Cass Bank & Trust Co. v. Sheehan

• Decision Date: 15 July 1938
• Docket Number: 11142 and 11147.,No. 11141 and 11146,11141 and 11146
• Citation: 97 F.2d 935
• Parties: CASS BANK & TRUST CO. et al. v. SHEEHAN et al. In re SCHORR-KOLKSCHNEIDER BREWING CO.
• Court: U.S. Court of Appeals — Eighth Circuit

97 F.2d 935 (1938)

CASS BANK & TRUST CO. et al. v. SHEEHAN et al.^* In re SCHORR-KOLKSCHNEIDER BREWING CO.

Nos. 11141 and 11146, 11142 and 11147.

Circuit Court of Appeals, Eighth Circuit.

July 15, 1938.

Paul G. Ochterbeck, of St. Louis, Mo. (William L. Igoe, J. W. McAfee, and Igoe, Carroll, Keefe & McAfee, all of St. Louis, Mo., on the brief), for appellants.

Staunton E. Boudreau, of St. Louis, Mo. (John B. Kramer, of St. Louis, Mo., on the brief), for appellees.

Before STONE, WOODROUGH, and BOOTH, Circuit Judges.

WOODROUGH, Circuit Judge.

Schorr-Kolkschneider Brewing Company, a Missouri corporation, is a debtor in reorganization under section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, and the appellant Cass Bank and Trust Company is a creditor in the amount of $63,000 for which it holds the notes of the debtor. The bank also holds in pledge as collateral security for its debt, a negotiable promissory note for one hundred thousand dollars executed by the brewery company to an officer of the bank, secured by the brewery company's deed of trust covering the land upon which the brewery is located. The bank claims that it has a first and paramount lien upon the brewery for the amount of the debt due it, with interest and attorneys' fees.

The trustee operating the brewery under court direction applied for authority to issue and sell trustee's certificates to meet the charges of operation, and prayed that the certificates be given a position of priority over all claims of the debtor, secured and unsecured. The bank filed an intervening petition setting up its claimed paramount lien and resisting any attempt to subordinate such lien to trustee's certificates. It also opposed borrowing money through certificates to carry on the business. Thereafter the trustee filed a motion setting forth that "investigation discloses that the claim of (the bank) probably is not secured by any valid mortgage or deed of trust of any debtor's real estate," and asking leave to join issue on the intervening petition of the bank and to try the question whether the bank's claim is secured by valid mortgage or deed of trust. Leave was granted and the issue was tried out on full hearing. The court held that the hundred thousand dollar note was a fictitious increase of indebtedness for which the debtor had received no consideration, and that it and the deed of trust purporting to secure it, were wholly void under Section 8, Article 12, of the constitution of Missouri, Mo.St.Ann.Const. art. 12, § 8. By separate order the court authorized the issuance and sale of trustee's certificates with priority over all claims of the debtor. These several appeals taken by the bank vest jurisdiction in this court to review the adjudication against the validity of the lien claimed by the bank and also the order authorizing issuance and sale of trustee's certificates. Milwaukee Postal Bldg. Corp. v. McCann, 8 Cir., 95 F.2d 948, loc. cit. 951, 952; Central Hanover Bank & Trust Co. v. Williams, 8 Cir., 95 F.2d 210, loc. cit. 212; Dickinson v. Orr, 8 Cir., 94 F.2d 536. The motion to dismiss appeals is denied.

We think the complete findings of fact made by the trial court¹ conform to the evidence that was adduced. It appears that prior to May 15th, 1935, the brewery company was indebted to the bank in the sum of $60,000 and that it borrowed the further sum of $15,000 on that day, increasing the debt to $75,000. Its officers then agreed that the brewery company would give the deed of trust and hundred thousand dollar note to secure the entire present and future indebtedness and the pledge was made pursuant to the agreement. It was the mutual expectation at the time that the bank could and probably would increase the loans if necessary to carry on the brewery business, up to more than $100,000. But the Bank Examiner of Missouri held that the bank could not loan the brewery company in excess of $63,000, and the bank thereupon required the brewery company to repay $12,000, and it reduced the debt to the bank from $75,000 to $63,000. The only consideration in new money, as it turned out, which remained as a loan from the bank to the brewery company on account of the pledge of the deed of trust and the one hundred thousand dollar note was the increase of three thousand dollars over and above the pre-existing indebtedness of $60,000.

