IN RE VAN SWERINGEN CORPORATION, 8218.

Citation111 F.2d 378
Decision Date15 May 1940
Docket NumberNo. 8218.,8218.
PartiesIn re VAN SWERINGEN CORPORATION et al. A. B. GOCHENOUR et al. v. J. P. MORGAN & CO.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Joseph L. Stern, of Cleveland, Ohio (Joseph L. Stern, of Cleveland, Ohio, and Meyer Abrams and Harry J. Myerson, both of Chicago, Ill., on the brief). for appellants.

Benjamin F. Fiery, of Cleveland, Ohio (Baker, Hostetler & Patterson and Benj F. Fiery, all of Cleveland, Ohio, on the brief), for appellee.

Before HICKS, SIMONS, and ARANT, Circuit Judges.

HICKS, Circuit Judge.

Cleveland Terminals Building Company (herein called C. T. B.) is subsidiary-debtor in the reorganization proceedings (Sec. 77B, of the Bankr.Act, 11 U.S.C.A. § 207) of Van Sweringen Corporation by which C. T. B. is owned. On November 12, 1936, appellee, J. P. Morgan & Company (herein called claimant) filed proof of claim in those proceedings against C. T. B. in the sum of $27,777,718.27, the unpaid balance and interest on a note of C. T. B. for $23,500,000 dated October 31, 1930, payable to bearer, and running 4½ years at 6%.

On October 27, 1937, appellants, including Gochenour and twenty-five others (herein called the objectors) as creditors of C. T. B. by virtue of their ownership of certain of its "first mortgage leasehold sinking fund 6% gold bonds," filed objections to the allowance of this claim.

A master dismissed the objections and recommended the allowance of the claim in full as an unsecured claim against the estate of C. T. B. The objectors excepted.

"Due to exceptional circumstances resulting from the passing of Judge West," the court did not grant an oral hearing, nor did it, on its review, read "the voluminous transcript of testimony," because it thought that there was no substantial dispute as to the facts. The matter was submitted on briefs and, giving consideration to the master's findings, the court overruled the exceptions and confirmed his report.

The appeal raises three main questions: (1) Whether the court erred in confirming the report without reading the record, inasmuch as certain exceptions challenged certain findings of fact; (2) whether the $23,500,000 loan transaction was void, it being contended that through collusion, participated in by claimant, C. T. B. did not receive the proceeds of the loan but that the same were used for the benefit of others, including claimant; and (3) whether, assuming the validity of the loan, the public auction of its collateral was valid, it being contended that the price received therefor was inadequate and that there was a secret agreement by claimant to prevent competitive bidding.

After the appeal was allowed by the district court, and after the record was printed and filed here, claimant filed a motion to dismiss the appeal upon the ground that appellants had not been granted the right to intervene under Sec. 77B, sub. c, of the Bankruptcy Act and upon the further ground that an appeal under the Chandler Act was ineffective because the district court had entered no order making the Chandler Act applicable. The order appealed from was entered on December 12, 1938, and the Chandler Act became effective on September 22, 1938. We think that the allowance of appeal was within itself a reasonable exercise of the Judge's discretion under Chapter X, Article XVI, Sec. 276, sub. c(1) (2), of the Chandler Act, 11 U.S.C.A. § 676, sub. c(1, 2), and the motion to dismiss is therefore denied.

C. T. B. was intimately connected by management and ownership with Van Sweringen Corporation, Vaness Company and Alleghany Corporation. By its management, it was also related to the subsequently organized Midamerica Corporation. O. P. and M. J. Van Sweringen and C. L. Bradley were together members of the boards of directors of the first four corporations named, between 1930 and 1935, and one or the other of these three men was president of each of the four during this period. The same three were on the board of Midamerica after it was organized. C. T. B., Van Sweringen Corporation and Vaness had but five directors, so that the Van Sweringens and Bradley constituted a majority. Alleghany had seven.

The Van Sweringen brothers owned 80% of the stock of Vaness, which in turn owned all of the stock of the Van Sweringen Corporation. The latter, as we have indicated, owned all the stock of C. T. B. These three corporations appear to have held the controlling ownership of Alleghany Corporation during the same time. Such is the background of the web of transactions which gave rise to the objections.

