Bookout v. Atlas Financial Corp., Civ. A. No. 74-302 A.

• Decision Date: 20 September 1974
• Docket Number: Civ. A. No. 74-302 A.
• Citation: 395 F. Supp. 1338
• Parties: John G. BOOKOUT, as receiver of Modern Home Life Ins. Co. v. ATLAS FINANCIAL CORP. et al.
• Court: U.S. District Court — Northern District of Georgia

395 F. Supp. 1338

John G. BOOKOUT, as receiver of Modern Home Life Ins. Co. v. ATLAS FINANCIAL CORP. et al.

Civ. A. No. 74-302 A.

United States District Court, N. D. Georgia, Atlanta Division.

September 20, 1974.

Warren W. Wills, Jr., Atlanta, Ga., Levine, Fulford, Pope, Levine & Minisman, Birmingham, Ala., for plaintiff.

Warren A. Rosser, Chamblee, Ga., Walter M. Henritze, Jr., Atlanta, Ga., Charles M. Crook, Montgomery, Ala., J. Roger Thompson, Atlanta, Ga., H. A. Stephens, Jr., Atlanta, Ga., Perry S. Bechtel, Cohen, Shapiro, Polisher, Shiekman & Cohen, Philadelphia, Pa., for defendants.

ORDER

RICHARD C. FREEMAN, District Judge.

This is a diversity action to recover for defendants' alleged default on certain notes issued as part of a reinsurance agreement entered into by two Alabama insurance companies. One of these companies, Modern Home Life Insurance Co., plaintiff herein and holder of the notes, is currently in receivership in the State of Alabama. On September 13, 1974, this court granted the motion of John G. Bookout, Insurance Commissioner of Alabama and receiver of Modern Home, for substitution as plaintiff in this action. In effect then this is an action by the Insurance Commissioner of the State of Alabama to secure payment of the notes in issue, face value of $5,000,000.00, in order to protect the interests of the approximately 120,000 policy holders of Modern Home. In light of the fact that the defendant makers of the notes are alleged to be virtually insolvent, the action is primarily an effort to envoke the equitable jurisdiction of this court to enforce certain security agreements executed to secure payment of the notes.

The facts of this case are by no means clear and apparently involve various complex transactions and manipulations by the various parties to this action and by certain individuals and entities not parties to this action. Although all the evidence in this regard is not yet before the court, the following historical analysis of some of the transactions underlying this suit has been provided by the plaintiff:

Upon information, in December, 1971, Atlas Financial Corporation was . . . . acquired by Atlas United Financial Corporation which was owned by Public National Life Insurance Company which was in turn owned by United Security Holding Company. Atlas United, Public National and United Security were all controlled by James M. Fail ("Fail") . . . . Fail and A. Townsend, through the entities they controlled, caused Modern Home Life Insurance Company, then owned by Hooker-Taylor Land Company, Inc. and controlled by Fail, to purchase all of the outstanding capital stock of a wholly owned subsidiary of Public National in exchange for a note from Modern Home in the amount of $6,130,547. Additionally, Atlas United issued two bearer notes to Public National and United Security face value $5,000,000 . . . for which the stock of Public National was transferred to Atlas Financial Corporation Atlas. The apparent result of the foregoing being that Public National owned all of the stock of Atlas United, which in turn owned all of the stock of Atlas Financial, which in turn owned all of the stock in Public National. At or about the time of . . . March and April of 1973, a reinsurance agreement was entered whereby Public National would reinsure into Modern Home insurance policies with a reserve liability of $12,160,547.00. In conjunction with this transaction Modern Home received the return of its $6,130,547 capital note and the $5,000,000 Atlas collateral notes (the subject of this action) which were reissues of the bearer notes issued by Atlas United to Public National and United Security.

(emphasis added). The various transactions described in this paragraph are presently the subject of a pending action in Alabama to recover for alleged common law fraud and fraud under the Securities Exchange Act of 1934. Moore v. Fail, Civil Action No. 73-P-1199S (N.D. Ala.). The salient facts regarding the security agreements in issue are described by plaintiff as follows:

The instant action is upon the $5,000,000 Atlas notes and the security agreements pursuant to which Modern Home was granted a security interest in certain collateral consisting of notes receivable by Atlas, which notes receivable were themselves secured by first or second mortgages upon real property. The collateral was alleged to have a face amount of $12,000,000. The security interest of Modern Home was second only to a security interest granted to Commonwealth Financial Corporation to secure a loan in the original amount of $3,500,000 made to Atlas United. . . . Commonwealth claimed a default on the part of Atlas United and Atlas and filed suit against Fail, Atlas United and Public National in the Eastern District of Pennsylvania, which suit resulted in the entry of a judgment against Atlas United and Public National in the amount of $1,400,000. This judgment was allegedly "purchased" by First National one of the defendants in the present action.

Thus, this action is basically an effort to enforce the security agreements executed by Atlas and Modern Home by invoking the equitable powers of this court to compel transfer of the $12,000,000 in collateral from defendant First National Mortgage & Discount Co., Inc., alleged to be presently in possession of the collateral, to plaintiff. As such, the action is founded on Article 9 of the Uniform Commercial Code, Ga.Code Ann. § 109A-9-101 et seq. The eventual disposition of this case will involve complex questions of law and fact relating to the nature of the security interests in issue, perfection of those interests, competing priorities in the collateral, the nature of the collateral, and the effect of the transfers of the collateral upon the various competing interests of the parties involved. Notwithstanding the complexities of these questions, resolution of this matter is within the equitable jurisdiction of this court. See Clark Equipment Co. v. Armstrong Equipment Co., 431 F. 2d 54 (5th Cir. 1970), cert. denied, 402 U.S. 909, 91 S.Ct. 1382, 28 L.Ed.2d 650 (1971) (Federal courts may enforce Article 9 security interests by well-recognized equitable principles).

On September 13, 1974, this court conducted a hearing into this matter in which counsel for the parties asserted and discussed many of the factual contentions described above. Rather than commence an extensive evidentiary hearing in this matter at that time, the court determined that in light of the complex circumstances, this case might be appropriate for the appointment of a receiver to conserve the collateral in issue pending resolution of this dispute. The court determined that "any hardship or inconvenience to defendants is greatly outweighed by the Court's interest in preserving the subject assets and the status quo and protecting the Plaintiff against possible irreparable loss." Accordingly, the court issued an order temporarily restraining defendants from transferring, encumbering, conveying or expending the collateral or from taking any action which would tend to diminish the collateral. This order also granted defendants four days in which to file briefs or other pleadings in opposition to the appointment of a receiver. Defendant First National has filed a brief in opposition to such appointment, and this issue is presently before the court.

Before reaching the merits of the issue of appointment of a receiver pendente lite, this court takes note of the fact that the brief of defendant First National contains several factual allegations which further amplify this dispute. These allegations indicate that the collateral in this case has now come full circle, in that it has apparently been pledged to United Security to secure a loan from United Security to First National to enable First National to purchase an assignment of the aforementioned judgment obtained by Commonwealth Financial Corp. against Atlas United, together with an assignment of Commonwealth's right, title and interest in the collateral that is the subject matter of this suit. As noted above, United Security, allegedly owned by James M. Fail, is the holding company which owns Public National Insurance Co., the company that executed the reinsurance agreement which resulted in the transfer of the $5,000,000 in notes from Atlas to Modern Home. Thus the collateral, originally and allegedly still "owned" by Atlas Financial Corp., a company allegedly controlled by James M. Fail, through Atlas United...