Whether as a result of the transaction the bank became entitled to have a lien for its $63,000 debt impressed upon the brewery property must be determined by reference to Section 8, Article 12, of the constitution and the decisions of Missouri, which this court has had occasion to consider in several cases.

Section 8, Article 12, Mo.St.Ann.Const. art. 12, § 8, so far as relevant, reads:

"No corporation shall issue stock or bonds, except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void."

Our first question is whether the hundred thousand dollar note issued by the brewery company should be deemed to come within the inhibition of the constitutional provision against the issuance by any corporation of its bonds, "except for money paid, labor done or property actually received." The note is a negotiable instrument made payable three years after date and bears no interest until after maturity, from which time it draws eight per cent. The interest at six per cent per annum prior to maturity is evidenced by six notes which are like coupons usually attached to bonds.

To all practical intents and purposes the effect of this note of the brewery company does not differ from that of a bond and coupons with like terms and taking into consideration the object and effect of the constitutional provision as explained by the Supreme Court of Missouri in Hunter v. Garanflo, 246 Mo. 131, 151 S.W. 741, we hold that the note comes within the intendment of the cited section of the constitution. Haskell v. McClintic-Marshall Co., 9 Cir., 289 F. 405, loc. cit. 412, 413; Ide v. Passumpsic & Conn. Rivers R. Co., 32 Vt. 297, 299; Schoonmaker v. Mitchell's Administrator, 144 Ky. 794, 139 S.W. 968; Marine & R. Phosphate Min. & Manufacturing Co. v. Bradley, 105 U.S. 175, loc. cit. 180, 26 L.Ed. 1034; Ackley School-Dist. v. Hall, 113 U.S. 135, loc. cit. 138-140, 5 S.Ct. 371, 28 L.Ed. 954; New Nueces Hotel Co. v. Weil Bros., Tex.Civ.App., 243 S.W. 731, loc. cit. 733; Courand v. Vollmer, 31 Tex. 397, 400, 401. The appellant bank cites Underhill v. Santa Barbara Land Co., 93 Cal. 300, 28 P. 1049, and Bank of Newman v. Monterey County Gas Co., 48 Cal.App. 263, 191 P. 970, as authority to the contrary, but those cases are not analogous.

As we think the issuance of the hundred thousand dollar note secured by deed of trust was forbidden unless for money paid, labor done or property actually received, we are constrained to hold that the consideration of the pre-existing sixty thousand dollar debt of the brewery company to the bank can not support the pledge or give rise to a valid lien in the bank's favor. This court has so held upon exhaustive consideration of the application of the Missouri law to such transactions involving bonds, and as our conclusions do not appear to have been contradicted by the Missouri courts, we adhere to them as correct interpretations of Missouri law. Kemmerer v. St. Louis Blast Furnace Co., 8 Cir., 212 F. 63; Mudge v. Black, Sheridan & Wilson, 8 Cir., 224 F. 919; Central Trust Co. of Illinois v. Southern Oil Corp., 8 Cir., 8 F.2d 338. See Texas & Pacific R. v. Pottorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777.

The appellant cites Slupsky v. Westinghouse Electric & Manufacturing Co., 8 Cir., 78 F.2d 13. That case involved bonds which had been lawfully issued by a Missouri corporation and afterwards reacquired for the express purpose of being pledged to secure a valid indebtedness, and our holding was that Section 8, Article 12, of the constitution did not apply. We distinguished the case from the decisions of this court last above cited, and it is without application to the case at bar.

But Section 8, Article 12, of the Missouri constitution does not prohibit the bank from acquiring a lien through the deed of trust and note in question here to the extent of any new money shown to have been actually paid the brewing company in consideration therefor. The Missouri decision applicable to that phase of the transaction was pointed out and quoted in Mississippi Valley Trust Co. v. Railway Steel Spring Co., 8 Cir., 258 F. 346, page 353. See Dibert v. D'Arcy, 248 Mo. 617, 154 S.W. 1116. Although the amount of new money actually paid by the bank was originally $15,000.00, all but $3,000.00 of that new consideration failed because of the mistake as to the extent to which the bank was empowered to loan to the brewery company.

The bank, therefore, has in equity a valid lien on the brewery for $3,000.00, Edgar v. Ames, 8...