This common ownership and control of these several corporations with their ramified holdings and activity complicated the proof of the charge of fraud, and the master permitted considerable latitude in the admission of evidence relative to a conspiracy. Each of the business moves of C. T. B. in the period involved dovetail with that of at least one other corporation under the Van Sweringen influence. In turn they were made to dovetail with transactions with bankers, stockbrokers, etc. Whether claimant was guilty of fraud and collusion is a question of fact to be drawn by inferences from the evidence of these involved business transactions.

The negotiations culminating in the execution of the note involved were carried on by claimant on the one side and the Van Sweringens individually and Vaness on the other; and were embodied in a printed "Letter Contract" between Vaness and claimant dated October 30, 1930, and containing twenty-eight pages, including exhibits. As a part of the same transaction, Vaness obtained for itself a separate loan of $16,000,000 from claimant on its own secured note, which, however, was not endorsed by C. T. B. The letter contract stated that C. T. B. "desires to procure the sum of $23,500,000 for the purpose of repaying its present indebtedness to Paine, Webber & Company in the sum of $16,000,000 secured by the pledge of certain collateral, to repay the Van Sweringen Corporation the sum of $2,500,000 recently advanced to it by the Van Sweringen Corporation, and to provide $5,000,000 to be applied to the acquisition from the Van Sweringen Corporation of 500,000 shares of the common stock of the Alleghany Corporation, * * *"; and Vaness engaged "to cause" such action to be taken.

Under the letter contract there was not a direct borrowing from claimant. C. T. B. was to borrow the $23,500,000 from Vaness. At the meeting of the board of C. T. B. held October 29, 1930, C. T. B. was authorized to borrow the amount from Vaness by the execution of the note and to secure the note by posting the securities listed in Schedule "A" attached thereto. These securities were those to be acquired from Paine, Webber & Company. This resolution also authorized the purchase of 500,000 shares of Alleghany Corporation common stock from Van Sweringen Corporation for $5,000,000. No corporate action was taken by C. T. B. authorizing the purchase of securities from Paine, Webber & Company, or the "repayment" of $2,500,000 in cash to Van Sweringen Corporation.

Vaness did not actually advance any money to C. T. B. on the note. It had none to advance. It was itself then borrowing a hugh amount from claimant. The note was issued to Vaness as an expedient for obtaining its guaranty. Bradley, President of C. T. B., testified: "The note took the form * * * because they" (meaning claimant) "wanted a guarantee of the Vaness." The Van Sweringens guaranteed the note as individuals at the same time. No cash went to Vaness but a credit was set up in its favor on claimant's books and by letter dated October 31, 1930, addressed to claimant, Vaness instructed that it be charged with the amount of the note and that the account of C. T. B. be credited therewith.

By letter dated October 29, 1930, C. T. B. directed claimant to pay $15,940,331.02 to Paine, Webber & Company in exchange for certain shares of stock, including 11,500 Alleghany Preferred and 1,122,950 Alleghany Common, and to charge its account for the amount; similarly, it directed the payment of $5,000,000 to Van Sweringen Corporation for 500,000 shares of Alleghany Common and their hypothecation with claimant as security for its note; and finally, on October 31, 1930, it directed claimant to charge its account with $2,500,000 and credit the amount to Van Sweringen Corporation. There is no dispute over the balance of $59,000 left in the account after these disbursements.

At the time claimant purchased the note of C. T. B. it arranged for participation therein with six other New York bankers. Claimant and Guaranty Trust Company participated equally, to the amount of $6,500,000 in round numbers, and claimant's participation in the two loans, that is, to C. T. B. and to Vaness, aggregated $11,000,000.

On the surface, C. T. B. simply utilized the credit to make certain stock purchases and to repay a loan. However, objectors insisted that the transactions involved other Van Sweringen interests which were financially unsound and that the Morgan loan was an endeavor to use the credit of C. T. B. to aid them. Claimant knew that this was true.

George Whitney, a partner in claimant, testified: "Our purpose in making the loan was that we believed the loan in the first instance was a good loan and could be liquidated when we made it. We had been advised there were certain loans of various corporations of which the Van Sweringens were the chief officers, that were in a rather precarious situation, for one reason or another, and we believed that it was good business, wise business, to consolidate those loans for a sufficient period of time to give the chance for them to be liquidated in an orderly way. * * *"

Lamont, another partner, testified: "The two corporations" (that is, C. T. B. and Vaness) "had certain obligations outstanding which the Van Sweringens were anxious to have protected, undoubtedly, and they came to make some bank loans in...

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