W. S. Gray Cotton Mills v. Spartanburg County Mills

This is an appeal from a decree of his Honor, Judge Bonham, confirming the report to the Master, which denied to the claimant, Mason Machine Works Company, priority of its claim over the unsecured creditors of the Spartanburg County Mills. (For convenience I shall refer to the Mason Machine Works Company as the "Mason Company," and to the Spartanburg County Mills, as the "mill.")

The main action was commenced in the Court of Common Pleas for Spartanburg County on August 23, 1923, by the plaintiff and other creditors of the mill, for the appointment of a receiver for the liquidation of its affairs as an insolvent corporation.

By order of the Court, a receiver was appointed and the case was referred to Le Roy Moore, Esq., as Special Master, to take the testimony and report upon the validity, amounts, and priorities of claims filed. In compliance with the order, notice was published calling in creditors, and references were held upon the claims presented. No objection was interposed to any of the claims filed, except to that of the Mason Company, and no objection was interposed to its amount, validity, or proof; the objection going solely to its claim of priority over unsecured creditors. The Master denied the priority; the Circuit Judge confirmed the Master's report; and the appeal is here from his decree involving the single question indicated.

The claim of the Mason Company and its contention that it has priority over unsecured creditors may be thus explained.

On October 11, 1919, soon after the organization of the mill, the Mason Company sold to it certain machinery, under a written contract of sale, wherein the Mason Company reserved title to the machinery sold, "until all payments of both cash, notes, and interest shall have been made in full, and proper receipt for same acknowledged by the seller." The machinery was delivered and installed, and the mill began operations. The contract was not recorded at the time or within 10 days after its execution, and not, as will be seen later, until April 23, 1923, more than two years after its date. In the meantime, that is, between October 11, 1919, the date of the contract, and April 23, 1923, the date of its record, the debts due to the objecting, unsecured creditors were contracted.

In January, 1921, the affairs of the mill having become involved; negotiations were begun between the officers and stockholders of the mill on the one side, and its creditors on the other, looking to the operation of the mill by Wade H. Gray, president of the W.S. Gray Mill at Woodruff, S.C. These parties first met at Spartanburg, some time in 1921 prior to February 24. A committee of the creditors, consisting of Messrs. Norwood, Fiske, and Howard, was appointed to carry forward the negotiations. A second meeting was held at Greenville, on February 24, 1921, at which a formal agreement in writing was prepared. It was dated on that day, and on account of the scattered locations of the various creditors a number of duplicate originals were prepared, containing this statement:

"That all copies of this contract, which may be executed by one or more of the creditors, shall be regarded as constituting one contract, having the same force and effect as if all the signatures were upon one copy."

It does not appear that any of the creditors signed the contract at that time, but eventually, at apparently different dates, the several forms of the contract despatched to the various creditors, were signed by all of the creditors with the exception of J.E. Sirrine Company, which claimed a mechanic's lien upon the property. Between February 24th and 28th, a meeting was held in Boston for the purpose of inducing the Mason Company and the Parker Company to sign the contract. There were present at this meeting, Mr. Cannon, the president of the mill, Mr. Cox, of the Mason Company, Mr. Gray, of Woodruff, Mr. Brennan, of New York, and Mr. Parker. The Mason Company signed the contract on March 25, 1921.

The contract, or "creditors' agreement," as it is called, purports to be an agreement between three parties, the mill, the creditors of the mill, and the committee above named, appointed at the Spartanburg meeting; it recites in the preamble that the mill had become involved, and that, having confidence in its ability to meet its obligations, there had been inaugurated a plan whereby a great majority of the stockholders should transfer their stock to the committee of stockholders, to be held by that committee until March 1, 1926, or until all debts shall be paid; and that the creditors had agreed to extend the time of payments of theirdebts, upon the terms and conditions set forth in the agreement. The agreement then proceeds to provide:

(1) That the agreement must be signed by 90 per cent. in amount of the creditors, and ratified by the stockholders of the mill.

(2) The duties of the committee.

