Clarke-Woodward Drug Co. v. Hot Lake Sanatorium Co.

McBRIDE, C. J.

1, 2. One of the principal questions arising upon this appeal relates to the effect of the following clause in the trust deed, which purports to convey all real and personal property then owned by the grantor and “all other real estate or right to purchase real estate, franchises, easements, appurtenances, privileges and interests which are now owned by the Hot Lake Sanatorium Company, or which it may hereafter acquire during the life of this instrument.” This language is plain and there is absolutely no room for doubt as to the intent of it. It is conceded that the property mortgaged was worth about $150,000 and the Hot Lake Sanatorium Company had at the time an option to purchase tract No. 4, upon which it had already made several payments and which purchase was afterwards completed at a total expense of $25,000, so that the present security for the bonds at the time of their issue was largely below the value of the property pledged, and the ultimate redemption of the bonds depended upon the expenditure of the money received for them and the industry of the company by offering *290 sufficient attractions to induce the general public to patronize the resort.

As disclosed by the testimony of Mr. W. M. Pierce there was situated upon tract No. 4 an artesian well which furnished water higher in temperature than that upon tract No. 1, and it was among the designs of the company in the course of its contemplated improvements to utilize this hot water to furnish a greenhouse and winter garden for the resort. Added to this was a possibility that if the property got into other hands the hot spring upon it might be utilized for the purpose of another resort of a similar character to the one then conducted by the defendant corporation. It is needless to say that such a contingency would have had a tendency to depreciate the value and income of the resort of the grantees in the trust deed and render the security of the bondholders less valuable. Under the circumstances as they then appeared the purchase of this tract- would seem both necessary and convenient for the successful prosecution of the business into which the bondholders were putting a quarter of a million dollars.

As to parcel No. 2, the testimony is that it was purchased with a view to using it as a pasture and place to raise feed and butcher livestock with which to supply fresh meat for the sanatorium; and that parcel No. 3 was purchased to secure a supply of firewood for the operation of the kitchen and laundry, and was also of value for stock pasture. It was evidently hoped and expected by the promoters of the scheme that an extensive health resort would be established, such as exists at Hot Springs, Arkansas, or at Boise, Idaho, but alas for the vanity of human expectations; neither the money expended, the heat of the water, nor the expenditure of air of a like temperature in *291 advertising, induced the public to patronize the resort; but this does not detract from the fact that as the matter then appeared to the defendants these expenditures were reasonably necessary to the convenient and successful operation of the sanatorium, and the status of the property is fixed by what then appeared convenient and necessary and not by the results of the enterprise.

It was evidently the intent of the parties to the trust deed that all after-acquired property should be subject to the lien created thereby, and we find nothing in the evidence indicating that the purchase was so far removed from the general objects of the corporation as to render it impossible for it to take and hold it. Many cases are cited by counsel wherein it has been held that after-acquired property does not become subject to the lien of a mortgage which in general terms provides that it shall be a lien on after-acquired property, but in these cases the intent of the parties is considered and each depends upon special circumstances not present in the case at bar.

The industry of counsel for plaintiff has brought before us a large number of such cases and for the convenience of the profession we cite them: Calhoun v. Memphis & P. R. Co., 2 Flipp. 442 (Fed. Cas. No. 2309); Humphreys v. McKissock, 140 U. S. 304 ( 35 L. Ed. 473 , 11 Sup. Ct. Rep. 779); Smith v. McCullough, 104 U. S. 25 ( 26 L. Ed. 637 ); New Orleans Pac. R. Co. v. Parker, 143 U. S. 42 ( 36 L. Ed. 66 , 12 Sup. Ct. Rep. 364); Parish v. Wheeler, 22 N. Y. 494 ; Boston etc. R. Co. v. Coffin, 50 Conn. 150 ; Mississippi Valley Co. v. Chicago etc. R. Co., 58 Miss. 846 ; Meyer v. Johnston, 53 Ala. 237 , 64 Ala. 603 ; Pardee v. Aldredge. 189 U. S. 429 ( 47 L. Ed. 883 , 23 Sup. Ct. Rep. 514) ; Guaranty Trust Co. v. Atlantic Coast Co., 132 Fed. 68 ; *292 Mallory v. Maryland Glass Co., 131 Fed. 111 ; Maxwell v. Wilmington Dental Mfg. Co., 77 Fed. 938 ; Calhoun v. Paducah Ry. Co., 9 Cent. L. J. 66; Brainerd v. Peck, 34 Vt. 496 ; Seymour v. Canandaigua etc. R. Co., 25 Barb. (N. Y.) 284; Eldridge v. Smith, 34 Vt. 484 ; Dinsmore v. Racine etc. R. Co., 12 Wis. (649) 725; Walsh v. Barton, 24 Ohio St. 28 .

The effect of these cases may well be summed up in the language of Mr. Justice Harlan in Smith v. McCullough, 104 U. S. 25, 27 ( 26 L. Ed. 637 ):

“That question is within a very narrow compass. It must be solved so as to-give effect to the intention of the parties, to be collected as well from the words of the instrument as from the circumstances attending its execution.”

