Butler v. Cockrill

• Decision Date: 13 April 1896
• Docket Number: 683.,682
• Parties: BUTLER et al. v. COCKRILL. OLD NAT. BANK OF GRAND RAPIDS et al. v. SAME.
• Court: U.S. Court of Appeals — Eighth Circuit

73 F. 945

BUTLER et al. v. COCKRILL.

OLD NAT. BANK OF GRAND RAPIDS et al. v. SAME.

Nos. 682, 683.

United States Court of Appeals, Eighth Circuit.

April 13, 1896

Morris M. Cohn, for appellants E. J. Butler, trustee, and Oscar Davis et al.

W. C Ratcliffe, John Fletcher, and E. W. Kimball, for appellants Old Nat. Bank of Grand Rapids, Mich., and Southern Nat. Bank of New York.

S. R Cockrill and Ashley Cockrill, for appellee Sterling R Cockrill, receiver of First Nat. Bank of Little Rock, Ark.

Before CALDWELL, SANBORN, and THAYER, Circuit Judges.

SANBORN Circuit Judge.

These controversies arise over the distribution of the proceeds of some cotton mills in the city of Little Rock and the lands on which they stood, which were sold under an agreement by all the parties to the original suit that the money derived from the sale should be paid into the court below and should stand in the place of the real estate. In a suit brought in that court, before the sale of the property, by Sterling R Cockrill, as receiver of the First National Bank of Little Rock, Ark., the appellee, against the appellants in these cases, and against all parties interested in this property, a decree was rendered that the receiver was entitled to recover all the proceeds of this sale, for the benefit of all the creditors of the First National Bank. The Old National Bank of Grand Rapids, Mich., and the Southern National Bank of New York, joined in one appeal from this decree, and E .J. Butler, as trustee in a certain trust deed of the property, and those who held the notes described in that deed, joined in the other appeal. The question is, to which of these parties do the proceeds of the sale of this real estate belong?

On February 3, 1893, the First National Bank of Little Rock, Ark., was insolvent, and the comptroller of the currency appointed a receiver of its property, who took possession of and has since been administering it. The legal title to the real estate, the proceeds of which are here in question, was then in the Little Rock Cotton Mills, a corporation which was organized on May 19, 1891. That corporation had taken possession of this property in the summer of 1891, had borrowed $23,000 of the First National Bank, which it had used to buy new machinery for, to make repairs upon, and to operate the mills, and had given its promissory notes to that bank for this money. These notes were unpaid. The First National Bank held two of them, which amount to $8,000. It had negotiated two of them, which amount to $11,000, for value and before maturity, to the Southern National Bank of New York; and it had negotiated one of them, which was for $4,000, for value and before maturity, to the Old National Bank of Grand Rapids, Michigan. The Little Rock Cotton Mills was insolvent. It had no property but the real estate, the proceeds of which are here in question, and it owed no debts but the $23,000, evidenced by these notes. The receiver of the First National Bank, soon after his appointment, took possession of these mills and this property of the cotton mills, and held it as such receiver until it was sold by the order of the court.

The property of an insolvent corporation constitutes a trust fund, pledged to the payment of all its debts, equally and ratably. Graham v. Railroad Co., 102 U.S. 148, 161; Railway Co. v. Ham, 114 U.S. 587, 594,5 Sup.Ct. 1081; Richardson v. Green, 133 U.S. 30, 44, 10 Sup.Ct. 280. In view of this principle, there can be no doubt, under the state of facts which we have recited, that the proceeds of the property of the cotton mills ought to be distributed pro rata among the three banks, which hold these notes and are its only creditors. The receiver of the First National Bank, however, seeks to escape from the effect of this principle, and to recover the entire proceeds of this property, by virtue of these additional facts:

Prior to June 29, 1889, this property belonged to another insolvent corporation, which conveyed it to P. K. Roots and Oscar Davis, in trust, for the First National Bank and the German National Bank, in satisfaction of debts owed to them. This property was silent and unproductive. The president, the cashier, and the directors of the First National Bank decided to organize the Little Rock Cotton Mills, to have this property conveyed to that corporation, to have that corporation operate the mills, and then to sell them for the highest price it could obtain. The purpose of this plan was to make the mill property more salable by putting it into operation, and thus to enable the bank to realize a larger amount for it; and the reason for putting the title to it in the Little Rock Cotton Mills was evidently to have a corporation that could make bills receivable that could be discounted on the credit of this property, and to have a corporation to carry on a business which, under its charter, the bank might not be able lawfully to conduct. The bank had eleven directors. Six of them joined with one Greer and incorporated the Little Rock Cotton Mills on May 19, 1891. They made four of their number members of its board of directors, which consisted of seven. They chose one of their number president of that corporation, and these officers remained such, and conducted the affairs of the cotton mills, until this suit was commenced. They filed a certificate in the office of the secretary of the state of Arkansas, that each of them held 20 shares of $25 each of the capital stock of that corporation, that $5,000 of its capital stock had been actually paid in by the subscribers, and that one Robert Greer had subscribed for 200 shares. When this had been done, H. G. Allis was president of the First National Bank, and H. G.Allis, N. Kupferle, Gus Blass, M. G. Hall, William Farrell, Mark M. Cohn, Logan H. Roots, W. H. Haliburton, George H. Sanders, and C. M. Taylor were its directors, and George H. Sanders was its counsel. N. Kupferle was president of the Little Rock Cotton Mills, and H. G. Allis, N. Kupferle, M. G. Hall, Mark H. Cohn, Robert Greer, E. J. Butler, and George R. Brown were its directors. Before these directors of the First National Bank subscribed for their shares of the capital stock of the cotton mills, they, as president and directors of the bank, agreed with themselves as individuals that those of the directors and stockholders of that bank who subscribed and paid for stock in the cotton mills should be first repaid the amounts they paid for the stock, out of the proceeds of the sale of the mills when made; but they did not make this agreement with Robert Greer, who subscribed for 200 shares. Pursuant to this contract, H. G. Allis, N. Kupferle, Gus Blass, and M. G. Hall, William Farrell, Mark M. Cohn, George R. Brown, and E. J. Butler each subscribed for 20 shares of the stock of the cotton mills, and each paid or promised to pay $500 therefor. About May 25, 1891, the First National Bank bought the interest of the German National Bank in the property in question, and the latter bank authorized its president and Oscar Davis, its cashier, to convey it. Thereupon, on the request of the president of the First National Bank, and with the knowledge and consent of all its directors and officers, Oscar Davis and P. K. Roots conveyed the real estate in question to the Little Rock Cotton Mills, by deed dated May 25, 1891, which recited that they held the property in trust for the two banks, and that the conveyance was 'executed by their directors, and at their request, and for their benefit. ' The several notes of the Little Rock Cotton Mills, which evidence its indebtedness for the $23,000, were made more than a year after this deed had been recorded, and in the months of June and October, 1892. No record of the passage of any resolution by the board of directors of the bank, authorizing their trustees, Davis and Roots, to make the deed to the cotton mills, was produced at the trial, but several of the directors testified that such a resolution was passed. The Little Rock Cotton Mills paid nothing for the conveyance made by Davis and Roots to it; but, soon after that conveyance was made, it proceeded to borrow money of the First National Bank, upon its notes, and to repair, improve, and operate the mills with this money. For this purpose it borrowed and used $23,000, and when its property was sold it brought but $15,000. When the First National Bank discounted the notes of the cotton mills, now held by the Old National Bank and the Southern National Bank, it represented that these notes were prime paper; and those banks had no notice, other than the record of the deeds, that the cotton mills did not own the property conveyed to it by Davis and Roots. On March 3, 1893, after the bank and the cotton mills had both become insolvent, when all their property was in possession of the receiver of the bank, and about two years after the stockholders of the cotton mills had taken their stock, that corporation made and delivered to each of the subscribers to its stock, who were either directors or stockholders of the bank, its promissory note for $500, and made a trust deed of all its property to secure the payment of these notes. A few days after this deed was made and recorded, the cotton mills made another trust deed, to secure the payment of its notes for $23,000, held by the three banks. The subscribers to the stock of the cotton mills, who received notes for $500, immediately transferred them to other parties, who claimed to be bona fide purchasers thereof for value. The holders of all these notes, the Little Rock Cotton Mills, and the trustee named in these trust deeds were parties to the suit brought by the receiver of the First National Bank, and a part of the relief sought in that suit was that these mortgages should...