16 Pac. 863, 8 Am. St. Rep. 251; Morris v. Sheridan, 167 Pac. 593, 596; Rehfield v. Winters, 62 Or. 299, 306, 125 Pac. 289; Capital City Bank v. Hilson, 64 Fla. 206, 60 South. 189, Ann. Cas. 1914B, 1211; McCoy v. McCoy, 32 Ind. App. 38, 69 N. E. 193, 102 Am. St. Rep. 223; Bolton Mines Co. v. Stokes, 82 Md. 50, 33 Atl. 491, 31 L. R. A. 789; Henry v. Herrington, 193 N. Y. 218, 86 N. E. 29, 20 L. R. A. (N. S.) 251; Rowell v. Smith, 123 Wis. 510, 102 N. W. 1, 3 Ann. Cas. 773; Fuller-Warren Co. v. Harter, 110 Wis. 80, 85 N. W. 698, 53 L. R. A. 603, 84 Am. St. Rep. 867; Clausen v. Head, 110 Wis. 405, 85 N. W. 1028, 84 Am. St. Rep. 933; Zimmerman v. Robinson & Co., 128 Iowa, 72, 102 N. W. 814, 5 Ann. Cas. 960; Harrill v. Davis, 168 Fed. 187, 94 C. C. A. 47, 22 L. R. A. (N. S.) 1153; Agar v. Winslow, 123 Cal. 587, 56 Pac. 422, 69 Am. St. Rep. 84; Wells v. W. U. T. Co., 144 Iowa, 605, 123 N. W. 371, 24 L. R. A. (N. S.) 1045, 138 Am. St. Rep. 317; Clark v. Heath, 101 Me. 530, 64 Atl. 913, 8 L. R. A. (N. S.) 144; Snow v. Alley, 156 Mass. 193, 30 N. E. 691; Johnson-Brinkman Com. v. Central Bank, 116 Mo. 558, 22 S. W. 813, 38 Am. St. Rep. 615, 625; 15 Cyc. 262; 9 R. C. L. 962; 7 Ency. Pl. & Pr. 366. The action at law brought by the corporation against Kirkpatrick was decided by this court on June 3, 1913, and a petition for rehearing was denied on July 15, 1913. On September 25, 1913, the corporation commenced the action at law against Hyde. A judgment was obtained against Hyde on January 4, 1914, and Kirkpatrick was served with notice of garnishment on February 10, 1914. Assuming without deciding that the garnishee could plead laches and that he has sufficiently pleaded it, nevertheless that defense is unavailing because the evidence fails to support it. Rowell v. Smith, 123 Wis. 510, 102 N. W. 1, 3 Ann. Cas. 773, 778; Wills v. Nehalem Coal Co., 52 Or. 70, 96 Pac. 528. The judgment is affirmed. CLARKE WOODWARD DRUG CO. v. HOT 2. FRAUDULENT CONVEYANCES 87(1)-SAT An insolvent corporation's assets will be applied first to secured debts and then to unsecured debts pro rata. In Banc. Appeal from Circuit Court, Union County; J. W. Knowles, Judge. Creditors' suit by the Clarke Woodward Drug Company against Hot Lake Sanatorium Company and others. Decree for defendants, and plaintiff appeals. Affirmed. This was a creditors' suit brought to impress the lien of plaintiff's judgment upon certain property of the defendants, and for other purposes which will more fully appear. The great length of the pleadings precludes the reproduction of them here; but, briefly stated, the situation is as follows: The plaintiff is a corporation doing a wholesale and retail drug business in Portland, Or. The Hot Lake Sanatorium Company and the Hot Lake Home & Sanatorium Company and the Topaz Land Company are corporations whose objects will hereinafter appear. At a time anterior to the 20th day of March, 1906, the Hot Lake Sanatorium Company was engaged in operating a sanatorium in connection with baths at Hot Lake in Union county, Or., and for that purpose owned a tract of land which will be hereinafter referred to as tract 1, upon which the hot springs used in connection with its sanatorium and also the build ing itself was situated. On March 20, 1906, for the purpose of its business the Hot Lake Sanatorium Company issued $250,000 of interest-bearing bonds, and to insure said issue executed a deed of trust in the nature of a mortgage upon tract No. 1, all of its personal property, and upon all the property that it should thereafter acquire. The Eastern Oregon Savings Bank was named as trustee; but on September 23, 1912, it resigned, and P. L. Willis, a large stockholder and bondholder, was duly chosen to succeed it, and continued to act as such trustee up to the institution of this suit. On May 16, 1911, the Hot Lake Sanatorium Company became in3. CORPORATIONS 566(3)-BONDHOLDERS-debted to the plaintiff in the sum of $3,347.PRIORITIES-JUDGMENT. Bondholders under a mortgage of a corpo-08, which sum-less certain payments thereration covering after-acquired property who on-was reduced to judgment against said ISFACTION OF MORTGAGE. A judgment creditor is not prejudiced by a corporation's conveyance of property subject to a recorded mortgage covering after-acquired property, where no fraud was disclosed, especially where the property's value was less than the mortgage debt. company on April 9, 1914, which judgment, solvent and without property and funds of was for the sum of $3,188.08, with interest at the rate of 6 per cent. per annum, and was duly docketed in Union county and an execution issued thereon and returned nulla bona. At the time the debt was contracted the execution defendant was the owner of four tracts of land, namely, tract 1 hereinbefore mentioned, and tracts 3, 4, and 5, which last three were acquired subsequent to the execution of the trust deed above mentioned. pany. That said sum was so received by said Hot Lake Springs Company with full knowledge and notice of the insolvency of the two other corporations and without consideration and with notice that they were going out of business. That about June 15, 1915, under and by virtue of the lease, there became due and owing from the Hot Lake Springs Company to said P. L. Willis the sum of $4,500 as rent. That at all the times mentioned, in the complaint P. L. Willis was the duly qualified and acting trustee of the bondholders under said deed of trust, and acted at all times with the consent of the directors and the bondholders, and all of them knew— or in equity