Hegarty v. American Commonwealths Power Corp.

• Decision Date: 02 November 1932
• Citation: 163 A. 616,19 Del.Ch. 86
• Parties: DANIEL A. HEGARTY, v. AMERICAN COMMONWEALTHS POWER CORPORATION, a corporation created by and existing under the laws of the State of Delaware. In the Matter of the Petition of American Gas & Power Company to Establish Trust Upon Certain Assets in Possession of Receivers
• Court: Court of Chancery of Delaware

163 A. 616

19 Del.Ch. 86

DANIEL A. HEGARTY, v. AMERICAN COMMONWEALTHS POWER CORPORATION, a corporation created by and existing under the laws of the State of Delaware. In the Matter of the Petition of American Gas & Power Company to Establish Trust Upon Certain Assets in Possession of Receivers

Court of Chancery of Delaware, New Castle

November 2, 1932

RECEIVERSHIP. Petition of American Gas & Power Company to establish a trust upon certain assets in the possession of the receivers of American Commonwealths Power Corporation. The facts sufficiently appear in the opinion of the Chancellor. Heard on petition, answer thereto and stipulation of facts.

Christopher L. Ward, Jr., of the firm of Marvel, Morford, Ward & Logan and Oscar R. Ewing, of the firm of Hughes, Schurman & Dwight of New York City, for petitioner.

Clarence A. Southerland, of the firm of Ward & Gray, and A. C. Smith of New York City, for receivers.

OPINION

THE CHANCELLOR:

Facts are shown from which I conclude that at the time of the transactions hereinafter referred to, the respondent, the Power Company, which is now in receivership, controlled and dominated the Gas Company, the petitioner. Sundry intercorporate relations of creditor and debtor had been created prior to March 25, 1931, between these companies, and also between the respondent and others, certain of which were subsidiaries of the petitioner.

The stipulation of facts shows that as of March 31, 1931, the following transactions were put through by the petitioner and the respondent:

1. Petitioner

(a) Was allowed by respondent an application of

dividends due petitioner on stock of Minneapolis

Gas Light Co. owned by petitioner to indebtedness

of petitioner to respondent, said dividends

amounting to

$ 88,000.00

(b) Sold to respondent $ 1,065,000 principal amount

of petitioner's secured Gold Debentures, 6%

series, at approximately 80 for the sum of

852,000.00

(c) Sold to respondent $ 721,000 principal amount of

5% First Mortgage Bonds of Jacksonville Gas

Co., at 75 and accrued interest, for the sum of

552,766.18

(d) Assumed a debt of respondent to American Commonwealths

Power Associates, a Massachusetts

Trust, in the sum of

123,851.64

(e) Assumed a debt of respondent to Minneapolis

Gas Light Co. in the sum of

2,143,670.94

(f) Assumed a debt of respondent to Vermont Lighting

Corporation in the sum of

7,000.00

$ 3,767,338.76

2. And respondent against the foregoing

(a) Credited the petitioner the amount owed by it

to respondent in the sum of

$ 1,226,425.13

(b) Credited petitioner with accrued interest due on

the foregoing indebtedness in the amount of

3,429.12

(c) Transferred to petitioner and petitioner accepted

for cancellation 24,000 shares of petitioner's

Preference stock at $ 100 per share and accrued

dividends from February 15, 1931, to March 1,

1931, in the sum of

2,418,000.00

(d) Paid to petitioner in cash

119,484.51

$ 3,767,338.76

What resolutions were adopted by which the foregoing transactions were authorized appear to have been adopted by the petitioner. The respondent controlled, as it had named, the directors of the petitioner, and as a matter of fact carried out all the things provided for in the petitioner's resolutions on its part to be done. Notwithstanding there was no formal contract executed by petitioner and respondent, yet it appears to me that the foregoing statement, which is put in the form of a rough debit and credit account, evidences a contract whereby certain existing indebtedness of petitioner to respondent was satisfied by the respondent, indebtedness of the respondent to others was assumed by petitioner, and at the same time a new transaction involving the purchase by respondent from petitioner of a block of the latter's gold debentures and $ 721,000 of Jacksonville Gas bonds, was entered into. This new transaction was, for purposes of settlement, blended with theretofore existing ones, and all, both old and new, were adjusted as a whole. Petitioner obtained a cancellation of its indebtedness to respondent and 24,000 shares of its own preference stock at $ 100 and $ 119,484.51 in cash; and respondent in exchange acquired from petitioner the debentures and Jacksonville Gas bonds, and an assumption by petitioner of certain liabilities owed by respondent to others.

