In re Lake Chelan Land Co.

• Decision Date: 05 May 1919
• Docket Number: 3223.
• Citation: 257 F. 497
• Parties: In re LAKE CHELAN LAND CO. v. TYLER. OLIVE
• Court: U.S. Court of Appeals — Ninth Circuit

257 F. 497

In re LAKE CHELAN LAND CO.

OLIVE v. TYLER.

No. 3223.

United States Court of Appeals, Ninth Circuit.

May 5, 1919

Carroll B. Graves, of Seattle, Wash., and R. S. Ludington, of Wenatchee, Wash., for appellant.

Ira Bronson, J. S. Robinson, and H. B. Jones, all of Seattle Wash., for appellee.

This is an appeal by the trustee of the bankrupt corporation from an order of the District Court denying the trustee's petition for a review, and confirming the order of the referee, sustaining the mortgage claim of one Tyler; Tyler having offered proof of a secured claim, which claim was established and allowed as a preferred claim by the bankruptcy court over the objections of creditors. The substance of the referee's findings, as adopted by the District Court, makes this case:

The bankrupt corporation organized in 1909, with a capital of $500,000, to hold, develop, and sell a large tract of land. There were a small number of stockholders, and large sums of money were raised by pro rata assessments upon the stockholders. The company gave its notes for such advances of money, and upon unsecured obligations about $340,000 were borrowed. In addition to these obligations, the company owed debts for money borrowed upon its notes, which were secured by pledges of certain purchase-money contracts, covering lands that the corporation had sold, in the sum of $110,000 $50,000 of which notes were held by the National Bank of Commerce of Seattle, and $60,000 held by certain individuals. In June, 1916, these secured notes were past due, and the bank notified the corporation that payment must be made by January 1, 1917.

About that time one Furey became a stockholder and was elected president of the corporation. He held one-fourth of the total amount of stock and one-fourth ($85,000) of the stockholders' notes that had been issued. After demand was made for payment, Furey assured the stockholders that he could raise the money in the Eastern cities to meet the obligations of the company, but after efforts he failed to do so. To avert the then apparent ruin of the corporation unless it could borrow money, two stockholders, Green and Tyler, were asked, and agreed, to furnish the needed money to meet the obligations, which by that time amounted to about $116,000, due upon secured notes and other debts, exclusive of notes due to stockholders. After the matter was discussed among the stockholders, it was decided that the corporation should borrow $120,000 from Green and Tyler in order to pay the obligations and to carry the company along for a few months, during which time Furey hoped that he could borrow enough money to save the business. His general purpose was to realize funds through the sale of bonds of an irrigation district to be organized, the district to take over a water system in which the corporation had an interest.

At that time the shares were owned as follows: Tyler had three-eighths, Green one-fourth, Furey one-fourth, and Swalwell one-eighth. There were some shares held by qualifying persons. On December 14, 1916, a stockholders' meeting was held, at which all of the stockholders, seven in number, were present or represented, and the corporation, by unanimous vote, was authorized to borrow $120,000 of Green and Tyler, and to secure the obligation by a mortgage upon all of the property and assets of the corporation. Upon the same day the trustees met and authorized the mortgage, and with provision therein that all of the income should be applied upon the mortgage. The mortgage was duly executed, and among other things provided that, while the company should continue in business and make sales, the income from sales should be applied in the reduction of the mortgage debt. In carrying out this plan, the $120,000 was paid to the company by Green and Tyler, and the company issued 12 notes, of $10,000 each, payable to bearer, dated December 30, 1916, due on or before one year after date, and executed a real and chattel mortgage, dated December 30, 1916, upon all of its property, which mortgage was recorded January 22, 1917. The notes owned by Green were afterwards transferred to Tyler. The secured obligations were paid, as also were the other obligations, except what was due upon stockholders' notes, and any sums due as assessments for irrigation purposes upon the cultivated lands of the company, which, under the terms of contracts between the company and the water company, were first liens upon the lands to which the water was furnished. The collateral to secure the old notes was delivered to Furey, president, and by using the $4,000 over the sums paid out on secured claims the corporation ran along with the hope of continuing. About August, 1917, 550 acres of the lands of the corporation, valued at about $93,000, were transferred by Furey, as president, to one Brown. Furey turned over to Brown the stockholders' note for $84,500, with interest, which was owned by Furey, to enable Brown to turn the note into the company as a payment for the 550 acres of land.

Tyler as the...