294 F. 939 | N.D. Tex. | 1923
On August 16, 1918, an involuntary petition in bankruptcy was filed against the Walker Grain Company, a corporation. On November 10, 1919, it was adjudicated. It was a Texas corporation, with its principal office and place of business in Fort Worth. The defendant is likewise a resident of Fort Worth.
In his bill the trustee alleges, in substance: The organization of the corporation in 1911. That the defendant was its principal stockholder, and its president, who controlled and dominated its affairs. That since its organization it has, for the purpose of hindering, delaying, and defrauding its creditors, past, present, and future, kept its assets secreted and concealed by various schemes and transfers. That it carried on a grain business, maintained no warehouse or' elevator, but bought in carload lots, with draft attached to bill of lading, and would resell and divert such cars. It had no tangible assets and kept itself in a constant state of insolvency and proof against legal process by fraudulently transferring to its president, the defendant, its earnings, either by direct transfers or by ostensible dividends. That one method of such concealment was to keep accounts in the same bank which were so managed that at the close of each day’s business the corporation would show an overdraft and the J. F. Walker account would absorb any credit belonging to said corporation. That from said J. F. Walker account there would be transferred, from time to time, enough balances to absorb such overdrafts. That in this manner the corporation kept
“That he have judgment against the defendant in the capacity In which he sues for the aforesaid sums, with legal interest; that the defendant be compelled to account herein for the sums of money transferred to him by the said corporation as dividends or otherwise, and Tor such portion of said sums of money as have been invested in the respective parcels of real estate, herein described; and that complainant have a foreclosure of his lien against said real estate accordingly.”
The defendant by appropriate pleading challenged the jurisdiction of the court, alleged the pendency of suits involving the same matters in both the state and federal courts, denied that the corporation had at any .time secreted or concealed any of its assets, admitted the conduct of the grain business, denied that it had no tangible assets, alleged that its capital stock was $25,000 and that at no time since its incorporation have its tangible assets been, less than that sum, admitted the keeping of the two accounts in the American National Bank at Poxt Worth, but alleged that defendant’s account was made up of rents and revenues from his real estate and from stock owned in various other corporations and from oil properties, that the earnings of the corporation were deposited to its own account, except as and when dividends might be declared, or the profits divided, at which time the defendant would deposit his part in his individual account, that mo dividend was declared when it had any outstanding indebtedness, and that no dividend had been received by the defendant since beginning of the year 1917: that the corporation had an agreement with the bank whereby it would pay all drafts drawn against it with hills 'of lading| attached, although such.,payments might overdraw its account, and the defendant authorized said bank to charge such overdraft to his individual account; that such overdrafts would be taken up in a short period, and that the corporation never lost one penny by any such arrangement, and that said arrangement resulted in a net profit to the corporation of $30,000; that the corporation account did not customarily show an overdraft; that it was usually in a sum exceeding its capital stock; that the corporation’s business was such that there might be fluctuations in the grain market, and that all grain dealers transacted their business in the name of corporations which they controlled and managed in the same manner that the defendant did; that those who dealt with it knew that they were dealing with a corporation with $25,-000 authorized capital stock, and they knew that the defendant was not guaranteeing all of the accounts of the corporation; that the last transaction between the defendant and the corporation was in the spring of 1917; that all of the claims represented by the trustee arose after July, 1918, and that the creditors could not complain of any transaction occurring prior to the time they became creditors; that during all of said times the corporation was solvent; that there were $100,000 deposited by the defendant in the said bank in an account styled “J. R. Walker, Trustee, for the Use and Benefit of the American National Bank”; that this deposit was from his individual account, and not from moneys belonging to the corporation, and was made under ah agreement with the bank whereby the bank might look to said account as security for any debts which might be owing to the bank, either by
The plaintiff in a supplemental bill, answered the charges of conspiracy, and illegal trustee, and void acts by the referee, and alleged that the state court suits and the federal court suits were over different matters, with different parties; that all claims of the creditors had been filed more than two years prior to the date of the filing of the supple
