123 N. Y. 191, 200 [10 L. R. A. 676]; Volkmar v. Manhattan R. Co. 134 N. Y. 418, 422; Rumsey v. Boutwell, 61 Hun, 165, 168; Roseberry v. Nixon, 58 Hun, 121; Posthoff v. Schreiber, 47 Hun, 593, 598.

the admission of all testimony having any possible bearing upon the question. Facts which to the court might seem of no pertinence and be rejected as having no legal tendency to show knowledge of the fraud, might be considered by the jury as significant and indicative of a guilty participation. Even negative evidence may sometimes have a positive value.

3. Upon the trial it was insisted that the deeds were void upon their face, but the court held them to be valid, and we see no reason to question the correctness of its conclusion. Upon the question of actual fraud, The testimony in this case indicates that which was the main issue in the case, the as early as February, 1891, it had been discourt charged the jury as follows: "If you covered by Freiberg that the firm had lost find from the evidence that any one creditor considerable sums of money through Seinhad accepted the deed of trust before the levy sheimer, one of the partners, and was in an of attachment, and that such creditor was embarrassed condition; and arrangements not guilty of fraud himself and was not were made with the principal creditor of the aware of fraud in the makers of said instru- firm, a kinsman of Freiberg, by which it ment, or was not in possession of such infor- was hoped to extricate themselves. This mation as would have put a reasonably pru- proving ineffectual, a meeting was called at dent person upon inquiry, you will find for the residence of one Fellman, in Galveston, the plaintiff; but, on the other hand, if you which was attended by the members of the find that the creditor or creditors had ac- firm and by Fellman, Kempner, and Grumcepted said deed of trust before the levy of bach, indorsers for the firm. Seinsheimer and said attachment, and were either guilty of Grumbach married sisters and were sons-infraud themselves or were possessed of infor- law of Fellman; Kempner was a brothermation that would have led a reasonably pru-in-law of Seinsheimer. At the time of this dent person to infer that fraud did exist, meeting Fellman and Grumbach, who were you will find for the defendant." partners in the dry-goods business were in-[411] dorsers for Freiberg, Klein, & Co. to the extent of $135,000. At this and other meetings which were held, the question of the solvency of the firm, and the means which should be used to protect it from failure, were considered, and arrangements were made to reduce their debts so that they could continue busi

This instruction was excepted to by the plaintiff upon the ground that it left to the jury the fact whether any of the creditors had knowledg of the fraudulent intent-if any there were in the making of the deed of trust, when there was no evidence whatsoever to show that the beneficiaries who accepted said deed of trust either had knowl-ness. edge of any such fraudulent intent-if it existed-or that they were put upon inquiry as to such fraudulent intent by any circumstances which had been given in evidence; but, on the contrary, the uncontradicted evidence was that they had no knowledge of any such fraud, if any there was, or of any fact that would have put them upon inquiry with reference to the same.

With regard to the question of fraud in fact there was considerable testimony, but it [410]was insisted by the plaintiff that, *so far as concerned the creditors who accepted the deed of trust, there was not a scintilla of evidence tending to show either direct knowledge of the fraud, or such information as would put a reasonably prudent person upon inquiry as to the existence of such fraud.

After these meetings the firm con. tinued business as before, buying and selling goods for cash and upon credit. At these meetings it was determined that the firm should endeavor to carry on their business, but if it had to fail that Fellman should be protected at all hazards. There was also evidence to the effect that a short time prior to the failure Fellman promised to buy out their goods and let them carry on the business in his name. The testimony also tended to show that before making the deeds, a conveyance of land for something less than its value was made by the firm to Fellman for cash paid by him. Also that Seinsheimer, one of said firm, had kept from the trustee some of the bills receivable by the firm, but that the trustee, upon finding this out, had made him turn the bills over to him.

In March, 1891, a request for a report of the financial condition of the firm by a commercial agency was answered by a statement, made under the direction of Seinsheimer, showing that the assets of the firm exceeded its liabilities by $200,000, when in truth the firm was insolvent. The business of the firm was continued by the purchase and sale of goods, and the Fellman indorsements were continued by extensions and renewals.

