Farrow v. Dermott Drainage Dist.

• Decision Date: 17 January 1944
• Docket Number: No. 12663,12664.,12663
• Citation: 139 F.2d 800
• Parties: FARROW v. DERMOTT DRAINAGE DIST. DERMOTT DRAINAGE DIST. v. FARROW.
• Court: U.S. Court of Appeals — Eighth Circuit

139 F.2d 800 (1944)

FARROW v. DERMOTT DRAINAGE DIST.

DERMOTT DRAINAGE DIST. v. FARROW.

Nos. 12663, 12664.

Circuit Court of Appeals, Eighth Circuit.

January 17, 1944.

Baucum Fulkerson, of No. Little Rock, Ark., and A. F. House, of Little Rock, Ark., for F. F. Farrow, as trustee.

P. A. Lasley of Little Rock, Ark., for Dermott Drainage Dist.

Before THOMAS and JOHNSEN, Circuit Judges, and MOORE, District Judge.

THOMAS, Circuit Judge.

This is a suit brought by F. F. Farrow, as trustee for bondholders, against Dermott Drainage District, a quasi public corporation of Arkansas, and its Board of Commissioners. The plaintiff demands judgment for $32,400 on past-due bonds of the District with interest, for foreclosure of the pledge and lien securing the bonds, and for costs and attorney fees. The defendants pleaded payment and sought by counterclaim to obtain a decree charging the holders of the bonds sued on for funds received from the District and misappropriated, and cancelling the bonds and the pledge and lien securing them.

Upon facts found and conclusions of law declared after trial, the lower court entered judgment against the District for $3,738.52, the balance found due on the bonds, and for $1,000 attorney's fee, and against the plaintiff for costs. The plaintiff appeals for failure of the court to grant the full amount claimed and from the judgment for costs, and the District appeals from the inclusion in the judgment against it of an item of $926.13 and from the allowance to plaintiff of an attorney's fee in the sum of $1,000.

Elmer C. Smith and C. W. Diekroeger own the bonds sued upon and are the beneficiaries of the judgment. Since the suit calls for equitable relief the District may urge any equitable defenses which it may have against the beneficiaries. Stone v. White, 301 U.S. 532, 535, 536, 57 S.Ct. 851, 81 L.Ed. 1265.

As of March 1, 1915, the District issued and sold $190,000 of 6% bonds, payable to bearer, and maturing September 1, 1918, through 1935. The bonds were in denominations of $500 and $1,000 each, numbered serially from 1 to 323, inclusive, beginning with the earliest maturities.

The District having defaulted in the payment of accrued interest and the matured portion of its outstanding bonds, the holders of the bonds in September, 1929, organized a Bondholders' Protective Committee of three members. Under the terms of their agreement the bondholders transferred the legal title to and deposited their bonds with the Committee, receiving from the Committee certificates or receipts evidencing their respective deposits. Among other things the agreement provided:

"The interest of the depositors in the property and assets of this trust shall be in proportion to the principal of the bonds deposited hereunder. * * *

* * * * * * *

"Any member of the Committee and any firm or corporation of which he may be a member, director, officer, or stockholder and the depositary or its respective officers, trustees, directors or agents, may be or become pecuniarily interested in any property or matters which are or may become the subject of this agreement and may contract with the Committee or be a member or manager of any other Committee, association or syndicate which may contract with the Committee."

Smith, a Saint Louis bond dealer, was secretary of the Committee from the time it was organized until its dissolution on June 1, 1940. He was also a member of the Committee after March 21, 1938.

Continuously since April, 1934, Smith and Diekroeger were joint managers of the special service department of Albert Theis & Sons, receiving as compensation, salaries and a percentage of the profits of their department. Their duties were to represent bondholders' protective committees and to collect defaulted bonds and coupons. The Committee employed Albert Theis & Sons as its fiscal and managing agent for 10% of all amounts collected from the District after April, 1934.

On April 1, 1933, Carroll J. Brown, one of the Commissioners of the District, was appointed receiver of the District by an Arkansas state court. The receivership continued until November 9, 1939, when it was dissolved and the affairs of the District returned to the Commissioners. John Baxter was attorney for the receiver during Brown's continuance in office.

After the appointment of the receiver it was recognized that the financial situation of the District was serious. The taxpayers were neither paying their taxes nor redeeming their lands. Under these conditions the Committee agreed to accept $54,300 in full settlement of the outstanding bonds, but the District did not have this amount and was unable to borrow it.

