Finefrock v. Kenova Mine Car Co.

• Decision Date: 14 January 1930
• Docket Number: No. 2879.,2879.
• Parties: FINEFROCK v. KENOVA MINE CAR CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

37 F.2d 310 (1930)

FINEFROCK v. KENOVA MINE CAR CO. et al.

No. 2879.

Circuit Court of Appeals, Fourth Circuit.

January 14, 1930.

Connor Hall, of Huntington, W. Va., for appellant.

Douglas W. Brown, of Huntington, W. Va. (Cary N. Davis and Fitzpatrick, Brown & Davis, all of Huntington, W. Va., on the brief), for appellees.

Before WADDILL and PARKER, Circuit Judges, and SOPER, District Judge.

SOPER, District Judge.

This case was before the court on an earlier appeal reported in 22 F.(2d) 627. As will there appear, a bill in equity was originally brought by James E. Finefrock, of Ohio, a creditor, for himself and all other creditors in like circumstances, against the Kenova Mine Car Company, the First Huntington National Bank, corporations of West Virginia, and H. S. King, trustee, and G. D. Miller, citizens of that state, the jurisdiction of the court being based on diversity of citizenship. The bill of complaint was filed to secure a decree restraining the sale of certain property covered by a deed of trust executed by the Mine Car Company to the bank, and to cancel the deed of trust. The deed covered all of the property of the company except certain machines, and was given to secure an issue of bonds in the sum of $150,000. The trustee named in the deed of trust was the bank, but the latter, having acquired ownership of the bonds in its individual capacity, had been replaced as trustee by the defendant H. S. King. The deed was executed on July 10, 1922, whereupon it was delivered to the bank, as trustee, together with the bonds. At or about the same time, the company applied to the bank for an additional loan, and on July 27, 1922, a new loan of $29,500 was made which brought the total indebtedness of the company to the sum of $100,000. In order to secure the new loan, the bank required that the mortgage bonds be deposited with it as security, not only for the additional loan, but also for the antecedent indebtedness. The new money advanced, amounting to $29,500, was used by the company to pay a note to the bank of $3,500, and the balance for other company purposes. During this period, the Mine Car Company was not able to meet its current obligations. Whether its assets were equal in amount to its indebtedness depended upon the proper valuation of its buildings and machinery. Its financial condition grew worse after the execution of the deed, and in 1926, at the time of the hearing in the District Court, it was insolvent in every sense of the word.

No proceedings were brought to test the validity of the transfer of the bonds to the bank until July 28, 1925, when Finefrock filed the pending suit. The complaint was rested on two grounds: (1) That the deed of trust was invalid from its inception, because it was authorized at a meeting of stockholders illegally held, and (2) that the bank had been guilty of a breach of trust in that it had converted, to its own use, bonds which had been delivered to it for the benefit of all of the creditors of the company. After careful consideration of the facts, we held (1) that the corporate meetings, at which the execution of the deed of trust was authorized, were legally held; and (2) that there was no breach of trust by the bank, as trustee under the deed, since the deed was not made for the benefit of creditors, and the appointment of the bank as trustee under the mortgage did not preclude it from acquiring ownership of the bonds. We nevertheless expressly stated that we did not wish to give our approval, in the state of the record then before us, to the course of dealing between the company and the bank, and suggested that, if the complainant could show that there had been a transfer of the property of the company to the bank, with intent to delay, hinder, or defraud its creditors, the complainant might not be without remedy. Adverting to the unusual circumstances of the transfer of the bonds to the bank in its individual capacity, we said:

"Bearing in mind the well-established rules in regard to fraudulent conveyances, it becomes clear that, although the transfer of the bonds to the bank was within the broad language by which the purposes of the trust were described in the deed, it is still pertinent to inquire whether the parties to the deed did not intend to hinder, delay, or defraud the other creditors, when the bonds were executed and delivered to the bank as security for an antecedent indebtedness. The true character of this transaction was not disclosed to the creditors by the conveyance which was recorded. One who read the deed of trust would naturally assume that the main purpose of the company was the acquisition of new money, in order, not only to retire its outstanding indebtedness, but also to extend its business. No one would suppose that the company was in failing circumstances, or that the actual purpose was to transfer all of the bonds to the bank as security for the existing debt and for a new loan of only $26,000. The obscurity was the more complete by reason of the appointment of the bank as trustee in the deed of trust. It was not unlawful for the bank to acquire a beneficial interest in the bonds; but no one would infer from the deed that it was the intention of the parties that the trustee named in the instrument should acquire for itself a lien upon the entire issue. It may well be that not only the interests of the bank were promoted, but the other creditors were lulled into a sense of security by the form which the transfer took. If the purposes of the parties had been fully revealed, other creditors could have more readily ascertained the financial condition of the company, and might have been led to test its solvency in some proceeding in a state or federal court before the period should have elapsed during which a preference might be set aside."

We nevertheless made no finding on the point involved because it had not been raised in the trial court, and the defendants had not been brought into court to answer it. We therefore remanded this branch of the case to the District Court for further proceedings.

The original bill of complaint was also brought to secure an adjudication that certain machines of the company, which had been sold at a sheriff's sale for taxes in the year 1925, and purchased for the bank by one G. D. Miller, were purchased under such circumstances that the bank should be required to account for them to the company. We sustained this charge, and decided that the bank held the machines upon a constructive trust for the benefit of the company, and directed that they be sold to pay its debts.

When the case was returned to the District Court, Finefrock filed an amended bill of complaint, wherein he rehearsed the facts which are set out in the prior opinion in this court, alleged that the deed was made and the bonds were pledged to hinder, delay, and defraud creditors, and asked that the bank be restrained from claiming any benefit under the deed of trust, and that all the bonds issued thereunder be canceled. The amended bill also charged that the machinery purchased at the sheriff's sale had been sold by the bank since the institution of the suit, and prayed that the bank be required to disclose to whom the machinery was sold, that a receiver might be appointed to take charge of and to sell the same, or, in the alternative, that the bank might be required to account for and pay over the value of the machinery as of the date of the tax sale.

On the main question at issue in the case, the amended bill repeats the allegations as to the meeting of stockholders on June 27, 1922, at which the directors were authorized to issue the bonds and to execute the deed of trust; and also as to the meeting of directors on July 6, 1922, which authorized the officers of the company to issue the bonds and to negotiate for the sale or pledge of them when issued. The amended bill alleges that the directors of the company at that time were C. K. Myers, D. C. Schonthall, W. H. Taylor, T. F. Bailey, and the defendant, G. D. Miller, and that, at the meeting of July 6, Miller, Schonthall and Taylor were the only directors present; that the declared purpose of those who took part in the meeting was that the bonds should be sold or pledged, and the proceeds applied to the payment, of indebtedness, and the further development of the company's business; and particularly it was contemplated that Myers, the president of the company, should proceed to make sale of the bonds to certain persons whom he then had in mind.

It was further alleged that the pledge of the bonds to the bank on July 27, 1922, to secure the antecedent as well as the new indebtedness, was made with intent to hinder, delay, and defraud the creditors of the company. It was...