In re Haynsworth

ERNEST F. COCHRAN, District Judge. The referee made an order (dated July 2, 19.27) providing for the sale of certain shares of stock of the bankrupts in tbe Carolina Building Material Company, tbe same to be — 335 — sold in a block with other shares in the same corporation held by another bankrupt estate, to wit, the bankrupt estate of J. M. Law-ton Company and J. M. Lawton. T. W. Jones filed a petition to review this order, and at the hearing it appeared to the court that a decision of the question might turn on what indebtedness against the bankrupts Haynswórth & Stuckey was owned by Mr. Jones, and the decision upon this petition to' review was reserved until the referee could hear the question as to the indebtedness claimed by him. Later the referee filed another order (dated April 11, 1928) finding in favor of Mr. Jones on his claims, and also setting aside as preferential an assignment made by the bankrupts of their equity in this stock to the Commercial & Savings Bank, and the trustee and the bank have filed petitions to review this order. I have read over the testimony and all of the evidence and record in the cause. The •case is very voluminous and the facts axe somewhat complicated. It will not be necessary to set forth all of the facts in detail. At the outset it may be stated that it was practically conceded by all parties at the hearing that the real contest here involved the control of the majority of the stock of the Carolina Building Material Company. With the control of this corporation this court has nothing whatever to do. But the parties have the right to have all of the proceedings in the bankruptcy court conducted according to legal and equitable principles, and this court, in considering and determining the questions presented, will decide all of the issues according to the legal and equitable rights of the parties, and can take no concern whether its conclusions, when rightfully reached, result in one or the other party’s attaining the control of that corporation. It appears from the record that T. B. Haynswórth and J. M. Lawton, both now bankrupts, before their bankruptcy owned a controlling number of shares, viz. 275 shares, in the Carolina Building Material Company. T. B. Haynswórth and J. M. Law ton, before their bankruptcy, had at first a verbal agreement, and later a written agreement, not to sell or in any way dispose of any of the capital stock of the Carolina Company individually, but that their entire holdings should be sold or disposed of by them simultaneously. Later the partnership of Haynswórth & Stuckey was formed, and apparently took over the business of Haynswórth & Lawton. Haynswórth & Stuckey executed to.Mrs. E. B. Douglas a certain collateral note, in which was pledged 95 shares of this Carolina Company stock. T. W. Jones was an indorser upon this Douglas note. Before the bankruptcy of any of the parties, and before the note was due, Mrs. Douglas either required Mr. Jones to take it up, or he did in fact take it up of his own motion (it being immaterial which is the fact), and she thereupon assigned that note and the collateral to him. Of the 95 shares pledged in the Douglas note, 20 shares belonged to the firm of Haynswórth & Stuckey, and 75 to T. B. Haynswórth. The other indebtedness claimed by T. W. Jones is a note, dated January 29, 1921, for $1,000, executed to him by J. M. Lawton and T. B. Haynswórth individually, and not as copartners; a note, dated . July 22, 1921, for $3,000, executed to him by Haynswórth & Lawton as a copartnership, indorsed by J. M. Lawton and T. B. Haynsworth, individually; and a third note, dated August 1,1921, for $1,500, executed to him by Haynswórth & Lawton as a partnership, but not indorsed — making a total of $5,500. These notes will hereafter for convenience be referred to as the Haynswórth & Lawton notes. After these transactions, the partnership of Haynswórth & Stuckey and the individuals, T. B. Haynswórth and M. C. Stuckey, were adjudicated bankrupts in a single proceeding. J. M. Lawton Company, the corporation, was adjudicated bankrupt in a separate proceeding, and J. M. Lawton individually was adjudicated a bankrupt in a third separate proceeding. The order of sale proposes that the trustee of the various bankrupt estates mentioned shall sell all of the Carolina stock belonging to those estates in a block at the price of $105 per share. Mr. Jones objects to this, on the ground that these shares cannot be sold in a block, but, being separate estates, should be sold separately, and, in addition to that, he urges that he has a right to have the 95 shares put up for the Douglas note sold as a separate block, and applied first to the Douglas note held by him, and then to the other obligations held by him, viz. the three Haynswórth & Lawton notes, which he says were assumed by the firm of Haynswórth & Stuckey. Other pertinent facts will be adverted to later in the course of this opinion. It will be advisable to consider first the petition to review the referee’s order dated April 11, 1928, in reference to the indebtedness which Mr. Jones elaims against the bankrupt