Central Trust Co. v. Southern Oil Corporation

• Decision Date: 14 September 1925
• Docket Number: 6803.,No. 6802,6802
• Citation: 8 F.2d 338
• Parties: CENTRAL TRUST CO. OF ILLINOIS et al. v. SOUTHERN OIL CORPORATION et al. BADGER OIL CO. v. CENTRAL TRUST CO. OF ILLINOIS et al.
• Court: U.S. Court of Appeals — Eighth Circuit

8 F.2d 338 (1925)

CENTRAL TRUST CO. OF ILLINOIS et al. v. SOUTHERN OIL CORPORATION et al.

BADGER OIL CO. v. CENTRAL TRUST CO. OF ILLINOIS et al.

Nos. 6802, 6803.

Circuit Court of Appeals, Eighth Circuit.

September 14, 1925.

George G. King, of Chicago, Ill., and C. E. Cooper, of Tulsa, Okl. (Max Pam and Harry B. Hurd, both of Chicago, Ill., H. W. Randolph, John A. Haver, and Randolph Shirk, all of Tulsa, Okl., on the brief), for Central Trust Co.

L. B. Coppinger, of New York City, and Benjamin C. Conner, of Tulsa, Okl., for Pennsylvania Tank Line.

Herbert H. Thomas, of Madison, Wis., and George S. Ramsey, of Tulsa, Okl. (John M. Olin and Harry L. Butler, both of Madison, Wis., and Edgar A. De Meules and Villard Martin, both of Tulsa, Okl., on the brief), for Thomas E. Brittingham, Sr., and Badger Oil Co.

Before LEWIS, Circuit Judge, and VAN VALKENBURGH and FARIS, District Judges.

LEWIS, Circuit Judge.

The Southern Oil Corporation was incorporated under the laws of Oklahoma in 1914, with an authorized capital of $25,000. In August, 1919, with consent of all stockholders, it executed its mortgage or trust deed to Central Trust Company of Illinois as trustee, by which it conveyed to the Trust Company its property in Oklahoma and Texas, consisting of lands, oil leases, pipe lines, tank cars, refineries and personal property for the purpose of securing payment of $1,000,000 of its negotiable bonds to be issued. In December, 1922, a receiver was appointed and he took charge of its property. It had become insolvent. The mortgage was foreclosed and after sale the administrator of the estate of Thomas E. Brittingham, Sr., deceased, presented to the court $190,000, face value, of the mortgage bonds as being entitled to share equally with other bonds that had been issued in the proceeds of the sale of the mortgaged property. The claim of the administrator was allowed and this appeal is from that order.

The contest is over the purpose for which these bonds were issued and the way in which they came to the hands of Brittingham, — it being the claim of appellants, the trustee and an unsecured creditor, that they were unlawfully or fraudulently issued, to the knowledge of Brittingham, and should be surrendered by his administrator for cancellation. The facts in that regard will be stated. The issued stock of the Southern Oil Corporation was owned by R. S. Ayers, George L. Woodard and Thomas E. Brittingham, Sr., each having one-third, except Brittingham held his in trust for members of his family, Ayers' brother had a small interest in his third, and Woodard's wife had an interest in his third. Ayers, Woodard and C. R. Monfort, who held one share which belonged to Woodard, constituted the board of directors and were at all times the officers of the corporation from the time of its organization. Ayers was president, Woodard vice-president, and Monfort secretary and treasurer. Brittingham was at no time an officer or director and did not give the corporation his personal attention. He appears to have been a wealthy man and was so rated.

The Inter-Ocean Refining Company, an Illinois corporation, owned and operated an oil refinery at McCook, Illinois. Its issued capital stock amounted to $600,000, of which Brittingham, John Alexander and George C. and J. M. Hixon each purchased $10,000, par value, in September, 1918. The three last-named persons were associated with Brittingham in the lumber business. His son-in-law, Bryan S. Reid, had the management of the Inter-Ocean Company and was a large stockholder, owning 1,700 shares in the company. Brittingham bought the shares that Alexander and the Hixons had purchased and gave them and his own shares to Reid, in June, 1921. He was not thereafter a stockholder in that company. He was its president from May, 1920, to June, 1921. He knew nothing about the oil business. There was a first mortgage for $250,000 on the Inter-Ocean plant. A second mortgage of $400,000 was held by Brittingham, Alexander and the Hixons. Later Brittingham loaned the Inter-Ocean $200,000. The Wadhams Oil Company of Milwaukee was a large stockholder in the Inter-Ocean Company, and it loaned that company $150,000, which, with the $200,000 loaned by Brittingham, was secured by a third mortgage. Thereafter Brittingham loaned the Inter-Ocean Company $10,000 in September, 1920. Woodard owned 1,800 shares in the Inter-Ocean. Ayers does not appear to have been interested in that company.

