Rudisill Soil Pipe Co. v. Eastham Soil Pipe & Foundry Co.

• Decision Date: 30 June 1923
• Docket Number: 7 Div. 410.
• Citation: 97 So. 219,210 Ala. 145
• Parties: RUDISILL SOIL PIPE CO. ET AL. v. EASTHAM SOIL PIPE & FOUNDRY CO.
• Court: Alabama Supreme Court

97 So. 219

210 Ala. 145

RUDISILL SOIL PIPE CO. ET AL. v. EASTHAM SOIL PIPE & FOUNDRY CO.

7 Div. 410.

Supreme Court of Alabama

June 30, 1923

Appeal from Circuit Court, Calhoun County; A. P. Agee, Judge.

Bill by the Eastham Soil Pipe & Foundry Company against the Rudisill Soil Pipe Company, H. B. Rudisill, W. C. Wilson, J. M Eastham, and the First National Bank of Anniston, Ala., to enjoin foreclosure of a deed of trust, for an accounting etc. From a decree denying motion to dissolve temporary injunction, respondents appeal. Reversed and remanded.

Knox Acker, Sterne & Liles, of Anniston, and W. B. Harrison, of Birmingham, for appellants.

J. P Whiteside, of Anniston, and Erle Pettus, of Birmingham, for appellee.

THOMAS J.

The bill prayed injunction to stay foreclosure of a mortgage securing an issue of bonds, and for an accounting. The temporary injunction was granted. Respondents filed verified answer, supported by affidavits, and moved to dissolve. Counter affidavits were filed for complainant; and on submission thereon the motion to dissolve was denied, from which the appeal was taken.

The trial judge classified the insistences of complainant as follows: (1) That the acquisition of the bonds constituted an usurious transaction; (2) the lease obligates the Rudisill Soil Pipe Company to apply profits to discharge the interest on the bonds, and default in this would preclude its directors from foreclosing their bonds; and (3) that Rudisill, Wilson, and Eastham, "by virtue of Eastham being an officer of the Eastham Company, can enforce the bonds only for the amount at which they were acquired." The respective corporations will hereafter be referred to as the Eastham Company and the Rudisill Company.

The insistence that there was usury under the alleged transactions on the part of Rudisill, Wilson, and Eastham is that the Eastham Company owed Sloss-Sheffield Company $27,000, secured by a like amount of bonds of the Eastham Company; that Rudisill and Wilson, for $13,500, purchased that indebtedness and took an assignment thereof with collateral attached. It is averred that such purchasers agreed with the Eastham Company that they would lend it $13,500 with which to pay Sloss-Sheffield Company, and, failing in this, they compromised said indebtedness with the latter company for the sum indicated; and it is averred that the Eastham Company, as security or in repayment, gave Rudisill and Wilson its bonds for double the amount of the loan. The bill being sworn to, this charge as to the loan of $13,500 to the Eastham Company is only supported by said verification of the bill, and not by the affidavits. The statements contained in the affidavits are that such was not the fact; the statement of the secretary and treasurer of the Sloss-Sheffield Company, and that of Rudisill and of Wilson, stating the facts of the transaction, deny the fact of such loan. The Eastham Company, or any of its officers, were not shown to have agreed with or conferred with the Sloss-Sheffield Company about compromising and extinguishing its debt. The affidavits of Rudisill and Wilson state that the subject of making a loan to the Eastham Company not only was not agreed upon as alleged, but deny that the subject was ever discussed between them. The officers of the Eastham Company fail to state that such a loan was ever mentioned or considered with Rudisill and Wilson.

There are affidavits to the effect that Sloss-Scheffield Company did not extinguish its indebtedness-merely sold and assigned its claim to Rudisill and Wilson, and delivered therewith its evidences of indebtedness, original and collateral. Mr. Angle, who acted for the Eastham Company in the negotiations with Rudisill and Wilson, testified that he "never heard of such a thing (a loan) until the bill was filed." The answer and affidavits of respondents are to the effect that the acquisition of bonds on the part of Rudisill and Wilson was mentioned by the directors of the Eastham Company only in an incidental way, by an inquiry of what Rudisill and Wilson expected to realize out of the contract, and the reply-to buy bonds at a discount and to profit by operating the leased plant. It is asserted by appellants that the same is true with reference to the bonds acquired by Rudisill and Wilson from the Alabama Company and the Whiting Company, as well as the bonds acquired from the First National Bank of Anniston.