On March 10, 1923, Judge Wilson referred the cause to H. A. Turner, Esq., as master in chancery, “to hear and determine the same and to report to the court his findings of fact and conclusions of law, with recommendations thereon.” Such report was filed on the 9th day of October, A. D. 1923. Prior to the filing of such report Judge Wilson had asked the writer to try the case, Seasonably exceptions were filed to the report of the master, and on December 12, A. D. 1923, the cause came on to be heard. Certain corrections were made to the report of the master on the facts. Such report, after the approval of the court, briefly is:
That the Walker Grain Company was incorporated in 1911, with a capital stock of $25,000, divided into shares of $100 each. That the defendant owned 248 of these shares, and his brother owned 1 share and'an employee owned 1 share. That in 1915 the following were shareholders: Darby, 10 shares; Joiner, brother-in-law of Walker, 10 shares; wife of Walker, 10 shares; Ivy, brother-in-law of Walker, 10 shares; Ivy, mother-in-law of Walker, 10 shares; and Walker himself, 200 shares. That the defendant was the president, his wife was the secretary and treasurer of the company, and that he and his wife and Darby were the directors. That this status continued until bankruptcy. That the defendant was in the grain business in Forth Worth in the name of the Ivy Grain Company. That in 1904 the name was changed ■ to the Walker Grain Company. That Walker was the sole owner of the business, which he conducted until he incorporated the Walker Grain Company. He was president and general manager, and dominated its affairs and dictated its business policies. He financed it, advancing large sums each year up to 1916; as much as $70,000 being advanced in one year. He took notes for such advances. He withdrew its funds to reimburse himself and-divided the profits of the business at- the will pf himself and the other directors, without any meeting'of the board. They acquiesced in and consented to everything he did. That though the corporation kept books and records and accounts, and paid franchise taxes, he dealt with it as though it were his own private business. That the corporation was engaged in buying and selling grain in carload lots, such cars being diverted to the purchaser with bill of lading and draft attached. It did a large business. In 1917 the business reached $27,000,000, and during the -busy season of that year drafts would frequently amount to as much as
The grain company transacted its business with the American Na,-tional Bank, as did the defendant. Each had an account there. All drafts drawn by persons selling grain to the company were paid through said bank, and all grain sold with draft attached were collected through said bank, and the debits and credits to the account of the company represented the amount of said drafts. In 1917 drafts drawn by it on those who purchased grain from it amounted to more than $13,000,000, while those who' sold grain to it through drafts, for something less than that amount. That this system resulted in frequently paying drafts amounting to $100,000 or $200,000 a day, when the company really had no money in the bank, but only credits arising from drafts that it had drawn on purchasers; hence the bank desired security, and the defendant guaranteed it against any overdrafts, or other indebtedness of the company, and the bank required him to keep “so much money” for the payment of any such overdrafts, or other indebtedness. That said bank frequently transferred money from the J. I,. Walker account to the account of the Walker Grain Company to cover such overdrafts, and when outgoing drafts were sufficient to cover the overdraft the moneys were transferred back to the account of J. E. Walker, and that from the year 1915 up to February 23, 1917, the books of the bank show that it did almost daily transfer from the said J. E. Walker account to the account of the Walker Grain Company large sums of money, the detail of which was unknown to Walker. This verbal agreement between the bank and Walker was finally reduced to writing in 1915 or 1916.
On February 23, 1917, a change in form, but not in substance, was made in the agreement between the defendant and the bank with respect to the manner of taking care of the overdrafts, and for that purpose a new account was created in said bank in the name of “J. E-Walker, Trustee, for the Use and Benefit of the American National Bank as per Written Agreement,” and that on that date $60,000 was deposited in that account, and on April 20, 1917, another deposit was made amounting to $60,000. The first $60,000 was transferred from the personal account of J. E. Walker by his direction. The second $60,000 was made up of $51,500, which was checked out of the Walker Grain Company account by a check of that date payable to J, E. Walker, which check was executed by the “Walker Grain Company, by J. E. Walker, President,” for the purpose of having it deposited to that account, though Walker, Carr, and Darby testified that this amount represented payment of loans made by Walker to the company. The other $8,500 of the second $60,000 consisted of a number of checks, which Walker testified were executed to him by the Union Grain Company and deposited by him in said trustee account. This account could not be drawn against by Walker without the permission of the bank, and the bank was given absolute control of the funds therein,
The bank, would not have paid the drafts of the grain company if it had not been for this guaranty and this deposit, and the grain company could not have carried on the tremendous business it was enabled to carry on without the same. On June 15, 1917, the defendant was permitted to use $75,000 of the trustee deposit in purchasing Liberty bonds, which Liberty bonds he put with'the bank for the same purpose. This made that account stand $75,000 in bonds and $45,000 in cash.
