679 F.2d 784 (9th Cir. 1982), 80-4386, In re THC Financial Corp.

Docket Nº:80-4386.
Citation:679 F.2d 784
Party Name:In re THC FINANCIAL CORP., Debtor. FALCON CAPITAL CORPORATION SHAREHOLDERS, Plaintiffs-Appellants, v. J. Carl OSBORNE, Trustee in Reorganization for THC Financial Corp., Defendant-Appellee.
Case Date:June 14, 1982
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 784

679 F.2d 784 (9th Cir. 1982)

In re THC FINANCIAL CORP., Debtor.

FALCON CAPITAL CORPORATION SHAREHOLDERS, Plaintiffs-Appellants,

v.

J. Carl OSBORNE, Trustee in Reorganization for THC Financial

Corp., Defendant-Appellee.

No. 80-4386.

United States Court of Appeals, Ninth Circuit

June 14, 1982

Argued and Submitted Jan. 14, 1982.

Jayson Burton Lumish, Rifkind & Sterling, Inc., Beverly Hills, Cal., for plaintiffs-appellants.

Page 785

James J. Feder, Beverly Hills, Cal., for defendant-appellee.

Appeal from the United States District Court for the District of Hawaii.

Before BROWNING, SKOPIL, and NORRIS, Circuit Judges.

NORRIS, Circuit Judge:

Appellants, claimants in the reorganization proceedings of THC Financial Corporation (THCF), seek parity with general unsecured creditors of THCF. The district court, sitting as a reorganization court under the former Bankruptcy Act (11 U.S.C. §§ 501-676 (1976) (repealed 1978)), granted summary judgment for THCF's Trustee in Reorganization, subordinating appellants' claim on the ground that it is equitably inferior to the claims of THCF's general unsecured creditors. We affirm.

I.

Appellants are shareholders of The Hawaii Corporation (THC). They were sole shareholders of Falcon Capital Corporation (FCC), which, on September 13, 1972, merged with THC. Under the merger agreement, appellants sold their FCC shares to THC's subsidiary, Hotay, Inc., in return for 400,000 shares of THC stock. Appellants received 100,000 shares immediately, and the remaining shares were placed in escrow. Appellants were to receive these shares when FCC's earnings reached an "earn-out" level. THC promised that it would not interfere with FCC's ability to maximize its earnings.

Appellants allege that THC and its wholly-owned subsidiary, THCF, fraudulently conspired to prevent them from receiving the 300,000 shares of THC stock placed in escrow. Appellants also allege that, pursuant to the fraudulent scheme and subsequent to the merger, THC transferred the assets of FCC's subsidiaries to THCF. This action and later actions by THCF allegedly caused FCC's earnings to fall short of the earn-out level, preventing appellants from receiving the stock still in escrow. In December 1976, THCF entered bankruptcy proceedings.

II.

The issue before us is where appellants' claim should be ranked relative to THCF's general unsecured creditors in the reorganization plan for THCF. The district court held that In re U. S. Financial, Inc., 648 F.2d 515 (9th Cir. 1980), cert. denied, 451 U.S. 970, 101 S.Ct. 2046, 68 L.Ed.2d 348 (1981) controls the issue and that appellants' claim is subordinate to the claims of THCF's general unsecured creditors. 1 We agree.

In U. S. Financial, a stockholder claiming fraud in the issuance of stock sought parity with general unsecured creditors in his claim against the issuing bankrupt. This court held that the stockholder's claim was inferior to the claims of the general unsecured creditors and that the absolute priority rule required subordination of the stockholder's...

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