Brayton & Lawbaugh v. Monarch Lumber Co.

169 P. 528, 87 Or. 365, 1917 Ore. LEXIS 193

• Court: Oregon Supreme Court
• Decided: December 27, 1917
• Status: Published

Opinions

Mr. Justice Harris

delivered the opinion of the court.

In the final analysis, the contest here, as in the Murphy suit, is one between judgment creditors on the one side and the Assets Realization Company on the other. Our opinion in the Murphy suit disposed of the questions arising out of the Spencer judgment, and hence the instant proceeding may be regarded as the complement of the Murphy suit, for this contest involves the remaining phases of the litigation between the parties.. Since it was determined in the Murphy suit that the sheriff’s deed to Murphy was void, it follows that the Assets Realization Company must now rest its claims upon the notes and mortgage and the conveyances to Cobe and Murphy. It must be remembered that the notes and mortgage were executed in September, 1911, and hence are prior to the respective judgments obtained by Bjelik on June 30,1913, by Patton on September 5, 1913, and by Brayton & Lawbaugh, Ltd., on December 8,1913. Throughout the discussion it must be kept in mind that Crawford is merely a trustee holding the mortgage for the benefit of the owner of the notes; and that both Cobe and Murphy at all times stood in the position of agents and trustees for the Assets Realization Company. For all practical purposes the transfers to Cobe and the conveyances to Murphy were transfers and conveyances to the Assets Realization Company. The main questions yet to be decided relate: (1) To the indebtedness represented by the notes and mortgage; (2) to the validity and effect of the deeds and bill of sale to the Monarch Lumber Company of Maine and the subsequent transfers to Cobe and Murphy; and (3) the validity of the appointment of the receiver. These three questions will be discussed in the order named.

1. The inquiry concerning the notes and mortgage necessarily involves a statement of the relationships between the persons and corporations dealing with the paper, as well as the financial condition of the maker of the notes. The Monarch Lumber Company of Oregon had completed a modem sawmill plant; and, while the evidence fails to disclose the exact amount, we infer from the scattered references in the transcript of the evidence and from statements in the briefs, that the company owed about $250,000. The lumber company did not own any timber; and hence being heavily in debt and without logs to saw, it became necessary to procure money so that it could not only pay its existing indebtedness but could also operate the mill. The David Investment Company was a Washington corporation capitalized at $2,000,000 with a paid-up capital of about $1,600,000. Lester W. David owned about three-fourths of the stock issued by the David Investment Company and was the president of it. Lester W. David was also the president of the Monarch Lumber Company of Oregon. The David Investment Company owned about three-fourths of the stock issued by the Monarch Lumber Company of Oregon; and therefore Lester W. David was for all practical purposes the owner of both companies since he owned three-fourths of the stock of the David Investment Company and that company in turn owned about three-fourths of the stock of the Monarch Lumber Company of Oregon. The David Investment Company had advanced moneys from time to time to the Monarch Lumber Company of Oregon and the latter owed the former company about $57,000. An officer and stockholder of the David Investment Company went to Chicago and interviewed the Assets Eealization Company about a loan. He was followed by Lester W. David who, upon his arrival in Chicago, conducted the negotiations with the Assets Eealization Company. The negotiations continued for several weeks. The Assets Eealization Company sent an appraiser to Oregon to inspect and report upon the holdings of the Monarch Lumber Company of Oregon; and after inspecting the properties and examining the books of the lumber company and those of the David Investment Company he reported to the Assets Eealization Company, giving the result of his examination and stating that the property would probably sell at quick sale for $500,000, and that the David Investment Company was a creditor of the Monarch Lumber Company of Oregon.

The notes and mortgage were prepared in August, 1911, are dated September 1, 1911, and were executed on or before September 16, 1911. Under date of September 18, 1911, the David Investment Company, by Lester W. David, its president, addressed a letter attested by its treasurer to the Monarch Lumber Company of Oregon saying that the David Investment Company agreed to purchase the lumber company’s twelve notes for $25,000 each, dated September 1,1911, and would pay for the notes by giving $264,000 in cash and crediting $36,000 on the indebtedness owing to the writer. At the bottom of this letter was written ‘ ‘Accepted Monarch Lumber Company of Oregon by Lester W. David its President.”

