In re American Fuel & Power Co.

• Decision Date: 04 September 1941
• Docket Number: No. 8923-8926.,8923-8926.
• Citation: 122 F.2d 223
• Parties: In re AMERICAN FUEL & POWER CO. and five other cases.
• Court: U.S. Court of Appeals — Sixth Circuit

122 F.2d 223 (1941)

In re AMERICAN FUEL & POWER CO. and five other cases.

Nos. 8923-8926.

Circuit Court of Appeals, Sixth Circuit.

August 15, 1941.

As Amended September 4, 1941.

Baker, Obermeier, Rosner & Rosenson, of New York City (Oscar S. Rosner, of New York City, of counsel), for Morris Green and others.

George W. Vaughn, of Lexington, Ky., Richard B. Hand, of New York City, and Robert J. Bulkley, of Cleveland, Ohio, for the Van Horn Committee.

LeWright Browning, of Ashland, Ky., and Milbank, Tweed & Hope, of New York City, for W. J. K. Vanston and others.

Martin & Smith, of Catlettsburg, Ky., and Miller, Owen, Otis & Bailly, of New York City (George B. Martin, of Catlettsburg, Ky., and Claude M. Terrell, of New York City, of counsel), for Clyde L. Paul and others.

Logan & Duffy and Arthur G. Logan, all of Wilmington, Del. (Caldwell & Gray and Robert T. Caldwell, all of Ashland, Ky., of counsel), for Ben Williamson, Jr., Trustee.

Stoll, Muir, Townsend & Park, Richard C. Stoll, and John L. Davis, all of Lexington, Ky., for Clinton M. Harbison, Trustee.

Chester T. Lane, Harry Baum, Homer Kripke, Philip Blacklow, and Wm. R. Sherwood, all of Washington, D. C., and Gerald E. Sveeggen, of Cleveland, Ohio, for Securities & Exchange Commission.

Before HICKS, ALLEN, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

These are appeals by creditors of the above-named debtor corporations from orders entered in bankruptcy reorganization proceedings authorizing and directing Clint M. Harbison, as trustee of the American Fuel & Power Company and Ben Williamson, Jr., as trustee of the Inland Gas Corporation and of the Kentucky Fuel Gas Corporation, to enter into and consummate a proposed settlement of cross-demands between the Columbia Gas & Electric Corporation and the debtors and their subsidiaries.

The question presented is: In bankruptcy reorganization proceedings, what position does a majority stockholder and creditor corporation occupy in relation to other stockholders and creditors of the debtor corporation where such stockholder and creditor files in the reorganization proceedings, stock interest and claims against the debtor which stock interest and claims such stockholder and creditor had theretofore acquired from the public in violation of Section 7 of the Clayton Act, 15 U.S.C.A. § 18?

The facts out of which this controversy arose are not in dispute and are substantially as follows:

The Inland Gas Corporation was incorporated under the laws of Delaware in March, 1927, and the Kentucky Fuel & Gas Corporation was organized under the laws of the same state in May, 1928. Each corporation was organized for the purpose of engaging in the business of producing, transporting and selling natural gas to industrial consumers in Eastern Kentucky and contiguous areas of Ohio and West Virginia. Shortly after the incorporation of the debtor, Inland Oil & Gas Corporation, it sold to the public $4,400,000 6½% first mortgage bonds and $1,500,000 ten-year 7% debentures; and the debtor, Kentucky Fuel & Gas Corporation, issued and sold to the public $4,000,000 6½% first mortgage bonds and $1,000,000 ten-year 6½% debentures. The common stock of both companies was held principally by promoters and underwriters.

In July, 1928, the debtor, American Fuel & Power Company, was organized under the laws of Delaware for the primary purpose of acquiring the capital stock of the debtors, Kentucky Fuel Gas Corporation and Inland Gas Corporation, which objective was achieved by an exchange of its shares for a majority of the stock of the other two corporations. It also sold to the public $2,000,000 of its 7% notes, the proceeds of which were loaned its two subsidiaries and used to acquire additional gas acreage and to build gas transmission pipe lines.

