Brown. v. Am. Gas Coal Co..

• Decision Date: 26 February 1924
• Citation: 95 W.Va. 658
• Parties: J. M. G. Brown et al. v. American Gas Coal Company et al.
• Court: West Virginia Supreme Court

95 W.Va. 658

J. M. G. Brown et al.

v.American Gas Coal Company et al.

Supreme Court of Appeals of West Virginia.

Submitted February 6, 1924.

Decided February 26, 1924.

1. Appeal and Error Appeal by Collector of Revenue From De-

cree in Chancery Will be Treated as Taken by Federal Government.

Where in a chancery suit to wind up the affairs of an insolvent corporation, marshal its assets and ascertain its debts in the order of their dignity and priority and distribute its assets accordingly, a final decree is entered fixing the dignity and priority and making recoveries for all the debts, in which is a claim of the federal government for income and excess profits taxes, and which recites: "the court doth adjudge, order and decree that the; claim of the collector of internal revenue for the district of West Virginia, for the use of the United States of America, amounting to $38,653.90, constitutes a lien," against certain property; and makes recovery therefor against the debtor; the collector of internal revenue may maintain an appeal therefrom to this court on behalf of the federal government. Looking to substance* and, not to form, such appeal will be treated as taken by the federal government. (p. 663).

2. Same Decree Winding Up Affairs of Corporation and

Marshalling Assets Without Sale Held Appealable.

Such decree which ascertains the assets and debts, and makes recoveries of the latter, fixing their dignities and, priorities, adjudicates the principles of the cause and is appealable, although no sale of the corporate assets is therein ordered. (p. 664).

3. Internal Revenue Grantee Corporation Held Trustee of As-

sets of Grantor Corporation for Payment of Federal Taxes.

Where a corporation, owing taxes to the federal government, which have not ripened into a lien under the federal statute, conveys its corporate assets to another corporation without consideration and later dissolves, the grantee corporation will be treated as a trustee of such assets for the payment of such taxes, and a tax lien afterwards perfected will attach to the property in the hands of the trustee. (p. 668).

4. Same Corporation Could Not Escape Payment of Federal

Taxes by Execution of Trust Deed.

A corporation cannot escape payment of accrued federal income, and excess profits taxes by executing a trust deed cov ering its corporate assets to secure payment of a debt of its stockholders incurred in the purchase of its stock from prior stockholders in which purchase the corporation has no direct or indirect interes. (p. 668).

5. Corporation's Corporation Cannot Pledge its Assets so as to

Defeat Payment of Its Just Obligations.

A corporation cannot become guarantor and pledge its assets for; the payment of a debt of its stockholders to third persons wherein it has no interest direct or collateral, and from which it derives no-benefit, so as to defeat payment of its own just obligation then in existence. And a trust deed on its property to secure such debt will not take preference over its own debts upon dissolution, and subsequent winding up of its affairs in chancery. (p. 668).

6. Internal Revenue Federal Income and Excess Profits Taxes

Held to Have Preference Over Guaranty Debt Secured by Trust Deed of Debtor Corporation.

Federal income and excess profits taxes which have accrued at the time of such trust deed made by the corporation will take preference in the distribution of the corporate assets over the guaranty debt secured by the trust deed, as an ultra vires act of the corporation. (p. 667).

Appeal from Circuit Court, Monongalia County.

Suit by J. M. G. Brown and another against the American Gas Coal Company, Albert B. White, United States Collector of Internal Revenue, and others. Decree for plaintiffs, and defendants Albert B. White and others appeal.

Reversed in part. Remanded.

T. A. Brown, U. S. Attorney, W. C. Grimes, U. S. Attorney, and Alvin B. Peterson, Special Attorney of Bureau of Internal Revenue, for appellants.

Cox & Baker, for appellees.

Lively, Judge:

The controversy on this appeal is over the question of priority of payment of federal income taxes for the year 1920 of Knob Coal Company, a corporation, over a deed of trust executed by that company to secure J. M. G. Brown and others (all of the former stockholders) in the payment of a balance of purchase money ($175,000), for the stock of Knob Coal Company sold by them to American Gas Coal Company, dated January 3, 1921. The decree gave preference to the debt secured by the trust deed, and the federal government, by its collector of internal revenue, appeals.

