McDonnell v. American Leduc Petroleums, Ltd.

• Decision Date: 19 January 1972
• Docket Number: 35294,No. 779-784,Dockets 35222,35283,35528 and 35532.,35518,779-784
• Citation: 456 F.2d 1170
• Parties: C. E. H. McDONNELL as Trustee in Reorganization of Equitable Plan Company, Plaintiff-Appellant-Appellee, v. AMERICAN LEDUC PETROLEUMS, LTD., et al., Defendants, Matthew Berdon, Seymour Berdon, et al., Defendants-Appellees-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

456 F.2d 1170 (1972)

C. E. H. McDONNELL as Trustee in Reorganization of Equitable Plan Company, Plaintiff-Appellant-Appellee, v. AMERICAN LEDUC PETROLEUMS, LTD., et al., Defendants, Matthew Berdon, Seymour Berdon,^* et al., Defendants-Appellees-Appellants.

Nos. 779-784, Dockets 35222, 35283, 35294, 35518, 35528 and 35532.

United States Court of Appeals, Second Circuit.

Argued April 28, 1971.

Decided January 19, 1972.

COPYRIGHT MATERIAL OMITTED

Robert S. Stitt, New York City (Thacher, Proffitt, Prizer, Crawley & Wood, George W. Taliaferro, Jr., New York City, on the brief), for plaintiff-appellant-appellee.

Roy H. Callahan, pro se.

Samuel Becker, New York City, for defendant-appellee Benjamin C. Cohen.

Francis B. Delehanty, Jr., New York City (Corbin, Bennett & Delehanty, David E. Pitcher, Jr., New York City, on the brief), for defendant-appellee Ruby Schinasi.

Andrew Stewart, New York City, for defendant-appellant George Stewart.

Max Freund, New York City (Rosenman, Colin, Kaye, Petschek, Freund & Emil, Harvey J. Yaverbaum, New York City, on the brief), for defendant-appellee-appellant Hyman D. Lehrich.

William F. Koegel, New York City (Royall, Koegel & Wells, James B. Weidner, New York City, on the brief), for defendant-appellant Szabo Food Service, Inc. (formerly Chemoil Industries, Inc. and United Dye & Chemical Corp.).

Jay Leo Rothschild, New York City, for defendant-appellee-appellant Matthew Berdon, and defendants-appellees Seymour Berdon, Dante Ferro, Myron Ganz, Alfred A. Marks, Sadye Berdon, Ferro, Berdon & Co., Seymat Associates and Maber, Inc.

Martin Blau, New York City, for defendant-appellee Joseph D. Blau.

Joel M. Leifer, New York City (Joseph Lotterman, New York City, on the brief), for defendant-appellant Harry T. Slavin.

Before HAYS and FEINBERG, Circuit Judges, and BLUMENFELD, District Judge.^**

FEINBERG, Circuit Judge:

C. E. H. McDonnell, the Chapter X trustee of Equitable Plan Company of Los Angeles, California (Equitable), brought this action in the United States District Court for the Southern District of New York, alleging that numerous defendants had conspired with the ubiquitous Lowell Birrell to acquire Equitable and then loot the company through various fraudulent transactions.¹ There were originally over 90 defendants, 35 of whom appeared and contested liability. The trial of this non-jury case in instalments was a herculean job, taking over 75 trial days during a period of 14 months. There were over 11,000 pages of transcript and more than 1,000 exhibits. The district judge's main opinion was over 200 pages long. The task was made even more difficult by "the bitterness which has pervaded this case," which the trial judge attributed in part to the fact that five defendants had already been criminally charged in California and acquitted in connection with many of the same acts for which plaintiff trustee sought to impose civil liability.² After reviewing the mass of evidence before him, the trial judge found that there had been three separate conspiracies to defraud Equitable, all led by Birrell, and held defendants Matthew Berdon, Hyman Lehrich, Harry Slavin and Roy Callahan liable as participants in one or more of these conspiracies. George Stewart was also held liable for an unrelated transaction. Each of these defendants appeals. Defendants Ruby Schinasi, Joseph Blau, Benjamin Cohen, Ferro, Berdon & Co., Seymat Associates and Maber, Inc. were exonerated from liability with respect to their dealings with Equitable. In the case of each of these defendants, the trustee appeals. The remaining party before us, Szabo Food Service, Inc.,³ appeals from the trial court's decision to deny Szabo costs after dismissing the trustee's suit against it.

For reasons given below, we affirm as to Blau, Cohen, the Berdon partnerships⁴ and Szabo and remand for further proceedings consistent with this opinion as to Berdon, Lehrich, Slavin, Callahan, Stewart and Schinasi.