estate of Haynswórth & Stuckey, for the decision upon the other petition to review will depend upon what decision is reached upon this one. — 336 — The first question to be considered under this petition to review the referee’s order as to the indebtedness of the bankrupt estate of Haynsworth & Stuckey to Mr. Jones is: What rights are given to the holder of the Douglas note ? In considering this question, I shall assume that the three notes for $5,500 now held by Mr. Jones were duly assumed by the partnership of Haynsworth & Stuckey. There is no question made but that the Douglas note must be paid in full from the proceeds of the 95 shares pledged in that note. Assuming, then, that the three Haynsworth & Lawton notes held by Mr. Jones axe a part of the indebtedness of the partnership of Haynsworth & Stuckey, does the 'Douglas note give him a right to collect those three notes out of the collateral in addition to the Douglas note? The Douglas note states explicitly that the collateral is deposited with the “payee” for the payment of “this note and all other demands, present or future, of the undersigned to the payee.” It further provides that the undersigned does hereby give unto the “payee, its successors or assigns, or the holder thereof,” a first and specific lien for all of the “said demands” “upon any of the above-mentioned property,” and so forth. It is dear from the language of this note that, as long as it remained in the hands of Mrs. Douglas, the proceeds of the collateral should be applied first to that note, and then to any other demands that Mrs. Douglas might hold against Haynsworth & Stuckey. These were the demands that were naturally in the contemplation of the parties when the note was executed. Now, did the parties contemplate the payment, not only of demands of that sort, but demands of any future holder of the note? I think not. The demands that can be, so to speak, tacked to the original note, must be those that are described in the note, namely, demands of the “payee7’ (that is, of Mrs. Douglas), and not of any third party. Here these additional demands of the three Haynsworth & Lawton notes now claimed by Mr. Jones were never payable to Mrs. Douglas, nor did she ever own them. When she assigned the note to Mr. Jones, she assigned to him, of course, all of her rights therein, and no more. She therefore assigned to him the right to collect the principal of the note itself, and any demands she might have then had against the parties and assigned to Mr. Jones. But she could have no right to assign to Mr. Jones the right to tack or add to the note any independent demands which he may have had, and which she had never owned. The learned attorney for Mr. Jones relies upon the cases of Mulert v. National Bank, 210 F. 857, 127 C. C. A. 419, Richardson v. Winnisimmet, 189 Mass. 25, 75 N. E. 97, and Oleon v. Rosenbloom, 247 Pa. 250, 93 A. 473, L. R. A. 1915F, 968,1 Ann. Cas. 1916B, 233. None of these is in point. They deal with contracts of pledge subjecting the collateral, not merely to debts due the original pledgee, but to all debts and liabilities "due any “holder” of the note, and authorizing any such holder to sell the collateral and apply the proceeds in payment of any debt then due or to become due, or that might thereafter be contracted in favor of another holder of the note. The contract of pledge in the present case limits the subjection of the collateral to debts due or to become due, or that might thereafter be contracted, in favor of the original pledgee — that is, the payee, Mrs. Douglas ; and the liability to which Mr. Jones is attempting to subject the collateral is not and was never due Mrs. Douglas, to which the pledge by its terms was limited. This very question was decided by the Circuit Court of Appeals of the Sixth Circuit,' in an able opinion by Circuit Judge Moor-man, in the case of Harter Bank v. Inglis, 6 F.(2d) 841, and with the views therein expressed I am in full accord. Compare Gillet v. Bank of America, 160 N. Y. 549, 55 N. E. 292. But there is another reason why these additional claims of Mr. Jones cannot be paid from the proceeds of this collateral. Assuming again that Haynsworth & Stuckey duly assumed the payment of these Haynsworth & Lawton notes to Mr. Jones, there is no evidence whatever that Mr. Jones assented to this assumption, and agreed to discharge the original makers as such. In other words, there was no novation of the contracts, and for aught that appears the original makers and indorsers of these several notes are still liable to Mr. Jones for their payment. If they are still liable, and Haynsworth & Stuckey are also liable, these notes are not obligations for which the collateral in the Douglas note is liable. The collateral in the Douglas note cannot be made liable for' any demands, except demands against Haynsworth & Stuckey. It does not cover demands against Haynsworth & Stuckey jointly with other persons. J. M. Lawton is not a member of the firm of Haynsworth & Stuckey, but he is liable on all the Haynsworth & Law-ton notes. It has been held, where a joint note was executed, pledging stock owned jointly