Taylor v. Standard Gas & Electric Co., 1545.

• Decision Date: 06 June 1938
• Docket Number: No. 1545.,1545.
• Citation: 96 F.2d 693
• Parties: TAYLOR et al. v. STANDARD GAS & ELECTRIC CO. et al.
• Court: U.S. Court of Appeals — Tenth Circuit

96 F.2d 693 (1938)

TAYLOR et al. v. STANDARD GAS & ELECTRIC CO. et al.

No. 1545.

Circuit Court of Appeals, Tenth Circuit.

April 27, 1938.

Rehearing Denied June 6, 1938.

COPYRIGHT MATERIAL OMITTED

Jason L. Honigman, of Detroit, Mich. (Sempliner, Dewey, Stanton & Honigman, of Detroit, Mich., Milsten & Milsten, of Tulsa, Okl., and A. W. Sempliner, Milton J. Miller, and Leonard Horton, all of Detroit, Mich., on the brief), for appellants.

N. A. Gibson, of Tulsa, Okl. (R. M. Campbell, of Chicago, Ill., and Wilbur J. Holleman, of Tulsa, Okl., on the brief), for Standard Gas & Electric Co.

James F. Oates, Jr., of Chicago, Ill. (Sidley, McPherson, Austin & Burgess, of Chicago, Ill., Campbell & Biddison, of Tulsa, Okl., and Paul V. Harper, John Dern, and Charles F. Martin, Jr., all of Chicago, Ill., on the brief), for Reorganization Committee.

George S. Ramsey, of Tulsa, Okl. (Edgar A. de Meules, Villard Martin, and Garrett Logan, all of Tulsa, Okl., on the brief), for H. N. Greis, trustee.

W. F. Semple, of Tulsa, Okl., for Deep Rock Oil Corporation.

Before PHILLIPS, BRATTON, and WILLIAMS, Circuit Judges.

PHILLIPS, Circuit Judge, delivered the opinion of the court.

This is an appeal from orders confirming a plan of reorganization under section 77B of the Bankruptcy Act, as amended, 11 U.S.C.A. § 207 and note, and the approval of a compromise of a claim against the debtor as an integral part of the plan.

The debtor was incorporated under the laws of Delaware on May 31, 1919, under the name of Shaffer Oil & Refining Company. In 1931 its name was changed to Deep Rock Oil Corporation. It will hereinafter be referred to as Deep Rock. The claimant, Standard Gas and Electric Company, hereinafter called Standard, was organized under the laws of Delaware in 1910.

H. M. Byllesby & Company, hereinafter called Byllesby, was organized under the laws of Delaware in 1904. It is an investment banking company engaged in underwriting, marketing and selling securities and in holding investment securities. Prior to 1919 it also engaged in engineering and management service.

Standard Power and Light Company owned a majority of the voting stock of Standard. Byllesby and United Electric Power Company owned the majority of the voting stock of Standard Power and Light Company; up to 1936, through this ownership, they jointly controlled Standard. Byllesby elected eight of the fifteen directors of Standard. However, in 1936 Byllesby was wholly divorced from Standard.

Byllesby Engineering and Management Corporation, hereinafter called Management Corporation, was organized under the laws of Delaware in 1919. It took over the engineering and management staffs of Byllesby. It furnishes the service of trained experts and technicians in the fields of management, engineering, insurance, advertising, rate making, financing, and valuation. It also maintains a purchasing department through which mass purchases at quantity discounts are made for the corporations it serves. All of its stock was issued to Standard.

Since its organization Standard has engaged in the investment business. Since 1919 it has also engaged, through its wholly owned subsidiary the Management Corporation, in furnishing engineering and other technical service. Up to 1919 Standard's investments were wholly in public utility securities. In that year, because of concern respecting the existing financial situation and diminishing returns from its public utility investments, it sought an investment opportunity in a field that would bring it greater returns, and its attention was directed to the oil business, a wholly unrelated industry. Messrs. C. B. Shaffer and E. E. Smathers owned a very large integrated oil business in the states of Oklahoma, Arkansas, and Kansas and the opportunity to acquire an interest in that business was brought to the attention of Standard. Negotiations were carried on which resulted in a contract on May 20, 1919, between Shaffer and Byllesby. It provided that Shaffer should organize a corporation under the laws of Delaware and in consideration of $15,580,000.00, convey to it certain oil properties consisting of lands, developed and undeveloped leases, and plants, stations and equipment for the production of crude oil and the refining, manufacture and sale of petroleum products; and that Byllesby should purchase from the corporation to be formed $11,000,000.00 par value of bonds, 50,000 shares of preferred stock of the par value of $100.00 each, and 120,000 shares of common stock and pay therefor $15,200,000.00 in cash.

