Davis v. Woolf, 5328.

• Decision Date: 09 February 1945
• Docket Number: No. 5328.,5328.
• Citation: 147 F.2d 629
• Parties: DAVIS v. WOOLF.
• Court: U.S. Court of Appeals — Fourth Circuit

147 F.2d 629 (1945)

DAVIS v. WOOLF.

No. 5328.

Circuit Court of Appeals, Fourth Circuit.

February 9, 1945.

H. G. Shores, of Keyser, W. Va., for appellant.

Arthur Arnold, of Piedmont, W. Va., and R. A. Welch, of Keyser, W. Va., for appellee.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

The trustee in bankruptcy of Snider Brothers Company, a corporation, objected to the claim of William B. Woolf to a lien upon the mill and equipment of the corporation which it had conveyed to him by deed of trust on October 15, 1942, to secure the payment of its demand note for $15,000 given to him for monies advanced at or about the time of the execution of the deed. The deed was recorded on October 20, 1942, and the money was paid to the corporation in three installments of $5,000 each on October 17, November 2 and November 27, 1942, respectively. The referee sustained the objections of the trustee on the ground that the deed was invalid because neither the stockholders nor the directors had properly authorized its execution; but the District Judge reversed this holding on the authority of certain West Virginia decisions which hold that when a corporation receives and uses money advanced to it as a loan, it is estopped to deny the validity of any instrument given to secure repayment. See Commonwealth Trust Co. v. Reconstruction Finance Corp., 3 Cir., 120 F.2d 254; Hartley v. Ault Woodenware Co., 82 W. Va., 780, 97 S.E. 137; Briers v. Alderson, 101 W.Va. 662, 666, 133 S.E. 373.

We have no doubt of the correctness of this holding; but the judgment is also attacked on grounds not discussed in the opinion of the trial court. It is now said that when the loan was made and the deed of trust was executed, the corporation was insolvent and Woolf was a director of the corporation and had agreed to indemnify a surety on a bond of completion given by the corporation with respect to a building which it had agreed to erect but was unable to complete because of its insolvent condition; and it is suggested that the loan was made to enable the corporation to finish the building and free Woolf from liability under his contract of indemnity. On these allegations it is contended that the conveyance constituted an illegal preference under the West Virginia law and should be declared invalid and set aside in the interest of creditors.

We are confronted at the outset of the inquiry by the fragmentary and unsatisfactory condition of the record, from which it is impossible to determine with certainty whether at the time the corporation was insolvent or Woolf was a director, or whether the purpose and effect of the transaction between Woolf and the corporation was to secure the discharge of his liability to the surety on the bond of completion. No finding on any of these points was made in the court below and the agreed statement of facts on which the case is submitted to us is of such a character that we should be unable to decide them ourselves even if we deemed it proper to attempt to do so.

The salient facts as far as they can be summarized are as follows: Snider Brothers Company, a corporation, was engaged in a general contracting business. It was a close corporation with 350 shares of stock outstanding. Hetzell Pownall, the vice-president and general manager in charge of the financial affairs, owned, together with his wife, 199 shares; Frank Snider, president and superintendent of construction, 75 shares; Arthur Snider, mill foreman, 37½ shares; Joseph Snider, superintendent of construction, 37½ shares, and William B. Woolf 1. The last election of directors took place in 1941 when Woolf was elected a director.

When the deed of trust was executed on October 15, 1942, the corporation was in the midst of erecting certain buildings which it was under contract to complete. The petition in bankruptcy was filed on April 8, 1943 and the adjudication took place on April 26, 1943, more than four months after the deed of trust was executed and recorded and the money was advanced. The money was used in the completion of a building at Glenville State Normal School which the corporation had contracted to build.

So much is not disputed. The question of solvency, however, is left in doubt. Frank Snider testified that he and his two brothers knew that the company was insolvent in 1942; that he did not know whether Woolf knew that the company was insolvent in September, 1942 but that he did know it in October, 1942. On cross examination he stated that in October, 1942 the corporation paid off all of its indebtedness except current accounts and the $15,000 note due to Woolf, but that he knew nothing of the bookkeeping of the corporation. There was also testimony that on October 15, 1942 the corporation had to its credit in bank $8,223.77. Woolf testified that he did not know and had no reason to believe that the company was insolvent when he loaned the money and the secretary and attorney of the company testified that it was solvent when the money was loaned.

