Maryland Finance Corp. v. Duvall

Citation284 F. 764
Decision Date24 November 1922
Docket Number1999.
PartiesMARYLAND FINANCE CORPORATION v. DUVALL. In re NATIONAL CONSUMERS' EXCHANGE, Inc.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

Arthur W. Machen, Jr., of Baltimore, Md. (William Stanley and Hershey, Machen, Donaldson & Williams, all of Baltimore, Md on the brief), for appellant.

J Wallace Bryan, of Baltimore, Md., for appellee.

Before KNAPP, WOODS, and WADDILL, Circuit Judges.

WADDILL Circuit Judge.

This is an appeal from an order of the United States District Court for the District of Maryland, at Baltimore, entered on the 30th day of March, 1922, in the bankruptcy proceedings of the National Consumers Exchange, Incorporated, whereby the court denied to the appellant herein, the petitioner in said bankruptcy proceedings, the right asserted in said petition to a preferred lien upon the assets of the bankrupt's estate, because of the invalidity of the mortgage creating such lien, and dismissed the petition. The following is a succinct and brief summary of the facts stated in the opinion of the district judge (280 F. 449):

'Early in January, 1920, the bankrupt obtained a Delaware charter by which its authorized capital was fixed at $200,000. In October of the same year those who ran it went through the form of amending its certificate of incorporation, so that its permissible capital was raised to $5,000,000. Although it was incorporated in Delaware, and did business in Baltimore City, and apparently nowhere else, its few corporate meetings were held in Spring field, Mass., presumably because that had been the former home of one Hale who was its promoter and its president. Such capital as it actually had came from the contributions of literally hundreds of stockholders, who were secured as the result of a door to door canvas in certain sections of the city (Baltimore). It is possible that as much as $70,000 in the aggregate may have been obtained from them. When in March, 1921, it was put into the hands of state court receivers, all this had disappeared, and it owed to unsecured creditors upwards of $20,000.
'Almost all of its fixtures had been bought under conditional sales contracts, upon which so little had been paid that there was practically no valuable equity in them.
'In January, 1921, Hale, its president, had application made to the Maryland Finance Corporation, hereinafter called the petitioner, for a loan of $5,000, to be secured by a mortgage on all its property, except provisions, situate in the several stores in the city of Baltimore. The petitioner was told that some of the property was covered by conditional sales contracts and bills of sale, and that the greater portion of the loan would be applied to their payment. It was also told that the loan would be repaid out of the receipts of the subscription to the bankrupt's capital stock and from the income of its several stores. As the result, on the 1st day of February, Hale, in the name of the bankrupt, executed a chattel mortgage to the petitioner for $5,000, to secure a note for that amount, payable three months after date. The amount actually advanced was only $4,250, and Hale, for the bankrupt, therefor promised to pay $750 for the loan of $4,250 for three months, or at the rate of slightly over 70 per cent. per annum.

'This mortgage was signed 'National Consumers' Exchange, Inc., by D. Everett Hale, President.' The bankrupt's corporate seal was also attached, attested by its assistant treasurer. The mortgage was never authorized at any meeting of the board of directors, and it does not appear that any director, other than Hale, ever knew anything about it.'

Appellant makes seven assignments of error to the rulings of the court. The first, second, sixth, and seventh relate to the action of the District Court (a) in dismissing the petition of appellant, and its failure to allow the asserted claim as a secured debt; (b) in holding invalid the mortgage attempting to secure the same; (c) for failing and refusing to hold the mortgage to be a valid and effectual security for the payment of the appellant's debt; (d) for its failure to decree in favor of the appellant in accordance with the prayer of its petition. Assignment 3 is for failure to hold the mortgage in question valid, because the same had been ratified by the bankrupt and its trustee; assignment 4, because the court erred in failing and refusing to hold the bankrupt's trustee estopped from denying the validity of the mortgage; and assignment 5, for error of the court in holding that said mortgage might be avoided and rescinded, without the trustee first restoring to the appellant the money advanced upon faith of the mortgage. These assignments will be considered in the order named, treating the first, second, sixth, and seventh as a single assignment, as they relate substantially to the same subject, that is, to the court's action in holding that the mortgage was invalid; that the debt therein secured was not a preferred claim, but on the contrary was ineffective and invalid, in so far as it sought to give the appellant a secured claim, and hence a denial of the prayer of the petition in that respect.

