Standard Lumber Co. v. Interstate Trust Co.

• Citation: 82 F.2d 346
• Decision Date: 02 March 1936
• Docket Number: No. 7737.,7737.
• Parties: STANDARD LUMBER CO. et al. v. INTERSTATE TRUST CO. et al.
• Court: U.S. Court of Appeals — Fifth Circuit

82 F.2d 346 (1936)

STANDARD LUMBER CO. et al. v. INTERSTATE TRUST CO. et al.

No. 7737.

Circuit Court of Appeals, Fifth Circuit.

March 2, 1936.

Philip S. May, J. T. G. Crawford, and Francis P. Conroy, all of Jacksonville, Fla., and Jno. F. Harrell, of Live Oak, Fla., for appellants.

George M. Powell, Robert H. Anderson, and Martin H. Long, all of Jacksonville, Fla., for appellees.

Before SIBLEY, HUTCHESON, and WALKER, Circuit Judges.

HUTCHESON, Circuit Judge.

The suit was an adversary proceeding by bill in equity brought, under the statute 13 Elizabeth¹, against named defendants, to compel an accounting for assets alleged to have been fraudulently encumbered by and fraudulently conveyed to them. It was filed by the Interstate Trust & Banking Company on February 16, 1931, not as a class suit, but for its own benefit on a judgment for $26,409, it had obtained on November 26, 1930, against Standard Lumber Company. The bill made parties defendant the Standard Lumber Corporation, the Standard Lumber Company, their directors and principal stockholders, and the trustees and purchasers at foreclosure of the mortgage on all its properties the Standard Lumber Company had given Mrs. Sears on April 2, 1928. The bill alleged in detail a scheme to defraud entered into by Mrs. Sears, the principal stockholder of the Lumber Company, and the directors and officers of that company, to encumber all of its properties in her favor, and by judgments thereafter entered to acquire all of it in fraud of the company's creditors.

It was alleged that in pursuance of that scheme the mortgage had been executed, foreclosure proceedings had been begun and consummated, and the Standard Lumber Corporation had been formed to take over the properties foreclosed, with the result that in fraud of plaintiff the assets of Standard Lumber Company had been removed from the reach of plaintiffs' claim and judgment. It was further alleged that Mrs. Sears had, as part of the same fraud, filed suit for and obtained judgment against the company on a series of bonds it had issued in 1914. The prayer was that Mrs. Sears and the Standard Lumber Corporation be required to account to plaintiff for all assets of the defendant, Standard Lumber Company, which had been conveyed in the foreclosure or for the value of the proceeds thereof. No claim was asserted or prayer made for attorneys' fees.

The defendants made full answers to the suit. They denied all the allegations of fraud, alleged that the mortgage had been given in good faith to secure in part advances which though past when the mortgage was executed, had been made on the assurance that the mortgage would be given, and in larger part to secure advances presently made upon the immediate faith of the mortgage.

As to the foreclosure proceedings and the judgment on the bonds, specifically denying that these proceedings were colorable or by consent, they alleged that they were truly had as adversary proceedings, and were not defended further than they were because the debts sued for were truly owed, and the securities relied on had been truly given.

Before the cause went to a decree in December, 1934, a great mass of testimony was taken. This showed that the Standard Lumber Company was a Sears corporation, in which Mr. Sears in his lifetime, and his widow Mrs. Anna L. Sears afterward, was, though not the only, the principal and dominant stockholder. It showed that throughout the whole of the company's existence it had been the custom and the practice of the Sears interest to finance it by advancing to it from time to time the moneys needed to carry on its business. In 1914 there was a bond issue of $1,200,000 of which $700,000 had been paid off, leaving in 1928 $500,000 owned by Mrs. Sears, still due and unpaid. By February 1, 1928, in addition to moneys due Mrs. Sears on the bond mortgage, there had become due her by the company on account of cash advanced during 1926, 1927, and 1928, $423,000, and on account of interest on moneys advanced and unpaid interest on the bonds, $122,607.65, a total of $545,607.65. It was then agreed that the company should give her a mortgage for these advances and the advances she was to make, and the preparation of the mortgage papers, actually executed on April 2, 1928, was begun. Thereafter she made the following advances: Between February 1 and March 17, 1928, $115,500; between April 9 and May 17, 1928, $761,000. Thus, the total principal indebtedness the mortgage secured was $1,432,117.65. In December, 1928, the interest being in default, the trustees in the mortgage brought a bill to foreclose. Defendants answered. There was a reference to a master, followed by a decree on February 25, 1929 for $1,545,213.21, and for foreclosure. On April 1, 1929, the trustees bid the property in by a credit on the judgment of $1,000,000, took a deficiency decree against the Standard Lumber Company for the difference, and on the same day transferred and assigned the properties to Standard Lumber Corporation which had been created to take them over after the sale. Since that corporation acquired the properties, Mrs. Sears, as the principal stockholder, has been advancing moneys to it to keep the business going, and receiving nothing in return from it, just as she had been doing while the Standard Lumber Company owned them. On February 11, 1929, Mrs. Sears obtained a judgment for $525,749 against the Lumber Company on her bonds, and recorded it in the public records. No testimony was offered showing or tending to show any actual fraud or that there had been any purpose, in connection with the advances to the Standard Lumber Company, the taking of the mortgage or its foreclosure, to hinder or delay the creditors of the company, or for any other purpose than to secure Mrs. Sears for the enormous sums she had advanced. On the contrary, the record shows that after the mortgage was taken the company paid out to its general unsecured creditors, $262,181.70. Considerable testimony was taken on the issue of the company's insolvency when the mortgage was given. This consisted of extracts from the books of the company, of the opinions of its officers, and of testimony as to an improvident contract for timber the company had made. There was no definite appraisement made of the properties, nor did any one testify as to their true value as of the date of the mortgage, the date of the foreclosure, the date of the filing of the suit, or the date of the trial. The other appellee, Southern Cypress Manufacturing Association, came into the suit by intervention on June 21, 1934, alleging the Standard Lumber Company's indebtedness to it prior to April 2, 1928, and that on May 18, 1934, it had obtained a judgment against it for $9,470.37, execution on which had been returned nulla bona. It adopted the general allegations and the prayer of the bill of complaint.

On September 21, 1934, the defendants, alleging that they had just learned the facts as to plaintiff's insolvency and the liquidation proceedings against it, and its having been removed as trustee, prayed leave to file a supplemental answer setting up these facts. The answer they tendered set out the following: (1) That the Interstate Trust & Banking Company was not the beneficial owner of the notes they had put in judgment, or of the judgment they sued on in this suit, but was trustee under a trust agreement executed by Mortgage & Securities Company which provided for the appointment of a successor trustee should Interstate...