Opposition Brief — Texasteel Manufacturing Co. v. Seaboard Surety Co.

FE COPY Sy

IN THE CHARLES ELMORE ORO? PLEY

Supreme Court of the United States ~~

October an iia 1946.

No. 1226.

TEXASTEEL MANUFACTURING COMPANY, GEORGE W.

ARMSTRONG, SR., ALLEN J. ARMSTRONG, GEORGE W.

ARMSTRONG, JR., and MARY C. ARMSTRONG,

Petitioners,

v.

SEABOARD SURETY COMPANY,

Respondent.

No. 1227.

GEORGE W. ARMSTRONG, SR., MARY C. ARMSTRONG, ALLEN

J. ARMSTRONG and GEORGE W. ARMSTRONG, JR.,

Petitioners,

v.

SEABOARD SURETY COMPANY,

Respondent.

Brief for Respondent in Opposition.

JULIAN B. MASTIN,

First National Bank Building,

Dallas, Texas,

¥ w. E. ALLEN,

L. L. GAMBILL,

First National Bank Building,

Fort Worth, Texas,

ALLEN & GAMBILL, “ LEWIS M. STEVENS,

Fort Worth, Texas, DANIEL MUNGALL, Jr,

SrrapLey, Ronon, Stevens & YounG, Real Estate Trust Building,

Philadelphia, Pa., Philadelphia, Pa.,

Of Counsel. Attorneys for Respondent.

International, 236 Chestnut St., Phila. 6, Pa.

INDEX

Page

TD on MENT TORT LER EEE ETT eee eee 2

Py TET TTT err rere reer ee 2

RE FORIOING oo nc cacnvunccencnsenbeancnees 2

NEE 464 WR Ode dk bashes sens stindarataeveaes 3

PC peererrrerrrrrrrrrrrcyy ssa sieeee re eee 11

I. A Declaratory Judgment Was a Proper Rem-

edy in This Case Where Petitioners Denied

Liability on Certain Notes Held by Respond-

ent and on Their Agreements to Indemnify

Respondent; Where They Asserted That Re-

spondent Was Liable for the Losses Which

Had Resulted From the Manufacturing Op-

erations of Petitioner Texasteel and Which

Were Being Sustained During the Subse-

quent Trusteeship; and Where Respondent

Was Being Called Upon to Guarantee Addi-

tional Trustee’s Certificates in Order That

the Trustee Might Continue Performance of

et SEE: ova vacwcacinndeagsiekasnasas 11

Il. The Fact That Texasteel Was in Corporate Re-

organization Under Chapter X of the Bank-

ruptey Act Did Not Deprive the District

Court of Jurisdiction Over the Petition for

Declaratory JOGGMOR 2... ccccsccvcscccses 14

Ill. The Decision of the Court Below That There

Was No Evidence for a Jury on Factual Is-

sues, Properly Applied the Pertinent State

and Federal Authorities .................. 17

IV. The Appeal From the Declaratory Judgment

Did Not Prevent the District Court From

Granting Further Relief by Entering Mone-

tary Judgments Against the Individual Peti-

PO, hace hey ntcdasndy ees aawehdeek babes 20

INDEX (Continued).

V. The Entry of the Monetary Judgments Was

Not in Disregard of the Texas Decisions and

Statutes Relied Upon by Petitioners. Those

Authorities Apply to Parties Whose Lia-

bility Is Secondary ......ccccsscccccccess 24

TABLE OF CASES.

Page

Abrahamson v. Burnett, 157 Wash. 668, 290 Pac. 228

(1990) ....cccccccsccccccccsccccoceccosccccess 28

Aetna Life Ins. Co. v. Haworth, 300 U. S. 227, 81 L.

Ed. 617 (1987) ......ceeeeeeeeeeecceecerscess 11,14

Angell v. Schram, 109 F. 2nd 380 (Sixth Cireuit, 1940) 11

Bank v. Goldstein, 261 S. W. 538 (1924, Tew.) ...000% 27

Bank v. Hanshaw, 255 Ky. 825, 75 S. W. 2nd 529

(199A) ..cccccvccceccccsccccrcncrcccssscoeccs 28

Butler v. Eaton, 141 U. S. 240, 35 L. Ed. 713 (1891).. 28

Commercial Inv. Co. v. Graves, 132 S. W. 2nd 439

(1939, Tex.) ....seccseeeeseeeescsseesessesss 28

Deposit Bank v. Frankford, 191 U. S. 499, 48 L. Kd.

QTG (1908) .....eseeceecensececceececreceecees 23

Dupont Co. v. Richmond Co., 297 Fed. 580 (Fourth

Circuit, 1924) ......eeeeeeeeeeeeeerereeserees 23

Eller v. Erwin, 265 S. W. 595 (1924, Tex.) ....ceee- 28

Ennis et al. v. Crump, 6 Texas 85 (1851) .......00- 27

Foust v. Munson Steamship Lines, 299 U. 8. 77, 81

L. Ed. 49 (1936) ......-eeeeeeeeeeeeeeeserses 16

Galloway v. United States, 319 U. 8. 372, 87 L. Ed.

1858 (1943) .....cececeseeeeceeeesceseeececes 19

Head v. Cleburne Bldg. & Loan Assn., 25 S. W. 810

(1898, Tex.) ....ceseeceecceeseccsccesecssesss 27

Howell v. Commissioner, 69 Fed. 2nd 447 (Eighth Cir-

cuit, 1934) ......cceeeeeceeceececceceescesccss 28

Jameson v. Officer, 15 Tex. Civ. App. 212, 39 S. W.

190 (1897) ......ceeceeeeeeceecseesseetescens 27

Kansas Pacific Ry. Co. v. Twombly, 100 U. 8. 78, 25

L. Ed. 550 (1879) .....eeceeeeeeeeeeeeeeeseess 23

McDonald v. Cabiness, 100 Texas 615, 102 S. W. 721

(1907) ....cccccccaccccccccccccsccececnssceees 26

TABLE OF CASES (Continued).

Page

Moore v. Downie Bros. Circus, 164 S. W. 2nd 420

CHDER, Teme) ann ncaceccvvecsineseccacedcceces 27

Moore v. Scott, 55 Fed. 2nd 863 (Ninth Circuit, 1932). 14

Olson et al. v. Smith, 72 S. W. 2nd 650 (1934, Tex.)... 28

Otto v. Republic Nat. Co., 173 S. W. 2nd 234 (1943,

TOR.) cc cccsvcvccccccccccceccccccveuccccsccccs 28

Ritter v. Hamilton, 4 Tex. 325 (1849) ...........008- 27

Seastrunk et al. v. Pioneer Savings & Loan Co., 34

B. W. GOG (IGRG, Tre.) 2... cccnsccecccccccuces 27

Thompson, et al. v. Findlater Hdwe. Co., et al., 156

BB. WH. SER CEPR, Thema) oc cccccccncccccccuccces 27

U.S. F. & G. Company v. Bank of Hattiesburg, 91 So.

