In re Simpson, 34-62

• Decision Date: 01 November 1963
• Docket Number: 35-62.,No. 34-62,34-62
• Citation: 222 F. Supp. 904
• Court: U.S. District Court — Middle District of North Carolina
• Parties: In the Matter of Hannibal Napoleon SIMPSON and Doris Dean Simpson, Bankrupts.

222 F. Supp. 904

In the Matter of Hannibal Napoleon SIMPSON and Doris Dean Simpson, Bankrupts.

Nos. 34-62, 35-62.

United States District Court M. D. North Carolina, Greensboro Division.

November 1, 1963.

Jordan, Wright, Henson & Nichols, Greensboro, N. C., for Guilford Mortgage Co., Sidney B. Allen, trustee, and David W. Allen, trustee, petitioners.

William Zuckerman, Eugene G. Shaw, Hubert E. Seymour, Jr., W. Marcus Short, Richard J. Tuggle and Jack W. Floyd, Greensboro, N. C., and John E. Hall, North Wilkesboro, N. C., for respondents.

EDWIN M. STANLEY, Chief Judge.

This matter is before the court upon the petition of Guilford Mortgage Company, Sidney B. Allen, Trustee, and David W. Allen, Trustee, for review of an order of the Referee in Bankruptcy, dated February 7, 1963, subordinating secured claims of Guilford Mortgage Company to the claims of certain material furnishers and to liquidation costs.

The bankrupts, who are husband and wife, filed voluntary petitions for bankruptcy on July 20, 1963. Hannibal Napoleon Simpson, hereinafter referred to as the bankrupt, was in the contracting business building homes for sale. While most of the real estate involved was conveyed to the bankrupt and his wife, Doris Dean Simpson, they were not partners in the construction business, and the wife had no financial interest in any of the real estate or financial transactions. She did, however, execute notes and mortgages at the request of her husband.

Among the assets of the bankrupt were houses at 3019 Cornwallis Drive, 1006 McDowell Road, 4015 Adamson Road, and 2504 Pinecroft Road, all in or near the City of Greensboro. Pursuant to an order of court, these houses were sold by the Trustee in Bankruptcy and all liens were transferred to the proceeds. The proceeding before the Referee was to determine the amount, validity and priority of the liens on the houses in question. With respect to the properties located on Cornwallis Drive, McDowell Road, and Pinecroft Road, the Referee found that the Guilford Mortgage Company and the bankrupt were joint venturers in the construction of these homes, and subordinated the mortgage liens of Guilford Mortgage Company to the claims of certain materialmen and the liquidating costs. There were, however, no unpaid claims for materials on the Pinecroft Road property, and the only outstanding lien on this house was a mortgage in favor of Guilford Mortgage Company. With respect to the Adamson Road property, the Referee found there was no evidence of a joint venture, and consequently the lien of Guilford Mortgage on this house is not in controversy, except to the extent the sale price was insufficient to pay the liquidating costs and the mortgage, including interest, in full. The Guilford Mortgage Company liens on the properties located on Cornwallis Drive and McDowell Road were subordinated to the liens of materialmen by reason of a finding of joint ventures between the bankrupts and Guilford Mortgage Company, as well as upon the legal theory of subordinating claims. The Trustee contended that not only the material furnishers but all general creditors of the bankrupts should come ahead of the mortgages upon the same ground, but the contention was rejected by the Referee with respect to general creditors.

The facts are set forth in detail in the order of the Referee. Those material to an understanding of the controversy may be summarized as follows.

The bankrupt had been in the general contracting business since about 1945. Most of his work had been in connection with the construction of residences, which were built for sale rather than for the owner. Until sometime in 1958, the bankrupt had been getting his financing through C. H. Slater, but upon Mr. Slater's death, he turned to the Guilford Mortgage Company for his financing.

Guilford Mortgage Company has been in the general real estate and mortgage loan business for more than 30 years. One of its businesses is to make construction loans. A construction loan is a short term loan made for the purpose of making funds available to the builder as construction progresses. When the house is sold by the builder, the permanent loan is obtained by the purchaser and the construction loan paid off. Permanent loans are also made by Guilford Mortgage Company as correspondents or agents for insurance companies. The Guilford Mortgage Company is owned by Sidney B. Allen, his son, David Allen, and other immediate members of his family. Sidney B. Allen is president and owns a majority of the stock of the corporation. He also controls, manages and directs the major activities of the corporation. Only minor matters are delegated to his son, David Allen, who is the secretary of the corporation.

