Gross v. Tierney, 55 F.2d 578 (4th Cir. 1932)

*579 A. P. Edgar and F. R. Hill, both of Marlinton, W. Va., for appellants.

Curt E. Amos and Rollo J. Conley, both of Fairmont, W. Va. (James P. Tierney, of Clarksburg, W. Va., and Frank R. Amos and Harrison Conaway, both of Fairmont, W. Va., on the brief), for appellees.

This is an appeal from an order allowing the holders of certain vendor's lien notes to prove secured claims in the bankruptcy proceeding of the Forest Lumber Company, and holding that these notes constituted liens upon certain property of the bankrupt. We cannot improve upon the statement of facts made by the referee in his opinion filed with the court below. That statement is as follows:

"By deed bearing date the 1st day of March, 1913, John A. Clark and others conveyed to John Y. Hite certain timber lands and other property situated in Pocahontas County, West Virginia, and in Highland County, Virginia. The deed recites a consideration of $1.00 and other good and valuable consideration and the further consideration of $112,500.00 for which one hundred notes of $1,000.00 each and twenty-five notes of $500.00 each, bearing even date with the deed, were executed by John Y. Hite to Clark and the other grantors in said deed, and to secure the payment of these notes a vendor's lien was retained on the real estate conveyed. The real estate conveyed by this deed consists of 13,800.66 acres, more or less. This deed was duly recorded in the counties mentioned. By deed bearing date the 15th day of May, 1913, Ida S. Pool, executrix, conveyed to said John Y. Hite certain other timber lands containing about 2,450 acres, situate in said Highland County, for the consideration of $1.00 and other good and valuable consideration, of which consideration $5,750.00 was to be paid on or before the 18th day of May, 1914, and the further sum of $5,750.00 to be paid on or before the 18th day of May, 1915, and to secure these payments a vendor's lien was retained in the deed. This deed was likewise duly recorded in Highland County. By deed dated the 3rd day of January, 1914, the above mentioned real estate was conveyed by John Y. Hite to the Forest Lumber Company, the above named bankrupt, reciting a consideration of $1.00 and other good and valuable considerations, the receipt of which was acknowledged, and for the further consideration that the Forest Lumber Company assume the payment of the unpaid purchase money then owing by the said Hite on the real estate conveyed. This deed reserved a vendor's lien to secure the payment of the unpaid purchase money mentioned therein, and it was recorded soon after its execution in both Highland and Pocahontas Counties.

"The Forest Lumber Company was organized by John Y. Hite and his associates on the 19th day of April, 1913, and Hite was the president of such corporation during the transactions out of which this controversy arose. At a meeting of the board of directors of the Forest Lumber Company held on the 15th day of October, 1913, a minute was made reciting that `John Y. Hite hereby offers to sell and convey unto the said Forest Lumber Company, for the price hereinafter stated,' * * * the above mentioned timber lands `fully and particularly described in a deed drafted and prepared by the said John Y. Hite, and now offered and tendered to the said board of directors'. A copy of the deed from Hite to Forest Lumber Company then follows, but with the month and the day of the month in blank, the year 1914 being written therein. The minutes then continue by stating that the price for which Hite agrees to sell and convey this property and the consideration which he asks for the same is the issuance to Hite of stock of the Forest Lumber Company of the par value of $200,000.00, stock to Louis Rafetto of the par value of *580 $100,000.00, and stock to Alex R. Watson for the par value of $31,000.00, and that after consideration of this offer, and `it appearing to the said board of directors that the said property * * * is fully worth, at least the sum of $331,000.00', upon motion, a resolution was adopted accepting this offer and directing that the corporation take immediate control and possession of the property and directing the secretary to cause this deed to be properly executed and recorded.

"The original of this copy of deed was executed and was recorded as above stated and the Forest Lumber Company took possession of the real estate conveyed by this deed and continued to hold this property without operating the same until some time during the year 1924 when it began to manufacture lumber and it thereafter continued for some time to cut timber on this land and to conduct an extensive operation thereon in the manufacture of lumber.

"Shortly after the organization of this corporation the books of the company were opened and kept at its office maintained in the city of Philadelphia, and in opening the books of the company the unpaid purchase money secured by the above mentioned vendor's liens was set up as a liability against the company. After the organization of the company, and during the years 1914 and 1915, $48,500.00 was paid of the series of notes given by Hite to Clark and others with money arising from the sale of capital stock of the Forest Lumber Company.

