ,ng ,t,he r,' th.e hOlder"','!shall receive. ··. ... · ... 70288 hoI, 3 h a,' . . .. 863 01 Itsoretlti mM. tl:hY;ftime yeO.t,theholder shall receive 1,000 00

re(leebilillduring the J1Bii year;fheholder- Shall receive. ... ·. ···

tlle mstl'l.

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how, t6 'ihebond does not certificate of in\X>rporation.it is retund up of the approPl;lft,Qt,j:p.e paIdm." What part of stated, but that made apparent by the following state' fil'$t

went: "',1':''''(''"", To, redeem l,lon\l'4Prj.p.g, t;lle
Let interesb,beaddad on

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wpuld be re$336 00 4932 $286 68

inEitalIIl3.en'fS ,·······.· :.................................. $48 00
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installments--either or both-,paid insta,um.ents, the one man wins what have, by mis.a4Yienture, ,already lost,; and; if from nonthe luckY indiv.idual gains extravagantly at of later for these must be additionally postpOned,Jn order that he. may be immediately and. excessively paid, anl\imany of them must svJier a. total loSs through the ultimate exbaustmni Of: the fund by the of "bonds .of a lower number!!,;atl8:Jl :enormous and unconscionable premitun. This might be deemedi'lfab.. play by .those; who wittingly engage in games of chance, but'ali! aI,method oVfsystematic.saving" provided for unwary "persons of 'moderate means" itcert:iinly does .not "insure perfectequity"as equity: is .1lnderstood· by Courts, of justice. It app.eals to cupidity, Mtto. ,1lhmft; and Jures'ito inot It is a contcivaDce:fol' handing over,ftol $omeof ,those who embark in the ven, of, th'eoili.elllfwho jC!lin<iIi it;, ; and "itis quibtdtp.parent .illi8f"tJ:lil:Man only: ico.ntinnesGllong as.'1h.e treasury can l:lereplenished r]tB inherent v.ice is substantially the 'bynbringing in: pointed,au;t'witl1 respecttd a c@ncernin the Case
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froIl), in by

'tq the.planj,this excess of,$286.68 must be providedfoI'

y'LAUGHLIN V.NA'l'IONAL MUTO'AIi BdND & INVESTMENT co.

911

()f the National Endowment Co., 142Pa. St. 450, 21 Atl. 879, and of which the supreme court of Pennsylvania said:
"It manifestly belongs to that class of associations, by far too numerous, the practical effect of whose operations Is to enrich a .few at the expense of confiding and ignorant people. Such corporations are 'unlawful and injurious to the community.' "

It is evident that the attractiveness of the present project is due to the opportunity which it affords for acquiring money by chance, and not as the reward of industry, frugality, or sagacity. The interesting question to those who participate in it is one of fate, and noth· ing else. It is this: Which of them shall be forced to forfeit, and so "fall in fortune's strife"; and which of them, surviving that catastrophe, will have obtained redemption of their bonds before the final and inevitable collapse occurs? Upon these contingencies tlle monthly and quarterly are put in jeopardy, and according to the issue of the game, the company, the holder of these stakes, distributes them among the winners. All such schemes are inhibited. They are deceptive and fraudulent, and in their nature simply gambling. In re National Endowment Co., supra; Brua's Appeal, 55 Pa. St. 294; U. S. v. McDonald, 59 Fed. 563; Horner v. U. S., 147 U. S. 449, 13 Sup. Ct. 409. . These plaintiffs are owners of "bonds" of the defendant company, upon which they have paid the required installments and dues. The money in the treasury of the company, therefore, constitutes a fund to which they are entitled to resort for recovery of their contributions to it. The possession of that fund was, as has been shown, obtained through fraud, and is in danger of misapplication in pursuance of an unlawful purpose. I am therefore of opinion that, irrespecU-V'e of any considerations of a general or public nature; the case made out is one which demands the appointment of a receiver, for the preven· tion of fraud and the preservation of the subject of litigation. Com· plainants' counsel has mentioned five cases in whieh, it is said, thePennsylvania courts of common pleas for the county of Philadelphi8. have, through receivers, taken possession of the funds of associations likethe one now before this court; but those cases have not been reported, or in any manner presented for my examination, and consequently I have not had the advantage of consulting them. If they have been rightly understood by counsel, they support the conclusion which I have reached in the present one. It is objected that these complainants are not entitled to relief, because, under the terms of their bonds, they might surrender them, and receive areturn of their monthly installments with interest; but I cannot assent to this. The reimbursement suggested-not tendered-would not be satisfaction. It would be less than the aggregate amount of all the payments (installments and dues) which the have made; and the precise sum to which they may be actually entitled can be known only upon a full accounting, and an adjustment of the rights of all parties. . There are other grounds upon which, perhaps, this objection should be overruled, but enough, .I think, has been indicated to show that it is not well taken; and it would be unfortunate if this were otherwise, for the ends of justice

