First Nat. Bank of Memphis, Tenn. v. Towner

• Decision Date: 06 February 1917
• Docket Number: 2866.
• Citation: First Nat. Bank of Memphis, Tenn. v. Towner, 239 F. 433 (6th Cir. 1917)
• Parties: FIRST NAT. BANK OF MEMPHIS, TENN., v. TOWNER.
• Court: U.S. Court of Appeals — Sixth Circuit

239 F. 433

FIRST NAT. BANK OF MEMPHIS, TENN., v. TOWNER.

No. 2866.

United States Court of Appeals, Sixth Circuit.

February 6, 1917

T. K Riddick, of Memphis, Tenn., for appellant.

St John Waddell, of Memphis, Tenn., for appellee.

Before WARRINGTON, KNAPPEN, and DENISON, Circuit Judges.

WARRINGTON Circuit Judge.

This appeal is from a decree in effect requiring the bank appellant, to surrender to appellee, as trustee in bankruptcy of the Reliance Cotton Company, a corporation, for cancellation, certain negotiable bonds and a deed of trust securing them, which had been issued and delivered by the bankrupt.The basis of the decree is a finding in substance that, although the bonds had been received by the bank in pledge to secure a loan it made to the Reliance Company and the loan had been fully paid, the bank, erroneously believing it had the right so to do, continued to hold the bonds to secure past-due indebtedness of another and distinct corporation, the Memphis Cotton Oil Company.

The two companies so concerned were Tennessee corporations, the Memphis Company having been organized in 1902 and the Reliance Company in 1905.At the times here in question, B B. Harvey owned all the shares of stock in both of these companies, except a sufficient number to qualify three persons additional to himself as directors in each company; and the stockholders and directors of each company were the same persons.On July 21, 1913, the stockholders of the Reliance Company met and instructed the directors 'to issue $40,000 first mortgage bonds of the company' and to secure them by a trust deed conveying the property of the company located in the states of Tennessee, Mississippi, and Missouri.On the same day the board of directors 'authorized and directed' the president and secretary to execute this trust deed and the bonds in accordance with forms set out in the minutes of the meeting.After the instruments were executed, the president of the company placed the bonds in the hands of B. B. Harvey to 'realize money on them * * * for the Reliance Company. ' It is not shown who delivered the deed of trust, though it appears to have been recorded in the several counties in the states in which the property of the company was located.A promissory note in the name of the Reliance Company for $10,000 and these bonds as collateral security therefor were delivered to the bank by B. B. Harvey.It is agreed in the record that the note was 'made by the Reliance Cotton Company, indorsed by B. B. Harvey and the Memphis Cotton Oil Company,' that it was discounted October 13, 1913, that the proceeds were 'credited to the account of the Memphis Cotton Oil Company,' and that the note 'has been paid.'

When these bonds were directed to be issued, the Memphis Company was largely indebted to the bank and was also in need of more money.The bank was not willing to make further loans to the Memphis Company upon its own credit, nor upon the bonds which it had previously issued and delivered in pledge to the bank, nor upon the additional individual indorsement of B. B. Harvey.In these circumstances the president of the bank suggested to B. B. Harvey a plan for obtaining additional security and money through the Reliance Company; and this plan was the one adopted and carried out, as stated, through the instrumentality of that company.But when the company's note was paid, its bonds were neither returned, nor were they or the trust deed canceled.Instead, the bonds were retained by the bank as further security for notes held by it against the Memphis Company, and this was done with the sanction of B. B. Harvey.It is not claimed that the Reliance Company authorized this later use of the bonds, unless it did so through the execution of its note before mentioned.We shall now consider the grounds upon which the bank seeks to justify its retention of the bonds; and it is to be borne in mind throughout that the bank's rights are to be determined with reference to those of the bankrupt's creditors.

