Guarantee Bond & Mortg. Co. v. Hilding

• Decision Date: 06 June 1923
• Docket Number: 3715.
• Citation: 290 F. 22
• Parties: GUARANTEE BOND & MORTGAGE CO. et al. v. HILDING.
• Court: U.S. Court of Appeals — Sixth Circuit

290 F. 22

GUARANTEE BOND & MORTGAGE CO. et al. v. HILDING.

No. 3715.

United States Court of Appeals, Sixth Circuit.

June 6, 1923

J. T McAllister, of Grand Rapids, Mich. (M. Thomas Ward and J. T and T. F. McAllister, all of Grand Rapids, Mich., on the brief), for appellants.

Glenwood C. Fuller, of Grand Rapids, Mich. (Wicks, Fuller & Starr, of Grand Rapids, Mich., on the brief), for appellee.

Prior to December 19, 1919, Claude B. Tompkins was conducting an automobile and garage business in the city of Grand Rapids Mich., under the name of the Hermitage Garage & Auto Company. Tompkins, on the date above mentioned, being largely indebted to a number of creditors, executed a trust mortgage for the benefit of his creditors to Walter H. Brooks, trustee, covering all his personal property, used in his business, including accounts and bills receivable. Brooks took possession of this property as such trustee, and conducted the business until August 9, 1920, at which time, by reason of ill health, he assigned this trust mortgage to Fred W. French, who took possession of the property and business and continued in control and operation thereof until November 27, 1920.

Upon succeeding to this trust, French caused an inventory and appraisement to be made of the assets then on hand, which amounted in the aggregate to $44,124.21. This included the leasehold of Tompkins in the real estate in which the business was conducted, under a lease granting to him the option to purchase the same at a price named therein, which leasehold and option to purchase was appraised at $17,130. After the execution of the trust mortgage, Tompkins conducted a rather extensive business in the sale of King and Liberty automobiles, particularly the King, as a personal enterprise, separate and apart from the garage business conducted by Brooks, trustee, but in the same building. In April, 1920, Walter J. Nelson, Fred W. French, and Claude B. Tompkins undertook to organize a corporation for the purpose of taking over all of the business and property of Tompkins. This arrangement contemplated the sale of a limited portion of this stock to outside parties and an equal division of the residue among the three promoters.

In furtherance of this plan and purpose Nelson and French indorsed the paper given by Tompkins, in the name of the Hermitage Garage & Auto Company to the Commercial Savings Bank. They also borrowed from the Fourth National Bank of Grand Rapids $7,100, either for the purpose of paying other claims secured by the trust mortgage or purchasing them at 50 cents on the dollar. The note evidencing this loan was signed by French and Nelson; $2,100 of this indebtedness was paid and a new note executed for the balance of $5,000. This $7,100, with an additional amount of about $300 contributed by French, was deposited in the bank to the credit of Chas. M. Owen, an attorney, who expended the same in the purchase of claims against the Hermitage Garage & Auto Company at 50 cents on the dollar, and these claims, amounting in the aggregate to about $14,600, were assigned directly to Owen.

During the time that the automobile sales agencies were conducted as a separate business by Tompkins, when Brooks was acting as trustee, Tompkins became indebted to the Commercial Acceptance Trust Company of Chicago in the sum of about $4,500. French and Nelson gave to Tompkins accommodation notes, which Tompkins assigned to the trust company. To protect French and Nelson upon these accommodation notes, Tompkins executed deeds to Nelson for certain real estate he owned at that time. Tompkins later paid about $1,400 of this indebtedness, and the balance, amounting to about $3,100, was paid, in part, at least, from proceeds derived from the sale of the real estate deeded by Tompkins to Nelson. It also appears from the evidence of French that he paid a part of this indebtedness, but his evidence upon that question is indefinite and uncertain.

After French took possession as assignee of the Brooks trust mortgage, the automobile sales agencies held by Tompkins were merged in the garage business. Nothing was paid to Tompkins for these agencies, although it is admitted by French that the King agency was valuable. French also secured the agency for the sale of Chevrolet automobiles, for which he advanced a thousand dollars of his own money, and this agency was also merged in the business conducted in the name of the Hermitage Garage & Auto Company. Transactions in these cars were entered in the same books as the transactions in the garage business, and the money arising therefrom kept in the same bank account. Checks were drawn indiscriminately upon this account for the purpose of the garage business and the sales agencies.

