#### A. C. EVERETT and Wife, ELLA S. EVERETT, v. CAROLINA MORTGAGE COMPANY and CAROLINA DEBENTURE CORPORATION, Intervener.

(Filed 1 February, 1939.)

1. Execution § 15: Evidence § 9—

Tlie burden is upon intervener claiming title to funds in the hands of a judgment debtor levied on by a creditor under execution to prove his title to such funds by the greater weight of the evidence.

2. Bills and Notes § 7b—

Possession of a note made to bearer is sufficient to place title in the holder, and actual possession is not necessary, it being sufficient if there has been constructive delivery, or possession for collection, even by the original holder or transferee, as agent of the real owner.

3. Fraudulent Conveyances § 1—

A corporation may not transfer all of its assets to other than a tona fide purchaser for value, without provision for the payments of its creditors.

4. Fraudulent Conveyances § 8—

A creditor beginning- an action prior to the transfer of assets by defendant is entitled to attack the transfer as fraudulent as to him, although he does not obtain judgment against the defendant until after the transfer of the assets had been accomplished.

*7795. Fraudulent Conveyances § 4—

When a corporation receiving all the assets of another corporation has knowledge of debts of the transferring corporation, or of circumstances which should prit it on inquiry as a matter of law, the transaction will be deemed void as to the receiving corporation, and a creditor may follow the funds into its hands.

6. Fraudulent Conveyances § 3—

Where a corporation transfers all its assets to another corporation for a grossly inadequate consideration, or no consideration at all, the transaction is fraudulent as to a creditor of the transferring corporation, and he may set aside the conveyance without showing actual fraud, regardless of the intent of the parties to the transfer.'

7. Fraudulent Conveyances § 2—

When a transfer of assets by a debtor is in law or in fact fraudulent as to creditors, so as to evade the just claims of the creditors, the mode and devices by which the transfer is made may be ignored and the transaction declared void.

8. Fraudulent Conveyances § 9: Execution § 15 — Held: Intervener failed to show that prior transfer to it of property by judgment debtor was valid as to judgment creditor.

Plaintiff! obtained a judgment against defendant mortgage company for usury, and levy under execution was had on funds in the bank to the credit of the mortgage company, which funds were derived from the payment to it of a mortgage note. Intervener claimed the mortgage note belonged to it by transfer had prior to the rendition of the judgment, but subsequent to the institution of plaintiff’s action. It appeared that defendant mortgage company being insolvent, its assets were transferred to two other corporations for the benefit of the secured creditors, bondholders and the surety for defendant mortgage company, under an agreement among this group of creditors for the liquidation of assets for their benefit, the intervener becoming the assignee of the mortgage note in question under the transfer, and claiming that defendant mortgage company was only its agent for the collection of the note. Held: The burden was on intervener to establish title to the funds levied on in the hands of the judgment debtor, and in the absence of evidence that the transfer of the assets of defendant mortgage company was supported by sufficient consideration, the transfer is void as to plaintiff judgment creditor, and an instruction that if the jury believed the evidence to find that inter-vener was not the owner and entitled to possession of the funds is without error.

Appeal by intervener, Carolina Debenture Corporation, from Phillips, J., at March Term, 1938, of BichmoND.

No error.

The plaintiffs instituted an action against the defendant Carolina Mortgage Company, on 11 July, 1935, to recover a penalty against this defendant for usury alleged to have been exacted, and at March Term, 1937, of Biehmond County Superior Court, secured judgment against said defendant in the sum of $2,228.94, double the usurious interest *780paid, together with costs of the action. From this judgment there was no appeal. On 15 April, 1937, plaintiffs caused execution to issue from Richmond County Superior Court, which was returned on 14 May, 1937, wholly unsatisfied. On 6 October, 1937, an alias execution was issued,' which was levied on a deposit in the name of the defendant Carolina Mortgage Company in the Farmers Bank and Trust Company of Rock-ingham, amounting to $1,650.00. This was held in the name o'f the Carolina Mortgage Company on a draft drawn by it on Mrs. Maie Dennis, and was the proceeds of a note given by Mrs. Dennis for a loan obtained from the Carolina Mortgage Company.

The Carolina Debenture Corporation obtained an order of court, upon which it intervened, claiming the funds levied upon as its own.

