Commerce Trust Co. v. Woodbury, 10028.

CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)
Citation77 F.2d 478
Docket NumberNo. 10028.,10028.
PartiesCOMMERCE TRUST CO. et al., v. WOODBURY et al.
Decision Date11 May 1935

Guy A. Thompson, of St. Louis, Mo., and H. M. Langworthy, of Kansas City, Mo. (S. A. Mitchell, of St. Louis, Mo., James E. Goodrich and Frank H. Terrell, both of Kansas City, Mo., John M. Holmes and Thompson, Mitchell, Thompson & Young, all of St. Louis, Mo., and Langworthy, Spencer & Terrell, of Kansas City, Mo., on the brief), for appellants.

Ellison A. Neel, of Kansas City, Mo. (Charles P. Woodbury, Phineas Rosenberg, and Cooper, Neel, Kemp & Sutherland, all of Kansas City, Mo., on the brief), for appellee Harold H. Woodbury.

William C. Michaels, of Kansas City, Mo., for appellee Thomas M. Barham, receiver.

E. R. Johnston, of Chicago, Ill. (I. N. Watson, Powell C. Groner, and Henry N. Ess, all of Kansas City, Mo., Poppenhusen, Johnston, Thompson & Cole, of Chicago, Ill., and Watson, Ess, Groner, Barnett & Whittaker, of Kansas City, Mo., on the brief), for appellees C. T. MacNeille et al.

William S. Hogsett, Chester L. Smith, Clifford Histed, and Hogsett, Smith, Murray & Trippe, all of Kansas City, Mo., for appellees Filer & Stowell Co. and Worden-Allen Co.

Rees Turpin, of Kansas City, Mo., and Leo Mann, of Milwaukee, Wis., for appellee Harnischfeger Sales Corporation.

Before WOODROUGH and FARIS, Circuit Judges, and DONOHOE, District Judge.

FARIS, Circuit Judge.

Appellee Woodbury, alleging the solvency of the Pickering Lumber Company, but its then inability to meet its obligations as they matured, on the 5th day of May, 1931, filed the original bill in this action. It was the conventional bill praying the court to take, by the appointment of a receiver, the properties of the Pickering Lumber Company, under its protecting aegis, and hold off its creditors till the defendant therein could again become financially rehabilitated.

The sole interest of appellee Woodbury is that he is the holder of 10 bonds of $1,000 each, out of an issue of $7,500,000 secured by a deed of trust on certain lands, timber lands, timber mills, plants, a railroad, and other properties, situated in three certain counties in California, as also by the stock of the Sugar Pine Railway Company, a railroad corporation under the laws of California. His legal status is that he is merely a potential deficit-judgment creditor of the lumber company, if and when such trust deed shall be foreclosed, and if the mortgaged properties enumerated shall not be sufficient to liquidate the bonds outstanding. No such foreclosure proceeding has up to now been had or sought.

It was a class suit and other creditors, secured and unsecured, with both liquidated and unliquidated claims have since come in or into a dependent ancillary proceeding, as general interveners, or as interveners pro interesse suo. Obviously, it was in the beginning a friendly suit, with a view of obtaining a friendly receivership. For the Pickering Lumber Company came in by answer, without service of process, and admitted all of the allegations of the original bill (as well as those in the intervention of Mastin & Co., to whom the Pickering Lumber Company owed $3,231 on open account), and consented to the appointment of a receiver. Thereupon, the judge nisi appointed George R. Hicks, the president of the company, as receiver.

Shortly thereafter, and on June 17, 1931, Woodbury, sole plaintiff in the original suit, filed a pleading entitled, "an application for instructions and directions to the receiver," and as relief inter alia, prayed an order of court directing the receiver forthwith to take into his possession the assets and properties of the Pickering Lumber Sales Corporation, and of other alleged subsidiaries of the Pickering Lumber Company, and hold and administer the same, as assets of the Pickering Lumber Company. Plaintiff Woodbury in his application set up in effect that the Pickering Lumber Sales Company, hereinafter called sales company, was a mere corporate shell, agent, and instrumentality, and the alter ego of the Pickering Lumber Company, hereinafter lumber company, for brevity. That the lumber company had fraudulently conveyed to the sales company vast and valuable properties in order to further the payment of, or in further security to appellant banks and another, to which the lumber company had been indebted on unsecured notes in the aggregate sum of more than $1,700,000.