From February 1 to March 4, 1918, the company made contracts for the purchase of approximately 250,000 bushels of corn with the Gregg Grain Company, ■ Elwood Grain Company, Brunswick Grain Company, Moore-Lawless Grain Company, Fisher Grain Company, and Guthrie Mill & Elevator Company. These companies subsequently became the petitioning creditors in bankruptcy. The company during that same period had other large dealings in grain. The petition for bankruptcy was filed on August 16, 1918, but an adjudication was not had for more than a year afterward, and after such adjudication the Walker Grain Company had no funds on hand and no property, except some office furniture of little value, and except the claims listed in the schedule of assets filed by the bankrupt, upon which the trustee has been able to realize the sum of $1,600. On April 29, 1918, Walker drew, with the bank’s permission, $12,500 from tifie trustee account. On the 6th day of July, 1918, $2,500 was transferred from the trustee account to the account of the Walker Grain Company. On April 24, 1918, $30,000 was drawn from the trustee account and credited to the Walker Grain Company. On November 2, 1918, there was transferred from the trustee account to J. L. Walker the $75,000 worth of Liberty bonds. Each of the transfers from the trustee account to the defendant Walker was made with the knowledge and consent of the bankrupt, and it acquiesced in the same, and the said Walker has never accounted to the trustee for said moneys or Liberty bonds. .At said time the bankrupt had practically ceased to do husiness. Exclusive of said trustee fund, it did not have sufficient assets to pay its debts and' was insolvent. Several were claiming indebtedness against it, among whom were the petitioning creditors. On June 20, 1918, its license to do business was canceled by the Food Administrator. On a trial in the United States District Court of the issue of insolvency and the commission of acts of bankruptcy while insolvent, on November 10, 1919, the company was declared bankrupt as of date August 16, 1918; such adjudication being affirmed by the Circuit Court of Appeals on November 10, 1920, and the plaintiff was appointed trustee on Februapr 21, 1921.
The petitioning creditors’ claims amounted to more than $100,000, and originated in contracts between them and the company providing for the future delivery of corn to the company, and for the difference between the contract price and the market price. These claims were duly proved in the bankruptcy court, over objection, and later the District Court ordered that any one entitled to object thereto would have such right. Such claims antedated the adjudication. The company,
1. With reference to the defendant’s challenge of the jurisdiction of this court to permit the trustee to sue herein, when there is no diversity of citizenship, he cites Bardes v. Bank, 178 U. S. 524, 20 Sup. Ct. 1000. 44 L. Ed. 1175, and Harris v. Bank, 216 U. S. 382, 30 Sup. Ct. 296, 54 L. Ed. 528. Neither of these cases is applicable. The first case was rendered before the amendments to the act which give concurrent jurisdiction to both the bankruptcy court and the state court for prefererices and for setting aside fraudulent conveyances and to avoid transfers by the bankrupt. The second case merely holds that Bankruptcy Act, § 70e (Comp. St. § 9654), provides for avoiding such a transfer as a creditor might have avoided. The later case of Flanders v. Coleman, 250 U. S. 223, 39 Sup. Ct. 472. 63 L. Ed. 948, is apparently directly in point, and upholds the jurisdiction of such a suit in this court, even though it should he determined to be an action under section 70e of the Bankruptcy Act.
2. That portion of the suit which seeks a recovery on the theory that the defendant used the corporation as his agent to carry on his business, in order that he should have no personal liability, and yet reap the fruits of the same, and while so conducting the business received large sums of money, which he converted into read estate described in the petition, is difficult of solution. To support a recovery the plaintiff presents a multitude of authorities, among which are Chicago, etc., v. Minneapolis, 247 U. S. 490, 38 Sup. Ct. 553, 62 L. Ed. 1229; In re Muncie Pulp Co., 139 Fed. 546, 71 C. C. A. 530; In re Eiler’s Music House (C. C. A.) 270 Fed. 915; Ludvigh v. American Woolen Co. (D. C.) 159 Fed. 796; Hunter v. Baker, etc. (D. C.) 225 Fed. 1006; Watson v. Bonfils, 116 Fed. 157, 53 C. C. A. 535; In re Kornit Mfg. Co. (D. C.) 192 Fed. 392; In re Rieger et al. (D. C.) 157 Fed. 609; Wallenstein v. Ervin, 112 Fed. 124, 50 C. C. A. 129; In re Desnoyers Shoe Co., 224 Fed. 372, 140 C. C. A. 58. These aúthorities, and they may be multiplied, support that very healthy commercial rule that no person or corporation can carry on a business in the name of another entity, and furnish capital therefor, and dominate the same, and receive the profits thereof, without subjecting both the property so accumulated and the capital so furnished to the debts and liabilities of the other concern.
