Opinion
12593
February 14, 1929.
Before TOWNSEND, J., Richland, February, 1927. Reversed.
Action by J.M. Cantey, Receiver, against Edward L. Summersett Co., Inc., and others. Judgment for plaintiff, and defendants appeal.
Following is the decree of Circuit Judge Townsend:
"This is an action to subject certain property standing in the name of Edward L. Summersett Co., Inc., to the payment of judgments against E.T. Summersett, on the ground that the corporation was organized, and has been used, as a scheme on the part of E.T. Summersett and other defendants to hinder, delay, and defraud then existing creditors of E.T. Summersett in the collection of the debts due them, and that E.T. Summersett is, in good conscience and equity as to such creditors, the owner of all the property standing in the name of said corporation.
"The case was heard before me on the pleadings, testimony, and evidence taken in proceedings supplementary to execution in the case of Frank Smathers et al. v. E.T. Summersett et al., along with other testimony taken before me, and documentary evidence introduced in connection therewith.
"The answer of Edward L. Summersett Co., Inc., verified by E.T. Summersett, to the complaint, which is full of charges of acts constituting fraud, alleged to have been perpetrated by said E.T. Summersett, contains no direct denial thereof. As to all of these material allegations, this answer sets up that the corporation `has no knowledge or information sufficient to form a belief with respect to the allegations contained in the complaint in this action, that it, therefore, denies the same.' Certainly in a case where the corporation is charged with being a fraud and the part of a fraudulent purpose, and it is charged that such use is being made of it by E.T. Summersett, it would seem to the Court that the answer made by and in behalf of this corporation and verified by the very party charged with the fraud and the fraudulent scheme, could not deny knowledge or information sufficient to form a belief as to the truth thereof.
"It seems to us to fall within the principle in regard to denial of knowledge or information sufficient to form a belief as to written instruments, like notes, etc., executed by a party. Our Court, speaking through Mr. Justice McIver, in Hall v. Woodward, 30 S.C. 564, 576, 9 S.E., 684, 685, says: `For the Code, proceeding upon the theory that mere formal proof should be dispensed with, and the parties brought to the real issues involved, does not permit a denial of knowledge or information sufficient to form a belief as to the existence of a fact, the truth of which can be readily ascertained.'
"And in Guaranty Trust Co. v. Kibler, 105 S.C. 513, 519, 90 S.E., 159, 160, the Court, speaking through Mr. Justice Gage, says: `A denial is predicated on knowledge; a lack of belief is predicated on ignorance. The defendant did not deny; she did allege lack of knowledge and, therefore, denied. That is not a sufficient denial. Pomeroy's Rem., Sec. 640. The defendant will not be heard to say that she has no knowledge about an act laid at her own door; she may deny, if she will, as Peter did, but she may not palter. The complaint charged her with an act; it alleged that she indorsed and delivered before maturity a particularly described note to the plaintiff for value. That was the vital allegation which charged her with liability. She was bound to know the fact, whether she did or did not indorse and deliver before maturity; she cannot say, unless she be frivolous, that she has no knowledge of it. Pomeroy's Rem., 641.'
"See, also, Bank of Johnston v. Fripp, 101 S.C. 188, 85 S.E., 1070; Union Guano Co. v. Garrison, 130 S.C. 407, 126 S.E., 133.
"It is true no motion to strike out this pleading has been made in this case, but this character of pleadings upon the issue involved herein may be considered in passing upon the facts along with all the evidence, so far as that defendant is concerned, is determining whether or not the charge of fraud has been proven against any and all defendants.
"From all the evidence, it appears that in the spring of 1919, Edward T. Summersett and his wife Cora Lee Summersett, found themselves insolvent, as a result of speculation in Columbia real estate. He was then working as a dispatcher in the employ of the Southern Railway Company, and, becoming dissatisfied with the wages, in April, 1919, he consulted the defendant J.T. Reese as to what he should do, and explained his situation and plans to him. Reese asked him: `Why don't you go back to building houses?' Summersett replied: `Jess, I haven't got money enough hardly to buy a keg of nails.' Reese replied: `Why don't you get some one to finance you?' Summersett replied: `You know the condition I am in, nobody will do that.' Reese replied: `How about forming a corporation and go into partnership with somebody?' Summersett said: `No, I will tell you what I will do; if you will finance me in the building of houses, I will give you a mortgage on all the property and all I have; and every house that I make a $1,000.00 on I will give you $200.00; and if I lose $1,000.00, I will give you $200.00. You are not to say anything about my ideas; I will let you look at anything I am doing, but I am to use my own method in working.' And they agreed to do that. I find that as a consequence, and in order to carry out these plans, the corporation of Edw. L. Summersett Co., Inc., was formed, and the defendant Reese undertook to finance it.
"The defendant Reese testified before me that he went into his dealings with Edw. L. Summersett Co., Inc., on the basis of sharing in the profits, at first, which he tells us was in the early part of probably April, 1920; but, finding this unsatisfactory, he proceeded to protect himself by taking a mortgage from that corporation for the amount then due him and to cover future advances, and from time to time thereafter took new mortgages embracing the previous indebtedness and securing any future debts or advances. He states that, in all his dealings with the alleged corporation, `I recognized nobody else to have authority to deal with Edward L. Summersett Co., Inc., to deal with but E.T. Summersett.' And again: `I recognized him as the official representative of Edward L. Summersett Co.' He also states that he did not know who organized the company, or either directly or indirectly who were the owners of the stock.
"The first mortgage that was given to Mr. Reese was in April, 1920. In connection with this mortgage, as well as with each subsequent mortgage to him, there appears a set of resolutions purporting to be minutes of the corporation, authorizing each of these mortgages.
