Equitable Trust Co. v. Central Trust Co.

• Decision Date: 07 March 1922
• Parties: EQUITABLE TRUST CO. ET AL. v. CENTRAL TRUST CO. ET AL.
• Court: Tennessee Supreme Court

239 S.W. 171

145 Tenn. 148

EQUITABLE TRUST CO. ET AL. v. CENTRAL TRUST CO. ET AL.

Supreme Court of Tennessee.

March 7, 1922

Appeal from Chancery Court, Hamilton County; W. B. Garvin Chancellor.

Suit by the Equitable Trust Company and others against the Central Trust Company and others. From the decree, certain complainants and defendants appeal. Modified and affirmed.

HALL J.

The bill in this cause was originally filed in the chancery court of Rhea county, but by agreement of counsel it was transferred to the chancery court of Hamilton county, and was there tried and determined.

The bill was filed by a number of creditors of the Dayton Coal & Iron Company, Limited, against the Commercial Bank of Scotland and the Bank of Scotland, seeking to hold said banks liable as partners upon the theory that they were stockholders in said corporation, which was chartered and organized under the laws of Great Britain, and had been doing business for a number of years in the state of Tennessee without having complied with its laws respecting foreign corporations.

It appears that in 1883, a corporation was organized under the laws of Great Britain under the name of Dayton Coal & Iron Company, Limited, hereinafter called the Dayton Company; that it acquired a large number of acres of coal and iron lands in the state of Tennessee, from which it developed and operated coal mines and built and operated furnaces for the manufacture of pig iron, and also established and operated commissaries for the sale of merchandise to its employees and others; and that this corporation complied with the laws of Tennessee relating to foreign corporations doing business in the state.

In 1895 the firm of James Watson & Co., iron merchants of Glasgow Scotland, became the owners of practically the entire issue of stock of said Dayton Company, and soon thereafter organized another corporation of the same name for the purpose, as recited in its charter, of leasing and operating the Tennessee properties; and that in 1897 the same parties organized a third corporation of the same name, also for the purpose, as recited in its charter, of taking over and operating said properties in Tennessee.

On January 28, 1903, a mortgage purporting to have been executed by the Dayton Company to secure the payment of pounds sterling100,000 of debentures was registered in Rhea county Tenn.

On June 4, 1913, the Dayton Company having become insolvent, a general creditors' bill was filed in the chancery court of Rhea county to have it wound up as an insolvent corporation, and its assets administered as such.

On October 18, 1913, the defendant Central Trust Company filed a cross-bill in said cause to foreclose the mortgage above referred to.

A hearing was had in said cause, and the chancellor rendered a decree holding said mortgage invalid. This decree was affirmed by the Court of Civil Appeals. The cause was then brought to this court. This court reversed both the decree of the Court of Civil Appeals and the chancellor, and held said mortgage valid, decreeing that the defendant Commercial Bank of Scotland was the owner of pounds sterling55,000 of the debentures, and the Bank of Scotland was the owner of pounds sterling35,000 of the debentures secured by said mortgage, and the cause was remanded to the chancery court for the foreclosure of said mortgage.

In the meantime certain creditors of the said Dayton Company had filed a petition in the United States District Court at Chattanooga, praying that said company be adjudged a bankrupt. This petition was sustained, and said Dayton Company was adjudged a bankrupt, and the state court, in which the general creditors' suit was pending, entered an order, transferring the personal property in the hands of the receiver of said company to the trustee in bankruptcy.

On January 18, 1916, the Central Trust Company filed a petition in the bankruptcy court, in which it set up the proceedings and adjudication in the state court with respect to said mortgage, and alleging that the value of the mortgaged property was not sufficient to pay the indebtedness secured, and praying for a foreclosure of the mortgage.

