Finefrock v. Kenova Mine Car Co.

• Decision Date: 09 November 1927
• Docket Number: No. 2593.,2593.
• Citation: 22 F.2d 627
• Parties: FINEFROCK v. KENOVA MINE CAR CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

22 F.2d 627 (1927)

FINEFROCK v. KENOVA MINE CAR CO. et al.

No. 2593.

Circuit Court of Appeals, Fourth Circuit.

November 9, 1927.

Connor Hall, of Huntington, W. Va. (O. J. Deegan, of Huntington, W. Va., on the brief), for appellant.

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

Before PARKER, Circuit Judge, and SOPER and ERNEST F. COCHRAN, District Judges.

SOPER, District Judge.

James E. Finefrock, a citizen of Ohio, and a judgment creditor of the Kenova Mine Car Company, brought a bill of complaint in equity in the District Court of the United States for the Southern District of West Virginia, against the mine car company and the First Huntington National Bank, West Virginia corporations, and G. D. Miller and H. S. King, trustee, citizens of that state. The suit was brought by the complainant, on behalf of himself and all other creditors of the mine car company, and related, in the first place, to a deed of trust in the nature of a mortgage conveying all the property of the company, except certain machines, to secure an issue of its bonds in the amount of $150,000. The trustee named in the deed of trust was the predecessor of the First Huntington National Bank, which, upon its organization, was vested with the powers and duties of the original trustee. For the sake of convenience the trustee in the deed of trust will be hereinafter referred to as the "bank," meaning thereby either the First National Bank of Huntington or its predecessor, as the case may be. Subsequent to the execution of the deed, the bank acquired the bonds themselves, in its individual capacity, and later, with the ultimate purpose of causing a sale of the mortgaged property, it filed a petition in the circuit court of Wayne county, West Virginia, praying for the appointment of a new trustee under the deed of trust, whereupon the defendant H. S. King was appointed trustee in its stead.

The bill of complaint was filed primarily to secure a decree restraining the sale of the mortgaged property, and canceling the deed of trust. The complainant rests his case on two grounds: (1) He charges 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 has been guilty of a breach of trust in its capacity as trustee, in that it has wrongfully converted all of the bonds to its own use in its individual capacity, notwithstanding the fact that the deed of trust was made for the benefit of all of the creditors of the company.

The bill of complaint also relates to certain machines of the company which were excepted from the deed. They were sold at a sheriff's sale for taxes, in the year 1925, and acquired in the name of G. D. Miller. This defendant was at one and the same time the vice president, secretary, and director of the mine car company, and also vice president, cashier, and director of the bank. The bill charges that, whether or not the machines were purchased by Miller, for the benefit of himself or of the bank, they were purchased under such circumstances that in equity they should be held to have been purchased for the mine car company. The bill prays for such relief as may be proper in the premises.

The separate answers of the defendant take issue with the bill in so far as it charges improper or illegal conduct in regard to the deed of trust, the bonds, or the machinery. It is admitted that the machinery was bought for the bank, and also that the bank intends to cause the trustee to sell the property covered by the deed of trust for its benefit.

The meeting of stockholders, at which the deed of trust was authorized, was held on June 27, 1922, in response to a notice for a special meeting to be held to consider and adopt means to furnish additional working capital for the company. A resolution was passed which authorized the board of directors to issue and sell bonds, with interest coupons, in a sum not to exceed $150,000, for the purpose of providing funds for the retirement of the outstanding indebtedness of the company, and of providing funds for general corporate purposes. On July 6, 1922, a special meeting of the board of directors was held, at which was passed a resolution that for the purposes mentioned in the stockholders' resolution of June 27, 1922, the officers of the company were authorized to issue and deliver to the bank, as trustee, bonds in the sum of $150,000, and that for the purpose of securing the bonds a deed of trust be executed and delivered to the bank as trustee, to be a first lien upon all of the real estate and the machinery of the company in West Virginia, as described in the deed submitted to the meeting. The president of the company was further authorized to negotiate, sell, or pledge the bonds, when issued.

