Parker v. New England Oil Corp. (4 F.2d 392, 1924)

ANDERSON, Circuit Judge.

This petition involves the right of a party in interest under a receivership reorganization to obtain through the court full and complete information with respect to the essential details of that reorganization. The situation is unusual, and presents questions of practice and procedure of some general interest in receivership reorganizations. It cannot be understood without first sketching the' general situation.

On July 14, 1922, there was filed in this court a so-called creditors’ bill seeking what has come to he called a “conservation receivership” of the respondent corporation. The respondent was alleged to owe over $11,000,000, and to have as its chief assets 75,000 shares, the entire capital stock, of the Now England Oil Refining Company (hereinafter called the Refining Company), and also (subject to pledge) all of the capital stock of tho New England Oil Corporation, Limited (hereinafter called the Canadian Company). The other assets were relatively small. The Refining Company is the owner of a large refining plant at Fall River, alleged to have made, in 1921, profits approximating $2,500,000. Its balance sheet shows $19,000,000 assets and liabilities. It was claimed to be a profitable enterprise; but in need of working capital, and rather badly extended. Tho Canadian Company had as its chief assets leases and concessions for oil lands in Venezuela.

The respondent corporation seems to have functioned chiefly as a holding company and as a borrower of money. One reason for the application for the receivership was a suit against the respondent corporation under which a judgment was entered for over $1,100,000 — threatening, as was alleged, unwarranted sacrifice of the respondent’s assets and irreparable damage to its other creditors.

A decree was entered on Jnly 20, 1922, appointing receivers and enjoining interference with their possession and control of the respondent’s assets, by attachment, levy, or in any other manner.

Tho situation was obviously one calling for a radical reorganization. And it was clear that a reorganization must be mainly based upon the prospective earnings of the Refining Company, plus such hopes as might rest upon the development of the oil properties in Venezuela. The Refining Company was the real going concern.

On January 8, 1923, on application of the receivers, a decree was entered for proof of claims on or before January 24, 1923. On February 26, 1923, the present petitioner, Ernest Wiltsee, filed a petition asking leave to intervene and to file his elaim as a creditor. This petition to intervene was allowed, and, after a full trial, his claim was allowed in the sum of $176,000. From the decree allowing this elaim an appeal was taken by the noteholders’ committee, hereinafter referred to. In his petition of May 8, 1924, Wiltsee alleges that he is also a stockholder in the Refining Company. Whatever the nature and extent of his rights, as they may ultimately be determined, he must, for present .purposes, bo regarded as at least a substantial creditor, whose claim has been duly proved and allowed, of the respondent company. Creditors of the respondent corporation arc, under the plan of reorganization, entitled to become stockholders of the Refining Company. They may have other rights. Compare Phipps v. Chicago, etc., R. R. (C. C. A.) 284 F. 945, 28 A. L. R. 1184.

On January 9, 1923, Francis R. Hart, Alfred L. Aiken, Allan Forbes, Frank Finsthwait, Thomas H. West, Jr., and Daniel O. Wing, describing themselves as “note-holders’ committee under an agreement dated 15th November, 1922,” were allowed to intervene, and were made parties to the suit. On January 22, 1923, this noteholders’ committee filed a petition for approval of a plan of readjustment and reorganization. Attached to this petition was a printed “Preliminary Plan of Readjustment dated January 1, 1923,” and also copies of various contracts which it was proposed to have executed by the parties in interest. After due order of notice, a decree was entered as of February 12, 1923, authorizing the receivers to participate in this plan of reorganization. The printed plan is hereto annexed and made a part hereof by reference. It sets forth that the respondent corporation had provable debts of over $11,500,000, besides large contingent additional claims. Nearly half of the direct debt was due the Refining Company, of which, as above noted, the respondent company was the sole stockholder. The plan of reorganization contemplated the eancel- ' Iation of this debt, and that the other creditors should receive preferred stock of the •Refining Company which át par would equal the face of their debts, with a bonus of a like number of shares of common stock of no par value. New working capital was also necessary for the Refining Company. In order to carry out these main purposes, the capitalization of the Refining Company was to be so changed as to authorize $10,-000,000 of 7 per cent, preferred stock, of , which ' approximately three-fourths would ’go to the creditors of the respondent; the balance to remain in the treasury for future corporate purposes; also 1,500,000 shares of common stock of no par value; and mortgage bonds' for $5,000,000, to be sold at 85 (with stock warrants and a bonus of common stock), thus furnishing $4,250,000 of new money for the Refining Company.