1.The form of the $10,000 note.The note of the Reliance Company provided that 'upon the discharge of this obligation' the bank might deliver the instrument (including, of course, the collaterals) to the maker, but that the bank should 'have the right to retain the same to answer any other obligation, note, etc., * * * just as if specially pledged under an agreement in the exact terms of this. ' The right thus reserved plainly had reference to some instrument which the Reliance Company was obligated to pay; but, apart from the bonds themselves, when the note was paid the bank held no obligation, certainly no express obligation, of the Reliance Company, and it has not held any since.It is insisted, however, for reasons presently to be stated, that the foregoing provision of the Reliance Company's note empowered the bank to retain the bonds to secure notes executed and delivered to it by the Memphis Company as maker.It may be well to notice here what notes of the Memphis Company were held by the bank at the time the Reliance Company's bonds were applied in pledge to secure them.The date of payment of the Reliance Company's note was May 15, 1914, and on the following July 27th the Memphis Company's indebtedness to the bank was consolidated into three notes in its favor for $22,000 each.These were demand notes, signed by the Memphis Company as maker, and indorsed by that company and B. B. Harvey.Harvey placed in pledge to secure them $80,000 face value of bonds of the Memphis Company and the bonds now in question of the Reliance Company; and Harvey testified that this was the first time the Reliance Company's bonds were pledged by him 'for the debts' of the Memphis Company.The Memphis Company was afterwards declared bankrupt, though the date of adjudication does not appear, and these notes were then unpaid.Two of the notes have since been paid, and, excepting a balance of about $9,000, also the third note, through proceeds derived from a sale made by the bank of the Memphis Company's bonds.Now, as we interpret the argument that the Reliance Company's bonds might, under the provision of its note, be held to secure all or any of these notes of the Memphis Company, it is twofold: (a) As to the manner in which the Reliance Company's note was executed; and (b) a claim that the Memphis Company's debts to the bank may be treated as really the debts of both corporations.

As respects the first of these grounds, all that appears touching the execution of the Reliance Company's note is that it was 'made by the Reliance Company, indorsed by B. B. Harvey and the Memphis Cotton Oil Company. ' It is said that the Memphis Company, as well as Harvey, indorsed the note before delivery, and so became a joint maker, and, as we understand counsel, that the above quoted provision of the note is broad enough to justify retention of the bonds of the Reliance Company to secure the debts of its joint maker-- the Memphis Company.Assuming, though it is not distinctly shown, that the Reliance Company's note was indorsed before delivery, as stated, the contention of counsel overlooks the fact that before this transaction occurred the Uniform Negotiable Instruments Act was adopted in Tennessee.While counsel correctly state the rule concerning the effect of such indorsements which prevailed in Tennessee (not to speak of other jurisdictions) prior to the adoption of the act referred to, yet the decisions cited in support of the rule were themselves rendered before the enactment of the statutory rule.^[1] According to section 63 of the Negotiable Instruments Act, passed in 1899, the Memphis Company as well as Harvey was simply an indorser, since nothing is shown which 'clearly indicates by appropriate words' an 'intention to be bound in some other capacity'(ActsTenn.1899, p. 152, and seesections 64 to 68); and the statutory rule thus distinctly prescribed may safely be regarded as applicable here.Pharr v. Stevens(1911)124 Tenn. 669, 673, 674, 139 S.W. 730.True, in that caseBank v. Busby,120 Tenn. 652, 13 S.W. 390, decided three years earlier, was distinguished; but as there is no proof in the instant case which tends to show that either of the indorsers intended to be bound in any other capacity than as an indorser, each would be so considered under both of those decisions.If, then, it were conceded that under the provision in question of the note the pledge of either of two joint makers might be retained to secure a debt of the other, it would by no means follow that this could rightfully be done as respects a debt of an indorser; no such claim is even suggested

We may now turn to the second ground of counsel's insistence: That the Memphis Company's debts to the bank were really the debts of both corporations.Here again the form of the note is relied on, at least in part.Admittedly the notes of the Memphis Company were not signed by the Reliance Company.It is not intimated that the Reliance Company received all the money which the bank parted with on the faith of the Memphis Company's notes; and to hold that the Reliance Company is chargeable with all these debts would be to affirm that the company had power to make itself answerable for debts, at least in some substantial amount, of the Memphis Company.The question hence arises whether the Reliance Company could guarantee, or pledge its bonds to secure, debts of the Memphis Company.This must depend upon the powers vested and limitations imposed by the Reliance Company's charter.The purposes of the company's incorporation are:

'Buying, ginning, manufacturing, selling and merchandising baled cotton, seed cotton, cotton seed, cotton seed products, feed, and fertilizers produced from same and other substances, and other art

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