Mitchell v. Investment Securities Corp.
| Decision Date | 25 November 1933 |
| Docket Number | No. 6931.,6931. |
| Citation | 67 F.2d 669 |
| Parties | MITCHELL v. INVESTMENT SECURITIES CORPORATION. |
| Court | U.S. Court of Appeals — Fifth Circuit |
T. Baldwin Martin, of Macon, Ga., for appellant.
Daniel MacDougald and Pope F. Brock, both of Atlanta, Ga., for appellee.
Before BRYAN, FOSTER, and HUTCHESON, Circuit Judges.
In April, 1931, the Case-Fowler Lumber Company transferred cash and securities to the Investment Securities Corporation, to pay a debt long past due. On May 6, on behalf of bondholders, a foreclosure suit was started and a receiver appointed. On May 8 the company, on its voluntary petition, was adjudicated a bankrupt. On the 17th of July the trustee filed this bill to set the transfer aside as preferential. The District Judge, upon full consideration, finding that the insolvency of the lumber company at the time of the transfer had not been proven, ordered the bill dismissed. The trustee, appealing, brings the record here for review. Fully recognizing the rule that though on an appeal in equity the reviewing court is not bound by the trial court's findings of fact, his findings ought not to be disturbed unless their error is clearly shown, he insists that upon the undisputed facts of record the findings and decree must be set aside as clearly wrong. The circumstances attending the transfer and the situation and prospects of the company when it was made are shown without dispute. They may be briefly stated.
In 1926 the Case-Fowler Lumber Company, which for more than ten years, many of them very profitable, had been a manufacturer of and dealer in hardwood, had through the instrumentality of R. W. Courts bonded its plant for $500,000. The mortgage covered all of the assets of the corporation, the inventory as well as all of the physical properties, except notes, accounts receivable, and cash. This greatly impaired the company's credit position, and, since in only two of the years after the bond issue was there a profit from operations, its position in that regard at the time of the transfer complained of was desperate. In 1929 there was a loss of $278,000; in 1930 of $347,000, not taking into account losses through the bad accounts of officers and loggers which, though carried on the books as assets, were in fact worthless, in excess of $206,000. In the spring of 1930, after Mr. Courts, who since the bond issue had been the financial adviser of the company, and the officers of the lumber company had been unable to obtain funds elsewhere, the company, to pay the spring interest and sinking fund on the bonds, borrowed from Mr. Courts' company, Investment Securities Corporation, without security except stock in the lumber company, put up personally by the president, $26,000. The fall interest and sinking fund was met, by along with other makeshifts, staving off the unsecured creditors. To add to its troubles, banks in which the company carried deposits seized them to apply against long overdue notes. The large sawmill at Macon which could not be operated except at a loss was shut down. In November, the company's affairs were at such a crisis that conferences, in which Mr. Courts participated, were called to consider ways and means of obtaining the operating money, which was absolutely essential to the company's keeping on. In these conferences it was freely stated that the company was broke; that the unsecured creditors would not get 10 cents on the dollar if it was liquidated, and one of the refinancing plans suggested involved the entire elimination of the unsecured creditors. This plan the officers of the company testified they rejected as unfair. Of these conditions Courts was fully aware, having floated the bond issue for the company, and, being one of its unsecured creditors, he kept in active touch with it. Working with the banks, securing extensions from the Union Trust Company, one of the unsecured creditors, endeavoring to enlist new capital, he corresponded with the banks and the creditors with a view to carrying the company along, and, if possible, reviving it. Ever mindful, however, of the $26,000 his company had advanced, which, though secured by the stock of Mr. Fowler in the lumber company he regarded as unsecured, in September, 1930, he wrote a "personal" letter to the president of the Case-Fowler Company, asking assurances that his company would be preferred ahead of other creditors, in the event of a crisis. He wrote: In reply to this letter the lumber company wrote: "We wish to assure you that we will protect you, should any crisis arise." The record does not show that this understanding was ever communicated to any other of the unsecured creditors. On the contrary, they assumed that Mr. Courts was working for the interest of all alike. The Union Trust Company wrote him in January, 1931, expressing the hope that his efforts might while on April 10, about the time the transfer was being carried out by remittances drawn to prevent their seizure by bank creditors,1 the trust company wrote him again:
Instead of improving after these conferences, the situation of the company became more desperate, not only on account of its own particular situation, but because of the general outlook which caused practically every other hardwood plant in Georgia to shut down. The hardwood lumber market as such was nonexistent. What was sold had to be sold at a constantly decreasing price, each buyer practically dictating what he would pay. Only by heavily discounting its acceptances with what one witness called "loan sharks" and keeping the fact concealed2 was the company able to go on at all. The time approaching for the spring interest and sinking fund requirements, and there being no way to meet them except by using the surrender value of Mr. Fowler's insurance and a note or two the company had...
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