Atlantic Refining Co. v. Hodgman (13 F.2d 781, 1926)

BUFFINGTON, • Circuit Judge.

This bill was brought by individual stockholders of the Superior Oil Corporation, héreafter called Superior, against the Atlantic Refining Company, hereafter called Atlantic, to enforce rights of the former company against the latter. The majority stockholders of Superior and the officers of Superior having declined to seek such relief, the bill was brought by the plaintiff stockholders against Atlantic, and Superior also was made a defendant.

Aligning the parties according to interest, the real plaintiff before us and the party whose rights are to be proven and established is the Superior Oil Corporation and the real right of action here involved is the right, if any, of that company against the Atlantic Company.. Viewing the action, then, as. that of Superior against Atlantic, what are the rights of Superior against Atlantic, and what, are the responsibilities of Atlantic to Superior? If we correctly determine the rights and' obligations of these two corporations to each other, we havd.the foundation on which this case must properly be adjudged.

Superior was a corporation of the state of Delaware, and by virtue of its corporate powers was engaged in the' production and sale of petroleum.- Atlantic was a corporation of the state of Pennsylvania, and, in addition to producing oil, was engaged in manufacturing illuminating and lubricating oils and other products of petroleum. Contemplating an expansion of its business by buying additional oil properties, Superior, on March 4, 1920, secured from Atlantic a loan of; $2,750,000. This was 'effected by' a contract of that date between Superior, Atlantic, and the former’s president, Robert M. Catts, designated trustee, “for the sole purpose of carrying' out the terms and conditions of this’ contract duly authorized by the board of directors” of Superior.

. Confining ourselves to such provisions of this lengthy document as' aie here pertinent, we note' that Superior was about to acquire from Robert M. Catts, trustee, certain described oil properties in the state of Kentucky,’ “which properties are all to- bé acquired from Robert M. Catts, trustee, subject to an-indebtedness of $2,750,000 to Company B, which sum represents a loan made by Company B to said trustee to enable him to acquire said properties, which loan, with interest at the rate of 6 per cent, per annum, is to be repaid as hereinafter more specifically set forth, and in no event not later than 1,000 days from date hereof.” It was also recited.’that'Atlantic: wished to buy the entire oil produce of Superior “from all its present properties and its said properties so about to be acquired during a period of five years,' commencing March 4, 1920, and-for such longer period as said loan or any part thereof and interest shall remain unpaid.”

To -carry out these purposes the contract provided that Atlantic should loan to Catts, trustee, to enable him to acquire the scheduled property, “an amount up to $2,750,000, * * * which loan the trustee, or any one ■'assuming said obligation, and Superior hereby agree to repay, with interest, * * * within 1,000 days from date hereof, and at the same time same shall bis payable at the rate of not less than one-third of the net daily production from the said combined properties.”- Provision was also made that, of the 150,000 shares of stock issued by Superior to Catts, trustee, to pay for the newly, acquired property, 86,667 shares were to be deposited with Atlantic as collateral. It was agreed a contract should be made for the Atlantic to buy, and Superior to sell, all its oil production of its owned and now acquired property at the current prices of the Seep Purchasing Ageney for five years, “and so much longer as any part of said loan with interest, shall remain unpaid,” with the understanding that, in paying for such oil, Atlantic could retain and apply to the note the price of one-third the oil, which sum Superior guaranteed should be at least $2,756 daily. And Superior and Catts agreed that another one-third of the oil income was to “be set apart and employed by Superior for maintenance of production, drilling, and betterments, for the purpose of maintaining and increasing the production of said combined properties.”

By the contract, Superior had a right to anticipate payment of the entire loan, but, until the loan was paid, Superior could not increase its stock, and “with the express understanding that this is only for the pur- . pose of further protecting said company [Atlantic] in -the event that, said company [Superior] shall, at any time prior to the repayment of said loan, fail to carry out the terms of this contract,” Superior was to keep in Atlantic’s hands the resignations of a majority of its directors, and, in ease of default, Atlantic was' empowered to elect a majority of Superior’s directors, “so that all property owned or controlled by Superior shall be operated or liquidated for the repayment of said loan.” Provision was further made by Superior and Catts, trustee, that oné‘share of the.stock held as collateral by Atlantic should issue to a-person.named by Atlantic, who should serve as a director “for the purpose of protecting said loan and its repayment, with interest,” and also that Catts should serve as a director until the loan was paid.

