Lyons-Thomas Hardware Co. v. Perry Stove Manufacturing Co.

The District Court found conclusions of fact, which were adopted by the Court of Civil Appeals, and are in substance as follows:

The Lyons-Thomas Hardware Company, a private corporation organized under the laws of Texas, being insolvent, on the 9th day of November, 1889, made three deeds of trust, by which it conveyed to L. P. Harrison all its property and assets of every kind, to secure certain named creditors, L.P. Harrison, the Farmers and Merchants Bank of Paris, the Exchange Bank of Paris, and others who are defendants, being embraced in the deeds, as well as some who are not parties to this suit.

The corporation owed more than $100,000, and the amount realized from its assets was $60,306.57. There was a large amount of its debts that were not secured by these deeds of trust. The Baker Wire Company sued out against the trustee a writ of sequestration, seizing a part of the property transferred.

The Perry Stove Manufacturing Company and other simple contract creditors filed suit in the District Court of Lamar County against the Lyons-Thomas Hardware Company, L.P. Harrison, Baker Wire Company, and the officers and stockholders of the corporation, the Lyons-Thomas Hardware Company, seeking to set aside the deeds of trust and have the property distributed to pay all the debts of the corporation, to recover of the stockholders the amounts unpaid on their stock, and praying an injunction against the trustee to prevent and enjoin the sale and disposition of the property under the deeds of trust. The petition also asked the court to appoint a receiver for the corporation.

The district judge granted a temporary writ of injunction, and set the hearing of the application for a receiver for the 29th day of November, 1889, in chambers. The creditors secured by the first mortgage or deed of trust filed a plea of intervention, setting up their debts, and they and the Baker Wire Company filed answers under oath. The latter joined in the prayer for receiver. The Baker Wire Company subsequently, by leave of the court, withdrew its answer, and was dismissed from the suit.

Upon hearing in vacation, the judge refused to appoint a receiver, but declared that the deeds of trust were valid; and upon the prayer of the trustee and creditors, ordered that the trustee, Harrison, proceed to administer the trust under the deeds of trust; that he give bond in the sum of $65,000, conditioned that he would faithfully execute the trust, and pay over to the secured creditors the money as in the deeds of trust directed; appointed appraisers to inventory the property, and directed the trustee to make report at the next regular term of the court. The clerk was ordered to record the decree upon the minutes of the court, which was done. The minutes were approved by the court at the next term, and signed, embracing the decree made in vacation. The trustee gave the bond, which was approved, the inventory returned, the property sold, and the proceeds applied by him to the payment of the secured debts as directed by the court. He made his report at the following term, and asked that he be discharged. At the time the order was made in vacation the plaintiffs excepted, took a bill of exceptions signed by the judge, and filed it among the papers of the case. Nothing further was done by the plaintiffs until in October, 1890, when a first amended original petition was filed, alleging, that they and a number of others had recovered judgments against the Lyons-Thomas Hardware Company. This petition repeated the allegations of the former petition, and alleged that the trustee had wasted and mismanaged the estate, praying judgment for the distribution of the funds among all the creditors.

Other pleadings were filed subsequently, which will be noticed, in so far as they affect the questions presented, under the different assignments of error.

Upon final trial before the court the deeds of trust were held to be void, and judgment was entered against the trustee, Harrison, for funds that came into his hands, less his commissions and costs of administering the trust, and against the Farmers and Merchants Bank and the Paris Exchange Bank, each for the sum paid to it. The judgment of the District Court was reformed and affirmed by the Court of Civil Appeals, and the plaintiffs in error present the case to this court upon objections to the judgments of the District Court and Court of Civil Appeals, embracing in substance these propositions:

1. That the court erred in holding that an insolvent corporation could not make a valid mortgage with preference to a portion of its creditors.

2. That the undisputed evidence shows that the Lyons-Thomas Hardware Company was not insolvent, and the court erred in so finding.

3. That simple contract creditors could not maintain this character of suit.

4. That there was a misjoinder of causes of action.

5. That all of the beneficiaries in the deeds of trust were necessary parties to this suit.

6. That the court erred in admitting evidence as to the money paid by Harrison to the Farmers and Merchants Bank and to the Paris Exchange Bank, because there was no allegation to permit it; and that the court erred in entering judgment against said banks.

