Selected Investments Corporation v. Duncan, 5854

• Citation: 260 F.2d 918
• Decision Date: 10 November 1958
• Docket Number: No. 5854,5976.,5975,5950,5855,5854
• Parties: SELECTED INVESTMENTS CORPORATION, a corporation, Appellants, v. Paul C. DUNCAN, trustee in bankruptcy, of Selected Investments Corporation, a corporation, and Selected Investments Trust Fund, et al., Appellees. J. S. PLEDGER, Appellant, v. SELECTED INVESTMENTS CORPORATION et al., Appellees. SELECTED INVESTMENTS CORPORATION et al., Appellants, v. Paul C. DUNCAN, Trustee, et al., Appellees. Walter D. HART et al., Appellants, v. Paul C. DUNCAN, Trustee, et al., Appellees. O'BRYAN, O'BRYAN & O'BRYAN, et al., Appellants, v. Paul C. DUNCAN, Trustee, et al., Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

260 F.2d 918 (1958)

SELECTED INVESTMENTS CORPORATION, a corporation, Appellants, v. Paul C. DUNCAN, trustee in bankruptcy, of Selected Investments Corporation, a corporation, and Selected Investments Trust Fund, et al., Appellees.

J. S. PLEDGER, Appellant, v. SELECTED INVESTMENTS CORPORATION et al., Appellees.

SELECTED INVESTMENTS CORPORATION et al., Appellants, v. Paul C. DUNCAN, Trustee, et al., Appellees.

Walter D. HART et al., Appellants, v. Paul C. DUNCAN, Trustee, et al., Appellees.

O'BRYAN, O'BRYAN & O'BRYAN, et al., Appellants, v. Paul C. DUNCAN, Trustee, et al., Appellees.

Nos. 5854, 5855, 5950, 5975, 5976.

United States Court of Appeals Tenth Circuit.

October 14, 1958.

Rehearing Denied November 10, 1958.

Herbert K. Hyde, Oklahoma City, Okl., for Selected Investments Corp., Selected Investments Trust Fund, Linwood O. Neal, Trustee, Hugh A. Carroll, and Julia L. Moore Carroll.

W. H. Pat O'Bryan, Oklahoma City, Okl., for O'Bryan, O'Bryan & O'Bryan.

George Zolotar, New York City, for Walter D. Hart and Jack Hart.

Sid White, Oklahoma City, Okl., for Louie Hamburger, Dan Hamburger, Emma Schneider, and Raymond Schneider.

Paul W. Updegraff, Norman, Okl., for J. S. Pledger.

Charles Hill Johns and Gomer Smith, Jr., Oklahoma City, Okl., for H. P. Willis, and Zona Willis.

Luther Bohanon, Roy C. Lytle, and James D. Fellers, Oklahoma City, Okl., for Paul C. Duncan, Trustee in Bankruptcy.

Thomas G. Meeker, David Ferber, Stuart C. Law, Washington, D. C., and J. Kirk Windle, Chicago, Ill., for Securities and Exchange Commission.

Before BRATTON, Chief Judge, and PICKETT and BREITENSTEIN, Circuit Judges.

Rehearing Denied in Nos. 5975, 5976 November 10, 1958.

BRATTON, Chief Judge.

For convenience, reference will sometimes be made to Selected Investments Corporation as the Corporation and to Selected Investments Trust Fund as the Trust Fund. A petition in involuntary bankruptcy was filed against the Corporation. The Corporation answered; a hearing was had; and an order of adjudication was entered. The Corporation and the Trust Fund filed a joint petition for reorganization under Chapter X of the Bankruptcy Act, as amended, 52 Stat. 883, 11 U.S.C.A. § 501 et seq. Treating the Corporation and the Trust Fund as a single entity, the court approved the petition for reorganization; appointed a trustee; authorized the trustee to operate the business assets, property, and affairs of the debtor; stayed the proceedings in involuntary bankruptcy; and stayed all other proceedings affecting the estate of the debtor. Asserting that they were creditors of the debtor, various owners and holders of certificates issued by the Corporation and countersigned by the trustee of the Trust Fund intervened in the reorganization proceeding. Asserting that it had an unpaid claim against the debtor for professional services rendered, the firm of O'Bryan, O'Bryan & O'Bryan filed in the proceeding a petition to vacate and dismiss. The prayer of the petition was that a hearing be had thereon; that the adjudication in bankruptcy be vacated; and that the petition for involuntary bankruptcy be dismissed. And asserting that they owned and held certificates issued by the Corporation and countersigned by the trustee of the Trust Fund, Walter D. Hart and Jack Hart filed in the proceeding a pleading denominated Certificate Holders' Joinder, Petition and Answer to Dismiss Debtors' Petition under Chapter X. In such pleading, it was pleaded among other things that the petitioners joined in and adopted the petition of the O'Bryans. The prayer was that the involuntary petition in bankruptcy be dismissed; that the order approving the petition for reorganization be vacated; and that the petition for reorganization be dismissed. The pleading filed by the O'Bryans and that filed by the Harts, respectively, were denied. These several appeals in their totality bring here for review the order of adjudication, the order approving the petition for reorganization, the order denying the pleading filed by the O'Bryans, and the order denying the pleading filed by the Harts. The cases were argued together and disposition may be made of them in like manner.

