58 N.E.2d 589 | Ill. | 1944
Plaintiffs, Freeman Coal Mining Corporation, William J. Krugly, and Material Service Corporation, filed their amended complaint in the circuit court of Cook county against the defendants, Fred A. Burton, Marjorie Hair Burton, his wife, and Chicago, Wilmington and Franklin Coal Company, seeking to have Fred A. Burton and his wife, the title holders, declared trustees of certain coal lands, located in Williamson county, for the use of the Burton Coal Company and to have plaintiffs declared successors in interest to the Burton Coal Company. Chicago, Wilmington and Franklin Coal Company was later dismissed as a defendant. The amended complaint alleged, in substance, that Fred A. Burton, at a time when he was president of the Burton Coal Company, unlawfully diverted its corporate funds, in fraud of the rights of the corporation, its creditors and shareholders, for the purpose of purchasing, in the name of his wife and himself, the real estate in controversy; that proceedings were subsequently instituted in the district court of the United States for the northern district of Illinois, eastern division, for the reorganization of the corporation and its two wholly-owned subsidiaries; that J. Roy Browning was appointed as trustee, and took possession of the assets and properties of the three debtor corporations, and that, under the provisions of a proposal for reorganization, approved by the court, the Freeman Coal Mining Corporation, one of the plaintiffs here, became grantee of all the estates and properties of the debtor corporations, together with all rights which the trustee may have asserted against any person by reason of any property held by such person in trust for the corporate debtors, or which he, as trustee, might have asserted as to the properties conveyed or transferred in fraud of the creditors of the Burton Coal Company, or properties in possession of some third person for which he, as trustee, may have sued for possession. The amended complaint *607 further alleged that Browning, as trustee, without full knowledge of the facts, paid to Burton large amounts of money as royalties for coal mined on the lands upon representations made to him by Burton that he, Burton, was the legal owner of the property, and that plaintiff Freeman Coal Mining Corporation, succeeding to the rights of the trustee, continued to mine the coal on the property described. Defendants, by their answer, admitted the purchase of the real estate in controversy; that Burton was president of the Burton Coal Company; the filing, in 1938, of a petition for reorganization of the Burton Coal Company and its two subsidiaries, and, in substance, denied all the remaining allegations of the amended complaint. The master in chancery, to whom the cause was referred, found the issues in favor of plaintiffs. The chancellor overruled defendants' exceptions to the master's report and entered a decree declaring that the conveyance was in fraud of the rights of the Burton Coal Company, its shareholders and creditors, and that the plaintiff Freeman Coal Mining Corporation be deemed to have succeeded to the rights and interests of the Burton Coal Company, its shareholders and creditors. The decree ordered and directed, among other things, that defendants, Fred A. Burton and Marjorie Hair Burton, his wife, (1) convey to Freeman Coal Mining Corporation all their right in and to the property, whether held by them in fee or as lessees, and, (2) account to the Freeman Coal Mining Corporation for all moneys, income, royalties, profits and other benefits previously received by them or in their possession or control. From this decree, the defendants prosecute an appeal directly to this court, a freehold being necessarily involved.
There is no substantial dispute as to the material facts. The real estate in controversy was owned by the Chicago, Wilmington and Franklin Mining Company, a subsidiary of the Chicago, Wilmington and Franklin Coal Company, previously dismissed as a defendant. The latter company, *608 in 1936, succeeded to all the rights of the former company, which was dissolved. In 1931, the former company contracted for the sale of the property to Burton. This contract was not introduced in evidence. On March 5, 1935, the Chicago, Wilmington and Franklin Mining Company and Fred A. Burton and Marjorie Hair Burton entered into a new agreement for the sale of the lands, in which is recited a previous payment of the sum of $5526.71, credit for which is allowed on the new sale price of $45,526.71. The contract also recites receipt by the seller of $1200 on the day of signing, and provides for payment of the balance of $38,800 in four installments, the last of which was to mature on or before March 1, 1937. The evidence discloses that, on December 15, 1936, a voluntary reduction of $10,000 from the sale price specified in the contract was granted by the seller, owing to depreciation in value of the coal lands subsequent to the execution of the contract, and that, with the exception of the sum of $5526.71 already paid in 1931, and the payment of $1200 on March 5, 1935, the date of the new contract, payment of the entire balance of $28,800, remaining due according to the terms of the contract, was made by using seven checks of the Burton Coal Company issued in varying amounts, during the period from October 24, 1936, to April 27, 1937.