7. The court erred in entering judgment against Harrison, and holding that the order appointing him was void.

8. The court erred in permitting the Baker Wire Company to withdraw from the case.

In this case, upon a question certified by the Court of Civil Appeals, this court held, that an insolvent corporation, which had ceased to do business, or which by the making of an instrument conveying all of its property, incapacitates itself for continuing its business, can not make a mortgage or deed of trust by which it gives a preference to some of its creditors over others. Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co.,86 Tex. 143. We see no reason to change our opinion on that question.

It is asserted by plaintiffs in error, that there was no evidence to sustain the conclusion of the court that the Lyons-Thomas Hardware Company was insolvent at the time the deeds of trust were executed. It is true that some of the officers of the company stated that it was not insolvent at that time. But the evidence shows, without doubt, that the company was largely indebted; that to secure a part of its creditors only, it conveyed and delivered to Harrison, trustee, all of its assets, with power to convert them into money and to apply the money to the payment of the debts named. If there was more than sufficient to pay all, why convey its entire property to secure the payment of a portion of its debts, leaving a large amount unprovided for? By these acts, which occurred within a few hours of each other, it declared in most unmistakable terms its inability to pay its debts, terminated its business, and having not a dollar with which to buy another stock of goods, no hope of resuming could exist, except upon the bare contingency of making a compromise with its creditors. There was not only evidence to sustain the conclusion that it was insolvent, and had ceased business without expectation of resuming, but the court could not in our judgment have found otherwise consistently with the facts.

The making of the trust deeds by the insolvent corporation was a violation of the trust which the law raised upon its insolvency, and this action was brought by beneficiaries of that trust to restore the funds to the trust estate and to place the property in the control of the court for proper distribution among those entitled thereto. Plaintiffs had a right to maintain the action, whether they had judgments or not. Dimmock v. Bixby, 20 Pick., 377. We do not deem it necessary to discuss this question at length, for the reason that the second amended original petition, upon which the case was tried, alleged, that all of the plaintiffs had recovered judgments during the pendency of the suit. If there was a defect in this particular in the original petition, which we do not believe to be true, the amendment cured it.

Plaintiffs in the second amended original petition set up that the stockholders owed large amounts for their stock, but did not pray judgment against them, and no judgment was entered against them. The petition sought to recover for the benefit of all the creditors of the corporation the value of the property that went into Harrison's hands, and the amounts paid to himself and to the two banks. These rights all grew out of the making of the deeds of trust and the proceedings thereunder in court. They were properly joined.

When the Lyons-Thomas Hardware Company, being insolvent, ceased to carry on its business, the law made its assets a trust fund to be held and administered by its officers and the courts for the benefit of all its creditors; each creditor became a beneficiary in that fund; the distribution was to be made under the law, and not under the deeds of trust that the company executed. The deeds of trust in this case committed the fund to the possession and control of Harrison, with full power to sell the property and distribute the proceeds among the creditors. The Lyons-Thomas Hardware Company parted with the control of the property, and the trustee could maintain suits to recover it and defend actions brought against him for its possession, or which brought in question his right of control.

We believe that reason and authority sustain the proposition that in a suit to set aside such an instrument the beneficiaries in the deeds of trust were not necessary parties, and that the trustee represented all creditors for the purpose of sustaining the deeds under which he held for their benefit. Railway v. Butler, 56 Tex. 511; Ebell v. Bursinger, 70 Tex. 120 [70 Tex. 120]; Kerrison v. Stewart, 93 U.S. 155.

The reasons assigned in support of the rule requiring beneficiaries to be made parties, where the object is to participate in the fund under the instrument by which the trust is created, do not apply in this character of case. When it is sought to construe an instrument and enforce it, the trustee is entitled to have the rights of all the parties interested determined, in order that he may be protected in the execution of the trust. He does not represent any of the beneficiaries so far as the rights between them and other beneficiaries are concerned, but is supposed to be indifferent in this respect. The beneficiaries named in the deed, as well as all others entitled to participate in the fund, have the right to be heard for the purpose of establishing their own rights, as well as to contest the claim of any other asserting a right to any part of it. As before said, the object of this suit was not to distribute under, but to set aside the deeds of trust and make division according to the law.