At the date of this contract the authorized' stock/.of Superior, was .'300,000. shares. It .left the-..parties occupying the relation of lender and borrower. .There is nothing whatever in the record to show anything other than the law would presume from such a situation, namely, that both companies acted in good faith and for their own best interests. Tersely stated, the gist of the contract was that Superior was acquiring further oil properties, and was taking them in the name of its president, Catts, as trustee; that Atlantic was advancing the funds to Catts to acquire such properties; that Superior was assuming the debt; that to pay it Superior was setting aside one-third of its production at the prices set by the Seep Agency; that in case of default it was turning over its property and management to Atlantic until its debt was paid; and that, pending the loan, Superior was, for the purpose of Atlantic’s protecting its loan, allowing on its board a director nominated by Atlantic, who had no financial interest in Superior. Meanwhile one-third of Superior’s income was by contract allocated to the loan, another one-third to specific work heretofore noted, leaving but one-third free for Superior control. But that Superior was, from the start, falling behind in its daily payment of $2,750 required by the contract is evidenced by the settlement memorandum, later made and hereafter referred to, which shows that for the 118-day period from March 4th to July 1st, while the daily production payment guaranteed by the contract was $322,500, the actual production was only' sufficient to pay $233,290.74. Moreover, it will be noted that, if this deficit continued, the 5-year production contract would be automatically extended until the loan was finally paid.

With this contract in force, which left Superior with a limited working capital, without power to increase its capital stock or to finance the acquisition of additional properties, Superior found itself in a condition which it outlined in a letter of May 29, 1920, wherein the facts are stated, viz.: (1) That its “early operations were comparatively limited in scope, and it was deemed wise to increase the area of its producing properties” ; (2) in view of its “pipe line capacity, which is now materially in excess of present production”; and (3) that it should have “additional working capital provided through sale or exchange of 1,118,478 shares of new stock.”

These considerations evidently led to Superior undertaking, through Catts, its president, negotiations with four prominent banking firms which it endeavored to enlist in its refinancing plan. Its letter to them, dated, May 29, 1920, and accompanied with a proposed prospectus to the public, marked “confidential,” dated June 5, 1920, in substance provided: That Superior increase its shares from 300,000 to 2,500,000, of which 1,018,--478 shares will be presently -issued for the purpose of acquiring the additional production and for working capital. At the conclusion of this operation there will be outstanding 1,231,811 shares, and there will be in the treasury of the corporation 1,268,-189 additional shares. The plan also contemplated the Atlantic purchasing a substantial block of the stock for its own investment; the Atlantic purchasing for 10 years the entire output of Superior; the Atlantic undertaking the management of Superior for 3 years, by selecting a majority of the board of directors, and the offer to the syndicate of the stock at $19 per share.

While this plan of Superior was never carried through, yet, evidently with a view to its being carried through as outlined, a conditional contract, dated June 24, 1920, covering Superior’s production for 10 years, by Atlantic, was entered into. We say “conditional contract,” for it will be seen that the substitution of this contemplated 10-year contract for the 5-year one in force was, as the contract stated, conditioned that “it is agreed that said existing contracts between the parties remain in full force and effect until said buyer’s loan to seller and interest shall be paid in full, and that this agreement shall not become operative and effective until said loan has been paid, all as aforesaid.” In effect, this contract provided that, if Superior paid off its debt to Atlantic, then Atlantic’s contract to take Superior’s product for 10 years then, and then only, came into effect. This provisional contract, it will be noted, fixed prices according to the Seep Agency provision of the former contract, and in that connection it will be observed that both contracts had the same equitable provision, namely, that in case the agency posted no price for Somerset oil, the price should be fixed by three arbitrators, “one a refiner selected by Atlantic, one a producer selected by Superior, and the third ‘ to be selected by these two.”

That it and other provisions were desired by Superior as a means of inducing the bankers to underwrite Superior’s new issue of. stock is • shown by the testimony, hereafter referred to. Indeed, it is clear that, to enable Superior to finance its plan and thus acquire the additional oil property needed to pay off its daily loan requirement and obtain néw capital, four things were necessary: (1) To induce Atlantic to exchange its indebtedness for stock; (2) to tie up its stock so acquired for two years; (3) to take Superior’s entire product for 10 years instead of 5; and (4) to assume the management of Superior’s properties. That these were the bankers’ requirements during the negotiations between them and Superior is shown by the testimony of Francis M. Weld, their syndicate manager, who was called as a witness by the plaintiff, viz.:

“We also felt that it was of considerable importance to have the Atlantic stock tied up as it was for two years, so it could not come out on the market. In other words, they were getting only receipts; they were not getting actual stock. Naturally, we were very much influenced by the fact that the Atlantic Refining Company were to be the management of the Superior Oil Corpora^ tion; and we considered it important that this oil contract should be extended and kept in force for, I think it was,,10 -years, because it meant a steady, sure market for the oil that was produced by the Superior Oil Corporation. It would keep them from having to shut down in bad times.

