Johnston v. Spencer

• Decision Date: 13 March 1912
• Docket Number: 3,597.
• Citation: 195 F. 215
• Parties: JOHNSTON v. SPENCER.
• Court: U.S. Court of Appeals — Eighth Circuit

195 F. 215

JOHNSTON v. SPENCER.

No. 3,597.

United States Court of Appeals, Eighth Circuit.

March 13, 1912

Julius C. Gunter and Henry E. Lutz, for appellant.

Edward C. Stimson (Page M. Brereton, on the brief), for appellee.

Before VAN DEVANTER, Circuit Justice, ADAMS, Circuit Judge, and RINER, District Judge.

ADAMS Circuit Judge.

This was an appeal from an order made in a summary proceeding by a court of bankruptcy, requiring Johnston, the appellant, to turn over to the trustee of the estate of Johnston Motor Sales Company, the bankrupt, the sum of $6,350. The jurisdiction of the court to proceed in this summary way was challenged at the outset and at every subsequent stage of the case by the appellant, and this must necessarily receive first consideration on this appeal.

The evidence tends to show these facts: Johnston, prior to April 25, 1910, had been the president and treasurer of the Sales Company, owner of two-thirds of its capital stock, and the manager of its business. He desired to sell his interest, and Paul S. Tobin, the owner of the balance of the stock and vice president of the company, desired to purchase it. On April 25th the assets of the company were estimated to be of the value of $13,000, and its liabilities amounted to $3,500. Johnston agreed to sell his interest represented by 10,000 shares of the capital stock, each share being of the par value of $1, to Tobin for $6,500 and a certain automobile belonging to the Sales Company known as the American Roadster. $5,000 was to be paid in cash, and the balance in three promissory notes each for $500 secured by stock to be purchased, as collateral. Tobin had difficulty in raising the money to make the cash payment and the following proceedings were taken: A meeting of the directors of the company was held. All the directors, who constituted also all the stockholders, Johnston, Tobin, and one Lutz (who held one share of stock to qualify him to serve as director), were present. Johnston resigned as a director and also as president and treasurer of the company. Tobin resigned as vice president and was elected president and treasurer in place of Johnston. Lutz remained secretary as before, and Mrs. Tobin, wife of Paul S., was elected vice president. The Sales Company then acting by Tobin as its president signed and delivered a bill of sale of practically all its stock in trade, consisting of automobiles, to one J Clifford Leavitt, who in consideration thereof executed his two promissory notes, one for $4,500 and the other for $1,252, payable to the order of the Sales Company, and secured their payment by a chattel mortgage executed by him on the automobiles acquired by him. These notes were indorsed in the name of the Sales Company by Tobin, its president discounted at the Central National Bank of Denver, and their proceeds, amounting to $5,500, were deposited by Tobin to the credit of his individual account in that bank. Upon this being done, the check for $5,000 before then given by Tobin to Johnston for his stock, was honored by the bank upon which it had been drawn, and the amount thereof charged against Tobin's personal account.

In this way the bank acquired legal title to the stock in trade of the Sales Company, and Tobin, the then owner of all the capital stock of the company, secured the money from the bank to make the cash payment to Johnston, and the Roadster of the value of about $2,000 came into the hands of Johnston.

The argument of counsel on this state of facts runs like this: The trustee, without challenging the sale of the stock in trade to the bank, claims that the money realized from that sale stands in place of the merchandise itself and is a trust fund for the benefit of creditors; that the directors' meeting which authorized the described transaction was unauthorized and unlawful and the proceedings invalid; that Johnston, although he retired after his resignation was tendered, well knew the subsequent proceedings whereby the assets of the Sales Company were employed to raise the money which Tobin paid him.

Johnston, on the other hand, claims: That he knew nothing of the proceedings of the directors' meeting after he withdrew as president and treasurer and did not know that the money which was paid over by Tobin to him came from the proceeds of the notes and mortgage given by the Sales Company; that the Sales Company was solvent and well able to pay all of its then existing debts without the use of the property appropriated to pay Johnston; and that Tobin, being then the owner of all the capital stock of the company, might properly do as was in effect done, reduce his capital by the declaration of a dividend equal to the amount of money and property taken out by him; that in any event he, owning all the capital stock of the company, could, inasmuch as the rights of no creditors were involved, take, with the co-operation of the other directors, the action which was taken.

But there are some other important considerations. On August 10, 1910, 3 1/2 months after the events of April 25th, a petition was filed by the then creditors of the Sales Company to secure its adjudication as a bankrupt. On October 13, 1910, adjudication followed. On December 13, 1910, this summary proceeding was begun against Johnston. On the return day of the order to show cause, December 17th, Johnston appeared with counsel and objected to the jurisdiction of the court in bankruptcy over the case. There was no evidence, except a possible presumption of continuance arising from the fact that he had it eight months before, that Johnston had the money in his possession or under his control, on December 17, 1910, when the peremptory order was made requiring him to turn it over to the trustee.

There is no pretense that the money had ever been taken into possession by the trustee as assets of the bankrupt estate or was in any sense in custodia legis, when the order was made.

An attempted analysis of the several cases (Bardes v Hawarden, 178 U.S. 524, 20 Sup.Ct. 1000, 44 L.Ed. 1175; White v. Schloerb, 178 U.S. 542, 20 Sup.Ct. 1007, 44 L.Ed. 1183; Hicks v. Knost, 178 U.S. 541, 20 Sup.Ct. 1006, 44 L.Ed. 1183; Mitchell v. McClure, 178 U.S. 539, 20 Sup.Ct. 1000, 44 L.Ed. 1182; Bryan v. Bernheimer, 181 U.S. 188, 21 Sup.Ct. 557, 45 L.Ed. 814; Mueller v. Nugent, 184 U.S. 1, 22 Sup.Ct. 269, 46 L.Ed. 405; Jaquith v. Rowley, 188 U.S. 620, 23 Sup.Ct. 369, 47 L.Ed. 620) in which the question of the jurisdiction of the District Courts as courts of bankruptcy to adjudicate, either by original suits or in summary proceedings, the rights of different claimants to property, would be idle. The Supreme Court has in a more recent case (Whitney v. Wenman, 198 U.S. 539, 552, 25 Sup.Ct. 778, 49 L.Ed. 1157) made final pronouncement upon several questions which seem to be decisive of this case. In that case the court, after reviewing the several cases just referred to, speaking by Mr. Justice Day,...