The opinion
WADDILL, Circuit Judge
(dissenting). The real contest in this case arises over the issuance, disposition, and hypothecation of an issue of $750,000 of the bonds of the Pigeon River Railway Company, secured by mortgage upon its property. On the 1st day of January, 1913, $180,000 of this issue was taken by the appellee, the Champion Fibre Company in settlement of an indebtedness due to it for expenditures made in the construction of the Pigeon River Railway. At a later date, the residue of the said issue of bonds, amounting to $570,000, was issued and delivered to the Champion Lumber Company as collateral security for the payment of three notes for $39,981.51 each, due by the Pigeon River Railway Company to 4the Champion Lumber Company, and the Champion Lumber Company was authorized to rehypoth-ecate the said notes and bonds to secure its own indebtedness. Subsequently, the Champion Lumber Company delivered said notes aggregating $119,944.53 due it by the Pigeon River Railway Company and rehypothecated the said $570,000 of bonds as collateral security for an indebtedness of its own, amounting to $328,921.67. The notes of the Champion Lumber Company, with the exception of $3,000, were indorsed by the firm of William Whitmer & Sons, Inc., and the money raised thereon practically all furnished by said William Whit-mer & Sons, Inc. The collaterals attached to said notes were delivered to David G. Wilson, trustee. Neither the Pigeon River Railway Company nor the Champion Lumber Company paid the notes at maturity, and William Whitmer & Sons, Inc., took up the same, and subsequently called upon Wilson, trustee, to sell the $570,000 of bonds of the Pigeon River Railway Company so deposited as collateral, and they were accordingly sold to William Whitmer & Sons, Inc., for $2,500, and they now claim to own the same.
The Champion Fibre Company attacks as well the issue as the hy-pothecation of the $570,000 of bonds by the Pigeon River Railway Company alike for its own indebtedness of $119,944.53, as the attempted hypothecation of said bonds as security for the payment of the debts of the Champion Lumber Company, and the sale of the bonds so hy-pothecated to William Whitmer & Sons, Inc. The mortgaged property securing the issue of bonds will not probably sell for more than enough to pay the appellee’s bonds of $180,000, and if the subsequent $570,000 issue and hypothecation is held valid, the holders of the original bonds would only receive from the proceeds of the sale of the mortgaged property, its pro rata share; in other words, assuming that the mortgaged property would sell for $200,000, the appellee on account of its holdings of $180,000 of the bonds so issued to meet an indebtedness of $180,000, incurred in building the railroad, would receive only $48,000; whereas, on account of the open account indebtedness of the company remaining unpaid, in round figures $120,000, the so- *568 called issue and attempted hypothecation of the $570,000 of bonds would net to their holders $152,000.
The District Court set aside and declared that all proceedings had in connection with ithe issue and hypothecation of the $570,000 of said bonds, save to ah amount equal to the actual indebtedness of approximately $120,000 due by the Pigeon River Railway Company on the three notes aforesaid, was null and void, for the reason that the relation that William Whitmer & Sons, Inc., bore to all of the properties and companies in question, being in effect the virtual owners of the same, and the dominating and controlling influence in them all, was such-that the effort to so hypothecate and dispose of the $570,000 of bonds, operated as a fraud upon the appellee, the Champion Fibre Company, the holder of $180,000 of said bonds, and the court accordingly held that only $120,000 of the $570,000 were lawfully issued and held on account of the transactions aforesaid, and that the remainder of the issue, viz., $450,000, should be canceled. In other words, the lower court held the relationship of William Whitmer & Sons, Inc., by virtue-of their ownership in and dominating control of all of said properties, was fiduciary in character, and that the effort to issue and hy-pothecate in its own interest, an issue of bonds of a company that if controlled and owned, was invalid, in so far as it operated to diminish the security, or destroy the first issue of $180,000 of bonds held by the appellee.
The learned judge of the lower court, in a most comprehensive and elaborate opinion, reviewed the transactions between these several 'companies from their organizations down to the consummation of the wrong here complained of. One or two excerpts from his opinion and findings will greatly elucidate the subject:
“Indeed, it is patent from the testimony that from their organization, the Tennessee & North Carolina Railroad Company, Pigeon River Railway Company and the Champion Lumber Company were subsidiary corporations of William Whitmer & Sons,' and ever since their organization they have been financed by William Whitmer & Sons, and the chief object of these corporations has been to serve and subserve the interests of William Whitmer & Sons, their creators.” (Record, p. 460.) '
“It should be particularly remembered that when the Whitmer interests bought these $570,000 of bonds at the sale-in Philadelphia, Whitmer & Sons owned all of the stock of the Pigeon River Railway Company and all of the stock of the Champion Lumber Company — in other words, they actually owned the two corporations. Indeed, the conclusion is irresistible that from the organization of these two companies Whitmer & Sons dominated and controlled them and a majority of persons on the board of directors of these corporations, who were subservient to, or mere agents of Whitmer & Sons; so, in reality, when the Pigeon River Railway Company pledged its $570,000 of bonds as security for its notes to the Champion Lumber Company, it was really the Whitmer interest dealing with the Whitmer interest; and when the Whitmer interests bought the $570,000’ bonds, they were in reality merely buying them from themselves for themselves, and all at the expense of and injriry of the plaintiff.” (Record, pp. 461, 462.)
“tinder these circumstances equity cannot sustain any such financial juggling or corporate dickering when the result is to injure another party.”
“I do not find as a fact that there was actual fraud in these various-transactions which led to the plaintiff’s injury, though there are ‘badges’ which might properly move a less charitable court to come to a contrary conclusion; but the transactions of the Pigeon River Railway Company, the- *569 Champion Lumber Company and Whitmer & Sons from and including January 1, 1913, March 6, 1913, and April 18, 1917, under all the circum-Hfances, constitute glaring legal or constructive fraud upon the rights of the plaintiff.” (Record, p. 403.)
“The court further holds that, as a matter of law, the Pigeon River Railway Company had no authority in law or equity to authorize the Champion Lumber Company to repledge the Pigeon River Railway’s notos and bonds to secure the payment of a debt due by the Champion Lumber Company. The stockholders of the Pigeon River Railway Company never authorized such a rehypoiheealion, md ihe directors exceeded their authority when they attempted to authorize it.” (Record, p. 467.)
The majority opinion is directly contrary to that of the lower court, and validates the issue and the rehypothecation of the $570,000 of bonds as well for the indebtedness of the Pigeon River Railway Company, as that of the Champion Cumber Company, which largely destroys appellee’s security. The decision of the District Court does not deprive the appellant, William Whitmer & Sons, Inc., of the entire value of the collateral security, but validates the same to the extent of $120,000, instead of $570,000, which, in the light of all the facts and circumstances, is, in iny judgment, all that in equity and good conscience it is entitled to ask for.
It is with reluctance that I differ from my Brethren, but I am firmly convinced that the practical effect of their decision is to reward the wrongdoers, and penalize the innocent in this transaction, and that, too. in the face of the findings of the lower court, with which I am in entire accord, as well on (lie law as on the facts.
Moreover, if the transactions respecting the issue, hypothecation and sale of the $570,000 of bonds, are not invalidated for the reasons herein stated, then, manifestly, in the light of the decision of the lower court, finding that the Pigeon River Railway Company was insolvent on the date of the alleged hypothecation of said bonds, to wit, the 6th of March, 1913, they should be voided, as constituting an illegal preference in favor of William Whitmer & Sons, Inc., the dominating and controlling influence that directed the affairs of all of said companies, in order to secure the payment of past due obligations of the Pigeon River Railway Company, held in their interest.