as collateral security or for any other liabilities of the undersigned to the holder, now due or to become due, or that might — 337 — thereafter be contracted, that, since the note created a joint liability, the other liabilities for which the collateral was pledged should be construed also to be those incurred by the holders jointly, and hence the collateral was not available in settlement of the several obligations of the bankrupts, assumed by them as indorsers of the notes of other corporations. Torrance v. Third National Bank of Pittsburgh (C. C. A. 3d) 210 F. 806. It has also been held that, where two members of a firm executed a note pledging collateral for their obligation, or any of their obligations, the collateral could not be used in discharging a note signed by all three members of the firm, and that, where collateral is pledged to secure a firm obligation, such collateral cannot be used in. paying a note signed by the members of the firm as their joint individual obligation. In re Evans (D. C.) 235 F. 635. A fortiori, other liabilities of the makers of the note jointly with other parties, who are not makers of the original collateral note, are outside of the operation of the collateral note. But there is a third reason why these three notes cannot b.e collected from the collateral pledged in the Douglas note. I have assumed so far that Haynsworth & Stuckey assumed payment of those notes. But there is no distinct finding by the referee that they assumed them, and the evidence upon that point is very confusing. Mr. J. M. Lawton testified at first that Haynsworth & Stuckey assumed all the liabilities of Haynsworth & Lawton; but later, when questioned about these three notes specifically, and his attention called particularly to dates and amounts, he testified positively that he assumed the responsibility of those particular notes. The testimony of Mr. T. B. Haynsworth is very confused and to some extent contradictory. When his attention was specifically directed to two of these notes by dates and amounts, he said that he could not swear positively to anything about them. Later he said that all of Haynsworth’s and Lawton’s debts were assumed by Haynsworth & Stuckey “in a way”; but his explanation of what he meant by “in a way” was far from clear. Later, in referring to the $3,000 note, he states that it was taken in consideration in the dissolution of Haynsworth & Lawton, but that Law-ton assumed it “with us.” Still later in his testimony, when his attention was specifically directed to the three notes by dates and amounts, he testified positively that they were not assumed by the firm of Haynsworth & Stuckey, but were assumed by J. M. Law-ton. Still later in his testimony, he said that these three notes were assumed by the firm of Haynsworth & Stuckey in case J. M. Lawton did not pay them, and that they were likewise assumed by and were the debts of the individuals (viz. Haynsworth and Stuckey), if Lawton failed to pay them. Mr. Stuckey in his testimony said that “$5,500 of notes” was assumed by him, and that Lawton was given credit on the books of Haynsworth & Stuckey for that amount. It is difficult to see why Lawton should be given credit, if Haynsworth & Stuckey assumed the notes. There was no suggestion made that any of these gentlemen were telling anything except what they believed to be the fact. Prom the reading of the testimony, the impression made upon the mind of the court is that they conducted their business, as it turns out so frequently when bankruptcy unfortunately supervenes, in rather a negligent manner, trusting entirely to one 'another, and that they really do not know themselves exactly what was done. It is true that in the schedules of Haynsworth & Stuckey these notes are listed as obligations of Haynsworth & Stuckey, and the statement made that they were assumed by the firm. But this ex parte statement, without right of cross-examination, is not binding on the trustee or the other creditors. So many notes were referred to in the testimony, and the testimony is so vague, that it is impossible for this court to reach the conclusion that there is a preponderance of the evidence to show that they were ever duly assumed. There was certainly no writing, and I cannot hold as a matter of fact that Mr. Jones has sufficiently shown that there was ever any assumption of these notes by the firm of Haynsworth & Stuckey. It has also been insisted that Mr. Jones could not obtain payment of the three notes referred to from the proceeds of the collateral in the Douglas note, on the ground that the transaction, if given such effect, would be a preferential transfer. In view of the conclusion I have reached, it is .not necessary to decide this question. I may say, however, that under section 60 of the Bankruptcy Act (U. S. C. title 11, § 96; 11USCA § 96) the transfer, to constitute a preference, must be made by the bankrupt. It is true it may be made directly, or indirectly through a third person. In the present ease, the transfer to Mrs. Douglas was made by the bankrupts before the four months period and while solvent. In the transaction whereby