"In the resolution accompanying the mortgage given in 1920, and another in the early part of 1921, to Mr. Reese, it is stated that Edward L. Summersett and E.T. Summersett were the only stockholders, and also the directors and officers.
"Beginning in the latter part of 1921, the defendant, Reese, took at least three mortgages from or in the name of Edward L. Summersett Co.; one in the latter part of 1921, one in 1923, and one in 1925, and perhaps one in 1924. Accompanying each of these mortgages were resolutions stating that E.T. Summersett and M.A. Park were all of the stockholders, as well as the officers and directors of the corporation.
"Likewise quite a number of mortgages were given in the name of Edward L. Summersett Co. to other persons or corporations from the latter part of 1921 to 1925, inclusive. In each instance there were resolutions accompanying these mortgages, stating that M.A. Park and E.T. Summersett were the only stockholders, and were the officers and directors, and the corporation tax returns were similar. None of these resolutions were entered on the minute book, and there was no record of the same anywhere, except in the files of the mortgages, the same not being recorded with the mortgage.
"Mr. Park was, and had been for years prior to 1921, bookkeeper for Mr. Reese. Mr. Park, Mr. Reese, and Mr. Summersett testified that he was made secretary for the convenience of the parties, and at the request of Mr. Summersett.
"Mr. Park said he thought he owned a share of the stock, but he learned, when litigation arose, that he did not own any.
"Mr. Park continued to keep the books generally for Mr. Reese, and also to keep the accounts of Mr. Reese with Edward L. Summersett Co., Inc. This latter he had been doing prior to the time he had been elected secretary.
"In the examination in supplemental proceedings, Mr. Park says: `Q. Now the books that you kept or keep are kept for the purpose of saving credit and protecting Mr. Reese in his advances? A. Largely. Q. And you are secretary largely for that purpose? A. Yes.'
"And Mr. Reese says: `Q. When Mr. Park was made secretary, was it not brought about by an agreement between you and Mr. E.T. Summersett, representing Edward L. Summersett Co.? A. Yes, sir; I consented to it for the reason that I thought it was or would benefit me to have Mr. Park secretary of the company and probably be convenient to both, as we were advancing considerable sums for their financial aid.'
"And again: `Q. You wanted Mr. Park in there because he was a good bookkeeper and your employer (employee), and you wanted him to be secretary of the company to safeguard your party (part)? A. Yes.'
"The indebtedness between Mr. Summersett and Mr. Reese was a constantly changing one. An account was kept in several different names, but the principal one under the head of `Building Fund.' Sums were drawn from Mr. Reese for pay roll, for purchase of lots, for material, etc., from time to time, upon request or order of Mr. E.T. Summersett. Payments were made on these accounts from the proceeds of sales and from collections on mortgages, etc.
"Mr. Park, who kept the books, states that he charged interest monthly in advance on this account at the rate of 8 per cent., and allowed interest at the same rate on the payments that were made during the month.
"This indebtedness was secured by a mortgage of real estate which usually had been previously given, and also by assignment of the bonds and mortgages taken for the sales, and in some instances by assignments of the equities after the payment of other debts for which they were assigned.
"In addition to these interest charges, Mr. Reese received a commission or bonus on all lots which were purchased and sold, regardless of the price, of generally $200 per lot; in a few instances less.
`The bonuses and commissions (outside of interest) thus received from the various transactions with Mr. Summersett amounted at the time of the supplemental proceedings, according to the testimony of Mr. Park, to a total of $26,030.
"After January, 1925, the interest charges on the account continued to be made monthly, but were at the rate of 7 per cent.
"A mortgage was given January 31, 1925, to Mr. Reese to secure the total amount of indebtedness existing at that time, of $28,888.40, and this indebtedness and account has been continued since that time, and, at the time of the hearing before me on February 9th and 11th, had been reduced to something over $19,000. From this it would appear that Mr. Reese had actually received a considerable amount, approximately $7,000, of his commissions or bonuses, and that the balance of indebtedness represented only the balance of such bonuses or commissions, and this is secured, not only by this mortgage, but also by assignment of various mortgages and equities in mortgages.
"The formation and management of the corporation known as Edward L. Summersett Co., was part of a scheme, on account of anticipated difficulties which might arise from the claims of then existing creditors of E.T. Summersett, including the then holder of the debt now belonging to Frank Smathers and Richard J. Cotter, to enable E.T. Summersett to continue in business on his own account, and to exercise the same control over his business and accumulations of property which he had prior to the creating of the corporation, and before becoming insolvent. Talcott v. Arnold, 54 N.J. Eq., 570, 576, 35 A., 532; Nat. Bank v. Sprague, 20 N.J. Eq., 13; Hart-Parr Co. v. Schafer, 73 Mont., 429, 236 P., 675; Ansorge v. Barth, 88 Wis. 553, 60 N.W., 1055, 43 Am. St. Rep., 928.
"The charter for the corporation was applied for by E. T. Summersett and his son, E.L. Summersett, then 22 years of age, as a board of corporators, on September 2, 1919; and notice was given of the opening of the books of subscription on September 4, 1919, at the office of an attorney on Washington Street; and a return was filed by them on September 9, 1919, stating that 20 per cent. of the stock had been subscribed and that E.L. Summersett, E.T. Summersett, and Cora Lee Summersett were the directors. There are in evidence four certificates of stock, each in the handwriting of E.T. Summersett and dated September 3, 1919, as follows: No. 1, Edward L. Summersett, 5 shares; No. 2, E.T. Summersett, 4 shares; No. 3, Elizabeth Summersett, age 19 years, 3 shares; No. 4, Susie Summersett, age 17 years, 3 shares.