Nor do I have any difficulty in finding and believing that the defendant, in accordance with the master’s report, dominated the bankrupt, carried on through it his favorite and succeeding business, and by his advances and guaranties enabled a $25,000 corporation’to do an enormous business reaching into the millions, and which it could not have done without his aid. Nor is there any question that the earnings of the corpoiation were, as soon as they came into being, without formal directors’ meetings, appropriated largely by himself and the
But the insuperable obstacle to a recovery under this head by the plaintiff is that the testimony is not sufficiently satisfying as to time, amount, specificness of property, and existence of any creditor at such time. The record discloses that the Walker Grain Company began business in 1904 or 1905, i that at that time neither the defendant nor his wife had any money, and that at the present time they are owners of property in the city of Fort Worth ranging in value from $350,000 to $700,000, and that the business of the Walker Grain Company was the principal source of these large accumulations. During what year did he receive these moneys? During what year did he purchase'the property described in the petition ? Which of his creditors held a claim against him at such particular time?
The Walker Grain Company became a corporation in 1911; that is, the bankrupt. Were these moneys received by him prior to such incorporation? Were the properties purchased by'him prior to such incorporation ? The last two questions we may answer with a measurable degree of satisfaction, as the record discloses that in 1914, 1915, 1916, 1917, and the beginning of 1918 the business of the company was very large and satisfactory. Were any of the properties purchased during that period? If so, and there were no creditors of the corporation, such purchases are perfectly valid and not subject to the lien sought.
Only such creditors as were in existence at the time of the alleged improper transfers, or at the time of the alleged voidable transaction, are entitled to the benefit of section 70e. Their right is measured by the statutes of Texas by the very wording of section 70e itself:
“The trustee may avoid any transfer by the bankrupt of his property which any creditor * * * might have avoided.”
Any then creditor must be the reading of the language. In Texas no creditor, who became such after a transfer, or conveyance, can recover the property from the transferee. I do’ not stop to discuss the possible equity ground supporting a recovery from the transferee of a debtor who made such transfer having in contemplation the making of the debt. That such a creditor is the only person for whom the trustee may make use of this section is irrefutably established by the Circuit Court of Appeals for this circuit, in an opinion by Circuit Judge Walker in American Trust, etc., v. Duncan, 254 Fed. 780, 166 C. C. A. 226. In that case a hankrupt, years before bankruptcy, gave his wife $1,000. At that time the bank was the only creditor. After the donor went into bankruptcy, the trustee sued to recover the gift. It was recovered. The bank asked to have exclusive benefit of such recovery. Other creditors contested. Judge Walker said;
*949 “Under the circumstances disclosed In the instant case, the appellant alone [hank] had the right to subject to the satisfaction of its demand against the bankrupt the property of the bankrupt’s donee in which the sum donated was invested.”
In other words when we stop and consider the justice and equity of such a recovery, we instantly see that no creditor, nor creditors, other than those existing at the time, could or should have any such right. Persuasive—perhaps a stronger word should • be used—of this position is the case of Martin v. Commercial, etc., 245 U. S. 513, 38 Sup. Ct. 176, 62 L. Ed. 441, in that it directs the mind to the fact that individuality has a place in the assertion of rights that arise under insolvency and bankruptcy statutes. All of the creditors, except the telephone company, which has not proven its claim in bankruptcy, and which is proceeding on its individual way to collect, find the basis of their complaints, or accounts, or claims, on contracts made between February 1 and March 4, 1918. Such contracts were for approximately 250,000 bushels of corn to be delivered in the future. The breaking of such contracts, the refusal to go forward with them, the ascertainment of the difference between the contract price of the com and the market price on the date of such refusal or cancellation, gave the figures making the amount and age of such claim and claims against the bankrupt. This date was “on or hefore June 20, 1918, except in the Brunswick Company claim, which was canceled on June 22, 1918.” As a matter of fact all of the refusals under these contracts, and the cancellations thereof were either the latter part of May, 1918, or June or July of 1918. There is no testimony in the record showing a transfer of any money or property or any profits after that date, except as treated in the next o-aragraph of this opinion. A recovery, therefore, of any portion of the $120,000 alleged to have been deposited in the account of “J. L. Walker trustee,” or for the guaranteeing of the drafts of the Walker Grain Company and the protection of the bank against the overdrafts of the Walker Grain Company, must be held to have been individual property of the defendant, at the time of such deposit, so far as the right of recovery under this section is concerned, unless there he some part of such $120,000 that is shown to have been the property of the bankrupt.