The Maie Dennis note was secured by a deed of trust executed to Carolina Mortgage Company, trustee, to secure the same, and the note, made to bearer, was held by the Mortgage Company. The Mortgage Company issued a great number of bonds, pledging the notes and mortgages held by it upon its customers as collateral to secure them. These loans in a large amount were guaranteed by the Maryland Casualty Company.

The evidence tends to show that the Carolina Mortgage Company was unable to pay the bonds so issued, and became insolvent. The Maryland Casualty Company, finding itself embarrassed by its guaranty to pay the bonds, undertook to bring about a refinancing of the obligations of the Mortgage Company, and the procurement of a loan from the Reconstruction Finance Corporation to make such financing possible.

There were two plans finally offered to the holders of the bonds of the Mortgage Company, the evidence tending to show that one plan so adopted received about ten per cent acceptance by the creditor bondholders, and the other plan received about ninety per cent acceptance.

Under the latter plan, the bondholders were to receive $300.00 in cash and $700.00 in debentures, issued by the Carolina Debenture Corporation, for each $1,000.00 bond of the Mortgage Company. It is claimed by the defendants that the Maie Dennis note became the property of the Carolina Debenture Corporation on 28 May, 1936, as part of the program of refinancing, and that in turn it was one of a great number of mortgages made to the Carolina Mortgage Company which became pledged to the Reconstruction Finance Corporation for a loan.

The evidence tends to show that in addition to the Carolina Debenture Corporation, the Carolina Bond Corporation was organized to facilitate the refinancing under Plan No. 1. A committee was appointed by the Maryland Casualty Company and the bondholders, by which committee it was determined “which collateral was up” for options 1 and 2, which committee got information as to the various mortgages which were held, *781and these were partitioned as collateral according to the information they received. As to this proceeding, E. C. Murphy testified:

“Those bonds were parceled out in Baltimore, I believe. The actual delivery of the bonds was in Baltimore. No, sir, it did not take place at the office of the bank in Raleigh. No, the notes and mortgages did not leave the bank in Raleigh in a bulk to go to Baltimore, to be parceled out. The partition was all agreed upon before the mortgages were removed from Raleigh, actually. The mortgages, securing the outstanding bonds, were removed from Raleigh in May, 1936, between May 20th and May 30th. I don’t know about their being moved to Baltimore. I understand Mr. Le Master was here when the bonds were removed. I did not check the bonds out myself.”

'With regard to the course of title of the Maie Dennis note and mortgage through the various transactions by which the refinancing was accomplished, the defendants point out that the Carolina Mortgage Company entered into a trust agreement in 1936 with the Commercial National Bank of Raleigh (the predecessor in the trust of Security National Bank of Greensboro), whereby the said bank should act as trustee and hold the notes as security for the payment of the bonds to be issued by the Carolina Mortgage Company, and that it pledged the notes to the trustee in pursuance of this. It appears from the original agreement, dated 3 August, 1926, that the Maie Dennis note and mortgage was so assigned. Reference is further made to the refinancing plan, and especially to the debenture agreement under option 2, dated 1 December, 1933, executed by the Carolina Mortgage Company, Carolina Debenture Corporation, Carolina Bond Corporation, and Maryland Casualty Company, under which it was agreed to exchange the new issue of bonds for those held, transferring the collateral supporting the old bonds in security for the new, and special reference is made to this clause: “It being-contemplated and intended that as soon as practicable collateral securing the exchanged bonds which may constitute assets of the corporation shall be substituted in place of any and all exchanged bonds as assets of the corporation.”

With regard to the actual transfer of the Maie Dennis note, reference is made by the defendants to the testimony of E. C. Murphy (R., pp. 61, 62), as follows: “The new-bonds were issued by Carolina Bond Corporation and the Debenture Corporation prior to the time the mortgages were removed from North Carolina; they were issued early in 1934, hut the details were not completed until May, 1936.”

Mr. J. M. Sink, Assistant Trust Officer of the Security National Bank of Greensboro (successor trustee), testified (R., p. 71) :

“I do have the receipt issued to us by the Reconstruction Finance Corporation. It consists of fourteen hundred and some-odd papers of *782the exhibits attached to these receipts. This receipt is dated May 23, 1936, the date on which the trust was actually closed out. On. that date we closed out the Carolina' Mortgage Company.”

