Fulk v. Gay, 4-8961

• Decision Date: 23 January 1950
• Docket Number: No. 4-8961,4-8961
• Citation: 226 S.W.2d 69,216 Ark. 462
• Parties: FULK v. GAY.
• Court: Arkansas Supreme Court

Page 69

226 S.W.2d 69

216 Ark. 462

FULK v. GAY.

No. 4-8961.

Supreme Court of Arkansas.

Jan. 23, 1950.

Baucum Fulkerson and Rose, Dobyns, Meek & House, Little Rock, for appellant.

Barber, Henry & Thurman, Little Rock, for appellee.

WOOD, Special Justice.

This is an action to determine who should receive the funds in the hands of a trustee at the termination of the trust. The trust was created to carry out a debt adjustment plan in a proceeding under the National Bankruptcy, Act, 11 U.S.C.A. § 1 et seq.

Statement of the Case

The events culminating in this litigation began in May 1929 when Augustus M. Fulk and other members of his family borrowed $362,500 from a bank and mortgaged certain Little Rock real property to secure the loan. The bank transferred to various persons the notes which had been given as evidence of this indebtedness. The debtors failed to pay or reduce the indebtedness and in April 1936, filed a debt adjustment proceedings in the Bankruptcy Court. Their first proposal was not accepted, but the proceedings were continued. In March 1940, the debtors filed what they designated, 'Amended and substituted proposal'. This last proposal was accepted by the noteholders and the court approved the plan April 22, 1940. The indebtedness at that time amounted to $362,500 principal and $57,450 interest.

Paragraph numbered II of the proposal is:

'The total indebtedness, principal of $362,500, and one-half of the interest, shall be $391,225, and shall be refinanced for a maximum period of 5 years at 4%. (Original notes bore 6%). The other half of the interest, $28,725, shall be waived by the noteholders'.

The proposal provides that after the proposal is accepted by the creditors and approved by the Bankruptcy Court, its material provisions should be included in an indenture to be executed by the parties. This indenture was executed. Each of its paragraphs bears the same number as the corresponding paragraph in the proposal and contains practically the same words. The Indenture:

'Par. II. The new notes aggregating $391,225 have been executed and dated Nov. 1, 1939, bearing interest at 4%, maturing on or before five years after their date.'

In Paragraph III(a)(1) the debtors 'grant, bargain, sell and convey to T. J. Gay as trustee for the noteholders' the same property which had been included in the original mortgage. This paragraph has the usual granting clause, the usual warranty, relinquishment of dower and waiver of redemption clauses. The defeasance clause is contained in paragraph XV, which will be mentioned hereafter.

'Par. III(a)(2). Debtors have executed and placed in the hands of Commercial National Bank four separate warranty deeds conveying to T. J. Gay, trustee, the lands that are included in the mortgage.

'Par III(b). If at the end of five years from and after Nov. 1, 1939, the full amount of indebtedness then due shall not have been paid in full, all the said deeds of conveyance shall be by said escrow agent forthwith delivered to, and they shall be accepted by the said T. J. Gay, trustee, or his successor in trust for and in behalf of each and all of the noteholders and their assigns; and in such case all liability and obligation of each and all of the debtors in respect to the above mentioned indebtedness shall immediately expire and terminate. That is to say, delivery and acceptance of the said deeds shall be full discharge and satisfaction of all obligation and liability of the debtors to the noteholders.

'Par. IV. During the five year period all of the properties shall remain in the hands of the trustee, who shall manage and supervise them generally and who shall manage and supervise them especially with respect to the obtaining of tenants, the negotiating and executing of leases, the collecting of rentals, the payment of taxes, the procurement of insurance and payment of premiums therefor, the making of repairs and the disbursing or all monies derived from the said properties in accordance with this instrument.'

Also in paragraph IV there is a provision requiring the trustee to set up a reserve for 'taxes, insurance premiums and regularly recurrent expenses'; and Par. IX requires the trustee to accumulate a reserve of $5,000 for preserving and protecting the property in case of emergency.

'Par. V. Funds remaining in the hands of the trustee after the establishment of these reserves shall be disbursed by him as follows: 1. To payment of interest coupons; 2. The balance of funds in the trustee's hands at the end of each six months period shall be employed in the purchase of notes by the trustee. All such purchases shall be made upon tenders.'