In Ebell v. Bursinger, supra, the deed of trust conferred such limited powers upon the trustee, that this court held that he was not empowered to institute and maintain suits alone with reference to the property. The general rule is announced in that case, that in a suit "by or against the trustee for the recovery of the trust property, the beneficiary is a necessary party." The decision recognizes the exceptions to this rule, and cites the case of a general assignment, in which it is held that the assignee may sue or be sued alone, so far as the possession of the property is concerned. In that case, the decision was placed distinctly upon the ground that the trustee had not such power as would enable him to sue alone for the property, nor such as would authorize a suit against him alone. It can not be doubted that a trustee, with the authority granted by these instruments, could sue for the possession of the property conveyed to him thereby.

In Hudson v. Milling and Elevator Company, 79 Tex. 401, it was sought to have an instrument claimed by the trustee and beneficiaries named in it to be a mortgage, declared to be a general assignment, and to annul the preference therein provided for. Plaintiffs sought to enforce this instrument as reformed, and claimed under it an interest in the fund antagonistic to the named creditors. It was held, that the creditors named in the instrument were necessary parties to the suit. We adhere to this as a correct practice in that class of case, and in so far as Preston v. Carter Bros., 80 Tex. 388, is in conflict with the doctrine announced in Hudson v. Milling and Elevator Company upon this point, the former case is overruled.

In every case where the beneficiaries are entitled to participate in a trust fund in proportions not fixed by the instrument, before the court can declare the part to which any one of them is entitled, notice must be given to all the beneficiaries, if known. If not known, or if they are too numerous to be made parties, then the court can give such notice and take such action as will enable them to present their claims for adjustment. The fund in this case is under the control of the court, and there are many creditors scattered throughout different States. The court should, before making distribution of that fund, give such notice as is practicable, that each may present his claim before the court for inquiry and adjudication. This suit was brought with a view to that end, and the petition so alleges its purpose to be.

The beneficiaries named in the deed of trust which attempted unlawfully to create a trust in a trust fund, were not necessary parties to this suit, which was prosecuted for the purpose of restoring the fund to its lawful purposes.

The Farmers and Merchants Bank intervened in this suit, and the Paris Exchange Bank became a party defendant; each set up its debt against the Lyons-Thomas Hardware Company, claiming that the same should be paid by the trustee, and asking the court to order the payment to be made by him. The court continued the trustee — in fact, appointed' him as receiver — and took control of the property, and ordered that he sell the property and pay the proceeds to the creditors preferred, as directed in the deeds of trust. The trustee sold the property and reported the payments to the two banks, which is not controverted. The plaintiffs filed their second amended original petition, alleging, in substance, that they were not sufficiently informed as to whether payments had been made by Harrison to the banks to enable them to allege the fact of payment, nor the amount so paid, but prayed that the two banks be required to produce in court the money paid to each.

The fact of payment and the amount paid to each were matters peculiarly within the knowledge of the banks and Harrison, and in the nature of things not known to the plaintiffs. The allegations were sufficient to notify the banks of what was sought to be enforced against them. Railway v. Brinker,68 Tex. 502; Lewis v. Alexander, 51 Tex. 585 [51 Tex. 585]. In Lewis v. Alexander, the court said: "The same strictness of pleading should not be required of plaintiff, who is not presumed to have a particular knowledge of the agreement, that would be required of a party to it." The court had a right to order parties to the proceedings to restore to the possession of the court the money which had been placed in their hands by an order of the court that was held to have been void or wrongfully entered, the cause being still in course of adjudication.

The evidence of payment by Harrison to the banks was properly admitted under the pleadings and the circumstances of this case.

Plaintiffs in error claim that the District Court erred in entering judgment against L.P. Harrison for the proceeds of sale of the property in his hands, the greater part of which he had paid to the Farmers and Merchants Bank and the Paris Exchange Bank, under the order of the court.

