Russell v. Tennessee & Kentucky Tobacco Co.

• Decision Date: 29 July 1933
• Citation: 65 S.W.2d 256
• Court: Tennessee Supreme Court
• Parties: RUSSELL et al. v. TENNESSEE & KENTUCKY TOBACCO CO. et al. NATIONAL BANK OF KENTUCKY et al. v. SAME.

Page 256

65 S.W.2d 256

RUSSELL et al. v. TENNESSEE & KENTUCKY TOBACCO CO. et al.

NATIONAL BANK OF KENTUCKY et al. v. SAME.

Court of Appeals of Tennessee, Middle Section.

July 29, 1933.

Certiorari Denied by Supreme Court December 9, 1933.

Appeal from Chancery Court, Robertson County; J. W. Stout, Chancellor.

Suits by S. R. Russell and another, and by the National Bank of Kentucky and another, against the Tennessee & Kentucky Tobacco Company and others. The Chancellor sustained the bill in the first suit, as a general creditor's bill, and ordered bill in second suit to stand in the nature of a cross-bill, and thereafter dismissed the second bill, and complainants therein appeal.

Modified and affirmed, and cause remanded.

True & Dorsey, of Springfield, and Ed. T. Seay, of Nashville, for National Bank of Kentucky et al.

Charles Willett, of Springfield, for appellee S. R. Russell.

R. L. Peck, of Springfield, for appellees R. F. and E. B. Long.

DE WITT, Judge.

This appeal involves the right of the creditors of the Tennessee & Kentucky Tobacco Company, a corporation, to hold S. R. Russell, R. F. Long, R. F. Long, trustee for E. B. Long, and E. B. Long, liable as stockholders, directors, and officers thereof for (1) unpaid capital stock; (2) incurring indebtedness in excess of the paid-in capital; and (3) on the ground that the corporation was a sham and a fraud and was so operated; and there is also involved the validity of the claim of Clem W. Russell against said corporation for borrowed money.

The original bills in these causes were filed as general creditors' bills to wind up the affairs of the Tennessee & Kentucky Tobacco Company as an insolvent corporation. The issues here presented arose among the complainants in these bills respectively.

On August 13, 1925, the first of these bills was filed by S. R. Russell and R. F. Long, trustee for E. B. Long, based on a note of said corporation for $1,063.33, dated July 31, 1924, due eight months after date, payable to the order of Miss Mary Dunn, and which said complainants alleged had been transferred to them by her for value. It was alleged that said corporation was insolvent, and certain of its debts were set forth in the bill, as well as its principal assets.

The second bill was filed on September 5, 1925, by the National Bank of Kentucky and the receiver of the People's Bank of Springfield. And in this bill the validity of the said claim of Russell and Long, trustee, was attacked, and it was sought to enjoin the prosecution of the former suit. S. R. Russell, E. B. Long, R. F. Long, and R. F. Long, as trustee for E. B. Long, as defendants, were sought to be charged with liability for capital stock of said corporation held by them and unpaid for, and for incurring indebtedness in excess of the paid-in capital, and for operating said corporation as a sham and a fraud. The claim of defendant Clem W. Russell upon a note for $1,500, purported to be secured by a chattel mortgage of said corporation, was attacked.

In both bills various creditors of said corporation were made defendants; and it was prayed in each bill that it be sustained as a general creditors' bill, that all other creditors be enjoined from prosecuting any suits against said corporation, but be required to prosecute their claims in the cause; that a receiver be appointed to take possession of all the property of said corporation, convert it into money; that reference be had to the master to take and state an account of assets and liabilities; and for general relief.

On November 16, 1925, the chancellor on motion sustained the bill of Russell and Long as a general creditors' bill, refused to sustain as a general creditors' bill the bill of National Bank of Kentucky and the receiver of the People's Bank of Springfield; but he ordered the latter bill to stand in the nature of a cross-bill to the bill of Russell and Long as "to the matters and things therein contained alleged against the several defendants named therein, but not related to a general creditors bill." He ordered that publication be made for creditors requiring them to set up and prosecute their claims in the suit brought by Russell and Long, appointed the clerk and master as receiver of the corporation and directed him in his duties; and retained in court the bill of Russell and Long as an original bill, and the other bill as a cross-bill, as he had defined in the decree.