"And each is indorsed on its back with an assignment in blank, dated October 6, 1919, and they were all left, according to the testimony, in the custody of Cora Lee Summersett, who was then insolvent. No record was made of the subscriptions for the capital stock, who, if any one, paid them in, or the amounts paid. Neither Edward L. Summersett, who was a supply clerk in the Southern Railway Company, nor Elizabeth nor Susie, neither of whom were earners, testified; and there is no satisfactory proof that any one of the three contributed any money toward the organization of the corporation; and it is more than probable that whatever money was contributed for this purpose, was contributed by E.T. Summersett, who was to have sole management of the corporation, from his own funds. In some way and from some one $1,000 was raised and used by E.T. Summersett in October, 1919, in purchasing the Sloan property on Pendleton Street, the title to which was taken in the name of Edward L. Summersett Co.
"In January, 1920, both Edw. T. Summersett and Cora Lee Summersett filed petitions in bankruptcy and were adjudicated bankrupt. In Schedule B-3, filed by E.T. Summersett, he listed the 4 shares of stock issued to him in Edw. L. Summersett Co., as having been assigned by him, but does not say to whom. Mrs. Cora Lee Summersett in her schedule lists no shares of stock as being held by her.
"The dealings between husband and wife, father and children — none of whom are shown to have had independent means or financial assistance from third parties — are to be closely scrutinized, and the burden is upon them to rebut the presumption that the money used to acquire the Sloan property was furnished by E.T. Summersett, the father, when he had the title taken in the name of a corporation of which he retained absolute control `without question,' although the shares were issued in the children's name, and physical possession of the shares was held by the wife and mother. The `minute' shows the children were not to be given the rights of stockholders, and that they had no power to manage, control, or direct the affairs of the corporation. See Bates v. Cobb, 29 S.C. 395, 7 S.E., 743, 13 Am. St. Rep., 742; Braffman v. Glover, 35 S.C. 431, 14 S.E., 935; Younger v. Massey, 39 S.C. 115, 17 S.E., 711; Chem. Co. v. Hunter, 94 S.C. 68, 77 S.E., 751. I find from the evidence that the moneys used in the formation of the corporation of Edw. L. Summersett Co., and in the acquirement of the Sloan property were the property of E.T. Summersett.
"In March of April, 1920, Edw. T. Summersett discovered that the claim of Frank Smathers and Richard J. Cotter (for which judgment against him has since been obtained) had not been listed on his schedule of liabilities, and probably was not barred or discharged by the proceedings in bankruptcy, and Summersett then was so advised by Mr. Earle. He then reverted to his original plan to carry on business in the name of the Edw. L. Summersett Co., Inc., as had been suggested by the defendant Reese. This plan was intended by E.T. Summersett as a means by which he could retain the control and conduct of his business, and to retain the profits thereof for himself and his family, and to hinder, delay, and defraud his existing creditors by preventing them from subjecting his interests and accumulations in the name of the corporation to the payment of their claims. His subsequent conduct pursuant to the scheme brings it within the prohibition pointed out in Hodges v. Cobb, 8 Rich., 57, and distinguishes this case from that. Instead of a bona fide gift of services by a husband or father to his wife or dependent children, the case here presented shows a scheme and attempt to keep the control of the husband's anticipated accumulations in business — so that he might use them as he pleased, without accountability to any one, free from claims of his creditors. Bank v. Dowling, 52 S.C. 348, 29 S.C. 788; Wolfsberger v. Mort, 104 Mo. App. 257, 78 S.W., 817; East St. Louis Ice Cold Storage Co. v. Kuhlmann, 238 Mo., 685, 142 S.W. 253; Talcott v. Arnold, 54 N.J. Eq., 570, 35 A., 532; Ansorge v. Barth, 88 Wis. 553, 60 N.W., 1055, 43 Am. St. Rep., 928; Nat. Bank v. Sprague, 20 N.J. Eq., 13; Greene v. Levinson, 123 Wn., 370, 212 P., 569. This purpose and intent to allow Edw. T. Summersett to do as he pleased with the assets and affairs of the corporation are disclosed by the minute, dated October 6, 1919, at 2319 Lee Street, though that minute was written at a much later date and in a different place, as 2319 Lee Street was then a vacant lot acquired in the name of Edward L. Summersett Co. in April, 1920.
"Every step taken in the business of the corporation was the offspring of his thought and will; and his power of disposition was absolute and without question; and no dividends were to be declared.
"I therefore find and conclude that the assets and accumulations of property in the name of Edw. L. Summersett Co., are in equity and good conscience the property and assets of Edward T. Summersett, and should be applied toward the satisfaction of the judgment in favor of Frank Smathers and Richard J. Cotter.
"It is hard that J.T. Reese, who furnished the financial aid without which E.T. Summersett would never have accumulated the property now in question, should have his claim against the property postponed to that of the judgment creditor; but the advances and undertaking of the risks involved were induced by the large bonuses and commissions to be paid by E.T. Summersett in accordance with their agreed plan for doing business. Reese was advised by Summersett of his financial situation, and, in view of it, suggested the method of doing business through the corporation, which was agreed upon and followed by them, and Reese had notice of facts which, if inquired into with due diligence, would have disclosed the intent of Summersett to thereby conceal his accumulations of property from creditors, and to hinder and delay them in the collection of their claims. I therefore conclude he has no right to reimbursement of his advances before application of the property to the payment of the Smathers and Cotter judgment. Mfg. Nat. Bank v. Simon Mfg. Co., 233 Mass. 85, 123 N.E., 343.
