Brainard v. Jones

BRAY, J. Defendant Douglas, sued as First Doe, appeals from a declaratory relief judgment against him.

Facts

There is no dispute as to the facts. In 1930, Ellery Arms Company, a corporation, owed approximately $101,000 to some 300 general creditors, more than $100,000 to its president and principal stockholder William Ellery, $11,500 to Christopher Ellery, and $2,500 to James H. Jones. (The latter two assigned their claims to defendant and will hereafter be referred to as assignors.) Through the San Francisco Board of Trade the corporation sought an extension of time of payment from [218]the general creditors. After negotiations and to induce those creditors to grant the extension, an agreement was entered into between the general creditors, the corporation, and William Ellery. It extended the time of payment of the claims of the creditors for one year, to December 15, 1931, upon certain conditions, including (1) the delivery by William Ellery to Brainard, the secretary of the Board of Trade, “acting as Trustee, for the pro rata use and benefit of creditors executing this” instrument, of deeds to certain real'property owned by William individually. Power of sale was given the trustee. (2) The corporation's business was to be continued under a manager selected by the creditors’ committee. (3) If a net loss was incurred between the date of the agreement and March 15, 1931, the business was to be liquidated. (4) William was to deliver to the trustee a full release of all corporation indebtedness to him. Assignors did not sign this agreement. As an inducement to the general creditors to sign this agreement, the corporation offered to obtain from assignors waivers or subordinations of their claims. Assignors signed waivers to the effect that in consideration of the general creditors extending the time of payment of their claims, assignors agreed not to attempt to collect their claims until after the general creditors’ claims had been fully satisfied. These waivers were upon condition that (1) interest be paid upon assignors’ claims “pending the payment to the other creditors,” and (2) that the waivers would not prejudice assignors’ rights in the event of bankruptcy of the corporation or William. As agreed, William deeded his property to the trustee. A manager operated the business for the creditors, but the business proved unprofitable. June 13, 1931, at the request of the creditors’ committee and pursuant to the agreement, the corporation executed an assignment for the benefit of creditors to Brainard as trustee, since he was the secretary of the Board of Trade. The business was not liquidated until February 12, 1932. The assets of the business were then sold. Interest had been paid to assignors on their claims and continued to be paid until October 13, 1933. On that date, Wren, attorney for the Board of Trade, wrote assignors to the effect that under the terms of their waivers it was agreed that interest would be paid them during the extension of the general creditors’ claims; that the extension had long since expired and the business had been liquidated on February 12, 1932. In spite of that fact, the committee had permitted interest to be paid assignors up to the present time with the result that while the