(3) "Upon the execution of this agreement, each creditor shall forward to W.H. Gray, at Woodruff, S.C. a statement showing the items of its claim, and, if any lien is claimed, a copy of the paper constituting the basis of such claim."

(4) The extension by creditors of the time for the paymentof their debts, for 5 years; the payment of the company'sindebtedness pro rata; the execution of notes for its indebtedness to each creditor upon certain terms stated; renewals every 6 months; the retirement, pro rata, of the company's indebtedness, as rapidly as financial conditions warranted; the application of at least 50 per cent. of the net profits and surplus toward the pro rata reduction of theindebtedness.

(5) Arrangement for a commercial fund of $75,000.00 with which to operate the mill.

(6) Inhibition of any additional liens upon the property.

(7) Powers of the committee.

(8) "It is agreed that any creditor executing this agreement shall not be understood as waiving or releasing any lien which it may have upon any property of the company, but that the execution of this contract and the acceptance by such creditor of the notes herein provided shall be without prejudice to any such lien, and that the lien, if any shall be preserved as though this agreement had not been executed by such creditor."

(9, 10) Relate to routine matters that do not concern the present controversy.

I think that it is perfectly clear that, under this agreement, every creditor who signed it, whether he had a lien or not, agreed to extend the time for the payment of his obligation for a period of 5 years, and that, during that period, all disbursements from the earnings of the mill should be made pro rata among all of the creditors, regardless of the existence of liens. Having made these provisions for the extension of credit and for the equal pro rata distribution among all creditors during that period of extension, paragraph 8 was introduced as a precautionary provision, lest there should arise a contention that the liens existing had been permanently displaced. The provision for a pro rata distribution and paragraph 8 are both parts of the agreement; they must be construed together and both allowed efficacy, if reconcilable upon any reasonable theory. If paragraph 8 means that the rights of lien creditors might be enforceable during the extension period, such a conclusion would be absolutely repugnant to and irreconcilable with the provision for a pro rata distribution; the two are entirely reconcilable under the construction that, during that period the liens should be in abeyance, a pro rata distribution had, and at the end of the period the liens should resume their original efficacy.

The lien creditor loses much; he grants an extension of 5 years; he puts his machinery at the service of the unsecured creditor, subject to inevitable and constant deterioration; he waives his lien for the time and consents that all creditors shall share equally in the anticipated profits of the new regime; the unsecured creditor, conversely, reaps where he has not sown, where he has all to gain and nothing to lose, for if the temporizing plan should fail, his claim would be lost in the storm which would strand the ship, swamped by the secured claims.

His Honor, the Circuit Judge, holds that, under the case of Carroll v. Cash Mills, 125 S.C. 332; 118 S.E., 290, the claim of the Mason Company to priority must be sustained, unless it has waived its lien or has estopped itself from claiming it; in which he was entirely right, for that case decides:

"A valid reservation of title contract (equivalent to a chattel mortgage), recorded after the 10-day limit, and prior to receivership, is valid as against all general unsecured creditors who become such between the time of the execution and the date of recording such instruments."

The burden is, therefore, upon the objecting, unsecured creditors, to defeat this prima facie right of priority, by showing waiver, estoppel, or other valid objection to its enforceability. The creditors in this proceeding claim that it has been defeated by waiver, estoppel, and fraud, one or all.

His Honor, the Circuit Judge, sustained the report of the Master, which upheld the contention of the objecting unsecured creditors.

I will now discuss the question whether there is anylegal evidence in the case even tending to establish any one of these objections:

I. As to waiver: The definition of waiver, approved by this Court in many cases, is "the intentional relinquishment of a known right." It may be either express or implied. If claimed to have been express, it must appear to have been express, it must appear to have been a clear, unequivocal, and decisive act, showing such a purpose, and the result of an agreement supported by a valuable consideration. 27 R.C.L., 909; 40 Cyc., 263. If claimed to have been implied, it must appear that the opposite party has been misled to his prejudice into the honest belief that such waiver was intended or consented to. Ibidem. Under the circumstances warranting a conclusion of implied waiver, it is indistinguishable from estoppel.

