City Bank & Trust Co. v. Leonard

53 So. 71, 168 Ala. 404, 1910 Ala. LEXIS 530

• Court: Supreme Court of Alabama
• Decided: June 7, 1910
• Status: Published

Opinion

MAYFIELD, J.

The K-S Lumber Company filed a bill against the 'Grand United. Order of Galileean Fishermen, an insolvent corporation, seeking to have the funds of the respondent declared a trust fund, and to have them marshaled and administered, as- such, among its creditors. The cause proceeded to a final decree, and the respondent corporation was duly decreed to be insolvent, and its assets were decreed to be a trust fund to be administered for the benefit of the creditors. For the purpose of administering the trust after the decree, the court appointed C. E. Leonard receiver, to take possession and control of the property and to preserve it, and to administer the trust.

The property of the corporation included a large farm in Macon county, which was taken possession of by the receiver, and rented out by him as such receiver, for the year 1910; which act, among others, was reported to and confirmed by the court. After this farm was rented for the year 1910, the appellant filed its petition in the court which was administering the trust, alleging, among other things, that “it is the owner as liquidator and trustee of the Alabama Trust & Savings Company of a first mortgage, and'the debt secured thereby executed by the defendant in said cause on the * *. * described lands, which has been taken possession of and is now held by the receiver,” etc. “That the said mortgagor has failed to comply with the terms of said mortgage by paying the indebtedness secured thereby as therein provided, and said mortgage is now in default, and said City Bank & Trust Company is proceeding to foreclose the same. Said Oity Bank & Trust Company therefore hereby makes application for the possession of said land, and asks the court to direct said receiver to turn over the same to it, together with such income as may be received by him for the use and occupation thereof.”

The receiver objected to the granting of the petition, and moved the court to refuse to grant, and to disallow, the same, upon the following, among other grounds,: “It does not appear therefrom that the said Oity Bank & Trust Company has such an interest in the subject-matter of said application as that said application should at its instance alone be granted. Said application seeks collaterally to assail the said decree of December 20, 1909. Said application if granted would have the effect to that extent of vacating the said decree of December 20, 1909. This court at the time of the filing of said application had lost control over its. said decree of December 20, 1909, so far as the said decree according to its terms affects the object of the said application. It would be improvident at this time for the court to grant said application, even if it have the power to do so. Under said decree of December 20, 1909, adequate provision is made to have the interest of said City Bank & Trust Company ascertained and its rights protected, and it is given full opportunity and means thereby and thereunder to-prove and have its claims allowed and to resist the claims of any or all of the creditors of said Grand United Order of Galileean Fishermen. The applicant in said application has a full and adequate remedy by intervening in this suit and asserting its claims by such intervention.”

On February 9, 1910, the petition came on for a hearing, and, after hearing, the court entered up a decree denying the petition, which decree was in substance as follows: That “they (the said petition together with another) are separately and severally overruled and dismissed without prejudice to the presentation of any claims said petitioners may have under the provisions of the final decree in this cause or in other manner to this court. It is further ordered, adjudged, and decreed that petitioners respectively pay the costs incurred upon said petitions, for which execution may issue. February 10th, 1910.” From this decree the bank, the petitioner, appeals; and if mistaken in the remedy by appeal, it then applies to this court for an alternative mandamus, commanding the chancellor to set aside and vacate the order or decree by which he denied or dismissed its petition.

It is insisted by the appellant that the chancery court should have granted its petition, and ordered the receiver to deliver the possession of the land to the petitioner as the mortgagee thereof; that the law day of the mortgage having.arrived, and default having been made as to the payment of the debt secured by the mortgage, it, as the assignee of the mortgage, was entitled to the possession, and that the possession of the receiver was wrongful as against it. The bank further sought to have the receiver pay it for the use and occupation of the land. It may he that, if the matters set forth in appellant’s petition are true, its right and title to the land in question are prior and paramount to those of either the receiver, the mortgagor, or its creditors. But the chancellor could not and should not have determined that those matters were true, on the mere ex parte petition or application of petitioner, who was a stranger to the main suit, and who did not even request to he made a party to the suit and to be allowed to contest his claims and rights to the property, the subject-matter of the suit, litigated and adjudicated by the final decree of the court which had assumed jurisdiction for the very purpose of determining the equitable rights of all claimants to the property. The effect of granting the petition would have been that the court accepted the ex parte showing of the hank as true, and conclusive of the rights of all other litigants to the property. At best, the showing made by the petition was only prima facie true. The parties to the suit and other creditors certainly had the right, after the court had acquired jurisdiction, to litigate the claims as to'the property.