Mr. Jones took an assignment of the Douglas note, while this occurred within four months prior to bank — 338 — ruptcy, and Mr. Jones knew of the insolvent condition of the bankrupts, nevertheless the bankrupts themselves took no part in this transaction. It would seem, therefore, that the transaction could not be assailed as a preference. In a similar case it was held squarely that such a transaction did not constitute a preference. Richardson v. Winnisimmet Nat. Bank, 189 Mass. 25, 75 N. E. 97, 98. The next question is whether attorney’s fees should be allowed upon the Douglas note. One of the objection^ made to the allowance of this fee was on the ground that the note had not been placed in the hands of an attorney before bankruptcy intervened. The referee does not distinctly hold that an attorney had not been employed before that time by the holder, but the inference is, from his report, that this was not done. He ruled that, even if an attorney had not been employed until after bankruptcy, nevertheless the fee should not be disallowed. He also held that the note had matured, or at least had been declared due and payable. I think the referee was in error in both respects. Where a note contains a provision for attorney’s fees, services rendered after the petition in bankruptcy is filed, are not as a general rule allowable. By section 63 of .the Bankruptcy Aet (U. S. C. title 11, § 103; 11 USCA § 103) debts provable against an estate must be for a fixed liability absolutely owing at the time of the filing of the petition. Under this section, the eases hold that if a claim has been placed with an attorney for collection prior to bankruptcy, and collection proceedings are actually instituted, so that the attorney’s fees were a fixed liability at the time of the filing of the petition in bankruptcy, such a fee would constitute a proper debt against the estate of the debt- or. But services rendered after the filing of the petition will not constitute such a claim; and where a note with attorney’s fees clause is secured by a mortgage of real estate or collateral pledged, and a petition in bankruptcy is filed before any action is taken to institute suit, and there is no contest over the validity of the note, nor the right of the owner to have the property sold and the proceeds applied to the satisfaction of the note, and the sale is made by the trustee, the eases all hold that an attorney’s fee is not a proper claim and cannot be charged against the proceeds of the property. British & American Mortgage Co. v. Stuart (C. C. A. 5th) 210 F. 425, and cases therein cited; Gugel v. Bank (C. C. A. 5th) 239 F. 676; In re Roche (C. C. A. 5th) 101 F. 956; In re V. & M. Lumber Co. (D. C.) 182 F. 231; First Savings Bank, etc., v. Stuppi (C. C. A. 8th) 2 F.(2d) 822; 2 Collier on Bankruptcy (13th Ed.) p. 1394. See, also, cases cited in USCA title 11, § 103, at page 48 et seq. As .stated above, while the referee did not distinctly hold one way or the other whether the note in question was placed in the hands of an attorney before bankruptcy or not, nevertheless the inference from his order is that it was not so placed. Be that as it may, however, I have read the evidence very carefully with this point in mind, and I fail to find any evidence at all to show that this note was placed in the hands of an attorney, or anything done to institute suit, or any action taken, prior to bankruptcy. The note by its terms had not matured. It is certainly not clear at all that Mrs. Douglas took any steps to declare it due and payable. All that I can find from the evidence that she did was either to accept payment from Mr. Jones or to eall upon him for payment. Nor is there any evidence that Mr. Jones took any steps to declare it matured. Certainly neither of them ever made any demand for the payment from the makers of the note. The trustee has never contested in any way the validity of the Douglas note, or that the collateral was properly applicable to that note. The trustee has negotiated a sale which will provide absolutely for the full payment of that note and interest, without any action being necessary on the part of the holder. The mere proof and filing in bankruptcy of a note containing an attorney’s fee clause, whether secured or not, does .not, of course, give the right to an attorney’s fee for such services in filing the claim, where no contest is made as to the validity of the note or the security. In these circumstances, I think it clear from the authorities that no attorney’s fee can be allowed upon the Douglas note. The petition for review on the part of the Commercial & Savings Bank alleges error also in the order of the referee of April 11, 1928, in holding that the assignment to the Commercial & Savings Bank of the equity in the 95 shares securing the Douglas note was null and void as a preference. The facts upon this question are as follows: On April 2, 1927, Haynsworth & Stuekey and T. B. Haynsworth executed to the Commercial & Savings Bank an assignment of any equity they might have in the 95 shares of Carolina Company stock held by Mrs. Douglas as security to the note of