The evidence further discloses that, on March 5, 1935, and during the entire period thereafter, the Freeman Coal Mining Company had its trackage and equipment located upon the property in controversy in position to mine coal. This equipment included ties, wires, pit cars and cutting equipment. By reason of its location and because of the cost of sinking a new shaft, if the mining were undertaken by any other company, when considered with respect to the amount of coal remaining to be mined, the Freeman Coal Mining Company, at the time of the purchase, was in an advantageous economic position to mine the land. *609 The cost of sinking a new shaft for the mining of this land was estimated at $500,000. Burton, at the time of these payments and prior thereto, was heavily in debt to the Continental Illinois National Bank and Trust Company of Chicago in an amount exceeding $100,000. Marjorie Hair Burton was a housewife, dependent upon her husband for support. On March 5, 1935, the Burton Coal Company and its subsidiary, the Freeman Coal Mining Company, were also heavily indebted to the same bank. This depressed financial condition of the Burton Coal Company and the Freeman Coal Mining Company continued and culminated in proceedings to reorganize, instituted in September, 1938. When the checks were drawn, the Burton Coal Company had no funds and its account with the Continental Illinois National Bank and Trust Company was overdrawn. The overdrafts during this period were: December 31, 1936, $21,776.21; February 28, 1937, $8,225.41; March 31, 1937, $10,301.13; April 27, 1937, $20,377.77, and June 7, 1937, $25,033.76. The evidence further discloses that the additional credit obtained from the bank, permitting payment of the Burton Coal Company checks notwithstanding the overdrafts indicated, was induced, in part, by the discount of fictitious accounts receivable, that is, accounts receivable represented by the Burton Coal Company and its officers as being genuine and bonafide, when, in fact, they were false and nonexistent. As of September 9, 1938, the Burton Coal Company had listed on its books total accounts receivable of $558,166.70, as security for bank loans amounting to $573,907.23. The actual accounts receivable, as verified by accountants, amounted only to $285,173.26. The difference represented fictitious accounts receivable. The checks were charged on the books of the Burton Coal Company as "royalty expense" and as a credit to this company's account with its subsidiary, Freeman Coal Mining Company, the amounts ultimately to be deducted from income of the latter company. Burton testified *610 that he gave instructions to charge the amounts to his personal account. The checks, however, were not included in, nor charged to, Burton's personal account. No corporate authorization for establishment of a royalty account appears in evidence.
Burton was president and a director of the Burton Coal Company, which, in turn, owned all of the stock of the Freeman Coal Mining Company and, after May 12, 1936, all of the stock of the Seymour Coal Mining Company. On May 12, 1936, an agreement was executed between Burton Coal Company, Burton, the Continental Illinois National Bank and Trust Company and the Peoples Trust and Savings Bank of Chicago. Burton Coal Company was then indebted to the two banks in amounts of $51,333 and $88,074, respectively, and Burton in amounts of $157,097 and $9659, respectively. The agreement, after reciting the inability of either to pay the debts, provides for the recapitalization of the Burton Coal Company and the issuance by it of 1600 shares of preferred stock having a par value of $100 in the name of Burton. By the terms of the agreement, this preferred stock was deposited as collateral security to Burton's note to the Continental bank. This note was filed by the bank as a claim in the reorganization proceedings. Subsequently, the note and the collateral security were sold to William J. Krugly, for the use of Material Service Corporation, for $150,000, who now stands in the shoes of the bank as a creditor. The evidence further discloses that, upon the execution of the agreement of May 12, 1936, Burton was required to furnish a statement of his assets and liabilities. The property in controversy was not listed by him as an asset. Moreover, on May 15, 1938, Burton executed an affidavit in which, after referring to the "coal lands and lease acquired by me from the Chicago, Wilmington and Franklin Mining Company, * * *" Burton concludes with the statement that "this was purchased *611 by me for use of the Burton Coal Company, to be mined through the shaft of the Freeman Coal Mining Company." In answer to an inquiry as to the purpose of its execution, Burton stated "The statements made were undoubtedly for the purpose of helping the companies do whatever they were trying to do."