In furtherance of the plan to organize a corporation to take over this property and business, advance subscriptions were taken to its capital stock, and advance payments, aggregating $5,500, were made by the subscribers to this stock, which advance payments were to be applied as a credit on their stock subscriptions when the corporation should be organized. This money was placed to the account of the Hermitage Garage & Auto Company and used in the conduct of its business. On August 30, 1920, French submitted to Nelson a proposition in writing that, in consideration of Nelson assigning to him by bill of sale all of Nelson's interest in the business and proposed corporation, French would protect Nelson against any obligation incurred through indorsement or guaranty of accounts, or any other claims that Nelson might have against Tompkins personally, and also that he would accord just treatment to Tompkins in the reorganization plans. Nelson thereupon withdrew from further participation in the organizing of the proposed corporation, but French was never able to procure the release of Nelson upon his indorsements, and Nelson never executed to him any bill of sale for any interest that he might have therein. Tompkins and French proceeded with their efforts to organize a corporation, in which each was to receive a substantial portion of the stock. Later French offered Tompkins $10,000, to be paid from time to time out of the earnings of the proposed corporation, for his interest in all the business and property, instead of stock in the corporation. It does not appear from the evidence that Tompkins accepted this proposition. In any event, the corporation was never formed, and when French was arrested the plan was abandoned. French testified in reference to this, 'I hadn't time to complete the deal with him before my arrest.'

From time to time during September and October of that year about $27,000 was borrowed from the Guarantee Bond & Mortgage Company for the purchase of new automobiles for resale at retail. Bills of sales covering the automobiles purchased with the borrowed money were executed and delivered to the Guarantee Bond & Mortgage Company by 'Fred W. French and Claude B. Tompkins, doing business as the Hermitage Garage & Auto Company of the City of Grand Rapids, etc.,' and signed 'Hermitage Garage & Auto Company, by Claude B. Tompkins and Fred W. French. ' Some of the notes were signed 'Hermitage Garage & Auto Company, Claude B. Tompkins,' and indorsed on the back 'Claude B. Tompkins, Fred W. French. ' Others were signed 'Hermitage Garage & Auto Company, Fred W. French, Claude B. Tompkins,' and indorsed on the back 'F. W. French, C. B. Tompkins. ' All of these bills of sale were recorded in the office of the city clerk for the city of Grand Rapids, Kent county, Mich.

Money was also borrowed from the Chattel Loan Company, and bills of sale given to that company, covering the automobiles purchased with the money borrowed from it. These bills of sale stated on their face that French was the trustee of the Hermitage Garage & Auto Company. One of these bills of sale was signed 'Hermitage Garage & Auto Company, by F. W. French. ' The other was signed 'Hermitage Garage & Auto Company by F. W. French, Trustee. ' On September 13, 1920, Tompkins assigned to French the lease of the building in which this business was conducted.

On November 27, 1920, French was arrested upon the charge of embezzlement of funds of the bank in which he was employed. Two or three days after the arrest of French, Brooks, the original trustee, took possession of the property and employed Nelson as his agent to take charge of the same. On December 9, 1920, an involuntary petition in bankruptcy was filed against French. On the 20th of that month French was adjudged a bankrupt, and Charles V. Hilding was elected trustee. On February 12, 1921, Hilding pasted a notice on several of these automobiles claiming ownership as trustee in bankruptcy of the property of French. On February 16, 1921, the Guarantee Bond & Mortgage Company filed a bill of complaint in the circuit court of

Kent county, in chancery, against Tompkins and French, as partners, to enforce its liens upon these automobiles for the money loaned by it to Tompkins and French for their purchase.

On March 7, 1921, Hilding, trustee in bankruptcy of the estate of French, filed a bill in the United States District Court alleging that all of the automobiles covered by these bills of sale and all of the property covered by the trust mortgage were owned by French individually, and therefore a part of the bankrupt estate. He procured a restraining order preventing the Guarantee Bond & Mortgage Company from proceeding in the suit filed in the state court. Later a decree was entered in the District Court, ordering and directing that all of this property should be delivered to the trustee and administered by him as assets of the bankrupt's estate; the priorities, if any, to be determined in the proceeding in bankruptcy. Nelson was ordered to...