Haynsworth & Stuckey — 339 — to her. At that time Mrs. Douglas still held this note and collateral. Written notice of the assignment was given to Mrs. Douglas and Mr. Jones, and thereafter, but on the same day, the Douglas note was assigned without recourse to Mr. Jones. When the bank took the transfer of this equity, either as collateral to secure past indebtedness or as a payment thereon, Haynsworth & Stuckey and T. B. Haynsworth were insolvent, and the president of the bank had full knowledge of their condition. The transfer was made within four months of the filing of the petition in bankruptcy, and the effect of the transfer, if it should be upheld, would be to enable the bank to obtain a greater percentage of its debt than other creditors of the same class, of all of which the bank was well aware at the time of the transfer. There can be no doubt, therefore, but that the transfer of this equity in the 95 shares of stock in question to the Commercial & Savings Bank was a preference, and should be avoided under section 60 of the Bankruptcy Act (U. S. C. title 11, § 96; 11 USCA § 96). It is said, however, that this transfer should not be avoided absolutely, but the trustee should be permitted to hold it for the benefit of the estate. It is not clear just how allowing the trustee to preserve the lien of the transfer would benefit the estate, especially as this court has now held that Mr. Jones cannot hold the collateral for anything except the Douglas note and interest. Nor are there any facts in the record from which the court can determine whether this would be proper or not. While this portion of the referee’s order must be sustained, it will, however, be without prejudice to the right of the trustee to move before the referee and upon proper showing to hold the transfer for the benefit of the estate. There is a good deal in the testimony relative to certain other transfers alleged to have been preferentially made by the bankrupts to the Commercial & Savings Bank, and some allusion was made to them in the argument; but it appears that those matters have not yet been passed upon by the referee. There is no petition to review any orders in reference to them, and therefore no ruling is made as to any of the other transfers to that bank than the one specifically set aside in the said order of the referee, dated April 11, 1928. My conclusion as to the order of the referee dated April 11,1928, is that it should be affirmed in part, and reversed in part; that is to say: First, in so far as the said order adjudges that T. W. Jones is entitled to hold the security pledged as collateral to the Douglas note for the amount of the Douglas note, With interest, it should be affirmed. Second, in so far as it adjudges that T. W. Jones is entitled to hold the said securities for attorney’s fees pursuant to the Douglas note, it should be reversed. Third, in so far as it holds that “T. W. Jones is entitled to hold the securities for the payment of the other debts and liabilities of Haynsworth & Stuckey to him, including notes for the aggregate amount of $5,500, with interest and attorney’s fees,” it should be reversed. Fourth, in so far as the said order adjudges that the assignment of the equity in the said 95 shares of stock made to the Commercial & Savings Bank is null and void as a preference, it should be sustained, with the proviso, however, that the trustee may move before the referee for an order permitting him to hold said transfer for the benefit of the estate as hereinabove provided. This brings us now to a consideration of the petition of T. W. Jones to review the order of the referee (dated July 2, .1927) directing the sale of the 95 shares of stock held as collateral to the Douglas note along with the other shares formerly owned by Haynsworth & Lawton, in a block. It appears that T. W. Jones objected to this form of sale and demanded that the stock be sold separately, and that the Carolina Company joined with him in this objection. The objection of Mr. Jones appears to be twofold: First, because he had a right to protect his interest in collecting from the proceeds of the sale of the 95 shares, not only the Douglas note itself, but the three Haynsworth & Lawton notes which he claimed should be paid from those proceeds; and, secondly, that in any event as a general creditor he would have the right to object to such a sale, and he has filed a petition to review. The objection of the Carolina Company, an unsecured creditor, appears to be simply on the ground that, as such unsecured creditor, the stock of this bankrupt estate should be sold separately and apart and not mixed with the sale of any other bankrupt estate. The Carolina Company, however, filed no petition to review. No other creditor of any of the bankrupt estates is making any objection to the proposed sale. If this court had found that Mr. Jones was entitled to collect from the proceeds of the 95 shares of stock, not only the Douglas note, but also his other three notes, then I think that his objection to the proposed sale would have been well taken. My — 340 — view is that, where a creditor has security for