And on page 72: “Yes, we received that receipt and the paper writing you showed me, purporting to be receipt from the Reconstruction Finance Corporation, dated May 23, 1936, for 1,431 separate pieces or groups of collateral, is the receipt. . . . The schedule is attached to the receipt listing loan 1982, name of the mortgagor, Mrs. Maie Dennis, widow; mortgagee, Carolina Mortgage Company, trustee, dated July, 1926, balance eight notes, $2,000.00.”

And on page 73: “Yes, we did deliver to the Reconstruction Finance Corporation the trust receipt of Carolina Mortgage Company attached to Exhibit N, which I have identified, the original of that. I was present. There was no written contract. The Maie Dennis paper was allocated. . . . We delivered the Maie Dennis papers to the Carolina Debenture Corporation and immediately received the Reconstruction Finance Corporation receipt.”

E. O. Murphy testified (R., p. 49) : “The Carolina Mortgage Company, prior to May, 1936, had received the Maie Dennis papers from the Security National Bank, trustee, for the purpose of collection or foreclosure. We executed a receipt for them to the Security National Bank, trustee. That is right, the papers did not pass to the Reconstruction Finance Corporation. The trust receipt passed.”

The evidence tends to show that the Carolina Mortgage Company put up all the capital stock for the organization of the Carolina Bond Corporation used in Flan 1 of the refinancing, and also of the intervener, Carolina Debenture Corporation, used in Plan 2, with which this case is more concerned. It shows also that the principal offices of these two corporations were the same as those of the Carolina Mortgage Company. It discloses further that, in the process of refinancing, all of the assets of the Carolina Mortgage Company were transferred either to the one corporation or to the other, or to the Careen Corporation, formed for the handling of the free assets of the Carolina Mortgage Company, leaving the Carolina Mortgage Company without assets. “This receipt is dated May 23, 1936, the date on which the trust was actually closed out. On that date we closed out the Carolina Mortgage Corporation.” Testimony of E. C. Murphy (R., p. 71).

E. C. Murphy, witness for the intervener, further testified (R., p. 66) : “There is no written conveyance from the Carolina Mortgage Company to the Carolina Debenture Corporation, covering this Maie Dennis note and mortgage, except these general agreements here in evidence.” And J. P. Be Master, president of the corporation and witness for the inter-vener, testified (R., p. 77) : “It was acquired by written contract.” And *783on page 80: “Tbe written instrument wbicb I bold is tbe instrument under wbicb tbe Carolina Debenture Corporation claims ownership of tbe mortgage referred to in tbis case.”

Tbe intervener accounts for tbe possession of tbe Maie Dennis note in tbe bands of tbe Carolina Mortgage Company at tbe time of its collection and tbe deposit of tbe proceeds in tbe bank by introducing a written agreement by wbicb tbe Carolina Mortgage Company undertook to “service,” tbat is, in tbis instance, “collect” as agent for tbe owners, tbe notes and mortgages formerly belonging to them.

Upon tbis evidence tbe plaintiffs, contended both in tbe court below and here: First, tbat no title to the- Maie Dennis note passed to tbe Debenture Corporation, and that there is no evidence tending to show such a transaction; second, if it should appear tbat title to tbis item passed, then it is undisputed from tbe evidence tbat tbe Carolina Mortgage Company transferred all of its assets, or tbe greater part, to tbe Debenture Corporation, and tbat under tbe circumstances of tbe transfer tbe Debenture Corporation was held to a knowledge of tbe fact tbat tbis was done without reservation of any fund to pay creditors and was, therefore, a legal fraud and void as against tbe levy of plaintiffs upon tbe funds in tbe bands of tbe Carolina Mortgage Company, no matter by what pretext or device they held it; third, tbat tbe Carolina Debenture Corporation was at tbe time of tbe transaction a mere subsidiary corporation, in wbicb tbe Mortgage Company held tbe entire stock, and tbe attempted transaction conveyed no title thereto such as to divest from tbe Carolina Mortgage Company tbe ownership of its assets, as against tbe claims of creditors; and, fourth, tbat tbe Carolina Debenture Corporation was created and intended as a mere fraudulent device, for tbe purpose of removing tbe assets of tbe Carolina Mortgage Company from reach of its creditors, and in furtherance of tbis fraud tbe property of tbe Mortgage Company was transferred to it, and tbe transaction is, therefore, void as to plaintiff creditors.

