Davis v. Hanover Savings Fund Society

• Decision Date: 04 November 1913
• Docket Number: 1162.
• Citation: 210 F. 768
• Parties: DAVIS et al. v. HANOVER SAVINGS FUND SOCIETY et al.
• Court: U.S. Court of Appeals — Fourth Circuit

210 F. 768

DAVIS et al. v. HANOVER SAVINGS FUND SOCIETY et al.

No. 1162.

United States Court of Appeals, Fourth Circuit.

November 4, 1913

Geo. M Beltzhoover, Jr., of Shepherdstown, W. Va., and A. Moore Jr. of Berryville, Va., for appellants.

Forrest W. Brown, of Charlestown, W. Va., and Charles Markell, of Baltimore, Md., for appellees.

Before PRITCHARD, Circuit Judge, and KELLER and CONNOR, District judges.

CONNOR District Judge.

The procedure in this case conforms with that approved in Coder v. Arts, 213 U.S. 223, 29 Sup.Ct. 436, 53 L.Ed. 772, 16 Ann.Cas. 1008. Appellees, Hanover Saving Fund Society, People's Bank of Hanover, and John R. Bittinger at the first meeting of the creditors of the Charles Town Light & Power Company, in bankruptcy, filed proof of their claims, consisting of 18 coupon bonds, executed by the bankrupt company, with coupons attached, bearing date November 18, 1904. They alleged that the payment of said bonds was secured by a mortgage or deed in trust to Paul Winebrenner, constituting a first lien on the property of the bankrupt, and asked that an order be made directing the payment of said bonds from the proceeds of the sale thereof. To this claim the trustee, and certain creditors, filed objections; for that:

'(1) The banks have no provable claim against the bankrupt because: (a) The bankrupt was not, on November 18, 1904, indebted to Ehrehart, from whom they received the bonds. (b) Ehrehart had no authority to pledge the bonds as collateral for his personal indebtedness.

'(2) If the banks have provable claims, they are not entitled to priority over the unsecured creditors because: (a) The mortgage, securing the bonds, constitutes a voidable preference; and (b) the mortgage was fraudulently withheld from record, and is therefore void as security.

'(3) That by their negligence and laches the banks have estopped themselves from asserting their claims, or, if allowed to assert them, they should be postponed in payment of the debts, to all other creditors. ' In re Charles Town L. & P. Co. (D.C.) 199 F. 846.

The referee heard the evidence and argument of counsel for the respective parties, overruled the objections, and upon petition for review certified the record, together with his conclusions, to the judge of the district. He accompanied his certificate with an opinion setting forth his conclusions both of law and fact. The judge sustained his conclusions in both respects and the trustee appealed to this court. We concur in the opinion of Judge Dayton that:

'By the very complete and able opinion filed by the referee, it is clearly shown that the evidence, upon which he bases his finding, was very carefully considered by him.'

We also concur with the judge, in affirming the finding of the referee, that the bankrupt was indebted to Ehrehart on November 18, 1904, for sums of money which he had advanced to it. The bankrupt corporation was organized during the year 1901-- the capital stock was subscribed by Charles E. Ehrehart, who transferred a small number of shares to his associates. In payment for the stock, he conveyed to the company the plant, etc., for which it issued to him stock for $19,000 and the obligation of the company for $16,000. The property may have been taken at an excessive valuation-- probably it was-- that contention is irrelevant to any question raised, or which could be raised, upon this record. The company was chartered and organized pursuant to the statutes of West Virginia. If the corporation has any cause of action against Ehrehart for unpaid stock, it must be prosecuted in an action appropriate for that purpose; the question cannot be litigated here. After the company was incorporated and became a 'going concern,' Ehrehart, as its largest stockholder and substantial owner, made advancements to it, largely through the claimant banks. On November 18, 1904, a large amount was due Ehrehart from the company, the larger part of which he owed the banks, on account of these advancements. The findings of fact, in both respects, is supported by the evidence, in respect to which there does not appear to be any contradiction. On November 18, 1904, the board of directors of the company adopted a resolution authorizing and directing the issue of 18 coupon bonds of $1,000 each, running 20 years and, for the purpose of securing the payment of the interest semiannually, and the principal of said bonds when matured, the president and secretary were authorized to execute a mortgage, or deed in trust, to Paul Winebrenner, trustee, conveying all of the property then owned, or which should thereafter be acquired, by said company. At a meeting of the stockholders, held on the said 18th day of November, 1904, at which the holders of all of the capital stock of said company were present, either in person or by proxy, the resolution of the board of directors was submitted, to gether with the form of the mortgage, and the same was 'ratified, confirmed, and approved.' The foregoing appears on the records of the company.