The correctness of the judgment depends upon the validity of the order of the court made in vacation. If the court had the power to make that order in vacation, then, no matter how irregular it might be, the officer would not be liable for obeying it. If, however, the court had not that power, the order would be void, and would afford no protection to Harrison. He was bound to know the law, and must act at his peril in the execution of a void order if the invalidity arises from want of power in the judge to make the order at the time it was made. Freem. on Judg., sec. 229; Freem. on Ex., sec. 100; Gurney v. Tufts, 37 Mass. 130; 58 Am. Dec., 777; Howard v. Clark, 43 Mo., 344; Laughlin v. Peckham, 66 Iowa 121.

Under article 1461, Revised Statutes, the district judge had authority to appoint a receiver in vacation, but no statute gave him power to appoint a trustee in vacation. The judge refused to appoint a receiver, but on application of Harrison and the preferred creditors, authorized Harrison, as trustee, to execute the trust in accordance with the deeds, and required him to give bond in the amount prescribed by the judge, to return an inventory of all property in his hands as trustee, and to report to the next term of the court his action. It also declared the deeds of trust valid, and ordered the trustee to pay over the proceeds of the property to the preferred creditors according to the directions of the deeds of trust. Thus the judge took control of the property, and made the trustee, as he was termed, amenable to the court. If the judge had appointed Harrison receiver, the same things would have been required of him as were required by this order. He must, as receiver, give bond as prescribed by the judge, and return an inventory and report to the court. The conditions of the bond are not exactly such as are required by the statutes, but that was merely irregularity, and would not avoid the appointment as receiver. He was called trustee instead of receiver, but courts will look to the substance of the action had and what it accomplished, and not to the particular terms used to denominate the character of the officer appointed. Harrison was in fact and law appointed receiver by the judge, and if the court in a receivership could enter the order under which he acted, he would be protected in this case.

A judge of the District Court in this State has no power to adjudicate the rights of litigants except at the times and places prescribed by law for holding courts, unless the authority is conferred by statute. Hunton v. Nichols, 55 Tex. 225 [55 Tex. 225]; Doss v. Waggoner, 3 Tex. 516; Hodges v. Ward Ingram, 1 Tex. 244; Black on Judg., sec. 179; Freem. on Judg., sec. 121; Hammock v. Loan and Trust Co.,105 U.S. 77; Kinports v. Rawsom, 29 W. Va. 496; 12 Am. and Eng. Encyc. of Law, 14; Laughlin v. Peckham, 66 Iowa 121.

Hodges v. Ward, cited above, is very much in point; a mandamus was applied for against a collector of customs to compel him to deliver goods to the plaintiff. The judge heard the application in vacation, and ordered the collector to deliver up the goods. The order was held to be absolutely void. In this case, the order which adjudged that the deeds of trust were valid and ordered the proceeds to be paid on the preferred debts, adjudicated in vacation the very matter in controversy. The statutes of this State do not invest the judge of the District Court with such authority, and the order was a nullity. The court rightly rendered judgment against Harrison for the money that came into his hands derived from the sale of the property.

The judgment of the court against Harrison was for the amount that he had paid the two banks and his own claim, besides a small balance remaining in his hands, allowing him his expenses and commissions. It provides for crediting Harrison with the amounts to be paid by the banks when paid, and no injustice is done him. The money is ordered to be paid to the clerk, to be held subject to the future orders of the court, and Harrison can be protected in all particulars, that is, consistent with the rights of others in the disposition of that fund.

Before this suit was instituted, the Baker Wire Company filed a suit against Harrison to recover some of the property held by him under the deeds of trust. It was made a party to this suit and joined in the prayer for appointment of a receiver, and was subsequently permitted to withdraw. That company would have had a right to sue Harrison after he was appointed, without leave of the court (Revised Statutes, article 1468); and there was no error in permitting it to prosecute its suit already pending. Harrison could make every defense in that case to which he was entitled, and if he is entitled to protection from the results, the court can, in the distribution of the fund, afford him such protection as he may show that he ought to have.

The judgment of the District Court as reformed by the Court of Civil Appeals is affirmed, and will be enforced in accordance with this opinion.

Affirmed.

Delivered June 7, 1894.

Motion for rehearing by the plaintiffs in error was overruled June 6, 1895.

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