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Warwick v. Meridian Hotel Co.

Supreme Court of Mississippi, Division A
Jan 11, 1937
170 So. 820 (Miss. 1937)


No. 32330.

November 30, 1936. Suggestion of Error Overruled, January 11, 1937.


Closing of bankruptcy estate does not relieve it of trustee's jurisdiction, but it may be reopened when shown to have been closed before administration, it is court's duty to reopen it when jurisdictional facts are shown, and court may open another proceeding after discharge of original proceeding (Bankr. Act, sec. 70, 11 U.S.C.A., sec. 110).


Judgment creditor's right of action to enforce trust arising from stockholders' unlawful diversion of bankrupt corporation's funds, bankruptcy trustee, and creditor, held within control of bankruptcy court, jurisdiction of which is exclusive, until surrendered, in absence of allegation that federal court granted creditor right to bring suit (Bankr. Act, sec. 70, 11 U.S.C.A., sec. 110).


Bankruptcy assignee, indicating choice not to accept certain property as part of estate by definite declaration, positive action, or unequivocal forbearance to act, with actual or imputed knowledge of facts, waives claim thereto (Bankr. Acts, sec. 70, 11 U.S.C.A., sec. 110).


Primarily and presumptively, federal court had jurisdiction of and right to enforce judgment creditor's claim of trust arising from unlawful diversion of bankrupt corporation's funds by stockholders, in absence of allegation of facts showing bankruptcy trustee's waiver of his prior paramount claim thereto (Bankr. Act, sec. 70, 11 U.S.C.A., sec. 110).


Bankruptcy trustee is not required to accept onerous and unprofitable property, which will burden rather than benefit bankruptcy estate, but must file disclaimer or abandon his right thereto (Bankr. Act, sec. 70, 11 U.S.C.A., sec. 110).


Judgment creditor held not entitled to sue in state court for enforcement of trust arising from stockholders' unlawful diversion of bankrupt corporation's funds, in absence of allegations indicating that such right of action was onerous, that bankruptcy trustee thought it so or knew of its existence, or that bankruptcy court, referee, or federal district judge was acquainted with facts (Bankr. Act, sec. 70, 11 U.S.C.A., sec. 110).


There is no presumption that right of action to enforce trust arising from stockholders' unlawful diversion of bankrupt corporation's funds would have been onerous or burdensome to bankruptcy trustee, so that judgment creditor cannot pursue such remedy in state court without showing that trustee was afforded opportunity to make election (Bankr. Act, sec. 70, 11 U.S.C.A., sec. 110).


Burden was on judgment creditor, suing to enforce trust arising from stockholders' unlawful diversion of bankrupt corporation's funds, to establish his right to bring such action in state court (Bankr. Act. sec. 70, 11 U.S.C.A., sec. 110).

APPEAL from the chancery court of Jones county. HON. A.B. AMIS, SR., Chancellor.

Shannon Schauber, of Laurel, for appellant, R.E. Warwick.

In an action by an officer or director to recover compensation, evidence of the situation and relations of the parties is admissible to establish their understanding and intention.

14A C.J. 148, sec. 1917.

A person is not precluded from recovering for personal services rendered to the corporation by the fact that he is a stockholder. The question whether there existed an express or implied promise to pay for his services is one of fact, and his relationship is evidentiary matter bearing on this issue, but that is the only effect it has on his right to recover.

14 C.J. 847, sec. 1288; Russell v. Patterson Co. and Coane, 36 L.R.A. (N.S.) 199; Bassett v. Fairchild, 52 L.R.A. 66.

It is almost the universal rule that a director or an officer rendering services outside the scope of his official duties may recover compensation therefor, although not provided for by express contract, if the circumstances are otherwise such as to raise an implied contract.

Goodin v. Dixie Portland Cement Co., L.R.A. 1917F 319-323; Fitzgerald and Mallory Construction Co. v. Fitzgerald, 34 L.Ed. 608; Stevens v. Industrial Commission, 81 A.L.R. 638; Hjorth Oil Co. v. Curtis, 3 A.L.R. 766; Shackelford v. N.O.J. G.N.R.R. Co., 37 Miss. 202; Ten Eyck v. Pontiac, Oxford Port Austin R. Co., 3 L.R.A. 378.

The rule that a director or other officer cannot act for the corporation in a matter in which he is interested is intended for the benefit of the corporation and its stockholders who may, like an individual, elect to confirm a transaction which could have been repudiated, in which case the contract becomes fully binding on the corporation to the same extent as any other duly ratified contract entered into by an unauthorized agent. So the rule is for the benefit of the corporation and its stockholders, and does not extend to its creditors in the absence of a fraud, and when a disposition of the property of a corporation is assailed by its creditors, they are not clothed with the right of the corporation or of its stockholders to set it aside solely on the ground that it was entered into by representatives who had put themselves in a relation antagonistic to the interests of their principal. Corporation creditors can only impeach such a transaction on proof of the insolvency of the corporation at the time of its consummation, or that it was entered into with intent to hinder, delay, or defraud them.