The trustee in bankruptcy resisted this petition on the ground that the mortgage was invalid, and likewise the adjudication in the state court sustaining it was challenged by said trustee on the ground that the state court had no jurisdiction of the controversy after the filing of the petition in bankruptcy. This contest is still pending in the bankrupt court at Chattanooga. It appears, however, that pending said contest over the validity of said mortgage, the property of the Dayton Company has been sold for $400,000 under an agreement that the proceeds of sale should be substituted for and stand in the place of the property itself.

In the bill filed in the instant cause it is alleged that if the mortgage is sustained the proceeds of the property will not be sufficient to pay the secured debts, and if the mortgage is held invalid the claims of the debenture holders will be of no value except as to the balance that may remain of the proceeds of the sale of the property, after paying and satisfying the Dayton Company's general creditors.

It is alleged in complainants' bill that said corporations, organized under the name of the Dayton Coal & Iron Company, Limited, in 1895 and 1897, had not complied with the foreign corporation laws of Tennessee, and that the change of corporate entity was kept secret, and none of the American creditors ever knew or heard of such change, but continued to deal with the new company, supposing they were dealing with the old one, and in ignorance of the failure of the new corporation to comply with the statutes of Tennessee, where it was doing business, relating to foreign corporations; that on September 18, 1900, the defendant Commercial Bank of Scotland had become a stockholder in said Dayton Company, and on July 7, 1905, the defendant Bank of Scotland, had likewise become a stockholder in said corporation, and both defendants had so continued down to the filing of the bill in this cause; that they were charged with notice, and knew the facts to be, that said corporation was carrying on business in Tennessee, and sanctioned the same; that it was while carrying on such business in Tennessee under the name of Dayton Coal & Iron Company, Limited, they became indebted to the respective complainants in the various amounts set out in the bill.

The bill further alleged that said defendants had no property in the state of Tennessee, except the debentures of the Dayton Company, which the bill alleged had been delivered by said banks to their attorneys in Tennessee, and were under the control of said attorneys; and that if said mortgage and debentures were held valid by the bankrupt court, and the proceeds were collected and transmitted to said defendants, complainants would be wholly without remedy.

The bill prayed for an injunction restraining said attorneys of the defendant banks from receiving or transmitting any funds belonging to their said clients; that the rights of said attorneys to a lien on said funds be settled and the amounts ascertained to be due them be paid; that complainants be given decrees for the amounts of their various claims against said defendant banks, and that such decrees be paid and satisfied out of any sum due said defendants in said general creditors' suit.

The Central Trust Company and said two banks answered the bill. In their answer they admitted the allegations of the bill with respect of the various charters of the Dayton Company, and admitted that none of them, except the charter of 1883, were registered in Tennessee; that in 1903 a mortgage was executed by the Dayton Company to the Central Trust Company as alleged by complainants, which recited, among other things, that the Dayton Company had complied with all of the requirements of the laws of Tennessee and of other states in which its properties were located, and that the Central Trust Company believed this recital to be true.

The defendant banks expressly denied that either of them ever became a stockholder or part owner in said Dayton Company, but that certain of the owners and holders of stock in said company had at various times assigned and transferred to certain designated persons as "trustees or nominees" of the respective banks various shares of stock specifically set out in the answer to secure the payment of loans or advances made to stockholders by the said banks; that none of the officers, agents, or representatives of either of said banks ever participated in the management or business transactions of the said Dayton Company, and never had any interest in the same except by virtue of the deposits of stock as collateral security; and that it was represented to the officers and agents of said defendants, and they believed, that the Dayton Company had complied with the requirements of the statutes of Tennessee respecting foreign corporations; and that they did not know to the contrary until after the filing of the general creditors' bill and the institution of bankruptcy proceedings against the Dayton Company.

The answer was afterwards amended so as to aver the following:

"That neither of said defendant banks has power or authority under its charter or the laws of Great Britain, under which it was organized, to enter into any partnership contract or relation with any other person, firm or corporation."

A stipulation was entered into by counsel for the parties covering the material facts relating to the questions involved, and the cause was originally heard and determined by the chancellor upon the pleadings, this stipulation, the various exhibits thereto, and the charters of the two...