John Wanamaker New York, Inc. v. Comfort, 6211.

• Decision Date: 03 December 1931
• Docket Number: No. 6211.,6211.
• Citation: 81 ALR 133,53 F.2d 751
• Parties: JOHN WANAMAKER NEW YORK, Inc., v. COMFORT et al.
• Court: U.S. Court of Appeals — Fifth Circuit

81 ALR 133, 53 F.2d 751 (1931)

JOHN WANAMAKER NEW YORK, Inc., v. COMFORT et al.^*

No. 6211.

Circuit Court of Appeals, Fifth Circuit.

December 3, 1931.

Wm. K. Miller, of Augusta, Ga., for appellant.

Lansing B. Lee, Geo. T. Jackson, and James E. Harper, all of Augusta, Ga., Samuel B. Adams and A. Pratt Adams, both of Savannah, Ga., and James M. Hull, Jr., and E. H. Callaway, both of Augusta, Ga., for appellees.

Before BRYAN, FOSTER, and WALKER, Circuit Judges.

FOSTER, Circuit Judge.

In this case the material facts, which are undisputed, are these:

The Forrest Hills Corporation, a Georgia corporation, built a hotel at Augusta, Ga., and on July 15, 1926, executed a mortgage and deed of trust on some 650 acres of land, on which the hotel was located, to secure an issue of bonds to the amount of $850,000, maturing annually, in various amounts, over a period of ten years. Later, on December 15, 1926, a chattel mortgage and deed of trust covering all the personal property of the company was executed as additional security for the bonds. Both deeds of trust named the Adair Realty & Trust Company as trustee. Bonds to the amount of $798,000 were issued and obtained by bona fide holders.

Appellant, John Wanamaker, a New York corporation, supplied the furniture for the hotel at a cost of $136,946.94. To secure the payment of the purchase money, a security deed and a security bill of sale, to be construed as one instrument, were executed. This security was made in effect a second mortgage on both the realty and the personal property of the company, subordinate to the mortgages securing the bonds. This debt was evidenced by 24 promissory notes of approximately $5,706 each, maturing monthly from February 1, 1927.

The Adair Company became insolvent. It resigned as trustee, and the Atlanta Trust Company was appointed in its stead. The Adair Company had pledged some $500,000 of the bonds for its own use, and had failed to account for $78,000 of bonds sold; consequently, the Forrest Hills Corporation was unable to meet its obligations as they matured. In this situation a new corporation, called the Forrest Hills Hotel Corporation, was organized, with the same personnel of officers as the old corporation. On April 11, 1927, a conveyance was made to it of all the property of the old corporation, subject to the existing debts and incumbrances, which the new corporation assumed and agreed to pay. The expressed purchase price was $350,000 and other valuable considerations, but no money was paid. Instead, stock of the new corporation to the amount of $350,000 was transferred to the old corporation.

Appellant, John Wanamaker, was advised of the above state of facts, and agreed to an extension of its debt. Only four of the notes had been paid, reducing the amount due appellant to approximately $115,000. Thirteen new notes were executed, the first due on April 1, 1928, and the last due on April 1, 1929, and these the new corporation indorsed. John Wanamaker agreed to not bring suit before the maturity of the last note.

Owing to the fact that the Adair Company was named in the bonds as trustee, the holders found it difficult to negotiate them. A condition of the trust deed permitted the exchange of bonds for those of lower or higher amounts. An agreement was entered into between the old and the new corporations, to which the trustee was a party, by which the bondholders were permitted to exchange them for bonds of the new corporation, to be secured by the original mortgages and deeds of trust. Holders of bonds to the amount of $636,000 exchanged them, leaving bonds of the original issue outstanding to the amount of $162,000. The new bonds were antedated to conform to the original issue, and their maturity was not extended. Clauses in the exchange agreement provided that the new bonds should be subrogated to the rights of the old bonds and be secured by the original mortgages and deeds of trust as fully as the original issue. It was further stipulated by the agreement that the exchanged bonds should not be canceled, but should be retained by the trustee and stamped surrendered for exchange and substitution by bonds of the new corporation.

The Atlanta Trust Company went into liquidation and resigned as trustee. On March 3, 1930, appellee, the Citizens' & Southern National Bank, was appointed trustee in its stead in a proceeding in a state court. Thereafter, on June 10, 1930, receivers were appointed for the property by the United States District Court for the Southern District of Georgia on a creditor's bill brought by Walker R. Comfort, Jr., and others, appellees. On October 25, 1930, the present trustee, on the request of 95 per cent. of the bondholders, and by leave of the court, filed a bill for foreclosure of the mortgages. The bill alleged that the trustee had the custody of all the bonds that had been exchanged. John Wanamaker was made a party defendant to this bill, and answered, asserting the priority of its lien over the holders of the exchanged bonds, but admitting its rights were subordinate to those of the holders of the original bonds not exchanged. The District Court ruled that all the bonds were valid, prior obligations, and on January 8, 1931, entered a decree of foreclosure ordering the property to be sold for the benefit of all the security holders. From that decree this appeal is prosecuted.

It is contended by appellant that the exchange agreement constituted a new mortgage, and that the exchange of bonds pursuant to it was a novation and cancellation of the original mortgage and a discharge of the old bonds, to the extent that the new bonds were substituted for them.

Novation is derived from the civil law. It is comprehensively defined by the Louisiana Civil Code as follows:

"Novation is a contract, consisting of two stipulations; one to extinguish an existing obligation, the other to substitute a new one in its place." Article 2185.

"Novation Takes Place in Three Ways: 1. When a debtor contracts a new debt to his creditor, which new debt is substituted to the old one, which is extinguished. 2. When a new debtor is substituted to the old one who is discharged by the creditor. 3. When by the effect of a new engagement, a new creditor is substituted to the old one, with regard to whom the debtor is discharged." Article 2189.

"Novation * * * is not presumed; the intention to make it must clearly result from the terms of the agreement. * * *" Article 2190.

Construing these articles, the Supreme Court of Louisiana held, in Baker v. Frellsen, 32 La. Ann. 822, as follows: "A compromise between creditor and debtor, by which the amount of the debt, the terms and mode of payment, the rate...