It may be said in general that there is no class of cases which are more peculiarly within the province of the jury than such as involve the existence of fraud. So much depends upon the character of the business transacted by the insolvent firm, the circumstances under which the deeds are executed, the relation of the parties to one another and to the preferred creditors, the manner in which the business is subsequently conducted, the opportunities the preferred creditors had In February, 1892, it was discovered that of informing themselves of the facts, that it the firm was hopelessly insolvent, but anis rarely safe to withdraw the question from other call from the commercial agencies for the jury. Parties contemplating a fraud fre- an annual report was again met by a false quently pursue such devious courses to con- statement, showing assets in excess of liabil ceal their designs, and resort to such subtle ities of more than $200,000. Fellman, practices to mislead their unsecured credit-Grumbach, and Kempner had full notice from ors, that the fraud becomes impossible to detect, unless the door be swung wide open for

members of the firm of all these matters.
In the summer of 1892 the failure of the

firm became evident, and goods were pur- of the firm. Such customers consisted largechased and placed in stock, with a knowleugely of barrooms throughout the state of Texas, that they could not be paid for. The credits and the purpose of the trustee was in accordof the firm were restricted; in some instances ance with the wish of the beneficiaries to entirely cut off, and rumors of its insolvency keep these barrooms going in the usual way [412]circulated throughout the community. *The by selling them goods on time, so as not to dangerous condition of the firm became a interrupt their usual business, and. gradumatter of discussion among business men in ally collect what they owed. Galveston, and inquiries continued to be made The books of the firm, the trustee claimed, from abroad of the local commercial agencies were in his charge, but he admitted that all as to their solvency. A demand was again entries made in the books after the date of made by a commercial agency in September, the failure were made therein by Seins1892, at the instance of the defendant brew-heimer, and not under his (the trustee's) diing company, and was answered by another rection, but in his capacity as a member of statement, showing an excess of $200,000 over the firm. In fact, he claimed to be ignorant all liabilities; and the brewing company was of such entries, although they showed that thereby induced to extend a further credit the books had been regularly kept just as to the firm. though no change had been made in the ownership of the property.

Notwithstanding the apparently desperate condition of the firm, during the months of While there is nothing in all this which September, October, and November and up proves either direct knowledge of the fraud to the 16th day of December, 1892, the day to the accepting creditors, or positive knowlof its failure, the firm made large purchases edge of facts which necessarily put them upon upon credit, and, early in December, Fell-inquiry, there is a strong probability that man, who was then in New York, was called these creditors, who were all business men home to participate in and direct the busi- resident in Galveston, were possessed of the ness. He came immediately and assumed same information that others had regarding the practical superintendence of affairs. the failing condition of the firm. As one Upon consultation with attorneys, he had the of the witnesses stated: "Rumors were original purpose of the firm to transfer its afloat that they were slow in payments, property directly to him changed to a trust owing largely to banks and individuals; deed in favor of the creditors whose paper credit refused them in some quarters, and he had indorsed. At his request Sonnen- generally that their business was not healththeil, a relative of his wife, was employed as ful. Inquiries as to the financial standing trustee, at a salary of $150 per month. He of the firm came from northern and eastern had been a business man in Galveston, but cities, local banks, and firms. There were was without knowledge or experience in the rumors in Galveston, general in their characparticular business for which he was select- ter and discussed among brokers, banks, and [414] ed. A deed of trust was thereupon executed merchants." It is scarcely possible that to Sonnentheil, as trustee, to secure home these rumors could have escaped the ears of creditors and two who were not home credit- their local creditors. It is not improbable ors, already secured, save in a few and rela- that the peculiar relationship of the firm to tively unimportant instances, by the indorse- Fellman was known to these creditors, as ments of Fellman and Grumbach. The prop-well as the fact that the assignment was inerty covered by the deed of trust, which exceeded in value the secured debts by about $75,000, was turned over to the trustee in pursuance of an arrangement between the firm and Fellman that the business should be continued either in Fellman's name or in the name of someone else, until a settlement could be obtained, when it was to revert to the firm.