There is no contention on the part of the objecting, unsecured creditors that there was an express waiver by Mason Company, either of its lien or of its right of priority over them; in fact, paragraph 8 of the creditors' agreement contains a specific negation of all intention to waive those rights, in that it, by reiteration, distinctly reserves the lien and all rights under it, subject, as I have endeavored to show, to the agreement for an extension of time and distributionpro rata among al creditors during the inter regnum: so that phase of the question may be dismissed from further consideration. That leaves the discussion applicable to implied waiver and estoppel which are practically identical.

Of course, if the circumstances are sufficiently strong to justify it, the Court might conclude that from the conduct or expressions of the lien creditor, whereby any unsecured creditor was led to alter his situation prejudicially, a case of implied waiver or estoppel would be presented.

The grounds upon which the unsecured creditors rely to defeat the claim of priority are conclusions they draw from the evidence in the case. The circumstances will be considered in detail.

(1) It is contended that the Mason Company waived or abandoned its claim to priority by failing to file with W.H. Gray, the new manager, a copy of the contract under which it claimed a superior lien, as provided for in Article 3 of the creditors' agreement, which is reproduced above.

It will be observed that the main purpose, in fact the sole purpose, of the creditors' agreement, was to establish a modusvivendi, an heroic remedy by which the life of the patient, threatened with paralysis, might be prolonged; a plan for the continued operation of the mill for the benefit of all of the creditors, regardless of liens, by which the lien creditors waived for the time being their liens, and all creditors, lien and otherwise, extended credit for 5 years, under the promise of a pro rata distribution of the earnings of the mill. There appeared no though or purpose of a plan for the establishment and declaration of liens. There was not only no provision in the agreement imposing a penalty for not filing liens, but an express provision that nothing in the agreement should in any wise affect them. What difference could it possibly have made, looking to the purpose of the agreement, whether the liens were filed or not? If they had been filed, they would have lain dormant until the time of extension had expired or a new calamity overtook the sanguine hopes of the reorganizers.

Then was the only occasion upon which the filing would have been of any use, and as it was filed in this particular matter upon the happening of such calamity, I cannot see that any one was injured by the failure complained of, or that it furnished the slightest evidence of an intention on the part of the Mason Company to waive or abandon its lien or more properly speaking its claim to priority. As a matter of fact, its claim to a lien has never been disputed.

(2) The unsecured creditors further contend that a certain letter written by Mr. Howard, southern representative of the Mason Company, dated March 19, 1921, to Mr. Gray, in the name of the Mason Company, which contained an extract from a letter written by Mr. Cox, treasurer of the Mason Company, is evidence of a waiver or abandonment by the Mason Company of its claim to priority.

The letter was written 6 days before the date of the agreement as signed by the Mason Company, and contained this statement:

"You will also note what our treasurer says about Fiske-Carter Company's lien on the property, and in Mr. Cox's letter to me he says this:

"``Builders, machinery makers, bankers, and supply creditors were to have no preference one over the other, and before we will allow you to deliver the signed copy of the agreement it must be understood that this mechanic's or workmen's lien is to be removed, as it would be unfair to all the rest of the creditors to allow this lien to remain, and then, if disaster overtook Mr. Gray's efforts, to wake up and find the Fiske-Carter people had this old lien on record."

From the disparity in dates it must appear that the treasurer's letter to Mr. Howard, dated March 17th, and Mr. Howard's letter to Mr. Gray, dated March 19th, were written before the Mason Company signed the contract, and whatever may have been Mr. Cox's intention on March 17th, it was entirely effaced when he executed the agreement on March 25th, which specifically and repeatedly declares that the liens shall not be affected in any way by the agreement. If this letter could be construed into an interpretation by Mr. Cox of the formal agreement, signed more than a week afterwards, it was clearly inadmissible upon the ground that all preceding negotiations and declarations are to be deemed merged into the formal agreement, which is in direct conflict with such supposed interpretation, in the absence of ambiguity in the formal agreement. Paragraph 8 is as clear as language could make it. Not only does it expressly preserve all liens, but to remove all doubt it makes provision against a waiver of liens by creditors who sign. If the creditors read it, they could not misunderstand it; if they did not read it, they cannot complain of the consequence of their negligence. There is nothing ambiguous about this paragraph, its meaning is perfectly clear, and there can be no doubt but its purpose was to inform all creditors that some creditors had liens, and that these liens would be preserved by the agreement itself.

