Taylor v. Standard Gas Electric Co

• Decision Date: 27 February 1939
• Docket Number: No. 312,312
• Citation: 306 U.S. 618,83 L.Ed. 669,306 U.S. 307,59 S.Ct. 543
• Parties: TAYLOR et al. v. STANDARD GAS & ELECTRIC CO. et al
• Court: U.S. Supreme Court

306 U.S. 307

59 S.Ct. 543

306 U.S. 618

83 L.Ed. 669

TAYLOR et al.

v STANDARD GAS & ELECTRIC CO. et al.

No. 312.

Argued Jan. 5, 1939.

Decided Feb. 27, 1939.

Mr. Jason L. Honigman, of Detroit, Mich. (Messrs. A. W. Sempliner, of Detroit, Mich., Travis I. Milsten, of Tulsa, Okl., and Milton J. Miller, of Detroit, Mich., of counsel), for petitioners.

Messrs. Nathan A. Gibson, of Tulsa, Okl., R. M. Campbell, of Chicago, Ill., Wilbur J. Holleman, of Tulsa, Okl., A. Louis Flynn, of Chicago, Ill., and Jacob K. Javits and Selig J. Levitan, both of New York City, for respondent Standard Gas & Electric Co.

Messrs. James F. Oates, Jr., of Chicago, Ill., William P. Sidley, Paul V. Harper, John Dern, and Gordon W. Winks, all of Chicago, Ill., for respondent Reorganization Committee.

Mr. George S. Ramsey, of Tulsa, Okl. (Messrs. Villard Martin and Garrett Logan, both of Tulsa, Okl., of counsel), for respondent H. W. Creis, trustee.

Mr. W. F. Semple, of Tulsa, Okl., for respondent debtor corporation.

Mr. Justice ROBERTS delivered the opinion of the Court.

The question presented is whether the District Court abused its discretion in approving the compromise of a claim by a parent against a subsidiary corporation and a plan of reorganization based upon the compromise, in proceedings under Section 77B of the Bankruptcy Act.¹ The Circuit Court of Appeals, by a divided court, approved the District Court's order.²

The petitioners are a committee for the protection of preferred stockholders. The respondents are the trustee of the debtor, Deep Rock Oil Corporation (a Delaware corporation whose business was that of producing, refining, and selling gasoline, oil, and other petroleum products, from lands located in Oklahoma, Kansas, Texas, and Arkansas), a reorganization committee, representing note-holders and certain holders of preferred stock, and Standard Gas and Electric Company, which owns practically all of the common stock of the debtor, claiming as a creditor.

The debtor was organized in 1919 to take over the properties then being operated by one C. B. Shaffer.³ Standard Gas & Electric Company, hereinafter called Standard, then had investments in various utility properties but had never been interested in oil. Byllesby & Company, hereinafter called Byllesby, an investment banking corporation which controlled Standard, entered into a contract with Shaffer whereby he was to organize the debtor corporation and to be paid by that corporation for his properties $15,580,000 made up of cash, a note, and preferred and common stock of the company. Byllesby agreed to purchase $11,000,000 par value of first mortgage bonds of an authorized issue of $15,000,000, $5,000,000 par value of preferred stock, and 120,000 shares of common stock, par $1, for $15,200,000 in cash, to be applied by the company to the cash payments to be made to Shaffer and for working capital.

Shaffer received for the properties turned over by him 80,000 shares of common stock, 50,000 shares of $100ar preferred stock, $9,500,000 in cash and a note of Byllesby and Standard for $1,000,000. In fact $12,000,000 of the first mortgage bonds were underwritten by a syndicate formed by Byllesby and sold to the public. The result of the above transactions was to leave Deep Rock with approximately $6,700,000 of cash. Shortly thereafter the remaining $3,000,000 of bonds were pledged to secure Deep Rock's notes for $2,000,000. From its organization Deep Rock was, most of the time, 'two jumps ahead of the wolf', as one of Standard's officers testified. The common stock went into a voting trust which gave Standard and Shaffer equal control. Shaffer undertook the management of the properties and business. After two years Standard became dissatisfied with Shaffer's management and he severed his connection with the company selling his common stock to Standard and surrendering to Deep Rock 50,000 shares of preferred stock which was cancelled.