"After the maturity of the notes given by Hite to Clark and others, John Y. Hite claims to have purchased and paid off with his own money a large number of these notes, some of which were assigned by him to others and twenty-four of which were held by him when he was later adjudged an individual bankrupt. Thereafter Hite sought to borrow some money and offered to put up the notes which he had purchased and which had not been assigned by him, as collateral security for such loan. Hite then stated to those with whom he was negotiating for a loan that there was nothing against the property of Forest Lumber Company and that the notes had been paid, but then stated to one with whom he was negotiating that the notes were not paid by the company and that they were good collateral and that he would not release the liens securing the payment of these notes. James P. Tierney, the trustee of the estate of John Y. Hite, bankrupt, filed a claim in this proceeding for twenty-four of these notes, claiming them to be secured under the above mentioned vendor's liens. Robert T. Donley, W. H. Conaway, C. & M. Land Company, Laura B. Eddy, S. C. Morgan, Mary E. Morgan, Fairmont State Bank, Frank R. Amos and James M. Stark took by assignment from Hite some of the notes paid off by him and have filed proofs of claim for them as secured debts in this proceeding. M. Virginia Hite, a stockholder in the Forest Lumber Company and a sister of John Y. Hite, claims to have bought in 1915, 1916 and 1917 as an investment, and at the suggestion of John Y. Hite, twenty-one of these notes of the aggregate par value of $20,000.00, and claim has been filed by her as a secured claim in this proceeding. John Y. Hite claims to have also paid out of his own money $5,750.00 of the consideration mentioned in the deed of Ida S. Pool, executrix, to John Y. Hite, and his said trustee in bankruptcy has filed in this proceeding a claim for that sum as a secured debt. These various claimants assert that they are subrogated to the rights of the original payees of said notes and to Ida S. Pool, executrix, to whom the $5,750.00 was payable under her deed.

"By deed dated the 1st day of January, 1926, the Warn Lumber Corporation conveyed to the Forest Lumber Company certain other timber lands and other property described in said deed for a consideration of $225,000.00 for which notes were executed and to secure the payment of which a vendor's lien was retained in that deed. This last mentioned deed was duly recorded. On the 15th day of June, 1928, the Circuit Court of Pocahontas County entered a decree in the chancery cause of B. B. Campbell against the Forest Lumber Company and others, then pending in said court, adjudicating the aforesaid debt of the Warn Lumber Corporation in the sum of $237,895.03 as a first lien on the real estate and mixed property granted and conveyed by said deed from the Warn Lumber Corporation to Forest Lumber Company, and adjudicating a debt in favor of B. B. Campbell against Forest Lumber Company for the sum of $47,588.75 as a lien on the real estate and personal property of said Forest Lumber Company, but continued the adjudication of the priority thereof.

"Clifford A. Gross, trustee of the estate of Forest Lumber Company, bankrupt, filed in this proceeding his written objections to the allowance of the aforesaid claims filed as secured by Robert T. Donley, M. Virginia Hite, James P. Tierney, Trustee of the estate of John Y. Hite, bankrupt, for the said twenty-four notes, W. H. Conaway, C. & M. Land *581 Company, Laura B. Eddy, S. C. Morgan, Mary E. Morgan, Fairmont State Bank, Frank R. Amos, and James P. Tierney, trustee of the estate of John Y. Hite Bankrupt, for the sum of $5,750.00. The Warn Lumber Corporation and B. B. Campbell joined in said objections. * * *

"The fourth objection is that the notes paid by John Y. Hite were paid with money belonging to the Forest Lumber Company. While it was argued that this was a fair assumption arising from the fact that large revenues arose to the Forest Lumber Company during the operation of its milling plant and no explanation as to the distribution of that money has been made, the only direct evidence offered upon the hearing respecting this point was the evidence of John Y. Hite in which he testified that he paid these notes out of his own money. That testimony was not contradicted in any way. It cannot be concluded that the money arising from the milling operation was used by Hite to pay these notes, without any evidence to support such conclusion. It may be true that this money was used for this purpose, but it may also be true that it went for some other purpose.