Another effect of granting the petition would have been to annul, or at least modify, a former decree of the court, after it had probably passed from the jurisdiction of the chancellor rendering it; and this being true, the chancellor of course had no power to grant the application. If a decree is absolutely void, of course the chancellor can at any time after its rendition, so declare it, and annul or set it aside, because so void on its face; hut he cannot do' so at another term of the court or after the decree has passed beyond the control of the court, merely because it was erroneous, irregular, or voidable. If the petitioner was not a party to the suit or decree, of course it was not binding upon it personally, no matter whether valid or voidable; nor could the decree conclude its rights to the land, if it was not a party or privy to the suit or decree. While the petitioner could have intervened and had its rights to the property adjudicated by the court, it did not seek to do this, but only sought to have the court deliver it the property, the subject-matter of the suit, upon its petition, and thus to defeat entirely the object of the suit and all the rights or claimjs of the litigants to the property being administered by the court.

We cannot agree with appellee as to the effect of section 3509 of the Code of 1907. This section reads as follows: “Sec. 3509. Marshaling Assets of Insolvent Corporations. — The assets of insolvent corporations constitute a trust fund for the payment of the creditors of such corporations, which may be marshaled and administered in courts of equity in this state.” It is contended by appellee that the effect of the statute is that it must be construed as if written into all mortgages executed by all corporations, whether solvent or insolvent at the time the mortgage is executed. To use the exact language of appellee’s counsel, the mortgage in question should be construed as if it read: “Should this mortga.gor corporation become insolvent, it is agreed between the parties hereto that the property herein described with the other assets of said corporation shall constitute a trust fund for the payment of the creditors of said corporation, and that the same may be marshaled and administered by a. court of equity in this state.” This we do not think to be the effect of this statute, or the intention of the Legislature which enacted it. The statute was only intended to settle what had theretofore been a disputed question as to the commton law of this state Upon that subject. The question was, however, settled in the case of O'Bear Jewelry Co. v. Volfer & Co., 106 Ala. 205, 17 South. 525, 28 L. R. A. 707, 54 Am. St. Rep. 31, and settled to the effect that the assets of an insolvent corporation were not a trust fund; but it was intimated in that opinion that the converse should be the law, though the Legislature only could so make it. And the statute was probably enacted upon the faith find strength of that decision, and to accomplish the ciids and for the purposes sought in that suit, which could not be attained for the lack of such statute. H'ow-ever, theretofore there had been numerous decisions of this and other courts holding that the funds of an insolvent corporation were a trust fund to be administered for the benefit of its creditors.

This court, from an early date, without the aid of a statute, held that the assets of an insolvent corporation were a trust fund for the equal benefit of all its creditors. In a bill to reach the assets of an insolvent bank (St. Mary’s Bank v. John, Powers & Co., 25 Ala. 612) this court in 1854 said: “The capital stock of the bank with all its property and assets, is to he regarded as a trust fund for the payment of creditors; and the stockholders, directors, and agents of the bank, are trustees for their benefit, and as such may be made to discover and account in chancery.”

In the case of Corey v. Wadsworth, 99 Ala. 77, 11 South. 353 (23 L. R. A. 618, 42 Am. St. Rep. 29) Chief Justice Stone reviewed many authorities, and quoted at length from many, and concluded in that opinion as follows: “The question we have been considering is one of grave and growing importance in this state, and we have, therefore, felt it our duty to collate the authorities. It will be seen that the m'odern authorities, almost without exception, utter the same strong condemnatory language of any and all attempts by directors of an insolvent corporation to have themselves indemnified and preferred, over the other creditors of the company. The assets are, in a sense, a trust fund in their hands for the payment of the corporation’s debts, and it is both their moral and legal duty to maintain perfect equality in their administration and disbursement; at least to the extent that they can not prefer themselves. We need go no farther in this case. In looking into the authorities, it will be seen that the right of the directors of an insolvent corporation to prefer themselves as creditors, is withheld from them, not alone on the ground that the assets are a trust fund, of which they are trustees for the creditors.”