"It appears and I find from the evidence in the case that the defendant Reese has received and collected by way of commissions or bonuses from the enterprise in which Mr. Summersett was engaged, with sufficient information to put him on notice or knowledge of the purpose and scheme thereof, in addition to his legal interest, more than enough to pay off and discharge the indebtedness due to Mr. Smathers and Mr. Cotter upon which this suit is founded, and that he also has in his hands and is collecting from time to time a considerable quantity of notes and mortgages held by him as security for the balance of his indebtedness, which balance represents additional bonuses or commissions.
"As to the statute of limitations of actions:
"The judgment plaintiffs, Smathers and Cotter, resided outside of the state, one of them in the State of Florida, formerly at Atlantic City, in the State of New Jersey, and the other one in Boston, Mass. They sent to Mr. Robinson, as their attorney, for collection or foreclosure, the bond and mortgage out of which this judgment arises, by letter of March 20, 1920. Suit was commenced on it in June, 1920, and resulted in a judgment in September, 1920. Supplemental proceedings upon which this action is based were commenced December 28, 1925, and the references before the Master were held on January 12th, 21st, 22d 26th, February 4th and 15th, and the testimony taken at these references disclosed the fact upon which this suit is based, especially the facts pertaining to the question of fraud, fraudulent intent, and fraudulent purposes in using the corporation.
"The Receiver was appointed in this case after notice March 3, 1926, based upon the supplemental proceedings, and the action was promptly commenced on the 6th of March, 1926.
"The defendants, E.T. Summersett and Cora Lee Summersett, individually and as trustee of her children filed answers setting up the statute of limitations. The other defendants, including the corporation of Edw. L. Summersett Co., Inc., and the defendants Edw. L. Summersett, Elizabeth S. Westmoreland, Mary Susie Rentz, and G.I. Rentz, as guardian ad litem of Cora Lee Summersett, Jr., who are the alleged real beneficiaries or stockholders of the corporation, filed their respective answers, and did not plead the statute of limitations. The defendants Reese and Park each filed an answer, and did not set up the statute of limitations.
"The answer of the defendant corporation, the formation and use of which it is claimed was the main part of the scheme to defraud, is verified by E.T. Summersett, who was the president and treasurer, and had full and supreme control of the same under the alleged minutes which he had written. This answer does not set up the statute of limitations.
"This plea is not sustained, because I find from the evidence that Frank Smathers and Richard J. Cotter, the creditors for whose benefit this action is brought, had no notice of the facts constituting the fraud complained of until within the last six years ( Shannon v. White, 6 Rich. Eq., 101, 60 Am. Dec., 115; Beattie v. Pool, 13 S.C. 381), and only recovered their judgment against E.T. Summersett within the last six years ( Suber v. Chandler, 18 S.C. 526; Richardson v. Mounce, 19 S.C. 477).
"It is therefore adjudged:
"(1) That the alleged corporation of Edward L. Summersett Co., Inc., be and the same is hereby declared to be fraudulent, null, and void, so far as it pertains and relates to the indebtedness due to Frank Smathers and Richard J. Cotter, represented by the judgment held by them against E.T. Summersett and others.
"(2) That J.M. Cantey, Jr., Receiver, have judgment against said Edward L. Summersett Co., Inc., or any assets in its name, E.T. Summersett, and Jesse T. Reese, for the amount of the indebtedness due and unpaid to said Frank Smathers and Richard J. Cotter, to wit, for the sum of $4,008.02, together with interest thereon from July 5, 1922, making total amount February 22, 1927, $5,307.07, with interest on said amount from February 22, 1927.
"(3) That the defendant Jesse T. Reese do hold all the collaterals, notes, and mortgages, and equities in collaterals now in his hands, as trustee, for the payment of said indebtedness.
"(4) That said J.M. Cantey, Jr., Receiver, have leave to apply at the foot of this decree for such other and further orders as he may be advised, or deem necessary, to take over any assets and properties now in the name of said Edward L. Summersett Co., Inc., and for such allowance as the Court may deem reasonable and proper for his services and for the services of his attorney in bringing and prosecuting this action.
"(5) That the proper costs of this action, together with the costs in the supplemental proceedings, be adjudged and taxed against the defendants, Edward L. Summersett Co., Inc., E.T. Summersett, Cora Lee Summersett, Edward L. Summersett, Elizabeth Westmoreland, Mary Susie Rentz, Cora Lee Summersett, Jr., Jesse T. Reese, and Marion A. Park."
Messrs. Thomas Lumpkin, for all appellants except Jesse T. Reese, cite: A debtor may give his labor or services as a gratuity to another, and his creditor cannot subject the proceeds or profits therefrom to the satisfaction of his debt, nor in any way charge the donee therewith: 8 Rich., 56; 54 S.C. 94; 28 A.L.R., 1043. Fraud must be proven by clear and convincing testimony: 101 S.E., 656. Cases distinguished: 52 S.C. 369.
Mr. John J. Earle, for appellant Jesse T. Reese, cites: Creditors of a corporation cannot attack the validity of a mortgage executed by it, on the grounds that it did not receive the consent of the stockholders: 10 Cyc., 1193. Grounds sufficient to annul for fraud, a deed based upon valuable consideration: 64 S.C. 364; 8 Rich., 56.