tended primarily to protect Fellman, and secondarily to secure a settlement with the creditors upon terms favorable to the firm, and the subsequent return of the property to them. It is by no means impossible that they knew that the firm were making large purchases of goods on credit just before their assignment; that false representations had been made to commercial agencies of their fi nancial standing; that the debts secured by the deed of trust were already secured by Fellman's indorsement; that the firm still remained in open possession of the stock and practically retained direction of the business, and that to the public at large there was no apparent change in its conduct or headship. Under the peculiar circumstances of this case it was not error to submit this question to the jury; and there is no criticism to make of the charge of the court in that particular. Indeed, in another case arising out of the same failure the supreme court of Texas held that the question of fraud was properly left to the jury. Sonnentheil v. Texas Guar anty & T. Co. [10 Tex. Civ. App. 274], 30 S. W. 945.

The possession of the trustee consisted in his having the key to the storehouse in which the goods were situated, and in attending at the store some hours every day. He signed all the letters and checks, and kept control of [413]the general* cash. The three members of the firm were each employed at a salary of $300 per month, Seinsheimer as correspondent. He also had the keeping of the daily cash receipts. The other two acted as collectors. All the employees of the firm, including the drummers, were retained in their respective positions, and at their former salaries. The firm's sign, prominently displayed over the door of the storehouse, was not removed. The business (exclusive of the purchase of goods) was conducted, with the consent of the beneficiaries, in the usual way, by selling 4. Error is also assigned in admitting the in small parcels, sometimes on credit and statement of one Werner as to interviews sometimes for cash, to the regular customers had between him and Freiberg and Seins172 U. S.

U. S., BooK 43.



heimer subsequent to the execution of the ] of the others renders it unnecessary to con deeds of trust, in which Freiberg is said to sider them. While the propriety of some of have asked Werner, as agent of the Moerlein the rulings may admit of doubt, the objec Brewing Company, to give him, Freiberg, the tions made were extremely technical in their agency for the sale of the beer, saying that character, and the majority of the court are "after they got a settlement they would go of opinion that no error was committed prejright ahead; the beer would not change udicial to the plaintiff and to the secured hands at all; go to the same customers; and creditors, and that the judgment of the Cirthat the firm was in such a shape that they cuit Court of Appeals must therefore be afhad to fail." This evidence was objected to firmed. upon the ground that it related to statements made by the firm after the execution of the deeds of trust, and was not known or assented to by the trustee or the beneficiaries of the trust deed, and was incompetent to affect their interests.


JAMES L. UTTER et al., Appts.,


(See S. C. Reporter's ed. 416-425.)

bonds, when may be made valid-judg-
ment, when not res judicata.

Bonds issued by a county in a territory, which were void because not authorized by act of Congress, may be made valid by a subsequent act of Congress.

Werner, the witness, was agent for the [415]brewing company, living in Cincinnati. Hearing of the failure, he left home and Void reached Galveston three or four days after the assignment. He went immediately to the office, and met Seinsheimer and Freiberg. At this interview Freiberg made the statement in question. There is no doubt of the general proposition laid down by this court in Winchester & Partridge Mfg. Co. v. Creary, 116 U. S. 161 [29: 591], that in an action by the vendee of personal property against an officer attaching it as the property of the vendor, declarations of the vendor to a third party, made after the delivery of the prop- Argued and Submitted December 12, 1898. erty, are inadmissible to show fraud or conspiracy to defraud in the sale, unless the al


A judgment holding bonds invalid is not res judicata as to their validity after a subsequent statute has cured their defect.

[No. 94.]

Decided January 3, 1899.

leged collusion be established by independ- APPEAL from an order of the Supreme

ent evidence, and the declarations fairly form part of the res gestæ.

