Cooke v. Bowersock

• Decision Date: 03 November 1941
• Docket Number: No. 11969.,11969.
• Citation: 122 F.2d 977
• Parties: COOKE v. BOWERSOCK, et al. In re FLOUR MILLS OF AMERICA, Inc.
• Court: U.S. Court of Appeals — Eighth Circuit

122 F.2d 977 (1941)

COOKE v. BOWERSOCK, et al. In re FLOUR MILLS OF AMERICA, Inc.

No. 11969.

Circuit Court of Appeals, Eighth Circuit.

October 16, 1941.

Rehearing Denied November 3, 1941.

Edgar Shook, of Kansas City, Mo. (David R. Hardy and Sebree, Shook & Gisler, all

of Kansas City, Mo., on the brief), for appellant.

Justin D. Bowersock, of Kansas City, Mo. (Robert B. Fizzell and John F. Rhodes, both of Kansas City, Mo., on the brief), for appellees Bowersock, Fizzell & Rhodes.

J. Kirk Windle, of Chicago, Ill., Atty., Securities and Exchange Commission (Chester T. Lane, Gen. Counsel, of Washington, D. C., W. McNeil Kennedy, of Chicago, Ill., and Homer Kripke, of Washington, D. C., Attys., Securities and Exchange Commission, on the brief), for Securities and Exchange Commission.

Before GARDNER, WOODROUGH, and THOMAS, Circuit Judges.

WOODROUGH, Circuit Judge.

This is an appeal by Thornton Cooke, Independent Trustee in corporate reorganization proceedings under Chapter X of the Revised Bankruptcy Act of 1938, 11 U.S. C.A. § 501 et seq., from an order allowing compensation and reimbursement for expenses out of the Debtor's estate to the law firm of Bowersock, Fizzell and Rhodes as attorneys for a gold noteholders' committee known as the Vincent Committee which participated in the reorganization proceedings. The appellant seeks to have the compensation and reimbursement of expenses disallowed on the grounds (1) that as a matter of law the attorneys (who are the appellees) are entitled to no compensation out of the Debtor's estate, and (2) that the allowance is so excessive as to have no reasonable relation to the facts and constitutes a clear abuse of judicial discretion. The appeal is heard upon the original papers in compliance with Section 250 of the Revised Bankruptcy Act of 1938, 11 U.S.C.A. § 650, each of those designated by the parties having been given a document number for reference here. Some 120 such documents are thus brought to our attention and these, together with elaborate statements of the facts in the briefs and oral arguments of counsel, afford sufficient basis for understanding of the contentions and decision of the controversy.

Flour Mills of America, Inc., a Maryland corporation, hereinafter referred to as "Debtor", filed its petition March 20, 1939, in the United States District Court for the Western Division of the Western District of Missouri, for reorganization under Chapter X of the Revised Bankruptcy Act of 1938. It owned and controlled all of the outstanding capital stock of The Kansas Flour Mills Corporation, a Delaware corporation, and Valier and Spies Milling Corporation, a Delaware corporation. The principal business of the Debtor's wholly-owned subsidiaries was the buying, selling, storing, milling and distributing of grain, wheat, wheat flour and wheat mill feeds.

The books of the Debtor on February 28, 1939, just prior to the filing of the petition for reorganization, showed assets of $6,015,681.80. At that time the Debtor had outstanding $2,800,000 in principal amount of twenty year six and a half per cent (6½%) Convertible Gold Notes, Series A, due April 1, 1946, with accrued and unpaid interest due on said notes in the amount of $75,833.33. There were authorized 80,000 shares of eight per cent (8%) cumulative preferred stock of no par value, of which 25,000 shares were issued and outstanding, and 525,000 shares of $1 par value common stock, of which 500,000 shares were issued and outstanding.

On March 21, 1939, the District Court entered an order approving the Debtor's petition. On the same day the court entered an order appointing appellant as Independent Trustee, Ralph W. Hoffman as Additional Trustee, Edgar Shook counsel for the Trustee, and Cyrus Crane and R. Arch Smith and the law firm of Lathrop, Crane, Reynolds, Sawyer & Mersereau counsel for the Debtor. The Trustee was directed by said order to make a report of the financial condition of the Debtor and of the Trustee's opinion as to the desirability of continuing the Debtor's business. The said Trustee was further ordered to file a plan of reorganization or a report of his reasons why a plan could not be effected.

