COVINGTON CTY. BANK v. RJ Allen & Associates
| Decision Date | 13 May 1977 |
| Docket Number | Civ. A. No. 75-8-N. |
| Citation | 462 F. Supp. 413 |
| Court | U.S. District Court — Middle District of Alabama |
| Parties | COVINGTON COUNTY BANK, Plaintiff, v. R. J. ALLEN & ASSOCIATES, INC., Robert J. Allen, Howard W. Alexander, All Enterprises, Inc., the Industrial Development Board of the City of Tuskegee, Alabama, Farmco, Inc., Hygroponics, Inc., Dean Woods and all other persons similarly situated, Roy Robertson and Gary Robertson, Partners, d/b/a Robertson & Son Building Supply, a partnership, Defendants. |
COPYRIGHT MATERIAL OMITTED
William M. Warren, Jr., Hobart McWhorter, and C. Larimore Whitaker, Bradley, Arant, Rose & White, Birmingham, Ala., for plaintiff.
Thomas W. Thagard, Jr., Smith, Bowman, Thagard, Crook & Culpepper, Montgomery, Ala., Solomon S. Seay, Jr., Gray, Seay & Langford, Montgomery, Ala., for The Industrial Development Bd. of the City of Tuskegee, Alabama.
William B. Moore, Jr., Rushton, Stakely, Johnston & Garrett, Montgomery, Ala., John F. Daniel, Sale, Bryant, Daniel & Thompson, Panama City, Fla., for Hygroponics, Inc.
J. Michael Rediker, Ritchie, Rediker & Warren, Birmingham, Ala., Roger J. Nichols, Nichols & Rose, Beverly Hills, Cal., John H. Blanton, Selma, Ala., for Dean Woods and all other persons similarly situated.
Philip Dale Segrest, Montgomery, Ala., for Roy Robertson and Gary Robertson, etc.
Robert E. Venney, Gunn, Venney & Buhler, Miami, Fla., for David L. Hughes, as Receiver of R. J. Allen & Associates, Inc.
Pursuant to order of the Court, this case is now submitted upon a stipulated set of facts.
Before setting the stage for this drama, a list of some of the characters is in order. The leading character is Alexander & Allen, Inc., a Florida dealer in securities. Alexander & Allen, Inc., changed its name to R. J. Allen & Associates, Inc. (R. J. Allen) in 1974. R. J. Allen was engaged in the offering, selling, and underwriting of industrial development revenue bonds (IDR's),1 including the 1973-All Bonds which were issued to finance the hydroponic farm project in Tuskegee. This suit arises out of that project. The president of R. J. Allen was Howard William Alexander. Alexander resigned as president of R. J. Allen in November, 1973. The next character, in order of appearance, is All Enterprises, Inc. (All), the lessee for the Tuskegee project. The president of All is Howard William Alexander; the secretary is Alexander's wife. All entered into a contract with A & A Enterprises, Inc. (A & A), whereby A & A would construct and manage the Tuskegee project. The president of A & A was Howard William Alexander.
Hygroponics, Inc., is a Florida-based corporation which, unlike the above-named characters, is still in business. Hygroponics contracted to supply the basic growing units for the hydroponic farm. Hygroponics has not been paid for some of the materials which it applied to the project. During September and October of 1974, 25 percent of Hygroponics was owned or controlled by Howard William Alexander. Robertson & Son Building Supply (Robertson) also supplied materials to the project for which it has not been paid.
This Court has jurisdiction under the Securities Exchange Act of 1934 § 27, 15 U.S.C.A. § 78aa. That section provides that the district courts have exclusive jurisdiction of suits for violations of the Act and for enforcement of the liabilities or duties created by the Act. Jurisdiction for the various state-law claims presented in the cross-claims and counterclaims is under the theory of pendent jurisdiction as applied in United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966).2
The genesis of the case is in Tuskegee, Alabama, where the city fathers made a decision to seek new industry for the town. It was decided to create an Industrial Development Board (the Board) which would search out promising industry that would locate in Tuskegee, whereupon the Board would issue IDR's to finance construction of the project. The plan called for the Board to lease the project to the lessee-industry, with the money from the lease being used to repay the bonds.
