In re Oliver C. Putney Granite Corporation, 8187.

• Decision Date: 19 March 1936
• Docket Number: No. 8187.,8187.
• Citation: 14 F. Supp. 31
• Parties: In re OLIVER C. PUTNEY GRANITE CORPORATION. SILBERSTEIN v. BALTIMORE COUNTY BANK.
• Court: U.S. District Court — District of Maryland

14 F. Supp. 31

In re OLIVER C. PUTNEY GRANITE CORPORATION SILBERSTEIN v. BALTIMORE COUNTY BANK.

No. 8187.

District Court, D. Maryland.

March 19, 1936.

William Saxon, of Baltimore, Md., for trustee.

James C. L. Anderson, of Towson, Md., for bankrupt.

CHESNUT, District Judge.

The matter now before the Court is the appeal of the Trustee in Bankruptcy of Oliver C. Putney Granite Corporation from an order of the Referee (J. LeRoy Hopkins) dated March 12, 1936, by which he refused to set aside a mortgage from the bankrupt to the Baltimore County Bank dated June 20, 1930, to secure an indebtedness of $30,000, reduced by partial payments, however, to the sum of $21,500, with interest at 6% from September 20, 1934. The order of the Referee sustained the mortgage as a valid lien for the indebtedness thereunder still due and unpaid.

The Referee filed a lengthy and well considered opinion discussing the law and facts of the case, in which he gives quite fully his reasons for the order that he passed. As the facts are fully stated in the opinion and are uncontradicted, it is unnecessary to repeat them here.

After hearing counsel at some length, and consideration of the authorities cited in support of the petition to review the Referee's findings, I reach the conclusion that the order of the Referee must be affirmed.

The mortgage is attacked by the Trustee in Bankruptcy on three grounds: (1) That it was not executed with due corporate authority; (2) that the chattels which the mortgage purports to cover are insufficiently described with the alleged result that the mortgage as to them is defective and void, and (3) that the mortgage has not been duly recorded as required by the Maryland statutes. In his opinion the Referee considered separately each and all of these alleged defects in the validity of the mortgage and overruled all of them. I agree with the final result reached by him as to all three points.

At the outset I will say that I have no doubt that if the mortgage were defective for any of the reasons stated, it is open to attack by the Trustee in bankruptcy. Fairbanks Steam Shovel Co. v. Wills, Trustee, 240 U.S. 642, 36 S.Ct. 466, 60 L.Ed. 841; In re Sachs (C.C.A.) 30 F.(2d) 510, 514; Moore, Trustee, v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, 76 A.L.R. 1198; Solter v. Macmillan, 147 Md. 580, 584, 128 A. 356.

1. The alleged lack of corporate authority for the mortgage. The mortgage covered both real and personal property. It is not contended that it is defective in form as to execution, acknowledgment or time of recording in the proper County of the State. It was executed and acknowledged by the president of the corporation after discussion with and approval of the secretary and treasurer.

The defect set up is that it was not authorized by the Board of Directors. It is true that the mortgage does not on its face recite such prior authority for its execution, and the facts do not show that there was ever any formal approval of the mortgage by the directors. In his opinion overruling this point made against the mortgage the Referee apparently placed his view largely on the consideration that the corporation was in substance a one-man corporation, in which the president, who executed the mortgage, owned 96% of the stock, and that the lack of formal authority by the directors was unimportant because the execution of the mortgage by the chief stockholder made it at least an equitable mortgage conferring an equitable title under the doctrine of the Maryland cases of Swift v. Smith, 65 Md. 428, 5 A. 534, 57 Am.Rep. 336; Bear Creek Lumber Co. v. Second Nat. Bank, 120 Md. 566, 570, 87 A. 1084, and Pott v. Schmucker, 84 Md. 535, 36 A. 592, 35 L.R.A. 392, 57 Am. St.Rep. 415. I prefer to put the ruling on this point, however, on a somewhat different consideration. It is true that there was never any formal or express prior authority for or subsequent ratification of the mortgage by the directors in meeting duly assembled. But the facts show that there were only three directors of the corporation, two of whom, the president and the secretary, expressly approved the mortgage, and the third, a stockholder holding less than 1% of all the stock of the corporation was a former employe who had apparently severed his connection with the corporation before the mortgage was made and whose whereabouts were unknown thereafter. The president and secretary between them owned at least 99% of all the stock of the corporation, and the president was general manager of the business which, prior to the incorporation, shortly before the mortgage was made, had been for a long time operated by him as his individual business. The mortgage for $30,000 to the bank was made to secure a then existing antecedent indebtedness in the amount of $24,392.05 and as security for a new advance of $5,607.95. The corporation continued after the making of this mortgage to do its banking business with the same bank and when the bankruptcy proceeding was filed on April 4, 1935, the mortgage had been reduced by partial payments on account of principal to $21,500. It further appeared that there never had been any formal corporate meetings of stockholders or directors or minutes thereof after the original organization meeting. Under these circumstances there was in my opinion no absolute necessity for a formal resolution of the board of directors to authorize the mortgage. The authority to the president to make the mortgage under such circumstances could and should be readily implied, and the corporation and its directors and stockholders estopped from thereafter questioning the validity of the mortgage by reason of their long acquiescence without objection in what had been done by the majority of the directors and the executive officers of the corporation. Under a practically parallel factual situation a corporate mortgage was upheld by the Maryland Court of Appeals in Buchwald Transfer Co. v. Hurst, 111 Md. 572, 75 A. 111, 19 Ann.Cas. 619, with opinion by Chief Judge Boyd. And likewise under similar facts a corporate mortgage was upheld by the Circuit Court of Appeals for the 6th Circuit in Cunningham v. German Ins. Bank, 101 F. 977, where the court consisted of Circuit Judges Lurton and Day (both subsequently Justices of the...