In re Elletson Co.

174 F. 859 | N.D.W. Va. | 1909

DAYTON, District Judge

(after stating- the facts as above). Is the deed of trust of February 15, 1905, void as a security for the bank’s debt by reason of its disclosing on its face an intention and purpose to hinder, delay, and defraud creditors of the bankrupt company, or by reason of such intention being shown by evidence aliunde? This deed having been executed more than four months prior to the institution of bankruptcy proceedings, under, older decisions some doubt might have arisen as to the right of the referee to pass upon and adjudicate the matter in this summary proceeding instead of requiring the institution of a plenary suit for the purpose. The bank, however, having-voluntarily submitted to the jurisdiction by presenting its claim for adjudication, and the estate of the bankrupt being wholly in the possession of the court, there can no longer be doubt of the jurisdiction as thus taken by the referee under the rulings of such cases as White v. Schloerb, 178 U. S. 542, 20 Sup. Ct. 1007, 44 L. Ed. 1183, and Whitney v. Wenman, 198 U. S. 539, 25 Sup. Ct. 778, 49 L. Ed. 1157.

The Supreme Court has also determined that the question of whether such a deed of trust is valid or not is a local one and must be governed by the state court decisions which the federal’ courts will follow. Thompson v. Fairbanks, 196 U. S. 516, 25 Sup. Ct. 306, 49 L. Ed. 577; Humphrey v. Tatman, 198 U. S. 91, 25 Sup. Ct. 567, 49 L. Ed. 956.

Turning to the West Virginia cases, we find that the Supreme Court of Appeals of the state, so recently as March last, has reviewed the question here involved in the case of Gilbert v. Peppers, 65 W. Va. 355, 64 S. E. 361. The facts there were, substantially, that Darkey sold his stock of goods to Peppers, took a deed of trust from him to secure 36 purchase-money notes payable one each month thereafter, allowed him to take charge of the goods, sell a part thereof, incur indebtedness, then had the trustee take charge of the store and advertise tbe same for sale. At the instance of creditors, a receiver was appointed, who sold the goods, keeping separate account of the proceeds arising from the sale of those originally sold by Darkey to Peppers and those arising from the sale of new stock since purchased by Peppers. This deed of trust was assailed as being fraudulent and void per se. It was so held by the court below. The Supreme Court of Appeals, reviewing this ruling and affirming- it, points out that, under the West Virginia statute, alt deeds of trust on stocks of mercantile goods, allowing the debtor to remain in possession, sell, and dispose of the same, until recently, had been held to be fraudulent and void per se (citing Shattuck v. Knight, 25 W. Va. 590; Klee v. Reitzenberger, 23 W. Va. 749; Livesay’s Fx’r v. Beard, 22 W. Va. 585; Clailin v. Foley, 22 W. V. 434; Garden v. Bodwing’s Adm’x, 9 W. Va. 121; Kuhn v. Mack, 4 W. Va. 186); that this ruling is sustained by the decisions in the states of Alabama, Colorado, Connecticut, Delaware, District of Columbia, Florida, Idaho, Illinois, Kansas, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and Wisconsin; that in Arkansas, New Jersey, North Carolina, South Dakota, and Vermont such trusts are held to he presumptively, not conclusively, fraudulent, while in Kentucky, .Maine, Michigan, North Dakota, and Rhode Island there is no presumption either way, the question being submitted to the determination of a jury as a question of fact; that such mortgages are in California prohibited by statute. in Georgia legalized, while the statute of Iowa is peculiar and exceptional. This court then points out that after enforcing its rule for many years, by the cases of Conaway v. Stealey, 44 W. Va. 163, 28 S. E. 793, Horner-Gaylord Co. v. Fawcett, 50 W. Va. 487, 40 S. E. 564, 57 L. R. A. 869, and Bartles & Dillon v. Dodd, 56 W. Va. 383, 49 S. E. 414, an exception was established by it in favor of a purchase-money debt secured upon the property purchased, where there were no existing creditors who could he prejudiced, or against whom fraud could have been directed, and where the deed of trust was recorded and notice thereof was thereby given subsequent creditors. This case then, after full discussion and review of these cases, expressly disavows the soundness of this exception and in terms overrules the cases of Conaway v. Stealey and Horner-Gaylord Co. v. Fawcett. In regard to the case of Bartles & Dillon v. Dodd, the court says, it ‘‘may possibly be sttstained on principle, as the property, except a small portion thereof, was not consumable in its use, nor perishable, nor intended to be sold.”