The Circuit Judge necessarily realized the correctness of the conclusion above stated. After reviewing the agreement the Court says:

"I think it may be taken as granted that the language in each paragraph is plain, and in itself presents no element of doubtful construction which requires the aid of parole testimony to make it plain," — but goes on to the conclusion that paragraphs 3 and 8, taken in conjunction, caused the ambiguity which allowed the admission of parole testimony.

It is apparent that the purpose of paragraph 3 was to inform Gray of claims and liens in order that he might ascertain the indebtedness of the mill, both secured and unsecured, and to issue notes in acknowledgment of the indebtedness. Cannon, the first president and treasurer, testified that a duplicate of the contract was kept at the mill and was with the records when Gray succeeded him, under appointment by the creditors' committee, and, in addition, Mr. Cox, treasurer of the machinery company, testified that at a meeting in Boston that the contract was in the possession of Mr. Cannon and was examined by Mr. Gray and others. There was no necessity to give Gray notice of a claim by the machinery company, under paragraph 3, when Gray had knowledge of the existence of the lien and a duplicate was in the records of the mills. The filing of a lien being merely for information, the failure to file such lien had no effect under paragraph 8 which expressly preserved all liens. The only result of the failure by a creditor to file a lien was that it might be overlooked in the distribution of the assets, and the creditor would have no remedy.

Since the obvious purpose of paragraph 3 was to inform the president of the liens which were claimed, such information was unnecessary as to the claimant in this proceeding, since its claim was already a part of the record of the mills; and since the purpose of paragraph 8 was clearly to preserve for the creditors who signed the agreement the liens, which they had at the time the agreement was signed, it must be most obvious that there can be no ambiguity created by either of these sections, nor by the two taken together, and the effort to create such ambiguity is obviously forced.

Construing paragraphs 8 and 3 together, there is no inconsistency no ambiguity; both are clear, and both may be given full effect; the former specifically preserves liens, the latter would merely require notice to be given, and where there was knowledge, notice was unnecessary.

There being no ambiguity in the agreement, it is elementary, and all authorities hold that extrinsic evidence is inadmissible. If such evidence does not tend to vary the terms of the written instrument, it is irrelevant; if it does vary the terms of the instrument, it is inadmissible under the parole or extrinsic evidence rule. I deem it unnecessary to quote from the authorities, but will cite a few where these principles are clearly set forth: 22 C.J., pp. 1177, 1179; 10 R.C.L., § 208. Cape Fear Lumber Co. v. Evans, 69 S.C. 99, 101; 48 S.E., 108. Carolina, C.G. C.Railway Co. v. Seigler, 24 S.C. 129. Forbes Co. v.Pearson, 87 S.C. 69; 68 S.E., 964. Coates Sons v.Early, 46 S.C. 229; 24 S.E., 305. Nor can such testimony be admitted to show an estoppel.

"Any theory that proof of prior and contemporaneous negotiations and representations, though not admissible to vary the terms or legal effect of the written contract, may be received for the purpose of raising an estoppel in pais has been held by the highest authorities to be a mere evasion of the salutary rule which protects written contracts from impeachment by loose collateral evidence, and, upon principle and authority, is not tenable." 10 R.C.L., 1017. ConnecticutFire Insurance Co. v. Buchanan (C.C.A.), 141 F., 877; 4 L.R.A. (N.S.), 758.

I do not think this letter furnishes the slightest evidence of estoppel upon the Mason Company to insist upon its priority, even if it could be held admissible.

The burden is upon objecting creditors to show estoppel of Mason, and not one creditor has shown that he ever saw this letter before signing the agreement, or, in fact, until it was introduced in evidence in this case, more than two years after. Not one creditor said that he signed after the date of that letter, and it must be taken, and is no doubt true, that none did; no one said that he was influenced or misled by that letter; and it is the necessary conclusion here that no one was. The letter, therefore, furnishes no basis whatever for the plea of estoppel, and the Court can only conclude that it was no factor whatever on that issue and must be laid out of consideration here. It is obvious that no one could say that he was "misled to his injury" by the letter.