Te PTT 28

Ward v. Scarborough, 236 S. W. 434 (1922, Tex.) .... 18

Wood v. Canfield Paper Co., 117 Tex. 399, 5 S. W. 2nd

= MT LERELERE RESET ERLE TUTE EEE 24, 26

TABLE OF AUTHORITIES AND STATUTES.

Page

Rule 38, 5, (b), U. S. Supreme Court Rules ......... 11, 19

Rule 57, Federal Rules of Civil Procedure .......... 12, 14

Bankruptcy Act, Section 77B (c) (10) ............. 17

11 U. S. ©. A. 516; Chapter X, Art. IIT, Section 116

FO Rae hSSSARESCANSS CAN SHES Sates ee encecreness 15, 17

28 U.S. C. A. 400 (Declaratory Judgment Act) ..... 20, 22

Texas Revised Statutes, Art. 1987 .............005. 26

ok a Sg PEPTTETTTeee eee eee 28

(iv)

IN THE

Supreme Court of the United States.

oo

October Term, 1946.

al

No. 1226

Texasteel Manufacturing Company, George W. Armstrong,

Sr., Allen J. Armstrong, George W. Armstrong, Jr.,

and Mary C. Armstrong,

Petitioners,

v.

Seaboard Surety Company,

Respondent.

No. 1227.

George W. Armstrong, Sr., Mary C. Armstrong, Allen J.

Armstrong, and George W. Armstrong, Jr.,

Petitioners,

v.

Seaboard Surety Company,

Respondent.

On Perrrions ror WRITs OF CERTIORARI TO THE UNITED

Srares Crrcurr Court or APPEALS FOR THE Firta

Crecurt.

BRIEF FOR SEABOARD SURETY COMPANY IN OPPO-

SITION TO THE PETITIONS FOR WRITS OF

CERTIORARI.

“¥

2 Brief for Respondent in Opposition

Opinion Below.

Opinion of the Circuit Court of Appeals, Fifth Circuit,

is reported at 158 F. 2nd 90.*

Jurisdiction.

The judgment of the Circuit Court of Appeals in both

cases was entered on December 6, 1946. The jurisdiction

of this Court is invoked under Section 240 (a) of the Judi-

cial Code (U. 8. Code, Title 28, Paragraph 347).

Questions Presented.

1. Is jurisdiction conferred upon the District Court by

the Federal Declaratory Judgment Act where controver-

sies exist between a surety and its indemnitors as to liabil-

ity on indemnity agreements and on promissory notes;

where indemnitors assert liability against the surety for

continuing losses from manufacturing operations being

sustained daily by the surety’s principal; and where the

surety was being called upon to extend additional credits

in behalf of its principal in order that the principal might

perform its contracts?

(Affirmed by the Circuit Court.)

9. Did the District Court have jurisdiction to entertain

proceedings for a declaratory judgment between a surety

and its corporate principal which appeared and joined in

the prayer for an adjudication of the controversies, while

the corporation was in reorganization under Chapter X?

(Affirmed by the Cigeuit Court.)

3. Did the Trial Court err in its holding that there was

no evidence on factual issues for a jury?

(Negatived by the Circuit Court.)

1The Opinion and Judgment of the District Court of

the United States for the Northern District of Texas is at

R. 147.

Brief for Respondent im Opposition 3

4. Did the District Court have jurisdiction to grant

further relief by entering monetary judgments based upon

a prior declaratory judgment where a petition for such fur-

ther relief was filed prior to the taking of an appeal from

the declaratory judgment?

(Affirmed by the Circuit Court.)

5. Were monetary judgments against the individual

petitioners entered in disregard of Texas law dealing with

the rights of parties secondarily liable, where petitioners

had agreed that all signers and endorsers on a promissory

note were to be regarded as principals, and where the indi-

viduals were primarily liable for the same obligation under

a separate indemnity agreement?

(Negatived by the Circuit Court.)

Statement.

Suit was brought by the respondent on December 9,

1944 for a declaration of rights and liabilities on the vari-

ous substantial controversies between the parties (R. 29, 2,

75, 91, 112, 128, 134).” Trial resulted in a directed verdict

on March 8, 1945 in favor of the respondent (R. 138, 1009).

Judgment was entered on May 2, 1945 (R. 147). On July

30, 1945, the petitioners filed an appeal (2 R. 37).

On July 19, 1945, the respondent filed a petition for

further relief, based upon the declaratory judgment, seek-

ing monetary judgments (2 R. 2, 28-31). After hearing

on August 20, 1945, judgments totalling $623,906.25 were

entered for the respondent on January 12, 1946 against the

petitioners George W. Armstrong, Allen J Armstrong and

George W. Armstrong, Jr., but execution was stayed dur-

ing the pendency of appeal (2 R. 108). No monetary judg-

2«¢R”? refers to Transcript of Record filed in the Cir-

cuit Court of Appeals, No. 11499; *‘2 R”’ refers to the Tran-

script of Record, No. 11603.

7

4 Brief for Respondent in Opposition

ment was entered against Texasteel Manufacturing Com-

pany * (2 R. 123). Petitioners filed an appeal on February

2, 1946 (2 R. 123).

By stipulation and by order of the Circuit Court of

Appeals, the two appeals were argued together. On De-

cember 6, 1946, the judgments of the District Court in both

appeals were affirmed. The questions presented by the

two applications for certiorari arise out of the same sub-

ject matter, and the respondent is therefore filing the same

brief in both cases.

In the summer of 1941, the petitioner Texasteel entered ¢

into three contracts with the U. S. Navy Bureau of Ord-

nance‘ to manufacture 364,000 five-inch shells and 20,000

six-inch shells for an aggregate price of $4,837,191.00, and

procured from the Navy Bureau advance payments of

$585,844.00 on two of the contracts (R. 183, 198, 209, 640,

641). Deliveries were to commence in January, 1942, and

were to be substantially completed by July, 1942 (R. 638).

In the fall of 1941, Texasteel, being in need of facilities for

manufacturing the shells, entered into a facilities contract

with the Navy Bureau whereby Texasteel obtained $550,-

000.00 from the Navy Bureau for that purpose (R. 816).

Respondent, as surety, and Texasteel, as principal,

furnished to the Navy Bureau bonds for the performance

of these various contracts (R. 195, 201, 211, 489) and for

the repayment of the advance payments (R. 192, 204, 489).

Petitioners, George W. Armstrong, George W. Armstrong,

Jr., Allen J. Armstrong and Mary C. Armstrong owned all

the stock of Texasteel. They executed agreements to in-

demnify respondent against all liability, loss, costs, dam-

ages and expenses resulting from its furnishing of the vari-

ous bonds (R. 189-191, 198, 200, 243, 180, 217).

3«<Texasteel’’ is used throughout to designate ‘‘Texa-

steel Manufacturing Company’”’.

