Paggi v. Rose Mfg. Co.

^* Writ of error refused April 23. 1924. Charles Paggi, a resident of Jefferson county, Tex., and Theo Ledel, a resident of Denton county, Tex., on October 4, 1922, filed in the county court of Dallas county at law a petition against Rose Manufacturing Company, a corporation, and its attorneys, Leake Henry, of Dallas county, a bill to review a judgment rendered against them in said court in favor of Rose Manufacturing Company, and for injunction to restrain the execution of the judgment. On hearing the court sustained a general demurrer to the petition and dismissed the case, from which order of dismissal Paggi and Ledel appealed and have assigned errors.

The material allegations of appellants are; That on January 25, 1922, Rose Manufacturing Company filed suit in the county court of Dallas county at law against Ledel Dry Goods Company on certain notes aggregating $686.80, and on an open account for $80, alleging that Ledel and Paggi were partners composing the firm of Ledel Dry Goods Company; that through their attorney, Edwin M. Fulton, the appellants, on March 2, 1922, filed separate answers in said suit; that Paggi in due order, as a part of his answer, denied under oath the alleged partnership, denied specifically that he was ever at any time a partner with Ledel in the firm of Ledel Dry Goods Company; that he had no dealing with Rose Manufacturing Company; denied under oath the execution of the note sued upon, or that his name was signed to the notes, etc. They further allege that this case was tried on June 2, 1922, in the absence of appellants and their attorney; that neither knew the case had been set for trial, or that it would be tried at the time; that the first knowledge either had that the case had progressed to judgment against them was when the sheriff of Jefferson county, Tex., appeared before Charles Paggi with an execution issued on the judgment and demanded a levy; thereupon, this suit was immediately instituted to review and set aside the judgment, and for injunction restraining the execution of the same.

Appellants allege further that on May 20, 1922, Theo Ledel was on his petition adjudicated a bankrupt in the United States District Court for the Eastern District of Texas, at Sherman, and that Rose Manufacturing Company, appellee, was scheduled as one of his creditors; that in the petition filed in bankruptcy Ledel alleged that he was the sole owner of Ledel Dry Goods Company. Later, he offered in settlement to his unsecured creditors, including Rose Manufacturing Company, a composition of 21 per cent.; that notices were sent to each of his creditors in the bankrupt proceedings of the creditors' meetings and in regard to the composition offered; that the offer of composition was duly accepted by a majority in number and amount of his creditors at a meeting in Sherman, held for that purpose on June 14, 1922, and that the same was on June 23, 1922, confirmed by Hon. W. L. Estes, judge of said court, and the bankrupt proceedings dismissed. The proceedings, with reference to the composition, the confirmation thereof, and the dismissal of the proceedings, are shown by certified copy of the proceedings in bankruptcy attached to and forming a part of appellants' petition.

Appellants account for the absence of themselves and their attorney from court, when the case was tried, substantially as follows: That their attorney, Edwin M. Fulton, who resided at Pilot Point, Denton county, Tex., at the time the answers were filed with the clerk of the court on March 2, 1922, requested the clerk to notify him when the case was set; receiving no answer from the clerk, later, in the same month, he wrote the clerk again for information in regard to the setting of the case. Receiving no answer, in the early part of the month of May, 1922, he made a special trip to Dallas for the purpose of getting this information; but at this time the case had not been set, and the attorney received no information in regard to the setting. It was further alleged that their attorney, prior thereto, had cases in said court and the clerk had previously notified him of the setting of cases, and he presumed the clerk would in a like manner notify him as to the setting of this case, and relied upon him to do so; that the adjudication on May 20, 1922, of Theo Ledel, on his voluntary petition as the sole owner of Ledel Dry Goods Company, suspended said suit and any action against him by the state court, and that the composition offered by Ledel, and its acceptance by his creditors and confirmation by the court, discharged him from liability for the debts; that the verdict and judgment against Charles Paggi is false and fraudulent and procured through fraud, in that it is based upon an alleged default as to him and is a judgment by default; whereas his answer, including a sworn plea denying partnership and the execution of notes, had been on file among the papers in the case for two months, and "that the court and jury were led to believe that the said Paggi had not filed his answer in said case." Appellants further alleged, on information and belief, that the only evidence introduced by appellee to prove that he, Paggi, was a partner with Theo Ledel in said firm, were two mercantile reports, the same being hearsay, incompetent, and not binding upon appellant, and that they have good reason to believe that a different result will be reached by a new trial.