Court of the Territory of Arizona denying a petition for a writ of mandamus to The same question was again considered in compel the defendants, Benjamin J. FrankJones v. Simpson, 116 U. S. 609 [29: 742], lin, Governor of said Territory, et al., acting in which declarations of the vendor made aft- as loan commissioners, to issue certain bonds er delivery of the property to the vendee, but in exchange for bonds issued by the county on the same day and fairly part of the res of Pima in aid of a railroad company. Regesta, were held to be admissible to show in-versed, and case remanded for further protent to defraud the vendor's creditors by the sale, it being also shown by independent evidence that the vendee shared the intent to defraud with the vendor.

In the case under consideration there was

independent evidence that the vendors, Freiberg, Klein, & Co., and the vendee, Sonnentheil, were engaged in a common purpose to defraud the creditors of the vendors, and the declarations in question were not mere admissions of what had already taken place, but were propositions for a further continuance of business with the brewing company, upon a basis which indicated that after they had obtained a settlement with their creditors, they would assume their ownership, and charge of the stock, and continue business as they had done before. While the propriety of admitting these declarations as against the plaintiff Sonnentheil and the secured creditors may be open to some doubt, it is entirely clear that they were admissible against Freiberg, Klein, & Co., and the rights of the secured creditors were so carefully guarded in the charge to the jury that we think no harm could have resulted from allowing the jury to consider them.

We have examined the remaining assign[416]ments of error, of which there are a large number. but the disposition we have made


Statement by Mr. Justice Brown:

This was a petition for a writ of mandamus to compel the defendants, who were respectively governor, auditor, and secretary of to issue certain bonds in exchange for bonds the territory, acting as loan commissioners, issued by the county of Pima in aid of the Arizona Narrow Gauge Railroad Company.

the bona fide holders for value of certain The petition set forth that plaintiffs were seven per cent bonds and coupons issued in July, 1883, in compliance with an act of the territory "to promote the construction of a certain railroad," approved February 21, 1883, aggregating, including principal and interest thereon, the sum of $289,964.50. There was a further allegation in the petition that it was the duty of the defendants to provide for the redeeming of such indebtedness and to issue refunding bonds therefor; that plaintiffs had made demands for the same, which defendants had refused.

Defendants demurred to the petition, and for answer thereto averred that the bonds now held by the plaintiffs had been declared,[417] both by the supreme court of the territory and by this court, to be void, and therefore the petition of the relators should be dismissed.

The petition being denied by the supreme of bonds already contracted for under express court of Arizona, the relators appealed to provisions of law, leaving the courts to deter this court. No opinion was filed in the su-mine the validity of such acts and obliga preme court of the territory.

[blocks in formation]

The bonds now held by the relators were declared to be invalid by this court in Lewis v. Pima County, 155 U. S. 54 [39: 67], upon the ground that bonds issued in aid of railways could not be considered debts or obligations "necessary to the administration of the internal affairs" of the county, within the meaning of the act of June 8, 1878. 20 Stat. at L. 101, chap. 168.

tions and the further question whether such bonds had been contracted for in pursuance of express provisions of law. It simply withheld its assent to, as well as its negative upon, such transactions, and declined to commit itself one way or the other. Nor did it assume to prevent the territorial legislature from legalizing the acts of any subordinate municipality as to bonds theretofore issued or contracted to be issued, leaving it to the territorial legislature to determine whether they should attempt to legalize such issues, and to the courts to pass upon the question whether this could be lawfully done. The bonds theretofore issued were left precisely where they stood before, and no attempt was made either to legalize or avoid them. Congress merely stayed its hand, and left the matter open for future consideration.