4<‘Navy Bureau’’ is used throughout to designate ‘‘U.

S. Navy Bureau of Ordnance’’.

Brief for Respondent in Opposition 5

Respondent’s first notice of trouble came when, on

February 10, 1942, the Navy Bureau wrote it that Texa-

steel’s ability to perform its shell contracts was in seri-

ous question and that deliveries under one of the contracts

were already in default (R. 650).

Additional facilities were needed at Port Arthur be-

fore shells could be produced, for, as became apparent by

February, 1942, only about one-third of the needed shell

making machinery had been included in the petitioners’

original plan. To cure this deficiency, the petitioners, in

late March, 1942, requested additional funds from the Navy

Bureau, and submitted on April 1, 1942, new plans and

specifications in which the itemized cost of the required

additional machinery was placed at $880,000.00 (R. 684,

334, 335).

The Navy Bureau launched an inquiry. Between

April 3, 1942—when (at a Bureau conference attended by

Allen J. Armstrong and George W. Armstrong) Comman-

der Hagen expressed emphatic belief that Texasteel could

not properly manage the project and recommended refusal

of additional facilities and removal of existing facilities

(R. 921)—and June 2, 1942, it sent three investigators, in-

eluding its chief engineer, to Port Arthur and received ad-

verse reports from each as to the Texasteel management

(R. 935-940, 922-924, 925-933).

In the last of these reports, the inspector recommended

that the requested facilities be allowed, ‘‘provided that

George W. Armstrong, Sr., Allen J. Armstrong and John

Foster be removed from any office or position they hold’’

(R. 932). George W. Armstrong, Sr., and Allen J. Arm-

strong, petitioners, were Board Chairman and President of

Texasteel. John Foster was Financial Officer for its Port

Arthur operations.

On the day that this report was received, Admiral

W. H. P. Blandy, Bureau Chief, summoned T. V. O’Neill,

a representative of respondent, before the members of the

Navy Bureau at Washington, and informed him that addi-

a

6 Brief for Respondent in Opposition

tional funds for facilities would be granted to Texasteel

only in the event that George W. Armstrong, Sr., Allen J.

Armstrong and John Foster sever their connection with the

Navy shell making operations of Texasteel. He requested

O’Neill to go to Texas and inform the petitioners of the Bu-

reau’s position (R. 220-222). O’Neill replied that he did

not consider such step necessary, but if such was the Navy |

Bureau’s requirement, it should evidence it with a letter

(R. 221). Admiral Blandy wrote, and delivered to O’Neill,

such a letter (R. 225-226).

When O'Neill informed petitioners Allen J. Armstrong

and George W. Armstrong of the Navy Bureau’s demand,

they flatly refused to resign (R. 228, 798). The petitioners

then conferred with their attorney, and adopted company

resolutions drafted by him, providing that Port Arthur

management would be placed in the hands of a management

committee consisting of George W. Armstrong, Jr., and

T. V. O'Neill, to act for and on behalf of Texasteel (R. 666,

65-66, 69, 230-231). The Navy Bureau was prevailed upon

to forego its condition precedent to granting further funds,

and to accept, in its stead, the petitioners’ counter proposal

(R. 898, 230, 235-237). On July 8, 1942, the Navy Bureau

made available to Texasteel approximately $927,000.00 to

be used to purchase the additional shell making facilities

(R. 851, 816).

Texasteel’s management committee, under the direc-

tion and supervision of its Board of Directors (R. 847-71,

876, 883), proceeded from the date of its appointment in

June 1942, to acquire and install machinery, obtain raw ma-

terials, hire labor, and to prepare generally to make shells

under the Navy contracts. Not until June, 1943, two years

after the making of the contracts and one year after the

company had originally obligated itself to complete them,

was production begun, and then on a very limited scale

(R. 283). \

On November 30, 1943, all three shell contracts being

materially in default, the Navy Bureau indicated that unless

—7—~”"

Brief for Respondent m Opposition 7

increased production was shown by February, 1944 (with-

in 60 days), the shell contracts would be canceled for non-

performance (R. 431). Provisions were contained in each

contract which authorized the Navy, upon default in per-

formance, to buy shells of a similar character upon the

outside market (Art. 5 of Shell Contracts, R. 183, 198, 209),

or to cause the contracts to be performed by third-party

shell makers (R. 183, 198, 209), all damages or added costs

accruing, to be assessed against Texasteel and the respond-

ent surety (R. 183, 198, 209). In the final analysis, the re-

spondent surety would have recourse against the petition-

ers upon their indemnities (R. 217).

Texasteel’s operating capital being exhausted, the peti-

tioners again turned to the respondent for assistance. On

the strength of the petitioners’ promissory note, supported

by their company’s resolutions and by stock pledges previ-

ously given by the petitioners to the respondent, and now

made available by the respondent for the petitioners’ press-

ing need, and supported also by the respondent’s additional

suretyship, for which the petitioners executed a new in-

demnity agreement, Continental National Bank of Fort

Worth loaned $350,000.00 on December 8, 1943 (R. 498,

392-332, 504-508, 513-514, 515-516, 517, 520). Texasteel re-

| ceived the loan proceeds (R. 388).

In March, 1944, the petitioners again borrowed from

Continental National Bank to obtain additional working

capital for Texasteel. This time, loan funds amounting to

$200,000.00, obtained on the petitioners’ promissory notes,

supported by the stock pledges and by the respondent’s

additional suretyship, for which the petitioners executed

new indemnity agreements, were made available to Texa-

steel (R. 500, 502, 501, 503, 496, 494, 518, 867).

Shell production, though improved, still lagged far be-

hind contract requirements, and the Navy Bureau on June

98, 1944, sent Texasteel a cancellation notice on one of the

three shell contracts, for default in performance (R. 341).

nn eee rr any

8 Brief for Respondent in Opposition

Texasteel, as principal, and the respondent, as surety,

on July 6, 1944, jointly wrote the Navy Bureau, requesting

withdrawal of the cancellation notice and urging recogni-

tion of Texasteel’s need for the lightening of amortization

provisions whereby 40¢ of each shell payment dollar was

being withheld by the Navy Bureau and applied to repay-

ment of advance payments, inasmuch as it had become ap-

parent that shells could not be made with the fractional

(60%) payments which Texasteel was receiving (R. 344-

350).

On July 29, 1944, following a Navy Bureau hearing at-

tended by representatives of the petitioners and the re-

spondent, the Navy Bureau indicated that it would with-

draw the notice and grant a moratorium in amortization

payments, provided that Texasteel would maintain a sched-

uled rate of production, and that Texasteel and the respond-

ent, as surety, would reaffirm the bond obligations (R. 465-

470).

Petitioners refused to reaffirm the bond obligations,

and charged, in letters to respondent and others, that the

respondent, and not Texasteel, nor themselves as indemni-

tors, was liable for Texasteel’s operating losses (R. 367,

368, 369, 472).