It was further shown that appellant Ledel has a meritorious defense, in that he was discharged from said debt in bankruptcy, and that Charles Paggi has a meritorious defense to said suit, in that he was never a partner with Ledel as alleged by Rose Manufacturing Company, never contracted any of the debts sued upon, or executed the notes.

Appellants' contentions on this appeal are, That the court below erred in sustaining the general demurrer to their petition and in dismissing their cause, and for this they show that their absence and the absence of their attorney from court on the day of trial was not due to the lack of diligence on their part, under all the facts and circumstances; that the judgment rendered against them was the result of fraud, in this that it was based, as to appellant Paggi, on a recital that he had made default and that the court and jury were led to believe that he had not filed an answer; that the sworn plea denying partnership cast the burden of proof upon appellee, and that the only proof offered by it on the issue of partnership was hearsay and incompetent; that they have meritorious defenses to the suit, and expect a different result if the case is retried.

Appellees answered this contention by urging the propositions that the relief prayed for will not be granted Appellants (a) simply because the judgment against them was erroneous; (b) that the failure of appellants to make a valid defense to the suit was due to their own fault or negligence; and (c) that the voluntary proceedings in bankruptcy by Theo Ledel did not, of itself, suspend or stay the suit in the state court.

These different contentions will be discussed.

The question for our decision is whether or not appellants' petition or bill of review was sufficient as against a general demurrer. It was said in an early case in this state that —

"The legal effect of a general demurrer is to admit the facts pleaded to be true, but to deny that they constitute a cause of action or ground of defense. * * * And the only question which will be considered under it is, whether any cause of action or ground of defense is disclosed in the pleadings demurred to. * * * Consequently, if sufficient be stated to enable the court to see that a good cause of action or ground of defense exists, however defectively stated, the insufficiency or defectiveness of the averments cannot be taken advantage of on general demurrer." Williams v. Warnell, 28 Tex. 612; Jefferson v. Scott (Tex.Civ.App.) 135 S.W. 706.

A general demurrer also admits all reasonable deductions or inferences from the facts alleged and all allegations of fact based on information and belief.

Tested by these rules, was the petition for review good as against a general demurrer?

That appellants had meritorious defenses to the suit is evident. The confirmation of the composition offered by Ledel to his creditors entered by the court on May 23, 1922, discharged him from the debt on which he was sued by Rose Manufacturing Company.

The law on this point is announced by Collier (12th Ed.) vol. 1, p. 314, as follows:

"The effect of the composition is to supersede the bankruptcy proceedings and reinvest the bankrupt with all his property free from the claims of creditors. It either extinguishes the legal liability or is a bar to the remedy, and, in either event, the bankrupt can no longer be compelled to pay; * * * provable claims are discharged though the holder thereof did not actually prove the same or participate with the other creditors in taking action upon the composition."

Ledel was entitled to a perpetual injunction against Rose Manufacturing Company restraining the execution of the judgment.

A case directly in point, decided by the Supreme Court of the United States under the Bankruptcy Act of 1837 (14 Stat. 517), is Boynton v. Ball. 121 U.S. 457-467, 7 S. Ct. 981, 984, 30 L. Ed. 985, 987. In that case the court said:

"If for any of these reasons, or for others, he permits the case to proceed to judgment in the state court, by failing to procure a stay of proceedings under the provisions of this section of the bankrupt law, or the assignee in bankruptcy does not intervene as he may do, * * * he does not thereby forfeit his right to plead his final discharge in bankruptcy, if he shall obtain it, at any appropriate stage of the proceedings against him in the state court. And if, as in the present case, his final discharge is not obtained until after judgment has been rendered against him in the state court, he may produce that discharge to the state court and obtain the stay of execution which he asks for now."