In the case' of Goodyear Rubber Co. v. Scott, 96 Ala. 439-441, 11 South. 371, which was decided after Corey v. Wadsworth though reported earlier, the same learned Chief Justice said: “In Corey v. Wadsworth (99 Ala. 68, 11 South. 350, 23 L. R. A. 618, 42 Am. St. Rep. 29), we cited and collated m'any authorities, and reached the following conclusions: That the capital stock and assets of an insolvent corporation are, in a sense, a trust fund, of which the governing board are trustees for the benefit of the creditors, and that such governing board cannot convey or assign such corporate assets in such manner as to secure to themselves, or to any member of their board, as a creditor of the insolvent corporation, a preference over the other creditors. This principle rests not alone on the. fact that the assets are a trust fund, of which they are the trustees. It is largely supported by the undue advantage the knowledge they necessarily have of the corporation’s embarrassments will secure to them over outside creditors, and by the fact that in paying or securing themselves no antagonistic interest is represented. They deal with themselves, and are thus both seller and buyer. Transactions of this kind by any one filling a fiduciary relation are voidable, if seasonably objected to by the beneficiary. We did not, however, go to the length of holding that directors of an insolvent corporation are so completely hampered by the trust relation they sustain as to disable them from paying or securing some creditors, in preference to and at the expense of others to whom the corporation is indebted. The trust element of the relation they sustain to the assets, considered alone, points in this direction; and perhaps it would be the sounder policy if such were the rule. The very great weight of the authorities, however, is the other way, and we are not inclined to run counter to them,” etc.

And in the case of Gibson v. Trowbridge Co., 96 Ala. 360, 11 South. 366, he again said: “In the recent case of Corey v. Wadsworth (99 Ala. 68, 11 South. 350, 23 L. R. A. 618, 42 Am. St. Rep. 29), we considered this question so fully that we do not propose to add anything to what is there said. The assets of the insolvent corporation had become so far a trust fund in the hands of the managing body as that by no artifice could a member of the governing board have himself preferred over other creditors of the insolvent corporation.”

McClellan, J., dissenting fom this trust-fund doctrine in all these recent cases, and in the O’Bear Jewelry Case, 106 Ala. 205, 17 South. 525, 28 L. R. A. 707, 54 Am. St. Rep. 31, wrote what he says was intended as a dissenting opinion on this subject; but was adopted by the court and expressly overruled the earlier cases in point. But in this case it was said: “This Avhole idea, that the property of insolvent corporations is held by them in trust for creditors — is a trust estate in their hands — and to be administered by chancery as such, originated in a dictum of Judge Story in Wood v. Dummer, 3 Mason, 308, Fed. Cas. No. 17,944. It had no existence at common law, and has none to this day in the law of England; but is distinctly a creation of some courts in this country, and is known in jurisdictions where it obtains as the ‘American doctrine.’ This court has quite recently adopted it, and held in the cases of Corey v. Wadsworth, 99 Ala. 68 (11 South. 350, 23 L. R. A. 618, 42 Am. St. Rep. 29), Goodyear Rubber Co. v. Scott & Co., 96 Ala. 439 (11 South. 370), and Gibson v. Trowbridge Furniture Co. (96 Ala.) 357 (11 South. 365), that the assets of an insolvent corporation is impressed with a trust in the hands of the company, in favor of its creditors first, and then in favor of its stockholders.” The opinion also suggests legislative action on the subject, by adopting the language of Dillon, J. (Buell v. Buckingham & Co., 16 Iowa, 284, 85 Am. Dec. 516), in which in referring to the trust-fund doctrine, he says.: “This condition of the law may constitute a good reason for giving pro rata to outside creditors, but the Legislature must furnish the remedy.”