Other minor details are for present purposes immaterial. The pending petition relates mainly to the disposition of the 1,500,-000 shares of common stock, but the settlement of the Tankers’ Syndicate claim of some $18,000,000 is also in question. The printed plan sets forth :

“Of this amount 500,000 shares will be reserved for issue against the stock warrants above mentioned; 560,000 shares will be sold with the initial issue of the general mortgage bonds; 250,000 shares will be reserved for the corporate purposes of the company, including for issue to officers and employees of the Refining Company upon such basis as shall be approved by the note-holders’ committee, and the balance may be issued so far aá required to make the provisions hereinafter specified for existing debt and stock of the Oil Corporation; and the authorized' amount of common stock may if necessary be increased for the last-mentioned purpose.”

The stock warrants, to meet which the 500,000 shares were reserved, gave rights to the holders of the general mortgage bonds, good at any time up to January 1, 1933, to buy 100 shares of this common stock at $10 per share.

It is obvious that the allotment of 560,-000 shares of common stock, to be sold with the initial issue of $5,000,000 of mortgage bonds, amounts to 112 shares for each $1,000, bonds; and that this block of 560,-000 shares is thus earmarked as destined by the plan for this specific purpose. 250,000 shares were made applicable to the corporate purposes of the Refining Company on such basis as should be approved by the noteholders’ committee; the balance of 190,-000 shares might be issued, so far as required, to meet the provisions set forth in the plan for existing debt and stock of the respondent corporation. The destination and use of the entire common stock issue of 1,500,000 shares were thus pretty closely and definitely provided for.

The plan also sets forth that:

“The noteholders’ committee will endeav- or to arrange for the sale of $5,000,000 principal amount of the general mortgage bonds, together with 560,000 shares of the common stock, for the sum of $4,250,000, together with accrued interest on the general mortgage bonds. Negotiations for this sale are now being conducted with Messrs. Malcolm G. Chace, Francis R. Hart, and Daniel G. Wing as syndicate managers.”

Two of the syndicate managers, it will be observed, are also members of the, noteholders’ committee. There is also provision for a five-year voting trust, with five named trustees, made up of the same persons who are syndicate managers, with the addition of Bradley W. Palmer and Alexander Smith. The shares under this voting trust became, in substance, and at the hearing were referred to as, the equivalent of the shares of common stock of the Refining Company.

The plan also provides that “the manner in which the plan is to be carried into effect and the form of all procedure, documents and instruments are left to the determination of the noteholders’ committee.”

Turning again to the decree of February .12, 1923, approving this plan: The receivers were directed in general terms “to participate in said plan and to do any and all things which they may deem necessary or advisable in order to carry out and consummate the' same.” There follow several paragraphs of specific directions to the receivers, not necessary now to detail, ending with instructions to the receivers to make report of their doings thereunder, and “to apply for approval of this court of such arrangements as they may desire to make for the payment of the contingent claims against the defendant corporation, and for the payment of their expenses and remuneration.” Nowhere in the decree is there any reference to the “preliminary drafts, subject to amendment, of the various contracts which it is proposed to have executed by the parties in interest,” referred, to in the note-holders’ committee’s petition for approval of the plan. Otherwise stated, the plan which was approved by the court was the printed plan hereto annexed. There is nothing to indicate, either in the decree or in the subsequent reports by the receivers, that the contracts, as distinguished from the printed plan, were ever brought to the attention of the court and given specific approval.

The printed plan controls, so far as now appears.

The receivers filed on February 17, 1923, the day when the decree of approval was actually entered, a report in which they suggested that the plan would be greatly improved by certain changes in the method provided for raising the new working capital for the Refining Company. They also reported that they had brought their views to the attention of the parties in interest, and had been informed that their suggested changes could not be adopted; and that they were therefore constrained to recommend that the plan be approved by the court as the best that could be presented under the conditions; the only alternative being such a liquidation as would leave practically nothing, even prospectively, for creditors.