',.nDE1UL REPORTER,

vol. 64.

wduld subserved by: maintaining any technical subtlety would render this suit abortive. ,T4e:,Q1Qtion Chwre for leave to intervene as party plainti:lf is granted. " 'IDhe defendant's motion to strike off the affidaviteitJflled on beh3lfof the complainants on Noyember 8, 1894, is granted. Counsel for the plaintiffs may prepare a decree for a receiver and injunction, and sl1bmitthe same for settlement upon 48 hourS' notice (with copy of thedeeree proposed) to defendant's coun· sel.
==NATIONAL PARK BANK

v.

PEAVEY.

(Olreult Court, S. D. Iowa, C. D.

N,o. 3,567.

December 13, 1894.)

1.

a.

Plaintiff recovered a 'judgment against the S. C. Street-Ry. Co., an Iowa corporatiqn;, upon which execution was Issued and returIied unsatisfied. He ,defendapt, a stockholder In the railway company, alleging these facts, and that nothing had ever been paid In on defendant's stock, and alsQ,In. a s,eparate paragraph, that defendant's stock purported to be In consequence ot defendant's receiving and holding It as sUch,'therallwaycompany appeared to be possessed of money that it did not,ln;tact PQ8SeSB, which was a fraud upon plaintiff, and entitled the aUl0'lWt of his judgment from defenqa;I;l:L The statutes ot 16Wa COde, §§ 1632-1635) provide that stockholders shall individualliablllty to the amount of the unpaid installments on the, stocli::owned by them, and execution against the corbe levle<iupon the privllte property of individual stockholdto th,at .that ):)etore such property is taken an execution against the COIrp0riW0n shall be,lssued and returned unsatisfied; that, before a Btockho!der be elrllrged with the 'payment of a judgment for a corporatA debt,'anaction shall be brought against him, in, which judgment qlay be; for l!.ny balance after diSpQsin,g of the corporate and the property of a Iiltockholder has been so he an action, against, the, ,corporation for tndemnityl,'or against any other stockholder for contribution. Such statutes also provide (Id; 0<1(21) that' intentional fraud", in failing to comply with of inGlilrporation,or the public as to their Shall sllbJert the guiltr:pa,rties to pUiQ.1llhment,and person injured by suqp frll,udmay rec,ov:ef damalfes against the parties participating In it. Held, that the pleading, framed as aforesaid, set up two causes of action at law, ba.sed upon the two statutory provisions.
SnrEi-Pnb6k!DuRE IN FEDF.RAL COURTS.

OF STOCKHl>LDERS-PLEADING IOWASTpUTIil.' , " , "

ACTION AT LAW OR IN EQUITY,

Held>,turtlher:,; that a$,ithe statute Imposed a new lIabUlty on the stockand did not depend on the llability of other holder, stoCkh,Old, .an,d, a rem,e,"d"ripr,' its enforcement had bee,II, provl,ded by the same statute' under w,llich the state courts had recognized and approved an action: at law as the eorrect method of procedlll'e, the federal courts shOUld aJsoenforee such liability' by action at law,and were not confined 'to a suit ,inequ,ity fQ!.' adjustment ottIie rights and liabilities of aU stockholde+1l and ereditp1'1l.

'8.

Held, turther. that theflict, that no' forJ:!lal assessm.ent or call for the subscription to the stoCk had been madewouId not protect the stockholder from liability to of the (:orporatlon, who was entitled to regard ,the stoCk subscripti()nliJ lWIa, fund for pis :1;lenefit.