Central Life Securities Co. v. Smith

• Decision Date: 14 June 1916
• Docket Number: 2104.
• Parties: CENTRAL LIFE SECURITIES CO. et al. v. SMITH et al.
• Court: U.S. Court of Appeals — Seventh Circuit

236 F. 170

CENTRAL LIFE SECURITIES CO. et al. v. SMITH et al.

No. 2104.

United States Court of Appeals, Seventh Circuit.

June 14, 1916

Appellees sought a money judgment against, and a receiver for, the Central Life Securities Company, a Maine corporation, and also sought to wind up its affairs. Application was first made to the Supreme Judicial Court of the state of Maine against the appellant Central Life Securities Company, where temporary receivers were appointed. Upon an amended bill and upon the answer of said company and upon its consent the court entered a decree appointing receivers and directing them to wind up the affairs of said company. Complainants also filed in this jurisdiction an ancillary bill similar to the one filed in the Maine court, and it appearing that due comity required the entry of a similar decree in this jurisdiction, a somewhat similar order was entered.

The receivers appointed reduced the assets to cash, and their reports have been approved. The chief controversy on this appeal arises over the distribution of the balance.

The contentions worthy of special consideration arise out of the claims of the Central Agency Company, Western Agency Company Atlantic Agency Company, Eastern Agency Company, and Thomas Rhodus for participation in this balance.

The court ordered a reference, and full and complete findings and conclusions were made by the master. To these findings and conclusions appellants filed exceptions, which were considered by the court in a careful opinion, and a decree entered March 8, 1913, followed. These findings and conclusions are too lengthy to be here set forth in full. The findings of the master as corrected by the decree are well supported by the evidence.

The capital stock of the Central Life Securities Company was of the par value of $2,500,000, one-half being preferred stock and one-half common stock. No distinction existed between common and preferred stock excepting over the right to dividends. While its charter gave it authority to pursue many lines of business the chiefly advertised business of the Central Life Securities Company was to assist in promoting the business of the Republic Life Insurance Company, an Illinois corporation. The five agency companies, also appellants herein, were organized under the laws of Arizona for the purpose of acting as general agents for placing life insurance business, and doing such other business as their respective charters and the laws of Arizona permitted. Each agency company was capitalized at $1,000,000, divided into $800,000, common stock and $200,000 preferred stock excepting one which had $100,000 of preferred stock and the balance common stock.

Another corporation was organized by the same parties, known as the Mercantile Securities Company, and from the sale of its preferred stock it was proposed to purchase the stock of a bank. Another corporation, known as the Bankers' Consolidated Corporation, was expected to own the stock in a chain of country banks. Both of these corporations were to hold some of the stock in the aforementioned five agency companies. The amount realized from the sale of the preferred stock of the Central Life Securities Company was $887,249.94 which preferred stock sold at a premium.

The common stock of the Central Life Securities Company was, through the American Trading Company also controlled by the same parties, transferred to the said five agency companies, and $1,250,000 par value of the latter named companies was turned over to the Central Life Securities Company. No other consideration is apparent for the transfer of the common stock of the lastnamed company. The sale of the stock and the conduct of the business of all of these companies organized as a part of the scheme was at all times in the hands of and under the control of Rhodus Bros.

In addition to the aforesaid companies these same Rhodus Bros., by means of their trading companies and some of the aforesaid companies, promoted and managed the business of the following companies: Nevada & Eastern Gold Mining Company, Boise King Placers Company, Mina Grande Mining Company, Moose Creek Gold Mining Company, Mines Development Company, National Rheostat Company, Merced Copper Company, Federal Mercantile Agency Securities Company, Mercantile Securities Company, the Finance Company of America, the American Trading Company, the Independence Zinc Mining Company and several others.

A policy of exchanging stock, one for the other, was pursued. The chief business of these companies was to sell stock. Enormous sums were paid in commissions and for expenses. Frequently the cost of selling the stock exceeded the amount realized from such sale.

The Republic Life Insurance Company was an Illinois Corporation, the object of which was to conduct a life insurance business. A large sum of money of the Central Life Securities Company was paid to said Republic Life Insurance Company for the preferred stock of the latter company. The Insurance Company wrote life insurance to the amount of about $200,000, of which about 25 per cent. was upon the lives of the Rhoduses and the agents of the various interlocking companies. The principal activity of said company consisted in getting the names of so-called representative men willing to take insurance in said company but with an understanding that certain special privileges followed. It appeared conclusively that the balance in the hands of the receivers of the Central Life Securities Company, available for distribution, was not sufficient to pay in full the preferred stockholders.

The complainants proceeded upon the theory that the sale of preferred stock to them was fraudulent, and asked that the moneys paid in by them be returned from the assets in the hands of the receivers, and if a sufficient sum be not realized in this manner, that they have judgment for the balance against said company. The court fixed a time in which all claimants might present their claims. Nearly all of the holders of preferred stock filed their claims for the amounts paid by them for said stock. The agency companies also filed their claims for participation in said fund, basing their claim upon their holding the said common stock. The appellant Thomas Rhodus asked for an allowance of his claim for moneys alleged to have been paid for preferred stock. Although the Central Life Securities Company consented to the appointment of receivers to wind up its affairs, it now seeks by this appeal to attack the decree appointing the receivers, and denies all the claims of fraud set up in the complainants' bill.

By the decree appealed from, the preferred stockholders of the Central Life Securities Company, who seasonably filed their claims, were permitted to share pro rata in the balance in the hands of the receivers. The claim of the appellant Thomas Rhodus was disallowed because the court found that he paid nothing for his said preferred stock. The claims of the agency companies, all similar in character were entirely disallowed. A further statement of the facts appears in the discussion.

Samuel Shaw Parks, of Chicago, Ill., for appellants.

Charles R. Holden, of Chicago, Ill., for appellees.

Before EVANS, Circuit Judge, and ANDERSON and GEIGER, District Judges.

EVANS Circuit Judge (after stating the facts as above).

The appellant Thomas Rhodus complains because the master disallowed his claim for moneys alleged to have been paid for preferred stock of the Central Life Securities Company. Whether any money was so paid by the appellant Thomas Rhodus for preferred stock was purely a matter of fact. The report of the master in this respect was confirmed by the judge, and we are convinced that the evidence justifies the conclusion that Thomas Rhodus paid nothing for the preferred stock held by him. He is therefore not entitled as a holder of said preferred stock to participate in the funds in the hands of the receivers.

The Central Life Securities Company attacks the order made in the Supreme Judicial Court of the state of Maine, and also made in these proceedings, wherein receivers were appointed to wind up the affairs of said appellant, contending that the bill originally filed in the Maine court was subsequently amended so that the allegations originally appearing were disputed and disproven by the allegations appearing in the amended bill. Appellant...