Fort Dearborn Trust & Sav. Bank v. Smalley

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Citation: 298 F. 45
• Docket Number: 242.
• Parties: FT. DEARBORN TRUST & SAVINGS BANK et al. v. SMALLEY et al.
• Decision Date: 27 March 1924

298 F. 45

FT. DEARBORN TRUST & SAVINGS BANK et al. v. SMALLEY et al.

No. 242.

United States Court of Appeals, Eighth Circuit.

March 27, 1924

William F. Tucker and A. J. Biddison, both of Tulsa, Okl (William Wilhartz and Edwin M. Ashcraft, both of Chicago Ill., William Ruger, Jr., of Evanston, Ill., and Carroll J Lord, of Chicago, Ill., on the brief), for petitioners.

Allen McReynolds, of Carthage, Mo. (E. H. Foster, of Muskogee, Okl., on the brief), for respondents.

Before LEWIS, Circuit Judge, and SYMES and PHILLIPS, District Judges.

LEWIS Circuit Judge.

Fort Dearborn Trust & Savings Bank (hereinafter called Fort Dearborn Bank), and Frank M. Forrey, as trustees under a mortgage or deed of trust given by Globe Oil Company (called Globe Co.), filed their petition here under section 24b of the Bankruptcy Act (Comp. St. Sec. 9608) against the trustees in bankruptcy of the Globe Co., wherein petitioners pray that an order of the Bankruptcy Court made summarily on December 5, 1922, against their objections, enjoining them from foreclosing that mortgage, be vacated and set aside because, as they allege, said order was made erroneously as matter of law. Their petition and the response of the trustees in bankruptcy thereto bring into the record here this situation and these facts:

In February, 1919, the Globe Co. gave its mortgage or deed of trust on oil leases and other oil properties which it owned in Okmulgee, Tulsa, Carter and Jefferson counties, Oklahoma, and in Caddo Parish, Louisiana, to secure payment of its negotiable bonds or promissory notes to be issued not in excess of $2,000,000. In that mortgage Fort Dearborn Bank and Forrey were named as trustees with express powers, among other things to bring foreclosure suit on default, to have the property sold and the proceeds applied on the mortgage debt. The mortgage was placed of record in those counties and parish during the month it was given. One year later and on February 17, 1920, the Globe Co. sold the mortgaged properties in Okmulgee, Tulsa and Carter counties to Skelly Oil Company (called Skelly Co.), as evidenced by written contract between them, and Skelly Co. made a down payment of $250,000 on the purchase price, the remainder to be paid when the Skelly Co. approved title to the properties. About three and a half months after the sale to Skelly Co. a petition in bankruptcy was filed against the Globe Co. and it was adjudged bankrupt on June 29, 1920. Two like petitions were filed by the same creditors in different jurisdictions, one on May 29th and one on June 3, 1920. Adjudication was on the latter. On June 2, 1920, Skelly Co. filed a suit in the State district court for Tulsa county against the Globe Co. and others, among them Fort Dearborn Bank, for specific performance of the contract of sale made on February 17th. In that suit Skelly Co. alleged that Globe Co. represented to it that only about $1,000,000 in notes issued under the mortgage were then unpaid, that it was agreed that all of the purchase price, to-wit: $900,000, except $50,000, should be paid to the Fort Dearborn Bank to be applied on the indebtedness, that $200,000 of the first payment was sent to and received by the bank for that purpose, that Globe Co. agreed to pay the balance of the mortgage debt when the deal was closed and obtain a release of the mortgage, that Skelly Co. was ready and willing to pay the balance, $650,000, when that was done, that according to the terms of the mortgage not more than $1,400,000 in notes should be outstanding at any time, that the remaining $600,000 had been issued to the Globe Co., as it then believed, in violation of the trust, and it prayed, among other things, that the court find whether any notes had been illegally issued, and if it so found, that they be cancelled, that the court find the true and just amount due on the mortgage debt, that the balance of the purchase price which it was ready to pay be received and credited thereon, and that if that did not fully discharge the debt other property of the Globe Co., if it could be found, be first taken and applied before resorting to the property which Skelly Co. had purchased. Thereafter Fort Dearborn Bank and Forrey, as trustees under the mortgage, filed their answer and cross-complaint, in which they alleged that the principal of the promissory notes or bonds secured by the mortgage and then unpaid was $1,445,000, that the interest of the Globe Co. in the property in Caddo Parish, included in the mortgage, had been lost to that company, that the remainder of the property covered by the mortgage was not of sufficient value to pay off the unpaid notes, that there had been default by the mortgagor, in respects specified, and it prayed in its cross-complaint that the mortgagor's equity be foreclosed, the property ordered sold and the proceeds applied in paying the outstanding notes in accordance with the terms of the mortgage. The cross-complaint brought in the trustees in bankruptcy as parties to the cause; and thereupon they initiated the proceedings which resulted in the injunctive order here complained of. In their petition for that order, filed in the Bankruptcy Court on May 12, 1922, they alleged that the property of the bankrupt was subject to the mortgage, but they claimed that $600,000 of the outstanding notes were issued and negotiated in violation of the trust, and for the purpose of defrauding unsecured creditors, and they asserted that they desired to contest those notes in the Bankruptcy Court. They alleged that on February 17, 1920, the bankrupt undertook to dispose of substantially all of its property to Skelly Co. by a pretended contract, that the property was of the value of approximately $2,000,000 and was being sold to Skelly Co. for $900,000, payable $250,000 in cash, the balance when Skelly Co. approved title and Globe Co. executed to Skelly Co. certain leases and conveyances, that--

