Shepherd v. Banking & Trust Co. of Jonesboro

• Citation: 79 F.2d 767
• Decision Date: 12 November 1935
• Docket Number: No. 6924.,6924.
• Parties: SHEPHERD v. BANKING & TRUST CO. OF JONESBORO et al.
• Court: U.S. Court of Appeals — Sixth Circuit

79 F.2d 767 (1935)

SHEPHERD v. BANKING & TRUST CO. OF JONESBORO et al.

No. 6924.

Circuit Court of Appeals, Sixth Circuit.

November 12, 1935.

J. R. Simmonds, of Johnson City, Tenn., and H. H. Haynes, Sr., and Robert Burrow, both of Bristol, Tenn. (Simmonds & Bowman, of Johnson City, Tenn., and Burrow & Burrow, of Bristol, Tenn., on the brief), for appellant.

S. C. Williams and J. H. Winston, both of Johnson City, Tenn. (J. A. Susong, of Greeneville, Tenn., and Williams, Miller & Winston, of Johnson City, Tenn., on the brief), for appellee.

Before MOORMAN, SIMONS, and ALLEN, Circuit Judges.

SIMONS, Circuit Judge.

The suit below was on a bill in the nature of a bill to quiet title, brought by the trustee in bankruptcy for the purpose of setting aside a certain trust deed given by stockholders of the bankrupt to guarantee the value and payment of preferred shares in the bankrupt corporation purchased by S. C. Williams and others. The real estate conveyed by the trust deed was at one time the property of the bankrupt, and title thereto came into the possession of the conveying stockholders as a result of the transactions to be presently unfolded.

The Summers-Parrott Hardware Company had been engaged in the wholesale hardware business in Johnson City, Tenn., since 1905. It was a close corporation, with 90 per cent. of its capital stock held by J. A. Summers, its president, J. P. Summers, and H. R. Parrott. About 1909, it appeared desirable to erect a building for the corporation's business on land which it owned. The corporation, however, feared that the execution of mortgages by it would adversely affect its line of credit. Williams, appellee, then a practicing lawyer, though not regularly employed as counsel for the corporation, was consulted, with the result that in 1910 a new corporation styled Buffalo Realty Company was organized, and on June 28th of that year the hardware company conveyed to it its real estate for an ostensible purchase price of $21,312.50, equivalent to its value as carried upon the hardware company's books. It does not appear, however, that the consideration named in the deed was ever paid.

At the same time the hardware corporation desired further capital, and wished to raise it by an issue of preferred stock. Advised that under Tennessee law it could not issue such stock, a new corporation, with the required power, was organized, and the assets of the old company transferred to it. The name of the new company was later changed to Summers Hardware Company. The officers, the stockholders, and their holdings were the same in the new company as in the old. In the organization of the Buffalo Realty Company its stock was subscribed for by the stockholders of the hardware company in proportion to their holdings in the hardware company. In payment of subscription, promissory notes were given but never paid. The hardware company authorized the issue of $100,000 of its own preferred stock, which it unsuccessfully tried to market through a Boston broker. Local investors later took $36,000 of this issue, but in 1912, two years later, $64,000 of the preferred stock was still in the treasury. In the meanwhile the realty company had negotiated loans upon the real estate, and with additional money advanced by the hardware company, had erected the building, at a cost of approximately $70,000. On January 8, 1911, it leased the building to the hardware company for a period of ten years, at a yearly rental of $6,000. Of the amount borrowed for construction by the realty company, $30,000 was represented by bonds secured by a mortgage to trustees in Richmond, Va. The realty company also borrowed from the banks, and it appears that its bank loans were for the most part for the use of the hardware company. With the intercompany transactions, and the activities of either corporation after the organization of the realty company, Williams had no connection in any capacity.

This was the situation when in 1912 Williams and the Brownlow estate, being in funds from the sale of utility interests, were solicited by the hardware company's president to purchase the unsubscribed preferred stock. Williams would purchase no stock unless guaranteed, and the Brownlow estate could not invest in securities unsecured by first mortgage on real estate. Summers then proposed to arrange for a transfer of the realty company's building to the hardware company, and for a mortgage by the hardware company to Williams and the Brownlow estate to secure the stock issue. This proposition, after being taken under advisement, was rejected because of lack of power in the hardware company to mortgage its property to secure its shares. A new arrangement was then proposed, and, as carried out, resulted in the conveyance by the Buffalo Realty Company of its property to Summers, Summers and Parrott as individuals, in consideration of $5 and the assumption by the transferees of the bonded indebtedness thereon. The grantees then executed a deed of trust to the defendant Banking & Trust Company, to secure and guarantee Williams and the Brownlow estate on their purchase of $64,000 of the hardware company's preferred stock. Contemporaneously there was an agreement that the bonded indebtedness upon the real estate would be retired, so that the trust deed would become a first lien upon the property. Since, however, the money for the retirement of the bonds must come from the hardware company, and since the bonds were not yet due and bore interest at 6 per cent., it was subsequently agreed between Williams and the hardware company that retirement of the bonds could be deferred until Williams should be able to pay the balance of his stock subscription, his initial payment for $32,000 of preferred stock being only $10,000. The Richmond mortgage was later discharged, and so the situation remained until May 29, 1916, when by joint deed of the Buffalo Realty Company and...