Bank of California National Ass'n v. McBride

• Decision Date: 14 January 1943
• Docket Number: No. 10062.,10062.
• Citation: 132 F.2d 769
• Parties: BANK OF CALIFORNIA, NATIONAL ASS'N, v. McBRIDE. In re WESTERN BOND & MORTGAGE CO.
• Court: U.S. Court of Appeals — Ninth Circuit

132 F.2d 769 (1943)

BANK OF CALIFORNIA, NATIONAL ASS'N, v. McBRIDE. In re WESTERN BOND & MORTGAGE CO.

No. 10062.

Circuit Court of Appeals, Ninth Circuit.

January 14, 1943.

Felix T. Smith, Marshall P. Madison, Francis R. Kirkham, and Leland B. Groezinger, all of San Francisco, Cal., and Borden Wood, of Portland, Or. (Pillsbury, Madison & Sutro, of San Francisco, Cal., and McCamant, King & Wood, of Portland, Or., of counsel), for appellant.

Teiser & Keller and Sidney Teiser, all of Portland, Or., for appellee.

Before GARRECHT, HANEY, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

On September 24, 1934, the Western Bond & Mortgage Company, herein called Western, was adjudicated an involuntary bankrupt on a petition filed November 25, 1931. The main controversy here is whether the bankruptcy court had jurisdiction summarily to order appellant to turn over to the trustee a certain ranch determined to be an asset of the bankrupt.¹

The property in dispute is known as the Russell ranch. The series of backstairs transactions by which this ranch disappeared as an asset of the bankrupt to reappear in the possession of appellant may be held in mind only by a sustained effort of the will.

In 1929 title to the Russell ranch was held by a wholly owned subsidiary of Western, the Russell Land & Livestock Co. During that year Western caused to be organized the Keystone Finance Co. as another wholly owned subsidiary; and on December 20, 1929, the Russell Company conveyed the ranch to Keystone, apparently without consideration. On the same day Keystone executed two mortgages on the ranch in the total sum of $150,000 in favor of Western. These mortgages were promptly recorded. Their amount was greatly in excess of the actual value of the ranch, which was worth about $65,000. A year later the Massachusetts Mortgage Company acquired complete control of Western by purchase of common stock, in connection with which purchase Massachusetts agreed to pay certain obligations of Western to appellant.

Thus matters stood when, on November 25, 1931, the petition to have Western adjudged a bankrupt was filed. At that time Western was indebted to appellant in an amount somewhat in excess of $100,000. The collateral held by appellant as security for this indebtedness was inadequate. In order to furnish added security and to obtain from appellant a cash advance for Massachusetts, one O'Flynn, who owned a controlling interest in the Massachusetts Company and who was by virtue of such control the animating force behind all the corporations involved, proposed to appellant the giving to the latter of a mortgage on the Russell ranch. This was subsequent to the filing of the bankruptcy petition.

The first step implementing the proposed plan was taken in February 1932 when another corporation, the Ochoco Farms Corporation, was formed as a wholly owned subsidiary of the Massachusetts Company. Before Ochoco filed its articles the officers of Keystone adopted a resolution to accept an offer from Ochoco for the Russell ranch. (The president and secretary of Keystone were two women office employees of Western who received no compensation for serving Keystone and who were directed in all their activities by O'Flynn.) Consideration for the offer was 850 preferred shares of Western, which shares Ochoco does not appear to have owned. The deed to Ochoco was executed three days before the articles of that company were filed. Western executed a satisfaction of the two mortgages on the Russell ranch previously given by Keystone, but no consideration appears for this satisfaction.

After Ochoco filed its articles one share of stock was issued to each of three women office employees of Western who had acted as incorporators, and 847 shares were issued to the Massachusetts Company. A resolution was passed authorizing the officers to execute notes to the Massachusetts Company so that Ochoco could borrow money. Significantly, the amount of these notes — $55,960 — was the aggregate of advances previously made by appellant to the Massachusetts Company and the balance of the debt owing appellant by Western, after crediting Western with the value of the collateral which appellant already held. The notes were executed by the same women who had acted as officials of Keystone and who now assumed to be president and secretary of Ochoco. As security for the notes Ochoco executed a mortgage on the Russell ranch.

It was not shown that Ochoco received any money or other consideration for the notes and mortgage, or even that Ochoco had a bank account. On the same day the mortgage was executed the Massachusetts Company assigned it to appellant. All of the pertinent documents, including the deed from Keystone to Ochoco, the satisfaction of the mortgages by Western to Keystone, the mortgage securing the notes from Ochoco to the Massachusetts Company, and the assignment of the mortgage from Massachusetts Company to appellant, were placed in escrow with appellant's attorney pending his determination of the question of title. These instruments were recorded simultaneously on March 2, 1932. Shortly thereafter Western released to appellant title to the collateral theretofore held by appellant as security for Western's indebtedness.

Ochoco made no payments on the mortgage, and appellant foreclosed, a decree being entered October 28, 1933. It is plain that Ochoco performed no function other than that of a conduit through which the Russell ranch passed from the control of Western into the hands of appellant. Ochoco was permitted to expire at once, defaulting immediately in the payment of its license fees and later being dissolved by the state.

The referee's findings, which the court adopted, were that Keystone was at all times operated and manipulated by Western as the latter's adjunct and agent for the sole purpose of carrying out Western's designs; that it was, to appellant's knowledge, a mere corporate shell, functioning solely as the alter ego of Western; that appellant had actual knowledge of the filing and pendency of the bankruptcy petition against Western, of the notes and the mortgages on the ranch given by Keystone to Western, and of the recordation of those mortgages; that it knew of the ownership by Massachusetts of all of the stock of Western, and of the interlocking character of the officers of the various companies.

In the proceeding before the referee an order was issued requiring appellant to show cause why it should not be directed to turn over the property to the trustee. Appellant seasonably objected to the proceeding, contending there, as it does here, that the controversy concerning its right to retain the property was triable only in a plenary suit.

1. The court had summary jurisdiction in the premises if, when the bankruptcy petition was filed, the property was actually or constructively in the possession of the bankrupt; or if at that time possession was held by a person who made no adverse claim to the property, or whose adverse claim was determined on inquiry to be merely colorable. Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 44 S.Ct. 396, 68 L.Ed. 770; Harrison v. Chamberlin, 271 U.S. 191, 46 S.Ct. 467, 70 L.Ed. 897; Isaacs v. Hobbs Tie & T. Co., 282 U.S. 734, 51 S.Ct. 270, 75 L.Ed. 645. There is no showing that Keystone, which at that time held the title and technically the possession, made any claim to the property adverse to the bankrupt. Apparently the ranch had been transferred to Keystone as a matter of convenience to Western, its real owner. As the court found, Keystone was not a free agent but a mere dummy. Not only was Western its creator and sole stockholder; its officers were subordinate employees of Western — puppets who were expected unquestioningly to do, and who did, the latter's bidding.

Since Keystone was a mere corporate shell, the naked fact that legally it was a distinct entity was no impediment to the exercise of summary jurisdiction. "The legal existence of the affiliated corporation does not per se give it standing to insist on a plenary suit," Sampsell v. Imperial Paper Corporation, 313 U.S. 215, 218, 61 S.Ct. 904, 907, 85 L.Ed. 1293. So far as our own decision in Adolph Ramish, Inc., v. Laugharn, 9 Cir., 86 F.2d 686, may be thought to intimate the contrary, the authority of that case has been displaced by Sampsell v. Imperial Paper Corporation, supra. The Supreme Court there observed page 218 of 313...