Brockett v. Winkle Terra Cotta Co.

• Decision Date: 16 March 1936
• Docket Number: 10324.,No. 10249,10249
• Citation: 81 F.2d 949
• Parties: BROCKETT et al. v. WINKLE TERRA COTTA CO. (two cases).
• Court: U.S. Court of Appeals — Eighth Circuit

81 F.2d 949 (1936)

BROCKETT et al. v. WINKLE TERRA COTTA CO. (two cases).

Nos. 10249, 10324.

Circuit Court of Appeals, Eighth Circuit.

February 12, 1936.

Rehearing Denied March 16, 1936.

Gus O. Nations, of St. Louis, Mo. (J. M. Feigenbaum, of St. Louis, Mo., on the brief), for appellants.

Arthur V. Lashly, of St. Louis, Mo. (Jacob M. Lashly, of St. Louis, Mo., on the brief), for appellee.

Before GARDNER, WOODROUGH, and VAN VALKENBURGH, Circuit Judges.

VAN VALKENBURGH, Circuit Judge.

Appellee is a Missouri corporation with an authorized capital stock of $40,000. It was organized in 1889 by Joseph Winkle. It is engaged in the manufacture and sale of terra cotta, a burnt clay product used as an exterior covering for buildings and for ornamental purposes. Its plant is located in the City of St. Louis, Missouri. At his death Joseph Winkle left the stock in the company to his children and grand-children. On December 31, 1929, the net assets of the company amounted to $240,000, and on that date a contract for the sale of all of the stock of the company to one R. F. Grady was authorized. The stockholders sold their stock, aggregating 400 shares, to Grady at $600 per share. The purchase price was paid in the following manner: The sum of $80,000 was paid by Grady in cash, and $160,000 of bonds were duly authorized and issued, secured by a first mortgage on the real and personal property of the company. The cash and bonds were distributed to the shareholders in accordance with their respective interests in the capital stock. Oliver L. Winkle, one of the heirs, refused to accept bonds for his stock, and Grady bought from him $20,000 in bonds to complete the purchase. Grady transferred the stock, except 3 qualifying shares, to Franklin Realty & Building Company, a corporation owned by his wife. The new directors of the Terra Cotta Company were Grady, John G. Hewitt, and J. A. McCarthy. Hewitt is a holder of bonds of the par value of $41,500; McCarthy is trust officer of the Mercantile Commerce Trust Company, trustee under the deed given to secure the bond issue.

In the five years following, the Terra Cotta Company sustained business losses aggregating $143,738.18, as shown by the profit and loss account on the books of the company. In 1934 the loss was $45,000. The interest on the bonds was paid for 1930 and 1931. The interest payment due January 2, 1933, and all subsequent interest payments, were not made. Some time, apparently in July, 1934, the exact date not appearing in the record, Edith J. Haase, owner of $5,300 worth of bonds and of two years of defaulted interest coupons, brought suit in a state court for foreclosure of the deed of trust securing the bonds, for removal of the board of directors and accounting, and for the appointment, pendente lite, of a receiver of the properties. An order to show cause why a receiver should not be appointed was set for July 17, 1934, in the state court. July 16, 1934, the Terra Cotta Company filed in the District Court of the United States for the Eastern District of Missouri at St. Louis a debtor's petition under sections 77A and 77B of the act to establish a uniform system of bankruptcy as amended (11 U.S.C.A. §§ 206, 207), providing for a corporate reorganization, praying that an order might issue authorizing the said debtor to file and propose a plan of reorganization and for such further orders and directions necessary and incident to the conduct of such proceeding. To the original plan of reorganization objections were filed by Edith Haase, owner of bonds of the par value of $5,300, Bessie L. Brockett, owner of bonds of the par value of $10,000, and by Andrew Winkle, Amelia C. G. Ford, and Joan Winkle Moore, owners of bonds of a par value aggregating $49,900. These objections apparently led to the submission of an amended and modified plan January 17, 1935, in the hope of harmonizing the views of the interested parties. To this plan all the holders of the capital stock of the debtor corporation filed acceptance and approval, as did substantially 88 per cent. of the bondholders, among whom Andrew W. Winkle, Amelia C. G. Ford, and Joan Winkle Moore withdrew their opposition. The plan provided that (1) all general and unsecured creditors should be paid in full; (2) that, for a period of five years from the date of the reorganization approval, the board of directors should consist of five stockholders, two of whom should be selected by the common stockholders, two by the preferred stockholders, and the fifth to be selected by the four already selected; (3) all bonds and the deed of trust securing them to be surrendered by the owners and trustee, canceled, and released; (4) 6 per cent. noncumulative stock, preferred as to income and distribution, be issued in the sum of $180,000 par value, consisting of 1,800 shares of the par value of $100 per share, and that 1 share of such preferred stock be issued and delivered to bondholders respectively for each $100 of par value of bonds and interest surrendered by them for cancellation — the shares of preferred stock, remaining after such distribution, to be held in the treasury of the company. The total principal of bonds outstanding was found to be $153,500, upon which there was accrued interest, as of October 31, 1934, in the sum of $21,490, making a total of bonds and interest of $174,990. The court in approving the plan states that the unsecured indebtedness is $1,572.28. To this amended plan Edith Haase and Bessie L. Brockett, owners of first mortgage bonds of the par value of $15,900 with accrued interest, and Edith E. Winkle, administratrix of the estate of Joseph Byron Winkle, deceased, having matured and unpaid interest coupons aggregating $546.75, filed objections which by the court were overruled. The assignments of error to the order and decree of the court in approving said plan of reorganization may be summarized as follows:

1. The plan is unfair and inequitable because it destroys the rights of secured creditors and constitutes a taking of property without due process of law.

2. It is unfair because it discriminates against secured creditors and in favor of general creditors.

3. The proposal was not made in good faith, but for the purpose of placing in office and in control of the property those charged with misconduct and with responsibility for the present condition of the company and its business.

4. The plan is not feasible and cannot be put into effect because it authorizes a Missouri corporation to issue fraudulent and fictitious shares of stock without real or adequate values to support such issue, in violation of the charter of the corporation, and of the Constitution and statutory law of the state of Missouri.

5. That, to require a bondholder to exchange his bonds for stock, the par value of which is vastly greater than the value of the bonds or of the property and assets of the corporation which must be the basis of the issue, would compel the bondholder to pay in cash into the company treasury an amount sufficient to satisfy the law of the state conditioning issues of corporate stock, or suffer potential liability to creditors who extend credit upon the faith of such corporate organization.

It may well be that, ordinarily a plan which discriminates against secured creditors in favor of general creditors contains elements of unfairness. However, in this instance the claims of the general creditors are found to amount to but $1,575.28, a sum too negligible in itself to warrant the rejection of the plan if otherwise unobjectionable.

It is charged that the proposal of the debtor was not made in good faith, because its object was to place and perpetuate the control of the properties and business in officers and directors, who are charged by objectors with misconduct in office and responsibility for the present financial condition of the company. The plan proposes that two directors shall be selected by the common stockholders, two by the preferred stockholders, and a fifth by the four so chosen. The common stock is held almost wholly by Grady and the Franklin Realty Building Company; the majority of the preferred stock likewise is held by the former management and those under its control. The charge that that management is left potentially, if not actually, in control seems sustained by the record. The charges of misconduct made against the officers and directors of the old company are not properly susceptible of determination in this form of action and upon this record.

Appellants assert that the plan is unfair and inequitable because it destroys the rights of secured creditors and constitutes a taking of property without due process of law. Where the fairness of a reorganization plan is seasonably challenged by objections, the action of the trial court is subject to review; but, when a matter is committed to the final discretion of a chancellor, his determination thereon will not be set aside unless clearly shown to be erroneous or improvidently granted. Kansas City Terminal R. Co. v. Central Union Trust Co. (C.C.A.8) 28 F.(2d) 177; Continental, etc., Bank v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 677, 55 S. Ct. 595, 79 L.Ed. 1110. It is, of course, true that the right of a mortgagee to insist upon full payment before giving up his security has been deemed of the essence of a mortgage, as stated by Mr. Justice Brandeis in Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 580, 55 S.Ct. 854, 79 L. Ed. 1593, 97 A.L.R. 1106.

"The obligations of a contract are impaired by a law which renders them invalid, or releases or extinguishes them (Sturges v. Crowinshield, supra, 4 Wheat. 122 pages 197, 198, 4 L.Ed. 529) and impairment, as above noted, has been predicated of laws which without destroying contracts derogate from substantial contractual rights." Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 431, 54 S.Ct. 231, 237, 78 L.Ed. 413, 88 A.L.R. 1481.

That...