Pigeon River Ry. Co. v. Champion Fibre Co.

• Decision Date: 21 March 1922
• Docket Number: 1919.
• Parties: PIGEON RIVER RY. CO. et al. v. CHAMPION FIBRE CO.
• Court: U.S. Court of Appeals — Fourth Circuit

280 F. 557

PIGEON RIVER RY. CO. et al. v. CHAMPION FIBRE CO.

No. 1919.

United States Court of Appeals, Fourth Circuit.

March 21, 1922

Sidney S. Alderman and William P. Bynum, both of Greensboro, N.C (Fred H. Ely, of Philadelphia, Pa., on the brief), for appellants.

Julius C. Martin and Thomas S. Rollins, both of Asheville, N.C. (Martin, Rollins & Wright, of Asheville, N.C., on the brief) for appellee.

Before KNAPP, WOODS, and WADDILL, Circuit Judges.

WOODS Circuit Judge.

On March 6, 1913, the Pigeon River Railway Company made three notes to Champion Lumber Company, each for $39,981.51, due May 1, 1915, 1916, and 1917, and delivered as collateral its mortgage bonds aggregating $570,000. Champion Lumber Company pledged these notes as part collateral to secure its notes of same date to David G. Wilson, trustee, aggregating $328,921.67.

The notes of Champion Lumber Company were sold-- all of them except notes to the amount of about $3,000 with and by means of the indorsement of the corporation Wm. Whitmer & Sons. The Champion Lumber Company having failed to pay its notes at maturity Wm. Whitmer & Sons paid all of them, including those not indorsed by that corporation, and became the owner. As owner of the Champion Lumber Company's notes it took over the notes of the Pigeon River Railway Company to Champion Lumber Company and the $570,000 of bonds of Pigeon River Railway Company deposited by Champion Lumber Company as collateral to its notes.

The Pigeon River Railway Company also failed to pay its notes. On February 7, 1917, James G. Campbell, president of Wm. Whitmer & Sons, Inc., notified Wilson, trustee, that notes of Pigeon River Railway Company were unpaid, and demanded sale of the $570,000 of bonds of Pigeon River Railway Company held by Whitmer & Sons as collateral. On the same day Wilson, trustee, demanded of James G. Campbell, president of Pigeon River Railway Company, payment of its two notes then due, and gave notice that on failure to pay he would sell its bonds for $570,000 deposited as collateral. Accordingly the bonds were sold in the city of Philadelphia, after published notice, at public auction, to Wm. Whitmer & Sons for $2,500.

The Champion Fibre Company attacks the delivery of the $570,000 of bonds of Pigeon River Railway Company as collateral for its notes to Champion Lumber Company, the repledge of the bonds to Wilson, trustee, and the sale made by him to Wm. Whitmer & Sons. The interest of the Champion Fibre Company arises out of its ownership of $180,000 of bonds of Pigeon River Railway Company of the same issue as the $570,000 bonds purchased by Wm. Whitmer & Sons. The mortgage property securing these bonds will fall far short of paying the aggregate issue of $750,000. If it be held that the $570,000 of bonds were improperly issued from the treasury of the Pigeon River Railway Company, the plaintiff's $180,000 of bonds would probably be paid; but, if the $570,000 bonds were properly issued to Champion Fibre Company as collateral and are now the property of Whitmer & Sons, the distribution of the proceeds of any sale of the property of Pigeon River Railway Company between Wm. Whitmer & Sons and the Champion Fibre Company, in the proportion of $570,000 to $180,000, would leave a large proportion of the plaintiff's debt unpaid.

The District Court held the hypothecation of the bonds of Pigeon River Railway Company to Champion Lumber Company, their rehypothecation to Wilson, trustee, and the sale by Wilson, trustee, to Wm. Whitmer & Sons, invalid; and, applying the rule that equality is equity, decreed as an equitable result that Whitmer & Sons was entitled, as of March 6, 1913, to $120,000 of the bonds for its debt in round numbers of $120,000 of that date-- because the Champion Fibre Company had accepted $180,000 of bonds for its debt of $180,000, in pursuance of its agreement of December 21, 1910. Wm. Whitmer & Sons, Inc., appeals.