In the case of Cavanaugh v. Fenley from the Supreme Court of Minnesota, reported in 94 Minn. 505, 103 N.W. 712, 110 Am. St. Rep. 382, the court was dealing with a state of facts similar to the case at bar, in which the bankrupt was sued by a creditor prior to the bankruptcy proceedings, and was discharged after the rendition of the judgment in the state court. The Supreme Court of Minnesota, in the course of its opinion, referred to the case of Boynton v. Ball, supra, and with reference to that decision said:

"This precise question has been before the courts of other states and before the Supreme Court of the United States under the old bankruptcy act, which, in the respects here under consideration, was the same as the present act, and relief was awarded to the bankrupt similar to that here applied for."

The case of Boynton v. Ball arose under the Bankruptcy Act of 1867, whereas the case from the Minnesota Supreme Court arose under the act of 1898 (U.S. Comp. St. §§ 9585-9656), containing, however, similar provisions on the subject under discussion.

The court further said:

"If an action be brought against him upon a claim existing at the time he was adjudged a bankrupt, his discharge, properly pleaded, is a complete defense, and it should not be in the power of a creditor to nullify the objects, purposes, and results of proceedings under the Bankruptcy Act by causing judgment to be entered before the bankrupt receives his final discharge. The debt here under consideration existed at the time defendant filed his petition in bankruptcy, was provable in the bankruptcy court, and its character was in no way changed by the entry of the judgment. It remained the same debt, changed only in form. It is true that defendant could have obtained from the court below a stay of proceedings, in the action in which the judgment was rendered, pending the administration of this estate in the bankruptcy court, but his failure in this respect is not fatal to his right to insist that effect be given to his discharge, nor does it matter that he made a general appearance in that action before or after the entry of the judgment; his release is just as effectual."

After citing numerous authorities sustaining the position taken by the court, the discussion under this head was concluded as follows:

"The rule laid down in these cases harmonizes with the purpose of the Bankruptcy Act, and gives force and effect to the discharge of the bankrupt, and we apply it in the case be fore us. It follows that the learned court below erred in refusing a perpetual stay of execution upon the judgment, there being no question but that defendant was by his discharge released from liability for the debt upon which it was founded."

These authorities are conclusive on the proposition that defendant Ledel was discharged from the debt evidenced by the judgment obtained against him by Rose Manufacturing Company, and that he is entitled to have the same perpetually enjoined.

Appellant Charles Paggi had equally as meritorious a defense. Paggi was brought in under an allegation that he was a partner with Ledel in the business. The suit was based on certain notes and on an open account. Paggi denied the partnership under oath, and denied that he had executed or authorized the execution of the notes. This set up a perfectly valid defense to the cause of action alleged against him, and cast the burden of proof on this issue on appellee.

On this point Judge Talbot, for this court, in the case of Staton Auto Co. v. Hogg, 160 S.W. 982, said:

"An answer setting up a denial of partnership, as alleged in the petition, must be verified by affidavit. If not so denied, proof of the partnership is not necessary. If such denial is made, then the burden rests upon the plaintiff to prove the partnership, and if this is not done, the party denying the partnership under oath is entitled to judgment" — citing Hayden Saddlery Co. v. Ramsay,14 Tex. Civ. App. 185, 36 S.W. 595; Robertson v. Du Bose, 76 Tex. 1,13 S.W. 300.

Thus it is perfectly apparent that these appellants show valid and meritorious defenses to the suit of appellee, and this brings us to the consideration of the difficult question in the case; that is: Have the appellants furnished a reasonable excuse for their absence from court when the case was tried? We must answer this from all the facts alleged and from all that can, by reasonable and fair intendment, be implied. As to the law controlling cases of this kind, there is little room for a difference of opinion. On the right, by a direct proceeding such as this, to reopen and try a case anew, Judge Stayton, for the Supreme Court, in Merrill v. Roberts, 78 Tex. 28, 14 S.W. 254, announced the following doctrine:

"Relief will not be granted unless the party seeking it can show that he was prevented from making a valid defense to the action in which the judgment had been rendered against him by fraud, accident, or the act of the opposite party, unmixed with fault or negligence on his part. He must be able to impeach the justice and equity of the verdict of which he complains, and to show also that there is good ground to suppose that a different result would be attained by a new trial."

