First Nat. Bank v. Radford Trust Co.

• Decision Date: 10 May 1897
• Docket Number: 456.
• Citation: 80 F. 569
• Parties: FIRST NAT. BANK OF CHATTANOOGA, TENN., et al., v. RADFORD TRUST CO.
• Court: U.S. Court of Appeals — Sixth Circuit

80 F. 569

FIRST NAT. BANK OF CHATTANOOGA, TENN., et al., v. RADFORD TRUST CO.

No. 456.

United States Court of Appeals, Sixth Circuit.

May 10, 1897

The Hughes Lumber Company, a corporation organized under the law of Tennessee, and doing a manufacturing business at Chattanooga, issued its interest-bearing bonds, to the extent of $200,000, secured by a mortgage upon its real estate machinery, etc., to R. M. Barton, Jr., as trustee. Ten of these bonds, each for $1,000, were pledged by it to the Radford Trust Company, a corporation organized under the law of the state of Virginia, as collateral security for an indebtedness of about an equal amount due to it by the Hughes Lumber Company. This indebtedness has not been discharged, and default has been made in the payment of interest on the bonds so held, in consequence of which the principal of the bonds has matured, under a provision of the mortgage. This Barton mortgage, as we shall designate it, was executed October 22, 1890. On the 26th of December, 1890, the same corporation made a deed of general assignment to the defendant M. H. Ward, whereby it conveyed its equity of redemption in the property conveyed to Barton, and all of its other assets of every kind, for the equal benefit of all its creditors. On the same day D. W. Hughes, president of the Hughes Lumber Company, and a large owner of its stock, also made a general deed of assignment to M. H. Ward, whereby he conveyed all of his individual assets for the equal benefit of all his creditors. Subsequently Mr. Hughes proposed a plan for the settlement of the debts of both the Hughes Lumber Company and himself, and a reorganization of the business of the corporation. This plan involved the organization of a new corporation, which should assume the debts of both himself and the old corporation, by giving to such creditors its own mortgage bonds in substitution for the bonds of the Hughes Lumber Company, and in discharge of the Barton mortgage and of the two assignments made to Ward; such bonds to be secured by a first mortgage upon the combined assets of the Hughes Lumber Company and of himself, which for this purpose should be conveyed to the new corporation. The combined indebtedness of the two debtors aggregated about $25,000. Bonds to this amount, secured as mentioned, were to be exchanged for the bonds of the Hughes Lumber Company, to the extent outstanding, and the surplus applied in the paying off of debts not protected by such bonds, but which were entitled to the security provided by the assignments to Ward. This plan was submitted to a number of creditors, including appellants who regarded it with favor, and joined in recommending its acceptance by all. Pending communication with creditors Ward, assignee, brought to public sale the property conveyed to him under the general assignments of the Hughes Lumber Company. At that sale the real estate and the manufacturing plant of the Hughes Lumber Company were sold, subject to the Barton mortgage, for the sum of $450. A large quantity of lumber and other material belonging to the same corporation, and not embraced in the Barton mortgage, were sold for $11,889.57. The successful bidder for both properties was J. F. Loomis. The evidence establishes that the purchase was made by Loomis as the agent for appellants, and that their purpose in buying in the property was to promote the scheme of settlement and reorganization which had already been accepted by a large proportion of the creditors interested. It was believed that all would assent finally, and that it was desirable that the property should be kept together, so that when the assent of all was received the property could be conveyed to the new corporation, and the plan carried out. No part of the purchase money was ever paid to Ward, who subsequently, at the instance of Loomis and those for whom he acted, conveyed the property so sold to the Hughes Bros. Manufacturing Company, the new corporation organized under the plan of settlement above detailed. Mr. Loomis' account of the purchase of this property is as follows: 'The purchases were made for T. G. Montague, president of the First National Bank, C. E. Stivers, cashier City Savings Bank, and the Loomis & Hart Manufacturing Company. I purchased them as trustee for the above-mentioned parties. I did not pay anything on these purchases. It was the understanding that Mr. Hughes was to make some arrangement with all of his creditors by which they were to take bonds issued on the plant and material, and on Mr. Hughes' individual property. When this arrangement was made, I was to deed back the property to Hughes Bros. If the arrangement was not made, I was then to handle the property for Mr. Montague, president, Mr. Stivers, cashier, and the Loomis & Hart Manufacturing Company. I understood Mr. Hughes had made such an arrangement with his company, and I deeded back the property, except what had been sold, to him, and the net proceeds of all sales that had been made by me. ' 'Q. Did not T. G. Montague, president of the First National Bank, C. E. Stivers, cashier of the City Savings Bank, and the Loomis & Hart Manufacturing Company all consent to your transferring said property back to Hughes Bros. Manufacturing Company, or Hughes Bros? And is it not also a fact that they knew you were not receiving anything for it, and were they not to take bonds of Hughes Bros. Manufacturing Company for their debts? A. I so understood that these parties all consented to my deeding the property back to Hughes Bros. The Loomis & Hart Manufacturing Company did agree to take bonds of the Hughes Bros. in settlement of their claim. Cannot answer as to other parties. ' Ward's deposition is not in this record, but, from exhibits and other evidence, it appears that he conveyed this property to D. W. Hughes, or to the Hughes Bros. Manufacturing Company, in promotion of the scheme of settlement, and without receiving the purchase price bid by Mr. Loomis, protecting himself by an indemnifying bond made by Hughes and some of his friends.