Due to his limited resources, the customary procedure of the bankrupt was to obtain a construction loan, from which a lot would be purchased and the balance used to pay the subcontractors and material furnishers in the construction of the house. Upon the sale of the house, permanent financing would be obtained by the purchaser and the construction loan liquidated. Lending institutions in the Greensboro area, such as savings and loan associations, banks, and insurance companies, do not customarily make construction loans for the purpose of purchasing a lot and constructing a house. It was primarily for this reason that the bankrupt turned to the Guilford Mortgage Company for his construction loans.

On July 7, 1958, the bankrupt entered into an agreement with the Guilford Mortgage Company covering the construction of five homes in Pine Hill Village. Under the agreement, the Guilford Mortgage Company was to make a construction loan on each of the five houses. The construction loan on each house was $12,000.00, out of which $2,000.00 was to be paid toward the purchase of the lot. Plans were to be approved by the Guilford Mortgage Company. The houses were to be sold by the Guilford Mortgage Company and, whenever possible, the Guilford Mortgage Company was to have the permanent financing and fire insurance. Guilford Mortgage Company was to also get one-half of the net profits, with a guaranteed profit of $600.00 on each house. As a bonus for making the construction loans, the bankrupt agreed to give the Guilford Mortgage Company a lot in another subdivision which had an estimated value of up to $5,000.00. Houses were built on four of the five lots in accordance with the agreement. By agreement of the parties, the other lot was sold without a building having been erected. Three of the houses were sold and settlement made before the bankruptcy petition was filed. The guaranteed profit of $600.00 was paid on each of the three houses to Sidney B. Allen, at his direction, even though the contract directed that such payments be made to Guilford Mortgage Company. The fourth house is one of the houses involved in this proceeding, and identified as 2504 Pinecroft Road. This house had not been sold due to the lack of a purchaser. All material furnishers had been paid. In accordance with the contract, Guilford Mortgage Company made the construction loans on each of the four houses, plans were approved by Guilford Mortgage Company, and the insurance was given to the Guilford Mortgage Company. The lot which the bankrupt had agreed to give to the Guilford Mortgage Company as a bonus for making the construction loans was conveyed to a corporation owned by the immediate family of Sidney B. Allen, even though the contract called for it to be conveyed to Guilford Mortgage Company. All the construction loans were repaid, except the one involved in this proceeding. The profits from the houses were divided in the manner provided in the contract.

Subsequent to the construction of the four houses in Pine Hill Village in accordance with the aforementioned contract, the bankrupt contracted to build 25 to 30 other houses, with construction loans made by the Guilford Mortgage Company. Several of the loans were made on the same or similar terms as the Pine Hill Village contract, except the agreements were oral. A similar agreement was entered into between the bankrupt and Guilford Mortgage Company in connection with the construction of a house at 906 Pembroke Road. The Guilford Mortgage Company made the construction loan on the understanding and agreement that the plans were to be approved by the Guilford Mortgage Company, and that Guilford Mortgage Company would get the insurance and sell the house at regular commission rates. The lot was purchased from the proceeds of the construction loan. This agreement was carried out and Sidney B. Allen received a check for $1,000.00 for his share of the profits. Payment was made to Sidney B. Allen rather than Guilford Mortgage Company, at the direction of Sidney B. Allen. The house was sold about July 2, 1959, and the construction loan was paid off by a permanent loan obtained by the purchaser through Guilford Mortgage Company.

Another house was built on the same arrangement on Avery Drive. There was no profit on this house, and nothing was paid to either Guilford Mortgage Company or Sidney B. Allen.

A third house was built at 1324 Surry Drive on the same arrangement, with one-half of the profits going to Guilford Mortgage Company. Sidney B. Allen directed that the profits on this house be paid to his two daughters. There was no evidence that the daughters contributed anything toward the financial investment of this transaction. On the other hand, the Referee found that it was a method of directing funds from Guilford Mortgage Company to the two daughters of Sidney B. Allen for some undisclosed purpose.

The houses on Cornwallis Drive and McDowell Road were built by the bankrupt with construction loan funds furnished by Guilford Mortgage Company. The construction loans were subject to an oral agreement similar to the agreement with respect to the Pine Hill Village houses. Lots were purchased with construction loan funds. The location of the...