Edwards v. Bay State Gas Co. of Delaware

• Decision Date: 23 September 1909
• Docket Number: 230.
• Parties: EDWARDS et al. v. BAY STATE GAS CO. OF DELAWARE.
• Court: U.S. District Court — District of Massachusetts

172 F. 971

EDWARDS et al. v. BAY STATE GAS CO. OF DELAWARE.

No. 230.

United States Circuit Court, D. Massachusetts.

September 23, 1909

Whipple, Sears & Ogden, C. Godfrey Patterson, A. A. Folsom Wm. F. Donovan, Morse & Friedman, Lee M. Friedman, Benj. L M. Tower, H. M. Burton, J. H. Benton, Jr., H. H. Ward Bancroft G. Davis, and Henry Major, for complainants.

Parker C. Chandler, Nathan Matthews, Homer Albers, Alfred S. Hall, and Tower, Talbot & Hiler, for defendant.

PUTNAM Circuit Judge.

The pending matters are applications for certain allowances to counsel and others from a fund which was gathered through the exercise of the equity powers of the Circuit Court of the United States for the District of Delaware, supplemented by ancillary proceedings in this court, all in suits against the Bay State Gas Company, a corporation created under the laws of the state of Delaware. We say proceedings against a fund gathered in the manner we have said, because, although the Delaware Gas Company, which was insolvent when the proceedings commenced, but as a result thereof has become solvent, and has, therefore, been permitted to receive a large portion of the fund, is now defending against the claims in issue, and is the sole party interested to defend against them, yet sufficient of the fund remains still under the hand of the court to liquidate the claims here in controversy; and, further, both the portion of the fund which the Delaware Gas Company received, and all the portion remaining, are, and always have been, subject to whatever equities arose in connection with, and incidental to, or as a result of, the gathering of the fund by the equity powers of the courts.

Consequently we expunge from the case every suggestion or argument based on the fact that the Delaware Gas Company is now defending against these claims, and is now the holder and owner of part of the fund; and we rest all the matters before us on precisely the same basis as though the whole fund were still in the registry of the court, or in the hands of the receiver. This will eliminate the necessity of further discussion of certain propositions connected with this topic stated by the counsel on both sides at considerable length.

The pending claims resolve themselves mainly into two classes: First, the claim of the counsel who initiated the proceedings, which is the first and the most substantial topic to be considered; and, second, the claims of the counsel who intervened for the purpose of securing complete liquidation with reference to the income bonds, so called, and the payment thereof.

The income bonds of the principal sum of $507,000 were the larger indebtedness of the corporation when these proceedings commenced. The entire indebtedness at that time is given by some of the counsel as exceeding $700,000, and the entire available assets as approximately $35,000. Assets were secured by the efforts of the receiver to the amount of approximately $2,000,000. This was accomplished without any assistance by the Bay State Gas Company, and very considerably by successful legal proceedings which met the hostility of its officers. The favorable results in this particular were at the end of very elaborate and difficult litigation, involving expenditures vastly beyond the pecuniary resources of the Bay State Gas Company. Without going further into details, and without undertaking to verify the figures, or to state them accurately, it is beyond question that, at the time proceedings were commenced, the Bay State Gas Company was not only utterly insolvent, but wholly unable to accomplish the favorable results which have been accomplished by the receiver, and utterly without hope or promise of any attempt in that direction. The ultimate end was that all the liabilities of the respondent corporation, including the income bonds, have been paid, the corporation made solvent, as we have said, and in addition thereto received out of the fund gathered by the court in excess of $500,000 in cash above all its liabilities.

The proceedings were commenced by the applicants here, Patterson & Major, as solicitors and counsel, in the Circuit Court for the District of Delaware, on February 10, 1898, by two bills-- one in behalf of Edwards and others as income bond holders, for themselves and such other bondholders as might join them; and one in behalf of Edwards and others as stockholders, for themselves and such other stockholders as might join them. The stock suit was never carried to a decree.

