117 F.2d 497 (5th Cir. 1941), 9660, Arnold v. Phillips

Docket Nº:9660.
Citation:117 F.2d 497
Case Date:February 04, 1941
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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117 F.2d 497 (5th Cir. 1941)





No. 9660.

United States Court of Appeals, Fifth Circuit.

February 4, 1941

Rehearing Denied March 8, 1941.

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[Copyrighted Material Omitted]

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Leon Jaworski, of Houston, Tex., for appellant.

J. C. Hutcheson, III, of Houston, Tex., for appellee.

Before FOSTER, SIBLEY, and McCORD, Circuit Judges.

SIBLEY, Circuit Judge.

In a bankruptcy case the district court on the trustee's petition set aside a duly recorded deed of trust against the bankrupt corporation's entire plant, made over four years before bankruptcy to its then President and dominating and practically sole stockholder to secure advances of money to the corporation. A foreclosure of it by sale under power six months before bankruptcy was also cancelled, the deed being unrecorded at bankruptcy, and the bankrupt adjudged to be the owner of the property free of this incumbrance. The appeal is from this judgment.

The legal theory of the decision stated by the district judge is that the original capitalization of $50,000 in 1933 was then known to be inadequate; that on September 5, 1934, when the deed of trust was made to secure past advances of $75,500 and interest, and contemplated future advances, the stockholder was seeking to protect himself not from the corporation, but against its then and future creditors, which was inequitable under the decisions in Taylor v. Standard Gas & Electric Company, 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669, and Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281, and that the advances are to be treated not as debts but stock subscriptions. The trustee puts

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forward an additional theory that the corporation was but the agency or instrumentality of the stockholder and that its corporate entity is to be wholly disregarded, and the view taken that the stockholder cannot have a debt against himself, nor a deed of trust against his own property.

The appealing stockholder, A. M. Arnold, contends that the matter is controlled by Texas law, and under that law the debt and security, though to an officer and sole stockholder, are valid; but if not, because the deed of trust was recorded before any of the creditors now represented by the trustee gave credit to the corporation, none of them can question it, and the trustee cannot. Also, that the failure to record the foreclosure deed before the bankruptcy did not avoid it, because Arnold, who bought in the property, at once leased it to the bankrupt, whose possession as Arnold's tenant was notice of Arnold's title and equivalent to record.

The important facts are in brief these: Arnold was and is in the building and contracting business. With the cessation of national prohibition in 1933 he though money could be made in the beer brewing business. He interested a brewer, Souza, and in July, 1933, obtained a Texas charter for Southern Brewing Company, the bankrupt, by which he, his son-in-law Otto, and Souza were named directors for the first year, and the capital stock was fixed at $50,000, all paid in cash by Arnold, to whom 498 shares were issued, and one share each to the other directors. While the brewery was building, it was decided to enlarge it to include a bottling plant. By the end of the year Arnold had advanced, on demand notes, about $70,000 in addition to the $50,000 capital, and the plant had cost approximately $115,000. Additional advances were made to begin operations, Arnold guaranteeing some of the accounts for supplies. At the end of the fiscal year, June 30, 1934, a demand note for the $75,500 of advances and interest at 8% was made. On September 5, 1934, a substitute note was given for $79,729, due September 5, 1937, with interest at 6%, and secured by a deed of trust on the entire plant, in which Arnold's daughter, Mrs. Otto, was...

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