Messrs. D.W. Robinson and D.W. Robinson, Jr., for respondent, cite: Proof of fraud: 111 S.C. 41; 121 S.E., 184; 54 N.J. Eq., 570. Where fraud charged, rules of evidence not strictly enforced, largely in discretion of Court: 103 S.C. 391; 113 S.C. 317; 5 Pom. Eq. Jur. (2nd Ed.), Sec. 2303. Transactions between near relations closely scrutinized: 129 S.C. 270; 135 S.C. 23; 98 S.C. 402; 52 S.C. 345; 62 S.E., 322; 76 S.E., 957; 88 S.E., 851. Retention of possession or control of property is badge of fraud: 35 S.C. 431; 4 McC., 294; 2 Bail., 128; Id., 118; 30 S.C. 497; 93 S.E., 572; 4 W. Va., 186; 12 R.C.L., 544, Sec. 68; 42 L.R.A., 361; 139 S.C. 35. Debtor can give future services of himself to his wife, provided this is done bona fide: 54 S.C. 94; 12 R.C.L., 508, Sec. 37. Pleading: 105 S.C. 519; Pom. Rem., Sec. 641; 101 S.C. 188; 130 S.C. 406. Where circumstances sufficient to put a party upon inquiry held to have notice of everything which that inquiry, properly conducted, would certainly disclose: 14 S.C. 321; 137 S.C. 36; 4 Rich, Eq., 116; 111 S.C. 330; 282 Fed., 1020; 45 Sup. Ct., 98; 148 U.S. 370; 37 L.Ed., 486; 129 S.C. 436; 112 S.C. 563; 34 S.C. 559; 35 S.C. 596; 4 Rem. on Bkr., 652, Sec. 1834; Id., 661, Sec. 1839. Grantee liable to creditor for value of property acquired from a conveyance made with intention to defraud: 12 R.C.L., 640, 645; 82 S.C. 97; 123 N.E., 343. Statute of limitations: 28 S.C. 101; 52 S.C. 345; 37 S.C. 374; 6 Rich. Eq., 101.
February 14, 1929. The opinion of the Court was delivered by
MR. JUSTICE COTHRAN: This is an action by the plaintiff, Cantey, who was appointed Receiver of the property of E.T. Summersett, in supplementary proceedings, for the purpose of subjecting certain property standing in the name of a corporation, "Edward L. Summersett, Inc.," to the payment of certain judgments against E.T. Summersett, upon the ground that the corporation was organized and has been used as a scheme on the part of E.T. Summersett and the other defendants to hinder, delay, and defraud his existing creditors; that in good conscience and equity E.T. Summersett is the owner of all of the property standing in the name of the corporation. Hereafter the corporation Edward L. Summersett, Inc., will be referred to as the "Corporation."
It appears that in the years 1912, 1913, and 1914, flush times in the City of Columbia, E.T. Summersett embarked heavily in the purchase of real estate; his enterprises resulted in tremendous losses; and in 1919 there were judgments outstanding against him amounting to nearly a quarter of a million dollars; he was hopelessly insolvent. Among his liabilities was a bond, secured by a mortgage of real estate, to Smathers and Cotter, upon which there was due about $11,000. He had a wife and several children dependent upon him, and practically not a dollar; his sole assets were his energy and muscle. With the promised assistance of the defendant Reese, who had agreed to finance the project, he determined, in 1919, to go into the business of buying lots, the erection of buildings, and the sale of the property so improved, upon terms of credit.
The arrangement with Reese contemplated the formation of a corporation under the name of Edward L. Summersett, Inc., which was accomplished in September, 1919. It appears that only 15 shares of stock were issued: Edward L. Summersett, 5 shares; E.T. Summersett, 4; Elizabeth Summersett, 3; Susie Summersett, 3. All of this stock was assigned in blank and delivered to Mrs. Summersett, the wife of E.T. Summersett.
The purpose of the formation of the Corporation is thus explained in the minutes of October 6, 1919:
"That all stock issued by said Company should be assigned to Cora L. Summersett to keep and hold as long as she may live, should she die the stock should be given to her children, the four shares to E.T. Summersett going to their daughter Cora Lee Summersett the second; E.T. Summersett was to be fully authorized and empowered to handle all business of any nature of this corporation without any question, but no moneys beyond $250.00 per month was to be spent by him for personal use but that his wife Cora Lee Summersett was empowered to spend at any time any amount she deemed best. All funds and assets should be held together during the life of Cora L. Summersett, and should she die all holdings should be equally divided between their living children or their childrens' heirs should they be dead. It was also to by that no dividends should be declared by said Company but if for any reasons E.T. Summersett, Cora L. Summersett, 1st, or Edward L. Summersett, Elizabeth Summersett, Susie Summersett, Cora Lee Summersett, 2nd, should become dependent for support that E.T. Summersett was empowered to any or all amounts for their support. In case of death of E.T. Summersett, his wife Cora L. Summersett was to be authorized and have all handling of all funds and hold of said Company and at her death to divide it equally between their children. In case if she should marry another then the holding should be divided to her children. If E.L. Summersett should die E.T. Summersett should continue to handle the business unless or such time. That if he should again marry that all holding of said Company should be divided between their children. After this explanation upon the part of E.T. Summersett a motion was made by Elizabeth Summersett and seconded by E.L. Summersett that the explanation should be a resolution and adopted and so recorded by unaminous vote this was done."
The arrangement with Reese is thus detailed in the answer of Reese, which appears to be sustained by the evidence and by the circuit decree:
"That the said E.L. Summersett Co., Inc., not having funds with which to buy real estate and to construct houses, this defendant entered into an agreement with the said Corporation, under and by the terms of which this defendant advanced moneys from time to time to the said Corporation, with which to buy real estate and to construct houses, the said Corporation agreeing to repay to this defendant all moneys so advanced, together with interest thereon, calculated monthly and together with the additional sum of two hundred dollars on each house sold by the said Corporation, the same to be in full payment to this defendant for all advances made by him and for all of his services and commissions, and that in order to secure the repayment of all of the same, the said Corporation, from time to time, gave to this defendant mortgages of its real estate and further assigned to this defendant as collateral, various purchase money mortgages which had been given to it, said assignments having been recorded upon this defendant being advised by his attorney that the law now provided for such papers to be so recorded."
