Hudson v. Wylie, 15110.

• Decision Date: 11 April 1957
• Docket Number: No. 15110.,15110.
• Citation: 242 F.2d 435
• Parties: John Lucas HUDSON, Sr. and Pacific-Palmdale Development Company, a corporation, Appellants. v. William A. WYLIE, as Trustee in Bankruptcy of the Estate of John Lucas Hudson, Sr., a bankrupt, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

242 F.2d 435 (1957)

John Lucas HUDSON, Sr. and Pacific-Palmdale Development Company, a corporation, Appellants. v. William A. WYLIE, as Trustee in Bankruptcy of the Estate of John Lucas Hudson, Sr., a bankrupt, Appellee.

No. 15110.

United States Court of Appeals Ninth Circuit.

March 1, 1957.

Rehearing Denied April 11, 1957.

Merrill L. Granger, Santa Monica, Cal., for appellants.

Craig, Weller & Laugharn, Thomas Tobin and William E. Bartley, Los Angeles, Cal., for appellee.

Before BONE and BARNES, Circuit Judges, and ROSS, District Judge.

ROSS, District Judge.

This is an appeal from an order of the District Court, Southern District of California, Central Division, affirming on review Findings of Fact, Conclusions of Law, and Order of a Referee in Bankruptcy. This case has an interesting background.

To make this opinion understandable a somewhat lengthy statement of the case history must be given. John Lucas Hudson, Sr., filed a voluntary petition in bankruptcy on April 19th, 1954, and on that date was adjudged a bankrupt. He has at all times been represented in this bankruptcy matter by one Merrill L. Granger.

As the brain child of Hudson and Granger the Pacific Palmdale Development Company (hereinafter called "Palmdale") came into being after numerous conferences and discussions, the tenor of which were how to capitalize Hudson's capabilities, make some profitable deals, and at the same time protect the profits of the insolvent Hudson against his creditors.

Hudson was and is a skilled "mass production" builder in the construction field. Merrill L. Granger, who represents Hudson in this matter, as well as the pending bankruptcy, is one of the actors. Granger is an attorney with considerable experience in the "insolvency" and bankruptcy field of law. He had in years past represented members of the Hudson family, and prior to the immediate events appeared to be family counsellor, without portfolio. He fully appreciated Hudson's financial difficulties and was well aware of his capabilities as a building contractor. To use the vernacular both Hudson and Granger knew their way around. Having with this foreword set the stage we will present sufficient of the factual background to give an appreciation of the more subtle points here involved.

For reasons unknown a former building venture "went sour" and Hudson found himself owing his creditors around $300,000.00, and in late 1953 or early 1954 he made an assignment of assets to his creditors which, so far as we can ascertain, amounted to little or nothing. The creditors did not release Hudson from his liabilities and obligations. Granger regretted to see his friend in such a situation, and as he testified —

"I did give him advice in connection with his relation to creditors at that time but it was after an affirmation, reaffirming of advice that I had earlier given him, probably very early in the year.

"It was mine (the idea for the creation of Pacific Palmdale Development Company), it took birth this way: It had come to my attention that Mr. Hudson had made an assignment for the benefit of creditors, and I had met him and he discussed the fact of his assignment, and expressed some apprehension as to how he was going to get started in business again.

"At that time I told him that I would like to plan a method of exploiting his experience and his skills, and I wanted to know particularly then whether if I do so his services would be available to me in anything that I set up, and he said they would.

"That if he would undertake from his earnings, substantial earnings, to build some fund to use in financing his independent operations before he obtained a release from his creditors, or before he obtained a discharge in bankruptcy, the accumulation that he would make would be subject to their demands. That was reiterated to Mr. Hudson on occasion." (267)

The plans progressed, the first step being the preparation and execution of a "sole trader" agreement between Hudson and his wife permitting her to engage in the construction business and to retain the profits as her separate property. Mrs. Hudson, the record indicates, was a housewife, with no special skills.

Granger, under the nom de plume of Sierra Construction Company, wrote to the Commodity Credit Corporation, and requested information on "grain bin" projects. It appears that in this specialized area Hudson was already particularly experienced, both in the methods required to obtain such a type of contract, and in the fabrication and erection of the bins themselves.