Whether the loan commissioners of the territory can be required to refund these ob- In this state of affairs the legislature of ligations, and issue new bonds to the holders Arizona, on March 10, 1897, passed *an act(419) thereof, depends upon the effect given to cer- (Rev. Stat. Arizona, p. 361), constituting tain legislation upon this subject, both by the governor, auditor, and secretary of the congressional and territorial statutes. These territory loan commissioners of the terristatutes were enacted both before and after tory, with the duty of providing "for the pay. the decision in Lewis v. Pima County, supra. ment of the existing territorial indebtedness, It seems that doubts were entertained as to due and to become due, and for the purpose of the validity of bonds issued in aid of rail- paying, redeeming, and refunding all or any roads, in view of the fact above stated, that part of the principal and interest, or ether, under the congressional act of 1878 the power of the existing or subsisting territorial legal of municipalities to incur debts or obligations indebtedness," with power to issue negotiable was limited to such as were necessary to the bonds therefor. This power, however, was administration of their internal affairs. To limited to the legal indebtedness of the terriput this question at rest, Congress on July tory, and apparently had no bearing upon the 30, 1886, passed an act to limit territorial in- indebtedness of its municipalities, certainly debtedness (24 Stat. at L. 170) in the second not upon indebtedness which had been illesection of which it was declared "that no ter-gally contracted. Indeed, the act is only perritory of the United States now or hereafter tinent as showing the authority under which to be organized, or any political or munici- the loan commissioners were appointed. pal corporation, or subdivision of any such territory, shall hereafter make any subscrip-gress passed an act approving with amend [418]tion to the capital stock of any incorporated ments this funding act of Arizona, "subject to company, or company or association having future territorial legislation," the second corporate powers, or in any manner loan its section of which declared it to be the duty credit to or use it for the benefit of any such of the loan commissioners "to provide for the company or association, or borrow any money payment of the existing territorial indebtedfor the use of any such company or associa-ness due, and to become due, or that is or may tion." This section was undoubtedly designed to put a stop to the practice, which had grown quite common in the territories, of incurring debts in aid of railway and other corporations.

The fourth section provided for a limit of municipal indebtedness, and then declared "that nothing in this act contained shall be so construed as to affect the validity of any act of any territorial legislature heretofore enacted, or of any obligations existing or contracted thereunder, nor to preclude the issuing of bonds already contracted for in pursuance of express provisions of law, nor to prevent any territorial legislature from legalizing the acts of any county, municipal corporation, or subdivision of any territory as to any bonds heretofore issued or contracted to be issued." This section evidently left the law where it stood before. It did not assume

to pass upon the validity of any territorial act previously enacted, or of any obligations thereunder incurred; nor preclude the issue

On June 25, 1890 (26 Stat. at L. 175), Con

be hereafter authorized by law, and for the purpose of paying, redeeming, and refunding

the existing and subsisting terri torial indebtedness, etc." The tenth section of this act provided that the boards of supervisors of the counties, and the municipal and school authorities, should report to the loan commissioners of the territory their bonded and outstanding indebtedness, and that said loan commissioners should "provide for the redeeming or refunding of the county, municipal, and school district indebtedness, upon the official demand of said authorities, in the same manner as other territorial indebtedness, and they shall issue bonds for any indebtedness now allowed, or that may hereafter be allowed by law to said county, municipality, or school district, upon Oincial demand by said authorities."

In compliance with the permit thus given by Congress for future territorial legislation, the legislature of Arizona on March 18, 1891 (Laws of 1891, p. 120), enacted a new fund

ing act, only the following sections of which | and in construing the act of Congress passed are material: in response thereto it may properly be considered as bearing upon the intention of[422] Congress and the exigencies the act was designed to meet.

[420] *"Sec. 1. That the act of Congress entitled 'An Act Approving with Amendments the Funding Act of Arizona,' approved June 25, 1890, be, and the same is hereby, now re-enacted as of the date of its approval, subject to the modifications and additional provisions hereinafter set out, and to carry out the purpose and intention of said act of Congress the loan commissioners of the territory of Arizona shall provide for the liquidation, funding, and payment of the indebtedness existing and outstanding on the 31st day of December, 1890, of the territory, the counties, municipalities, and school districts within said territory, by the issuance of bonds of said territory, as authorized by said act, and all bonds issued under the provisions of this act and the interest thereon shall be payable in gold coin of the United States."