Jones on Mortgages (3 ed.), Section 153, states the rule as follows:

“The chief question therefore is, whether the parties to the mortgage intended that the after-acquired property, which is in any case the subject of litigation, should be subject to the lien of the mortgage; and it will be noticed that in the recent cases the contention is generally upon this question.”

See, also, Central Trust Co. v. Kneeland, 138 U. S. 414 ( 34 L. Ed. 1014 , 11 Sup. Ct. Rep. 357); Toledo D. & B. R. Co. v. Hamilton, 134 U. S. 296 ( 33 L. Ed. 905 , 10 Sup. Ct. Rep. 546); Hickson Lbr. Co. v. Gay Lbr. Co., 150 N. C. 282 ( 63 S. E. 1045 , 21 L. R. A. (N. S.) 843); Mitchell v. Winslow, 2 Story, 630 (Fed. Cas. No. 9673); Maxwell v. Wilmington Dental Mfg. Co., 77 Fed. 938 .

Ye conclude, therefore, that all the property mentioned in the complaint' became subject to the lien created by the trust deed and that such lien was superior to any lien created by plaintiff’s judgment. *293 The transfer of the property to the new corporation does not innre in any way to the benefit of plaintiff. It is conceded that the value of the property is less than the amount due upon the bonds. The Hot Lake Home and Sanatorium Company took the property subject to the indebtedness and was bound to discharge it. There is nothing in the evidence that indicates any intention on the part of anyone to defraud creditors by means of the transfer and nothing is disclosed which indicates that plaintiff was thereby placed in a more disadvantageous position relative to collecting its debt. When plaintiff allowed the Hot Lake Sanatorium Company to contract the debt which is the basis of its present judgment the record of the trust deed was notice to it that all of the property, present and prospective, of the Hot Lake Sanatorium Company was pledged for the payment of the outstanding bonds. No unpledged property was conveyed to the new company and none existed.

3, 4. Another question is raised as to the status of the $14,000 received from the sale of tracts 2, 3 and 4. It appears from the testimony that the effort to build up a profitable watering place upon the premises was unsuccessful. In 1912 the Hot Lake Sanatorium Company had defaulted in the payment of interest on its bonds and was indebted in considerable amounts to unsecured creditors, and a plan was devised to sell the property to the Loyal Order of Moose as a home for the purposes of said organization. To facilitate this the Hot Lake Home and Sanatorium Company was organized and stock in this company issued to the stockholders in the old company, in consideration of which the latter company — the bondholders consenting ■ — transferred the property of the old company to the new company. The old company subscribed for one *294 half of the stock of the new company and the plan which is not clearly detailed in the evidence, seems to have been to sell a majority of the stock to the various Moose lodges so they would control the property. Subscriptions to the amount of some $6,000 in cash, and other amounts not paid, were made hut all with the understanding that they were merely tentative and not to be effective unless the lodges generally agreed to the arrangement. Some of the larger lodges not agreeing the plan fell through and the money, which had never been turned into the company treasury, was returned to the lodges by W. M. Pierce and others who had the custody of it. Failing in this plan W. M. Pierce who was the principal promoter and large stockholder in the Hot Lake resort project, suggested to some of the creditors including plaintiff, that the only way to save the company from impending bankruptcy and the unsecured creditors from consequent loss of their debts, was to interest the Oregon-Washington R. & N. Company, a branch of the "Union Pacific Railroad Company, in the operation of the property. In pursuance of this plan and with the consent and assistance of plaintiff, W. M. Pierce took the matter up with Mr. J. D. Farrell, president of the Oregon-Washington R. & N. Co., with the result that a corporation called the Hot Lake Springs Company was formed under the auspices of the Oregon-Washington R. & N. Co., with Mr. J. P. O’Brien of the latter company as president, to take over and manage the property under a lease executed June 10, 1913, wherein the Hot Lake Home and Sanatorium Company were parties of the first part; the Hot Lake Springs Company, parties of the second part; the Hot Lake Sanatorium Company, P. L. Willis, trustee for the bondholders, and Walter M. Pierce parties of the third, *295 fourth, and fifth parts, respectively, wherein parcel No. 1, together with all the buildings and personal property was leased to the party of the second part for a term of two years. In consideration of said party paying to P. L. Willis, trustee for the bondholders, the interest on the $250,000 of bonds outstanding, which amounted to the sum of $15,000. The buildings and equipment of the property having deteriorated and being out of repair, a rehabilitation thereof having become necessary, and it being apparent that the Hot Lake Home and Sanatorium Company had not the means of raising it without disposing of some of the property not immediately and urgently necessary for the present operation of the sanatorium, it was stipulated that tracts 2, 3 and 4 should be sold and out of the proceeds derived from such sale $14,000 be paid to the lessee as a rehabilitation fund for the purposes above indicated. There were mortgages upon the properties amounting to $5,000 and after considerable effort the properties were sold subject to these mortgages, the purchasers assuming the same, which brought the purchase price up to $19,000. And the testimony indicates that this was the fair market value of the property. Of the sum of $14,000 paid over to the Hot Lake Springs- Company as a rehabilitation fund, $11,834.23 was actually expended during the first two years of the lease for the purposes indicated therein, leaving in its hands at the end of the term the sum of $2,165.65 unexpended. At the expiration of the term the lease was renewed under practically the same conditions as the original with the stipulation that the lessee might retain this unexpended balance as a betterment and repair fund, and any unexpended balance left of the fund was to be paid over to the trustee of the bondholders. The money was not so *296 expended and one of the contentions of the plaintiff here is that it is entitled to have this sum applied upon its judgment. We see no equity in this contention. The land from the sale of which it was realized was subject to the lien of the bondholders’ mortgage. The plaintiff had no lien by judgment or otherwise upon the land or the proceeds of it, either at the time of the original lease or of the second lease. Under the circumstances the bondholders were first in time and had an equity equal or rather superior to the plaintiff, arising from the fact that they had consented to a sale of the property under circumstances which gave them at least an equitable lien upon the proceeds, subject only to the right of the lessee to expend such sums as might be necessary in repairs and betterments. This reasoning applies to the whole $14,000 received for the property. Nothing that was done in respect to the sale of these tracts put plaintiff in any worse position than it was before they were sold. They were subject to the lien of the bondholders’ mortgage and the evidence indicated that the value of all the property subject to such lien was far short of the par value of the bonds. The loan was evidently made upon a speculative basis and was dependent for its repayment to a considerable extent upon the financial success of the sanatorium, which seems to have been a failure from the beginning until the present.