Also in evidence were certain letters written by the National Surety Company to Woolf, Pownall and others in October, 1942 indicating that the Surety Company was surety on a bond given by the corporation for the performance of a contract with the State of West Virginia for the completion of the Science Building at Glenville, and that the company and Woolf had given the surety an indemnity agreement to protect it from loss. The letters also indicated that the company had received an overpayment of nearly $30,000 on the building from the State of West Virginia; that the cost of completion of the building would exceed the balance of the contract price by approximately $18,000, and that the Surety Company had placed the matter in the hands of its attorneys. The letter stated that the Surety Company had refused a request of the corporation to advance it money to enable it to complete its contract and that the banks were also unwilling to do so and suggested that an application for a loan be made by the corporation to the Reconstruction Finance Corporation and that Woolf, by reason of his connection with the corporation, might be in a position to assist the corporation in securing the loan.

The agreed statement of facts also stated that Woolf had testified that he never qualified as a director under the election of 1941 and never attended a directors' meeting and was not a director of the corporation after the year 1940.

There was no agreement on these important points in the agreed statement of facts, but merely a brief outline of the testimony on either side, and hence it is obvious that this court is in no position to make findings of fact which must depend upon the credibility of the witnesses and their knowledge of the facts to which they have testified. But enough appears to indicate that when the deed was executed, the corporation may have been insolvent and unable to complete its building contracts and Woolf may have been a director of the company, sufficiently acquainted with its affairs and its financial status to induce him to safeguard himself against possible liability to the Surety Company under the indemnity agreement. Insolvency might have existed even though all the current indebtedness had been paid off if the corporation's obligations under its building contracts were sufficiently certain to be provable claims. See Williams v. United States F. & G. Co., 236 U.S. 549, 35 S.Ct. 289, 59 L.Ed. 713; Maynard v. Elliott, 283 U.S. 273, 51 S.Ct. 390, 75 L.Ed. 1028; Glenn, Liquidation, §§ 19 and 458; 8 C.J.S., Bankruptcy, §§ 397, 404. In such case the fact that Woolf had made no payment under his indemnity agreement would be immaterial for even though his claim had not matured, the steps taken to secure him from loss might nevertheless be preferential. Glenn, Fraudulent Conveyances and Preferences, § 459. The case must therefore be remanded to the District Court for further proceedings because the validity of the deed of trust cannot be determined until these uncertainties are cleared up.

When this has been done, consideration must be given to the rule, for which there is ample authority, that if property is transferred to a surety after he has become bound upon his guaranty, in order to indemnify him from loss, and the principal is insolvent at the time of the transfer, it is a preferential transfer and may be recovered by the trustee in bankruptcy of the principal under § 60, sub. a, of the Bankruptcy Act, 11 U.S.C.A. § 96, sub. a, if the other conditions therein prescribed for a recoverable preference concur. In other words, a surety is a creditor under the Bankruptcy Act. Glenn, Fraudulent Conveyances and Preferences, § 459; Cohen v. Goldman, 1 Cir., 250 F. 599, 600; Kobusch v. Hand, 8 Cir., 156 F. 660, 18 L.R.A.,N.S., 660; Walker v. Wilkinson, 5 Cir., 3 F.2d 867; Hershon v. Abelson, 2 Cir., 69 F.2d 102. To the same effect is the decision in Arnold v. Knapp, 75 W.Va. 804, 815, 84 S.E. 895, where it is said that by the weight of authority the payment of a note by a corporation by the procurement and for the relief of a director of the corporation who endorsed the note constitutes an unlawful preference to him recoverable by the trustee in bankruptcy.

It is equally true that if a surety pays or provides funds for the payment of a debt and the principal transfers property to the surety to indemnify or reimburse him, this is a preference of the surety in the event of the principal's bankruptcy and the existence of the other conditions which are declared by the Bankruptcy Act to constitute a preference. United Surety Co. v. Iowa Mfg. Co., 8 Cir., 179 F. 55, certiorari denied 217 U.S. 606, 30 S.Ct. 696, 54 L.Ed. 900; Crandall v. Coats, D.C.N.D. Iowa, 133 F. 965; McAtee v. Shade, 8 Cir., 185 F. 442; 88 A.L.R. 83 and cases cited. In such case the estate of the bankrupt is not enhanced in the least by the money advanced by the surety at the time of the transfer...