In re Elletson Co.

Decision Date29 November 1909
Citation174 F. 859
CourtU.S. District Court — Northern District of West Virginia
PartiesIn re ELLETSON CO.

Prior to December, 1904, Will A. Elletson was conducting a business at Parkersburg, West Virginia, under the name of the Elletson Printorium. The scope of this business was general job printing, the manufacture and sale of record and like books and the purchase and sale of stationery. At the time, in addition to the manufacturing machinery plant, he had a stock in storeroom and in the paper, stock, and printing department of about $4,000. His business was apparently successful although to an extent indebted, and he was limited in means and credit. In this month of December, 1904, he sold a half interest in this business to E. M. Carver, who was then, and still is, cashier of the Ritchie County Bank, for $12,000. Of this sum Carver paid him $5,000, which he applied to the discharge of indebtedness of the business. In January, 1905 a corporation was chartered by the state known as the Elletson-Carver Company. Its incorporators were Will A Elletson, E. M. Carver, Edgar Carver, E. B. Elletson, and Bernadine F. Norton, each subscribing one share of the par value of $100, with an authorized capital of $50,000. E. B Elletson was a brother of Will A. Elletson, Edgar Carver was a son of E. M. Carver, and Miss Norton was the bookkeeper of the Elletson Printorium. These five became the directors of the corporation and were its sole stockholders. Carver manifestly became dissatisfied with his purchase of a half interest in the Printorium business, and, either before or shortly after the formation of the Elletson-Carver corporation, sold back such interest to Will A. Elletson. On January 20, 1905, as shown by its record, this Elletson-Carver Company purchased from Will A. Elletson the entire plant and stock of his Printorium, including its bills receivable, and in payment therefor authorized the issue to him of 495 shares of its stock, the full amount of its authorized capital excepting the five shares subscribed by the original incorporators.

From the date of the organization of the corporation up to February 15, 1905, the amount of stock and supplies was increased by purchases made to about $7,000, so that, on that date, the corporation had as assets $7,000 of merchandise, the value of bills receivable, transferred to it from the Printorium, its own bills receivable (the amount of both which are not disclosed), and the manufacturing plant, which included inks, type, and other consumable property.

On this 15th day of February, 1905, the stockholders held a meeting, notice of which was waived by all, and at which all were present. A resolution was then passed setting forth that the company was indebted to E. M. Carver in the sum of $12,000, and authorizing the president of the company, Will A. Elletson, to execute promissory notes therefor and secure the same by deed of trust upon all the company's property, plant, furniture, fixtures, and lease. The directors, who were the same individuals as the stockholders, immediately met and ratified the stockholders' action, and thereupon five negotiable notes were executed by this company, by Will A. Elletson, its president, all dated at Parkersburg, W. Va., on this February 15, 1905, all made payable at the Ritchie County Bank to the order of Will A. Elletson and indorsed by him. The first four were for $2,500 each, the fifth for $2,000. They were made payable on the 1st days of June, September, November, 1905, and of January and March, 1906, respectively. To secure the payment of these notes to E. M. Carver, a deed of trust was executed on this same day by the company, acting by its president, Elletson, whereby it conveyed to George H. Carver, trustee (a brother of E. M. Carver), 'every and all appliances, attachments, furniture, fixtures and machinery of all kinds and character, together with the attachments thereof and every part of the equipment, furnishings and fixtures used in and about the conducting of the business known as the Elletson-Carver Company, now in or upon the premises, together with all the accounts then due the Elletson-Carver Company as assignee of the Elletson Printorium, Will A. Elletson, proprietor, it being all the property of every kind, character and description, together with the books, accounts, lease, furniture, fixtures and stock now on hand of the said the Elletson-Carver Company.'

It is stipulated in this trust deed that if the company should default in the payment of the notes or any one of them when due, should fail to pay the taxes or rent due, or fail to keep the property insured for at least $12,000, then, upon 'request' or 'demand' of E. M. Carver, the trustee should sell all the property for cash.