The master to whom these claims were referred, according to the interlocutory decree which we will give later, has reported, nevertheless, that proceedings in the stock suit supported the proceedings on the creditors' bill and were essential to the success of the latter. We are not disposed to make any distinction between the two, inasmuch as the practical result was that complainant Edwards succeeded, as the financial result shows, as a stockholder as well as a creditor. The record is such that we are satisfied that the two proceedings are to be regarded for present purposes as though they had been consolidated, so that in what we say with reference to the claim of Patterson & Major we will treat the two as though they were consolidated, and not make any distinction, as the master has done, between services and disbursements in one suit and services and disbursements in the other.

From that time to the present litigation in behalf of the original complainants so far has been conducted by Patterson & Major, and they have remained their sole counsel and solicitors.

The bills demanded an accounting, to which on the face of the bills the complainants were fairly entitled. It was also so held by the Circuit Court for the District of Delaware in two cases. Edwards v. Bay State Gas Company (C.C.) 91 F. 942, 946. Nevertheless, the litigation was protracted and difficult to such an extent that the counsel for the respondent corporation, who were reputed as gentlemen of great ability, and also of great tenacity of purpose, were able to bar the appointment of a receiver until May 26, 1903. Then the receiver was appointed, and he has been active as such through all subsequent years until the balance of the fund was paid over to the respondent corporation, as we have said, and the receiver was discharged, except as to the amount retained to meet the claims now in controversy.

In due course of time applications for the payment of the income bonds were made, out of which applications came the claims of the counsel of the second class. This litigation was also protracted, and resulted in a proceeding before Causten Browne, Esq., as master, which are printed in a volume known as the 'Green Book,' to which we have no particular occasion to refer with any detail. Two main propositions arose in reference to the income bonds, of which there were 507 outstanding, of $1,000 each, carrying interest at the rate of 7 per cent. per annum, of which none had been paid since 1893; thus accumulating, all together, if interest proved to be a valid claim, a possible amount of about $1,000,000. The main propositions about these bonds were, first, the claim on the part of the corporation that, as the principal of the income bonds had not become payable according to their terms, and especially as the corporation had been rendered solvent, holders of the bonds had no present right to have them liquidated and paid-- a proposition which, if it could have been successfully maintained, would, in view of the improbability of income, and of the weakened credit of the Bay State Gas Company, although for the time solvent, have rendered their market value merely nominal, as they were not payable till May 1, 1939. The second main proposition was, in behalf of the income bond holders, that, although there was no evidence of any net income out of which the interest on the income bonds was to be paid according to their face, yet the respondent corporation had been negligent and wasteful, and might have earned income sufficient therefor, so that, for that and other reasons, interest was to be added to the principal as we have said.

In its own mind the court leaned to the view on the first proposition that, according to the rules in regard to proceedings against insolvent debtors, a corporation when once insolvent is always insolvent, so far as the winding-up litigation is concerned, so that in bankruptcy universal liquidation is the rule. On the other hand, the court was of the impression that income bond holders were bound by the terms of the bonds, and entitled to nothing unless there was actual net income. The bill was originally filed and proceeded on this basis, as we understand, because it asked an accounting of income, and claimed that it had been wasted or applied to purposes to which, under the terms of the income bonds, it was unlawful to apply it. However, it is plain that these questions were serious, involving, as they did, large amounts. In behalf of the bondholders it was claimed that their proposition as to the interest had been sustained in the decisions we have referred to, although a careful examination leads the court to the view that there was nothing decisive in them in this particular.

This court has been insistent that an ancillary suit should be regarded as strictly ancillary, and that the proper court of administration, as well as the court of distribution, is the court of the domicile. We have sometimes refused to appoint receivers until proceedings of some kind had occurred in the district of the domicile. Here nearly the entire fund gathered by the receiver as described was gathered in this district. Nevertheless, presumably we should have remitted it to the district of the domicile, and sent all the...