Curtis v. O'LEARY

• Decision Date: 05 December 1942
• Docket Number: No. 12252.,12252.
• Parties: CURTIS et al. v. O'LEARY et al.
• Court: U.S. Court of Appeals — Eighth Circuit

131 F.2d 240 (1942)

CURTIS et al. v. O'LEARY et al.

No. 12252.

Circuit Court of Appeals, Eighth Circuit.

November 12, 1942.

Rehearing Denied December 5, 1942.

Paul L. Martin, of Omaha, Neb. (Arthur R. Wells and Winthrop B. Lane, both of Omaha, Neb., on the brief), for appellants.

Paul R. Stinson, of Kansas, Mo., and Yale C. Holland, of Omaha, Neb., for appellees.

Before SANBORN, THOMAS, and JOHNSEN, Circuit Judges.

SANBORN, Circuit Judge.

This appeal is from a summary judgment for the plaintiffs, under Rule 56 of the Federal Rules of Civil Procedure, 28 U. S.C.A. following section 723c, in an action brought by Dorman H. O'Leary and Stern Brothers & Co., a corporation, against H. F. Curtis, Fred P. Curtis, Lewis C. Curtis and other minority stockholders of the Lyman-Richey Sand and Gravel Corporation. The purpose of the action was to secure an adjudication that the plaintiff O'Leary, as trustee for the Vinton Corporation, is the absolute owner of 23,252 shares of the common stock of the Lyman-Richey Sand and Gravel Corporation, and to enjoin the defendants from challenging or interfering with O'Leary's ownership of these shares of stock, and from bringing threatened suits based upon the claim that, under an oral agreement, the shares are merely held as security and are subject to redemption. H. F. Curtis, Fred P. Curtis, and Lewis C. Curtis, who were defendants below, and Lyman-Richey Sand and Gravel Corporation, which intervened, have appealed. They assert that, under the pleadings and the undisputed facts disclosed by the record, the entry of a summary judgment was not justified.

The facts out of which the controversy arose are, in substance, as follows: The Lyman-Richey Sand and Gravel Company, a Nebraska corporation (hereinafter called the debtor), being in financial difficulties, on December 6, 1934, filed a petition for reorganization under Section 77B of the Bankruptcy Act, 48 Stat. 912, 11 U.S.C.A. § 207, in the court below. H. F. Curtis and his sons, Fred P. Curtis and Lewis C. Curtis (who will be referred to as "the Curtises"), were directors and officers of the debtor and the owners of more than 80% of its outstanding stock. The court appointed Fred P. Curtis, Lewis C. Curtis, and Mary A. Mullen trustees of the debtor, pending reorganization, and appointed G. Keyes Page, a vice-president of Stern Brothers & Co., reorganization manager. Stern Brothers & Co. represented bondholders of the debtor in the reorganization proceedings. It had acted as fiscal agent for the debtor and had underwritten its bonds.

On May 18, 1935, Page filed a plan for reorganization of the debtor, which bore the approval of the debtor and of the holders of more than 77% of its outstanding stock, including the Curtises. The plan called for the organization of the Lyman-Richey Sand and Gravel Corporation (hereinafter referred to as the new corporation) to take over all of the assets of the debtor and to assume certain of its liabilities, which included the bonds of the debtor, the bonds to bear interest at a reduced rate and to have extended maturities. The plan provided that general creditors whose claims were allowed should receive noncumulative preferred stock of the new corporation in exchange for their claims, and that a claim of the United States for approximately $82,000 should be compromised for $20,000, to be paid in four annual instalments by the new corporation. To supply the necessary working capital for the new corporation, the plan provided as follows:

"The Reorganization Manager will be immediately authorized to sell 500 shares of 6% Prior Preference Stock at $100 per share, and to also sell and deliver at par to the purchasers of the 6% Prior Preference Stock 23,252 shares of the authorized common capital stock of the Corporation.

* * * * *

"Common Capital Stock. The New Corporation will have authorized 42,250 shares of its common capital stock of the par value of one per cent per share, which will be issued in the following manner: 18,998 shares to the holders of the present outstanding capital stock of Lyman-Richey Sand and Gravel Company; 23,252 shares to the purchasers of the 6% Prior Preference Stock of the New Corporation. Each share of common stock shall be entitled to one vote on all matters. * * *"

The plan also provided that all voting rights in the new corporation "are vested exclusively with the holders of common capital stock." Under the plan, the prior preference stock was redeemable. There was no provision for the redemption of common stock.