and good conscience ought to have known-the insolvent condition of the companies and all the facts recited in the complaint. any kind. That thereafter and about November 13, 1913, the defendant G. A. Pierce acquired the legal title to tract No. 4. That from and after June 10, 1913, the defendant Hot Lake Home & Sanatorium Company ceased to do any regular business whatever, and the defendant Hot Lake Springs Company carried on the business before carried on by the Hot Lake Home & Sanatorium Company. That by virtue of said lease the deThe complaint alleges: That about De- fendant Hot Lake Springs Company received cember 18, 1912, the defendant Hot Lake from the defendants Hot Lake Sanatorium Sanatorium Company, with a view of going Company, Hot Lake Home & Sanatorium out of business, transferred and conveyed all Company, P. L. Willis, and Walter M. Pierce its property both real and personal, includ- the sum of $14,000. That in a manner uning all the above-mentioned tracts of land, known to plaintiff but well known to defendto the Hot Lake Home & Sanatorium Com- ants, and each of them, said sum was derivpany, and ever since said date the first-nam-ed from unincumbered property theretofore ed company has not engaged in any regular owned by said Hot Lake Sanatorium Combusiness. That the Hot Lake Home & Sanatorium Company received said property and conveyances with a view of continuing the business theretofore conducted by the Hot Lake Sanatorium Company. That the conveyance was without consideration and caused the Hot Lake Sanatorium Company to be insolvent and without any property or funds with which to pay its debts, and especially the debt due plaintiff, and that this fact was well known to all of the defendants. That from December 18, 1912, to June 10, 1913, the business was conducted by the Hot Lake Home & Sanatorium Company. That during the time the latter company was so conducting the business it became involved in financial difficulties and, with a view of going out of business, as each and all the defendants well knew, it delivered possession of all its property to P. L. Willis and Walter M. After other allegations along the same Pierce, said property being the same which it line, it is charged that the defendants, by received from the Hot Lake Sanatorium Com- reason of the facts recited, have fraudulently pany; and that Willis and Pierce received converted the property described to their the property with a view of continuing the own use, and the complaint prays, among business theretofore conducted by the Hot other things, that the lien of plaintiff's judgLake Home & Sanatorium Company; and ment be established upon the $14,000 alleged that ever since that time Willis and Walter to have been received by the Hot Lake M. Pierce have controlled and directed the Springs Company and that such lien be dedisposition of said property. That on June clared superior to all other liens, including 10, 1913, P. L. Willis and Walter M. Pierce, that of the bondholders; that the lien so esfor the purpose of hindering, cheating, and tablished be foreclosed, and such of the defrauding the creditors of the Hot Lake San-assets be sold or accounted for and the proatorium Company and the Hot Lake Home & ceeds applied to the satisfaction of plainSanatorium Company, and especially plaintiff's judgment; that in case said judgment tiff, sold, transferred, and disposed of all of said property in the manner following: Tract No. 1 with all the personal property was leased to the defendant Hot Lake Springs Com-ants. The complaint was put at issue by an pany, upon such terms that neither the Hot answer and replies thereto, which are too Lake Sanatorium Company nor Hot Lake lengthy to even summarize here; but it is Home & Sanatorium Company have sufficient to say that they are adequate to ceived or will receive any property, money, justify the admission of all the testimony or funds therefrom with which to pay any offered by either party. There was a decree for defendants, and plaintiff appeals. unsecured corporate debts; tracts 2, 3, and 4 were conveyed to G. A. Pierce without con- R. G. E. Cornish, of Portland, and Geo. T. sideration, which caused defendant Hot Lake | Cochran, of La Grande (Cochran & Eberhard, re cannot be satisfied from said property that plaintiff have personal judgment for the amount thereof against each of the defend H. Crawford, of La Grande, and W. A. Rob-| pasture. It was evidently hoped and expectbins, of Portland (Crawford & Eakin, of ed by the promoters of the scheme that an La Grande, and A. C. Spencer, Giltner & extensive health resort would be established, Sewall, and Guy G. Willis, all of Portland, on such as exists at Hot Springs, Ark., or at the brief), for respondents. 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 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. MCBRIDE, C. J. (after stating the facts as above). [1] 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 sufficient attractions to induce the general public to patronize the resort. 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 afteracquired 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 Flip. 442, Fed. Cas. No. 2309; Humphreys v. McKissock, 140 U. S. 304, 11 Sup. Ct. 779, 35 L. Ed. 473; Smith v. McCulloch, 104 U. S. 25, 26 L. Ed. 637; New Orleans Ry. Co. v. Parker, 143 U. S. 42, 12 Sup. Ct. 364, 36 L. Ed. 66; Parish v. Wheeler, 22 N. Y. 494; Boston v. Coffin, 50 Conn. 150; Miss. Valley v. Chicago, 58 Miss. 846; Meyer v. Johnston, 53 Ala. 237; Id., 64 Ala. 603; Pardee v. Aldridge, 189 U. S. 429, 23 Sup. Ct. 514, 47 L. Ed. 883; Guaranty Trust Co. v. Atlantic Coast Co. (C. C.) 132 Fed. 68; Mallory v. Md. Glass Co. (C. C.) 131 Fed. 111; Maxwell v. Wilmington Dental Co. (C. C.) 77 Fed. 938; Calhoun v. Paducah Ry. Co., 9 Cent. Law J. 66, Fed. Cas. No. 2309; Brainard v. Peck, 34 Vt. 496; Seymour v. Can. & Niagara R. R. Co., 25 Barb. 284; Eldridge v. Smith, 34 Vt. 484; Dinsmore v. Racine, 12 Wis. 649; Walsh v. Barton, 24 Ohio St. 28. 