September 7, 1938, reorganization proceedings were instituted in the district court of the United States for the northern district of Illinois, eastern division, against the Burton Coal Company, the Freeman Coal Mining Company and the Seymour Coal Mining Company. J. Roy Browning was, on September 9, 1938, appointed trustee of the estates of the corporate debtors. Burton was employed by the trustee on a salary, in the capacity formerly occupied by him, and he participated actively in the operation of the debtor companies' business. On December 13 and 16, 1938, under official examination by Browning, as trustee, Burton testified that the lands in controversy were paid for and owned by himself and his wife. Browning also testified that Burton informed him on many occasions that the companies were indebted to him in large amounts of money, and that he, Burton, had not been paid any salaries, amounting to $40,000 per year, by the companies for seven years. In subsequent conversations with Browning, he reiterated his claim of ownership, stating that he, Burton, had been receiving a royalty of ten cents per ton for all coal mined previously to the reorganization proceedings and that he expected to receive a similar amount as royalty from the trustee. From the time of his appointment as trustee, Browning continued to mine the property until April 1, 1942, when, pursuant to orders confirming the plan of reorganization and the instruments executed by him as trustee, all of the assets of the three debtor corporations were turned over to the newly organized Freeman Coal Mining Corporation, the present plaintiff. During *612 his incumbency as trustee in the reorganization proceedings, he paid Fred A. Burton royalties of $22,451.16 on the lands in controversy.
To reverse the decree, defendants first contend that Browning, as trustee, having recognized Burton's ownership of the land and having paid him royalties, the relationship of landlord and tenant was created, and that, therefore neither Browning nor his successor in title, the Freeman Coal Mining Corporation, could dispute Burton's title as landlord. Defendants maintain that Browning had full knowledge of the existence of the relationship of landlord and tenant with Burton, having been in possession of the books and records of the Burton Coal Company and its subsidiaries and of the checks constituting the payments for the land, segregated from a number of other checks; that Browning had discussed with representatives of the Continental bank, the largest creditor, the payment of royalties to Burton, and that the Freeman Coal Mining Corporation, having succeeded to the rights of the trustee as a tenant, and having continued to mine the coal, the relationship has not changed. Plaintiffs, on the other hand, insist that the trustee was without power to create an estoppel against a bankruptcy estate, or its successor in interest, in the absence of an order of court authorizing such action. Browning, as a bankruptcy trustee, was an officer of the court as fully under its control as would be a receiver. (Pearson
v. Higgins,
Apart from the lack of authority in the trustee to alienate important rights possessed by the debtor estates, this court has held, as an exception to the general rule, that where entry into a lease was induced by artifice, fraud or mistake, the tenant can assert better title in himself, or in any other third person under whom he claims, and may disregard his present attornment.(Carter v. Marshall,
Defendants next urge that the right to bring an action in equity arising out of the perpetration of a fraud is not assignable, being claimed to be contrary to public policy and savoring of the character of maintenance. Norton v. Tuttle,
Finally, defendants contend that the trial court was not warranted in declaring Burton a trustee for Burton Coal Company in the acquisition of the lands in controversy, where it was not shown (1) that the Burton Coal Company ever had an existing right or an expectancy in the land, or (2) that the land was necessary to the continuance of its business or that its purchase in some way impaired the value of the properties of the Burton Coal Company. To support this contention, defendants rely upon Tierney
v. United Pocahontas Coal Co.
The decree of the circuit court of Cook county is affirmed.
Decree affirmed. *618