The action of the court in treating the Corporation and the Trust Fund as a single entity is challenged. It is argued that the question whether the two are a single entity or separate entities must be determined by the law of Oklahoma, and that under the law of that state they are separate entities to be dealt with in that manner. The case of Selected Investments Corp. v. Oklahoma Tax Commission, Okl., 309 P.2d 267, is relied upon to sustain the contention. That was an action for refund of income tax paid under protest. The ground of attack upon the tax was that the Corporation and the Trust Fund were separate legal entities; that the income involved constituted income to the Trust Fund; and that therefore the Corporation was not liable for the tax. It was held that the Corporation and the Trust Fund were separate legal entities; that the items of income involved constituted income to the Trust Fund; that they were not taxable as income of the Corporation; and that therefore the Corporation should prevail. But that was an action at law. Equitable principles did not control. It is the general rule both in actions at law and in proceedings in equity that existing separateness of legal entities will be respected and preserved. But in an equitable proceeding, the fiction of separate entities may be disregarded and two or more entities treated as one when it becomes necessary to do so in order to prevent fraud, injustice, or wrong. That general rule is frequently applied in determining the separateness of identity of a corporation and its members. Fitzgerald v. Central Bank & Trust Co., 10 Cir., 257 F.2d 118. But it is not limited in application to instances of that kind. It has appropriate application in determining whether under the facts and circumstances in these cases the separateness of entities of the Corporation and the Trust Fund should be disregarded as a means of preventing fraud, injustice, or wrong.

These facts and circumstances should be brought into focus in determining whether the court providently disregarded the separateness in legal entity of the Corporation and the Trust Fund and treated the two as a single entity. The Corporation was organized under the law of Oklahoma in December, 1930. A trust indenture was entered into in January, 1931. Provision was made in the indenture for the formation of the Trust Fund as an unincorporated entity, and Security National Bank of Norman, Oklahoma, was named as trustee. The Corporation and the Bank executed the instrument as parties thereto. The indenture contemplated that certificates of indebtedness would be issued by the Corporation, countersigned by the trustee of the Trust Fund, and sold to investors in Oklahoma; that the funds paid by the investors would be placed in the assets of the Trust Fund; and that the funds would be invested in stocks, bonds, and other securities. The indenture vested in the Corporation full power to issue and sell the certificates, and to manage and control the trust. For about ten years immediately preceding the intervention of receivership in the state court, Linwood O. Neal was trustee of the Trust Fund. But he was merely an empty figure. He was the nominal custodian of the assets of the Trust Fund but he did nothing except to receive funds and disburse them upon the direction and at the command of the Corporation. He was selected as trustee by the Corporation; was subject to removal by the Corporation; and was completely subservient to the control and direction of the Corporation. Hugh A. Carroll, president of the Corporation, completely dominated and controlled both the Corporation and the Trust Fund. And the affairs of the two were managed at least in part for the financial benefit of Carroll, his wife, and a few close associates. The pattern employed in several instances in managing the affairs of the Corporation and the Trust Fund for the financial benefit of Carroll, his wife, and one or more close friends, was to cause funds to be siphoned from the Trust Fund to the Corporation, cause the funds to be passed on to satellite corporations organized or acquired and financed in part with such funds, and then cause the satellite corporations to pay salaries to Carroll, his wife, and the friend or friends ostensibly as compensation for services in the form of advice and supervision. In one instance, a large amount of cash was siphoned from the Trust Fund to the Corporation and then paid by the Corporation direct to Carroll in the form of a loan. And most of the debt remained unpaid at the initiation of bankruptcy. The action of the court in disregarding the separateness of legal identity of the Corporation and the Trust Fund as a means of preventing fraud, injustice, and wrong rested upon solid equitable basis and therefore should not be disturbed on appeal.

The pivotal question to which the contending parties direct with vigor much of their argument is one of jurisdiction of the court to proceed with the reorganization proceeding. The question is whether at the time of the filing of the petition for reorganization, the debtor was insolvent or unable to meet its debts as they matured. And it turns upon whether the relationship of debtor and creditor existed between the debtor and the holders of certificates issued to investors. It is clear that if such relationship did exist, the debtor was insolvent and the court was clothed with jurisdiction to proceed with the reorganization. On the other hand, if the holders of the certificates were merely beneficial owners of proportional...