The original bill was filed by the Radford Trust Company, as a creditor of both the Hughes Lumber Company and D. W. Hughes, and entitled to the benefits of the Barton mortgage and of both the assignments made to Ward, for the purpose of foreclosing the Barton mortgage and of winding up the assignments to Ward for the benefit of all such creditors as had not waived the benefit of those instruments by accepting the liability of the new corporation in exchange for the obligations of the lumber company. The bill was filed against the Hughes Lumber Company, the Hughes Bros. Manufacturing Company, R. M. Barton, trustee under the mortgage of the Hughes Lumber Company, H. C. Beck, trustee under the mortgage of the Hughes Bros. Manufacturing Company, M. H. Ward, assignee under the two general assignments mentioned, and a number of others liable upon commercial paper transferred to the complainant by the Hughes Lumber Company either for value received, or as collateral for the debts of that corporation to the complainant. September 22, 1893, on application of complainant, a temporary receiver was appointed to take possession of the property embraced in these instruments. This appointment was subsequently made permanent. By an amended bill, filed October 5, 1893, other defendants were brought in; among them being the appellants, the First National Bank of Chattanooga, G. H. Jarnagin, assignee of the City Savings Bank, and the Hart & Loomis Manufacturing Company. After setting out the transactions we have stated, the bill, as amended, avers that, with the exception of complainant, every holder of bonds secured by the Barton mortgage had accepted bonds of the Hughes Bros. Manufacturing Company secured by a mortgage embracing the identical property conveyed to Barton, in addition to other property included in the assignments to Ward, and insists that thereby all such beneficiaries have estopped themselves from claiming any benefit under the Barton mortgage. It further insists that never having accepted bonds of the Hughes Bros. Manufacturing Company, nor assented to the conveyances made by Ward to that company, it is entitled to have the Barton mortgage foreclosed, and the assignments to Ward closed up, and the proceeds, as far as necessary, applied in payment of its debts against the Hughes Lumber Company and against D. W. Hughes. The complainant further insisted that all creditors who had assented to this reorganization scheme, and accepted the new security provided by the mortgage made by the new corporation, had waived the benefit of the general assignment made by the Hughes Lumber Company and D. W. Hughes, and that complainant was entitled to enforce said assignments for its benefit and that of other general creditors who had not agreed to this plan of reorganization. To this end, this amended bill asserted the right of complainant, in behalf of itself and all other creditors who had not accepted the bonds of the corporation, or assented to the acquisition of the property covered by the several conveyances in trust mentioned above, to follow and recover all such property, and compel its application exclusively to the payment of the demands of creditors who had not waived the benefit of the said several trusts, or, if such property could not be found or recovered from those into whose hands it had come, the right to hold Ward liable personally for the value of the property so lost to the trust was asserted, and proper relief prayed. Other facts necessary to an understanding of the case will appear in the opinion.

Upon a final hearing the circuit court decreed as follows: (1) That complainant was entitled to a decree foreclosing the Barton mortgage. (2) That complainant was the only...