On December 16, 1936, the Committee adopted the following resolution:

"Whereas, Dermott Drainage District of Ashley, Drew and Chico Counties, Arkansas has failed to obtain a commitment from the RFC to enable it to refinance its outstanding indebtedness on the basis of a cash payment of $54,300, and

"Whereas, said District desires to adopt a definite plan of liquidating its outstanding indebtedness,

"Now, Therefore, Be It Resolved that this Committee hereby approves a plan of liquidation on the following terms and conditions, to-wit:

"Allow the District to settle accrued interest on the bonds up to March 1, 1936 at 50¢ on the dollar.

"The District to pay interest on the bonds from March 1, 1936 at the rate of 4% per annum and use the balance of funds to pay bonds at the face amount of the principal thereof.

"The Committee to pay and agrees to pay annually 4% on the approved settlement price of $550.00 per $1,000 C/D before using any funds to call for tenders of certificates.

"The Committee to use the $7,783.65 received in settlement of int. up to March 1, 1936 and all money received in the payment of bonds to call for tenders of C/D at a price not to exceed 55¢ on the dollar of the original par value of bonds represented by certificates and give the District Credit for all bonds purchased in this manner.

"All bonds purchased for the benefit of the District are to be held by the Committee as a guarantee for the faithful performance of the duties of the officers of the District. These bonds are not to be considered outstanding obligations of the District and are to be surrendered to the District when as and if all outstanding bonds are retired and interest paid thereon at the rate of 4% until paid. Otherwise, these bonds are to be returned to the assets of the Committee and considered outstanding obligations of the District.

"In subsequent years, the District is to first pay 4% interest on the outstanding bonds and the balance of the funds are to be applied on the principal. The Committee after allowing for interest on the C/D at 4% of the settlement price of $550.00 and after allowing for its expenses is to use the balance of funds to call for tenders at a maximum price to be determined by the Committee and the District is to be given credit for the bonds so purchased as in the first instance."

At the time the resolution was adopted the District had paid and retired bonds numbered 1 to 220, inclusive, aggregating $99,500 par value, and in addition had paid $15,370 which had been applied on the principal of the remaining bonds as follows: On bonds 220 to 253, inclusive, $370 on each $1,000 par value, leaving $630 unpaid; on bonds 254 to 271, inclusive, $270 on each $1,000 principal, leaving $730 unpaid; on bonds 272 to 290, inclusive, $50 on each $1,000 principal, leaving $950 unpaid. No payments had been made on the principal of bonds 291 to 323, inclusive.

On March 1, 1936, there were outstanding past-due bonds in the face amount of $90,500 on which there was unpaid $75,130 principal with accrued and delinquent interest in the amount of $15,777.30. To liquidate this indebtedness the receiver, and after him the Commissioners, accepted the plan proposed in the resolution of the Committee. The parties agree that the resolution then became a binding contract.

After the plan of liquidation embodied in the resolution had been agreed upon the District transmitted funds to the Committee from time to time to be applied according to its terms. The dispute arises out of the handling and application of these funds.

The plaintiff's appeal presents four questions: 1. What was the proper formula under the resolution of December 16, 1936, for retiring bonds purchased by the Committee on tenders? 2. Did the resolution of December 16, 1936, after its acceptance by the District create a fiduciary relation between the Committee and the District? 3. Was the resolution rescinded by mutual agreement in May, 1940? and 4. Did Smith and Diekroeger have a right, as successors of the Committee, to fix the tender price at 100%, or as owners to collect 100%, on the theory that the resolution had been rescinded?

1. Purchasing and retiring bonds after December 16, 1936. — Pursuant to the provisions of the resolution of December 16, 1936, the Committee made three calls for the purchase of certificates on tenders at not to exceed 55 cents on the dollar: on May 5, 1937; on March 21, 1938; and on November 27, 1939. On the first call certificates representing bonds of the face value of $48,000 were tendered, and certificates representing bonds of the face value of $25,500 were purchased at a cost of $12,843; on the second call $28,000 were tendered, and $6,000 were purchased for $2,876.75; and on the third call $35,000 were tendered and $16,500 were purchased for $7,913.50.

After each such purchase of certificates tendered the Committee, instead of setting aside for the benefit of the District identical bonds represented by the particular certificate-receipts purchased, withdrew bonds with the lowest serial numbers. For example, as a result of the tender of May 5, 1937, bonds numbered from 221 to 257, inclusive, were selected. These bonds had all matured on September 1, 1928, and $370 had been paid on each $1,000 principal. The same system...