(3) It is further contended by the unsecured creditors that the silence of Mr. Cox at the Spartanburg, Greenville, and Boston meetings, as to the claim of the Mason Company to priority, is evidence of its intention to waive the claim now presented.

As I have endeavored to show, the object in view in all of the preceding meetings, and as shown in the perfected agreement was to affect an arrangement by which the mill would continue operations, the creditors to postpone the maturity of their claims for 5 years, the lien creditors in the meantime to suspend their liens, and the earnings to be distributed among all creditors regardless of liens. There was no occasion for the Mason Company to express its course of proceeding when the time limit of extension had expired or the working plan failed.

No matter what took place or what did not take place at the first meeting in Spartanburg, when "certain" creditors appointed a committee and put their stock in the hands of that committee to feel out the situation, or at the Boston meeting, no matter what agreement Mr. Cox wished drawn, when the creditors actually met in Mr. Haynsworth's office they drew it exactly the other way, and it is not claimed that there was any mistake by the draftsman or any fraud in connection with the actual drawing of the agreement. It is certainly shown above that there is no ambiguity in the language of this agreement; therefore, the evidence antecedent to the signing of the contract is not admissible to show waiver, because the negotiations are conclusively presumed to be merged in the contract, in the absence of fraud. For a good statement of this doctrine, see also, 22 C.J., 1098-1104; see, especially, page 1220, § 1826. Only subsequent evidence can be considered to establish waiver of such contract rights: United Firemen's, etc., Co. v. Thomas, 82 F., 408; 27 C.C.A., 42; 47 L.R.A. 454. Thompsonv. Knickerbocker, etc., Co., 104 U.S. 252, 259;26 L.Ed., 765, 768. The antecedent parole evidence is certainly inadmissible on "waiver," except as the claim of waiver is based on allegations of fraud.

"Parole evidence, admitted and admissible only for the purpose of proving fraud in a written agreement, cannot be legally used to control or vary the terms of such agreement; that is to say, if the evidence is insufficient to defeat the instrument, it cannot be considered for any other purpose." 22 C.J., 1220.

(4) It is further contended by the unsecured creditors that it was the "understanding" of the creditors at the Greenville meeting on February 24, 1921, that the signing of the agreement would put all creditors upon an equal footing; that there would be no liens enforced.

The creditors undertook to have Mr. Fiske, of Fiske-Carter, creditors, to testify:

"It was the understanding, after the discussion of claims, that the signing of that instrument would put every one on an equal footing, that there would be no liens enforced. That was at the meeting in Mr. Haynsworth's office in Greenville when the creditors' agreement was drawn up."

And yet the Court is asked to believe that Mr. Haynsworth would have drawn the agreement with paragraph 8 in it, expressly preserving all of the liens, and everybody would sign it so.

In Carson v. McCaskill, 111 S.C. 516, 524; 99 S.E., 108, 111, our Supreme Court says:

"When an instrument is ambiguous, parole testimony is admissible to remove the ambiguity; but, except in cases of fraud, accident, or mistake, it is always admitted for that purpose, subject to the limitation that it must be consistent with the instrument, and, therefore, that it must not tend to contradict or vary its terms. South CarolinaSociety v. Johnson, 1 McCord, 41; 10 Am. Dec., 644. Falconerv. Garrison, 1 McCord, 209. Milling v. Crankfield, 1 McCord, 258. Barkley v. Barkley, 3 McCord, 269. Railwayv. Seigler, 24 S.C. 124, 129. Jones v. Quattlebaum,31 S.C. 606; 9 S.E., 982; 10 R.C.L., 1075, 1076."

Compare Knighton v. Merc. Co. 119 S.C. 340; 112 S.E., 343, cited in Land v. Reese, 136 S.C. 267;134 S.E., 257.

In the face of that statement their own witness, Mr. Cannon, president of the mill, testifies:

"That the purpose of the agreement was to put all creditors on the ``same basis' — not forever, as it is now contended against Mason — but ``for a period of five years.'"

