Fowler Bros. Cox v. Davis

Rogers Company, incorporated, owned and operated a large number of retail merchandise stores, also a central distributing warehouse or storehouse in Knoxville, from which it supplied its retail stores. It proposed a sale to complainant of its stock of goods in this central warehouse on terms satisfactory to complainant, which included the payment out of the consideration of an indebtedness to complainant. Counsel for complainant conceived that the Bulk Sales Law (Chap. 133, Acts of 1901) applied and should be complied with. Counsel for Rogers Company held to a different opinion, with the result that, to induce the closing of the transaction, and as an evidence that the seller had no intention of avoiding liability to its creditors, or affecting their rights protected under the Bulk Sales Law, a bond was offered, executed, and accepted with the defendant and an associate as sureties, to indemnify the purchaser against any claims of creditors. Subsequently, Rogers Company failed and this Court held the Bulk Sales Act applicable and adjudged complainant liable to unpaid outstanding creditors of Rogers Company.

Contemporaneously with the sale, and as a part of the transaction, a second bond, with the same sureties, was given to guarantee payment to complainant for certain merchandise, which Rogers Company at the time entered into an agreement to purchase of complainant over a period of two years, for re-sale in its retail stores.

This suit was brought to enforce liability against the sureties on these two bonds. The co-surety of defendant Davis has satisfied his proportion of this liability, but Davis defended on the ground, in substance, that the sale having been held to come within the Bulk Sales Law was fraudulent in law and in fact, that the bonds grew out of this transaction, were thereby tainted with fraud and therefore unenforceable. The Chancellor, adopting this view, dismissed the bill. The Court of Appeals, while recognizing the principle that a contract tainted with fraud is unenforceable, held that a sale without compliance with the Bulk Sales Law is void only as to creditors, and not as between the parties and unless the rights of creditors are affected.

Conceding that in this case these were creditors, that the sale was void as to them, and that complainant, the purchaser, became liable for these debts, which it has since paid, the court thus details the circumstances of the execution of the bonds and announces its conclusion.

"There was a genuine and sincere contention as to whether the sale under the circumstances and under the facts was within the Bulk Sales Law. The sale was not made, and the merchandise was not purchased by complainant with the view of defeating creditors of Rogers Co., or with any intention of perpetrating a fraud. The very fact that Fowler Bros. Cox required an indemnity bond was a recognition of the probable rights of creditors under the Bulk Sales Law to enforce their claims against the purchaser, and the bond was required and given for the purpose of indemnifying complainant as the purchaser against any loss for any amounts it may have to pay creditors. The creditors' rights were in fact protected by this bond, since it appears that Fowler Bros. Cox were well able financially to pay the creditors in the event there were creditors who had just claims. This is not now a controversy between creditors and Rogers Co., or Fowler Bros. Cox. The bond taken to indemnify Fowler Bros. Cox was not given or accepted for the purpose of perpetrating any fraud on any creditors of Rogers Co. . . . Fowler Bros. Cox fully complied with the terms of sale. It paid to Rogers Co. the purchase price for the stock of merchandise. Defendant Davis was the then president of Rogers Co., and was active in all the negotiations, including the execution of the two bonds sued on in his capacity as president of Rogers Co., and also became the personal surety or guarantor for the performance by Rogers Co., of the contract, with full knowledge and understanding of the entire facts and circumstances of the transaction. We are of the opinion that this case is controlled by the opinion of the Supreme Court in the case of York v. Ambrose, and think the learned Chancellor was in error in denying the relief sought by complainant, and in dismissing its bill."

In this view we concur. The opinion of Mr. Justice COOK, in the case referred to of York v. Ambrose, 156 Tenn. 314, was handed down pending the appeal from the Chancellor, and was therefore not before him. In that opinion previous opinions of this Court discussing the Bulk Sales Law are reviewed and distinguished, emphasis being properly placed on the language of the act itself declaring that all sales of merchandise in bulk without notice to creditors "shall be presumed to be fraudulent and void as to the creditors of the seller." This Court said:

"The Act merely declares the sale of goods in bulk without notice fraudulent in law and void as against creditors. To go further and give it the effect of rendering all contracted, would extend the force of the statute beyond the clear meaning of the language used and give it a force violative of well-known constitutional inhibitions. In the absence of actual fraud and where rights of creditors of the seller are not involved, noncompliance with the act does not render the sale void."

If this is true of a sale, certainly it must be even more clearly true of incidental and collateral agreements between the parties such as the bonds before us, executed under the circumstances and conditions described in the foregoing excerpt from the opinion of the Court of Appeals, from which it plainly appears that these bonds were given, not as a part of a fraudulent plan to defeat creditors, but rather to make certain the payment of all claims of creditors.

It results that the decree of the Court of Appeals is affirmed.