“XQ. Will you tell the eóurt whether or not the. bankers would have purchased the stock of the Superior Oil Corporation had it not been for the assumption and management by the Atlantic Refining Company and the 10-year oil contract that you have referred to ?. A. No; I do not think that they would- have.”

And, further, it will be noted, when this contract for 10 years’ oil production was being considered by Superior at the directors’ meeting of June 24, 1920, the minutes show that Director-Henry, who, as we have seen, was the representative of Atlantic on Superior’s board to safeguard its loan, stated that his company, “provided that so to do in any instance would not work to its own disadvantage, would at any time be glad to waive its right so to- purchase under the terms of the contract, if the Superior Company deemed it advantageous to sell that oil elsewhere.”

Whatever may have been the conduct of Catts, the president of Superior, during these negotiations, whatever the representations he made, no contract between Atlantic and Superior other than the 10-year oil provisional contract básed on the bankers’ requirement, had resulted therefrom when, on August 5, 1920, -the corporate written contract between Atlantic and Superior here involved was made. On that day, as shown by Superior’s minutes, a letter of Atlantic to Superior was presented at the directors’ meeting, as follows:

“New York, August 5, 1920.

“Superior Oil Corporation, 32 Nassau Street, New York City — Gentlemen: The undersigned company, under agreements with your company, to which we refer, has loaned and advanced moneys for the purchase of properties by-your corporation and the charges and expenses incident thereto incurred by your - corporation and ourselves. We are infoxmed that Messrs. Brown Brothers, White, Weld & Co., - Graham, Parsons & Co., and Frazier & Co., propose to loan your corporation the sum of $2,910,000, and to accept in payment thereof, under certain contingencies, 181,875 shares of stock of the Superior Oil Corporation.

“We hereby offer to accept 325,000 shares of the stock of your corporation, issued full-paid and nonassessable in full payment of the principal sum of all your in-, debtedness to us, including charges and expenses, and for- interest accruing on said principal sum from June 1, 1920 (all evidence of such indebtedness to be canceled by us and surrendex-ed to your corpox'ation). Our acceptance is conditional upon your delivery to the aforementioned firms of 181,-875 shares of your stock in payment of their loan to you, and furthermore conditional upon the aforementioned firms’ purchase from your corporation 81,500 shares at $16 per share. Subject to the approval of your board of directors, we will accept from R. M. Catts, trustee, 86,6616 shares of your capital stock now held by us as part payment of the 325,000 shares we offer to accept, leaving certificates for 238,334 shares of your stock to be delivered to us. We suggest that such delivery, coincident with delivery of 181,875 síxares plus said 81,500 shares to bankers be made at the office of the Guaranty Trust Company in the city of New York on or before August 19, 1920.

“This offer is made subject to the resolution of your board of directors of June 24, 1920, and without in any way affecdng our contract of June 24, 1920, with your corporation for the purchase of crude petroleum for the period of ten years.

“The Atlantic Refining Company,

“By [signed] W. M. Irish, Vice President.”

“Thereupon, on motion duly made and seconded, it was unanimously resolved, that the board of directors hereby accept the offer of the Atlantic Refining Company dated August 5, 1920, upon the terms thereof; and

“Further resolved, that the proper officers of this company be and they hereby are authorized and directed to deliver to the Atlantic Refining Company, or their nominee, tn full payment of all indebtedness of this company to the Atlantic Refining Company (as per schedule to be agreed upon between the officers of this company and the Atlantic Refining Company, setting forth in detail the items of such indebtedness) 325,-000 shares of the common stock of this company, delivery to be made by assignment to the Atlantic Refining Company by Robert M. Catts, trustee, of a certificate or certificates for 86,666 shares standing in the name of Robert M. Catts, trustee, and indorsed in blank, and a certificate or certificates for 238,334 shares standing in the name of the Atlantic Refining Company, or its nominee; and

“Further resolved, that the proper officers of this company be and they hereby are authorized and directed to execute and deliver to the Atlantic Refining Company, or its nominee, in pursuance of the preceding resolution, and the transfer agents and registrars to countersign and register, respectively, stock certificates in the forms to be approved at this meeting for 238,334 shares of the common stock of this company.”

In pursuance of this resolution an account was stated which showed Superior was entitled to credits on its indebtedness of $295,787.78. This sum, deducted from its indebtedness to Atlantic, which Atlantic paid to Superior by check dated September 1, 1920, left Superior’s indebtedness to Atlantic $2,750,000, which made the cost to Atlantic of the 325,000 shares of stock about $8.54 per share. Inasmuch