Now, as to the facts, it appears that appellants' attorney was a resident of Pilot Point, Denton county, and that he sought information from the clerk as to the setting of the case by writing two letters and by making a special trip, all to procure this information. The clerk had, prior to this, furnished him information in regard to the setting of other cases; hence the attorney presumed he would do so on this occasion, and relied on him for the information. The voluntary petition in bankruptcy filed by Ledel under oath alleged, among other things, that he was the sole owner of Ledel Dry Goods Company. It also appears that Ledel offered a composition settlement to his creditors that was accepted, confirmed by the court, and the case dismissed. It further appears that Rose Manufacturing Company was one of the creditors whose claim sued upon was involved in these proceedings. All this tended, naturally and humanly, to lull the anxiety of the parties in regard to the pending lawsuit. It may be readily admitted that the attorney for appellants was negligent and should not have relied wholly on the clerk to furnish him information in regard to the setting of the case, although the clerk had on former occasions done so, and, besides, this is the usual means employed by nonresident attorneys to obtain such information. It may also be admitted that, as construed by the courts, the pendency of a bankruptcy proceeding did not, of itself, stay the civil suit pending in the state court, although appellants' attorney took that view of the matter, and very plausibly so, from the language of section 11 of the Bankruptcy Act, which reads that such suits "shall be stayed."

The case of Dancy v. Rosenberg (Tex.Civ.App.) 174 S.W. 831, presents a very similar case to the one under consideration in the strength of the equitable ground set up for a new trial. The plaintiff brought suit against the defendants for the value of services rendered. Defendants were regularly served with citation to answer at a term of the county court of Harris county that convened on January 5, 1914. Neither of the defendants appeared or answered until after judgment by default was rendered. When the case was called on January 7th, plaintiff demanded, and the court rendered, judgment by default against the defendants. On January 8th the defendants filed their answer setting up meritorious defenses, and, on the same day, filed a motion for a new trial, which was amended on January 12th, in which, as grounds therefor, they alleged in substance that at the time the judgment by default was rendered no evidence was offered by the plaintiff or heard by the court, that the motion to set aside was promptly filed and a meritorious defense alleged, and that defendants were ready and willing to promptly try and dispose of the case at that term of the court. No excuse, however, appears as a reason for their failure to file an answer on or before appearance day. On appeal from the judgment overruling the motion for new trial, the Court of Civil Appeals said:

"We, therefore, think that the court below erred in rendering judgment for appellee by default, upon his petition, without proof of the matters therein alleged other than the petition, and that said court should have sustained appellants' motion for new trial upon this proposition. We also think that by their motions for new trial, as well as their answer filed in said cause, appellants show a meritorious defense to appellee's suit, and that they also show some excuse, though weak, for not having filed their answer before judgment was entered against them, and as they agreed to go to trial at once on the issues joined, so as not to prevent a trial at the appearance term, the court should have sustained their motions for new trial" — citing Scottish Union, etc., Ins. Co. v. Tomkies,28 Tex. Civ. App. 157, 66 S.W. 1109; Pecos, etc., Ry. Co. v. Faulkner (Tex.Civ.App.) 118 S.W. 747; Springer v. Gillespie (Tex.Civ.App.)56 S.W. 369; Chicago Ry. Co. v. Anderson, 105 Tex. 1, 141 S.W. 513, Ann.Cas. 1915A, 198; Gillaspie v. City of Huntsville (Tex.Civ.App.)151 S.W. 1114.