The receivers made no comment or suggestion as to the disposition of the common stock, or the settlement of the Tankers’ Syndicate claim of some $18,000,000, as a part of the plan of reorganization.

The general situation disclosed by the foregoing statement is: . After the court had, on application by some of the parties in interest, enjoined creditors from pursuing their legal rights, and had taken possession of what may conveniently be called “a receivership estate,” the noteholders’ committee, made parties on their own application, sought and obtained the approval of the court for a plan of reorganization under which they became, in effect, promoters and managers of a plan of reorganization, approved by the court, to be carried into effect only by and through the co-operation and assistance of the court’s receivers. On these facts the noteholders’ committee plainly became fiduciaries for all the parties in interest in the receivership proceedings. The plan approved by the court contemplated that, while the noteholders’ committee had pretty large discretionary powers, these powers should be exercised with the co-operation of the court’s receivers, for the purposes, and only for the purposes, described and essentially limited by the printed plan approved by the court.

It is not desirable, probably not practicable, now to undertake to define exactly the nature and extent of their powers and duties. It is enough, for present purposes, to characterize them under the general term of fiduciaries. Their position was, as already indicated, in many important respects, like that of the promoters of a corporation, who stand in a fiduciary relation to the corporation of which they are promoters. Old Dominion Copper Co. v. Bigelow, 188 Mass. 315, 320, 74 N. E. 653, 108 Am. St. Rep. 479; s. c., 203 Mass. 159, 89 N. E. 193, 40 L. R. A. (N. S.) 314; Erlanger v. New Sombrero Co., 3 App. Cas. 1218; Hayward v. Leeson, 176 Mass. 310, 57 N. E. 656, 49 L. R. A. 725. They had the general rights and powers, and were subject to the general obligations and limitations, of trustees. They could not, of course, trade with their trust estate to their own profit or otherwise use their position for personal profit. Hill v. Hall, 191 Mass. 253, 263, 264, 77 N. E. 831, and cases cited.

This general principle is well stated in Arnold v. Brown, 24 Pick. 89, 96, 97, 35 Am. Dee. 296, as follows:

“This wise and salutary rule, designed to protect the weak and incompetent from the encroachments and overreaehings of the artful and the powerful, is founded upon two principles. The one is that the trustee has no right to derive any benefit or advantage from the trust fund; but all his skill and labor in the management of it must be directed to the advancement of the interest of his cestui que trust. The other is that the character of buyer and seller are incompatible, and can never be united in the same person, in whatever different capacities he may act. The agency of adverse interests is the surest guaranty of fidelity a.nd equality in negotiations of this kind. The assent of two minds is essential to the contract of sale, as well as to every other contract. Hence the action of one person can never change the ownership of property. There may be formal sa\es made by an executor, administrator, guardian, or trustee, to themselves, or to others for them, but the legal property, will still remain unchanged and chargeable with the same trusts as before. Nor can this salutary rule be evaded by circuity of, conveyances. As the trustee cannot sell directly to himself, so he cannot do the same thing indirectly, by selling to another person for his benefit. As he is bound to act in everything pertaining to the trust, for the advantage of the cestui que trust, so the latter always has the option tq consider the sale valid or invalid as he shall deem most for his interest. When he is capable of acting, his assent .will give vitality to a contract which before only had a potential existence.”

It is also important to consider what affirmative duty these fiduciaries — becoming such under what is, in substance and legal effect, an appointment and approval by the court — owe the parties in interest. Wilts'ee’s petition prays that the receiver (tlie resignation of one of the receivers because of his impending absence in Europe was accepted by the court) or the Refining Company or the noteholders’ committee be directed to file a report containing full and complete information with respect to various points detailed in the petition. The only fairly debatable question is as to the proper method' of recognizing Wiltsee’s prima facie right to the information sought. On careful consideration, the sound course seems to be that when, as in this case, a reorganization is being carried out, as it were, under the aegis of a court of equity, the fiduciaries should be required by the court to make report to the court of their doings with the trust estate. In controlling aspects they are, in that regard, like ordinary ' probate trustees. The beneficiaries are entitled to get from the court records adequate information -as to what their trustees have done’with their property. It is, elementary that trustees and receivers must make an affirmative showing of all their material acts concerning, their trust estate'. A fortiori, trustees having the large business and -discretionary powers vested in this noteholders’ committee should be required to spread seasonably upon the records of the court an account of their doings with their trust. Parties in interest in .this case, mostly, if not entirely, creditors, should not be required to go to the expense of employing counsel and seeking information in pais or by independent court proceedings. They are entitled to know from the court which is, in vital aspects, administering their property what that administration has done with their property. The promoters of the approved reorganization are, under the facts here disclosed, a vitally important part of that administration.