'said pretended contract of sale being a mere subterfuge to get the property of said bankrupt beyond the reach of its creditors and to hinder, delay and defraud said creditors. The property thus sought to be fraudulently disposed of consisted of certain producing oil and gas leases, and oil wells, which, in its nature, was not susceptible of actual manual possession, but for all practical purposes the same was in the possession of certain pipe line companies, as agents and bailees of said Globe Oil Company. Petitioners are informed and believe, and so state, that said Skelly Oil Company claims that it was in possession of said property, at the time of the filing of said petition in bankruptcy, and the adjudication of said Globe Oil Company bankrupt, but petitioners show that there was no visible change of possession, and the only evidence of possession of said Skelly Oil Company is by virtue of certain division orders which petitioners are informed were executed by said Globe Oil Company, as a part of said fraudulent scheme. And petitioners further show that said Skelly Oil Company, is not and never has been in the actual adverse possession of said properties, claiming the title thereto in good faith, and is, and has been subject to the summary orders of this Court.'

They further alleged that on June 2, 1920, the day before the petition was filed on which the Globe Co. was adjudged bankrupt, Skelly Co. brought its suit in the State court for specific performance of its pretended contract of purchase that Fort Dearborn Bank and Forrey were made defendants in that suit on the ground that $600,000 of the notes had been issued fraudulently, that Fort Dearborn Bank and Forrey by cross-complaint in Skelly Co.'s suit seek to foreclose the mortgage, which is wholly unnecessary, will entail great expense, would be a first charge on the proceeds of sale and greatly impair the equity of redemption of the creditors, and that the trustees in bankruptcy had been made parties to the cross-complaint without their consent and without leave of the Bankruptcy Court. On these allegations the petition prayed that an order issue to Fort Dearborn Bank and Forrey and their counsel commanding them to show cause why they should not be enjoined from further prosecuting their cross-complaint in the State court. On May 12, 1922, a temporary order issued, staying further prosecution of the foreclosure proceedings until otherwise ordered by the Bankruptcy Court. On May 25, 1922, Fort Dearborn Band and Forrey entered their special appearance and objected to the jurisdiction of the Bankruptcy Court. The court ordered them to file their written special appearance and objections, which they did on June 3d following, wherein they set forth the proceedings in the case in the State court and exhibited therewith Skelly Co.'s complaint in that case, the answer and cross-complaint of Fort Dearborn Bank and Forrey thereto, alleged the giving of the mortgage by the Globe Co. in February, 1919, that all of the authorized $2,000,000 in notes were outstanding and unpaid except $555,000 thereof, that on February 17, 1920, the Globe Co. entered into written contract with Skelly Co. to sell to it the property covered by the mortgage,

'and the said Skelly Oil Company did thereupon pay over to the said Globe Oil Company of the consideration named in said contract the sum of Two Hundred Fifty Thousand Dollars ($250,000.00), and the said Globe Oil Company did, on or about the 25th day of February, 1920, surrender and deliver over to the said Skelly Oil Company the possession of all of the said properties described in said Trust Deed, in the State of Oklahoma, and did transfer to the said Skelly Oil Company all of the oil to be run from and after such date, and the said Skelly Oil Company did then enter into the possession of all of the said

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