Paragraph VI provides for release of each of the various parcels of real property if the debtors sell them at certain specified prices.

Paragraph VII authorizes the trustee to sell any or all of the various parcels of property at not less than certain specified prices, $300,000 for one, $85,000 for another, $85,000 for another, and $40,000 for another. If the trustee could have sold for these prices he would have realized $118,775 more than the mortgage debt.

'Par. XII. It is the intent and purpose of all parties hereto that in the event the debtors shall have failed at the expiration of five years to pay in full all amounts then due, the noteholders may acquire merely upon making demand upon the escrow agent and without the necessity for litigation or other court proceedings of any kind or character whatsoever, good title to all the lands herein above referred to free and clear from all and every right, title, claim and interest of each and all of the debtors and of all other persons who have at any time been obligated upon or in respect of any of the notes.

'Par. XV. If on or before five (5) years from the date hereof all or any of the first parties shall pay or cause to be paid in full the said principal sum of Three Hundred Ninety-one Thousand Two Hundred Twenty-five Dollars ($391,225.00), together with all interest, the trustee shall endorse upon the margin of the record a notation stating that said indebtedness has been paid in full and that a lien of this indenture has been fully satisfied and discharged.'

It will be noted that the mortgage which is included in the indenture does not contain the usual power of sale and that the delivery of the deeds was intended to pass the title to the property, thereby doing away with the necessity for foreclosure proceedings. This arrangement was made in the bankruptcy proceedings and was approved by the Bankruptcy Court which had the power to prescribe the manner in which the title should pass.

The trustee took possession of the property, managed it and collected the rents under the agreement. He never solicited tenders. Appellants admit that there were no funds on hand to require a call for tenders until six months before the end of the five year period, but they say that they think there were sufficient funds six months before the end to justify calling for tenders. However, the accountant on whom both parties rely, testified that there was not enough in the Trustee's hands to justify a call for tenders until the end of the last six months of the five year period; and we find this to be true.

According to appellants' contention, at the end of the last six months, there was available for the purchase of notes upon tenders, the sum of $25,308.08. Appellees insist that there was only the sum of $16,205.23 on hand at that time. The difference between these two figures is made up of credits for attorneys' fees and taxes claimed by the trustee to which appellants have objected. No part of the principal was paid either by the makers of the notes or the trustee.

The trustee paid all of the interest up to the date of maturity; but he did not deliver to the noteholders or to the Commercial National Bank where the notes were made payable, the balance in his hands at the end of the five year period or any part of it. Neither did he show on his books that the balance had been credited to the noteholders. But on November 1, 1944, the day after the maturity of the notes, the four deeds were delivered to the trustee by the escrow agent, Commercial National Bank. The notes were delivered up sometime later and the various noteholders, at the time they surrendered their notes, received certificates of interest showing their respective interests in the property which had been conveyed to their trustee. The trustee, T. J. Gay, continued as trustee for those who owned the property, he being the grantee in the deed as trustee for them. He continued to carry the funds which are in dispute in his name as trustee. Later, all of the property was sold in different sales from which the trustee, for the owners, realized the total sum of $340,654.00. If the amount now in controversy were added to this, the creditors would still lack about $14,000 of collecting their notes.

Appellants filed this suit in the Pulaski Chancery Court in August 1945, claiming that the debt was satisfied when the trustee took down the deeds; that the surplus money left in the hands of the trustee was the property of appellants, since it had not been applied on the notes, and they prayed for an accounting and judgment for all surplus moneys in the trustee's hands. Appellants do not challenge the right of the escrow agent to deliver the deeds, or question the title of the grantee.

The Chancery Court, in January 1947, sustained a motion to dismiss the complaint on the ground that the Bankruptcy Court has exclusive jurisdiction of the matter in controversy. On appeal to this Court, the decree of the Chancery Court was reversed and the cause was remanded for hearing on the merits. 212 Ark. 151, 205 S.W.2d 24. After hearing the evidence the Chancery Court dismissed the complaint for want of equity and the plaintiffs appealed.

Other Facts--And Opinion

The decision of the case turns on the interpretation of the proposal made by...