The situation is to be carefully distinguished from interference by the court with the management of a corporation, which may, through and after the completion of a receivership, reorganization, have come .into possession and control of the receivership estate. Of course no court would think of interfering with the discretion of a board of directors or committee which might have happened to purchase, as a complete act, the property or estate once held in receivership. But the management of the Refining Company as a reorganized concern is a thing quite distinct-from proceedings of the noteholders’ committee dealing with rights of the parties that grow out of the note-holders’ committee’s relations to the court, in the reorganization conducted by the note-holders’ committee under the approval of the court. The fact that such rights involve also rights in the reorganized Refining Company is immaterial.

It follows that the petitioner is entitled to a report, and that the report should be made, not by the Refining Company, nor by the receiver, but by the noteholders’ committee, who stand, as already stated, in a position analogous to that of trustees of an estate.

A decree accordingly may be presented. This is stated tó be an early draft, and may in some details differ, from the plan as approved.

Note.

Preliminary Plan of Readjustment, January 1, 1923.

Present Debt of New England Oil Corporation (as of August 31, 1922)

Five-year 8 per cent, convertible gold notes:

Total outstanding...............$5,762,000

Held by New England Oil Refining Company ......... 322,000

Balance ............................... $ 5,440,000

To New England Oil Refining Company:

Five-year 8 per cent, convert-

■ ible gold notes ............... $ 322,000

Demand note secured or par-

tially secured.........'....... 1,250,328

Unsecured account........... 3,225,372

Total .................................. 4,797,700

Note payable to France & Canada Oil Transport

Company:

Face amount...................$ 200,000

Credit, say ..................... 15,000 185,000

Judgment in favor of Island Oil Marketing

Corporation (subject to adjudication) 1,161,000 Miscellaneous direct liabilities (other than accrued interest a.nd exclusive of approximately $5000 of items incur-

red by receivers)....................... 9,412

Total ................................... $11,593,112

In addition to the foregoing the New England Oil Corporation (which is hereinafter called the Oil Corporation) is indebted for large amounts as guarantor of obligations of, or as joint obligor with, the New England Oil Refining Company (which is hereinafter called the Refining Company), and is also liable as guarantor of notes for $517,000 of New England Oil Corporation, Limited, a Canadian corporation (hereinafter called the Canadian Company). The Oil Corporation is also subject to a claim by the Sun Oil Company on account of alleged breach of contract.

Present Outstanding Stock of the Oil Corporation.

Preferred stock, par value $100 a share, 19,-497 shares.

Common stock, no par value, 540,000 shares.

Assets of the Oil Corporation.

In addition to the stock of the Refining Company, the only important asset of the Oil Corporation consists of all the stock and certain indebtedness of the Canadian Company as follows :

Stock of Canadian Company...... $ 10,000

Increase arising through appraisal ..................... 1,525,844

Total stock .................... $1,535,844

Indebtedness for advances........ 557,361

Total stock and advances, Canadian Company ................................... $2,093,205

Of this item, all the stock and $344,877.34 of the indebtedness is pledged to the Refining Company. $168,615 of the indebtedness is pledged to secure the $517,000 notes above mentioned. $44,369 of the indebtedness is unpledged.

Proposed Capitalization of Refining Company.

First mortgage bonds — closed issue — now outstanding, $4,7.15,000.

General mortgage 8 per cent, sinking fund gold bonds, to be presently issued, §5,000,000.

These bonds (hereinafter called the initial issue of general mortgage bonds) will be dated January 1, 1923, payable January 1, 1943, subject to redemption on any interest day on 90