The present controversy has to do with the alleged over-valuation placed on the 24,000 shares of petitioner's preference stock which respondent surrendered to petitioner for cancellation. It is claimed by the petitioner that a valuation of that stock at $ 100 per share was a grossly exaggerated one, that at the best it was not fairly worth more than $ 65 per share and that therefore the respondent fraudulently used its power over the petitioner to cause it to agree in substance to pay $ 35 per share too much for the stock, whereby it became damaged in the total of $ 840,000. The theory upon which the petitioner is proceeding is that it can follow the Jacksonville Gas bonds and the petitioner's debentures, or their proceeds, in the hands of the receivers of the respondent as being impressed with a trust because of the alleged fraud so perpetrated by the respondent.

When the transactions involved in the foregoing statement had been completed, as they were in due course, the respondent was in possession of $ 1,065,000 of the petitioner's debentures and $ 721,000 of the Jacksonville Gas bonds, formerly held and owned by the petitioner. The respondent became indebted to U. S. and International Securities Corporation in the principal sum of $ 2,963,598.77 evidenced by a note in that amount. The note was secured by collateral. The collateral was composed not only of securities and stock which the respondent acquired otherwise than from the petitioner, but also of the $ 1,065,000 of petitioner's debentures and the $ 721,000 of Jacksonville Gas bonds, which the respondent had acquired from the petitioner in the manner above described.

The note was reduced to $ 1,192,598.77 and after receivers were appointed for the respondent, the holder of the note gave notice that because of default in the payment of the balance due thereon the collateral would be sold on January 18, 1932.

Thereupon the receivers, by order of this court, entered into an arrangement with A. E. Fitkin, the details of which need not be stated, whereby Fitkin paid the note. In order to raise the cash necessary for Fitkin to pay the note, he sold with the consent of the receivers the petitioner's debentures which were a part of the collateral for $ 335,287.16. As a result of the arrangement with Fitkin the receivers received into their possession that portion of the released collateral which the respondent had acquired otherwise than from the petitioner, as well as some of the Jacksonville Gas bonds before mentioned. They now hold most of the collateral so released.

It is the contention of the petitioner that, as the debentures which the respondent acquired from the petitioner under the allegedly fraudulent circumstances above shown supplied a portion of the cash which, through payment of the note, went to the acquisition by the receivers of the released collateral just referred to, and as, it is contended, the petitioner is entitled to rescind the contract as having been procured by fraud, it, the petitioner, has the right to impress a trust on the proceeds yielded by the sale of the debentures, said proceeds now being in the form of collateral released to the receivers upon payment of the note by Fitkin. Of course such of the Jacksonville Gas bonds as were obtained from the petitioner and were deposited in the collateral and subsequently released, are differently circumstanced from the other collateral, for as to them there is no occasion to resort to the doctrine of following trust proceeds into their converted form, as the petitioner seeks to do with respect to the other released collateral. As to the Jacksonville Gas bonds, therefore, the petitioner claims that all of them which were obtained from it are reclaimable by it as being precise property which was obtained by the alleged fraud and is upon rescission, recoverable in specie. As to such bonds, there is no occasion for the petitioner to resort to the doctrine of following trust assets in their converted form.

Putting petitioner's contention in another way, it is that inasmuch as the respondent fraudulently caused it to pay $ 840,000 too much for the 24,000 shares of its preference stock, and as a result of such fraud secured from it its debentures and Jacksonville Gas bonds, the petitioner is entitled not only to be repaid the damage done to it in that amount, but as well to follow everything obtained from it as a result of the alleged fraud which is now in the hands of the receivers, whether in the original or converted form, and have it impressed with a trust in its favor superior to the rights of all other creditors.

This contention is in the last analysis based on the equitable right of the petitioner to treat the contract of March 31 1931, as rescinded. That is what it amounts to. Yet the petitioner does not ask that the rescission prayed for be so effected that the status quo ante shall be restored. It recognizes that that cannot be accomplished, because there is no way that the liabilities of the respondent which it assumed can be shunted back from its, the petitioner's shoulders to those of the respondent alone where they formerly rested.

And so while the petitioner treats its claim as based on a right to a rescission of the contract, it abstains from restoring or offering to restore anything which it obtained under the contract. In taking such a position it encounters the obstacle of certain fundamental principles applicable to the law of...