By August 18, 1944, a stalemate had been reached, and

the parties mutually agreed upon the filing, on that day, of

a petition for the reorganization of Texasteel, and upon

the appointment of a Trustee (R. 453-454). The Trustee

took over the operations of Texasteel under the Court’s

direction, and was authorized to sell, from time to time,

Trustee’s Certificates to obtain funds to continue the con-

tract performance at Port Arthur (R. 144-145).

The Trustee found no market for selling certificates ex-

cept with the aid of the respondent’s guaranty to the pur-

chaser (R. 382). Between August 18, 1944 and February

26, 1945 (when the respondent’s suit for declaratory judg-

ment came to trial), the respondent furnished its guaranty

Brief for Respondent in Opposition 9

to the purchaser of certificates in the aggregate sum of

$515,000.00 to procure for the Trustee an equivalent amount

of funds for operating capital necessary to the perform-

ance of Texasteel’s Navy shell contracts (R. 379).

Following the Trustee’s appointment on August 18,

1944, the petitioners supplemented their claims of financial

immunity for Port Arthur losses with damage claims and

claims of fraud and duress against the respondent (R. 8-9,

477, 418, 370-373, 382, 120-130).

The $200,000.00 Continental National Bank notes be-

came due on September 1, 1944 (2 R. 64-65), and on De-

cember 11, 1944, no payment having been made, the bank

demanded payment from the Trustee and from the peti-

tioners (R. 311). The $350,000.00 note was a demand note

(R. 498), and payment having been refused (R. 311), the

bank in early January, 1945 made demand on the respond-

ent to honor its guaranty. Respondent complied on’ Janu-

ary 8, 1945 by paying the bank $550,000.00, with interest (R.

312), and took assignments of the notes and pledges secur-

ing them (2 R. 77, 314).

On December 9, 1944, the respondent filed its petition

for a declaration of the rights and liabilities in controversy

(2 R. 3) at a time when operating losses were continuing

and additional guarantees on Trustee’s Certificates were

being required.

Texasteel, answering by its Trustee, and George W.

Armstrong, Sr. and his wife, Mary C. Armstrong (joint

owners of 80% of Texasteel stock) joined in the respond-

ent’s request for a declaration of correlative rights and

liabilities of the parties (R. 94-95, 133-134). No motion to

dismiss was filed by either of them (R. 94, 133). The Trus-

tee, seeking affirmative monetary relief, asked the Court to

declare the petitioners’ notes, bonds and indemnities void ;

that the respondent be adjudged liable for Texasteel’s op-

erational losses and expenses, and for damages against the

respondent approximating $1,000,000.00 (R. 91-95). The

me

10 Brief for Respondent in Opposition

answer of the petitioners, George W. Armstrong, Sr. and

wife, majority stockholders, was of similar general import

(R. 2-9).

At the time of bringing suit, the aggregate amount of

suretyship which the respondent had furnished Texasteel,

in reliance upon the indemnifications of the petitioners, was

approximately $2,880,000.00 (R. 376).

EE — . -

er

Brief for Respondent in Opposition 11

Argument.

I. A declaratory judgment was a proper remedy in this

case where petitioners denied liability on certain notes

held by respondent and on their agreements to indem-

nify respondent; where they asserted that respondent

was liable for the losses which had resulted from the

manufacturing operations of petitioner Texasteel and

which were being sustained during the subsequent Trus-

teeship; and where respondent was being called upon

to guarantee additional Trustee’s certificates in order

that the Trustee might continue performance of the

contracts.

In seeking to raise a question within Supreme Court

Rule 38, 5, (b), the petitioners assert that the decision of

the Circuit Court is in conflict with the decision in Angell v.

Schram, 109 Fed. 2nd 380 (Sixth Circuit, 1940).5 They cite

the Angell case for the proposition that a declaratory judg-

ment is not appropriate where the rights of the parties have

become fixed.

There is nothing in that decision to that effect, but if

there were, it would not affect us here. When the re-

spondent’s petition for a declaratory judgment was filed,

the parties’ rights and liabilities had not been fixed, nor

will they become so finally until this ligitation is concluded.

Petitioners’ liability upon the bank notes, as is conclusively

shown by their Petition and Supporting Brief, has not been

fixed to their satisfaction, nor do they recognize that the

respondent’s non-liability to them was fixed by the declara-

tory decree and its affirmance by the Circuit Court of Ap-

peals. In Aetna Life Ins. Co. v. Haworth, 300 U. S. 227,

81 L. Ed. 617 (1937), the dispute which this Court held to

be appropriate for declaratory judgment was described in

these words:

5 Petitioners’ Brief, Cause No. 1226, p. 22.

—¥

‘It calls, not for an advisory opinion upon a hypo-

thetical basis, but for an adjudication of present right

upon established facts’’ (p. 242).

The suggestion of the petitioners® that declaratory

judgment proceedings will not lie where there is another

adequate remedy is directly contrary to the Federal Rules [

of Civil Procedure which have been approved by this Court.

Rule 57 provides:

12 Brief for Respondent in Opposition

‘‘The existence of another adequate remedy does

not preclude a judgment for declaratory relief in cases

where it is appropriate. . . .”’

The other objection of the petitioners to the use of this

remedy is that the issues have become moot.’ The best

proof that the issues remain alive is that this matter is

being contested to the highest Court in the country.

Before and after the start of reorganization proceed-

ings, the petitioners charged that the respondent had domi-

nated and controlled the Port Arthur operations of Texa-

steel from 1942 forward, and that it was liable for all losses

sustained in performance of the shell contracts (R. 369,

471). Since that time they have made numerous charges

with respect to the rights and liabilities between the re-

spondent and the petitioners. They have denied any lia-

bility on the various indemnity agreements (R. 367-368-

369, 472). They have asserted the invalidity of the stock

escrow agreements (R. 9, 120, 477-478). They have denied

any liability arising out of the $550,000.00 in notes (R.

477-478). They have charged the respondent with fraud

and misrepresentations (R. 120). They have asserted that

the respondent instigated the proceedings for the reorgani-

zation of Texasteel for the purpose of obtaining control

of that company’s assets and that the respondent procured

® Petitioners’ Brief, Cause No. 1226, pp. 56-57.

7 Petitioner’s Brief, Cause No. 1226, pp. 3-4.

|

|

|

|

‘i

—

the appointment of a disqualified trustee through whom it

continued to dominate and control the Port Arthur opera-

tions (R. 124-125, 477-478). These various charges have

been made from time to time since August, 1944 right up

Brief for Respondent m Opposition 13

{ to the present time as appears from the Petitions for Cer-

l tiorari.

Respondent was not required to remain in the state

of uncertainty created by these numerous and oft repeated

charges of the petitioners. Based upon the petitioners’

assertions, every day’s operation by the Trustee (and his

operation was losing money) was being charged against the

respondent. Nor could the respondent intelligently pass

on the wisdom of guaranteeing additional Trustee’s Cer-

tificates without knowing its rights under the previous in-

demnity agreements. Petitioners’ claims were not limited

to the Trustee’s operational losses and expenses either, for

their damage claim had then reached $2,000,000.00, and was

increasing daily. Respondent therefore filed its Petition

for the declaratory judgment.