It is settled that no usury exists where a corporation in good faith pledges its bonds at less than the face value as collateral security to secure its debt, the primary duty being to pay the debt, which releases the collateral. If payment is not made, the fact that collaterals in excess of the indebtedness may be sacrificed does not relate to the inception of the loan and taint it with usury, when no such intent or effect was the result of the loan when made. In Nelson v. Hubbard, 96 Ala. 238, 250, 11 So. 428, 17 L. R. A. 375, it was held that bonds may be bona fide pledged in excess of corporate debt, in the absence of statutory and constitutional provisions, if not done in fraud of corporate rights. The pledge of bonds of the face value of $105,000 to secure a debt of $85,000 was the subject of discussion and upheld in Dexter v. McClellan, 116 Ala. 37, 22 So. 461, as not a fictitious issue or disposition of bonds within the prohibitions of the Constitution.

It is established that the original transaction must be tainted with usury, and when such is the fact the infirmity adheres to all subsequent transactions, having the effect of a device for evading the usury statute. Not so as to bona fide novation of the debt. Brock v. Clio Banking Co., 207 Ala. 404, 92 So. 805; Id., 204 Ala. 57, 85 So. 297; Blue v. First National Bank, 200 Ala. 129, 75 So. 577; Lewis v. Hickman, 200 Ala. 672, 77 So. 46; Scheussler & Sons v. Heard, 202 Ala. 648, 81 So. 590; Gardner v. Ruffner, 206 Ala. 666, 91 So. 580. The evidence offered in support of averments of usury fails to show that in the original transaction of the loan between the parties-the Sloss-Sheffield Company and the Eastham Company-or that of the acquisition of the note of $27,000 and collateral securing the same, was tainted with usury. To the same effect was the purchase of that note, and collateral securing it, from the former company by Rudisill and Wilson; and the case of Lewis v. Hickman, supra, is without application.

The four main creditors of the Eastham Company in the year 1922 were the Sloss-Sheffield Company, with an indebtedness of $27,000 secured by an equal amount of bonds of the debtor company; the Alabama Company, with an indebtedness of $13,000 secured by $13,000 worth of bonds of said company; the First National Bank of Anniston, with an indebtedness of $26,000 likewise secured; Mr. Eastham, $20,000 (an indebtedness and indorsement for said company) secured by $20,000 of the bonds of the Eastham Company; and there was a general indebtedness of about $5,000 that had not at such time been secured. The negotiations between Rudisill, Wilson, and Eastham, for the lease of the plant, culminated in the contract between the Eastham Company and the Rudisill Company, a new corporation.

The lease contract was of date February 4, 1922, and by which the Eastham Company accepted the Rudisill Company as its lessee, and Rudisill, Wilson, and Eastham were not personally obligated in the matter and were not shown to have been intended by either party to have been so obligated. Rudisill and Wilson purchased from the Alabama and Sloss-Sheffield Companies the indebtedness of the Eastham Company secured by about $40,000 worth of bonds. As the indebtedness was thus shifted, $40,000 of bonds were held by Rudisill and Wilson, and $20,000 by Mr. Eastham, leaving $26,000 held by the First National Bank of Anniston, and $1,000 by the Alabama Power Company. The total indebtedness of outstanding bonds of the Eastham Company at such time was about $87,000; and the bonds ($4,000) held in the treasury under tender (to the Whiting and Moffatt Companies) in October, 1922, after the execution of the lease contract, were accepted. The Alabama Power, the Whiting and Moffatt Companies' bonds were afterwards acquired by Rudisill and Wilson, long after the signing of the lease contract by the Rudisill Company.

It is said of the formation of the Rudisill corporation that the subscribers for its stock were Eastham, Rudisill, Wilson, and Mr. W. P. Acker, each taking one-fourth thereof, and that Rudisill, Wilson, and Eastham constituted its executive officers.

We have observed of the averments of the bill that Rudisill, Wilson and Eastham, contemporaneously with the incorporation of the Rudisill Company and the execution of the lease, loaned, or agreed to loan, the Eastham Company an amount equal to 50 per cent. of its indebtedness. This charge finds no support in the evidence, outside of the verification in the bill by Mr. Miller; this is repudiated in the affidavits of the several directors, including Mr. Miller. The testimony of the officers of the Sloss-Sheffield Company, and the Alabama Company, handling the transactions, shows that the same did not occur, and were not had with the Eastham Company; that the respective negotiations and communications thereof were of a sale to Rudisill and Wilson of their indebtedness against the Eastham Company. It is further shown that at the time of the Rudisill Company's incorporation there was no understanding or agreement that Mr. Eastham would acquire and hold any bonds, except those securing the Eastham Company's indebtedness to him for money loaned and the several indorsements indicated in the pleading and evidence; that some months thereafter he purchased from the First National Bank of Anniston the Eastham...