It is not controverted that, of this $12,000 os secured, $5,000 was to reimburse E. M. Carver the sum he had paid Elletson upon his purchase of a half interest in his Printorium, $3,600 was to discharge an overdraft which the Elletson-Carver Company had been permitted to make in the Ritchie County Bank, and the residue was to be placed to the credit of the company in this bank. At the time this trust was authorized and executed, Will A. Elletson was president, E. M. Carver, vice president, and Edgar Carver, secretary and treasurer, of the company, and all three participated in these transactions both as stockholders and directors. At the same meeting of the directors a resolution was adopted setting forth that Edgar Carver, the secretary and treasurer, would be absent for a time, and that therefore, until the next meeting, Elletson, president, should be empowered to carry on the business of the company with power to execute and indorse promissory notes, sign checks, drafts, and vouchers for the payment of any and all indebtedness of the company.

Of the five notes, it appears that the first two were paid in full and $1,000 was paid upon the fifth and last one. The third one was protested for nonpayment November 1, 1905, the fourth one on January 2, 1906, and as to the fifth one, with the credit of $1,000 indorsed thereon, protest was waived by Elletson, the indorser.

In this condition of things, from the date of this trust deed, February 15, 1905, up to the 4th of February, 1909, nearly four years, this corporation, which by resolution under the West Virginia statute changed its name to the Elletson Company, under the management and control of Will A. Elletson, its president, remained in full and undisturbed possession of all the property conveyed by the trust and proceeded to carry on its business of manufacturing blank and record books, of job printing, and selling stationery. To this end it sold, without let or hindrance from Carver or any one else, the consumable stock on hand included in the trust and purchased and sold some $29,000 of new stock of like nature, except about $1,500 worth of it on hand. A fire occurred during this period that damaged near $1,300 of the machinery in the manufacturing plant, a total of $2,600 insurance money was collected and used, and some $3,000 worth of new machinery was installed. On February 4, 1909, this company was adjudged bankrupt. R. L. mcFarland was appointed trustee. He has listed the assets to be something over $22,000, and the liabilities over $34,000.

Before the referee to whom the matter was referred, the Ritchie County Bank has appeared and filed proof of claim for $9,960.37, $3,500 of which is not in controversy here, the remaining $6,400 based upon the three unpaid notes secured to Carver by the trust deed and which the bank claims to be the owner of. To the claim of the bank that this sum is a secured claim by reason of the trust deed and first payable out of the assets of the company, the trustee has filed before the referee a protest, and the bank, E. M. Carver, and G. H. Carver, trustee, have filed replications thereto.

The referee has held the deed of trust to be valid as to all the property conveyed therein except the stock of goods in the stationery and binding departments. To this ruling the trustee has excepted, and, at his instance, the question has been certified for review.

Smith D. Turner, Reese Blizzard, John Marshall, and Merrick & Smith, for trustee and unsecured creditors.

Dorr Casto and Robinson & Prunty, for Carver and Ritchie County Bank.

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

Is the deed of trust of February 15, 1905, void as a security for the bank's debt by reason of its disclosing on its face an intention and purpose to hinder, delay, and defraud creditors of the bankrupt company, or by reason of such intention being shown by evidence aliunde? This deed having been executed more than four months prior to the institution of bankruptcy proceedings, under older decisions some doubt might have arisen as to the right of the referee to pass upon and adjudicate the matter in this summary proceeding instead of requiring the institution of a plenary suit for the purpose. The bank, however, having voluntarily submitted to the jurisdiction by presenting its claim for adjudication, and the estate of the bankrupt being wholly in the possession of the court, there can no longer be doubt of the jurisdiction as thus taken by the referee under the rulings of such cases as White v. Schloerb, 178 U.S. 542, 20 Sup.Ct. 1007, 44 L.Ed. 1183, and Whitney v. Wenman, 198 U.S. 539, 25 Sup.Ct. 778, 49 L.Ed. 1157.

The Supreme Court has also determined that the question of whether such a deed of trust is valid or not is a local one and must be governed by the state court decisions which the federal courts will follow. Thompson v. Fairbanks, 196 U.S. 516, 25 Sup.Ct. 306, 49 L.Ed. 577; Humphrey v. Tatman, 198 U.S. 91, 25 Sup.Ct. 567, 49 L.Ed. 956.

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