The Trial Court recognized the propriety of the

declaratory judgment proceedings in these words:

| ‘© | | In view of all of these controversies and

threatened suits, in view of this further prospect, if the

| rights of these parties are not declared, that this de-

| fense plant was really going to be closed down. I

know I have never had any declaratory suits where

| there was as much powerful and strong appeal, I should

|

|

|

|

|

think far beyond the contemplation of this suit, for

immediate declaration of the rights of these parties,

and why it would not be to the interest of everybody.

You have got these rights, of course they are not going

to be determined by future happenings; they are de-

termined by what has already happened, of course

. . -'? (BR. 176).

Each one of the controversial issues is ‘‘appropriate

for judicial determination’’. The controversies, here, are

ie

certainly ‘‘definite and concrete, touching the legal relations

of parties having adverse legal interests.’’ Aetna Life Ins.

Co. v. Haworth, supra. The propriety of a declaratory i

judgment in a situation where, as here, the moving party

seeks, inter alia, a declaration of non-liability on claims i

asserted by the defending party, was clearly recognized in

that opinion.

Petitioners’ challenge of the propriety of declaratory

relief in this case is completely unfounded in view of the

controversial issues presented, the decisions of this Court

typified by the Aetna Life Insurance Company case, supra,

and the provisions of Rule 57 of the Federal Rules of Civil |

14 Brief for Respondent in Opposition

Procedure. No conflict between decisions exists. The Pe-

tions reveal no issue on this point requiring review by

this Court.

Il. The fact that Texasteel was in corporate reorganiza-

tion under Chapter X of the Bankruptcy Act did not

deprive the District Court of jurisdiction over the peti-

tion for declaratory judgment.

Petitioners contend that the instant decision conflicts

with the Ninth Circuit’s decision in Moore v. Scott, 55 Fed.

2nd 863 (Ninth Circuit, 1932), and with other decisions cited

at pages 21 and 22 of their Brief in Cause No. 1226. They

claim that conflict results from the entry of a declaratory

judgment against Texasteel when that corporation was in

reorganization proceedings.* Their statements therein are

considered insufficient and inaccurate, and cause the sub-

mission of the following statement: Honorable James C.

Wilson, Federal Judge, Northern District of Texas, Fort

Worth Division, at the request of the attorneys for the peti-

tioners and the respondent, appointed J. Mac. Thompson as |

Trustee of Texasteel in August, 1944 (R. 454). Subse- |

quent thereto, the respondent, in December, 1944, filed suit |

8 Petitioners’ Brief, Cause No. 1226, pp. 20-21.

maar

ao ee

a

Brief for Respondent im Opposition 15

for a declaration of the correlative rights and liabilities of

the petitioners and the respondent (2 R. 3). This declara-

tory suit and the subsequent monetary proceeding were

both tried before Judge James C. Wilson (R. 1; 2 R. 1).

The Trustee (who was operating Texasteel under the di-

rection and instruction of the appointing Court) sought by

his Answer to augment assets of Texasteel by monetary

recoveries against the respondent (R. 91-95). In his An-

swer, he requested and prayed for the cancellation of the

$550,000.00 Continental Bank notes, the cancellation of all

Texasteel indemnities, and for the recovery of damages

against the respondent (R. 91-95).

The Trial Court refused to enter a monetary judgment

against Texasteel, the pertinent part of its findings in that

respect being: ‘‘I further conclude that inasmuch as Texa-

steel Manufacturing Company is involved in a bankruptcy

proceeding in this court, no judgment should be rendered

herein against said Texasteel Manufacturing Company or

its Trustee . . .’’ (2 R. 123).

Petitioners urge that the decision of the Cireuit Court

is contrary to decisions in the other Circuits in holding that

the District Court had jurisdiction over Texasteel for the

purpose of these proceedings.® The decisions cited by the

petitioners deal with ‘*proceedings’’ in bankruptcy as dis-

tinguished from ‘‘eontroversies’’. Most of them are con-

cerned with straight bankruptcy, and those dealing with cor-

porate reorganization are not in point. These cases deal

with situations where other than bankruptcy courts sought

to administer or deplete the assets of bankrupt estates.

They are, therefore, inapplicable to the present situation.

Section 116 (4), Article III, of Chapter X, 11 USCA 516

provides that, upon the approval of a petition, the judge

may 10

® Petitioners’ Brief, Cause No. 1226, p. 20.

rie The italics used throughout this Brief are respond-

ent’s.

me

‘enjoin or stay until final decree the commence-

ment or continuation of a suit against the debtor or its

trustees . . .”

16 Brief for Respondent in Opposition

PAD Se PRT

This section of Chapter X clearly recognizes that suits may

be properly brought in other Courts against a corporation

undergoing reorganization.

The power of another Court to entertain a suit against \

a corporation undergoing reorganization under the bank-

ruptey laws was clearly recognized by this Court in Foust

v. Munson Steamship Lines, 299 U. 8S. 77, 81 L. Ed. 49

(1936). In that case an administrator brought an action in

a State Court against the Steamship Lines under the

Merchant Marine Act for the wrongful death of the de-

cedent mariner. After a petition for reorganization of the

Steamship Lines under 77B had been filed, the adminis-

trator petitioned the bankruptcy court for leave to con-

tinue the State Court Suit. This Court reversed the action

of the Court below in denying leave to proceed, and said:

_

eT

‘‘In reorganization proceedings neither the Act nor

any rule of law entitles debtors or trustees as a matter

of right to enjoin the trial of action such as that

brought by petitioner. The court is to exercise the

power conferred by subd. (¢) (10) according to the par-

ticular circumstances of the case and is to be guided

by considerations that under the law make for the as-

certainment of what is just to the claimants, the debtor

and the estate’’ (pp. 53-54). ,

‘‘There is nothing in the record to warrant a finding |

that liquidation of petitioner’s claim by trial of his

pending action at law would hinder, burden, delay or

be at all inconsistent with the pending corporate reor-

ganization proceeding under 77B”’ (p. 56).

Although the State Court suit involved in that decision

had been instituted prior to the filing of the petition for |

|

|

a

Brief for Respondent im Opposition 17

reorganization, this Court attached no significance to that

fact in its reasoning and holding. The provisions of Sec-

tion 77B (ec) (10) referred to as the source of the power to

stay are similar to those of Section 116 (4) of Chapter X

quoted above. Both refer to ‘‘eommencement’’ and ‘‘con-

tinuance’’ of suits.