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 live stock 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 Jones on Mortgages (3d Ed.) § 153, states 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." See, also, Central Trust Co. v. Kneeland, 138 U. S. 414, 11 Sup. Ct. 357, 34 L. Ed. 1014; Toledo D. & B. R. Co. v. Hamilton, 134 U. S. 296, 10 Sup. Ct. 546, 33 L. Ed. 905; 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 Co. (C. C.) 77 Fed. 938. We 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. "The chief question therefore is whether the to the amount of some $6,000 in cash, and parties to the mortgage intended that the after- other amounts not paid, were made, but acquired property, which is in any case the subject of litigation, should be subject to the all with the understanding that they were lien of the mortgage; and it will be noticed that merely tentative and not to be effective unin the recent cases the contention is generally less the lodges generally agreed to the arupon this question." rangement. 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 OregonWashington Railroad & Navigation Company, a branch of the Union Pacific Railroad [2] The transfer of the property to the Company, in the operation of the property. new corporation does not inure in any way In pursuance of this plan and with the to the benefit of plaintiff. It is conceded consent and assistance of plaintiff, W. M. that the value of the property is less than Pierce took the matter up with Mr. J. D. the amount due upon the bonds. The Hot Farrell, president of the Oregon-Washington Lake Home & Sanatorium Company took the Railroad & Navigation Company, with the property subject to the indebtedness and was result that a corporation called the Hot bound to discharge it. There is nothing in Lake Springs Company was formed under the evidence that indicates any intention on the auspices of the Oregon-Washington Railthe part of any one to defraud creditors by road & Navigation Company, with Mr. J. P. means of the transfer, and nothing is dis- O'Brien of the latter company as president, closed which indicates that plaintiff was to take over and manage the property under thereby placed in a more disadvantageous a lease executed June 10, 1913, wherein the position relative to collecting its debt. When Hot Lake Home & Sanatorium Company plaintiff allowed the Hot Lake Sanatorium were parties of the first part; the Hot Lake Company to contract the debt which is the Springs Company, parties of the second part; basis of its present judgment, the record of the Hot Lake Sanatorium Company, P. L. the trust deed was notice to it that all of Willis, trustee for the bondholders, and Walthe property, present and prospective, of ter M. Pierce, parties of the third, fourth, the Hot Lake Sanatorium Company was and fifth parts, respectively-wherein parpledged for the payment of the outstanding bonds. No unpledged property was conveyed to the new company and none existed. cel 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 [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 become necessary, and it being apparent that indebted in considerable amounts to unse- the Hot Lake Home & Sanatorium Compacured creditors, and a plan was devised to ny had not the means of raising it without sell the property to the Loyal Order of Moose disposing of some of the property not immeas a home for the purposes of said organiza- diately and urgently necessary for the prestion. To facilitate this the Hot Lake Home ent operation of the sanatorium, it was & Sanatorium Company was organized, and stipulated that tracts 2, 3, and 4 should be stock in this company issued to the stock- sold, and out of the proceeds derived from holders in the old company, in consideration | such sale $14,000 be paid to the lessee as a of which the latter company-the bondhold- rehabilitation fund for the purposes above ers consenting-transferred the property of indicated. There were mortgages upon the the old company to the new company. The properties amounting to $5,000, and after old company subscribed for one-half of the considerable effort the properties were sold 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 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 paid over to the Hot Lake Springs Company | be imputed to Pierce or the other parties to 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. 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 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. 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 expended, and one of the contentions of the plaintiff here is that it is entitled to have this sum applied upon its judgment. We unexpended proceeds of the security disposed 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 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 con [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 & 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 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 Railroad & Navigation Company 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 |