During this period, March, 1954, Granger hit upon the Palmdale area near San Diego in Southern California as an area where a mass building project might be undertaken. The matter was discussed between Hudson, Granger, and one Bloom, who was a friend of the family and who was also interested in real estate and building. The three of them made several trips to Palmdale to look over possible building sites. During this period of time, March of 1954, the Pacific Palmdale Development Company, a corporation, was conceived and organized for the ostensible purpose of carrying on the Palmdale building venture. This was necessary to protect Hudson who by reason of his assignment to creditors, and insolvent condition could not openly participate in any venture that would return personal profits. As set-up the interests in the Palmdale Corporation were as follows: Hudson's wife 44%, Hudson's son 44%, Granger 12%. On April 3rd the articles were mailed to the Secretary of State and on April 6th the certificate of incorporation was issued. The corporation at no time issued any stock, had no property or funds, entered into no business transactions, and its existence was limited to and is important only in relation to the matter under discussion here, the joint venture agreement for the construction of the grain storage bins hereinafter more particularly explained.

At about this time Granger, as Sierra Construction Company, received in answer to his former inquiry, an invitation from the Commodity Credit Corporation to bid on the construction of certain grain storage bins in the mid-west. Interest was immediately transferred from the Palmdale venture to the grain bin deal. Also, about this time, the contemplated building venture at Palmdale "washed out", and Bloom withdrew from the Pacific-Palmdale Corporation, leaving only Hudson's wife, his son, and Granger.

Now to the (1) joint venture agreement, and (2) the contract with the Commodity Credit Corporation for the building of surplus grain storage bins. Having received the invitation to bid Granger and Hudson were interested in "teaming up" with someone who might finance such a deal in the event it was possible to obtain such a contract.

On or about April 3, 1954, Hudson and one Lloyd Russell Reeve made contact. Reeve was a financially sound contractor. In the conversations that took place Hudson advised Reeve of his past experience and success in grain bin ventures, and presented the files of his former transactions with the Commodity Credit Corporation to back him up. Reeve had no experience in this field but became "sold" by Hudson. Thereupon the parties discussed a "joint venture" agreement, and for the first time Reeve learned of Pacific-Palmdale Development Corporation.

In the early part of April when the discussions concerning the grain bin deal and the joint venture were taking place Hudson advised Reeve that he, Hudson, was the company. The following is a portion of Reeve's testimony:

"Q. Did you discuss who the parties on the contract (joint venture) would be? A. No, it was about that time that the Pacific-Palmdale Development Corporation got into the picture, and I asked who they were.

"Q. Who mentioned the Pacific-Palmdale Development Corporation? A. Mr. Hudson.

"Q. What did he say in that connection? A. Well, he said something about the Pacific-Palmdale Company. I said who is the Pacific-Palmdale Development Company.

"Q. What was his answer? A. To my best recollection he said that he was the Pacific-Palmdale Company, a corporation; that he had a Mr. Phil Bloom and a Mr. Merrill Granger who was an attorney * * * Mr. Granger was an attorney and he was paying him 12½% of every cent he made in that capacity.

* * * * *

"Q. Mr. Reeve, did at any time prior to the execution of this agreement, Mr. Hudson make any representation as to the ownership of the Pacific-Palmdale Development Company, as to who owned the company? A. Yes, he said he owned it. * * * Well, the conversations regarding — concerning Mr. Hudson\'s ownership of the Pacific-Palmdale was the fact — if I have to say it, I will say it. It was that this Pacific-Palmdale Development Company was a corporation that he had organized to benefit himself.

"Q. Did he state that to you? A. Yes * * *"

* * * * *

"Q. What was the conversation which occurred between the two of you at that meeting of April 4th? A. That he (Hudson) wanted me to go ahead with him and finance the grain bin deal or this deal.

"Q. Now in return for your services of financing, did Mr. Hudson agree to perform any services himself? A. Yes.

"Q. And what did he say regarding that? A. Well, he had all the experience and he was going to put the experience into the deal, if I would finance it."

As a result of conversations between Reeve and Hudson a joint venture operation was blueprinted, and became the finalized joint venture agreement entered into between Reeve, Inc. and Palmdale. During the discussions Hudson mentioned to Reeve that the joint venture agreement would be with Pacific-Palmdale Development Corporation, that he (Hudson) was the company, that it was a corporation he had organized to protect himself. In the actual drafting of the agreement, Hudson, and/or Palmdale, was represented by Granger. It provided in part:

"That the availability of the said John L. Hudson by the party of the second part is one of the inducing considerations for the party of the first part

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