In re V. & M. Lumber Co., Inc.

• Decision Date: 26 October 1910
• Docket Number: 10,266.
• Citation: 182 F. 231
• Court: U.S. District Court — Northern District of Alabama
• Parties: In re V. & M. LUMBER CO., INC.

182 F. 231

In re V. & M. LUMBER CO., INC.

No. 10,266.

United States District Court, N.D. Alabama, Southern Division.

October 26, 1910

[Copyrighted Material Omitted]

N. L Miller, for petitioning creditors.

Tillman Bradley & Morrow (M. M. Baldwin, of counsel), for Samuel J. Seay.

A. Leo Oberdorfer and J. K. Dixon, for J. B. Cobbs, receiver of Union Bank & Trust Company.

GRUBB District Judge.

The petition of the trustee was referred to a special master to take the proof and report to the court his findings of fact and conclusions of law, and now comes on to be heard upon the report of the special master.

The facts necessary to a decision of the questions presented by the petition are as follows: Spink and Brewer purchased from Seay certain timber rights in lands for $3,500 and from one Wyatt a sawmill and certain personal property appurtenant to it for $1,400. The two transactions were consummated at the same place and time. Spink and Brewer paid no cash and gave no mortgage or other express lien to secure the purchase money on either trade. Seay claims the retention of a vendor's lien. Wyatt makes no such claim. After the two trades were made, Brewer and Spink organized the bankrupt corporation to take over the property and operate the sawmill. The property so acquired by Brewer and Spink was conveyed to the corporation by them, in satisfaction of a stock subscription of $9,000. The shares were distributed equally between Spink and Brewer, one share of each being issued to their wives as nominal owners. Spink and Brewer, with their wives, were the sole owners of the stock of the corporation at the time of the conveyance to it of the property acquired from Seay and Wyatt. Thereafter the bankrupt corporation executed a note to the Union Bank & Trust Company in the sum of $2,000, providing for an attorney's fee, and secured by a mortgage on all the property acquired from Seay and Wyatt. The proceeds of the mortgage note, which was discounted, were credited to the bankrupt by the bank, and thereafter about $770 of the proceeds were applied to the payment of notes of the bankrupt previously held by the bank, two of which were demand notes, and the third, not yet due. The balance was drawn out by Spink and applied to pay an indebtedness of the bankrupt to him. There has been an adjudication of the bankrupt.

The questions involved in the determination of liens and their respective priority are: (1) As to whether Seay is entitled to a vendor's lien as against the estate in the hands of the trustee; and (2) as to whether the Union Bank & Trust Company's mortgage is a valid lien against the estate in the hands of the trustee as to the whole amount of the note, or only the part not applied by the bank to the existing indebtedness of the bankrupt to it, and whether an attorney's fee is included in the amount secured by the mortgage.

It is conceded that the Union Bank & Trust Company had no notice of any retention by Seay of a lien to secure the purchase money due him, and that the lien of its mortgage, if valid, is prior in right to any Seay may have to secure such purchase money.

The trustee's contention as to Seay's lien is that Seay either expressly or impliedly waived his lien in the transaction with Brewer and Spink, and that, if his lien was not waived, the bankrupt was an innocent purchaser for value and without notice of the lien from Brewer and Spink, and hence not affected by it.

Whether the vendor's lien was or not expressly waived depends upon what was the effect of the conversation between Seay and Brewer and Spink and their attorney, Mallory. The first expressed purpose of Seay was to have the purchase money secured by mortgage.

In this respect Seay's conduct differed from the outset from that of Wyatt, who never demanded security of any kind. Spink and Brewer objected to giving Seay a mortgage, because it would interfere with their handling the property as they desired to do. They desired to operate the mill and cut the timber, either personally or through a corporation to be owned and controlled and managed by them. Their idea was that a mortgage would interfere with the cutting of the timber and its transfer to a corporation organized by them for that purpose. Seay was willing to permit them to cut the timber, and also to operate through a corporation, and was willing to risk the promise of Brewer and Spink not to sell the timber rights to innocent purchasers. He wanted all protection consistent with conferring these rights. This is shown by his inquires addressed to Mallory. Mallory assured him that the notes and deed as drawn, and without express retention of lien, would protect him as between the original parties as in case of a resale, except as against innocent purchasers. On this assurance, Seay consented to and did execute the deed. Mallory testifies that the assurance was repeated to Seay by him at Seay's request after the conversation in the hall on which the trustee relies as constituting the waiver, and that only after its repetition did Seay execute the deed. This shows conclusively that the extent of the waiver, as understood by Seay up to the time he signed the deed, was that it operated only as to innocent purchasers, and that he then intended to insist on his lien as between the original parties, with the exception of the right to cut timber on the part of such purchasers or a corporation to be formed by and composed of them to operate the mill.

The trustee also contends that the evidence shows a waiver implied from the communication to Seay by the purchasers of their intention to put the property in a corporation to be organized by them, and relies upon the cases of Hubbard v. Buck, 98 Ala. 440, 13 So. 364, and Scheer v. Agee, 106 Ala. 139, 17 So. 610. The conveyance of real estate to purchasers, who, with the knowledge and consent of the seller, buy for the purpose of reselling to third persons, free from incumbrances, is inconsistent with a purpose on his part to retain a vendor's lien, and is an implied waiver of such lien. The inconsistency lies in the fact that the retention of lien would be dishonest to the subpurchaser, and the original purchaser will be presumed not to have intended such a result. If the express object of the vendee in making the purchase would be either to defeat the vendor's lien or defraud the subpurchaser, the vendor will be held to have waived his lien, rather than to have intended to have defrauded the subpurchaser. If Brewer and Spink had communicated to Seay an intent to dispose of the property to third persons, free of liens, Seay's assent to the sale, under such circumstances, would have implied a waiver of his lien. A fair construction of the evidence, however, is that the only indicated disposition of the property was to a corporation, to be organized by and composed exclusively of Brewer and Spink. Retention of lien as against a corporation subpurchaser, which was composed of and owned solely by the original purchasers, would be entirely fair and not inconsistent with the transaction contemplated. That this was the only intent communicated to Seay by Brewer and Spink is clear from what was afterwards done by them. They organized a corporation to take over the property and operate the mill, in which the sole stock ownership was vested in them in person and through the nominal ownership of their wives. In this respect this case is to be distinguished from those relied on by the trustee, in which the intent was to reconvey so as to cause a change of ownership, while, here, no change of ownership was intended; the ownership remaining identical before and after the reconveyance.

The trustee also contends that the bankrupt took the timber rights for a valuable consideration and without notice of Seay's lien, and is an innocent purchaser for value thereof. The satisfaction of Brewer's and Spink's stock subscription by the conveyance constituted the bankrupt a purchaser for value of the property so conveyed. Brewer and Spink had actual knowledge that the timber rights had not been paid for. Is their knowledge imputable to the bankrupt? In the transaction by which the bankrupt acquired the timber rights from Brewer and Spink and parted with 90 shares of its stock therefor, the bankrupt was represented by Brewer and Spink, who also acted for themselves as individuals. If the beneficial ownership of the entire capital stock had not been vested in Brewer and Spink at the time of the transaction their knowledge of the lien, acquired before the transaction (their interest in the transaction being adverse to that of the bankrupt) might not have been imputed to the bankrupt. On the contrary, it appears that Brewer and Spink subscribed and paid for all the stock issued by the bankrupt, up to the time of the conveyance; the ownership of their...