Coleman, J., who concurred in the O’Bear Jewelry Co. Case, which overruled the former cases on this subject, said (106 Ala. 229, 17 South. 534 [28 L. R. A. 707, 54 Am. St. Rep. 31]) : “I do not understand the case at bar to overrule any principle of law decided in either of the foregoing cases, which were necessary to a decision of those cases, but that these cases are overruled only so far as the opinion stated that the assets of a corporation became a trust fund for the benefit of creditors, and were placed beyond the power of disposition or control of the governing board, whenever and as soon as the corporation became insolvent, and that the insolvency of the corporation alone gave a court of equity jurisdiction to administer the assets as trust property.”

It does not appear whether the other members of the court agreed with Justice Coleman as to this.

Tiie language of the statute (Code 1907, § 3509) is almost identical with that used by this and other courts, when announcing and defining this “American trust-fund doctrine.” This being true, we are constrained to hold that the intention of the Legislature, in the passage of this statute, was to restore the law in this state as it was before the decision in the O’Bear Jewelry Company Case—this, and nothing more. We have above set out that doctrine and need not here repeat it. Many, if not all of the authorities pro and con this question, are quoted from and reviewed in the two cases above referred to, viz., Corey v. Wadsworth and O’Bear Jewelry Co. v. Volfer. It was never intended by that trust-fund doctrine which our statute only adopts to hamper or embarrass solvent corporations in conveying or mortgaging their property, or in making the security of their creditors conditional upon the corporation’s becoming insolvent in the future, and thus destroying their priority of lien. The doctrine only applied to corporations after they became insolvent and ceased to be going concerns. It did not apply to solvent corporations nor to those which were going concerns. Chief Justice Stone, in Corey v. Wadsworth, tersely expressed the true rule as follows: “At what stage of a corporation’s affairs must it be pronounced insolvent, so as to bring it within the principle we have declared? It is not enough that its assets are insufficient to meet all its liabilities, if it be still prosecuting its line of business, with the prospect and expectation of continuing to do so. In other words, if it be, in good faith, what is sometimes called a ‘going’ business or establishment. Many successful corporate enterprises, it is believed, have passed through crises, when their property and effects, if brought to present sale, would not have discharged all their liabilities in full. We feel safe in declaring that when a corporation’s assets are insufficient for the payment of its debts, and it has ceased to do business, or has taken, or is in the act of taking, a step which will practically incapacitate it for conducting the corporate enterprise with reasonable prospect of success, or its embarrassments are such that early suspension and failure must ensue, then such corporation must be pronounced insolvent.”

We do not doubt the right of the bank, in this case, to intervene and to have the court declare and determine, and protect, its right to the property, the subject-matter of this suit, even after it has been declared to be a trust fund for the benefit of the creditors of the corpora ti on. Nor do we mean to intimate that its failure to intervene and litigate its rights would conclude its rights as to priority of lien or possession, to the lands, if it is not made a party. But we do not think that the court erred in declining to deliver the possession to it, on its mere ex parte motion, after decree rendered which put the receiver in possession. So far as the court could know or determine, on this motion, it might have been mistaken as to the validity or priority of its claim; or the claim might have been fraudulent or feigned. It did not ask to have its claims as between it and the other claimants there litigated, but sought only to have the court deliver the possession and control of the property to it upon its voluntary showing and claim.

It had a right to have itself made a party, and to have the question determined — but this it did not rer quest or seek. It essayed simply to obtain possession and control of the property, and to have the receiver required to pay it as for the use and occupation thereof, without litigating with the other creditors and claimants its rights thereto.