Notwithstanding I might disagree with the reasoning of this case, I would, as hereinbefore indicated, be compelled to follow it. It is the last enunciation of the Supreme Court of Appeals of the state construing a local contract and a local statute. But I do not disagree; on the contrary, I am in full accord in judgment with it. As well said by Judge Poifenbarger:

“A tailing merchant, or a solvent one having a store in'a had place, would he required to do no mow1, in order to profit at Ihe expense of wholesale dealers, than make a pretended sale to an irresponsible party on credit, at any price they may see fit to adopt, and take such a deed of trust on the stock * * * and let the store continue to operate under it as long as the pretended purchaser can obtain credit.”

The illegality of such conveyances under our statute does not turn upon the validity of the debt secured, but upon the intent of the grantor thereby to hinder, delay, and defraud other creditors either existing or subsequent. The intent may not be to actually cheat and defraud; it is enough if it be to hinder and delay. A debtor may honestly believe that by making such conveyance of personal property he will be able to continue in business and in time work out of it a profit sufficient to pay all debts existing and that may be incurred in accomplishing this purpose. The favored creditor, to be so secured, may share in this view and be willing to sell his property on long time thus secured, in order to allow the experiment to be tried. But it.is not sound morality or good law to allow these two to determine the rights of others, or to hinder or .delay those others in the enforcement of their rights.

The statute is in the disjunctive; therefore either intent is sufficient. This intent is to be proven from the facts surrounding the transaction. These facts may appear upon the face of the deed or from evidence aliunde. If they appear aliunde, the obligation is upon the plaintiff to prove them. These propositions are clearly sustained by a long line of West Virginia decisions, among which are: Edgell v. Smith, 50 W. Va. 349, 356, 40 S. E. 402; Goshorn’s Ex’r v. Snodgrass, 17 W. Va. 717; Landeman v. Wilson, 29 W. Va. 702, 720, 2 S. E. 203; Knight v. Nease, 53 W. Va. 51, 44 S. E. 414; Butler v. Thompson, 45 W. Va. 660, 31 S. E. 960, 72 Am. St. Rep. 838; Hutchinson v. Boltz, 35 W. Va. 754, 14 S. E. 267.

In the case before us, the deed of trust is assailed as being both fraudulent on its face and in fact. It is not necessary to consider these two charges separately. There is no difference in effect between the two. Rather let us consider the conditions, as a whole, existing at the time this trust deed was executed. Elletson owned the business personally. He was to some extent indebted.. He induced Carver to buy' a half interest at $12,000 and pay down $5,000. Carver soon became dissatisfied and refused to pay the balance of $7,000. He wanted to rue the contract, get out of the payment of the $7,000, and secure repayment to him of the $5,000. Elletson had paid out the $5,000 on his debts, and therefore could not repay it to Carver; besides the $7,000 was ábsolutely necessary to the continuing of the business because Elletson, upon the strength of Carver’s agreement to pay it, had bought additional stock and overdrawn some $3,600 in the Ritchie County Bank, of which Carver was cashier, and which overdraft Carver had permitted to be made. What was the problem to be solved by these men under these conditions ?