"The fifth objection is that John Y. Hite represented to a broker and a banker with whom he negotiated for a loan that these notes were paid and that Hite is now estopped from claiming them. These representations do tend to confuse a situation that is otherwise clear to the referee, but the broker testified that while Hite said to him that the notes were paid, he further said that they had not been paid by the Company and Hite did not want to sign a release and insisted that the notes were good collateral (see page 90, 92 and 93 of the deposition of R. H. Jarvis). The banker testified that Hite did not say by whom the notes had been paid, but said that they had been paid and had not been released, and were good collateral (see page 95 of the testimony of E. D. Tomlin). Furthermore, no credit was obtained upon the representation that the notes were paid and it does not appear that any creditor had knowledge of these representations at the time that they extended credit to the Forest Lumber Company."

Before PARKER and SOPER, Circuit Judges, and McCLINTIC, District Judge.

PARKER, Circuit Judge (after stating the facts as above).

Five questions are presented by the contentions of appellants: (1) Did the Forest Lumber Company assume the payment of the notes secured by lien on the lands conveyed to it? (2) Were the notes held by John Y. Hite and his transferees paid off by the funds of the Forest Lumber Company? (3) Are the trustee of John Y. Hite and his transferees entitled to be subrogated to the lien of the original holder of the notes for which they have filed claim? (4) Is Miss M. Virginia Hite entitled to be subrogated to the lien of the original holder of the notes for which she has filed claim? And (5) are the holders of the notes precluded from asserting them as secured claims against the estate by reason of laches or estoppel? We think that all of these questions must be answered against the contention of appellants.

The first two are pure questions of fact; and, as to them, the well-settled rule applies that, where findings of fact are made by the referee and approved by the District Judge, they are presumptively correct and will not be disturbed upon appeal unless clearly wrong. After a careful review of the evidence, we are not satisfied that they are wrong; but, on the contrary, we see no other conclusion that could be reached under the evidence.

The fact that the property acquired was valued at the first meeting of the directors at a sum equal to the amount of stock issued by no means negatives the testimony that the corporation was to assume the payment of the mortgage indebtedness. The corporation was acquiring merely the equity of redemption in the property; and it is not unreasonable to assume that this was what was referred to in the valuation. And the fact that the corporation was to assume the mortgage indebtedness is shown not only by the provision contained in the deed which it accepted, but also by the fact that a copy of this deed was attached to the minutes of the directors' meeting in which the purchase was authorized, and that shortly afterwards a statement was set up on the books of the corporation showing that this mortgage indebtedness was owing by it. It is true that the copy of the deed attached to the minutes bears a date subsequent to the meeting of the directors, and this strongly tends to show that it was actually prepared after the meeting was held; but, on the other hand, there is no reason to think that it was not prepared in accordance with the understanding arrived at during the meeting. A holding that the directors did not agree at the meeting to assume the mortgage indebtedness would be based upon mere speculation and would be contradictory of the direct evidence in the case.

*582 Likewise, on the second question, the only positive evidence in the case with regard thereto is that of John Y. Hite, who testified that he paid the notes from his own funds, and not from the funds of the corporation. The argument based on the supposed earnings of the corporation does not meet this testimony. If Hite received funds of the corporation. for which he has not accounted, he can, of course, be held liable therefor. If such funds went into the payment of these notes, the corporation is entitled to have same extinguished. But merely to show that the corporation should have made profits is by no means a tracing of its funds into the notes. The referee, who saw Hite and heard him testify, accepted his statement that he paid same from his own funds. The District Judge has approved this finding. And we certainly would not be justified in reversing it and finding the contrary on the basis of mere argument as to the supposed earnings of the corporation.

Coming to the third question, we agree with appellants that the trustee of John Y. Hite and the persons to whom he assigned past-due notes stand in no better position with regard thereto than he would occupy if he still held the notes; but this is sufficient for their protection, as we think that he would be entitled to the subrogation which they ask. When the Forest Lumber Company assumed the payment of the notes of Hite secured by the land conveyed to it, it became in contemplation of equity the principal debtor under these notes, and Hite became a mere surety for their payment. Cobb v. Interstate Mortgage Corporation (C. C. A. 4th) 20 F.(2d) 786, 788; Klapworth v. Dressler, 13 N. J. Eq. 62, 78 Am. Dec. 69 and note. When therefore he was compelled to pay notes upon which he was only secondarily liable, he became entitled to subrogation to all of the security which the creditor held for their payment. Clayton v. Fort Worth State Bank (C. C. A. 5th) 4 F.(2d) 763, 765; Kyner v. Clark (C. C. A. 8th) 29 F.(2d) 545; Dater v. Anderson (C. C. A. 6th) 28 F.(2d) 944, 947; Brown v. Thompson, 99 W. Va. 56, 128 S.E. 309; Pomeroy's Equity Jurisprudence (4th Ed.) vol. 3, §§ 1211 and 1212. The rule is thus well stated by Judge Walker of the Fifth Circuit in Clayton v. Fort Worth State Bank, supra: "Where, on a sale of mortgaged property, the buyer, as part of the consideration or price agreed on, obligates himself to pay the debt secured by such mortgage, as between the buyer and seller, the buyer becomes the principal debtor to the mortgage creditor, and the seller becomes the buyer's surety. If, while such relation exists between the seller and buyer, the former is compelled to pay off the mortgage debt, he is entitled to be subrogated to the rights of the mortgagee, and to have the property subjected to the payment of the amount of the mortgage debt. Henson v. Reed, 71 Tex. 728, 10 S.W. 522; Wood v. Smith, 51 Iowa, 156, 50 N.W. 581; 37 Cyc. 465."

