Fayette Realty & Finance Co. v. Commonwealth

• Decision Date: 22 March 1929
• Citation: 229 Ky. 556,17 S.W.2d 722
• Parties: FAYETTE REALTY & FINANCE CO. v. COMMONWEALTH, by, etc.
• Court: Kentucky Court of Appeals

17 S.W.2d 722

229 Ky. 556

FAYETTE REALTY & FINANCE CO. v. COMMONWEALTH, by, etc.

Court of Appeals of Kentucky

March 22, 1929

Rehearing Denied June 21, 1929.

Appeal from Circuit Court, Fayette County.

Suit by the Commonwealth, by the Revenue Agent for the State at Large, against the Fayette Realty & Finance Company. Judgment for plaintiff, and defendant appeals. Reversed.

Allen Botts & Duncan, of Lexington, for appellant.

Harry D. Kremer, of Lexington, for the Commonwealth.

STANLEY C.

The appellant, Fayette Realty & Finance Company (to be referred to as the realty company), was incorporated in 1914, with $1,000 common stock, and $230,000 of 5 per cent. cumulative preferred stock, convertible at the option of the holders into 5 per cent. first mortgage bonds. On May 25, 1914, the realty company acquired by deed the Fayette National Bank building in Lexington for $230,000 cash, and other valuable consideration agreed to be paid. On the same day it mortgaged the building to the Security Trust Company of Lexington, as trustee, to secure an issue of bonds in the sum of $230,000 into which the preferred stock was convertible. After this mortgage was executed, but on the same day, the realty company, in consideration of the release and discharge from the payment of the balance of the purchase price, reconveyed to the Fayette National Bank (to be referred to as the bank) an undivided twenty-seven fiftieths interest in the building and leased to it for a period of 20 years the remaining twenty-three fiftieths interest, all of which was subject to the mortgage. For this lease the bank became obligated to pay to the realty company $11,500 annually during the first two years, and $21,500 annually during the remainder of the term.

Thus the relations between the two corporations continued until June 29, 1929, when the realty company conveyed to the bank an undivided four-fiftieths interest in the building, which represented $40,000 of the preferred stock which had been retired. This left the realty company owning nineteen-fiftieths of the property. On the same day, by a separate deed, the realty company conveyed, subject to the mortgage of the Security Trust Company, trustee, the remaining nineteen-fiftieths undivided interest in the building in consideration of $190,000, payable at the rate of $21,500 or more annually, with interest, and in further consideration of the payment of all taxes by the bank, the cancellation of the lease of May 25, 1914, and the mutual release of all obligations between the parties.

The deed is quite lengthy. It is provided in it that, in order that the bank might be fully protected and indemnified against any loss or damage which it might sustain or incur by reason of the mortgage to the trust company existing upon the property, the realty company covenanted and agreed that it would use and apply at the time of the payment thereof the interest paid on the deferred purchase price of the property to the payment of dividends upon the preferred stock, and apply the balance, together with the payments on the principal of the purchase price, "to the retirement of so much of the preferred stock then outstanding at par or mortgage bonds at par into which any of such stock may have been converted." It was further provided that, in the event the realty company did not so apply the payments made by the bank, the bank should be released and discharged from its obligations until the realty company had so used and applied the payments theretofore made.

But on December 12, 1921, another instrument was executed by the realty company and accepted by the bank; its purpose being as therein recited, to correct and clarify the deed of June 29, 1920, and to evidence the intent and agreement of the parties in executing it. The material portion of this instrument is as follows:

"Now, therefore, for the purpose of correcting said mistake and making said deed conform to the agreement of the parties, it is agreed between the parties of the first and second parts that the sum of $190,000.00 and any interest thereon shall be at once applied and paid upon and towards the payment of the dividends upon and the redemption of the $190,000.00 of preferred stock which had been issued by said first party and outstanding upon the date of said deed, the intent and purpose of said deed being that the second party (the Bank) in consideration of the conveyance to it of said interest in said real estate, should assume and pay off the liability of the first party upon the preferred stock held by divers persons, and which was to be redeemed under and in accordance with the terms of the charter of said property of the first part."

This must be considered in connection with the deed. The effect of these instruments was that, in consideration of the conveyance of the realty company's undivided interest in the building, the bank obligated itself to satisfy the owners of the preferred stock or of the bonds (though it appears that none of the stock was ever converted) by paying the dividends or interest and redeeming the stock or bonds according to the terms under which they were issued. The bank thus assumed the realty company's obligation. The former indebtedness to it as a corporate entity was transferred direct to its preferred stockholders or bondholders, and it was indemnified against the failure of the bank to redeem its preferred stock or pay its bonds.

This suit was instituted on September 8, 1924, in the Fayette county court by the commonwealth, by the revenue agent for the state at large, against the realty company, seeking to have assessed for taxation, and the company adjudged liable for taxes and penalties, on July 1, 1920, 1921, 1922, and 1923, what was charged to be a debt owing to the defendant by the Fayette National Bank in the principal sum of $190,000 secured by lien on its building "created, reserved and expressed" in the foregoing deed of June 29, 1920. The county court denied the prayer of the petitioner, but, on appeal to the circuit court, it was adjudged that the realty company was liable for the taxes and penalties on $190,000, assessable on July 1, 1920, and $180,000 for each of the subsequent three years-it being stipulated that $10,000 had been paid between July 1, 1920, and July 1, 1921. From that judgment this appeal is prosecuted.

If the transaction between the parties was only as evidenced by the deed of June 29, 1920, there could be no doubt that the realty company was liable for taxes on the debt due it by the bank. But the transaction and obligation is as evidenced by the two instruments.

To sustain its position it was necessary that the commonwealth prove that the realty company had intangible property, with a cash value, acquired under the deed as corrected, which it had failed to list.

Section 172 of the Constitution provides that: "All property, not exempted from taxation by this constitution, shall be assessed for taxation at its fair cash value, estimated at the price it would bring at a fair voluntary sale."

Section 4020 of the Statutes reads in part: "All real and personal estate within this state, and all personal estate of persons residing in this state, and all corporations organized under the laws of this state * * * shall be subject to taxation * * * and shall be assessed at its fair cash value, estimated at the price it would bring at a fair voluntary sale."

It is clear that only property having a cash value on the market can be taxed. If there is an enforceable, collectible demand that one person has against another or against property upon which it is in lien and out of which it can be collected, it is property within the meaning of the statute. Commonwealth v. Ky. Distilleries & Warehouse Co., 143 Ky. 314, 136 S.W. 1032. But did the realty company have an enforceable, collectible demand against the bank until and unless the bank failed to comply with its obligations to the holders of the stock? The question is: Could any bidder be found who would pay a cash price for this contingent and uncertain interest of the realty company? If not, then that interest is not taxable. There was no proof tending to show that this lien or right of the realty company under these instruments had any market value. Nor could it have been proven, for the realty company had nothing it could sell. There was evidence that the debt " owed by the Fayette National Bank and secured by a 19/50 interest" on the building was worth $190,000, but there is no proof of any cash value of the lien owned by the realty company. The debt was owing to the holders of the stock or bonds. It had nothing that could be of any value to anybody else. The lien of the company on the building had a value only to...