Is it not clear that, on Carver’s part, it was to get a rescission of his contract of purchase, a repayment of his $5,000, and of the overdraft in his bank? Is it not also clear that, on Elletson’s part, it was to be able to continue the business without litigation and secure the additional capital necessary to do this? What was moré natural than that Carver, seeing his absolute inability to secure in cash the $5,000 to himself and the $8,GOO to his bank, should think of the next best thing, that of “securing” himself somehow? What more natural than that Elletson should be glad and quick to accede to any proposition that would enable him to continue the business without embarrassment and obtain the needed additional capital ? Do not the facts inevitably point to these purposes — to secure Carver, to enable Elletson to continue the business? Elletson bought Carver’s half interest back. They formed a close “family” corporation of just five, the lowest number the law allowed, Elletson and his brother, Carver and his son, the bookkeeper of Elletson, becoming the sole stockholders, each holding one share. Elletson then sells the business to the corporation for 495 shares of capital stock, par value of $19,500, more than double what the property was likely worth, for he had sold to Carver and just bought back a half interest therein for $12,000. Then the five stockholders, as .such and as directors, hold a meeting and resolve that the $12,000 due from Elletson to Carver is the debt of the corporation and shall be secured by the execution of five negotiable notes, and this deed of trust. Carver and Elletson participated in this action of stockholders and, directors, in which they were both so deeply interested— a fact in itself rendering the deed of trust executed in accord therewith liable to be viewed with suspicion and jealousy, as held in Hope v. Salt Co., 25 W. Va. 789, and Sweeny v. Sugar Refining Co., 30 W. Va. 443, 4 S. E. 431, 8 Am. St. Rep. 88. The deed of trust is drawn in minute detail setting forth hundreds of articles of personal property, very many of perishable and consumable character, and including all books, accounts, bills receivable, and the lease for the building. So far it might have been legal, if it had required the trustee therein to take possession of the goods and sell them to pay the debt. Such, however, was not the purpose. The company was to remain in possession until default was made in the payment of the notes, or some one of them, when due, and then the trustee was to take and sell only at the request of Carver. The directors resolved, Carver participating, that in the meanwhile Elletson should conduct the business, incur liabilities, and discharge them.

Was not the purpose to thus withdraw this property from being liable to any other creditor of the company, keep it together for an indefinite period as a security for Carver’s debt, and yet let Elletson under the company’s name use it, sell it, wear it out, exchange it, upon condition that the profit of the business derived from such use, sale, wear, and exchange of it should go to the liquidation of Carver’s debt ? A single undisputed fact, it seems to me, proves this beyond all controversy. The notes became due on the first days'of June, September, November, January, and March following. While the first two seem to have been paid, the third one, becoming due in November, was not paid. It was apparently then in the custody of the bank, for it caused it to be protested. Carver was, cashier of the bank all this time. He was also vice president of the Elletson corporation all this time. He knew the condition of the company, the perishable character of the property covered by this trust, yet for the whole period from November, 1905, to February 4, 1909, when the company became bankrupt, three years and three months, no request came from either Carver or the bank to enforce this trust! And again in January, 1906, when the fourth note became due, default was made, protest was had,, and no taking possession or sale was required. The conclusion is inevitable that this trust was not to be enforced as long as it could hold together the property and shield. the business from attack by other creditors. That the bank and Carver fully understood and participated in this purpose is established by this delay and the connection and association the one with the other.

But, finally, it is insisted that this case comes within the ruling in Bar-ties & Dillon v. Dodd, supra, which Judge Poffenbarger, in Gilbert v. Peppers, says might “possibly” be sustained on principle because so small part of the property involved was consumable in its use or perishable or intended to be sold. I do not think this position can be maintained here, for three reasons: First. Because I do not think the decision in Bartles & Dillon v. Dodd can possibly be maintained in principle for the reason stated. On the contrary, I think it in direct conflict with the true principles established by very many older cases (such as Shattuck v. Knight, 25 W. Va. 590, 600; Landeman v. Wilson, 29 W. Va. 702, 2 S. E. 203; Livesay’s Ex'r v. Beard, 22 W. Va. 585; Claflin v. Foley, 22 W. Va. 434, 441; Gardner v. Johnston, 9 W. Va. 403) to which the ruling in Gilbert v. Peppers directly takes us back, as also with those directly established'by this Gilbert Case itself. Second. If this be not so, and the Bartles Case can be distinguished and upheld, in my judgment it is not applicable here where no small portion of the property conveyed was consumable in its use, perishable, or intended to be sold, but where, on the contrary, near $J,000 worth of the property so conveyed was of this character, Third. In the Bartles Case the trust deed was only assailed as being fraudulent on its face. Here the trust deed is not only assailed for this reason, but also because it is fraudulent in fact, and, as I have indicated, I think the facts disclosed clearly show it to be so, made as it was to hinder and delay creditors from interfex-ing with this property while the company carried on business with it for years.

The decision of the referee must be reversed, and the trust deed, as a security for the bank’s debt, must be held wholly null and void.