These properties, when acquired or built, were transferred to the Carbreath Gas Company, Inland Gas Distributing Company, the Buckeye Fuel Company or Buckeye Gas Service Company, all subsidiaries of the American Fuel & Power Company, and all now in bankruptcy reorganization with their trustees parties to these appeals. Some of the properties were transferred to the Kentucky Drilling Company, another subsidiary of the American Fuel Company, which latter company is not in reorganization. Each of the companies sustained operating losses in 1928 and 1929. The Hope Engineering Company, a creditor of the American Fuel & Power Company, managed the properties of the subsidiary companies and in connection with such management recommended to the parent company that through its subsidiaries a franchise be obtained from the city of Detroit, Michigan, for the sale and distribution of gas there and that additional pipe lines from the Eastern Kentucky gas fields be built for that purpose. The project was undertaken and to procure capital from the public, the Hope Engineering Corporation associated with it American Utilities and General Corporation, and Moody-Seagraves Company, investment companies. In March, 1930, this syndicate acquired a majority of the 898,711 outstanding shares of the American Fuel & Power Company's stock and immediately thereafter caused the capital of the corporation to be increased to 1,000,000 shares. The syndicate acquired the additional shares for $500,000 and then entered into an agreement with the Kentucky Fuel Gas Corporation and the Inland Gas Corporation for the period of one year beginning April 1, 1930, that the syndicate would make the advances necessary to meet the monthly sinking fund requirements on bonds of the two companies.

Prior to October 30, 1930, options were acquired for at least fifty percent of the right-of-way for the pipe line, and a permit from the United States for crossing the Ohio River with it was obtained and actual construction immediately begun. The syndicate opened an office in Detroit and assembled a field organization to solicit contracts from prospective industrial consumers of gas in that community and by October 9, 1930, contracts were procured for the sale of approximately 19,000,000 cubic feet of gas per day. On that date the syndicate formally petitioned the city of Detroit for a franchise to lay gas mains in its streets.

Prior to November 6, 1930, the Columbia Gas & Electric Corporation was engaged in the business of producing, transporting and distributing natural gas in the states of Indiana, Ohio, Kentucky, Pennsylvania and New York and controlled through its subsidiaries one-fourth of the total mileage of natural gas pipe lines operating within the United States.

In October, 1928, the Columbia completed a detailed investigation on the financial condition and the gas reserves of the American Fuel & Power Company and its subsidiaries, which showed an unfavorable financial status. Shortly thereafter one of Columbia's vice-presidents stated that the contemplated construction of additional gas pipe lines by the American and its subsidiaries in Ohio constituted an improper invasion of Columbia's territory and when the debtor corporations commenced their expansion into the state of Ohio, the same vice-president stated that his company would not stand idly by and permit the construction of competing natural gas pipe lines across that state. In January, 1930, the Columbia began to purchase in the open market bonds of the Kentucky Fuel and Inland Gas Corporation, and by May 30th of that year had acquired at approximately par, 27% of the bonds of Inland and 28% of the bonds of Kentucky Fuel.

On November 6, 1930, Columbia acquired all of the interest of the Hope Engineering Company and its associates in the American Fuel & Power Company and its subsidiaries for $2,870,706.70, which was the syndicate's original investment plus $350,000 and thereafter Hope disassociated itself from the American and its subsidiaries. Columbia agreed to hold harmless the syndicate from any claim the American Fuel & Power Company or its subsidiaries might have against it for a breach of its agreement to provide funds to enable the Inland and Kentucky to meet their sinking fund payments to and including April 1, 1931.

The Hope Engineering Company had a contract with the American Fuel & Power Company and its subsidiaries to supervise the construction of their pipe lines to Detroit at an estimated cost of $20,000,000 of which it was to receive 4%. Shortly after the Columbia acquired the interest of the syndicate, it made a supplementary three-year contract with Hope for supervision of $20,000,000 of construction work for which it was to receive from Columbia a fee of 4% of the cost. Later the Columbia paid to Hope $53,600 and through one of its subsidiaries, $400,000 additional for cancellation of the contract. No engineering work was done by Hope under the agreement.

After Columbia acquired the interest of the syndicate in American Fuel & Power Company and its subsidiaries, it owned 76% of the common stock of the American and between October and December, 1930, made additional purchases of $358,000 of Inland bonds for which it paid $315,828 and $558,000 of Kentucky Fuel bonds for which it paid $498,898. It also purchased between June and December, 1930, $267,000 of Inland debentures for which it paid $203,829 and $341,600 Kentucky Fuel debentures for which it paid $268,736, Columbia's total investment in American Fuel and its subsidiaries being $6,318,625.70. At the time Columbia acquired these securities, the American Fuel & Power Company and its subsidiaries were in financial difficulties and the only direct prospective return on any of the securities would arise from the completion of the proposed gas pipe lines to Detroit, and from that source only.

On October 10, 1930, the executive committee of Columbia's Board of Directors adopted a resolution providing for the immediate construction by it of a gas pipe line from Toledo, Ohio, to Detroit, Michigan, but this project was never undertaken.

On September 7, 1930, Columbia acquired control...