Under date of September 19, 1911, the David Investment Company, by its president Lester W. David, addressed a letter to the Assets Eealization Company reciting that the writer had undertaken to purchase from the Monarch Lumber Company of Oregon its twelve promissory notes and that it had agreed to pay cash and credits for the notes, and offering to sell the paper to the Assets Eealization Company. The letter was accompanied by a copy of the ■ letter which had been addressed to the Monarch Lumber Company of Oregon. A meeting of the board of directors of the Monarch Lumber Company of Oregon was held on September 9,1911, and a resolution was passed authorizing the president and secretary to execute the twelve notes and mortgage. A meeting of the board of directors of the David Investment Company was held on September 19, 1911, and a resolution was adopted authorizing the president and treasurer of the company to execute upon the back of each of the twelve notes a guaranty of the indebtedness evidenced by the paper. Both letters signed by the David Investment Company as well as the resolution passed by the board of directors of the Monarch Lumber Company of Oregon and the resolution adopted by the board of directors of the David Investment Company were prepared by Jacob Levin, the attorney for the Assets Eealization Company. The David Investment Company received a check from the Assets Eealization Company on September 26, 1911, for the sum of $263,473.06, which was immediately deposited in a Chicago bank. At the request of Lester W. David, the Chicago bank transmitted the amount by wire to a bank in Portland, Oregon, where the sum of $263,473.06 was deposited on September 27, 1911, to the credit of the Monarch Lumber Company of Oregon. On the same day, September 27,1911, according to a certificate sworn to on September 29, 1911, by the accountant of the Monarch Lumber Company of Oregon, an entry was made upon the books of the Monarch Lumber Company of Oregon crediting the David Investment Company with $263,473.06 cash to apply upon the notes which had been charged to the David Investment Company, and the further sum of $36,526.94 was entered upon the books of the Monarch Lumber Company of Oregon to the account of the David Investment Company.

The charge made by Brayton & Lawbaugh, Ltd., in its complaint, that the Monarch Lumber Company of Oregon owed the Assets Realization Company only about $200,000 and that the notes and mortgage were given for the purpose of preferring the Assets Realization Company and to defraud other creditors, is disproved by the evidence. Neither Lester ~W. David nor the Monarch Lumber Company of Oregon nor the David Investment Company had ever dealt with the Assets Realization Company prior to the negotiations which resulted in the execution of the notes and mortgage. The Monarch Lumber Company of Oregon owed about a quarter of a million dollars and it was without means with which to operate its sawmill. As the owner of most of the stock of the lumber company the David Investment Company was necessarily interested in procuring money with which to pay the indebtedness of the Monarch Lumber Company of Oregon; and as the owner of most of the stock of the David Investment Company, Lester W. David was desirous of securing funds for the Monarch Lumber Company of Oregon. The David Investment Company was a bona fide creditor of the Monarch Lumber Company of Oregon to the amount of about $57,000. Every dollar represented by the face of the notes was received by the Monarch Lumber Company of Oregon, because it received $263,473.06 in cash and was credited with $36,526.94 on its indebtedness to the David Investment Company. These notes and the mortgage were executed for the purpose of obtaining funds with which to pay creditors and not for the purpose of defrauding them. The money received on these notes was in fact used to pay the then existing indebtedness and so far as disclosed by the record every creditor was paid in full with the single exception of the David Investment Company. The indebtedness represented by the notes and mortgage is free from fraud, illegality or taint unless it can be said that they are infected with usury.

2. The notes and mortgage are assailed, particularly by Bjelik, on the ground that they are usurious. However, we do not deem it necessary in this suit to determine whether the Assets Realization Company was a usurer. The notes and mortgage either are or they are not usurious papers. If they are not usurious then the Assets Realization Company holds a prior lien on Tracts A and B because Bjelik, the plaintiff and Patton are subsequent judgment creditors. If on the other hand the notes and mortgage are usurious, nevertheless they are superior to the subsequent judgments for the reason that usury neither discharges the debtor from the payment of the debt nor releases the land from the lien of the mortgage.