It should be noted that the Trustee of Texasteel filed

an Answer denying the allegations of the respondent’s Pe-

tition for declaratory judgment (R. 91-95), and joined in

requesting that ‘‘the liabilities and non-liabilities of this

defendant (Texasteel) and the plaintiff (the respondent)

be settled and adjusted . . .’’ (R. 94). The representa-

tive of the bankruptey court has therefore affirmatively

approved the commencement and continuation of this action.

The quoted provision of Chapter X and the decision

of the Court on the application of the similar provision of

77B are a complete answer to the petitioners’ contention

in this regard. There is, therefore, no need for a review

of this question by this Court.

III. The decision of the Court Below that there was no evi-

dence for a jury on factual issues, properly applied the

pertinent state and federal authorities.

The petitioners claim error in the Trial Court’s re-

fusal to submit an issue on duress." Their claim is based

on these facts: In March, 1942, the petitioners pledged their

Texasteel stock with respondent as additional security for

its suretyship obligations (R. 238). The pledge instrument

authorized the respondent to vote the stock if the United

States Government, or any branch thereof, should advise

it that a change in management or policy of Texasteel was

necessary in order to prevent the Government from declar-

ing a default (R. 240). On June 6, 1942, the Navy Bureau,

through its Chief, wrote the respondent that changes in

1 Petitioners’ Brief, Cause No. 1226, p. 22.

18 Brief for Respondent in Opposition

management personnel of Texasteel were a condition prece-

dent to the granting of additional funds (R. 226). Shell

contract NORD 150 was then five (5) months behind sched-

ule. Deliveries, as contracted, were to be “‘2000 by Janu- :

iv

ary, 1942, and 2000 per month thereafter’ (R. 199). No

shells had then been manufactured. By deposition, the

petitioner, Allen J. Armstrong, testified that after he had

refused to resign from Texasteel’s management, as was }

then demanded by the Navy Bureau, the respondent’s

agent said, ‘‘if he persisted in that adamant attitude that

the Seaboard Surety Company might have to exercise its

rights under the escrow agreement, and he never did say

what they would do, but the inference was clear”’ (R. 665).

When this petitioner was upon the witness stand at

the trial of the declaratory proceeding, he testified that

the respondent ‘‘had the legal right to oust us from the

corporation under the terms of the escrow agreement of

March 28, which provided that in the event of notice from

the Navy that a change in management or policy would

be necessary to obviate default of the contract, the Sea-

board Surety Company might take over the voting power

of the stock of both the Texas Steel and the Texasteel

Manufacturing Company. That right we did not question’’

(R. 666). The respondent in fact never exercised such

rights.

The threat must be wrongful before duress results.

The Texas case of Ward v. Scarborough (Commission of

Appeals), 236 S. W. 434 (1922), upon which the petitioner '

relies for conflict states the following rule: ‘‘Duress of

property cannot exist without there being a threat to do

some act which the threatening party has no legal right

to do . . . some illegal exaction or some fraud or decep-

tion’’ (p. 437). Had the Trial Court ruled differently, the

decision would have conflicted with Ward v. Scarborough,

supra. \

The Trial Court found that the evidence wholly failed

to raise any issue of fact triable by a jury (R. 146), and

en

—

WEE RFE

Brief for Respondent in Opposition 19

therefore directed a verdict for the respondent. Peti-

tioners assert that they were thereby denied their consti-

tutional right to trial by jury.” However, a directed ver-

dict involves no constitutional question where the evidence

raises no issue of fact for a jury to determine. Galloway

v. U. S., 319 U. 8. 372, 87 L. Ed. 1858 (1943).

Petitioners argue generally that the evidence presented

Jury questions, and that the direction of a verdict was

therefore not in accord with State and Federal decisions.*

Actually, there was no failure to follow State or Federal

decisions. There was simply a determination that there

was no evidence for the jury on any factual issue. It is

obvious that the petitioners are asking this Court to review

al} the evidence in the case and determine whether there

was any evidence to go to a jury on any of these factual

issues. This is not the type of question which Rule 38, 5,

(b) contemplates. The District Court considered the evi-

dence and found no issues of fact. The Circuit Court re-

viewed the evidence and affirmed this conclusion. There

:s no need for a third consideration of the facts by this

Court.

Petitioners assert that the Court below improperly

imposed upon them the burden of proving these facts."*

The Trial Court found as follows:

‘‘The evidence did not raise any issue of fraud or

duress, and did not raise any fact issue to make the

plaintiff liable to the defendants, or to any of them.

The evidence wholly failed to raise any fact issue

triable to a jury.’’ (R. 146)

Obviously, the Trial Court determined the issues on

the evidence, irrespective of the burden of proof.

12 Petitioners’ Brief, Cause No. 1226, p. 22.

18 Petitioners’ Brief, Cause No. 1226, pp. 23-26.

14 Petitioners’ Brief, Cause No. 1226, pp. 3, 24, 51.

Bs

IV. The appeal from the declaratory judgment did not pre-

vent the District Court from granting further relief by

entering monetary judgments against the individual

petitioners.

20 Brief for Respondent in Opposition

The declaratory judgment was entered by the District

Court on May 19, 1945 (R. 147). It declared the liability |

of Texasteel and the three Armstrong petitioners on the

three notes totaling $550,000.00 and on the various in-

demnity agreements (R. 154-157). On July 19, 1945, based

on this judgment, the respondent petitioned for money

judgments against the three Armstrongs (2 R. 2), who

thereafter on July 30, 1945, appealed to the Circuit Court

from the declaratory judgment (2 R. 108). On January 12,

1946, the District Court entered monetary judgments in ac-

cordance with the prayer of the petition (2 R. 108).

Petitioners contend that the District Court did not

have jurisdiction to enter these monetary judgments while

the appeal from the declaratory judgments was pending.”

No ease cited by the petitioners so holds. Subdivision (2)

of the Federal Declaratory Judgment Act authorizes the

procedure of which the petitioners complain. It reads:

ee

‘‘Further relief based on a declaratory judgment

or decree may be granted whenever necessary or

proper. The application shall be by petition to a court

having jurisdiction to grant the relief. If the applica-

tion be deemed sufficient, the court shall, on reasonable

notice, require any adverse party whose rights have

been adjudicated by the declaration, to show cause why

further relief should not be granted forthwith’’ (Title

28, Sec. 400, Judicial Code).

If the respondent had sought and obtained a monetary

judgment with accompanying foreclosure at the time it com- |

menced its declaratory proceedings on December 9, 1944, |

such action would have rendered even more precarious the

15 Petitioners’ Brief, Cause No. 1227, pp. 2-3, 7-11, 18,

21-22.

—

NLL ET sey

Brief for Respondent im Opposition 21

status of the shell contracts, and could have destroyed the

petitioners’ ownership in both Armstrong corporations.