On the fourth question, the contention of appellants is that Miss M. Virginia Hite should be denied subrogation on the ground that she paid the debts of the corporation as a mere volunteer. This contention cannot be sustained. Miss Hite was a stockholder in the corporation and the uncontradicted testimony is that she purchased the notes as an investment upon the advice of her brother, who was president of the corporation. It is well settled that, where one purchases a note secured by a vendor's lien, and a purchase and not an extinguishment of the debt is intended, the purchaser acquires the right of subrogation as an incident of the purchase. Bispham's Principles of Equity (7th Ed.) 480, 481; 25 R. C. L. p. 1352; Calhoun v. Ainsworth, 118 Ark. 316, 176 S.W. 316, L. R. A. 1915E, 395; Henderson v. Hawley (Tex. Civ. App.) 237 S.W. 341. And if the transaction is in doubt, the presumption is that a purchase and not a payment was intended. Baer v. Security Trust Co. (C. C. A. 4th) 32 F.(2d) 147.

And, even if the notes be regarded as having been paid by Miss Hite, she is not to be treated as a volunteer and denied subrogation on that ground. As a stockholder of the corporation, she had an interest to protect in making the payments; and it would seem that on this ground alone she would be entitled to subrogation, as the loss to a stockholder resulting from foreclosure on property of a corporation is closely analogous to the loss to a cotenant from the foreclosure of a lien or mortgage on the common property. On the general principle here involved, see Pomeroy's Equitable Remedies (2d Ed.) vol. 2, § 921 (b); Redington v. Cornwell, 90 Cal. 49, 27 P. 40; note 99 Am. St. Rep. 504, 505; Fletcher's Cyc. of Corp. vol. 4, p. 3628; Haverford Loan Ass'n v. Fire Ass'n, 180 Pa. 522, 37 A. 179, 57 Am. St. Rep. 657. But, in addition to this, Miss Hite made the payments at the request of her brother, who was president of the debtor corporation and secondarily liable upon the notes himself, and is entitled to subrogation on that ground. 25 R. C. L. 1326, 1327; Pomeroy's Equitable Remedies *583 (2d Ed.) vol. 2, § 921 (e); Rachal v. Smith (C. C. A. 5th) 101 F. 159; Home Savings Bank v. Bierstadt, 168 Ill. 618, 48 N.E. 161, 61 Am. St. Rep. 146; Fort Jefferson Improvement Co. v. Dupoyster, 112 Ky. 792, 66 S.W. 1048, 2 L. R. A. (N. S.) 263; Huggins v. Fitzpatrick, 102 W. Va. 224, 135 S.E. 19.

The questions raised under the fifth point merit little discussion. There is no ground for estoppel; for if the representations of John Y. Hite be viewed in the light most favorable to appellants, it appears that he obtained no loan by reason thereof, and consequently no creditor can be said to have been misled thereby to his injury. We see no basis whatever for contending that appellees have been guilty of laches. The notes are not barred by the statute of limitations; and, while this fact is not conclusive on the question of the existence of laches, courts of equity will ordinarily be guided by the statute in passing upon that question. Pomeroy's Equitable Remedies (2d Ed.) § 20. The suggestion that John Y. Hite is to be deemed guilty of laches because he did not pay them out of the money passing through his hands ignores the fact that the money may have been needed for the other purposes of the business.

There was no error, and the decree of the District Court will be affirmed.

Affirmed.