In re Charles Town Light & Power Co.

• Decision Date: 04 November 1912
• Citation: 199 F. 846
• Parties: In re CHARLES TOWN LIGHT & POWER CO.
• Court: U.S. Court of Appeals — Fourth Circuit

199 F. 846

In re CHARLES TOWN LIGHT & POWER CO.

United States District Court, N.D. West Virginia.

November 4, 1912

[Copyrighted Material Omitted]

A Moore, Jr., of Berryville, Va., and Geo. M. Beltzhoover, Jr. of Charles Town, W. Va., for trustee.

Gans &amp Haman, of Baltimore, Md., and Brown & Brown, of Charles Town, W. Va., for bondholders.

DAYTON, District Judge (after stating the facts as above).

It is insisted by the trustee and objecting creditors that (1) the banks have no provable claims against the bankrupt, because (a) the bankrupt was not on November 18, 1904, indebted to Ehrehart, and (b) Ehrehart had no authority to pledge the bonds as collateral for his personal indebtedness; (2) that, if the banks have provable claims, they are not entitled to priority over the unsecured creditors, because (a) the mortgage securing the bonds constitutes a voidable preference, and (b) the mortgage was fraudulently withheld from record, and, therefore, is void as security; (3) that by their negligence and laches the banks have estopped themselves from asserting their claims, or, if allowed to assert them, they should be postponed in payment to the debts of all other creditors.

Carefully considered, I am not inclined to think that much difficulty arises in determining the first objection in its first aspect. Its determination involves purely a question of fact. The referee's judgment on such questions must always be given favorable consideration, and in cases of doubt be solved in favor of his finding. By the very complete and able opinion filed by him it is clearly shown that the evidence upon which he bases his findings was very carefully considered by him. A review of this evidence convinces me that the bankrupt was indebted to Ehrehart on November 14, 1904, for sums of money which he had advanced to it. It cannot be successfully contended that Ehrehart had sold to it property at an overvaluation, and should be held to be indebted for the difference between this overvaluation and its true value, to offset this indebtedness for advances made, because it has been held by the Supreme Court of Appeals of this state that the fact that property, received by a corporation in full payment of stock issued, is taken at an overvaluation, will not make the holder of such stock liable as for unpaid subscription until the transaction has first been impeached for fraud upon the corporation. Bank v. Coal & Coke Co., 51 W.Va. 60, 41 S.E. 390. Such impeachment for fraud must be instituted and prosecuted by the corporation itself, or at least by some of its stockholders or creditors existing at the time the sale was made. Stockholders existing at the time, who assented to and confirmed the contract of purchase (as all did in this case), are estopped afterwards from impeaching it. Subsequent creditors, who have extended credit to the corporation upon the strength of the property so acquired, will certainly not be permitted to impeach the purchase under any ordinary conditions. These principles are clearly determined in Old Dominion Co. v. Lewisohn, 210 U.S. 206, 28 Sup.Ct. 634, 52 L.Ed. 1025, and cases therein cited. In the case here Ehrehart himself owned the property, and in turning over the property became the substantial owner of all of the stock of the corporation and its sole creditor. These bank debts were not incurred for money which Ehrehart secured in payment for the property, but for additional sums borrowed by him from the banks and advanced by him to the corporation for purposes of improving and operating the property-- all to the end of increasing its value in the interest of subsequent creditors. I am wholly unable, from the evidence, to conceive any extraordinary conditions justifying subsequent creditors in regarding themselves defrauded in the premises.

Touching the second aspect of this first objection, as to Ehrehart's authority to pledge the bonds to these banks, it would be entirely sufficient to say that the undisputed testimony of Gibson and Ehrehart is that such authority was directly given by vote of the directors; but, even if this were not so, the circumstantial evidence, it seems to me, is entirely sufficient to indicate such authority. It is reasonable to presume that these bonds were authorized by the company to issue in order to settle its outstanding debts; that Ehrehardt, the treasurer of the company, would be the one selected to negotiate settlement of these debts with these bonds; that, being substantially the sole creditor of the company at the time, his taking over of the bonds in payment of his debt would be both satisfactory and ratified by the company; and the fact that no complaint was at the time or since made by the company, or any of its officers or directors, is strong presumptive evidence, in absence of anything to the contrary, that his negotiation was satisfactory and acquiesced in.

The more serious question in the case arises under the third objection stated, which includes substantially both aspects of the second, and may be stated as a single proposition in these words: Have these banks, by either fraudulently concealing their deed of trust, or by reason of negligently withholding it from record, lost the right to prove their debts at all, or, if not, to assert their claim of priority over unsecured creditors? In other words, have they estopped themselves from asserting either debts or priorities, or both? What debts are entitled to priority under the bankrupt law? Section 64b says, among other things:

'Debts owing to any person who by the laws of the states or the United States is entitled to priority.'

Section 3103 of the Code of West Virginia, 1906, provides that among other contracts a deed of trust--

'shall be void as to creditors * * * until and except from the time that it is duly admitted to record.'

What kind of creditors are referred to? The Supreme Court of Appeals, in Gilbert v. Peppers, 65 W.Va. 355, at page 364, 64 S.E. 361, at page 365 (36 L.R.A. (N.S.) 1181), referring to this section of the Code says:

'It does not contemplate general creditors. As to them, it is valid, whether recorded or not. A mere personal debt bears no relation to the property of the debtor, since it does not constitute a lien

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