7 R.C.L. 483, sec. 463; Russell v. Patterson, 36 L.R.A. (N.S.) 199.

There is no question but that Mr. Warwick, as a stockholder, had a right to vote to ratify the payment of his salary, or the setting up of a salary to him as general manager of the corporation.

Express Engineering Works, Ltd., 1 Chancery (1920) 466.

As to the fourth proposition that this judgment was not an existing debt, we most respectfully refer the court to the following authorities on this proposition: Section 4149, Code of 1930; Kimbrough v. Davies, 61 So. 697.

The next proposition we desire to discuss is that a tort is not a debt in the meaning of the Mississippi statute and the construction of the same by the Supreme Court. We most respectfully refer the court to the following authorities.

Section 4149, Code of 1930; Avery Son v. McClue, 47 So. 901; 14 C.J., pages 1036, 1037, sec. 1612d, note 18 on page 1037; 7 R.C.L. 510, sec. 504; Chase v. Curtis and Decoppet, 28 L.Ed. 1038.

Shannon Schauber, of Laurel, for appellee, on cross-appeal, First National Bank.

It was our contention in the lower court, and it is also our contention here, that The First National Bank of Laurel had a right to accept the checks of the Fire Protection Company signed by "R.E. Warwick, Treasurer" payable to R.E. Warwick, and apply the proceeds of said checks on the indebtedness of R.E. Warwick and Mrs. L.M. Warwick to The First National Bank of Laurel, and that in doing so and surrendering the notes, for which the checks were payment, to R.E. Warwick, the bank became an innocent purchaser for value of the checks and the proceeds thereof.

Section 2681, Code of 1930; 8 C.J. 217; 3 R.C.L. 1058, sec. 261; West Rutland Trust Co. v. Houston, 80 A.L.R. 664.

One of the first duties of a bank in relation to a depositor is to honor the depositor's check, regardless of the purpose for which it is given, if it is properly signed and there are funds in its hands belonging to the depositor.

7 C.J. 679, sec. 402; Eyrich v. Capital National Bank, 67 Miss. 60, 6 So. 615.

Counsel for the New Meridian Hotel Co., the cross-appellant, seems to rely very much on the case of Bolivar County v. Bank of Cleveland, decided by this court on May 28, 1934, and reported in 170 Miss. 555, 155 So. 176. We think this decision supports our contention, rather than that of counsel for cross-appellant.

The chancellor, in his written opinion, gives the New Meridian Hotel Company a lien on the property described in the deed of trust securing the indebtedness owing by the Warwicks to the First National Bank, but makes the lien subject to the balance, of the indebtedness owing to The First National Bank of Laurel by them, which is something over one thousand six hundred dollars. We submit that whatever equities the New Meridian Hotel Company has or might have, are subject to the rights of The First National Bank, as shown by the testimony in this record.

Alexander Satterfield, of Jackson, for appellant, R.E. Warwick.

No cause of action whatsoever exists in the New Meridian Hotel Company as the same lies only in the trustee in bankruptcy. It would be possible to burden the court with cases from almost every federal circuit in the United States upholding the proposition that when an individual or corporation goes into bankruptcy the creditors have no remedy after adjudication except through the trustee.

The fact of the closing of the bankrupt estate does not change the rule, for the same may be re-opened at any time upon the request and suggestion of any party, including creditors.

Collier on Bankruptcy, sec. 2, pages 102, 103 and 104, and sec. 60, page 1318; Remington on Bankruptcy, par. 2222, page 319; Lovell v. Latham, 211 Fed. 374; Trimble v. Woodhead, 26 L.Ed. 290; Glenny v. Langdon, 25 L.Ed. 43.

The suit is improper because it is brought by an individual creditor and is not for the benefit of all creditors.

Platner v. Hughes, 43 A.L.R. 1141.

The Fire Protection Company was justified in paying salary to R.E. Warwick for services rendered as general manager as distinguished from his position as secretary.

Allen Gravel v. Nix, 129 Miss. 809, 93 So. 244; Shackelford v. New Orleans, etc., Railroad Co., 37 Miss. 202; Thompson on Corporations, sec. 1851, page 437, sec. 1853, page 439, and sec. 1855; Fletcher Cyclopedia, Corporations, sec. 2114, page 387, sec. 2115, page 393, and sec. 2116, page 396; Rosehill Cemetery Co. v. Dempster, 79 N.E. 276; Navco Hardwood Co. v. Bass, 108 So. 452.

Ownership by R.E. Warwick and his wife of all stock in the corporation does not affect the corporate status.