One issue was submitted to tbe jury: “Is tbe Carolina Debenture Corporation, intervener, tbe owner and entitled to tbe possession of tbe funds seized by tbe plaintiffs in tbis action?” Thereupon, tbe judge gave tbe following instruction to tbe jury: “Upon tbis issue, tbe court charges you, if you find all tbe facts to be as testified to by tbe witnesses in tbis case, and further find tbe facts to be as tbe evidence tends to show, you will answer tbis issue Nod ”

To tbis instruction, tbe defendants excepted.

Jones <& Jones for plaintiffs, appellees.

W. Cr. Mordecai and Varser, McIntyre & Henry for Carolina Debenture Corporation, appellant.

*784Seawbi/l, J.

Tbe burden was upon tbe intervener to establish, by tbe greater weight of tbe evidence, its ownership of tbe funds levied upon by tbe plaintiffs. Tbe plaintiffs say that tbe intervener has not carried this burden, contending that there is no evidence in tbe record of any delivery to tbe intervener of tbe Maie Dennis note, upon tbe proceeds of which levy was made.

Tbe note was payable to bearer, therefore want of actual endorsement would not defeat the title of tbe bolder. In some doubtful cases, delivery is largely a matter of intent, and tbe manner of tbe delivery is unimportant; even “retention of possession by tbe maker is not fatal to tbe valid delivery where there has been an intent to deliver and tbe maker bolds tbe instrument as agent of tbe payee.” 10 C. J., 520. And tbe want of actual physical delivery of tbe note by tbe person originally bolding tbe same would not be fatal to tbe title if such person became tbe agent of tbe real owner for collection. 10 C. J., 520.

Tbe evidence respecting delivery of tbe note, actual or constructive, need not be material to tbe consideration of tbe case, since it may be decided on an issue less involved. Tbe evidence discloses that tbe Carolina Mortgage Company, at tbe time an insolvent concern, transferred all of its assets concurrently to tbe Carolina Bond Corporation, tbe Carolina Debenture Corporation — tbe intervener in this case — and tbe Careen Company. Tbe fact that tbe property so transferred consisted largely of equitable interests in mortgages and notes, which may have been of doubtful value, makes no difference to a discussion of tbe principles involved. One other transfer took place during tbe succession of transactions reviewed in this case' — tbe transfer of $1,000.00, represented by tbe total stock of tbe Debenture Corporation, to tbe Maryland Casualty Company. Tbe time relation between tbe latter transfer and other pertinent incidents in tbe case does not exactly appear, but this is not important to tbe result.

Tbe principle that a corporation may not transfer all of its assets to other than a bona fide purchaser for value, without provision for tbe payment of its creditors, is very generally accepted. 13 Am. Jur., p. 1121, sections 1233, 1234; 7 R. C. L., p. 573, section 561; 14A C. J., p. 884, section 3064; Darcy v. Brooklyn Ferry Co., 196 N. Y., 99, 89 N. E., 461; McIver v. Hardware Co., 144 N. C., 478, and cases cited on p. 484, 57 S. E., 169; Sweeney v. Heap O'Brien Mining Co. and Grand Haven Mining Co., 186 S. W. (Mo.), 793; Kentucky Beaver Colliers, et al., v. Mellon and Smith, 254 S. W. (Ky.), 421. This rule is modified and conditioned so as to show some differences in its application in various jurisdictions, but tbe main principle is tbe same. It may be considered as a proper extension of tbe “trust fund” doctrine, as recognized in this State. McIver v. Hardware Co., supra.

*785We consider that the plaintiffs in this action were entitled to the protection afforded by this principle of law as other creditors, since they had begun their action before the transfer of the assets of the defendant Carolina Mortgage Company had been accomplished, although the actual judgment was not obtained until after that date. Avery v. Safety Cab & Storage Co., 80 P. (2nd Series), 1099.

