123 S.E. 413 | W. Va. | 1924
The controversy on this appeal is over the question of priority of payment of federal income taxes for the year 1920 of Knob Coal Company, a corporation, over a deed of trust executed by that company to secure J. M. G. Brown *660 and others (all of the former stockholders) in the payment of a balance of purchase money ($175,000), for the stock of Knob Coal Company sold by them to American Gas Coal Company, dated January 3, 1921. The decree gave preference to the debt secured by the trust deed, and the federal government, by its collector of internal revenue, appeals.
Brown and others, on December 14, 1920, owning all the stock of Knob Coal Company, sold said stock to American Gas Coal Company for $300,000, of which sum $125,000 was paid in cash on or before January 3, 1921, and for the remainder, $175,000, four notes each for $43,750, were to be given, payable in four semi-annual payments, with interest, secured by trust deed executed by Knob Coal Company on all of the properties of the Knob Coal Company, the Markley-Dale Coal Company (another company owned by Brown and others, also sold to the American that day), on its property, and by the American company on all of its property. For brevity, the American Gas Coal Company and Knob Coal Company will be called "American company" and "Knob company, " respectively. The federal income taxes on the Knob company for the year 1920 amounted in the aggregate to $46,888.75. J. L. Maust and others, from whom Brown and his associates purchased the Knob company, assumed part payment and did pay to Knob company $9,915.02 of this federal tax accrued up to June 15, 1920. The stock of the Knob company transferred to the American company by Brown and his associates was to be free from all lien debts or encumbrances, on January 3, 1921, except notes of Nelson against Knob company for about $12,300; and plaintiffs guaranteed that deferred royalties on the leased lands would not exceed $90,000 including possibly some unpaid purchase money to Wiseman on two of its tracts of land. The income tax was discussed but none of the contracting parties then knew what the exact amount would be; Brown thought it would not exceed $10,000, according to defendants' I testimony; and it seems to have been understood that the American would pay the tax, that it would be to its advantage to do so, by making a report consolidated with the report of other companies owned and operated by it. Nothing concerning the amount or payment of the federal tax was incorporated *661 in the agreement. On the books of the Knob company there was a balance sheet as of December 20, 1920, which shows, "Reserved for Federal Income tax, $46,888.75." Brown was president of both the Knob and Markley-Dale companies and the stockholders in each company were the same.
In October, 1921, Brown and the other plaintiffs filed their bill against the American Gas Coal Company, the Knob Coal Company and other corporations whose stock and assets had been purchased by the first named company, and against lien holders on the properties, charging the insolvency of the American company, charging non-payment of the said income taxes for the year 1920, amounting to about $35,000, and praying for ascertainment of the liens and debts against the American company, their dignity and priority, preservation of its assets by receivership, and for sale of its properties in discharge of its indebtedness, and generally to wind up its affairs. The cause was referred to a master, who filed his report in September, 1922, setting out all of the property owned by the American, Markley-Dale and Knob companies, fixing the personal property value at $28,665.74, the real estate of the American at $18,400; and the value of its land acquired from Knob company at $14,690. The claim for federal income taxes against Knob company was ascertained to be $35,166.66 with interest from June 15, 1922, and 5% penalty, amounting in all to $38,653.90, and listed as fourth lien in dignity and priority against the American company; and first in priority against its holdings purchased from Knob company. Exceptions were taken by Brown and the other plaintiffs because the report did not give their trust deed of the 3d day of January, 1921, for $175,000, priority over the federal taxes on all of the properties. Other exceptions by other lien holders of like import were made. The decree of November 27, 1922, sustained the exceptions and gave preference to the deed of trust and various other liens, amounting in all to probably $500,000, over the federal taxes; finds that the American company is not insolvent, and postpones entry of decree of sale. In January following, a decree of sale was entered directing the special commissioner to distribute the proceeds to the creditors in the order formerly *662 decreed, after payment of receivers' certificates and costs; and on March 2, 1923, the property was sold to plaintiffs, J. M. G. Brown and Robert Hennen, for $301,600. From the final decree of November 27, 1922, appeal and supersedeas was awarded.
