Stumbo v. Paul B. Hult Lumber Co.

Citation444 P.2d 564,251 Or. 20
Parties, 5 UCC Rep.Serv. 753 Robert G. STUMBO and Allan D. Stumbo, copartners, dba Stumbo Brothers Logging Co., Respondents, v. PAUL B. HULT LUMBER CO., Keystone Lumber Company, Georgia Pacific Corporation, Defendants, Arthur I. Rich, assignee of M D M Co., Respondent and Cross-Appellant, J. H. Baxter & Co., Pierre Biencourt, Kenneth Brady, Donald Brady, Vernon Strong, Richard Tyke, John L. Casteel and Clyde Marriott, Respondents, Southern Logging Company, a corporation, Appellant. SOUTHERN LOGGING COMPANY, a corporation, Appellant, v. KEYSTONE LUMBER COMPANY, a corporation, Defendant, Warren A. Woodruff, Garnishee.
Decision Date23 August 1968
CourtSupreme Court of Oregon

Darryl E. Johnson, Roseburg, argued the cause and filed briefs for respondent and cross-appellant Arthur I. Rich.

Stults, Jayne, Murphy & Anderson, Roseburg, filed a brief for appellant Southern Logging Co.

Donald H. Coulter, Grants Pass, argued the cause and filed a brief for respondents Robert G. Stumbo and Allan D. Stumbo, co-partners, dba Stumbo Brothers Logging Co., and Vernon Strong, Richard Tyke, John L. Casteel and Clyde Marriott. With him on the brief were Long, Neuner, Dole & Caley, Roseburg, for respondent J. H. Baxter & Co., and Johnson, Telfer & Sloan, Grants Pass, for respondents Kenneth Brady, Donald Brady and Pierre Biencourt.

Before PERRY, C.J., and McALLISTER, SLOAN, O'CONNELL, GOODWIN, DENECKE and HOLMAN, JJ.

O'CONNELL, Justice.

This is a suit for a declaratory decree establishing the rights of various creditors of defendant Keystone Lumber Company. Plaintiffs Allan and Robert Stumbo brought an action asserting their claim as creditors of Keystone and in a separate action Southern Logging Company asserted its claim as a creditor of Keystone. The two actions were consolidated for trial. In the consolidated action Southern Logging Company became in effect a defendant as to plaintiffs Allan and Robert Stumbo and, therefore, for the purpose of convenience, we shall treat the Stumbos as the only plaintiffs in the case on appeal.

The trial court held that the claim of plaintiffs Allan and Robert Stumbo had priority over the claim of Arthur I. Rich the holder of a security interest in the inventory of Keystone and also over the claim of Southern Logging Company, an attaching creditor. Rich and Southern Logging Company appeal. The facts are as follows.

Riddle Manufacturing Co. was formed as an Oregon corporation in September, 1949; its stockholders and officers were Herbert Paetz, Rudolph Paetz, and Clyde Cockerell; its plant was at Riddle, Oregon where it did a general lumber remanufacturing business. Economic climate for the lumber industry was good, and by the early 1950's Riddle's production was from two to two and a half million board feet per month. Riddle had banking connections with Douglas County State Bank which was later absorbed into the chain of First National Bank of Oregon. In 1953 the proprietors of Riddle acquired a sawmill at Canyonville, Oregon. It was separately incorporated as an Oregon corporation under the name of Keystone Lumber Company, but the two corporations had the same management and were operated together, Mr. Herbert Paetz being general manager of both. The evidence shows that there was a constant commingling of the finances, conduct of business, and the business affairs of the two corporations, and they were in fact operated as a single, integrated operation. Logs were brought to Keystone and sawed into rough lumber. The rough lumber was transported to Riddle and there processed into finished lumber, after which it was sold by Riddle. Until 1962 the receipts from such sales were deposited in Riddle's bank account and, after deducting a set cost for manufacturing the lumber, Riddle remitted the balance to Keystone. By accounting practice, the debts of the combined operation were substantially amassed in Keystone.

When Keystone was formed in 1953 it was capitalized at $1,000. Thereafter, additions to capital were made through stockholder loans, either directly or by others with the loans guaranteed by the stockholders. The three stockholders of Riddle owned 55% Of Keystone stock and the other holders in Keystone were Francis Marsh, Eugene Marsh, W. H. Dashney and Dr. John Manning, all of McMinnville, who owned the remaining 45% Of Keystone stock in different percentages. Stockholders' loans were advanced by them from time to time in the same proportions as their stock ownership. These loans began from the very inception of Keystone and continued thereafter. These parties were not only lending stockholders, they were also guarantors of loans to Keystone from the bank. They were not stockholders at any time in Riddle.

