In re Consolidated Rock Products Co.
| Decision Date | 28 October 1940 |
| Docket Number | No. 9000.,9000. |
| Citation | 114 F.2d 102 |
| Parties | In re CONSOLIDATED ROCK PRODUCTS CO. et al. DU BOIS v. CONSOLIDATED ROCK PRODUCTS CO. et al. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Mott & Grant, John G. Mott, Kenneth E. Grant, and Howard A. Grant, all of Los Angeles, Cal., for appellant.
H. W. O'Melveny, Walter K. Tuller, Louis W. Myers, Homer I. Mitchell, and Graham L. Sterling, Jr., all of Los Angeles, Cal., for appellees Badgley, Col. Frith, Knight, Taylor, and others.
Gibson, Dunn & Crutcher, J. C. Macfarland, Thomas H. Joyce, and Frederic H. Sturdy, all of Los Angeles, Cal., for appellees Courtright, Dreher, Gay, Ginoux, Witter, and others.
Latham & Watkins and Paul R. Watkins, all of Los Angeles, Cal., for appellee Consolidated Rock Products Co.
Stanley M. Arndt, of Los Angeles, Cal., for appellees Hatch & Van Gelder, and others.
Edgar Shook, of Kansas City, Mo., amicus curiae.
Chester T. Lane, Gen. Counsel, Martin Riger, George Rosier, and Irving S. Rogers, Attys., Securities and Exchange Commission, all of Washington, D. C., amicus curiae.
Before GARRECHT, HANEY, and STEPHENS, Circuit Judges.
Writ of Certiorari Granted October 28, 1940. See 61 S.Ct. 71, 85 L.Ed. ___.
An objecting bondholder has appealed from an order confirming a plan of reorganization under § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207.
In the year 1929, Union Rock Company, hereinafter called Union, Consumers Rock & Gravel Company, Inc., hereinafter called Consumers, and Reliance Rock Company, hereinafter called Reliance, all of which were Delaware corporations, were engaged in the business of mining, processing, shipping and selling rock, sand and gravel. Prior to, or about the time of what the parties call the "consolidation" hereinafter mentioned, Union acquired all the outstanding stock of Reliance. These three corporations carried on about 75% of all the rock, sand and gravel business carried on in Southern California.
Both Union and Consumers had 6% first mortgage bonds outstanding. The acreage of the properties owned by each are shown as follows:
Fee Lease Total
--------------------------
Union and subsidiaries 2121.10 470.75 2491.55
Consumers 321.32 919.84 1241.16
In 1928, independent appraisers appraised the properties of Union and Consumers at approximately $15,000,000. The record does not disclose how these values were allocated between Union and Consumers. Balance statements made on March 31, 1929, show values of fixed assets as follows:
Union $ 6,644,868.99
Reliance 1,533,389.60
Consumers 4,988,134.66
______________
$13,166,393.16
At the same time the amount of bonds outstanding in the hands of the public was as follows:
Union $2,388,000.00
Consumers 1,492,000.00
The consolidation referred to was accomplished by organization of a Delaware corporation, Consolidated Rock Products Company, hereinafter called the debtor, with no par preferred stock, having a liquidation preference of $25 per share and a dividend rate of $1.75 per share, and no par common stock, which stock was either exchanged for the stock in Union and Consumers, or sold and part of the proceeds thereof used to acquire stock in Union and Consumers. Some of the proceeds of the sale were used to purchase operating equipment. Debtor then made an agreement by which it became entitled to operate directly the properties of Union and Consumers, and was required to meet payments of principal and interest on the bonds.
In 1931 a revaluation of the properties was made by officers of the debtor, who fixed the value of all properties at $4,414,425. The record does not disclose how those values were allocated between the corporations.
On February 16, 1933 an agreement was executed purporting to be a modification of the operating agreement. The operating agreement required the debtor to make allowance for depreciation, depletion and obsolescence but did not prescribe the value basis to be used. The accountants had used the then book value as a basis. The modification provided for an "actual value" basis, to be obtained yearly by a Board of Appraisers. Default in the payment of the interest due on the Union bonds occurred on March 1, 1934. A similar default occurred with respect to the Consumers bonds on July 1, 1934. There were defaults also in required retirements.