The statute which prohibits usury also fixes the penalty to be imposed upon the usurer. Section 6030, L. O. L., reads thus:

“If it shall he ascertained in any snit brought on any contract that a rate of interest has been contracted for greater than is authorized by this chapter, either directly or indirectly, in money, property, or other valuable thing, or that any gift or donation of money, property, or other valuable thing has been made or promised to be made to a lender or creditor, or to any person for him, directly or indirectly, either by the borrower or debtor, or any person for him, the design of which is to obtain for money so loaned or for debts due, or to become due a rate of interest greater than that specified by the provisions of this chapter, the same shall be deemed usurious, and shall work a forfeiture of the entire debt so contracted to the school fund of the county where such suit is brought. The court in which such suit is prosecuted shall render judgment for the amount of the original .sum loaned or the debt contracted, without interest, against the defendant and in favor of the state of Oregon, for the use of the common school fund'of said county, and against the plaintiff for costs of suit, whether such suit be contested or not.”

It will be observed that the statute does not cancel the debt. The debtor is not relieved from liability to pay, although the amount which he may be obliged to pay is reduced to the original sum loaned without interest. The debtor is compelled to pay by force of a judgment against him and in favor of the State of Oregon for the use of the common school fund of the county. The very circumstance that a judgment is provided for of itself necessarily implies that the debt is not canceled. The mortgage secures and is incident to the debt and consequently when the debt is forfeited to the state the forfeiture carries the mortgage with the debt: Chapman v. State, 5 Or. 432, 436. No payments have been made on any of the notes except interest to September, 1912, and hence the maker of the notes is still a debtor. If the contracts are not usurious, the lien of the mortgage gives the holder .of the notes the right to be paid $300,000 with interest from September, 1912, before payment of the subsequent judgments; and even though the notes are tainted with usury the mortgage nevertheless gives the amount secured by it priority over the subsequent judgments. The debtor cannot be freed from liability; nor can the mortgage be canceled so as to reduce the notes to the rank of unsecured claims; and hence for the purposes of this suit it is immaterial whether the notes are or are not usurious and for that reason we do not attempt to determine whether the statute against usury has been violated.

3. The object of this suit is to annul the deeds and bills of sale conveying the assets of the Monarch Lumber Company of Oregon and to defeat or to reduce the amount and rank of the notes and mortgage. Neither the Assets Realization Company of Oregon nor Crawford seeks a foreclosure of the mortgage. The holder of the notes, the trustee and the lumber companies merely ask for a dismissal of the suit. This is not such a suit as is contemplated by Section 6030, L. O. L., and since that section of the Code is the measure of the power of the court a judgment could not be entered in this suit in favor of the state even though it be assumed that the notes are tainted with usury: See Sujette v. Wilson, 13 Or. 514, 521 (11 Pac. 267); Holladay v. Holladay, 13 Or. 523, 530 (11 Pac. 260, 12 Pac. 821). Nor do the judgment creditors contend that a judgment on the notes can be entered in this suit, although they do insist that the contracts are usurious. However, we do not now express or intimate any opinion concerning the quality of the notes. The character of the paper can be ascertained whenever a suit described by Section 6030, L. O. L., is brought by some party.