Another case presenting equitable grounds addressed to the discretion of the court is that of Hubb-Diggs Co. v. Mitchell (Tex.Civ.App.)231 S.W. 426. In order that the language of the court in disposing of the contention of the parties may be understood, the following short statement of the case is necessary:

The plaintiff brought suit against Hubb-Diggs Company, a corporation, in the county court of Coleman county. The defendant was first cited to answer a term of court beginning the first Monday in July, 1920. The return day stated was incorrect, and plaintiff procured the issuance of another citation showing the correct return date to be the first Monday in June, and the same was served in time for the June term of court. Judgment by default was rendered against the defendant on appearance day at the June term. The first citation was delivered by the president of the defendant company to its attorney at Fort Worth for attention, who, in due time, forwarded to the clerk of the court, and had filed, a plea of privilege, and, at the time of filing the same, advised plaintiff's attorneys that such plea had been filed; whereupon, plaintiff's attorneys informed defendants' attorney that judgment by default had already been rendered.

Neither of the officers of the defendant nor its attorney had any actual knowledge of the service of the second citation, although service thereof was legally perfected by leaving a copy, together with a certified copy of plaintiff's petition, at the principal office of the defendant. The trial court overruled a motion to set aside the judgment by default, from which an appeal was perfected.

The Court of Civil Appeals, in reviewing the case, held that defendant set up a meritorious defense to the suit, and, on the showing of an equitable excuse for its failure to appear and answer, the court used the following language:

"From the sworn answer and motion and the other evidence considered at the hearing, it fairly appears that, while there was legal service of the second citation, the officers of the corporation had no actual knowledge of it until after the judgment was taken. It is further shown that appellant and its counsel were misled into suffering judgment by default to be taken by the erroneous return date stated in the first citation. We find an utter want of bad faith indicated, and, while these considerations do not afford a legal excuse, they have a strong appeal in equity. * * * Upon the whole, we think the showing made presented an equitable excuse for both the failure to appear and answer before default judgment was rendered, and to sooner present the defense."

In the light of these cases, and considering the entire group of facts and circumstances alleged by appellants, we have concluded, using the language of one of the cases, that they "show some excuse, though weak, for the failure to be present when the case was tried."

It is contended, however, that the default judgment against Paggi was correct, in that his answer was not called to the attention of the court. Appellate courts of this state have in numerous decisions affirmed the correctness of this proposition. Gillaspie v. Huntsville (Tex.Civ.App.)151 S.W. 1114, London Assur. Corp. v. Lee, 66 Tex. 247, 18 S.W. 508; Hopkins v. Donaho, 4 Tex. 336; Pierson v. Burney, 15 Tex. 272; Lytle v. Custead, 4 Tex. Civ. App. 490, 23 S.W. 451. This suggestion, however, reaches the crux of the question under consideration. The appellants allege which allegation is before us unchallenged, that the judgment was fraudulently obtained; that the court and jury were led to believe that Paggi had not filed his answer in said cause. It is not to be presumed that the court would have rendered judgment against Paggi on incompetent evidence if his sworn denial of partnership had been brought to its attention. The absence of appellant and his attorney did not relieve appellee from the burden of proving by competent evidence the essential fact necessary to establish the liability of Paggi; that is, the existence of a partnership between him and Ledel.

There is another view, however, that renders the judgment by default against Paggi fatally defective; that is, that it was based on hearsay, hence incompetent evidence. Evidence within itself wholly incompetent, and therefore without probative force, gains no vitality because admitted without objection. It will not support a verdict by a jury or a finding of fact by a court. This is true, whether the judgment is by default or otherwise. Southern Surety Co. v. Nalle Co. (Tex.Com.App.) 242 S.W. 201, and authorities cited; Home Nat. Bank v. Herd (Tex.Civ.App.) 250 S.W. 250. In the case under consideration, the allegation, the truth of which is admitted by the demurrer, is that the only evidence introduced on the trial to prove the partnership relation between Paggi and Ledel was hearsay, hence without probative force, and insufficient to sustain the judgment.

We have concluded from all these considerations that the court erred in dismissing the petition of appellants and that the case must be reversed. It is therefore ordered that the judgment below be reversed and the cause remanded for trial, with instructions to the court to issue the temporary injunction prayed for pendente lite.

Reversed and remanded, with instructions.