Olive v. Tyler

257 F. 497, 5 A.L.R. 557, 1919 U.S. App. LEXIS 2229

• Court: Court of Appeals for the Ninth Circuit
• Decided: May 5, 1919
• Docket: No. 3223
• Status: Published

Opinion

HUNT, Circuit Judge

(after stating the facts as above). [1, 2] The contention of the trustee is that majority directors and stockholders of an insolvent corporation, having knowledge of insolvency, cannot take a mortgage on all of the property, assets, and income of the corporation, and thus prefer themselves; that the mortgage in question was made by the directors and officers with intent to prefer their claims; that the mortgage was used by the directors and officers to secure themselves upon a prior obligation, which they had assumed with the Bank of Commerce; that Tyler could not propound and prove the mortgage and secured notes as the real owner of the claims, because one Backus owned $40,000 worth of notes, and Green owned $20,000 worth thereof, and that these interests had not, in any manner, been transferred to Tyler; and that Green, one of the mortgagees, had never assigned his interest in the mortgage.

The question of the condition of the corporation and of the good faith of the directors and officers at and about the time of the transactions under investigation being most important, we have carefully considered the whole record, with the principle in mind that the mortgagees were bound by those rules of conscience and fairness which courts of equity have laid down in disposing of transactions, where directors of corporations are dealing with the subject-matters of their trust and with the party whose interests are within their care. Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328.

It is evident that the loan to the corporation was made after Tyler and Green were urged to lend the money and after the failure of earnest efforts to obtain money from outside sources. It was evident that the corporation would fail unless it could procure money to meet its pressing obligations, but it was believed by stockholders and directors that if funds could be borrowed operation could be continued, and the immediate necessities could be met, and the company could work through its difficulties. Two courses seemed open: The directors could stop business and close up the affairs, or, in good faith, they could lend it money, thus enabling business to go on for the ap1parent benefit of the corporation. The directors and stockholders chose the latter plan, and, while disaster eventually came, it has been found that good faith on the part of the directors characterized their conduct. We find no foundation for the argument that the money loaned by Green and Tyler was to enable the company to pay its antecedent debt. The advances were present ones, to be used by the corporation to pay its pressing debts, and to enable it to extricate itself from immediate embarrassment, and in the expectation that it could continue in business and meet its obligations. Under such circumstances the mortgage was not invalid, though made to an officer of the corporation. 7 R. C. T- § 775; Sanford Tool Co. v. Howe et al., 157 U. S. 312, 16 Sup. Ct. 621, 39 L. Ed. 713.

Strohl v. Seattle Nat. Bank, 25 Wash. 28, 64 Pac. 916, cited by appellant, was a case where the security was given for an antecedent debt. The decision is not authority for holding that a mortgage given by an insolvent corporation for a present advance is not valid. It is referred to in 10 Cyc. 1261, as sustaining the validity of such mortgages, and Thompson on Corporations, § 6200, makes the following comment upon it and other like cases:

“It must be noted that the cases make a very clear distinction between the fact of securing a director for money loaned or advanced to a corporation and the fact of giving the director preference by way of security for any claim that he may have against the corporation. There is no reason why even an insolvent corporation, in need of funds and ready cash, may not borrow the amount needed from a director or other officer of the corporation and* secure him by a lien on its property or a transfer of its assets.”

See, also, Twin-Lick Oil Co. v. Marbury, supra; Illinois Steel Co. v. O’Donnell, 156 Ill. 624, 41 N. E. 185, 31 L. R. A. 265_, 47 Am. St. Rep. 245; Cook on Corporations, § 692. Of course, if there had been fraud or action by the mortgagees to secure an undue advantage to themselves, by endeavoring to acquire all of the assets of the corporation under mortgage, a different question would be presented. But the findings are against such conclusions. It is true that a prior indebtedness of $110,000 existed and was secured by contracts for sales, and that the new mortgage by the corporation was for $120,-000 and covered the land, and it may be that the security was excessive. However, when it is considered that the property would have to be sold on judicial sale, that the bidding would he open to all, and that a sale would be subject to redemption, and that the mortgagees would only be entitled to receive the amount of the mortgage indebtedness, it is not to be held that undue advantage was being taken by the mortgagees in taking all the assets as security.

[3] As to all other material matters, it is sufficient to say that the findings of the referee, affirmed by the District Court, are supported, and will not be set aside in this court. In re Dorr, 196 Fed. 292, 116 C. C. A. 112.

We think that the lower court was right in holding the mortgage to be valid. The court went no farther, and by its decision did not adjudicate questions of the claim of the water company to a superior lien.

The order appealed from is affirmed..