A Preferred Stockholders' Protective Committee, three gold noteholders' committees (afterwards reduced in number by a merger) and the Securities and Exchange Commission appeared and participated in the proceedings (the latter at the request of the court) before the Vincent Committee entered its appearance. It filed a petition to intervene on May 1, 1939, through its attorneys, William Ritchie and the appellees, but on May 5, 1939, the District Court decided that the Revised Bankruptcy Act does not contemplate the limiting of recognition to a few committees but gives to every interested person the right to be heard, and sustained a motion of the Securities and Exchange Commission to vacate orders allowing the intervention of the committees. In re Flour Mills of America, Inc., D.C., 27 F.Supp. 559. The committees and the Commission continued to participate, however, and their respective counsel were recognized and heard.

Pursuant to the order of March 21, 1939, a report and a supplemental report were filed by the Trustees and by the Independent Trustee, reporting that on the basis of the financial estimates of Arthur Young and Company and the appraisals of Horner and Wyatt, engineers, the current assets amounted to $2,135,326.55, and fixed assets $2,963,829, total $5,099,155.55, and that the Debtor should continue to do business and the business was carried on through the Additional Trustee Ralph W. Hoffman, former president of the company. On June 20, 1939, a hearing was had before the court upon the question of the propriety and desirability of retaining Mr. Hoffman, president of the Debtor and Additional Trustee, as operating head of the Debtor. The Trustee proposed and favored Mr. Hoffman's retention and the appellees strenuously opposed it. The court ordered his retention.

Following the order of his appointment, the Independent Trustee began an exhaustive study of the Debtor and of its financial condition. After much study, consideration and investigation, the Trustee arrived at a valuation of the assets of $3,202,000. The Trustee concluded that while there was no equity in common stockholders of the Debtor, there was an equity in the preferred stockholders and such equity should be recognized and provided for in any plan of reorganization. Having so concluded, the Trustee on November 29, 1939, filed his proposed plan of reorganization which recognized the equity of the preferred stockholders and provided for the issuance of term notes to the noteholders and common stock to the preferred stockholders. Said plan applied the theory of relative rather than strict priority and did not make provision for the accrued and unpaid interest on the gold notes. In the preparation and promulgation of his plan the Trustee was assisted by suggestions and proposed amendments offered by counsel for the Debtor, the preferred stockholders' committee, and the noteholders' committees other than the Vincent Committee. Whether the Vincent Committee or its counsel so assisted is vigorously disputed and has received our consideration.

On December 8, 1939, the Archer Noteholders' Committee, by its attorneys George Reinhardt and Edward L. Scheufler, filed its petition to amend the Trustee's proposed plan of reorganization. Said committee proposed several amendments, one of which was an amendment which provided for the recognition of accrued and unpaid interest on the gold notes of the Debtor by the issuance of certificates of indebtedness (apparently non-interest bearing) by the Debtor to the holders of such gold notes. Its proposal was that such interest at the rate of five percent instead of the six and one-half percent promised on the face of the notes, be recognized.

On December 11, 1939, appellees filed objections of the Vincent Committee to the Trustee's plan of reorganization on the grounds, i. a., that it was "neither fair, equitable nor feasible and should in all things be by this court disapproved". It also filed a plan of reorganization which recognized no interest in the common or preferred stockholders and provided for no funded debt, but contemplated vesting the assets in the gold noteholders by issuing stock to them in proportion to their note holdings.

The preferred stockholders' committee, the Merged Noteholders' Committee and the Debtor filed proposed amendments to the Trustee's plan.

On December 15, 1939, a hearing was begun in the District Court pursuant to a petition which the appellees had filed for the Vincent Committee to evaluate the assets of the Debtor and to consider the plans of reorganization and objections and amendments to the Trustee's plan. During the course of said hearing numerous experts testified in support of the valuations found by the Trustee and stated in the Trustee's plan, while the evidence of appellees was limited to the testimony of Fred C. Vincent and Charles E. Valier, two members of the Vincent Committee, and to evidence elicited by cross examination in which Mr. Rhodes of appellee's firm took the lead. Following said hearing the District Court submitted the Trustee's proposed plan, objections and amendments thereto, and the plan of the Vincent Committee, to the Securities and Exchange Commission with the request that the Commission render an advisory opinion as to the fairness and feasibility of the plans and the various objections and amendments to the Trustee's plan.

On April 1, 1940, the Securities and Exchange Commission rendered its advisory opinion. The Commission found the Debtor to be insolvent, disapproved of the Trustee's plan, and approved the plan of the Vincent Committee advocated by appellees.

On May 6, 1940, M. L. Webber, a secretary in appellee's law office and also secretary of the Vincent Committee, sent a letter to all noteholders in...