his debt or debts, he has a right to have that collateral itself sold separate and apart from any other collateral, so that he may have an opportunity to bid it in and protect himself in this way, and should not be compelled to make a bid on that property in connection with other property, even though of the same class. But that is not the situation here. Here the court has found that Mr. Jones is not entitled to collect the three notes referred to, aggregating $5,500, from the collateral which secured the Douglas note. It is conceded by all of the parties that the sale proposed by the trustee will pay the Douglas note in full, principal and interest. So far as being a secured creditor is concerned, therefore, Mr. Jones is not an aggrieved party, and has no right to complain of or object to the proposed sale. The Douglas'note is being paid in full, and any disposition of the property in order to create an equity for the benefit of the unsecured creditors is no concern of the holder of the secured note whieh is so paid. Now, can he complain because, as he alleges, he is a general creditor, or can the Carolina Company, as a general creditor, complain? Ordinarily, I should say that a particular piece of property belonging to a particular bankrupt should, as a general rule, , be sold by itself and not sold in conjunction with the property of another bankrupt estate or another individual. But I do not entertain any doubt but the bankrupt court may, in the interest of creditors, order the trustee to make a sale of such a nature. For example, suppose a bankrupt estate owns a parcel of land or a block of stock in a concern, which can be sold, say for a certain sum; suppose, however, the trustee ascertains that if he will join with the owner of another piece of real estate whieh adjoins it, or, in a case of stock, with another owner of similar stock, he can sell it at an increased price and bring in more money to the bankrupt estate by such sale than by a separate sale, I see no legal reason why it cannot be done, and, if the facts warrant it, why it should not be done. It is not against the interests of the unsecured creditors, but is to their interest, and tends to bring in a larger sum to be distributed among them. Now, in this particular case, it is clear, and is practically conceded, that this 95 shares of stock belonging to the present bankrupt estate can be sold, with the other stock, at a sum whieh will not only pay off the Douglas note, but secure a surplus whieh will go for the benefit of the unsecured creditors. It is also clear, and practically conceded, that unless sold in that way — that is, if sold separately — it will not bring near as much, and, indeed, will probably not bring more than enough to pay the Douglas note. These are cogent reasons why the sale should be approved, unless some injury is shown by some person having a right to complain. I have shown that the secured creditor has no right to complain, because he is paid in full. It may be said that the unsecured creditors would prefer to bid on the stock separately, and not care to bid when it is sold in connection with another block, when they must take the whole. But there is no showing here that anybody desires to purchase that 95 shares separately, except Mr. Jones. The sale proposed is beneficial to .the unsecured creditors, and I do not see how either they or Mr. Jones have any right to complain. In addition to this, while not controlling, it is to be observed that in this particular case the parties themselves, before their bankruptcy, had an agreement in writing (and, prior to the written agreement, an oral agreement to the same effect) that this particular stock should not be sold separately, but should be disposed of in a block, as it was recognized that its value depended largely on there being sufficient in the block to control the corporation. The whole matter, as a practical situation, may be summed up in a few words: If the 95 shares are sold separately, there will practically be nothing for the unsecured creditors from that stock. If they are sold in connection-with other stock, as proposed by the order of the referee, there will be a surplus to be distributed among the unsecured creditors of the bankrupts. I think, therefore, that the referee’s order for the sale of the stock in question should be upheld. For these reasons, the petition of the trustee and of the Commercial & Savings Bank to review the order of the referee adjudging Mr. Jones to have the right to collect the Haynsworth & Lawton notes from the proceeds of the collateral in the Douglas note must be sustained in part, and the said order modified as herein stated, and that proceeding remanded to the referee for further proceedings, in accordance with this opinion. But the petition of T. W. Jones to review the order of the referee providing for the sale of the 95 shares of stock, in connection with the other stock as a block, must be denied, and said petition dismissed, and the said order of the referee ordering such sale must be sustained. — 341 — Appropriate orders in accordance with, this opinion will he duly entered.