The trust deed to secure Brown and his associates in the payment of the purchase money for the Knob company of $175,000, was executed by American company, Knob and Markley-Dale companies, on January 3, 1921. The notes for this balance of purchase money were given by American company, payable to Brown and the other stockholders of Knob company, appellees herein, in amounts proportionate to their respective stock holdings. On April 14, 1921, Knob company conveyed all of its assets to American company, the deed therefor being recorded June 30, 1921. The deed was made subject to all the lien debts or encumbrances of the Knob company; and appellant asserts that the federal income taxes were then accrued; and that the United States then had an equitable lien upon all of the property for said taxes; and regardless of its lien the United States had priority of payment over Brown's trust deed, out of any monies derived from the specific property so transferred to the American company, the parties thereto and their stockholders having full knowledge of the taxes, payment thereof being assumed by the American.
It appears that notice for the payment of the first deferred installment (1-4) of the income and excess profits tax was given, and on June 1st, 1921, that the second installment must be paid June 15, 1921; and later on February 24, 1922, notice of the lien of the taxes due from Knob company and its successor was filed with the clerk of the District court as required by U.S. Revised Statutes 3186. On July 21, 1921, Knob Coal Company was formally dissolved and went out of corporate existence.
The alleged errors in the decree may be grouped under two heads:
(1) The court erred in decreeing that the American company was solvent;
(2) It erred in not giving the United States preference over other lienors, and especially over the deed of trust of *663 January 3, 1921, to secure balance of purchase money to Brown and others, in the sale of Knob company stock.
Preliminary questions arise on motion of appellees Brown and others, former stockholders of Knob company, to dismiss the appeal: (1) because Albert B. White, as collector of internal revenue for West Virginia, has no right to prosecute this appeal on behalf of the federal government; and (2) because the decree of November 27, 1922, appealed from, is not final.
By reference to the commissioners' report we find that the claim for income and excess profit taxes is reported as a claim of the United States and filed by A. B. White as internal revenue collector, and amounts to $38,653.90, including penalties and interest. In the decree it is ordered and decreed "that the claim of the collector of internal revenue for the district of West Virginia, for the use of the United States of America, amounting to the sum of $38,653.91, constitutes a lien against that part of the property of the American Gas Coal Company which was conveyed to it by Knob Coal Company, as hereinbefore set forth, next in priority to judgment lien of Falconer Company," subject to receivers' certificates and costs and liens, before decreed (which latter includes Brown and others as beneficiaries under the deed of trust).
The application for appeal is made by Albert B. White, United States collector of internal revenue for the district of West Virginia, who sues for the use and benefit of the United States of America.
It is clear that the United States is the claimant and became a party by appearing before the commissioner and filing its claim through its internal revenue collector who is charged with the collection of all such claims. It is the real party although the decree is in favor of its agent for the use of the United States. We can see no substantial reason why the appeal should be dismissed on this technicality. The real party, the United States, proceeding through its proper officer appointed for the purpose of asserting and collecting its income and excess profits taxes, will be bound by the result; and court of equity will always look to substance *664
and not to form. On the second point, it is apparent that the decree of November 27, 1922, appealed from is a final decree ascertaining all of the assets and adjudicating the rights and priorities of the parties, and that the subsequent decrees of sale and distribution in accordance with the decree fixing, amounts and priorities, simply carry into effect the former decree and make no change in the status of the the parties. The decree of sale and distribution is dependent upon and ancillary to the final decree adjudicating the principles of the cause and the rights of the parties. Richmond v. Richmond,
Appellant asserts that the record discloses that the principal defendant, the American Gas Coal Company, was insolvent at the time the decree was entered, although the decree adjudicates that it was not. Appellees, Brown and his associates say this company was not insolvent. They charge, however, in their bill, that it was insolvent and totally unable to meet its obligations by reason of its insolvency. The bill sets out many obligations due and to become due, which the defendant company cannot pay, and says its assets are not sufficient to pay all of its debts and that its insolvency was occasioned by sharp decline in the market value of its property and by mismanagement of its affairs. Receivers were appointed at their instance to preserve the assets from dissipation and forced sale under execution. The answer