Bahannon v. Binns, 31 Miss. 355; Millsaps v. Merchants Planters Bank, 13 So. 903; Cannon Mfg. Co. v. Cudhay Co., 267 U.S. 333; Pullman Car Co. v. Missouri Pacific Co., 115 U.S. 596; Watson v. Bonfils, 116 Fed. 167; Pickett v. Wood, 234 Fed. 833.

Under the above authorities, we believe that the court below committed error in holding that the Fire Protection Company was not a distinct corporation and that its bankruptcy was of no effect with reference to the rights involved.

No fraud whatever has been shown in connection with the transactions of R.E. Warwick and the Fire Protection Company.

Welch Cooper, of Laurel, for appellant, Capital National Company.

We believe that the case of Joseph H. Reif, Trustee, etc., of Shongood Hart Company, Inc. v. Equitable Life Assurance Society of the United States, 268 N.Y. 269, 197 N.E. 278, 100 A.L.R. 55, is decisive of the questions involved.

The utmost result of the acceptance of a corporate check is to put the payee upon inquiry to ascertain the truth. Inquiry may have been omitted. The payee has the benefit, nonetheless, of anything that inquiry would have developed if pressed to a conclusion.

Mutual Trust Co. v. Merchants' National Bank, 236 N.Y. 478, 141 N.E. 922; Whiting v. Hudson Trust Co., 234 N.Y. 394, 138 N.E. 33, 25 A.L.R. 1470.

It is clearly the general rule that the payee of a corporate check who accepts the check in payment of the individual debt of the corporate officer signing it is not liable to the corporation, if the officer was authorized to use corporate funds for that purpose.

Reif v. Equitable Life Assurance Society of the United States, 268 N.Y. 269, 197 N.E. 278, 100 A.L.R. 55; J.B. Kepner Co. v. Hutton, 179 App. Div. 130, 166 N.Y.S. 408, 226 N.Y. 674, 123 N.E. 871; American Surety Company of New York v. Waggoner National Bank of Vernon, Texas, 5th C.C.A.

Warwick is not liable to appellee. We do not represent Mr. Warwick. His interests are being handled capably by his own attorneys. We hope we will say nothing herein that will hurt them or prejudice their cause. However, it is obvious in this case that if there can be no recovery by the appellee, Meridian Hotel Company, against Warwick, there can be no recovery against the Capital National Company.

The mere fact that the company was a "one man corporation" does not affect the immunity of a stockholder from liability to pay the debts of the corporation.

10 Cyc. 652.

Indiscretion, or the want of prudence in the paying of large salaries, or in paying dividends, would not make Warwick liable.

10 Cyc. 654; 3 R.C.L., Corporations, sec. 169.

The stockholders of a corporation are not liable to creditors unless they are liable to the corporation.

10 Cyc. 651.

If Warwick made any improper withdrawals of funds of the company, it was not shown by the evidence in the case. There were no withdrawals traceable to either of the defendants after the judgment was rendered which made the Fire Protection Company insolvent and made the Meridian Hotel Company a creditor. Warwick was clearly entitled to a salary for services rendered.

Failure of stockholders to make a record at the time, does not affect the validity of a record afterwards made.

7 R.C.L. 340, sec. 319.

There was an effort to invoke the so-called "trust fund doctrine," which has been limited and qualified and is by no means now as originally laid down by Mr. Justice Story. A corporation may prefer creditors.

Hospes v. Northwestern Mfg. Co., 31 Am. St. Rep. 637, 15 L.R.A. 470; 7 R.C.L. 755, sec. 771; 4 Thompson on Corporations (2 Ed.), sections 3415 to 3422.

Fraud on the part of Warwick was not established by the testimony in the case. If the complainant can have no decree against Warwick, it follows that there can be no decree against the other defendants.

In no event can there be a decree against the Capital National Company.

The Capital National Company was in the position of a purchaser for value of the check, even though the proceeds of the check were applied to the payment of an antecedent debt.

Stephens v. Board of Education, 79 N.Y. 183, 35 Am. Rep. 511; Holly v. Domestic Foreign Missionary Society, 34 C.C.A. 649, 92 Fed. 745, 180 U.S. 284, 45 L.Ed. 531, 21 Sup. Ct. Rep. 395; Heidenheimer v. Boyd, 57 N.E. 1106; Newhall v. Wyatt, 36 Am. St. Rep. 712; Porter v. Roseman, 112 Am. St. Rep. 222.

Everybody having acted in good faith, the action of the parties should be upheld.

McDonald v. Williams, 43 L.Ed. 1022; Thompson on Corporations (2 Ed.), sections 6168, 6169.

Bad faith alone will defeat the right of the taker. Mere ground of suspicion, or defect of title, or knowledge of circumstances which will create a suspicion in the mind of a prudent man, or gross negligence on the part of the taker, will not defeat his title. The test is honesty and good faith and not diligence.