Early in 1920 Woodard proposed that the Southern Oil Corporation acquire the plant of the Inter-Ocean Company by purchase of its issued stock. He wrote to Reid on that subject in March, 1920, and he testified that Ayers co-operated with him for that purpose. It was thought to be to the advantage of the Southern Oil Corporation to acquire the Inter-Ocean plant, if its issued stock could be obtained at a reasonable price. Reid testified that Ayers talked to him about it and urged that the plan be carried out. Woodard went to Milwaukee during the summer of that year and in conference with representatives of the Wadhams Company it was ascertained that the shares which it held, 1,251, could be purchased at $42.00 each, which, together with Woodard's 1,800 shares, which he proposed to turn over to the Southern Corporation without charge, would constitute a control. The remainder of the stock was to be acquired if it could be had at reasonable prices. Finally, on December 30, 1920, a meeting was held at the Southern Corporation's office in Chicago for the purpose of considering the proposed acquisition of the Inter-Ocean's plant by the Southern Corporation. There were present at this meeting Ayers, Woodard and Monfort, who were all of the directors and officers of the Southern Corporation, Brittingham, who with Ayers and Woodard represented all of the stock of that corporation, Cramer, Dodge and Marshutz, who represented the Wadhams Company and the shares of stock which it held. Reid, John Alexander, George Hixon and the Inter-Ocean's attorney were also present. The principal and immediate purpose of the meeting was to consider a proposed lease by the Inter-Ocean of its plant to the Southern Corporation, — whether such a lease should be given, on what terms and for what length of time. The lease was desired by the Southern Corporation for the purpose of enabling it to determine whether or not it was willing to go forward in the acquisition of the plant by the purchase of the issued stock of the Inter-Ocean Company. The meeting lasted for about three hours. There was no opposition to the giving of a lease, but its terms and the length of time it should run were given extended consideration. Reid had been operating the plant at a loss; but the Southern had been operating its plants in Oklahoma at large profits. In 1918 it made net profits from operations of $407,650.69, in 1919 $406,110.38, in 1920 $409,750.17, and after adding other income during those three years and deducting other expenses aside from operating it had net profits for those three years of $771,190.92. Early in 1921 prices declined sharply and the oil business became disastrous to many who were engaged in it. During the fifteen months extending from January 1, 1921, to March 31, 1922, the Southern suffered a net loss of $1,212,- 416.62. The representatives of Wadhams Oil Company agreed to give an option on the stock which that company held to the Southern Corporation at $42.00 a share, to be taken up during the lease. The purpose of the Southern Corporation in taking a lease was to enable it to make a test of the plant in order that it might determine whether to exercise its option. There was a large amount of raw material at the plant which would be consumed in operation. Terms of the lease were finally agreed upon and the attorney of the Inter-Ocean was instructed to draft it. It was then executed by the officers of the two companies and reads thus:

"This indenture, made and entered into this 31st day of December, A. D. 1920, by and between Inter-Ocean Refining Company, a corporation duly organized and existing under and by virtue of the laws of the state of Illinois (for convenience hereinafter termed the `lessor'), and Southern Oil Corporation, a corporation duly organized and existing under and by virtue of the laws of the state of Oklahoma (for convenience hereinafter termed the `lessee'), witnesseth:

"That the lessor has demised and leased, and by these presents does demise and lease unto the lessee the oil refinery and the equipment, machinery, cars, and appliances of the lessor used or intended for use in connection with such oil refinery, for the period beginning as soon after January 1, 1921, as may be convenient to the lessee and ending July 31, 1921, in consideration whereof said lessee covenants, promises and agrees as follows:

"1. To purchase from the lessor and from time to time pay for the oils, supplies and materials of the lessor taken and used by the lessee during the term hereof, a list of which oils, supplies and materials of the lessor now on hand is hereto attached, marked `Exhibit A' and hereby made a part hereof.

"2. To pay any and all operating and overhead expenses during the term of this indenture.

"3. At the termination of this indenture to return, yield up and deliver to the lessor said refinery, equipment, machinery, cars, and appliances, also such of said oils, supplies and materials as shall not have been used and paid for by the lessee, in as good condition as when the same were received, ordinary wear and tear excepted; but the lessee may replace such oils, supplies and materials taken or used by it during the term hereof by substituting in lieu thereof other oils, supplies and materials of equal quantity and quality; and if, after accounting by the lessee for the oils, supplies and materials of the lessor so taken and used there shall remain on hand an excess of oils, supplies or materials acquired or accumulated by the...