The city decided upon a hydroponic farming project and began looking for a firm to carry out the project. After one abortive attempt, a Florida firm, All, was selected as the project company. The bond issue was prepared by drafting a Trust Indenture, naming Covington County Bank as Trustee, the Board as owner and mortgagor. The indenture was filed for public record in Macon County, Alabama, on January 23, 1974, the date the bond issue was closed. The indenture provided that part of the proceeds from the sale of the bonds would be placed in a Construction Fund, to be used to finance construction of the project. The Trustee was given a lien on this fund as security for the bonds sold to the bondholders. The bonds were sold,3 and construction began on the project. At some point, it was discovered that R. J. Allen, which had been underwriting the bond issue and which, as it turns out, had masterminded this scheme as well as others involving IDR's, had engaged in various fraudulent securities practices with regard to these bonds. See SEC v. R. J. Allen & Associates, supra. The project collapsed and the scramble began for the funds that remained.
Sometime after the Securities and Exchange Commission began its action for securities fraud against R. J. Allen in the Southern District of Florida, the Trustee filed this Rule 22 action asking to have its rights and obligations under the Trust Indenture and the securities laws declared. At the time this action was filed, an interest coupon was due, which the Trustee had been paying. The Trustee feared that continued payments, as well as any other activity, might subject it to liability under the securities laws for aiding and abetting the violations for which R. J. Allen & Associates, among others, had been found guilty. After this action was filed, the Court ordered the Trustee to pay into the Court the monies remaining from the sale of the bonds. This amounted to over two hundred thousand dollars. It is this money over which the parties are fighting. The only remaining active defendants are Hygroponics, Robertson and the bondholders. The other defendants either have settled or had default judgments entered against them.4 Because there are not sufficient funds to pay all the claims, it is necessary for the Court to determine the priority among the various claimants.
The claims of Hygroponics and Robertson are based on materials supplied to the project.
Hygroponics is claiming $11,832.97. Hygroponics has a signed requisition from the Tuskegee Industrial Development Board for $9,856.45. The requisition was signed by a representative of Hygroponics on September 26, 1974, and by the secretary of the Industrial Development Board on October 13, 1974. The materials represented in the requisition were delivered to the project site and Hygroponics has not been paid for them. Hygroponics has not sought to perfect a lien for these materials under Alabama's lien law. See Title 33, § 37 Code of Alabama (Recomp.1958). The materials were sold on open account pursuant to an arrangement entered into between Hygroponics and A & A, the contractor for the project. Prior to the requisition in question, the Industrial Development Board had not signed any document evidencing any claim or right to claim by Hygroponics relative to the materials for which claim is being made in the requisition.
Robertson furnished materials to the project at the request of A & A pursuant to an oral contract between Robertson and A & A. The materials were furnished between April 13, 1974, and September 27, 1974. During this period, Robertson sent bills to A & A which A & A paid. The current balance in the account is $2,550.48. It was Robertson's understanding after talking with someone on the project believed by Robertson to be A & A's foreman that a construction fund had been established out of which was to be paid the cost of constructing the project, including materials furnished for construction. Within the time provided by Alabama law, Robertson recorded a lien for the materials furnished for which no payment had been received. Again within the time provided by law, a judgment was obtained on this lien, which judgment remains unsatisfied. No requisition has been submitted to or approved by the Industrial Development Board for materials furnished to the project by Robertson.
The bondholders are seeking in this case to block claims against the funds remaining after the collapse of the project. In a separate suit, bondholders are seeking to recover damages for losses suffered due to alleged fraudulent practices in connection with the issuance of the 1973-All Bonds. For the reasons set out below, the Court concludes that the claims of the bondholders are superior to those of Hygroponics and Robertson.
The Indenture provides that the Trustee has a lien in the Construction Fund which is "subject to the provisions of this Indenture pertaining thereto, including the making of disbursements therefrom." This lien is created "in order to secure the payment of the principal of and interest on the bonds according to their tenor and effect and the performance and observance by the Board of all the covenants expressed or implied herein and in the bonds." Section 207 of the Trust Indenture states:
This Indenture is given in order to secure funds to pay for new construction and by reason thereof, it is intended that this Indenture shall be superior to any laborers', mechanics' or materialmen's liens which may be placed upon the Project.
Article VI of the Indenture, which creates the Construction Fund and establishes the procedure for disbursing this money, provides:
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