First National Bank of Birmingham v. Gibert, 49 So. 593, 25 L.R.A. (N.S.) 631; Newell v. Hadley, 92 N.E. 507, 29 L.R.A. (N.S.) 908; Modern Equipment Co. v. Northern Trust Co., 1 N.E. (2 Series) 105.

Is the signature of Warwick as the officer of the corporation drawing the check a fact that would make the act of the Capital National Company in taking the instrument amount to an act of bad faith? We find no Mississippi cases that are actually in point on this question. In our original brief we referred to the case of Joseph H. Reif, Trustee, etc., of Shongood Hart Company, Inc. v. Equitable Life Assurance Society of the United States, 268 N.Y. 269, 197 N.E. 278, 100 A.L. R. 55, as in point. We now call the attention of the court to the case of National Investors Security Company, 222 Mass. 453, 111 N.E. 357, as being in point.

Guaranty Investment Loan Co. v. Stevens, 137 So. 335; Gibbons v. Longino and Reid, 153 Miss. 749, 121 So. 490; Crane v. Guaranty Finance Corp., 41 Miss. 692, 105 So. 485; McAnge v. Falls, 145 Miss. 471, 110 So. 840; Jones v. First National Bank of West Point, 155 So. 173.

These few cases from the Mississippi court are the only ones we can find which involve this question of notice and what would be necessary to put the holder or purchaser of a check on notice as to the infirmity of the instrument. They are not directly in point but, as pointed out by Mr. Justice McGowen in the case of Moore v. Vaughn et al., 150 So. 372, the court will not be unmindful of the great value to the commercial world of removing obstacles in order to facilitate the transfer of negotiable instruments and this court will know that it is the usual and customary thing for an officer of a corporation such as the Fire Protection Company, to draw checks against corporate funds to pay personal bills and that there is nothing wrong with the transaction if the money is not misappropriated. That is to say, the drawer of the check charges his account with the amount thereof so that there is not in fact an embezzlement of funds.

Boston Steel Iron Co. v. Steuer, 183 Mass. 140, 66 N.E. 646, 97 Am. St. Rep. 426; West Rutland Trust Co. v. Houston, 158 A. 69, 80 A.L.R. 664; National Investment Security Co. v. Corey, 111 N.E. 357; Empire Trust Co. v. Cahan, 71 L.Ed. 1158; Eastern Mutual Ins. Co. v. Atlantic National Bank, 157 N.E. 520; Kendall v. Fidelity Trust Co., 230 Mass. 238, 119 N.E. 861; Johnson v. Langley Luncheon Co., 207 Mass. 52, 92 N.E. 1035; Ashton v. Atlantic Bank, 3 Allen 217; Whiting v. Hudson Trust Co., 234 N.Y. 394, 138 N.E. 33, 25 A.L.R. 1470; Corporation Agencies, Ltd. v. Home Bank of Canada (1927), A.C. 318.

From the above authorities it is plain that if the bank had not paid the check, the Capital National Company could have recovered a judgment against the Fire Protection Company thereon. This being true, it follows, of course, that a judgment creditor of the Fire Protection Company cannot recover.

J.H. Currie, Walker Broach, Jr., and J.C. Floyd, all of Meridian, for appellee, Meridian Hotel Company.

It is the contention of the complainant below, Meridian Hotel Company, that any funds unlawfully diverted by Warwick from the Fire Protection Company, and which are then traced into the hands of either a party receiving same under such circumstances as to put a reasonable man on inquiry as to the source and authority for the use of such funds, or into the hands of one who though acting without notice is not a bona fide purchaser for value thereof, and who has relinquished nothing of value therefor; then, in either or both cases recovery of such trust funds can be had from such receiving parties as well as from Warwick himself. We think that it has now been too long established that money itself may be impressed with trust, as well as other property, to require any lengthy citation of authority; and we do not understand that opposing counsel disagree with us as to this statement.

26 R.C.L. 1353.

No right is more fully recognized than that of the cestui que trust to pursue and to recover trust funds wrongfully recovered provided their identity has not been lost, and it has not passed into the hands of a bona fide purchaser for valuable consideration without notice.

McLeod v. First National Bank, 42 Miss. 99; Salem v. Bank of City of New York, 97 N.Y.S. 361; Truelsch v. Northwestern Mutual Life Ins. Co., 202 N.W. 352; Primo v. Granfield, 184 Fed. 480; LeGrone v. Brown, 109 So. 490; Bolivar County v. Bank of Cleveland, 170 Miss. 555, 155 So. 176; Jackson v. Jefferson, 158 So. 486, 171 Miss. 774.