The referee found, as a fact, and his finding was approved by the judge, from oral evidence that, at the same meeting a resolution was adopted, authorizing Ehrehart, who was treasurer of the company, to negotiate, or use, the bonds as he deemed best to reimburse himself for the money he had expended for the company. At this time the amount due Ehrehart from the company was about $20,000. While, as said by the referee, the records of the company were loosely kept, he finds the foregoing facts from the evidence before him. The bonds and mortgage were executed, in proper form, by the president and secretary. The mortgage was duly probated and delivered to the trustee, who duly certified the bonds. He handed the mortgage to Ehrehart, with the direction that he cause it to be recorded in the proper office in the county wherein the property was situate. The trustee resided in the borough of Hanover, York county, Pa. Ehrehart neglected to have the mortgage recorded until November 6, 1909. Neither the trustee nor the banks had knowledge or information of his failure to have the mortgage recorded until a few days prior to the date of its registration, when they directed that it be recorded at once. On November 18, 1904, Ehrehart--

'was the practical owner of the plant, and its only creditor. He and his associate stockholders, in the course of the operation of the plant, at various times prior to November 18, 1904, had borrowed sums of money upon their individual credit from the Hanover Saving Fund and the People's Bank of Hanover, aggregating $12,816.79, which had been furnished to, and expended by, the bankrupt, in such operations and improvements. Between November 18, 1904, and March 30, 1905, additional loans were made by these two banks to Ehrehart and by him used for the same purposes, of some $3,363.69-- making a sum total of $16,450.48 so loaned by them.'

Ehrehart took up the individual obligations of himself and associates, and gave to the banks his individual note and, as collateral security therefor, deposited with said banks 16 of said bonds, according to the amounts due each bank. The remaining two bonds were sold to J. R. Bittinger. Subsequent to these transactions, and prior to the registration of the mortgage, the company became indebted to other creditors, all of whom have proven their debts. The company was adjudged an involuntary bankrupt on March 13, 1911, upon petition filed March 3, 1910. 183 F. 160; 184 F. 986, 106 C.C.A. 488.

The foregoing is relevant to the questions of law presented upon the appeal. The validity of the bonds, as outstanding obligations against the estate of the bankrupt, and the indebtedness for which they were deposited as collateral security, being established, it would seem to follow, without serious controversy, that the banks are holders for value. It appears that Ehrehart has, since the transactions between the banks and himself, been adjudged bankrupt. The infirmity in the bonds, suggested by the trustee and objecting creditors, is that, by reason of matters connected with the organization of the bankrupt, the corporation had claims or causes of action against Ehrehart. There is no suggestion that the banks had any notice of these matters, and, if they had, we do not perceive how they could be considered or disposed of in this proceeding. The bonds were duly executed and, as found by the court, placed in the hands of the treasurer for the specific purpose to which they were applied. It is inconceivable that either Ehrehart or the other stockholders intended, by anything done in connection with the issue or disposition of the bonds, to defraud the corporation, for the conclusive reason that the property, for all practical purposes, belonged to Ehrehart, and he was its only creditor. The bonds were negotiable, and upon the facts found the banks took them for value. Railroad v. Natl. Bank, 102 U.S. 14, 26 L.Ed. 61.

We are thus brought to the question regarding the validity of the ...