Appellant acquired Union bonds having a maturity value of $150,000 after default thereon had occurred. Of that amount he acquired $72,000 of bonds prior to the date upon which debtor's petition under § 77B was filed, and $78,000 of such bonds after such date. He also acquired $31,500 of Consumers bonds after default thereon but before the filing of proceedings under § 77B. He testified that he purchased the bonds after careful inquiry and with the full belief and conviction that a building "boom" would soon occur, and that he did not purchase them for purposes of speculating or market fluctuations. The $181,500 of bonds were purchased by appellant for $28,300.
On May 24, 1935, the debtor, Union and Consumers filed petition to reorganize under § 77B of the Bankruptcy Act. On April 28, 1937 the petition submitting the plan of reorganization was filed. Appellant filed objections, and asked that the various properties be impartially appraised, and that an independent auditor be appointed to report the indebtedness. On September 30, 1937 the amount of principal and interest due on bonds held by the public was:
Principal Interest
---------------------
Union $1,877,000 $459,865
Consumers 1,137,000 255,825
__________ ________
$3,014,000 $715,690
About this time the debtor's books showed that it owed Union and Consumers about $5,000,000, the validity and amount of such debt being disputed by the debtor.
The plan of reorganization contemplated: Organization of a new corporation; transfer to it of all Union properties (including those of its subsidiaries), Consumers' and debtor's properties free of any claims; issuance by the new corporation of a mortgage covering all the properties as security for $1,507,000 in 5% bonds payable from income only, and divided into two series; Series U bonds in the amount of $938,500 were to go to Union bondholders; Series C bonds in the amount of $568,500 were to go to Consumers bondholders; issuance by the new corporation of 30,140 5% preferred stock having a par value of $50,000, in two series; 18,770 shares of Series U preferred stock was to be issued to Union bondholders, and 11,370 shares of Series C preferred stock was to be issued to Consumers bondholders; issuance by the new corporation of 425,718 shares of common stock having a par value of $2 per share, as follows: 285,947 shares to debtor's preferred stockholders; 37,540 shares to be reserved for issuance upon the exercise of stock purchase warrants to be attached to Series U preferred stock; 22,740 shares to be reserved for issuance upon exercise of stock purchase warrants to be attached to Series C preferred stock; 79,491 shares to be reserved for issuance upon the exercise of stock purchase warrants to be issued to the debtor's common stockholders. The net income was to be divided into equal parts; one part was to be applied: to interest on Series U bonds, then to sinking fund for retirement of Series U bonds, then to dividends on preferred stock, then to a sinking fund for retirement of Series U preferred stock after Series U bonds were retired. The other part of the net income was to be applied in the same manner and order on the Series C bonds and preferred stock. The plan also apparently provides for cancellation of the interest due on Union and Consumers bonds, and of any indebtedness owing Union and Consumers by the debtor, although it is not clear where the record so shows.
Under a plan, the holder of a $1,000 Union bond was to receive: (1) a Series U bond of the new corporation in the amount of $500; (2) 10 shares (having a total par value of $500) of Series U preferred stock of the new corporation; and (3) a stock purchase warrant entitling the holder to purchase 20 shares of common stock of the new corporation at any time within five years at stipulated prices varying from $2 to $6 per share, depending on the time of exercise. The holder of a $1,000 Consumers bond obtained the same treatment except that he received Series C bonds and preferred stock.
At the hearing valuations of the properties were given by Mitchell, who was vice president and secretary of the debtor, secretary of Union and secretary of Consumers, by Rogers who had been employed by Union for many years prior to the consolidation, and by Gautier, an executive officer of the debtor. The valuations of the properties of Union (including Reliance), and Consumers so given were:
Witness Union Consumers
---------------------------------------------
Mitchell $2,150,200 $1,267,100
Rogers 2,518,000 750,000
Gautier 1,940,000 1,436,000
Average 2,202,733 1,151,033
Taking the average of these valuations, the following shows a comparison with the amount of principal and interest due on the bonds:
Union Consumers
Valuation Bond Pr. & Int. Valuation Bond Pr. & Int
$2,202,733 $2,336,865 $1,151,033 $1,392,825
The parties seem to assume that the properties are valuable enough to pay the bonds in full, and it may be they are considering only the principal. From the above valuation, it can be seen that both principal and interest now due would be amply secured only if the debtor is indebted to...
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