It is well stated in 7 R.C.L., page 462, that officers of corporations are usually chief promoters of the corporation, whose interest in the stock and other incident advantages are supposed to be a motive for executing the duties of the office without compensation, and this presumption prevails until overcome by an express prearrangement for salary. So it is said that the president and directors are the trustees for the stockholders, and for that reason the law does not imply a promise to pay them for discharging their duties. And it is the well settled general rule that the directors of the corporation cannot recover compensation for their services when rendered in line of their duty whether eo nomine as directors, officers, or otherwise, unless compensation for such services is provided in its charter or authorized by a by-law, and authorized before the services rendered. The rule applies to a director, president of the company, treasurer, or vice-president thereof.

First National Bank of Birmingham v. Foreman, 160 So. 109; 7 R.C.L., sec. 446; 14A C.J., sec. 1970, page 190; Thompson on Corporations, sec. 1411.

Though the officers of a corporation own substantially all of its stock, this gives them no right to appropriate all of its property or money to their own use.

Thompson on Corporations (2 Ed.), page 4152, sec. 1418.

14A Corpus Juris, sec. 1869, under Corporations, at page 102 holds, that directors are liable for losses of the corporation caused by their wilful and intentional departures from duty, their fraudulent breaches of trust, their gross negligence, or their ultra vires acts. At page 104, the same volume, it is further said, under the same section, that managing officers of the corporation are liable for wilful and intentional breaches of duty. At page 180 of 14A Corpus Juris, under sec. 1958, it is said: "The conversion by an officer or director of corporate money or property to his own use is constructively fraudulent as to creditors. Where the officers of the corporation wilfully misappropriate or misapply its assets, and the corporation becomes insolvent, the creditors in equity may hold them liable to the extent of the misappropriation." Further, under said section in a subtitle "Liability to Creditors," it is said: "A judgment creditor may hold the president and directors liable for corporate funds which they have embezzled or misappropriated, and which ought to have been applied to the payment of the judgment."

Thompson on Corporations (2 Ed.), sections 6280-6302, 1415 and 1421; Millsaps v. Chapman, 76 Miss. 942, 26 So. 369, 71 A.S.R. 550; Beech v. Miller, 130 Ill. 162, 17 A.S.R. 291; McKenna v. Marks Stadium, Inc., 167 A. 133; 14A C.J. 180.

Any failure of the directors to exercise diligence or good faith, which results in loss to stockholders or creditors, entitled such stockholders or creditors to require the director whose negligence has caused the loss to pay.

Johnson v. Coleman, 20 S.W.2d 186; Baldwin v. Wolfe, 74 A. 948, 82 Conn. 559; Marshall v. Mechanics and Farmers Savings Bank of Alexander, 85 Va. 676, 17 A.S.R. 84; Robinson v. Smith, 24 Am. Dec. 212; In re Brockway Mfg. Co., 89 Me. 121, 56 A.S.R. 401; Atlas National Bank v. Moore, 43 A.S.R. 274; Bronough v. Evans, 85 So. 556.

Even if we were without further authority, we feel that the old Mississippi case of Wright et al. v. Petrie et al., Smedes Marshall's Chancery Reports, page 282, decided as early as 1843, is clearly determinative of these issues, and has since that early date conclusively proved the right of a judgment creditor to recover in equity by following and levying with the aid of a court of equity, upon equitable assets or choses in action of an insolvent corporation. Without any other citation of authority at all we feel that this case would be determinative of the instant appeal, and will show the right of the individual judgment creditor to proceed against such an equitable asset in satisfaction of its individual judgment.

Hadden v. Spader, 20 John. R. 554.

As to the right of a judgment creditor whose claim is based upon tort to recover in the event of a fraudulent conveyance, and in answer to the contentions of the appellant Warwick thereasto, and his contentions that the Meridian Hotel Company was a subsequent creditor who cannot complain, we shall content ourselves with citation of the case of McInnis v. Wiscassett Mills, 78 Miss. 52, 28 So. 725, which we think without further citation amply answers this suggestion and contention. Such case holds that the plaintiff in an action of tort who recovers a judgment therein is a creditor of the defendant from the beginning of the suit, within the statute of frauds.

The directors of an insolvent corporation may not prefer themselves by devoting its assets to pay debts due to them or debts upon which they are bound as directors of the corporation.

P.W. Electric Co. v. Brothers et al., 110 So. 787; Love Mfg. Co. v. Queen City Mfg. Co., 74 Miss. 290.

Messrs. Alexander and Satterfield, in their splendid brief filed herein in behalf of the appellant Warwick, suggest that the instant suit cannot be maintained by the Meridian Hotel Company due to the bankruptcy of the Fire Protection Company, but obviously are proceeding upon a misconception of the true facts in this cause, as they were not of counsel for the appellant Warwick, defendant below, in the trial court. It is not a case where any discharge was ever granted. The Fire Protection Company in this case never even applied for a discharge; and, therefore, as we understand the uncontradicted weight of authority, when the bankruptcy matter was closed under date of the 24th day of April, 1933, all unadministered assets reverted back to the bankrupt.

Gilbert's Collier on Bankruptcy (1927 Ed.), page 1137.