First. The mortgage involved admittedly was executed without any authority from the directors or stockholders of the company, by the president of the bankrupt corporation, who signed the corporation's name as president; the corporate seal being attached by the assistant treasurer of the company. The mortgage upon its face did not purport to have been executed pursuant to any lawful authority or direction of the corporation, acting either through its board of directors or stockholders, but was the sole act of the president, in concert with the assistant treasurer of the corporation. It was made at a time when the corporation was hopelessly insolvent, and in effect embraced all of the assets of the corporation, including its office furniture, except provisions in several stores of the company, and certain property fully covered by vendor's liens. The money raised upon this mortgage was used or dissipated largely in the payment of obligations for which the president was personally liable, and which at the time were not known to be obligations of the company.

In these circumstances, we think the District Court correctly held that the president of the corporation had no power to mortgage the company's assets without previous authority from the board of directors.

The fact that the president of a corporation cannot execute a valid mortgage under conditions such as here is well settled. There is no claim in this case that the mortgage was authorized by the stockholders, or board of directors, at any meeting called for the purpose, or that such directors or stockholders had actual knowledge of the making of the same or that they either directly or indirectly, collectively or as individuals, participated in the making of the mortgage, or had any knowledge of the execution thereof; and have never ratified the same since it came to their knowledge. The so-called mortgage was the outcome of an effort on the part of the president of the corporation, acting through and by a clerk of the company, to raise money by giving a preferred lien upon the company's assets, which was accomplished, though $750 was paid for the use of $4,250 for a period of three months, that is, more than 70...

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6 cases
  • Kagan v. Levenson
    • United States
    • United States State Supreme Judicial Court of Massachusetts
    • May 4, 1956
    ...De La Vergne Refrigerating Machine Co. v. German Savings Institution, 175 U.S. 40, 53, 20 S.Ct. 20, 44 L.Ed. 65; Maryland Finance Corp. v. Duvall, 4 Cir., 284 F. 764, 766-767. Whether or not there was authority for the execution of the mortgage in question or subsequent conduct by the direc......
  • Newark Morning Ledger Co. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 86355.
    • United States
    • U.S. Board of Tax Appeals
    • March 28, 1939
    ...20, 1924, is prima facie evidence that it was placed there by the secretary with the authority of appellant. Maryland Finance Corp. v. Duvall, 284 F. 764, 770 (C. C. A. 5) Bliss v. Harris, 38 Colo. 72, 87 P. In Independent Ice & Cold Storage Co. v. Commissioner (C. C. A., 5th Cir.), 50 Fed.......
  • In re Oliver C. Putney Granite Corporation, 8187.
    • United States
    • U.S. District Court — District of Maryland
    • March 19, 1936
    ...by the board." And the same principle was recognized by the Circuit Court of Appeals of this 4th Circuit in Maryland Finance Corporation v. Duvall, Trustee, 284 F. 764, 768, although the facts in the particular case did not justify the application of the rule. See, also, Brune, Maryland Cor......
  • In re James, Inc.
    • United States
    • U.S. District Court — Northern District of New York
    • October 26, 1927
    ...corporation. In re Post & Davis Co., 219 F. 171 (2d C. C. A.); In re Progressive Wall Paper Corp. (D. C.) 230 F. 171; Maryland Finance Corporation v. Duvall, 284 F. 764 (4th C. C. A.); Commerce Trust Co. et al. v. Chandler, 295 F. 241 (1st C. C. Here the General Motors Acceptance Corporatio......
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