Edgar v. Ames
| Decision Date | 27 January 1919 |
| Docket Number | 4938,5043. |
| Citation | 255 F. 835 |
| Parties | EDGAR v. AMES et al. WRIGHT v. SAME. In re OKLAHOMA CITY TIMES CO. |
| Court | U.S. Court of Appeals — Eighth Circuit |
J. L Hull, of Muskogee, Okl., and O. E. Shultz, of St. Joseph Mo., for appellant Edgar.
Keaton Wells & Johnston, of Oklahoma City, Okl., for appellant Wright.
Ames Chambers, Lowe & Richardson, of Oklahoma City, Okl., for appellees.
Before SANBORN, Circuit Judge, and TRIEBER, District Judge.
The Oklahoma City Times Company, in April, 1911, was a corporation of the state of Oklahoma, engaged in publishing newspapers in Oklahoma City. D. T. Flynn, C. B. Ames, and B. P. Johnson, owned all its capital stock, the par value of which was $100,000. Two rival newspapers, the Pointer and the Free Press were being published in competition with the Times. Flynn and his associates made agreements with C. B. Edgar that they would sell and transfer to him their $100,000 of stock, would pay certain debts of the corporation, which amounted to $5,000, would pay $15,000 to the Times Company to enable it to buy the Pointer, that for their stock and these payments they should receive $115,000 of the mortgage bonds of the corporation, that the corporation should buy the Free Press and should issue $20,000 of its mortgage bonds to Gaylord & Stafford, the owners thereof, and that Edgar should pay to the Times Company $10,000 in cash. These agreements were performed. In the performance of them the corporation issued its bonds for $135,000, of which Flynn and his associates received $115,000, and Gaylord and Stafford $20,000. The Times Company secured these bonds by a mortgage on its property dated September 1, 1911. On October 12, 1914, the corporation filed its voluntary petition in bankruptcy, and it was adjudged a bankrupt on October 15, 1914. The property of the bankrupt was worth about and no more than $40,000. Its operation by the bankruptcy court incurred a constant loss, and it was soon sold to the holders of the mortgage bonds by order of the court, on condition that they give a bond to pay 'all claims, demands, charges, costs, expenses of administration and of the receivership proceedings, that may be ad adjudged by this court or other court of competent jurisdiction to be prior to the lien of said mortgage or deed of trust or legally payable out of the property of this estate in priority to the lien of said deed of trust. ' They gave the bond, and the question now is whether certain unsecured creditors of the corporation whose claims accrued after the mortgage was made and recorded are either prior in lien or superior in equitable right to payment out of the mortgaged property to the lien and equitable right of the mortgage bondholders to such payment.
These subsequent creditors, here represented by the appellant, the trustee in bankruptcy, insisted that they were entitled to payment out of the proceeds of the property of the bankrupt, in preference to the bondholders, first, because the consideration of the indebtedness of $135,000 secured by the mortgage was the payment of Edgar's debt to Flynn and his associates, for the transfer of their stock to him; and, second, because a fictitious increase of the indebtedness of the corporation was made by the making of the bonds and mortgage, and was void under article 9, section 39, of the Constitution of Oklahoma. The court below held, first, that $50,000 of the $135,000 mortgage indebtedness, consisting of the $10,000 paid into the treasury of the corporation by Edgar in consideration of the sale and transfer to him of the stock of Flynn and his associates, of the $5,000 of the debts of the corporation Flynn and his associates paid, of the $15,000 they paid and the corporation used to purchase the Pointer, and the $20,000 due on the bonds of the corporation issued to Gaylord and Stafford for the Free Press, was a just and valid indebtedness of the corporation, for which it received a full and valuable consideration, without regard to the transfer of the stock, so that, to that amount and interest thereon, the lien of the mortgage was prior in time and superior in equitable right to payment to the claims of unsecured creditors, and that, as the value of the property of the bankrupt was much less than $50,000, the unsecured creditors were entitled to no payments upon their claims under the terms of the bond or in equity. In the second place, the court below held that to the amount of the $50,000, the indebtedness evidenced by the mortgage bonds did not constitute a fictitious increase of the indebtedness of the corporation in violation of article 9, section 39, of the Constitution of Oklahoma, that full consideration was paid therefor, and that the bondholders were entitled to the preference in payment out of the property of the corporation to this amount over the unsecured creditors. The trustees appealed; the bondholders did not.
As the mortgage indebtedness for $50,000 and interest is more than sufficient to absorb the value of all the property of the bankrupt's estate, it is unnecessary to discuss the correctness of the decision below that as to the $85,000, the only consideration for which was the payment by the corporation of the debt of Edgar to Flynn and his associates for the transfer of their stock in the corporation to him, the claims of the subsequent unsecured creditors, who became such without notice of the consideration, or of the lack of it, for this $85,000 of indebtedness, were superior in equity and entitled to a preference in payment out of the mortgaged property of the corporation over the claims of the bondholders. Suffice it to say that the rule seems to be well established that in the administration and distribution of the property of insolvent corporations in equity the claims of subsequent creditors without notice are superior and entitled to preference in payment over the holders with notice of mortgage bonds of the corporation whose only consideration was the purchase by the mortgagor corporation of its own stock, either for itself or for another. In re Haas Co., 131 F. 232, 65 C.C.A. 218; M. V. Moore & Co. v. Gilmore, 216 F. 99, 101, 132 C.C.A. 343; Coleman v. Tepel, 230 F. 63, 70, 71, 144 C.C.A. 361; Atlanta & Walworth Butter & Cheese Assn. v. Smith et al., 141 Wis. 377, 382, 123...
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