Certainly the trustee's final account, and the referee's approval thereof, his discharge of the trustee and closing of the estate is sufficient disclaimer to revert title to the bankrupt, which if the judgment creditor, here the Meridian Hotel Company, elects to pursue, and risks the burden and expense, and doubtful outcome of a lawsuit, which the trustee was unwilling to risk; then one who has unlawfully and without vestige of authority converted funds of the corporation, cannot complain in behalf of such trustee in bankruptcy.

2 Remington on Bankruptcy, sections 1154, 1156, 1157, 1158 and 1159; In re Harper, 23 A.B.R. 918, 175 Fed. 412; Dusbane v. Beall, 161 U.S. 513, 40 L.Ed. 791, 17 Sup. Ct. Rep. 637; Sessions v. Romadke, 145 U.S. 29, 36 L.Ed. 609, 12 Sup. Ct. Rep. 799.

In reference to the contention of the appellant that other creditors should have been joined in this suit, we simply observe that this is not a creditors' bill, but is simply an action in equity on the part of a particular and individual judgment creditor to recover an equitable asset, which procedure was expressly approved in a Mississippi case hereinbefore cited of Wright et al. v. Petrie et al., Smedes Marshall's Chancery Reports, page 282; wherein property released unlawfully by the debtor corporation to a third party was subjected to the right of a judgment creditor of such corporation in an equitable action similar to the one at bar; and which, as we recall, likewise had no idea or reference to a creditor's bill.

Kimbrough v. Davies, 104 Miss. 722, 61 So. 697; 15 C.J. 1413, pars. 112, 113.

The overwhelming weight of authority, and certainly that of the state of Mississippi, is to the effect that the Meridian Hotel Company as a judgment creditor had a right to proceed against the equitable asset of the Fire Protection Company, which consisted of the indebtedness of R.E. Warwick, by virtue of illegal and unauthorized withdrawals from said company in excess of the amount herein sued for; and that as held by Mississippi, and all of the courts, that this fund so unlawfully diverted, can, where traced into the hands of parties with notice, be likewise recovered from them. We insist that the chancellor's decree is correct, therefore, in holding Mr. Warwick liable for such diversions, and charging the party to whose benefit they went with them, as Mrs. Warwick, his wife, likewise received the benefit thereof.

We likewise think the chancellor is eminently correct beyond peradventure of doubt and the necessity of further argument, in holding the Capital National Company liable for refund of the amount paid to them by Mr. Warwick, under the circumstances above detailed; and in holding that due to the letter of remittance and the check of the Fire Protection Company used in making such remittance, that they were put upon sufficient notice to require inquiry on their part, which would have revealed the unlawful act of Warwick in the diversion of such funds. We do submit, however, that the chancellor is erroneous in his holding that the First National Bank of Laurel should not be held accountable for the funds of the Fire Protection Company received by them from Warwick.

Isom v. First National Bank, 52 Miss. 902; Armour v. Bank, 69 Miss. 705, 11 So. 29; Bolivar County v. Bank of Cleveland, 155 So. 176, 170 Miss. 555.

Argued orally by A.B. Schauber, for appellant.

The Meridian Hotel Company, a corporation, and appellee herein, filed its bill against R.E. Warwick and wife, Mrs. R.E. Warwick, and others, in the chancery court of the second district of Jones county on the 10th day of May, 1934.

The bill alleged that the complainant, the Meridian Hotel Company, a corporation, recovered a judgment at law for damages in the sum of three thousand dollars, and that the complainant was entitled to a decree against the defendants R.E. Warwick and his wife for that sum, together with interest and costs. The bill further alleged that R.E. Warwick and his wife were the owners of all the stock of the Fire Protection Company, a corporation, and that contrary to the by-laws and the law, Warwick, while the corporation was a going concern, had taken therefrom as his salary ten thousand four hundred dollars, and that Warwick and Mrs. R.E. Warwick had unlawfully diverted the funds belonging to the Fire Protection Company to their own personal benefit, and in the payment of their private debts owing to the other defendants herein who were charged with notice that such money belonged to the said Fire Protection Company; and alleged thereby that a trust in its favor should be set up in equity, and its claims should be made superior to certain securities and liens held on the property of Warwick and his wife by the various defendants herein; and prayed for a decree allowing complainant to recover as against Warwick and Mrs. R.E. Warwick, and the other defendants, that its lien be prior in right to those held by the other defendants.

There was no effort to make the bill a general creditors' bill. No other creditors were invited to come in, nor was the bill filed in behalf of any other creditors in a like situation.

A demurrer to the bill was filed by Warwick and his wife, which was overruled. Answers were filed by the other defendants, in brief, denying liability or notice of the appropriation of the funds of the Fire Protection Company by Warwick and his wife.

