Snyder v. Yakima Finance Corp.

• Decision Date: 18 September 1933
• Docket Number: 24386.
• Citation: 25 P.2d 108,174 Wash. 499
• Parties: SNYDER v. YAKIMA FINANCE CORPORATION.
• Court: Washington Supreme Court

25 P.2d 108

174 Wash. 499

SNYDER v. YAKIMA FINANCE CORPORATION.

No. 24386.

Supreme Court of Washington

September 18, 1933

Department 2.

Appeal from Superior Court, Yakima County; Charles H. Leary, Judge.

Action by J. L. Snyder against the Yakima Finance Corporation. Judgment for plaintiff, and defendant appeals.

Affirmed.

Joseph C. Cheney and Elwood Hutcheson, both of Yakima, for appellant.

Grady &amp Velikanje, Stanley P. Velikanje, and Cherry & Hull, all of Yakima, for respondent.

TOLMAN Justice.

This action was brought to recover on a promissory note and to have a receiver appointed for the corporation maker thereof.

The complaint contained the usual allegations regarding the execution, delivery, maturity, and nonpayment of the note. As a basis for the appointment of a receiver, the complaint alleged that the defendant was insolvent; that the defendant held a large number of unpaid stock subscriptions; that its trustees had unlawfully paid dividends out of its capital that no attempt had been made by the defendant either to collect such stock subscriptions or to enforce the liability of the trustees for the unlawful payment of dividends; that had the defendant done so, it would have been able to pay its indebtedness; that the defendant had surrendered its business and affairs to a trust company for liquidation and had thereupon ceased to do business; and that, unless the unpaid stock subscriptions were collected and the liability of the trustees enforced, the plaintiff and others similarly situated would sustain a severe financial loss.

The answer admitted the allegations concerning the note, but denied all allegations with reference to the grounds for the appointment of a receiver. By way of an affirmative defense, the answer alleged that the note was given in renewal of a former unsecured note; that, to secure the renewal note, together with others of a similar kind, the defendant had, by chattel mortgage, pledged a large amount of securities, and had, by deed, conveyed certain real estate to Guaranty Trust Company as trustee; that pursuant to the execution of those instruments the trust company in turn had executed its declaration of trust; that the trust arrangement had been made with the full knowledge and consent of the plaintiff and other note holders similarly situated; that the trust was being properly administered, and that the assets of the defendant were being liquidated thereunder; that the note holders, including plaintiff, had been paid dividends to the extent of 30 per cent. upon their notes; that plaintiff, with six other note holders, had previously instituted an action similar to, and upon the same allegations as those contained in, the present action, and that that action had been dismissed; that, by reason of the premises, plaintiff was estopped and barred from maintaining this action. The affirmative matter contained in the answer was denied in the reply.

From a judgment awarding recovery on the note and appointing a receiver for the defendant, the latter has appealed. The plaintiff is therefore the respondent here, and the defendant becomes the appellant.

The facts of the case, as shown by the evidence, are these: Appellant, Yakima Finance Corporation, was incorporated in this state in 1920, and thereafter engaged in a general finance business at Yakima for about ten years. Its capital stock of $500,000 was divided into 10,000 shares of the par value of $50 each; one half of the stock being common stock and the other half being preferred stock. For the purpose of assisting in the sale of the stock, an affiliate corporation was organized. The stock was to be disposed of under a plan whereby single units, each consisting of two shares of preferred and one share of common stock, were to be sold for $125 per unit. Of the 5,000 shares of common stock, 2,500 shares were sold under the unit plan. The other 2,500 shares were divided between the affiliate corporation and the trustees of the appellant. The money realized from the sale of the 2,500 shares of common stock under the unit plan was paid over to the affiliate corporation on account of services rendered. The stock which was to be divided between the affiliate corporation and the trustees of the appellant was held in escrow until the year 1925 and then distributed. The consideration for the cash paid to the affiliate corporation and for the 1,250 shares of common stock ultimately delivered to it, consisted of services rendered by the affiliate corporation and by its payment of all expenses and commissions incurred in the sale of the stock in units, and all expenses of operation of the appellant until it was fully capitalized and had sufficient money on hand to pay the first quarterly dividend on the common stock. The trustees, originally five and later fifteen in number, gave for their stock their services as such and paid the expenses of organization of the appellant corporation. Whether the consideration for the 'promotion stock,' so called, was adequate or inadequate does not clearly appear from the evidence. At any rate, it was obviously the purpose of the promoters and organizers of the appellant that it should be capitalized through the sale of its preferred stock and a certain portion of its common stock, and that the remainder of the common stock should go to them for their services and expenditures in its behalf. Financial statements, showing that $250,000 of the capital stock was carried as donation stock, were sent to the United States Revenue Department, to the secretary of state of Washington, and to the various stockholders, and were regularly published in the press.