Mr. Jones, in his work on Mortgages (section 1439), as to necessary and proper parties, says: “Persons having interests in the property paramount to the mortgage sought to be foreclosed are generally neither necessary nor proper parties to the suit, because the only proper object of the proceedings is to bar all rights subsequent to the. mortgage. The decree can have no effect upon the rights of the parties having priority, whether they are made parties to the action or not. In some cases prior mortgagees are made parties to the bill, so that the court may with their consent order a sale of the whole estate, and thus make a good and complete title in the purchaser. Sometimes a prior mortgagee is made a party to tlie suit, with a view to his assenting to a decree for the sale of the whole estate, in Avhich case his mortgage is first paid, and the proceeds then applied to the second-mortgage. In such case the legal presumption is that a purchaser at a foreclosure sale gives the full value of the property; and the Avhole proceeds of the property are then applied to the payment of the incumbrances in the order of their priorities. But it is proper to make the person Avho holds the prior legal title a party only Avhen his debt is payable, and he is willing to receive payment, and for the purpose of making a sale of the whole title. He is not a necessary party except for such a decree. The court may order a sale subject to a prior incumbrance; and unless the mortgagee with paramount title expressly consents to a sale of the mortgaged estate, the sale must be made subject to his mortgage; and no portion of the proceeds of the sale can be applied in payment thereof.”

So, in this case, if the claim of the petitioner is true, and it is not a party to the proceeding, it will not be bound or concluded by the decrees to which it is not a party. Petitioner in this case did not pursue or offer to pursue the course pointed out in the text, but desired only that the property be delivered to him on his petition, and that the suit between the other parties be ended. The proper practice and rules as to the right of third parties to intervene in pending suits like this have been several times stated, and the authorities both as to text-books and adjudicated cases reviewed, by this court. Some of these rules are as follows:

“ ‘Where there is no privity, a stranger interested in the subject-matter or objects of a suit must bring forward his claim by an original bill in the nature of a supplemental bill, or in the nature of a cross-bill, as the case may be, so that those interested adversely may have process, with a copy of the bill, served on them, and may have an opportunity to avail themselves of the regular modes of defense against such bill; and even where a third person claims under or in privity with one of the parties litigant, his interest can only be brought before the court by bill. It cannot be done by petition.—Foster v. Deacon, 6 Madd. 59; CaroW v. Mowatt, 1 Edw. Ch. (N. Y.) 9.’”

“Intervention by petition may be allowed when the purpose of the petitioner is to assert his interest and right to share in a fund which is in the custody of, and being administered by the court. Manifestly, this is not the purpose of the petitioners in the case at bar. They do not seek to share in the fund which will be brought into court as result of the proceeding to which they ask to be made parties, but, on the contrary, their avowed purpose is to defeat the only action of the court which could produce a fund to be administered and distributed.'—Carlin v. Jones, 55 Ala. 630.”

“ ‘When a person, not a party to a pending suit, between whom and the complainant there is no privity, but who has a claim or lien on the property, or is interested in the subject-matter of the suit, desires for’ his own protection to present his new claim, to assert his independent right, and raise new issues, he must do so by a formal bill, containing appropriate allegations —an original bill in the nature of a cross-bill, or of a supplemental bill, as the case may be.’—Renfroe v. Goetter, 78 Ala. 314; Cowles v. Ledyard, 39 Ala. 130.” Ex parte Printup and Ex parte Elliott, 87 Ala. 151, 152, 153, 6 South. 419.

It is quite evident that the petitioner did not meet the requirements or come within the provisions of any of these rules, and the chancellor properly disallowed his petition.

What was said in the case of Ex parte Branch, 53 Ala. 150, may not be inappropriate here: “It is possible, perhaps, that if the petitioners had set forth that they were advised and insisted that upon the pleadings and evidence in the cause before the chancellor the decree therein was erroneous and would be reversed on appeal, and had shown that they had such an interest in the subject-matter that they ought to have been made parties to the cause at the beginning, and had prayed that they might now be made parties to enable them to seek redress by appeal to this court to have the decree reversed- — a case might have been made in which the prayer should have been granted. We do not now decide, however, that this would be so. The cases of Watson and Wife v. May, 8 Ala.177, Lees v. Brownings, 15 Ala. 495, and Boykin v. Kernochan, 24 Ala. 699, seem to indicate that the power in question might, to that extent, and under such a state of facts, be properly exercised. Such was not the case made by the petition presented to the chancellor, or, of course, that which is brought before us.”

All that we decide in this case is that the chancellor did not err in denying the petition.

Affirmed.

Simpson, Anderson, and Sayre, JJ., concur in the conclusion.