Upon a final hearing the court granted the appellee, Meridian Hotel Company, the relief as prayed for to enforce its claim to a trust on the property pledged by the appellants Warwick and wife to at least two other creditors.

We are persuaded that it is our duty to reverse the decree of the chancellor, for the reason that we are of the opinion that the demurrer interposed by Warwick and his wife to the bill should have been sustained.

For some reason the following allegations are contained in the bill: "That thereafter, on or about the 4th day of June, 1932, the said Fire Protection Company filed a petition in the United States District Court in and for the Eastern Division of the Southern District of the State of Mississippi to be adjudicated a bankrupt, and was thereafter duly adjudicated a bankrupt, as per Exhibit `A' hereto, and said estate duly and properly administered, and all assets thereof liquidated, and closed on or about the ____ day of April, 1933, without any payment of dividends to creditors." It was further alleged that testimony was given in connection with the bankrupt corporation by Warwick, as manager, that the said corporation, at the time of its closing, was without assets or property of any kind, and that no further business had been transacted since the petition for bankruptcy had been filed. The exhibit discloses that the Fire Protection Company was adjudicated a bankrupt on June 4, 1932.

The demurrer challenged the bill on two grounds:

"1. The cause of action, if any there is, subsists in the trustee in bankruptcy.

"2. Because complainant does not allege that the trustee in bankruptcy has refused to bring a suit against these defendants."

The allegation that the bankruptcy estate had been duly and properly administered, together with the fact that there had been an examination of the bankrupt corporation and the statement that there were creditors, is sufficient to indicate that there had been such a proceeding, and that all the things necessary had been performed by the bankruptcy court.

In the case of Allen Co. v. Montgomery et ux., 48 Miss. 101, this court held: "Property conveyed by a bankrupt in fraud of his creditors, becomes vested by operation of law in his assignee for the benefit of his creditors, and he alone has the right to reach and subject it to the payment of debts;" and that "creditors cannot, in a state court, pending the administration of an insolvent's estate in a bankrupt court, appropriate property fraudulently conveyed by the bankrupt, exclusively to their debts." The proceeding in the case supra is very similar to the instant one save for the one fact that the assignee in bankruptcy was discharged, as was the bankrupt, during the pendency of the suit in the state court to recover on behalf of a single creditor. In the opinion in that case, this court said: "But we think the bankruptcy of the debtor, F.A. Montgomery, presented an insurmountable obstacle in the complainants' path." The court further said: "The effect of bankruptcy, on suits pending in the state courts, is to stay or suspend them. They may, with the leave of the bankrupt court, be prosecuted to judgments for the single purpose, however, of determining the amount due. Final process to procure satisfaction cannot be issued and executed. To permit it, would involve the collection and conversion of the assets into money by the assignee and their distribution in inextricable confusion. If the suit of the creditor proceed to judgment on the suggestion of bankruptcy, the debtor must retire and the assignee be brought in as defendant in his place." And it states further: "Nor are we inclined to remand the cause as asked by counsel for appellees, if we should be of opinion that the assignee is a necessary party, in order that he might be made such in the chancery court. The district court of the United States sitting in bankruptcy has full and complete jurisdiction to administer the estate of the bankrupt. If the property pursued by the complainants in this suit may be subjected for the creditors, that court, which draws to it all the funds and has before it all the creditors, can mete out full redress, whatever doubt there may be as to the jurisdiction of the state court, at the suit of the assignee alone or with the creditors, to set aside a fraudulent disposition of property by the bankrupt debtor. . . . There is no doubt of the cognizance of the federal tribunal over the subject."

By the Bankruptcy Act (section 70 [11 U.S.C.A., sec. 110]), the title to property upon an adjudication of bankruptcy becomes vested in the trustee named in that court, and the fact that an estate may have been closed does not relieve it of his jurisdiction. Such estate may be reopened whenever it appears that it was closed before being administered; and when the jurisdictional facts are shown, it is the duty of that court so to do; and the court, if the original proceeding has been discharged, may open another. Collier on Bankruptcy (13 Ed.), sec. 2, pp. 102-104.

The trust and the misappropriation here made the basis of this suit were in existence long before the adjudication in bankruptcy. There is no contention that this right of action did not pass to the trustee. The remedy available to the creditor is exclusive. Collier on Bankruptcy, p. 1318. The same authority is to the effect that after the appointment and qualification of a trustee, suits may not be instituted by creditors to recover or protect assets for the estate in their own name or of their own right, except when the bankruptcy court shall have authorized the suit.

There is no allegation in the bill here under consideration that a right to bring this suit was granted to the creditor by the federal court. In the case of Glenny v. Langdon, 98 U.S. 20, 25 L.Ed. 43, that court held: "It is only through the instrumentality of his assignees that creditors can recover, and subject to the payment of their claims, the property which the bankrupt fraudulently transferred prior to the adjudication in bankruptcy, or which he conceals from, and fails to surrender to, his assignees," and that for good cause shown, assignees of the bankrupt would be compelled by that court to take the requisite steps for the full and complete protection of his creditors.