4. The plaintiff avers that the deeds and bill of sale to the Monarch Lumber Company of Maine were executed pursuant to a conspiracy to prefer the Assets Realization Company and to defraud the other creditors. This accusation makes it necessary to relate the story of the deeds and bill of sale. The conveyances were the fruits of a plan for the reorganization of the affairs of the Monarch Lumber Company of Oregon; and while the plan itself was conceived in honesty it may possibly be true that its execution was corrupted by questionable motives. When the Monarch Lumber Company of Oregon received $263,473.06 in cash on September 27, 1911, it paid all its creditors, except the David Investment Company, and resumed the operation of its sawmill. The mill was run until February, 1913, when it was closed down on account of the financial condition of the company. A large floating indebtedness had again been incurred and the Lumber Company found itself owing approximately $200,000 besides the indebtedness on the notes. Interest had not been paid on the notes since September, 1912, and the principal was overdue. The Assets Realization Company was pressing the Monarch Lumber Company of Oregon for the payment of the notes and was threatening foreclosure. Funds were needed to pay premiums on insurance and taxes were unpaid. In this situation a reorganization plan was devised. The Monarch Lumber Company of Maine had been organized in 1912 and the amount of its capital stock placed at $6,000,000. Even as early as 1912 the Monarch Lumber Company of Oregon was known to be drifting towards financial troubles. At that time Lester W. David and' another person had an option on a large body of timber. David planned tbe organization of the Maine company with the purpose of transferring the option on the timber to the Monarch Lumber Company of Maine so that it could issue bonds on the faith of the property conveyed to it and use the proceeds to pay for the timber lands and also to pay the creditors of the Monarch Lumber Company of Oregon. This plan was never consummated; the option was not transferred; stock in the Maine company was not issued; and no bonds were sold. However, the Maine corporation was still available in 1913 when a second organization plan was conceived. The. second plan contemplated that all the assets of the Monarch Lumber Company of Oregon would be transferred, subject to the $300,000 mortgage, to the Monarch Lumber Company of Maine for shares of stock to be issued by the Maine company in payment for the assets received by it, and that the stock so issued would then be sold and the proceeds used to pay the creditors of the Monarch Lumber Company of Oregon. The stockholders of the Oregon company held a meeting on March 26, 1913, and authorized the transfer of its assets for $750,000 of preferred stock to the Maine company. On the same day the board of directors of the Oregon company authorized its president to enter into an agreement which was afterwards made with the creditors of the company. This agreement is dated April 1, 1913, and is signed by creditors holding claims which aggregate $190,187.57. By the terms of the agreement the creditors consent to a transfer of the assets of the Oregon company to the Maine company upon condition that the $750,000 of preferred stock to be issued by the Maine company to the Oregon company is by the latter company indorsed in blank and deposited with a trustee named by the creditors with the understanding that Lester W. David would on or before August 1, 1913, sell “enough of such stock deposited with said trustee to pay in full the claims” of the creditors. It may be added in passing, however, that neither the plaintiff nor Bjelik nor Patton signed this agreement. The board of directors of the Monarch Lumber Company of Maine held a meeting on June 24, 1913, and formally accepted the offer of the Oregon company to convey its assets for $750,000 of the preferred stock of the Maine company, the stock to be delivered to the nominee of the Oregon company. The Monarch Lumber Company of Oregon conveyed all its property by executing the two deeds and bill of sale to the Monarch Lumber Company of Maine and the latter company issued $750,000 of its preferred stock and delivered it to a committee named by the creditors. The Maine company never at any time owned any property except the property received by it from the Oregon company. None of the stock turned over to the creditors committee was ever sold. The Assets Realization Company had been insisting upon the payment of the notes. On July 30, 1913, the very day when the deed to the Oregon Slough property and the bill of sale were executed by the Oregon company, the board of directors of the Monarch Lumber Company of Maine held a meeting and adopted a resolution authorizing the conveyance by warranty deed of all the mortgaged property to Ira M. Cobe “in full payment, release and discharge” of the notes and mortgage. The Assets Realization Company asserts that it refused to accept a conveyance of the property as payment of the indebtedness and it claims that the deed and bill of sale to Cobe dated September 4, 1913, and recorded September 6, 1913, the day upon which the deed made by the Oregon company conveying the Kenton property was recorded, were made and received as further security for the notes held by it and to enable it to dispose of the personal property. Although we do not find it necessary to decide whether the conveyances to Cobe constituted an attempt to discharge the indebtedness and to transfer title to him for the benefit of the Assets Realization Company, we do, however, call attention to the fact that there is evidence in the record about an agreement to reconvey to the Maine company for $332,000, interest and expenses; and it will be noticed that this sum exceeds the amount that would be due by the terms of the notes. None of the stock delivered to the creditors committee was ever sold. No attempt was made by Lester W. David to sell any of the stock; and, indeed, any attempt to sell, stock would have been futile because when the Maine company deeded to Cobe it was, so far as shown by the records, left without any assets. It is conceded that no consideration was paid to the Maine company for the deed and bill - of sale delivered by that company. The consideration for the deeds and bill of sale executed by the Oregon company failed completely. The Assets Realization Company had knowledge of the circumstances and purpose of the conveyances to the Maine company. The deed and bill of sale to Cobe were made not only without authorization but also in direct violation of the only resolution that had been adopted by the Maine company. The Assets Realization Company does not assert ownership by virtue of the instruments made by the Maine company. Moreover, in their brief the appellants, when referring to the deeds from the Oregon company and the one from the Maine company, expressly admit that “all parties concede that they are not valid” as deeds. Neither the Monarch Lumber Company of Oregon nor its creditors consented to the transfers to Cobe. The conveyances to the Maine company, to Cobe, and to Murphy were properly annulled by the decree appealed from.