After a hearing, the court, on July 2, 1935, entered an order approving the plan of reorganization and directing its execution. No objection to the plan was filed by any of the appellants, and no appeal was taken from the order approving it.

On July 18, 1935, Page, as reorganization manager, and the debtor, by its president, H. F. Curtis, filed a report stating that the plan of reorganization had been carried out, and prayed for the entry of a final decree. The report showed that the new corporation had been organized, and stated:

"500 shares of the 6% prior preference stock of the par value of $100.00 per share have been issued to G. Keyes Page and the new corporation has been paid therefor the sum of $50,000.00 in cash "23,252 shares of the authorized common capital stock of the new corporation of the par value of One Cent per share have been issued to G. Keyes Page and the Corporation has received therefor the sum of $232.52."

There was a hearing upon the report and petition before the court, with respect to fees and allowances. Counsel for the reorganization manager stated what had been done in carrying out the plan of reorganization. Among other things, he said: "The old management receives approximately 45% of the common stock. Those that put in the new money receive preferred stock prior preference stock to an equivalent of the new money, plus 55% of the common stock. The new officers are Mr. Fred Curtis, as President, Mr. L. C. Curtis as Vice President, Mr. Griffis as Treasurer and Mr. Burke as Secretary. The directors are the two Curtises and Mr. Page." The court then said to H. F. Curtis, president of the debtor: "Now, Mr. Curtis, you have heard the statements here. Do you have comments or objections to interpose?" Mr. Curtis answered, "I do not, Judge." The court said: "You concur in what has been represented to the Court, do you?" The reply was, "I do."

The court, on July 18, 1935, entered its final decree, in which it approved the report of the debtor and the reorganization manager; declared that the plan of reorganization had been executed; discharged the debtor from its debts; discharged the trustees, and released their sureties; enjoined creditors and stockholders of the debtor from bringing suit against the new corporation, or its assets, based upon claims against the debtor, except such as the new corporation had expressly assumed pursuant to the plan; terminated the reorganization proceedings, and reserved jurisdiction only with respect to two pending matters which had not been decided. No appeal was taken from the final decree.

The $50,000 paid by Page for the 500 shares of the prior preference stock of the new corporation, and the $232.52 paid by him for the 23,252 shares of its common stock, had been furnished by the Vinton Corporation, for which Page acted as trustee in acquiring the stock. As long as Page continued his connection with Stern Brothers & Co., he continued to hold this stock and to act as a director of the new corporation. When he severed his connection with Stern Brothers & Co., he was succeeded, as a vice-president of Stern Brothers & Co. and as a director of the new corporation, by O'Leary, to whom the stock was transferred and who held it in trust for the Vinton Corporation.

Lewis C. Curtis and Fred P. Curtis, two of the three directors of the new corporation, on April 15, 1941, caused its Board of Directors to adopt a resolution providing for the redemption of the 500 shares of prior preference stock, on condition that the 23,252 shares of common stock, held by O'Leary, be returned to the new corporation by the purchaser upon payment of $232.50. The resolution recited the existence of an oral agreement between the Curtises and Page whereby the 23,252 shares of common stock sold under the plan of reorganization were subject to cancellation and retirement on payment of $232.52, whenever the $50,000 of prior preference stock was redeemed.

On April 22, 1941, this action was brought. The complaint was captioned in the reorganization proceedings and purported to be an ancillary and dependent bill, although it also asserted diversity of citizenship as a ground of jurisdiction. The complaint set up the reorganization proceedings pursuant to which the 23,252 shares of common stock in suit were sold, the purchase of this stock by Page for the Vinton Corporation, and its transfer to O'Leary. The complaint alleged that the defendants, notwithstanding the provisions of the plan of reorganization and the court's orders and decrees approving the plan, had conspired to destroy the rights of O'Leary and the Vinton Corporation in the stock, by claiming that, prior to the defendants' assent to the plan and prior to its approval by the court, there was a secret understanding between Page and the defendants that the 23,252 shares of common stock sold would be held by the purchaser as security for the redemption of the prior preference stock and would, upon redemption of that stock and the payment of $232.52, be returned to the new corporation. The complaint also alleged that the defendants intended to bring a suit or suits against the plaintiffs to enforce the "pretended oral agreement" with Page; that the Curtises had caused the adoption by the Board of Directors of the new corporation of the resolution before referred to, and were threatening to refuse to recognize the ownership of the stock by O'Leary and the ...