The Glenny Case, supra, was approved in the case of Trimble v. Woodhead, 102 U.S. 647, 26 L.Ed. 290, wherein the facts of the case do not essentially differ from the facts of the case at bar. In that case, the bankrupt had long been discharged, two years having elapsed without the assignee in bankruptcy bringing suit. The court, as to that situation, said, "We do not see on what principle the failure of the assignee to sue within two years transfers his right of action to the complainant;" and further made this interesting statement: "Nor is the creditor of a bankrupt without remedy in such a case as the present. If he is aware of the existence of property or credits which should rightfully go to the assignee for the benefit of the creditors, he should inform the assignee of all he knows on the subject, and request him to proceed, by suit if necessary, to recover it. If he declines, a petition to the court of original jurisdiction would, if a proper case was made, compel the assignee to proceed. . . . The primary object of the bankrupt law is to secure the equal distribution of the property of the bankrupt of every kind among his creditors. This can only be done through the rights vested in the assignee and by the faithful discharge of his duties. Let us suppose, however, that a creditor is aware of the existence of property of the bankrupt sufficient to satisfy his own debt, which has not come to the possession or knowledge of the assignee. He has but to keep silence for two years, and then bring suit in his own name against the fraudulent holder of this property, and make his debt really at the expense of the other creditors; or he may have an understanding with the bankrupt, who, after two years, and after his own discharge from all his debts, may confess judgment to this creditor and furnish him the evidence to prove the fraud, and thus secure him a preference forbidden by the act itself." See, also, Moyer v. Dewey, 103 U.S. 301, 26 L.Ed. 394.

From all these authorities we deduce that the right of action here sought to be enforced, the trustee, and the creditor are all within the control of the bankruptcy court, and that jurisdiction is exclusive, unless and until surrendered by it.

The demurrer in this case raised the federal question: Had the trustee in bankruptcy waived his right to this claim? Williams v. Heard, 140 U.S. 529, 11 S.Ct. 885, 35 L.Ed. 550.

An assignee knowing the facts or being chargeable with knowledge of them, who by definite declaration, positive action, or unequivocal forbearance to act, indicates a choice not to accept certain property as a part of the estate, waives the claim to it. Dushane v. Beall, 161 U.S. 513, 16 S.Ct. 637, 40 L.Ed. 791.

Primarily and presumptively the federal court had jurisdiction hereof, and the right to enforce the claim in the courts unless such facts are alleged as would show the trustee had waived his prior paramount claim to it. In the case at bar the facts alleged show no waiver or knowledge of this claim by the trustee. The allegations of the bill in the case at bar, and the record, show that this suit was brought within about thirteen months from the time the estate was settled.

The only answer appellee makes is that the trustee is not required to accept property which is onerous and unprofitable and which will burden rather than benefit the estate. In the cases which we have examined, many of which were suits to recover property fraudulently appropriated by the bankrupt, we have not found that any one of those similar cases was thought to be onerous. It is true that the trustee is not required to accept such property, but he must either file a disclaimer or abandon his right thereto. No such state of facts is alleged in this bill as would warrant the creditor to pursue his remedy in the state courts. There is no allegation that indicates to this court that the property is onerous or that the trustee thought it to be such, or that he knew of the existence of this right of action, or that the bankruptcy court, its referee, or the United States District Judge had been acquainted with the facts. There is no presumption here that this right of action would have been onerous or burdensome to the trustee. The trustee is not shown to have been afforded an opportunity to make any election whatsoever in this matter. The bankruptcy court is fully equipped with the machinery and power to control the collection of the assets of the bankrupt debtor and to see that such assets are administered fairly and equally among the bankrupt's creditors. Cases are cited in the authorities to which we have referred where demurrers have been sustained to bills brought by creditors similar to the one here under consideration.

There are many statements referring to the record of the trial, and adverted to by counsel on either side, which are not contained in the bill, and to which we cannot have recourse in considering the demurrer.

It is difficult to see how the bill in this case could be amended so as to obviate the defects in its allegations, to which we have called attention. The burden was on the complainant in the court below, by his bill, to establish his right to bring the action, and we think the parts of the bill which we have quoted demonstrate that he had no such right. However, we will remand the case in order that the question of amendment of the bill may be determined.

Reversed and remanded.

Summaries of

Warwick v. Meridian Hotel Co.

Supreme Court of Mississippi, Division A
Jan 11, 1937
170 So. 820 (Miss. 1937)
Case details for

Warwick v. Meridian Hotel Co.

Case Details

Full title:WARWICK et al. v. MERIDIAN HOTEL CO

Court:Supreme Court of Mississippi, Division A

Date published: Jan 11, 1937


170 So. 820 (Miss. 1937)
170 So. 820

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