5. The final question for consideration arises out of the appointment of a receiver. The Assets Realization Company argues that either the mortgagee or its alienee was in possession of the property when the receiver was appointed and that the court could not oust the mortgagee or its alienee by the process of appointing a receiver. The Assets Realization Company through its trustee Cobe took charge of all the property immediately upon the delivery of the deed and bill of sale recorded on September 6, 1913. Cobe and his successor Murphy rented some of the property and from time to time sold lumber and other personalty and used the proceeds to pay the expenses incurred in caring for the property. The third amended complaint was filed in this suit in November, 1915, and the decree of the Circuit Court was not rendered until May 2, 1917. Bjelik filed a motion on January 3, 1917, and Patton presented a motion on January 17, 1917, asking for the appointment of a receiver. The motions were supported by affidavits and the court appointed a receiver on January 23, 1917. Among the findings made by the trial court and upon which the final decree was rendered are the following:

“This court now finds it to be true that after the trial and submission of this cause, and while the same was under consideration by this court, the defendants Cobe, Murphy and Assets Realization Company by an instrument in writing executed and entered into by and between said parties and said Lester W. David, sold and transferred all their right, title and interest in and to all of said property, unto said David, at the agreed purchase price of $180,000, of which amount the sum of $5,000 was in full payment for said personal property, and the balance $175,000, was in full payment of the purchase price of said real property, to be paid as follows: $30,000 in cash upon execution of said instrument, and $25,000 yearly thereafter on August 1, 1917, to 1920, inclusive, and $50,000 on August 1, 1921, with interest on deferred payments at 6 per cent. And as an incident to said sale of said property said Assets Realization Co., agreed to have defendant Crawford, its trustee, .release said mortgage, or to assign, transfer or set over said trust deed, and the notes secured thereby, to said David at his option; and further therein agreed to and did turn over and deliver possession of all of said property to said David, as the purchaser thereof. That prior thereto said David had caused the Monarch Mills, a corporation, to be organized under the laws of the State of Oregon, with a capital stock of $750,000 for the sole and exclusive purpose of selling and transferring to said corporation all of his right, title and interest, and his possession in and to all of said property under his said contract of purchase, as herein found; all of which was done. That said David was and is the vice-president of said Monarch Mills, a corporation, and owns $440,000 of its capital stock, and is its controlling and dominating factor.

“The court further finds that thereupon said Monarch Mills entered into possession of said property, claiming to be the owner thereof, and thereafter exercised acts of ownership therein, and did” thereafter-operate said electric power plant situate on said property, and did lease the two mills thereon situate to various parties, and did erect and make certain improvements thereon.

“The court finds that the Assets Realisation Co. was not in possession of said property as mortgagee: that said Crawford was not in possession of said property as trustee under said instrument, and that neither said Cobe nor Murphy were in possession of said property as agents of said mortgagee or trustee, but that at said time said Monarch Mills, a corporation, was in possession thereof, as the reputed and assumed owner of said property under its said contract of purchase.”