Where the corporation receiving the assets of another corporation under the circumstances indicated had knowledge of the existence of debts of the transferring corporation, or of circumstances, which as a matter of law, should put it on inquiry, the transaction will be deemed void as to the receiving corporation, and a creditor may follow the funds into its hands. “Of course, a corporation holds its property subject to the payment of the corporate debts, and when a corporation sells or transfers its entire property to a purchaser, knowing the fact, the latter is chargeable with knowledge that the property is subject to the corporate debts and that equity will, in proper eases, allow the corporate creditors to follow the property into the hands of the purchaser, for satisfaction of their claims.” 7 K. C. L., p. 573, section 561, and cases cited.

Whatever may be the difference in the principle announced in the various jurisdictions dealing with this question, where the sale and purchase of the assets were for a valuable consideration, and whatever the status of the purchasing corporation under such circumstances, and whatever the procedure required in cases where it may become necessary to show actual fraud in the transaction, such distinctions do not apply to instances where there was a grossly inadequate consideration, or no consideration at all. In such cases, regardless of the intention of the parties, the transaction amounts to a legal fraud upon creditors. It strips the corporation of its assets, to which the creditor has a right to resort for the payment of his debt, and substitutes therefor, without his consent, the naked liability of officers and directors who have violated their trust, and who are often financially irresponsible.

In the case at bar, the transfer of assets was made to the intervener— the Carolina Debenture Corporation — a corporation entirely owned by the defendant Carolina Mortgage Company and having substantially the same responsible officers. This by no means diminishes the propriety of applying the rule. Avery v. Safety Cab & Storage Co., supra. And the inference of notice, even of intimate knowledge of the condition of the parent corporation and of its inability to make a fair and equitable transfer of its property to its infant creation, seems unavoidable.

In order to maintain its title to the funds in dispute, the burden was upon the intervener not only to show that the item had been assigned to it and, at least, constructively delivered, but, also, we think, under the *786circumstances of this case, in order to support the transfer, there should be some evidence of a valuable consideration. We do not find such evidence in the record, but, indeed, such inferences as we may draw from the evidence lead to a contrary view. The devices employed, the creation of these new corporations by the Carolina Mortgage Company, including the Carolina Debenture Corporation, seem to have been prompted by a desire to save the bondholders of the Mortgage Company, and particularly the guarantor — the Maryland Casualty Company— from substantial loss, while unsecured debts and other liabilities of the Mortgage Company were ignored. The interposition of the Debenture Corporation between the Mortgage Company and its unsecured creditors seems to serve no substantial purpose except to render the assets of the Mortgage Company unavailable to pay its unsecured debts.

The plan apparently did not regard an exchange of values as necessary. The Debenture Corporation merely acquired the assets of the Mortgage Company and. participated in their distribution according to a schedule prepared by a committee of the Maryland Casualty Company and the bondholders. The whole transaction seems little more than the attempted taking, through corporate devices, of the entire property of the Mortgage Company by a preferred class of creditors, and a partition thereof amongst them, with no return to the Mortgage Company except a way out. This is not morally or legally satisfying to a creditor whose claim is ignored, and is a method of liquidation which stands somewhat opposed to the principles of law and equity, and is, needless to say, unauthorized.

It is sufficient to say that, on the face of the record, we cannot find evidence of that quid pro quo which might serve as a consideration and give to the transfer of its assets by the Mortgage Company to the Debenture Corporation the necessary quality of good faith to support the transaction, or to require a different procedure on the part of the prejudiced creditor to attack it.

If the Corporation has disposed of its property fraudulently, either in fact or in law, so as to evade the just claims of the creditor, and the property has gone into the hands of other than a bona fide purchaser, we may ignore the devices by which the assets were wrongfully divested from the Mortgage Company and by which they were returned to it as being void upon the above announced principles, and regard the proceeds of the Maie Dennis note, now in the hands of the Mortgage Company, as being there by original right of ownership, or we may regard the holder as being charged with the trust in favor of the creditor; and when the assets have been subjected to levy by a judgment creditor and the holder intervenes, and both are, therefore, parties to the proceeding, ' the Court will administer the equities and execute the trust by enforcing the levy.

*787In tbis case, tbe inferences to be drawn from tbe evidence are in snob agreement that tbe court below was justified in tbe instruction given to tbe jury.

We bave examined tbe exceptions to rejection of evidence, as well as other exceptions in tbe record not bere mentioned, and find

No error.