Brown and others, on December 14, 1920, owning all the stock of Knob Coal Company, sold said stock to American Gas Coal Company for $300,000, of which sum $125,000 was paid in cash on or before January 3, 1921, and for the remainder, $175,000, four notes each for $43,750, were to be given, payable in four semi-annual payments, with interest, secured by trust deed executed by Knob Coal Company on all of the properties of the Knob Coal Company, the MarkleyDale Coal Company (another company owned by Brown and others, also sold to the American that day), on its property, and by the American company on all of its property. For brevity, the American Gas Coal Company and Knob Coal Company will be called "American company" and "Knob company," respectively. The federal income taxes on the Knob company for the year 1920 amounted in the aggregate to $46,888.75. J. L. Maust and others, from whom Brown and his associates purchased the Knob company, assumed part payment and did pay to Knob company $9,915.02 of this federal tax accrued up to June 15, 1920. The stock of the Knob company transferred to the American company by Brown and his associates was to be free from all lien debts or encumbrances, on January 3, 1921, except notes of Nelson against Knob company for about $12,300; and plaintiffs guaranteed that deferred royalties on the leased lands would not exceed $90,000 including possibly some unpaid purchase money to Wiseman on two of its tracts of land. The income tax was discussed but none of the contracting parties then knew what the exact amount would be; Brown thought it would not exceed $10,000, according to defendants' testimony; and it seems to have been understood that the American would pay the tax, that it would be to its advantage to do so, by making a report consolidated with the report of other companies owned and operated by it. Nothing concerning the amount or payment of the federal tax was in- corporated in the agreement. On the books of the Knob company there was a balance sheet as of December 20, 1920, which shows, "Reserved for Federal Income tax, $46,-888.75." Brown was president of both the Knob and Markley-Dale companies and the stockholders in each company were the same.

In October, 1921, Brown and the other plaintiffs filed their bill against the American Cas Coal Company, the Knob Coal Company and other corporations whose stock and assets had been purchased by the first named company, and against lien holders on the properties, charging the insolvency of the American company, charging non-payment of the said income taxes for the year 1920, amounting to about $35,000, and praying for ascertainment of the liens and debts against the American company, their dignity and priority, preservation of its assets by receivership, and for sale of its properties in discharge of its indebtedness, and generally to wind up its affairs. The causo was referred to a master, who filed his report in September, 1922, setting out all of the property owned by the American, Markley-Dale and Knob companies, fixing the personal property value at $28,665.74, the real estate of the American at $18,400; and the value of its land acquired from Knob company at $14,690. The claim for federal income taxes against Knob company was ascertained to be $35,166.66 with interest from June 15, 1922, and 5% penalty, amounting in all to $38,653.90, and listed as fourth lien in dignity and priority against the American company; and first in priority against its holdings purchased from Knob company. Exceptions were taken by Brown and the other plaintiffs because the report did not give their trust deed of the 3d day of January, 1921, for $175,000, priority over the federal taxes on all of the properties. Other exceptions by other lien holders of like import were made. The decree of November 27, 1922, sustained the exceptions and gave preference to the deed of trust and various other liens, amounting in all to probably $500,000, over the federal taxes; finds that the American company is not insolvent, and postpones entry of decree of sale. In January following, a decree of sale was entered directing the special commissioner to distribute the proceeds to the creditors in the order form- erly decreed, after payment of receivers' certificates and costs; and on March 2, 1923, the property was sold to plaintiffs, J. M. G. Brown and Robert Hennen, for $301,600. From the final decree of November 27, 1922, appeal and supersedeas was awarded.

The trust deed to secure Brown and his associates in the payment of the purchase' money for the Knob company of $175,000, was executed by American company, Knob and Markley-Dale companies, on January 3, 1921. The notes for this balance of purchase money were given by American company, payable to Brown and the other stockholders of Knob company, appellees herein, in amounts proportionate to their respective stock holdings. On April 14, 1921, Knob company conveyed all, of its assets to American company, the deed therefor being recorded June 30, 1921. The deed was made subject to all the lien debts or encumbrances of the Knob company; and appellant asserts that the federal income taxes were then accrued; and that the United States then had an equitable lien upon all of the property for said taxes; and regardless of its lien the United States had priority of payment over Brown's trust deed, out of any monies...