admits that defendant company is unable to pay its pressing obligations, but says that if certain sales of stocks and properties to it be set aside and annulled and the money paid thereunder be returned (a relief which it asks) it will be able to pay off and discharge all of its indebtedness. The court did grant this relief prayed for in the cross bill answer. The commissioner reported the value of defendant's personal and real property at $61,665.74. This was the assessed value, and we find no evidence of the actual value. The issue of incolvency seems to have been overlooked, or at least not well developed. The indebtedness reported was in excess of $574,000. The property in its entirety sold under a subsequent decree for $301,600, leaving debts of over a quarter of a million dollars unprovided for. The commissioner *665
reported that the assets were insufficient to pay the debts and that the property would not rent for a sufficient sum to pay the liens within five years, after applying the personal property to their payment. We think there are sufficient facts in this record to clearly show that defendant company was hopelessly insolvent as charged in plaintiffs' bill. Davis,Director General v. Pullen, 277 F. 650; Wolf v. McGugin,
The insolvency of American Gas Coal Company is sufficiently established by this suit resulting in the appointment of official assignees, the receivers, to set this federal statute in motion. The real estate and much of the physical assets of Knob company are yet in existence. The title only changed by voluntary conveyance to the American company in April, 1921. Afterwards, on July 7, 1921, Knob company was dissolved and went out of corporate existence. Its obligation, the federal income tax, was assumed by the American company when it purchased the entire stock on January 3, 1921, and the property and assets cannot escape the debt by transfer to another.Finance Co. v. Window Glass Co.,
It is very well established that sec. 3466, Revised Statutes U.S. does not create a preference in favor of the government in case of insolvency of the debtor, over any bona fide lien, general or specific, existing before the insolvency occurred.U.S. v. Fisher, 2 Cranch 202; U.S. v. Hooe, 3 Cranch 73; Brent
v. Bank, 10 Peters, 596; Conard v. AtlanticIns. Co., 1 Pet. 386; and Savings Loan v. Multnomah County,
Whether this trust deed is good as between the parties thereto and will bind them it is not material to inquire. Appellant asserts that his debt, reduced to a lien on July 21, 1921, when the demand for payment was made, the tax assessment having been received later by the collector, is superior to the alleged trust lien and is entitled to preference. In this way the ultra vires act of Knob company is challenged. A creditor may impeach an ultra vires contract of a corporation which has the effect of fraudulently diverting the corporate assets from his debt. Force v. Age-Herald Co.,
Cross assignment of error is that the court erred in decreeing *669 any sum in favor of appellant because, it is alleged, there was not sufficient proof of the government's claim. We find that appellees in their bill charge that one of the liabilities of American company is the income and excess profit taxes for the year 1920, amounting to about the sum of $35,000. Defendants' answer admits that the federal taxes for 1920 are about the sum of $38,000. January 1st, 1921, and asks for an abatement of the notes then given of the difference between $10,000, which it charges was the amount plaintiffs then represented as the true sum, and the sum of $38,000, which is the approximate amount of the federal income and excess profit taxes of the Knob company for the year 1920. In paragraph 40 of the answer defendants say they are advised and believe that there remains unpaid about $37,000 owing by the Knob company on the 1920 taxes to the federal government. Frank Burke, a public accountant, who audited the books of the American for the special receivers, filed with his deposition before the commissioner a statement from the books of defendant corporation which showed a debt unpaid to the internal revenue collector of $35,166.56, which is the exact amount of the government's claim exclusive of penalty for non-payment, and interest. Witness Shriver swears that the income tax for 1920 was ascertained to be approximately $46,000, after the sale of the stock of Knob company had been completed on January 3, 1921. Witness Ream states that the tax amounted to approximately $48,000. We do not find the income tax report of the Knob company for the year 1920. A statement of what it contains is in brief of counsel for appellant. We think the pleadings and evidence, especially that of auditor Burke, will fully justify the finding of the commissioner that there was due the government the amount decreed.
The report of Commissioner Dille as to the amount of the federal income and excess profits taxes, and its priority in payment over the debt of appellees secured by the trust deed of January 3, 1921, out of the American Gas Coal Company's holdings acquired from the Knob Coal Company, should have been confirmed and the exceptions of appellees thereto by Brown and his associate stock owners secured by *670 said trust deed, attacking its dignity and priority against such holdings so acquired, should have been overruled.
The decree will be reversed in that respect, and the cause remanded.
Reversed in part. Remanded.