I

The trial court considered a myriad of transactions that need not be summarized here. Many of them involved defendants who have not appealed, and our disposition of the appeals makes it unnecessary to set forth the facts in great detail. The following statement deals primarily with the defendants who have appealed and merely summarizes briefly the events leading to this lawsuit. Part III of this opinion, which discusses the trustee's appeal, contains further facts relevant to those defendants who are appellees.

Equitable is a California industrial loan and finance company located in Los Angeles. Under permits issued by the California Division of Corporations, the state agency responsible for regulating industrial loan companies, Equitable was authorized to accept and pay interest on deposits from the general public. Between 1953 and 1957, the years in which the alleged fraud occurred, approximately 4,500 individuals invested funds with Equitable.

In the summer of 1953, Lowell Birrell, a highly regarded businessman and attorney whose reputation only began to tarnish in 1957, decided to purchase Equitable. Birrell dispatched appellants Matthew Berdon, a certified public accountant, and Hyman Lehrich, an attorney, to investigate Equitable's financial and legal status. After lengthy negotiations with the owners of Equitable, the final closing occurred in October 1953.

In order to keep his ownership of Equitable secret, Birrell used appellee Ruby Schinasi, a wealthy widow who had had previous legitimate dealings with Birrell. Before the closing, he persuaded Mrs. Schinasi to invest in Equitable. California Investment Company (Calico), a Delaware corporation, was created to take title to Equitable's stock, and Mrs. Schinasi was told that she would be Calico's sole stockholder. Although Mrs. Schinasi believed and represented throughout the years in question that she was the real owner of Calico, and through it of Equitable, Calico's stock was actually owned by a succession of Birrell owned and controlled corporations. The trial court found that Birrell, following the acquisition of Equitable and with the aid of various defendants, orchestrated three separate conspiracies to defraud Equitable.

The Insurance Purchase Conspiracy

Birrell arranged for Equitable to bear most of the cost of the down payment he had made to purchase the company. At a meeting of the newly elected board of directors on October 24, 1953, soon after the closing, Birrell, with Berdon's assistance, persuaded the board to replace Equitable's reserves with a credit insurance policy. The policy was purchased from Inland Empire Insurance Company through defendant Leadenhall Corporation, a Birrell controlled enterprise which had provided $250,000 of the initial $263,000 cash down payment made on the purchase of Equitable. The terms of the policy provided that $250,000 of the $639,789 premium would be nonrefundable if the policy was cancelled. Since Birrell knew that the Division of Corporations would veto the insurance policy plan, he was assured that Equitable would have to terminate the insurance policy and thus eventually furnish most of the $263,000 down payment which he had made for the purchase of Equitable. The fraud was compounded by the fact that Inland Empire was subsequently willing to cancel the insurance policy at a total cost to Equitable of only $5,000, but Equitable was never so informed.

The trial court found that "Equitable was defrauded of $250,000 through the intentional deception of Equitable's board of directors by Birrell and Berdon."⁵ Berdon was held liable for the $250,000 loss Equitable suffered when the Division of Corporations, as expected, ordered that the insurance policy was not an acceptable substitute for adequate reserves. The judgment against Berdon also included pre-judgment interest.

The Insurance Premium Refund Scheme

Once the policy was cancelled and Equitable forfeited $250,000, Leadenhall became obligated to refund to Equitable $389,790, the remainder of the premium payment. On May 18, 1954, Leadenhall drew a check for that amount but did not send it to Equitable until after June 17, 1954. Equitable did not deposit the check until June 24. Before the check was deposited, Birrell, aided by Berdon and Lehrich, caused Equitable to make three loans of $150,000 each to Birrell companies. The funds passed through various accounts and were collected in the account of Birrell's law firm on June 24. On that date, the law firm drew a $400,000 check to Leadenhall, which it deposited on June 25, the same day that Leadenhall's account was charged with the refund check drawn to Equitable. By this scheme Equitable also provided the cash for the refund of its own insurance premium.

The three loans were adequately collateralized when made in 1954, but by the time the trustee finally foreclosed after Equitable's collapse in 1957, the collateral was inadequate to liquidate the obligations. The trial court held that appellants Berdon and Lehrich along with other defendants "perpetrated a fraud upon Equitable, through a conspiracy developed by Birrell ..., in the cancellation of the Inland Empire insurance policy ...."⁶ Berdon and Lehrich were held liable for the outstanding balances of principal on the loans ($229,407) plus pre-judgment interest.

The Conspiracy to Loot Equitable

Appellants Slavin and Callahan were found to be liable to the trustee for their participation in the third conspiracy. Slavin served as director and executive officer of Equitable from May 1956 to February 1957. Callahan was an officer of several Birrell owned companies.

The acts for which these defendants were held are too numerous and intricate to be fully described here. Suffice it to say that Slavin was held liable, inter alia, "for the losses Equitable suffered from the loans made, the loan practices adopted and followed, improper stock purchases, the acquisition of receivables he knew or should have known to be improper, the deliberate...