In January, 1920, both E.T. Summersett and his wife, Cora L., filed petitions in bankruptcy and were adjudicated bankrupt, and in May, 1920, were discharged. At that time, while the business arrangements referred to had been perfected with the defendant Reese, nothing had been done towards carrying them out. In the schedule filed by E.T. Summersett in the bankruptcy proceeding, a certain bond and mortgage held by Smathers and Cotter, it appears, were inadvertently omitted. Consequently these mortgages were not affected by the bankruptcy proceedings. They accordingly instituted foreclosure proceedings, and in September, 1920, recovered a judgment against E.T. Summersett for $11,361.32 and obtained a decree of foreclosure and sale. The sale was had, the property did not bring the amount of the mortgage, and on July 5, 1922, a deficiency judgment of $4,008.02 was entered. The execution issued thereon having been returned nulla bona, the plaintiffs instituted supplementary proceedings against E.T. Summersett, and in them had the plaintiff, Cantey, appointed Receiver for E.T. Summersett, with the usual powers of gathering his assets together for application to the execution. In that way the Receiver has become plaintiff in this action.
Issues were joined by the filing of answers by the several defendants, and the case came on to be heard by his Honor, Judge Townsend, in equity. A mass of testimony was introduced, practically 80 per cent. of which was evidence adduced in the supplementary proceedings. Seven witnesses, whose testimony covers about 100 of the 450 printed pages of the transcript, were examined before his Honor, Judge Townsend.
"This hearing resulted in a decree filed by Judge Townsend giving judgment in favor of the plaintiff, and holding that Edward L. Summersett Co. was fraudulently conceived and operated, and amounted to a hiding of assets on the part of E.T. Summersett. The decree further subjected such assets to the payment of the judgment of Smathers and Cotter, and that the claim of such plaintiffs was paramount to and should be paid prior to any claim or demand held by Jesse T. Reese against the assets of Edward L. Summersett Co. The decree also gives personal judgments against Jesse T. Reese for the amount claimed by the plaintiffs.
"All of the defendants in the case appealed except Roof Lumber Company and Marion A. Park. The defendant Jesse T. Reese filing separate exceptions herein and the other defendants, including Edward L. Summersett Co., E.T. Summersett, Cora Lee Summersett, Sr., and the children filing one set of exceptions as covering their appeal herein."
It appears that in April, 1920, after the adjudication in bankruptcy and before the discharge in May, the defendant Reese began the advancements in cash to the corporation, which were secured by the mortgage of the corporation duly authorized by the stockholders and by the assignment of certain bonds and mortgages which had been taken by the corporation in the conduct of the business as contemplated.
In January, 1925, it appears that the corporation owed Reese $28,888.40 for advances of cash, interest, and the bonuses which the corporation had agreed to pay Reese for his financial assistance, which was secured to Reese by a mortgage of certain property owned or in the name of the corporation and by the assignment of various mortgages and equities in mortgages held by the corporation. At the time of the hearing before Judge Townsend in February, 1927, this balance had been reduced to "something over $19,000."
The decree adjudicates:
(1) That the corporation be declared fraudulent, null, and void so far as the debt to Smathers and Cotter is concerned.
(2) That the plaintiff have judgment against the corporation, E.T. Summersett, and the defendant Reese, for the amount of the Smathers and Cotter debt, amounting to $5,307.07, as of February 22, 1927, with interest from that date.
(3) That the defendant Reese hold all the collaterals, notes, and mortgages, and equities in collaterals now in his hands, as trustee, for the payment of said indebtedness.
(4) That the plaintiff have leave to apply for such orders as may entitle him to take over all of the assets of the corporation in conformity with his ruling:
"I therefore find and conclude that the assets and accumulations of property in the name of Edw. L. Summersett Co., are in equity and good conscience the property and assets of Edward T. Summersett, and should be applied toward the satisfaction of the judgment in favor of Frank Smathers and Richard J. Cotter," with provisions for costs and attorneys' fees.
We do not think that there can be any doubt but that E. T. Summersett, in his hopeless insolvency, conceived the double project of going into bankruptcy and ridding himself of the mountain of debt under which he lay, and of organizing a corporation for the benefit of his wife and children into which the fruits of his future energies might be preserved and protected from the grasp of his creditors, and applied to the first obligation which he owed, the maintenance and education of his family.
Assuming then that these were his purposes and that he supplied the money necessary to the stock subscriptions, the certificates for which were issued in the names of the members of his family, we do not think that the validity of the corporation was at all affected thereby.
The decree contains no finding that the capital stock represented by the 15 certificates issued was in fact paid in. It is said:
"No record was made of the subscriptions for the capital stock who, if any one, paid them in, or the amounts paid * * * it is more than probable that whatever money was contributed for this purpose was contributed by E.T. Summersett who was to have sole management of the corporation, from his own funds."
Nor is there any finding as to the net worth of the corporation; it may have gone upon the rocks, for all that appears to the contrary, and the stock worthless.
It is possible that, if the whole $1,500, representing the certificates issued, had been supplied by E.T. Summersett, and the stock had been transferred to his wife and children for the purpose of defrauding his creditors, the creditors may have had the remedy of holding the assignees of the stock as trustees for them and thus force an assignment by them to the Receiver and realize upon the value of the stock if it has any, but this is not such a proceeding. If it were, there are not sufficient facts shown upon which to base relief.