Clearly, both statements were inadmissible as tending to vary the explicit terms of the written agreement.

(5) It is further contended by the unsecured creditors that the testimony of Fiske, Matthew, Leathers, and O'Neill, creditors, that they had heard nothing of the claim of the Mason Company to either a lien or priority over unsecured creditors, and that if they had done so they would not have signed the agreement, is evidence tending to show estoppel against Mason Company now setting up the claim presented.

I find nothing in the evidence to show that this testimony is anything more than an opinion now entertained, an afterthought, which, however honestly entertained now, is entitled to little consideration. In the first place, as I have before remarked, it was greatly to their advantage that this proposed arrangement should be carried out. It was the only thing that could possibly avert the wreck that was imminent and the submission of their claims; they wisely adopted the only course to escape the certain perils of bankruptcy,

"* * * dangerous rocks, Which, touching but my gentle vessel's side, Would scatter all her spices on the stream, Enrobe the roaring waters with my silks."

Unfortunately, their hopes were not realized, but they took the chance, and the Mason Company showed a commendable spirit in making a sacrifice in the effort to save the ship.

They were not giving up anything; they were merely giving the mill a chance to work out and pay them in full. It was practically Mason's machinery, he having retention of title contract; Mason, therefore, was doing more than any one else, as he was allowing the use of his machinery, with consequent deterioration, for 5 long years in an effort to enable the mill to pay everybody in full. Yet these cotton men say that they would have refused to sing if Mason had refused to contribute his machinery to the common enterprise by the cancellation of his retention of title contract! Creditors say there was no secret that Fiske and Sirrine had liens, yet they did not balk at signing the agreement that Fiske and Sirrine should preserve their lines. Would they have not taken the same hurdle if one other rail had been added to the fence, or were they willing for the other liens to be asserted and unwilling for Mason's lien to be preserved?

(6) It is further contended by the unsecured creditors that the interview between Mr. Cox and Mr. Norwood at Spartanburg at which Mr. Cox asked Mr. Norwood for a list of the secured creditors, which was furnished to him without the name of Mason Company upon it, and that Mr. Cox interposed no objection to the omission and asked as to the probable dividend to unsecured creditors, is evidence tending to show waiver or estoppel on the part of Mason Company.

The Circuit Judge has found as a fact to which there is no exception, and a fact stressed by counsel for the respondents, that the claim of Mason Company to priority is an afterthought, inspired by the decision of this Court in the Carroll v. Cash Mills case. If it be true, there can be no waiver of a right which was not known at the time of the alleged waiver. 21 C.J., 1166, 1167. McGee v. Hall,26 S.C. 179; 1 S.E., 711. Chambers v. Bookman, 67 S.C. 432;46 S.E., 39; 40 Cyc., 256, 259, 261.

There could be no estoppel, for the conversation occurred long after the agreement had been executed. I do not think that there is the slightest evidence in the case tending even to establish fraud on the part of the Mason Company. The well-recognized rule is thus clearly stated in 21 C.J., 1119:

"In order to constitute this kind of estoppel there must exist (1) a false representation or concealment of material facts; (2) it must have been made with knowledge, actual or constructive, of the facts; (3) the party to whom it was made must have been without knowledge or the means of knowledge of the real facts; (4) it must have been made with the intention that it should be acted upon; (5) and the party to whom it was made must have relied on or acted upon it to his prejudice. To constitute an ``estoppel in pais,' ``there must occur an admission, statement, or act inconsistent with the claim afterward asserted, action by the other party thereon and injury to such other party.' The complaining party must be ``misled to his injury.'"

See, also, Pom. Eq. Juris, 805. Cannon v. Baker, 97 S.C. 116;81 S.E., 478. Gaston v. Brandenburg, 42 S.C. 348,351; 20 S.E., 157, citing Bigelow on Estoppel (3d Ed.), 434. Not one of these essential elements appears.

For these reasons I think that the Circuit decree should be reversed, and that the case should be remanded to the Circuit Court for further proceedings in harmony with the foregoing conclusions.