From the mass of evidence, documentary and oral, a statement of the vital facts in their proper relation will make plain the right legal conclusions. On December 21, 1910, J. D. Lacey and Charles I. James owned and controlled all the stock and bonds of Pigeon River Lumber Company and of the Tennessee & North Carolina Railroad Company. The property of the Pigeon River Lumber Company consisted chiefly of a large tract of timber known as the Crestmont tract and a sawmill thereon. The T. & N.C.R.R. Company was used chiefly to carry the mill product to the Knoxville Branch of the Southern Railway. The Champion Fibre Company owned a large tract of timber known as the Sunburst tract, and owned and controlled all of the stock and bonds of the Pigeon River Railway Company. The Pigeon River Railway Company was partially graded, and when completed was to be used mainly to carry the timber from the Sunburst tract to the Murphy Branch of the Southern Railway. Robert F. Whitmer, A. B. Leach & Co., Clark L. Poole & Co. and De Vitt Tremble & Co., owned and controlled all the stock of the Parsons Lumber Company and of Wm. Whitmer & Sons and of the Appalachian Railway Company. On December 21, 1910, the parties above named entered into a contract looking to the formation of a new corporation-- afterwards chartered under the name of Champion Lumber Company--and to the acquisition by it of the tracts of timber and sawmills, and all the property of the Pigeon River Lumber Company, and to the control of the T. & N.C.R.R. Company and Pigeon River Railway Company. The contract is complex and reference is omitted to its provisions and the action taken under it, except such as are essential to an understanding of the questions involved.

In accordance with this contract the Champion Fibre Company received for its property above mentioned 2,100 shares of the preferred and 9,500 shares of the common stock of the Champion Lumber Company, $400,000 in cash, and $180,000 of the mortgage bonds of the Pigeon Railway Company. These bonds of the Pigeon River Railway Company were taken in payment of $180,000 expended by the Champion Fibre Company on the partial construction of the road. Robert F. Whitmer and his associates, A. B. Leach & Co. and others, were to take under the agreement 18,500 shares of the stock of the Champion Lumber Company. Leach & Co. and others were to furnish the money necessary to settle with the plaintiff and others as agreed, taking therefor the mortgage bonds of the new company at 90 per cent. of par. It is important to observe that the contract clearly contemplated that R. F. Whitmer, who controlled the corporation, Wm. Whitmer & Sons, should have the controlling interest in the Champion Lumber Company, Pigeon River Railway Company and T. & N.C. Railroad Company, and that he should manage these corporations. Accordingly, on the organization of the Champion Lumber Company, Whitmer & Sons had 18,462 shares out of a total of 30,000, while the Champion Fibre Company had 9,498. As trustees for the stockholders of the Champion Lumber Company, R. F. Whitmer held 394 of the 400 shares of Pigeon River Railway Company, and 2,288 of the 3,061 shares of the T. & N. C. Railroad Company. It is thus apparent that R. F. Whitmer and Wm. Whitmer & Sons, Inc., actually acquired legitimate control of the three corporations. In this control and management they represented their own beneficial ownership of about two-thirds interest in the three corporations, and in a trust relation the interest of the Champion Fibre Company.

Whitmer & Sons appears to have had full faith in the new corporation, Champion Lumber Company, and advanced large sums to it from time to time, aggregating in the whole about $2,000,000. All this was lost except 4 per cent. paid to the unsecured creditors in the ultimate bankruptcy of the Champion Lumber Company in 1916.

In the early part of 1913 the financial difficulties of the Champion Lumber Company were giving concern. At that time and afterwards R. F. Whitmer and Wm. Whitmer & Sons were undoubtedly in control of both railroad corporations as well as of the Champion Lumber Company, in the manner above indicated. We think, therefore, Whitmer and Whitmer & Sons must be held, throughout all subsequent transactions, to the full responsibility of the utmost good faith as trustees for all persons interested in the several corporations. The Champion Fibre Company was represented, however, by three directors on the board of the Champion Lumber Company; and obviously neither R. F. Whitmer nor Wm. Whitmer & Sons can be held responsible to the Champion Fibre Company for any neglect of duty or failure to act with diligence by these directors representing it.

The Pigeon River Railway Company had been leased on January 1, 1913, to the T. & N.C. Railroad Company for 30 years. There is nothing in the record to show that the lease was not legal, or that it was not made in good faith, or that any effort was made to conceal its existence. From December 21, 1910, to March 6, 1913, the Champion Lumber Company had expended on the construction of the Pigeon River Railway about $120,000. The mortgage of the Pigeon River Railway Company, executed on January 1, 1913, provided that its issue of $750,000 of bonds should 'be used and sold for the purpose of completing, finishing, improving, or operating the railroad of the Railway Company and paying indebtedness incurred in constructing, completing, improving or operating its railroad. ' The stockholders of the Pigeon River Railway Company, at their meeting of October 26, 1912, which authorized the execution of the mortgage and bonds, passed a resolution:

'That the board of directors place the said bonds on the market as soon as may be, selling them for not less than ninety per cent. of their face value net to the company, or in the

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