So far as the devotion of his energies to the benefit of his wife and children is concerned, that is not a matter of which the then existing creditors have a right to complain. This proposition is clearly sustained in the case of Hodges v. Cobb, 8 Rich., 50. The facts in that case were these:
A man named White and a man named Mosely married sisters. In 1849 Mosely was hampered by judgments and executions, and in fact insolvent. White was well-to-do, and advanced money because of his relationship and friendship to Mosely to use in buying and selling negro slaves, and he returned to White the principal and the net profits, who agreed and stipulated that he would give one-half of those profits to the wife of Mosely. Mosely made money out of this transaction. Under this state of facts the plaintiff brought suit, trying to hold certain slaves and moneys in the hands of Mosely to settle a judgment due the plaintiff Hodges by Mosely, claiming that the agreement between Mosely and White worked a fraud upon Hodges as a creditor, and that he was smuggling the fruits of his skill and labor into a form that should benefit his family and indirectly himself, whereas his creditors were and are entitled to such fruits.
The Court held: "All must agree that if Mosely had been so unmindful of the duties of life as to work not at all, or for half price, or for nothing, his creditors could not have pricked him up, with their executions. That he should have left his family to starve would have brought neither consolation nor profit to them. What stimulated his exertions — what produced the fruits that make the subject of this litigation? The answer is, that a benevolence of White; a stranger to Mosely's creditors, toward Mrs. Mosely, his sister-in-law, set in motion the debtor's industry; and the use of White's capital, Mrs. Mosely being the meritorious cause and object, produced the fruits now in contest. These have been created by a cause, and a means over which the creditors had no control, and from whose liens they were wholly free, and when they were in posse merely were devoted, by agreement, to an object most worthy in the eye of all sound morality."
It was also said: "It is very true, on the other hand, that this debtor could not have set apart the fruits of his labor, after they had been earned, in trust for his wife and children" — the reasoning being that such property would have been property in esse.
The Court adds: "But if he had agreed to sell his labor to White, on terms the most improvident, as for his mere maintenance or for less, how could his creditors have rectified that? If he had made a more reasonable and thrifty contract with White, as, for example, that he would labor for him, on condition that he would maintain his wife and children, and articles consumed in the use were accordingly applied, what fraud would there be, in such case, upon creditors — what scope would have been found for their executions — what would they have lost to which they could show any title? If White, by the promptings of a benevolent sympathy, should have agreed to add something more enduring, in the hands of a trustee, for the use of the wife, no infringement of a creditor's right can be detected in that."
And: "Although it is conceivable, that, under stipulations such as characterize this case, an insolvent debtor might be enabled to engage his labor and skill upon means, trusted to him by a benevolent friend of his wife, upon previous stipulations so liberal as to endow her trustee with a sum large enough to make the transaction seem a mockery in the eye of the creditor, and although we admit that, in an adventure so fortunate, his just expectations would be sadly disappointed, yet the question would still be as to the range of his execution, not his expectations; and, on the other hand, we see that the principle of this appeal would make it a fraud, if, in pursuance of a debtor's stipulation in the morning, the proceeds of a day's work by him should be applied, in the evening, in the shape of bread towards the maintenance of his family. Neither difference in sums, nor in time, fortunate or unfortunate adventures, provident or improvident contracts, in a debtor's selling his labor by previous stipulation, can alter a principle."
In Zimmerman v. Dean, 54 S.C. 90, 31 S.E., 884, it was held, quoting syllabus: "An insolvent husband may give his services and those of his minor children to his wife as against his creditors."
The Court quotes from the Hodges case approvingly, and says: "There is no constitutional provision against this construction of the law, as it was not a gift of something in esse, nor of anything that would become in esse, except by the labor of the husband. Sound morality and public policy sustain this view."
Judge Freeman, in a note to Morris v. Fletcher, 77 Am. St. Rep., 101, makes the proposition as clear as the sunlight. Referring to the Hodges case, he says: "In the second case, however, the husband used his labor and skill in the service of a third person. He could have given his services to such third person if he had desired, and the profits resulting from the business would have belonged to the third person, because he was a competent person to receive such a gift. His creditors could not object, because the husband had acquired no property which could be reached by them. His skill and labor resulted in profits which belonged to a third person, hence his creditors could not touch them. * * * This fundamental principle must be remembered, viz., that a debtor is not obliged to work for his creditors or to work at all. His creditors cannot levy execution upon him and compel him to work for them. While a creditor [debtor?] cannot set apart the fruits of his labor after they have been realized, in disregard of the rights of his creditors, yet before they are earned he may make any bargain he wishes in regard to his services and his creditors are not defrauded, because they have been deprived of nothing to which they have a right."
"The creditors of an insolvent have no claim upon his services, and he may give them away by working gratuitously for another." Note, 21 L.R.A., 624, citing Sexton v. Martin, 37 Ill. App. 538, Osborne v. Wilkes, 108 N.C. 651, 13 S.E., 285.
"A debtor may agree to carry on business for his wife in consideration of support of his family and mother without giving his creditors any claim on the profits arising from his services." Note, 21 L.R.A., 625, citing Scoville v. Shed, 120 N.Y., 646, 24 N.E., 1102.
There can be no difference between this state of facts and an agreement to carry on the business of a corporation, all of the stock in which has been assigned to the wife.
"The creditor cannot impute fraud to the transaction by which the debtor gives his labor to his wife, for the creditor has no legal or equitable right to that labor." Note, 21 L.R.A., 625, citing Buckley v. Dunn, 67 Miss., 710, 7 So., 550, 19 Am. St. Rep., 334.
In Mayers v. Kaiser, 85 Wis. 382, 55 N.W., 688, 21 L.R.A., 623, 39 Am. St. Rep., 849, the Court said: "We are unable to understand how the husband's creditors can be said to be defrauded, when they cannot compel him to labor for their benefit, if he voluntarily bestows on others, or on his wife, that which, under the law, they cannot reach for the satisfaction of their demands."