Accordingly, bonds in the sum of $150,000, and a deed of trust, dated July 10, 1922, were executed and delivered by the company to the bank. The deed of trust recites that the bonds were issued because the company desired to borrow money for the transaction and extension of its business, for the retirement of its outstanding indebtedness, and for the purpose of providing funds for general corporate purposes, and the acquisition of additional working capital. The property described in the deed was conveyed to the bank, its successors and assigns, in trust for the equal pro rata benefit and security of all the holders of the bonds secured by the indenture, and for enforcing payment thereof, when payable. It was provided that the bonds, upon the signing and execution thereof, should be duly certified by the trustee and delivered by it to the company. Until default by the company, it was agreed that the company should be suffered and permitted to have actual possession of the property, and to mortgage, borrow, and use the same; that, if the company should pay the principal and interest when it became due, then all the estate, right, title, and interest of the trustee should cease and determine, and the trustee should, by proper instrument in writing, release and discharge the deed of trust. Provision was also made that the trustee, in case of default, should become entitled to immediate possession of the property, with power to sell, without suit in equity or action at law, or with power to institute and carry out proceedings authorized by law for the enforcement of the deed. In other words, the deed of trust contained the usual provisions to be found in deeds of trust or mortgages executed to secure the payment of corporate bonds. It was nowhere provided in the mortgage that the bonds were issued for the benefit of all of the creditors of the company. The nearest approach to such a statement was the recital that amongst the purposes of the transaction was the retirement of the company's indebtedness.

The complainant contends that the stockholders' meeting was invalid because he received no notice thereof. He claims that he was entitled to be notified, because he was at that time the holder of certain promissory notes of the company (later reduced to judgment), secured by preferred stock of the company deposited with him as collateral. The stock was registered and issued in the name of the company itself. The certificates provided that upon any question relating to the issuing of bonds by the company, or securing the same by mortgage or deed of trust upon its corporate property, the holders of preferred stock should be entitled to the same voting powers as belonged to the common stock. Therefore the complainant says that he was in effect the holder of certificates for the preferred stock of the company, and as such entitled to notice of the stockholders' meeting. It is clear that the point is not well taken. It is true that the stock was in the possession of the complainant, as pledgee; but he was not the owner of it, and was not the registered holder on the records of the company. Under these circumstances, he was not entitled to notice of the meeting, and could not have voted the stock, had he been present.

The complainant concedes that the correct rule under these circumstances is set out in 6 Fletcher, Cyclopedia on Corporations, p. 6667, § 3920, as follows: "Until the stock is transferred to the pledgee on the corporate books, he does not become a stockholder, and hence is not entitled to notice of corporate meetings which the statute requires to be given to stockholders. In the absence of statutory provision or agreement to the contrary, the pledgee of stock is entitled to vote the same at corporate meetings, if he appears as the holder of the stock on the books of the corporation, while the pledgor is entitled to vote the stock, if it continues to be registered in his name." See, also, Cook on Corporations (8th Ed.) vol. 3, §§ 596, 612; Thompson on Corporations, vol. 4, § 4237; 14 C. J. 904.

The statutes of West Virginia (see Barnes' Code, c. 53, §§ 18 and 19) provide that "the person in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof, so far as the corporation is concerned," and that "no vote shall be given on any stock while owned by the corporation, nor shall any stock while so held be entitled to any dividend." Hence it would appear that Finefrock was not entitled to notice of the stockholders' meeting, and that the stock held by him as collateral carried no voting privilege at the time. There is nothing at variance with this conclusion in the decision of this Court in Granite Brick Co. v. Titus, 203 F. 659, and 226 F. 557, for in that case the stock was issued in the name of the pledgee, and there was an agreement that he should have the right to vote it.

The complainant, however, replies that the issuance of the certificates by the company to itself, and the indorsement and delivery of them to him, was equivalent to registry of the stock in his name. He relies upon the...