The corporation having failed to answer, a decree pro confesso was in time duly entered against it; but answers were filed by Russell, R. F. Long, trustee, R. F. Long, and E. B. Long as cross-defendants, denying all of the charges made against them; averring that they had paid for their stock, had not incurred indebtedness in excess of the paid-in capital; and had not operated the corporation as a sham and a fraud. An answer was also filed by Clem W. Russell averring that he did make a loan of $1,500 to the corporation on August 9, 1924, and that the note and mortgage held by him were bona fide. Upon a voluminous record, upon the final hearing the complainants in the second bill again excepted to the action of the court in sustaining the first bill as a general creditors' bill, and in not sustaining the second bill as a general creditors' bill, and in not enjoining the further prosecution of the first suit; but the chancellor overruled said exceptions and he also dismissed the second bill as a cross-bill. The complainants in said bill prayed and perfected an appeal to this court.

More specifically stated it is sought to hold S. R. Russell, R. F. Long, trustee, R. F. Long individually, and E. B. Long, liable for $9,000 each for unpaid subscriptions to the capital stock, and as officers and directors for contracting debts in excess of the capital stock, for unauthorized and illegal purchase of a farm, unauthorized and improper lease of a warehouse, and for making fraudulent financial statements as to the affairs of the corporation in order to obtain credits. Upon the issues thus created the chancellor found and decreed as follows:

"As to the capital stock, the Chancellor finds that no specific payments were made to the corporation but the defendant stockholders placed their credit behind the corporation and procured a loan with which the property, which constituted the capital of the corporation was purchased. This was payment within the requirement of the law.

"No single debt contracted was in excess of the amount of the capital stock.

"The corporation lost nothing by the purchase of the farm complained of.

"The lease of the warehouse was made August 15, 1924, after the Peoples Bank closed. It was authorized by the Board of Directors at $3,000.00 per year which was full value, and has been paid and distributed to creditors by decree of this Court.

"The Court finds that all the debts sued on were contracted by the defendant corporation. That its corporate existence was complete. That all the debts sued on were contracted by the defendant corporation with the said Peoples Bank and charged to defendant corporation. That the President of said Bank, H. T. Stratton was Vice-President of defendant corporation, and that R. F. Long, cashier of said Peoples Bank, was defendant's Treasurer.

"That the credit given by said Peoples Bank to defendant corporation was not induced by deceit or fraudulent misrepresentation.

"Neither the Peoples Bank nor the cross-complainant, National Bank of Kentucky extended to or gave defendant corporation any credit on the faith of the statements filed as exhibit No. 1 and exhibit No. 2 to the deposition of the witness, H. T. Stratton. The defendant had no dealings with the cross-complainant, National Bank of Kentucky.

"The Peoples Bank and its President, H. T. Stratton and cashier, R. F. Long, were at all times fully aware of the financial condition of the defendant, Tennessee & Kentucky Tobacco Company, and said Bank was not misled when credit was given defendant corporation.

"When the State granted defendant's charter, and stock was issued and a Board of Directors elected, the Tennessee & Kentucky Tobacco Company became a complete corporation and legal entity and was so dealt with by its creditors. The stockholders and directors were not liable for the corporate debts. To avoid such liability was the reason for the organization of the corporation. The defendant corporation was in business for more than six years doing a large volume of business each year, and doing almost all its banking business with the said Peoples Bank, and all charges were made in the name of and against the defendant, Tennessee and Kentucky Tobacco Company and so charged on said bank books."

The Tennessee & Kentucky Tobacco Company was incorporated in March, 1918, as the Bohanan Tobacco Warehouse Company, with R. T. Bohanan, E. B. Long, J. A. Long, Harold Bell, and A. G. Woodard as the incorporators; with an authorized capital stock of $36,000. The original subscribers to the capital stock were R. T. Bohanan, H. T. Stratton, R. F. Long, and R. F. Long, trustee for E. B. Long. No money was ever paid to the corporation directly for these shares of stock. Each of these four stockholders subscribed for stock amounting to $9,000 par value, except Stratton, whose stock was given to him. In September, 1918, by an amendment to the charter, the name of the corporation was changed to Tennessee & Kentucky Tobacco Company. The purposes of incorporation were stated in the charter as, "storing, buying, selling and dealing in tobacco either on loose leaf floors, in hogsheads, on commission or otherwise, and doing any and all things necessary and proper for the purpose of carrying out the objects and purposes of said corporation; the said corporation to be located at Springfield, Robertson County, Tennessee."

At the time of its organization the corporation had no property necessary to conduct its business, no money, and no credit; but it purchased a warehouse...