After its organization, the appellant transacted a fairly substantial and profitable business until 1930, but in the early part of that year it began to meet with financial reverses.

On March 30, 1926, the appellant, desiring to deal in collateral trust obligations, had executed to Guaranty Trust Company of Yakima a collateral trust deed agreement pledging certain securities for the purpose of securing its collateral trust notes and bonds thereafter issued.

Dividends were paid to stockholders as late as September, 1929.

Between May 16, 1929, and January 21, 1930, respondent had made loans to the appellant aggregating $11,500, for which he took, and held, appellant's thirty-day demand notes, without security. Other individuals had similar transactions with the appellant, the aggregate of which totaled about $59,000 in amount. In May, 1930, appellant became, and ever since has been, insolvent. In order to avoid the possiblity or probability of a receivership or of bankruptcy proceedings, the officers of the appellant conceived and formulated a plan whereby appellant was to issue and deliver to all general, unsecured creditors, in lieu of their demand notes, its series B notes, bearing interest at the rate of 7 per cent. per annum, payable two years after date. To secure these notes, the appellant was to execute to Guaranty Trust Company, as trustee, deeds to certain real estate, and also a chattel mortgage covering certain personal property, the two instruments to constitute a pledge of all the assets of the appellant not previously pledged by the collateral trust agreement. Under this plan, the trust company was to liquidate the pledged assets, consisting principally of conditional sales contracts, chattel mortgages, notes and accounts receivable, automobiles, musical instruments, and certain other personal property, and also some real estate, and, after the payment of its expenses, to disburse the proceeds in dividends to the creditors upon their series B notes.

A meeting of the creditors of the appellant was called in the early part of May, and the plan and the reason therefor, were explained to them. The respondent was present at that meeting. As a result of the conference, the plan above outlined was adopted and made effective. The respondent received, in lieu of his demand notes, a series B note dated May 2, 1930, for $12,777.37, representing the principal and interest then due and owing to him. The other unsecured creditors received similar notes. The chattel mortgage and deeds, given to secure the notes, were executed and duly filed for record. Thereafter, on June 27, 1930, a declaration of trust was executed, defining the purposes of the trust and prescribing the powers and duties of the trustee. In pursuance of the trust arrangement, the Guaranty Trust Company entered upon, and has ever since been engaged in, the liquidation of the assets which were turned over to it for that purpose. The holders of the series B notes have received dividends totaling 30 per cent. of their claims. Unfortunately, however, the period of liquidation has extended beyond the time originally thought to be sufficient for its completion, and the process, though continuous, has admittedly been a slow one.

Some time in 1931, and prior to the maturity of the series B notes, respondent and six other holders of such notes brought an action against appellant for the appointment of a receiver. A demurrer to the complaint therein was sustained and thereafter the action was dismissed without prejudice. On May 12, 1932, after the series B notes became due, and while the liquidation was still in progress, this action was begun by respondent to recover the balance due and owing him. The result of the trial, as already stated, was a recovery on the note in favor of respondent, and the appointment of a receiver for appellant. In his oral decision at the conclusion of the evidence, the trial judge stated that, in his opinion, he was not called upon to pass on the question of the stockholders' liability for unpaid subscriptions, or upon the question of the trustees' liability...