61 F.2d 329 (7th Cir. 1932), 4793-4798, Guaranty Trust Co. of New York v. Fentress

Docket Nº:4793-4798.
Citation:61 F.2d 329
Party Name:GUARANTY TRUST CO. OF NEW YORK v. FENTRESS et al., and five other cases.
Case Date:October 17, 1932
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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61 F.2d 329 (7th Cir. 1932)

GUARANTY TRUST CO. OF NEW YORK

v.

FENTRESS et al., and five other cases.

Nos. 4793-4798.

United States Court of Appeals, Seventh Circuit.

October 17, 1932

Appeals from the District Court of the United States for the Northern District of Illinois, Eastern Division; Walter C. Lindley, Judge.

The above six appeals have been joined for common presentation and disposition. Three are from an order made in cause No. 11,680; the others are from a similar order in cause No. 11,679. Both causes are similar in character, and the legal questions back of each order are identical. The complaints are so similar that, except for names and amounts, numerous paragraphs would be interchangeable. The fact statement in this opinion will, as far as possible, avoid repetition.

Upon the complaint of a contract creditor and upon the consent of the debtor, receivers were appointed for the holding companies,

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Insull Utility Investments, Inc. in one case and Corporation Securities Co. of Chicago in the other. Said receivers sought and obtained orders restraining certain New York banks (appellants herein) from selling securities which had been deposited with them to secure loans made prior to the appointment of the receivers. The loans were past due and unpaid, and the market values of the securities did not equal the indebtedness at the time the injunctional orders were entered. The court on ex parte application entered the injunctional orders. Thereafter, appellants, appearing specially, moved to vacate these injunctional orders on the ground that the District Court for the Northern District of Illinois had no jurisdiction over the banks in New York or the securities by them held. These applications were denied, and each bank appealed. Their appeals were all heard together.

Horace Kent Tenney and S. Ashley Guthrie, both of Chicago, Ill., for appellants.

Edwin H. Cassels and William S. Warfield III, both of Chicago, Ill., Lawrence T. Allen and Everett L. Dalbey, both of Danville, Ill., and Robert B. Johnstone, of Chicago, Ill., for receivers Calvin Fentress and George A. Cooke.

Sidney S. Gorham, of Chicago, Ill., for Howard Cherry.

William L. Latimer, of Chicago, Ill., for Insull Utility Investments.

Edwin M. Ashcraft, Jr., Carroll J. Lord, and Russell F. Locke, all of Chicago, Ill., for receivers Raymond F. McNally and Patrick J. Lucey.

John E. MacLeish and Walter S. Underwood, both of Chicago, Ill., for Frank B. Schoeneman.

Before EVANS and SPARKS, Circuit Judges, and FITZHENRY, District Judge.

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

Each of the two original suits was brought for the avowed purpose of obtaining the appointment of receivers, who in turn were to protect the property from loss through sale under the present unfavorable conditions, which are alleged to be abnormal. The Insull Utility Investments, Inc., it appears, was a corporation, commonly described as a holding company, organized for the purpose of speculating in stocks, chiefly utility, issued by companies which were controlled or manipulated by a group of men in Chicago headed by one Samuel Insull. Generally speaking, there were four companies whose securities were thus acquired: Commonwealth Edison Company, Public Service Company of Northern Illinois, The Peoples Gas Light and Coke Company, and the Middle West Utilities Company. The latter was itself a holding company.

The stock of the Insull Utility Investments, Inc. consisted of 60,000 shares of $5.50 Prior Preferred Stock without par value, 40,000 shares of Preferred Stock 1st Series without par value, 450,000 shares of Preferred Stock 2nd Series, and 3,636,622 shares of Common Stock without par value. It is inferable from the complaint that this stock is valueless and never will be of value because of the existence of outstanding funded indebtedness consisting of $2,469,000 of 5% Gold Debentures, Series A, due January 1, 1949, $55,256,000 of Ten Year 6% Gold Debentures, Series B, due January 1, 1940, and $45,000,000 of other notes. These debentures were unloaded on the public in prosperous times and were outstanding at the time of the application for the appointment of a receiver. A petition in bankruptcy has been filed against this company, which is insolvent.

The capital set-up of the Corporation Securities Co. was as follows: 1,000,000 shares of Prior Preferred Stock; 1,000,000 shares of Preferred Stock; and 6,000,000 shares of Common Stock. 4,569,019 shares of the common stock and 742,019 shares of the preferred stock are outstanding. The inference is strong that this stock is valueless because of the outstanding funded indebtedness of $24,033,000, represented by 5% Serial Gold Notes, and the existence of about $26,000,000 of notes payable.

This company too was engaged in speculating in the stock of the above-named four companies, controlled by the same group of individuals and headed by the same Samuel Insull.

The plaintiff in each case is the holder of five one thousand dollar notes or debentures.

Notwithstanding the outstanding indebtedness represented by gold notes and debentures, the officers in charge of the Insull Utility Investments, Inc. and of the Corporation Securities Co. borrowed large sums of money from various banks and deposited the securities which they had purchased out of the proceeds of the sale of stock, the gold notes, and the said debentures as collateral for such loans. As the securities fell in price and as the loans increased, a larger percentage of the

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holdings of the two companies was thus pledged as collateral with said banks. It appears that practically all of the assets of both corporations have been thus hypothecated, and yet the market value of the pledged securities when the injunctional orders were entered was insufficient to cover the indebtedness to the banks. The stock, the gold notes, and the debentures are thus left with no securities to give them value.

It is alleged in the bill as the sole basis for the appointment of the receiver, and is urged here in support of the orders appealed from, that the present market value of the securities is such that great sacrifices will occur if the collateral be sold at this time. As the assets were all pledged and as the market value of the securities was less than the indebtedness, the real purpose of the litigation was to prevent the sale of the securities until a better price could be obtained.

Material parts of the injunctional order are set...

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