There is some question raised as to the adequacy of the consideration paid for tracts 2, 3 and 4, but the evidence indicates that they brought their full market value and that they were conveyed in good faith with the sole purpose of complying with the requirement of the Hot Lake Springs Company that a rehabilitation fund should be raised as a condition precedent to its taking a lease of the property. The making of *297 this arrangement seemed at the time the only hope of the unsecured creditors. The institution was in default of interest on the bonds for the payment of which all its property was pledged, and an inevitable foreclosure that would necessarily absorb all the assets was imminent. Such foreclosure would probably have meant a partial loss to the bondholders and a total loss to the unsecured creditors. In this condition of affairs fraud or bad faith cannot be imputed to Pierce or the other parties to the lease, on account of their taking a course which appeared to offer some hope of infusing new life into a failing venture and possibly rendering it ultimately profitable. The leasing proposition was the proverbial “last straw” and the parties interested grasped at it. That it proved unavailable does not prove or tend to prove want of good faith on the part of the parties executing it. The stipulation in the renewal lease in regard to the unexpended balance of the rehabilitation fund seems fair. To help the project along the bondholders had consented that a portion of their already inadequate security might be disposed of. It was only fair that the unexpended proceeds of the security disposed of should take the place of the original security. This result would seem equitable even in the absence of the agreement to that effect, from the terms of the trust deed.

5. There is nothing in the circumstance that the defendant made the lease to the Hot Lake Springs Company, which indicates an intent to defraud any creditor of the Hot Lake Sanatorium Company or the Hot Lake Home and Sanatorium Company. The lease was the last experiment that remained to be tried to prevent a foreclosure and sale of the property, which would have left the secured creditors only partially *298 paid and the unsecured creditors without hope of receiving anything whatever. The scheme was founded on the not wholly unreasonable theory that a company organized under the auspices of a great corporation like the Oregon-Washington R. & N. Co., might be able to attract tourists and others to the sanatorium. The railroad company would naturally be benefited by increased tourist travel over its lines, and could advertise the resort more widely than the Sanatorium Company in its embarrassed and crippled condition would be able to do. Nobody objected to the plan until it was found that it did not work out successfully when tried. As before remarked, no creditor is in any worse position by reason of the lease and, therefore, no creditor can complain because of it.

6. Much space has been devoted to a discussion of the doctrine that the assets of an insolvent corporation constitute a trust fund in the hands of its officers for the payment of its indebtedness. This, as a general proposition is true, but such a trust does not throw secured and unsecured indebtedness into hotchpot to be satisfied regardless of priorities, but on the contrary equity will apply the assets first to the payment of secured debts, which were a lien upon the property and second to unsecured debts pro rata. It is conceded and fully established that the debt secured by the bondholders’ mortgage will absorb the property and, as previously indicated, it is a prior lien upon all; there is no other property upon which a trust can be fastened, and there is not the slightest evidence that any of- the officers of the original Sanatorium Company made any of the conveyances in bad faith, or for an inadequate consideration, or for any purpose other than to keep the institution on its feet and try to make it a success. Walter M. Pierce, the pro *299 jector of the institution, testifies that he has sunk about $200,000 in it, and the bondholders stand to lose a large part of the money they have invested. It is useless to speculate upon the cause of the failure. It may be that the management was not the best or it may be that the project was inherently unsound, as many plausible ventures prove to be when given the acid test of actual experience. That the scheme so far has been a failure and that everybody who has put money into it has been a loser is evident from this record, but we find nothing in the facts or the law that would justify us in setting aside existing priorities or holding that there have been any such fraudulent practices as will justify a decree for plaintiff.

The decree of the Circuit Court is affirmed.

Affirmed. Motion to Retax Costs Overruled.