Keystone and Riddle apparently enjoyed reasonable financial success until 1961 when first Keystone and then Riddle was shut down for lack of cash and timber. At that time Keystone was indebted to Douglas County State Bank in an amount in excess of $130,000, of which $16,000 was secured by guaranty of the McMinnville group and the remainder by mortgages on physical plant and fixed assets.

In 1962 M D M Company, a joint venture, was formed by the McMinnville parties to finance the recommencement of operations by Keystone and Riddle. The joint venture agreement dated March 26, 1962, stipulated that no participant in the venture had authority to bind the other participants without the assent of all. It also operated as an agreement between M D M and Riddle and Keystone by which M D M agreed to loan the two corporations up to $50,000, such loans to be secured by the log inventories of Keystone, title to which was to be transferred log by log to M D M as logs were purchased by Keystone, and the accounts receivables of Riddle, which were to be assigned to M D M as they accumulated. In execution of the agreement an account in favor of M D M was established in the bank and the proceeds of all sales of lumber by Riddle were deposited in this account. M D M authorized an employee of the bank to disburse the funds thus deposited to Keystone and Riddle to meet their operating expenses and some fixed liabilities.

Pursuant to the above arrangement, in April, 1962 M D M loaned $35,000 to Keystone to obtain logs from Georgia-Pacific Company. The agreement of March 26, 1962 was twice amended in 1962 and the maximum amount to be loaned was raised to $125,000. Between April, 1962 and March 24, 1964, M D M allegedly loaned to Keystone, by deposit in the M D M account available for use by Keystone and Riddle, the remaining $90,000 provided for in the amended agreement.

On March 24, 1964 the 1962 loan agreement was replaced by a security agreement covering all inventory of Keystone, including after-acquired inventories. The alleged purpose of this agreement was to bring the arrangement into conformity with the Uniform Commercial Code effective in Oregon on September 1, 1963. A statement of indebtedness of $125,000 in the 1964 security agreement is the primary evidence of the amount of the debt claimed to be owed to M D M. The security interest evidenced by the 1964 security agreement was perfected by the filing of financial statements containing a description of inventories claimed by M D M as security and including the proceeds of such inventories. The statements were filed in the Secretary of State's office and the office of the County Clerk of Douglas County as required by ORS 79.4010.

In October of 1964 the McMinnville parties, except for Manning, withdrew as shareholders of Keystone. At that time the McMinnville parties cancelled the debt of approximately $75,000 to $80,000 incurred by Keystone in the years before 1962. These parties, however, were added to the board of directors of Keystone. Although Keystone showed a profit of some $50,000 in the fiscal year ending on June 30, 1964, it suffered severe flood damage in the latter half of 1964 and was forced to secure a loan from the Small Business Administration. In securing this loan it was necessary for M D M to permit a cessation of payments on its loan until the SBA was paid.

In October of 1965 Keystone, finding itself unable to pay for rapidly accumulating log inventories, secured a substantial loan from the bank by agreeing to fieldwarehouse over a million board feet of logs which were physically segregated and decked alongside and in Keystone's millpond. In making the loan the bank demanded and received from M D M a subordination of M D M's security interest to the extent of the warehouse logs.

Beginning about July, 1965, Southern Logging Company delivered substantial quantities of logs to Keystone. Despite the additional financing from the bank, Keystone was unable to pay Southern Logging for logs delivered in the latter half of October, 1965. Keystone requested and Souther Logging agreed to accept three post-dated checks in payment for such October deliveries. The post-dated checks were never honored. Southern Logging delivered only $810.69 worth of logs to Keystone in November of 1965.

Plaintiffs Robert G. Stumbo and Allan D. Stumbo, co-partners in the general business of logging, began selling logs to Keystone about August 1, 1965 and continued such sales until about November 19, 1965. During the period from November 1, 1965 to November 19, 1965, the plaintiffs, pursuant to oral agreement, delivered to Keystone logs totalling 134,270 board feet for which plaintiffs were entitled to be paid the sum of $7,643.21.

During the same approximate period of time, other loggers, including defendants J. H. Baxter & Co., Pierre Biencourt, Kenneth Brady, Donald Brady, Vernon Strong, Richard Tyke, 1 Casteel & Gilliam, and John L. Casteel, also delivered logs to Keystone in quantities approximating 24,290; 64,460; 34,980; 41,900; 7,740; 78,170; 14,270; and 12,640 board feet, respectively.

All the logs delivered by these parties, including Southern Logging and plaintif...

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