Deep Rock was organized, Shaffer transferred the properties to it and received therefor $9,500,000.00 in cash, the note of Byllesby and Standard due in four months for $1,000,000.00, 80,000 shares of Deep Rock common and 50,000 shares of Deep Rock preferred. From March 31, 1920, to March 18, 1921, Shaffer was a director and president of Deep Rock. Standard was dissatisfied with the results obtained under Shaffer's management. In 1921 arrangements were made for him to retire from Deep Rock under which he surrendered bonds of Deep Rock of the par value of $200,000.00, preferred stock of Deep Rock of the par value of $5,000,000.00, and 80,000 shares of common stock of Deep Rock, for which Deep Rock paid him $10,000.00 in cash and gave him two notes, in the aggregate amount of $740,000.00, and certain oil properties in the state of Louisiana. Shaffer resigned as an officer and director and four other directors who had been elected at the request of Shaffer also resigned. In May, 1921, an appropriate reserve for the reduction in assets was set up on Deep Rock's books.

The capital structure of Deep Rock at the time of its organization was 500,000 shares of common stock, par value $1.00 per share, 50,000 shares of preferred stock, par value $100.00 per share, and $15,000,000.00 of first mortgage bonds. After 1928 the capital structure consisted of $10,000,000.00 of publicly owned 6 per cent notes, 50,000 shares of publicly owned preferred stock, par value $100.00 per share, and 580,000 shares of common stock. From the formation of Deep Rock, Standard owned a majority of the shares of common stock. From the time of the retirement of Shaffer, Standard owned substantially all of the common stock. At the time of the inception of the receivership, hereinafter referred to, it owned 98 per cent of the common stock. From 1921 to 1932, inclusive, Standard elected the board of directors of Deep Rock. A majority of such directors were also directors of Standard. During that period certain of the officers of Deep Rock were also officers of Standard.

In 1924, John L. Gray, an experienced engineer and refinery operator, was employed to make a survey and report on Deep Rock and its subsidiaries; on October 1, 1924, he became its executive vice president and general manager and continued in that capacity until February 28, 1933. L. B. Riddle was vice president in charge of production of Deep Rock from May, 1922, until February 28, 1933. The business of Deep Rock from 1924 on was under the management and direction of Gray and Riddle. Each of them owned securities of Deep Rock and neither had any interest in Standard or Byllesby, except that during the year 1928 only Gray served as a director of Standard.

On the organization of Deep Rock, Bernard L. Majewski became division manager of sales of its Illinois-Indiana division. He was connected with the properties under the Shaffer ownership. He became a director and vice president in charge of sales in 1928 and continued in that capacity until February 28, 1933. W. E. Moody was in charge of refinery operations, first under Shaffer and later under Deep Rock. In 1928, he became a director and vice president in charge of the refinery operations. William R. Francisco became associated with Deep Rock in 1919 in charge of auditing, accounting and finance. He became a director and treasurer in 1923 and continued in that capacity until February 28, 1933. O. O. Kerr became associated with Deep Rock at the time of its organization. He became assistant treasurer in 1922 and continued in that capacity until February 28, 1933. Moody, Francisco and Kerr were not interested in or officially associated with Standard or Byllesby.

Deep Rock was not organized as a department of Standard. Each kept separate and distinct corporate records and books and the properties and assets of the former were not commingled with those of the latter. Deep Rock paid its own officers and employees. The offices of Deep Rock were first maintained at Chicago. Soon after Mr. Gray became executive vice president and general manager they were moved to Tulsa, Oklahoma. The officers at Tulsa held frequent consultations with the officers and directors of Deep Rock in Chicago upon questions of acquiring additional gasoline stations, oil and gas leases, and other oil properties, and with reference to financing and general business policies. These conferences were consultive in character. The officers at Tulsa were in actual charge of the operations and affairs of Deep Rock and were not dictated to by Standard or its officers. At these meetings the annual budget of Deep Rock was gone over, its financial requirements considered, and on requests of the Tulsa officials, Standard made frequent advances and loans of funds to Deep Rock. But for its ability to borrow from Standard, Deep Rock's liquid funds would not have been sufficient to take care of the cost of expansion and current requirements.

In 1922 and 1923, on the recommendation of Riddle, and by the use of funds advanced by Standard, which amounted in the aggregate to $2,544,591.00, Deep Rock acquired certain producing properties and built a cracking plant thereon which became an important part of Deep Rock's refinery operations. The legal title to such properties, hereinafter referred to as the Refining Company properties, was transferred to J. C. Kennedy, as trustee, and Deep Rock was charged...