In Grand Lodge v. Allen, 208 Ala., 292, 94 So., 343, 28 A.L.R., 1043, the syllabus is:
"1. A debtor may give his labor or service as a gratuity to another, and when he chooses to do so his creditor cannot subject the proceeds or profits therefrom to the satisfaction of his debt, nor in any way charge the donee therewith.
"2. A creditor has no remedy against either the corporation or the wife if his debtor contributes his services gratuitously to a corporation of which his wife is a heavy stockholder, and by so doing increases the dividends accruing to her, which she shares with him."
The Court said: "The law does not give to a creditor the right to appropriate the labor or personal services of a debtor for the satisfaction of his debt. From this it results, as is thoroughly well settled by our decisions, that a debtor may give his labor or services as a gratuity to another, and, when he chooses to do so, a creditor cannot subject the proceeds or profits therefrom to the satisfaction of his debt, nor in any way charge the donee therewith. [Citing many authorities.] * * *
"So, also, it is held that the dividends and profits accruing from corporate stock owned by a married woman are not liable for her husband's debts, although they are the result of his successful management of the corporation's business. Taylor v. Wands, 55 N.J. Eq., 491, 37 A., 315, 62 Am. St. Rep., 818; Magerstadt v. Schaefer, 213 Ill., 351, 72 N.E., 1063; First Natchez Bank v. Moss, 52 La. Ann., 1524, 28 So., 133.
"Manifestly, such a donation of labor or services presents no analogy to a donation of property which is subject to the claims of creditors, and the rules of law that govern fraudulent conveyances can have no application. * * * In the instant case, the husband of the respondent, Josephine Allen, could lawfully render service to the respondent corporation, with the understanding that its value should go to his said wife by way of increased dividends on her shares of corporate stock; and such an arrangement, whatever their intention may have been as to keeping his earnings out of the reach of creditors, was not a fraud on them, because it did not take from them anything which they could appropriate to the satisfaction of their demands. Even a fraudulent intent does not make a lawful gift or transfer unlawful."
In Pierson v. Garrison, 83 N.J. Eq., 334, 91 A., 824, the syllabus is: "A judgment creditor of a husband may not compel him to work, or to charge for services he renders to others, nor can the creditor complain if the debtor works for his wife without pay, provided the business in which the debtor is employed really belongs to the wife."
It seems clear, therefore, that there can be no legal objection to the formation of the corporation and the carrying out of the business agreement entered into between the corporation and the defendant Reese as to advancements of money for its operation. He evidently did so in good faith and is entitled to the securities which the corporation delivered and executed to him. We think that there is no possible ground for holding that the formation of the corporation was null and void. It was legally organized, and conducted a large amount of business. The fact, if it be a fact, that the creditors may have the right to require E.T. Summersett and the stockholders to account to them for the money put into the corporation by E.T. Summersett or for the value of the stock in which it was invested cannot affect the validity of the legal existence of the corporation or of the rights of Reese, a bona fide legal lienee of the corporation in the securities executed and delivered to him. Whatever right the creditors may have in the assets of the corporation are subject, of course, to the valid liens upon them.
We particularly adhere to these views in consideration of the fact that the judgment creditors are standing upon a strictly technical ground by reason of the accidental omission of their claim in the schedule of liabilities filed by the bankrupt.
The judgment of this Court is that the decree of the Circuit Court be reversed and the complaint dismissed, without prejudice to the right of the plaintiff in a different suit to require an accounting of the money, if any, furnished by E. T. Summersett in the organization of the corporation and a consequent interest in the assets of the corporation after its debts and liens shall have been extinguished.
MESSRS. JUSTICES BLEASE and STABLER concur.
This was an action commenced on the 6th day of March, 1926, as a suit growing out of supplementary proceedings brought by Frank Smathers and Richard J. Cotter against E.T. Summersett, by virtue of a deficiency judgment obtained in a foreclosure proceeding in 1920.
The plaintiffs, Smathers and Cotter, claimed that E.T. Summersett was insolvent. This was not denied, and on their motion J.M. Cantey, Jr., was appointed Receiver, who filed this suit, claiming that Edward L. Summersett Co. was a fraud, and any property it might have was in fact the property of E.T. Summersett.
In this suit Jesse T. Reese was made a party defendant, and the plaintiff Receiver claims judgment against Jesse T. Reese; that any securities or liens held by him against Edward L. Summersett Co. be set aside in so far as the judgment of the plaintiffs, Smathers and Cotter, is concerned; and that such judgment be paid ahead of any claims or demands of the said Jesse T. Reese.
Issues were joined by the filing of answers on the part of the several defendants, and finally the case was heard before Judge W.H. Townsend in equity on February 9 and 11, 1927.
This hearing resulted in a decree filed by Judge Townsend giving judgment in favor of the plaintiff, and holding that Edward L. Summersett Co. was fraudulently conceived and operated, and amounted to a hiding of assets on the part of E.T. Summersett. The decree further subjected such assets to the payment of the judgment of Smathers and Cotter, and that the claim of such plaintiffs was paramount to and should be paid prior to any claim or demand held by Jesse T. Reese against the assets of Edward L. Summersett Co. The decree also gives personal judgments against Jesse T. Reese for the amount claimed by the plaintiffs.
All of the defendants in the case appealed except Roof Lumber Company and Marion A. Park, the defendant Jesse T. Reese filing separate exceptions herein, and the other defendants, including Edward L. Summersett Co., E.T. Summersett, Cora Lee Summersett, Sr., and the children, filing one set of exceptions as covering their appeal herein.
For the reasons stated in the decree of his Honor, Judge W.H. Townsend, the appellants' exceptions, in my opinion, should be overruled, and the judgment of the Circuit Court affirmed.
MR. CHIEF JUSTICE WATTS concurs.