The sales company had been incorporated under the laws of Delaware, in June, 1930, and in exchange for all the corporate stock of the sales company, and the assumption and payment of $2,203,856.23 of the pressing debts of the lumber company the latter had conveyed to it the retail lumber yards and other properties of the lumber company, all of which were unincumbered, and of the value of $5,311,186. For brevity, cents omitted.

The antecedent facts and situation leading up to and moving the lumber company to incorporate the sales company and to make the transfer to it of the properties mentioned are lengthy and complicated.

The lumber company was organized in 1926, under the laws of Delaware. It had a paid-up capital stock of $7,500,000. It was formed by the consolidation of two or more long existing and prosperous lumber concerns. The president thereof, one W. A. Pickering, died suddenly on April 15, 1930, and George R. Hicks, mentioned above as having been appointed receiver, was induced to become president. He had long been president of the Bowman-Hicks Lumber Company, and was connected with other large lumber interests and concerns, and had a reputation for integrity and ability in the lumber business, second to none.

Upon an investigation of the financial condition of the lumber company, as shown by the balance sheet as of April 30, 1930, he found that the total assets of the lumber company were $38,353,696. Of these assets, $5,795,981 were current assets, and $30,281,925 were fixed assets. The difference is made up of current items due the lumber company, but slow and indefinite as to time of liquidation. The cash on hand and in banks amounted to $498,025.

At this same time, the current liabilities were $3,324,865, and the long-term liabilities (including the balance outstanding on the bonds of appellee Woodbury and others of $7,316,900) were $10,900,253. The above items (including depreciation of timber reserves and ordinary depreciation of $101,965) constituted the whole of the liabilities. Even subtracting capital stock of $7,500,000, which, of course, is not required, the lumber company thus had, as of April 30, 1930, a net surplus of $16,526,612, and so it was not insolvent within the purview of the Bankruptcy Act (11 USCA).

But the current assets of the lumber company were not in the ratio of two to one of its current liabilities, as seems to be advisable, if not a condition precedent, to the maintenance of a line of bank credit for manufacturing concerns. This situation came about by reason of congested maturities of the lumber company's financial obligations. Explaining it Mr. Hicks, the president and later receiver, said:

"As to the outstanding indebtedness of Pickering Lumber Company at that time; the Company owed commercial banks a total of $1,700,000 all of which, of course, matured within six months. It had outstanding $850,000 of commercial paper, represented by some notes of various denominations, all of which matured within six months. There was past due on a timber purchase contract since March 1, 1930, on which, however, there was six months grace under the provisions of the contract, an item of $600,000. There was due on another timber purchase contract June 5, 1930, $100,000. That particular one was the Whiteside. There was due to the Detroit Trust Company in connection with the timber purchase $150,000 on July 1, 1930, being an installment of a prior mortgage to which the timber purchase contract was subject.

"There was due interest on the first mortgage bonds May 1, 1930, $220,500 and there would be due on November 1, 1930, additional interest of $220,500 and on November 1, 1930, there was an obligation to retire bonds in the principal amount of $150,000. In addition to the above there were accounts payable, many of which were past due, approximately $440,000. According to the records of the Company, there had been about $1,000,000 invested in the construction of the lumber producing plant at Alturas, California. The construction work had been suspended for some time prior to my association with the Company, at least, most of the work had been suspended, although there may have been some slight carrying on in the way of working on plans, etc. The buildings, or most of the buildings necessary to the plan, had been constructed, a log pond had been built, necessary dressing sheds, dry kilns, saw mill buildings, burner, necessary plant track had been laid; but, with the exception of such equipment and mill machinery as it was necessary to install simultaneously with such construction as had been carried on, none of the machinery had been installed."

In view of the situation above detailed by Mr. Hicks, and in view of the general financial situation, it was, as the special master finds, and we agree, "apparent that the Pickering Lumber Company could not have obtained additional funds either by further borrowings on the open market or by loans from banks other than those to which it was then indebted." As shown already, in the excerpt from the testimony of Mr. Hicks, the total bank indebtedness on April 30, 1930, was the sum of $1,700,000. This indebtedness was due to the following banks, now here as interveners pro interesse suo, namely: Commerce Trust Company of Kansas City, Mo., $500,000; New York Trust Company of New York, $500,000; First National Bank in St. Louis, Mo., $250,000; Mercantile-Commerce Bank & Trust Company, of St. Louis, Mo., $250,000; Anglo & London-Paris National Bank of San Francisco, Cal., $200,000....

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