If it be assumed, however, for the purpose of this case that the mortgagee was rightfully in possession when the court appointed a receiver or if it be assumed that the deed and bill of sale to Cobe rightfully transferred possession to the mortgagee and that the subsequent possession of the Monarch Mills was the possession of the alienee of the mortgagee, nevertheless the appointment of a receiver was warranted. It máy be conceded that the general rule is that a mortgagee rightfully in possession of mortgaged property cannot be ousted by the appointment of a receiver at the instance of the mortgagor or one claiming under the mortgagor without first paying or tendering the amount due on the mortgage debt; but this rule lite most general rules has its exceptions. If the mortgagee is committing waste and is insolvent, equitable relief may be necessary: Brundage v. Home Sav. & Loan Assn., 11 Wash. 277 (39 Pac. 666); Bolles v. Duff, 35 How. Pr. (N. Y.) 481.

Attached to the bill of sale signed by the Monarch Lumber Company of Oregon on July 30, 1913, is an inventory showing the value of its assets. The total assets are appraised in the inventory at $1,078,063.50; the property accounts are fixed at $778,593.96 and the buildings and machinery are listed at $755,835.15. Under date of February 1, 1912, the Assets Realization Company prepared and sent to its customers, to induce them to purchase the notes acquired in September, 1911, a circular which among other things declares that the financial statement of the Oregon Company “as of November 1, 1911” shows the mill-site, sawmill, plants complete and equipment and the Kenton property to be worth $815,396.63; and that “our timber expert states that the sawmill property, equipment and real estate are worth $375,000 at quick sale and that the entire property of the company could be disposed of within 60 days for $500,000.” At the trial in June, 1916, Lester W. David testified that in his opinion the mill property was not reasonably worth more than $175,000 at that time. The Monarch Lumber Company of Oregon is hopelessly insolvent; the Monarch Lumber Company of Maine has no property and exists in name only; prior to June, 1916, the Assets Eealization Company had met with financial reverses, its Chicago office was closed, and its affairs were placed in the hands of a creditors committee; Lester W. David “had to go through bankruptcy”; it is a fair inference to say that the plight of the David Investment Company was neither, better than its owner, Lester W. David, nor than the concern owned by it, the Monarch Lumber Company of Oregon. If the Monarch Mills is to be considered as an alienee of the mortgagee and that it was rightfully in possession of the property, then it is plain, from the record presented on this appeal, that it does not measure up to the financial standard which is necessary to enable it to retain possession.

In brief, the properties shrunk from $778,593.96, their appraised value when the Assets Eealization Company entered into possession on September 6, 1913, to $175,000 when the receiver was appointed; ■ the Assets Eealization Company had had possession of the property for more than three years and notwithstanding the fact that the monthly expense incurred in caring for the property exceeded the receipts from sales and rentals no attempt was made to foreclose the notes and mortgage; in the language of Jacob Levin the Assets Realization Company “failed”; the mortgaged property was rapidly diminishing in substance and in value to the detriment of both the mortgagee and the judgment creditors. The facts warranted the appointment of a receiver. However, the appointment of the receiver should in no wise interfere with the foreclosure of the notes and mortgage; and whenever the holder of the notes desires to sue permission to do so should be promptly granted and the quality and amount of the indebtedness can then be determined, the mortgaged property sold and the proceeds of sale distributed. The conclusions herein, expressed lead to an affirmation of the decree.

(170 Pac. 717.)

On petition for rehearing.

Denied. Messrs. Teal, Minor & Winfree and Messrs. Wilson, Neal & Bossman, for the petition. Mr. Hugh Montgomery, Messrs. Platt & Platt, Mr. J. W. Kaste and Mr. Maurice W. Seitz, contra.

Affirmed. Rehearing Denied.

Mr. Chief Justice McBride, Mr. Justice Benson and Mr. Justice Burnett concur.