Thenceforward the debtor was under the complete control and domination of Standard through ownership of the common stock. Standard's officers, directors, and agents always constituted a majority of the Board. The remaining directors were operating officers or employes of Deep Rock who had been employed on behalf of Deep Rock by Standard or the Byllesby Management Corporation, hereafter called Management Corporation, a wholly owned subsidiary of Standard, or were under the complete control of Standard. A majority of Deep Rock's officers were officers or directors of Standard or of the Management Corporation, or of both. The officers of the debtor, who were chosen for their technical or business experience in the oil industry, although allowed some discretion in the matter of development and operation of the oil properties, reported to and were always subject to the direction of officers and directors of Standard. All of the fiscal affairs of the debtor were wholly controlled by Standard, which was its banker and its only source of financial aid.

Deep Rock was placed in the hands of a receiver in March 1933 and the present proceeding under Section 77B of the Bankruptcy Act was instituted in June 1934. Standard filed a claim as a creditor in the receivership and in the bankruptcy proceedings, which the receivers and the trustee resisted. The claim was referred to a master, before whom trial lasted many months. All the witnesses were officers, directors or agents of Standard, or its affiliates, and officers of the debtor. All the documentary evidence came from the books and records of Standard and Deep Rock. The basis of claim was an open account which embraced transactions between Standard and Deep Rock from the latter's organization in 1919 to the receivership in 1933. The account consists of thousands of items of debit and credit. The book entries were made under the direction of Standard's auditing department, which supervised the auditing department of Deep Rock, and it is not surprising, therefore, that the books of the two companies agree with respect to all items.

The account contains debits to Deep Rock in excess of $52,000,000 and credits of approximately $43,000,000 leaving a balance shown to be due Standard of $9,342,642.37, which was the amount of the claim presented. Cash payments by Standard to Deep Rock, or to others for its account, as shown by the books, total $31,804,145.04. Management and supervision fees paid or credited to Management Corporation amount to $1,219,034.83. Interest charges by Standard to Deep Rock on open account balances total $4,819,222.07. Rental charges upon a lease to Deep Rock of oil properties owned by a Standard subsidiary but claimed by petitioners to belong, in equity, to Deep Rock, amount to $4,525,000. Debits by Standard to Deep Rock of the amounts of dividends declared by Deep Rock to Standard, but not paid, reach the sum of $3,502,653. In addition there are hundreds of debits and credits representing other inter-company items.

Two preferred stockholders were permitted to intervene in the proceedings and they joined in the trustee's objections to the claim. Many transactions entered in the account were attacked as fraudulent and it was asserted that as Standard had made Deep Rock its mere agent or instrumentality it could not transmute itself from the status of the proprietor of Deep Rock's business to that of creditor. The hearings before the master were closed, but before he made any report, and as a result of negotiations initiated by the reorganization committee organized at the instance of Byllesby, representing approximately eighty-two per cent. of the noteholders and sixty per cent. of the preferred stockholders of Deep Rock, Standard proposed a compromise of its claim.

The court referred the proposal to the master who reported favorably. The trustee and his counsel also recommended the approval of the compromise, which involved the allowance of Standard's claim at $5,000,000. In contemplation of the approval of this compromise a reorganization of Deep Rock was proposed by the reorganization committee. The plan was based upon the trustee's appraisal of the debtor's assets at $16,800,000, of which $7,300,000 represented net current assets, mainly cash, and the remainder comprised fixed assets valued at $9,500,000. It provided that upon approval of the compromise of Standard's claim, the reorganization would be effected by the formation of a new company which would take over the debtor's assets and would issue $10,000,000 par value of fifteen year six per cent. income debentures which were to go to the holders of the debtor's unpaid notes of like amount; 25,000 shares of $7 cumu- lative preferred stock and 520,000 shares of no par common stock, of which the entire preferred stock and 390,000 shares of common should go to Standard on account of its claim, 80,000 shares of common to the noteholders, and 50,000 shares of common to the preferred stockholders of the old company. Standard's claim to the extent of $3,500,000 was to stand on a parity with the debtor's notes.

In the District Court the petitioners insisted that as the testimony before the master had been closed he should be required to pass upon the provability of Standard's claim and no reorganization plan should be considered until the validity of the claim had been adjudicated. The court, without passing on this demand, refused to approve the compromise or the plan of reorganization. Referring to the 50,000 shares of preferred stock outstanding, the judge stated that somebody had received the money represented by this stock from the public; that the plan in effect wiped out preferred stockholders and that he could not approve any plan which had this effect. In the course of the hearing he stated: 'The evidence is overwhelming that Standard ran this company; they officered it; they capitalized it; it is just a child in their hands, and if there ever was a case the law is clear on, it is nothing but an instrumentality,...