The respondent in paragraph 6 of its Petition for declara-

tory relief, summed up its position in these words:

‘‘And in this connection, the Court is informed

that it has not here requested a monetary judgment

against the defendants for the amounts owed by them

upon said notes, nor has it requested a foreclosure of

its lien and pledges, its desire being to continue to

cooperate with the trustee in the performance of said

contracts, to the end that the United States Navy may

obtain the benefit of needed shells, and with the hope

that, through such cooperation, the Port Arthur losses

might be minimized, or wholly met, but in making the

allegations immediately foregoing, the plaintiff, makes

its position that its failure to here and now request a

monetary judgment upon said notes and a foreclosure

of its pledge and liens is without prejudice to its rights

to such reliefs, either before or during trial of this

case, by due amendment, or by subsequent request for

further relief, in this, or in some other, Court, based

upon any declaratory judgment or decree which may

be granted by this Court, or by the exercise of any

other remedy to recover a monetary judgment and a

foreclosure, whether legal or equitable, which the said

plaintiff might possess.’’ (R. 48-49)

But on July 14, 1945, after the entry of the declaratory

judgment, the reason for the respondent’s refraining from

requesting a monetary judgment with the accompanying

foreclosure no longer prevailed, for, the war in Europe

having ended, the Navy Bureau then exercised its right to

terminate the shell contracts (2 R. 107).

Following such termination, the respondent on July

19, 1945, filed its Petition for further relief wherein it

alleged that, the Navy Bureau having terminated the shell

contracts on July 14th, ‘‘no reason exists for now denying

es

to the plaintiff coercive judgments against the defendants,

jointly and severally, for the amounts owed upon the said

notes, principal, interest and attorney’s fees, with a fore-

closure of the pledges securing the payments thereof’’ (2

R. 8).

When this Petition for further relief was filed, the

declaratory judgment had not been appealed from (2 R. 2,

37).

The Trial Court, upon the filing of the respondent’s

Petition for further relief, issued notice to the petitioners

whose rights had been adjudicated by the declaration, to

show cause on August 9, 1945, why the requested relief

should not be granted forthwith (Court’s Finding of Fact,

2 R. 116-117).

At the hearing which followed, the Court (in keeping

with subdivision (2) of the Declaratory Judgment Act),

stated that it considered it proper to grant the respond-

ent’s request for further relief, based upon the declaratory

judgment, and that, in its opinion, the petitioners had

failed to show cause why such relief should not be then

granted (2 R. 38). The Court stated from the bench:

22 Brief for Respondent in Opposition

CLT ERA,

ARR NR TS SR

‘‘Tt seems to me the proper time—I do not say

that it is necessary—but the proper time for plain-

tiff to come in and ask for relief as provided for under

the Act, and relief forthwith—in other words I do not

see any reason why it should not be construed relief

without any unreasonable delay, similar to the guar-

antee of a man when he indicated for a speedy trial, ’

without any unreasonable delay. Of course any delay

that is unnecessary in either instance would be an

unreasonable delay, and it does not give any limit on

existing circumstances or conditions. It says they may

come in after they get their judgment, and they have

that here, and cite the parties to show cause why that

relief should not be given to them. Now I do not

understand that the relief they are asking for here is

—

what you gentlemen representing the defendant seem

to understand it to be.

I understand this relief that they are really calling

for here, since the Court has decided these instruments

valid, is simply for judgment on those instruments.”’

(2 R. 38)

Brief for Respondent m Opposition 23

CLR PIR ES NE:

The liability established by the Court’s earlier declara-

tory judgment was not vacated by the subsequent appeal

therefrom, and the declarations therein decreed were ad-

missable in evidence in the subsequent monetary suit, as

proof of the prior adjudication of such facts. Kansas

Pacific Railway Company v. Twombly, 100 U. S. 78, 25 L.

Ed. 550 (1879) ; Deposit Bank v. Frankfort, 191 U. S. 499,

48 L. Ed. 276 (1903); Butler v. Eaton, 141 U. S. 240, 35

L. Ed. 713 (1891); Dupont Company v. Richmond Com-

pany, 297 Fed. 580 (Fourth Circuit, 1924).

The Trial Court followed to the letter the provisions

of the Declaratory Judgment Act. Having determined that

the petitioners had failed to show cause why further relief

should not be granted forthwith, the Court entered the

monetary judgments, the evidence having shown that it was

proper to do so.

The petitioners do not assert that the Trial Court

erroneously exercised a judicial discretion vested by the

Statute in determining that it was proper to then enter

the monetary judgments, but contend that the Court was

: without jurisdiction to do so. By reason of the express pro-

visions of the Act, the petitioners’ contention is without

merit.

ee ee

\

24 Brief for Respondent in Opposition

V. The entry of the monetary judgments was not in dis-

regard of the Texas decisions and Texas statutes relied

upon by the petitioners. Those authorities apply to

parties whose liability is secondary.

The petitioners claim conflict between the Fifth Cir-

cuit’s instant decision and the decision in Wood v. Canfield

Paper Company, 117 Texas 399 (1928), 5 S. W. 748, by the

Supreme Court of that state. The claim is that their lia-

bility to respondent upon the Continental National Bank

notes is secondary, while that of Texasteel is primary, and

that the decision in Wood v. Canfield precludes judgment

against a party not primarily liable on a note or other con-

tract, unless judgment be also rendered against the prin-

cipal obligor.’®

The following additional facts are submitted: .

In December, 1943, Texasteel was financially unable

to proceed with performance of its shell contracts (R. 416,

322, 323). The Continental National Bank of Fort Worth,

upon being approached by the petitioners, was willing to

lend Texasteel $350,000.00 upon condition that the peti-

tioners, George W. Armstrong, Sr., Allen J. Armstrong, and

George W. Armstrong, Jr., also obligate themselves upon

the note. Another condition was that the respondent uncon-

ditionally guarantee payment thereof (R. 331).

The three Armstrong petitioners agreed to endorse

it and did so, provision being contained in the body thereof

that ‘‘all signers and endorsers are to be regarded as prin-

cipals so far as their liability to payee is concerned”’ (R.

326).

Before the respondent delivered its guaranty to the

lending bank, it obtained from each of the three Armstrong

petitioners an agreement jointly and severally to indemnify

it and hold it harmless ‘‘from and against any and all

liability, damages, losses, costs, charges and expenses of

16 Petition, Cause No. 1227, pp. 11-13.

| —

Brief for Respondent in Opposition 25

whatever kind or nature which the Surety shall or may, at

any time, sustain or incur by reason or in consequence’’ of

having executed the guaranty (2 R. 69-71). The financial

statements of the individual petitioners subsequently re-

ceived by the respondent showed their combined net worth

as being $5,348,733.75 (R. 694-699).

In March, 1944, the petitioners again borrowed from

the Continental National Bank to obtain additional work-

ing capital for Texasteel. On this occasion, loan funds

amounted to $200,000.00 and were evidenced by two notes,

each in the sum of $100,000.00. Texasteel was not a signer

of either note. Petitioner, Allen J. Armstrong, signed one,

and the petitioner, George W. Armstrong, Jr., signed the

other. Petitioner George W. Armstrong, Sr., endorsed

each note, which had on its face a provision similar to that

contained in the $350,000.00 note that ‘‘all signers and en-

dorsers are to be regarded as principals so far as their

liability to payee is concerned’’ (R. 500, 502).