"Sec. 7. Any person holding bonds, warrants, or other evidence of indebtedness of the territory or any county, municipality, or school district within the territory, existing and outstanding on the 31st day of December, 1890, may exchange the same for the bonds issued under the provisions of this act at not less than their face or par value and the accrued interest at the time of exchange; but no indebtedness shall be redeemed at more than its face value and any interest that may be due thereon."

In compliance with this memorial Congress on June 6, 1896 (29 Stat. at L. 262), passed an act extending the provisions of the act of June 25, 1890, and the amendatory act of 1892 (not here in question), the first section of which provided that the above acts "are hereby amended and extended so as to authorize the funding of all outstanding obligations of said territory, and the counties, municipalities, and school districts thereof, as provided in the act of Congress approved June 25, 1890, until January 1, 1897, and all outstanding bonds, warrants, and other evidences of indebtedness of the territory of Arizona, and the counties, municipalities, and school districts thereof, heretofore authorized by legislative enactments of said territory bearing a higher rate of interest than is authorized by the aforesaid funding act approved June 25, 1890, and which said bonds, warrants, and other evidences of indebtedness have been sold or exchanged in good faith in compliance with the terms of the acts of the legislature by which they were authorized, shall be funded with the interest thereon which has accrued and may accrue until funded into the lower interest-bearing bonds as provided by this act.

"Sec. 2. That all bonds and other evidences of indebtedness heretofore funded by the loan commission of Arizona under the provisions of the act of Congress approved June 25, 1890, and the act amendatory thereof and supplemental thereto approved August 3, 1894, are hereby declared to be valid and legal for the purposes for which they were issued and funded; and all bonds and other evidences of indebtedness heretofore issued

It seems, however, that the existing legislation upon the subject was not deemed adequate by the territorial legislature, since in 1895 it adopted a memorial (Laws of 1895, p. 148), to the effect that, under various acts of the assembly, the counties were authorized to, and did, issue railroad aid bonds, which were sold in the open market at their face value, and were then held at home and abroad by bona fide purchasers; that the validity of these bonds, though ques-under the authority of the legislature of said tioned, was acknowledged by the payment of interest thereon; that a repudiation of the same would work a great hardship to the holders and affect the credit of the territory, and therefore the general assembly urged upon Congress the propriety of passing such curative legislation as would protect the holders of all bonds issued under authority of its acts, the validity of which had been acknowledged, and relieve the people from 1421]*the disastrous effects of repudiation. The memorial is printed in full in the margin,†


To the Senate and House of Representatives of
the United States of America in Congress

Your memorialists, the legislative assembly
of the territory of Arizona, beg leave to submit
to your honorable bodies; that-

Whereas, under various acts of the legislative assembly of the territory of Arizona, certain of the counties of the territory were authorized to issue in aid of railroads and other quasi public improvements and did under such acts issue bonds, which said bonds were sold in open market, in most instances at their face value, and are now held at home and abroad by persons who in good faith invested their money in the same, and, save and except such knowledge as the law imputes to the holder of

territory, as hereinbefore authorized to be
funded, are hereby confirmed, approved, and
validated, and may be funded as in this act
provided until January 1, 1897: Provided,
That nothing in this act shall be so construed
as to make the government of the United[423]
States liable or responsible for the payment
of any of said bonds, warrants, or other evi-
dences of indebtedness by this act approved,
confirmed, and made valid, and authorized to
be funded."

This is the act upon which the relators bonds issued under authorized acts, are holders of the same: and

Whereas, the validity of these bonds for many years after their issuance was unquestioned, and acknowledged by the payment of the interest

thereon as it fell due; and

Whereas, there has recently been raised a

question as to whether these acts of the legisla tive assembly were valid under the organic law of the territory, which had led to a movement looking to the repudiation of the indebtedness created under and by virtue of such acts; and

Whereas, we believe that such repudiation would, under the circumstances, work great wrong and hardship to the holders of such bonds, and at the same time seriously affect the

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