I reach these conclusions for the defendant without the assistance of the reasoning in the cases of Scharbauer v. Lampasas County (Tex. Com. App.) 235 S. W. 533; Staacke v. Routledge, 111 Tex. 489, 241 S. W. 994; American Salt Co. v. Heidenheimer, 80 Tex. 344, 15 S. W. 1038, 26 Am. St. Rep. 743; White v. Pecos, etc., 18 Tex. Civ. App. 634, 45 S. W. 207; Pullman Co. v. Railway, 115 U. S. 587, 6 Sup. Ct. 194, 29 L. Ed. 499; Snider’s Sons Co. v. Troy, 91 Ala. 224, 8 South. 658, 11 L. R. A. 515, 24 Am. St. Rep. 887; Peterson v. C., R. I. & P., 205 U. S. 364, 27 Sup. Ct. 513, 51 L. Ed. 841; P. & N. T. Ry. Co. v. Cox, 106 Tex. 74, 157 S. W. 745; College Park Belt Line v. Idle & Son, 15 Tex. Civ. App. 273, 40 S. W. 64. Such cases display the propositions that, even though a corporation may have been fraudulently organized, there could be no holding of stockholders as partners, and, further, that creditors having dealt with the de facto corporation will not be heard to attack or question its responsibility, nor to sub
3. The agreement between the defendant and the bank for the protection of the overdrafts and the indebtedness of the bankrupt was reduced to writing in 1915, and is as follows :
“Fort Worth, Texas, Nov. 9, 1915.
“The American National Bank, Fort Worth, Texas — Gentlemen: In consideration of the accommodations you are rendering the Walker Grain Company, the Officer-Smith Grain Company, the Union Grain Company, and myself as manager and largely the owner of said- eampanies, in the way you are handling our accounts with you and in connection with certain drafts on us, and in other particulars, and in view of the fact that some of our accounts may become overdrawn, or we may otherwise become obligated, or indebted to you: Now, therefore, this is to witness that I hereby personally guarantee any overdraft or other obligations, liability, or indebtedness to you which may at any time be created or exist against said companies or either of them; and in addition you may, at any time that you might become uneasy about any of their overdrafts, liabilities, or indebtedness to you, charge same to. my personal account, or appropriate my balance on any such liabilities, indebtedness, or overdrafts.
“Witness my hand this 10th day of November, 1915. J. L. Walker.”
On February 23, 1917, a change in form and not in substance was made in the agreement between Walker and the bank with respect to. the manner of taking carg of the overdrafts referred to in the preceding paragraph. This new agreement merely gave the bank the actual cash rather than the written guaranty, but the purpose was the same. The defendant deposited in an account with said bank to the credit of “J. B- Walker, Trustee, for the Use and Benefit of the American National Bank, as per Written Agreement,” $60,000. Under the views expressed in the foregoing paragraph, this was his individual money, and not'subject to recovery by the trustee. On April 20, 1917, another deposit of $60,000 was made in said account. It arose from a check for $51,500 issued on that date to J. B- Walker by the “Walker Grain Company, by J. B. Walker, President.” The other $8,500 consisted of a number of checks, which Walker testified were executed to him by the Union Grain Company, another corporation which he controlled. The defendant, and Carr, and Darby, the latter two being connected with the defendant in some way., testified that the $51,500 check was to pay loans that Walker had made to the bankrupt; but it was not so found by the master, even though the master’s report, as amended by the court, contains this phrase:
“Though Walker, Carr, and Darby testified that this sum paid loans made by Walker to the Walker Company.”
My opinion is that a careful study of the record in this case drives one to the conclusion that this $51,500 was the property of the bankrupt. Bater $32,500 of the $120,000 was indisputably paid on claims of the bankrupt to creditors other than the defendant. On November 2, 1918, after the filing of the petition in bankruptcy, the defendant withdrew $75,000 worth of Biberty bonds, which were purchased out of the $120,000, having previously drawn $12,500 of said $120,000. These three iterns aggregate $120,000.
The date of this transaction, and the view taken of the ownership of this fund, and the condition of the bankrupt at such time, authorizes this recovery under either of the three statutes; i. e., subdivision b of section 60, Bankruptcy Act, subdivision e of section 67, or subdivision e of section 70 (Comp. St. §§ 9644, 9651, 9654).
"This recoveiy is not entitled to he aided by the foreclosure of any lien upon any property mentioned in the bill. The exceptions and pleas of the defendant are overruled.
Judgment will be drawn accordingly.