The respondent, before guaranteeing payment of these

notes, received from the individual petitioners agreements

of indemnity similar to that given to protect it from loss

upon the $350,000.00 note (R. 494-496). The petitioners

refused to pay the notes when requested by the bank (R.

311). The respondent paid them in keeping with the terms

of its guaranties (R. 312), receiving assignments thereof

from the bank (R. 314; 2 R. 77).

The respondent alleged in its pleadings that the Arm-

strongs are note principals (R. 46, 47, 50, 51, 55). The

respondent further alleged that the petitioners’ indemnities

likewise cast primary liability upon them (2 R. 30, 34).

The petitioners pleaded that they signed the notes as ac-

commodation makers (R. 113). The Trial Court, in the

trial of the declaratory suit, held that the liability of the

Armstrongs and of Texasteel on the notes was that of

primary obligors (R. 155-157), and in the monetary pro-

ceeding, entered judgment against the Armstrongs for the

amounts due thereon (2 R. 110-111).

26 Brief for Respondent in Opposition

The individual petitioners contend error because a

money judgment was not likewise entered against

Texasteel.'? There is, however, no Texas decision holding

that judgment must be rendered against all primary

obligors. McDonald v. Cabiness, 100 Tex. 615, 102 S. W.

721 (1907), and the many decisions following it, are authori-

ties for the Circuit Court’s decision that it was not neces-

sary to sue or render a money judgment against the Arm-

strongs’ co-principal, Texasteel. It was there said:

‘Under the rule in this state it is not indispensable

to sue all the promissors on a joint promise. The

plaintiff may sue one or more, or may dismiss as to

one and proceed as to another, even in the appellate

court. Miller v. Sullivan, 89 Tex. 480, 35 S. W. 362

and cases there cited. That decision has been followed

and approved in the following cases: Bute v. Brainard,

93 Tex. 139, 53 S. W. 1017; and McFarlane v. Howell,

91 Tex. 221, 42 S. W. 853.”’

The case of Wood v. Canfield Paper Company, supra,

relied upon by the petitioners as conflicting with the

decision of the Circuit Court, deals with the rights of

parties whose liability is secondary. That opinion applies

the statutes ** to the facts there involved. The holding is

that no judgment should be rendered against a party whose

liability is secondary, unless judgment be also rendered

against the principal obligor, except where the principal

obligor cannot be reached by the ordinary process of law,

or his residence is unknown and cannot be ascertained with

reasonable diligence, or where such principal obligor is

insolvent.”

There is not only an absence of conflict between the

decisions, but the Circuit Court’s decision is correct and

17 Petition, Cause No. 1227, p. 11.

18 Petitioners’ Brief, Cause No. 1227, Appendix B.

1 Texas Revised Statutes, Art. 1987.

i

|

i

|

eae ae

ery we oer

Brief for Respondent in Opposition 27

is in strict conformity with those of the Texas Courts for

the following reasons:

First: The provision contained in all of the notes that

‘« All signers and endorsers of this note are to be regarded

as principals, so far as liability to payee is concerned’’,

makes their status that which they agreed it would be, i. e.,

principals. Ritter v. Hamilton, 4 Texas 325 (1849) ; Ennis,

et al. v. Crump, 6 Texas 85 (1851); Jameson v. Officer,

15 Texas Civ. App. 212, 39 S. W. 190 (1897); Head v.

Cleburne Bldg. & Loan Assn., 25 8. W. 810 (1893) ; Moore

». Downie Bros. Circus (Texas Civ. App.), 164 S. W. 2nd

420 (1942).

In the petitioners’ attempts to explain this note pro-

vision, they have admitted that it made them principals,

as applied to the payee, but claim that such relationship is

limited to the payee. In their brief filed with the Circuit

Court they state ‘‘. . . the judgment recited a provision

of the note that, as to the payee, appellants would be prin-

cipals. This provision is not applicable to appellee (re-

spondent). It related only to payee, the Continental Na-

tional Bank’’ (Appellants’ Brief, Circuit Court, p. 13).

The petitioners claim that the quoted provision has

no application to a purchaser from the original payee, is

not the law. That provision is not limited to the designated

payee in the note, but includes any person to whom the debt

subsequently becomes payable. Seastrunk et al. v. Pioneer

Savings & Loan Co., 34 S. W. 466 (1896) ; Thompson v.

Findlater Hardware Co., 156 S. W. 301 (1913).

Srconp: The Texas Courts have also held that when

a stockholder, officer or director of a corporation signs or

endorses a note to enable the corporation to obtain funds

for its use and benefit, such stockholder becomes liable as

a principal debtor to the obligee. In so holding, the Dallas

Court of Civil Appeals, in Bank v. Goldstein, et al., 261

S. W. 538 (1924), said:

«| | | Appellee was a stockholder in the L. Wenar

Millinery Company, therefore was interested in the

28 Brief for Respondent in Opposition

welfare of said company, and, to the extent of the stock

held by him, owned an interest in its property. This

interest was sufficient consideration to make him liable

as a principal debtor in the execution of said note,

although the proceeds were for the use and benefit of

the L. Wenar Millinery Company, Reed v. Pueblo First

National Bank, 23 Colo. 380, 48 Pac. 507, Vitkovitch v.

Kleinecke, 33 Tex. Civ. App. 20, 75 S. W. 544 . . .”

To like effect are Otto v. Republic National Company, 173

S. W. (2nd) 234 (1943); Commercial Inv. Co. v. Graves,

132 S. W. (2nd) 439 (1939).

The individual petitioners owned all of Texasteel’s

outstanding stock, and admittedly signed and endorsed the

notes for the benefit of their corporation.

Tutrp: Finally and conclusively, the petitioners’ joint

and several liability as indemnitors, no less than their lia-

bility upon the notes, made them primary obligors. Howell

v. Commissioner, 69 Fed. 2nd 447 (1934); Eller v. Erwin,

265 S. W. 595 (1924); Olson, et al. v. Smith, 72 S. W. 2nd

650 (1934) ; U. S. F. € G. Company v. Bank of Hattiesburg,

91 So. 344 (1922); Abrahamson v. Burnett, 157 Wash. 668,

290 Pac. 228 (at 229-230) (1930); Bank v. Hanshaw, 255

Ky. 825, 75 S. W. 2nd 529 (1934) ; 42 C. J. S. 612, See. 30.

It is respectfully submitted that no one of the reasons

advanced by the petitioners in support of their Petition

is sound, and that there is no occasion for review by this

Court of the decision of the Circuit Court of Appeals.

Juuian B. Mastin,

W. E. Aten,

L. L. Gamsrt,

Lewis M. STEvENs,

DanreL Munaatt, JR.,

Attorneys for Respondent.

May 3, 1947.