Hutson v. Long Bell Lumber Co.

• Decision Date: 15 October 1932
• Docket Number: No. 1832,1841.,1832
• Parties: HUTSON v. LONG BELL LUMBER CO. et al. CARSON v. SAME.
• Court: U.S. District Court — Western District of Missouri

1 F. Supp. 468

HUTSON v. LONG BELL LUMBER CO. et al.

CARSON v. SAME.

Nos. 1832, 1841.

District Court, W. D. Missouri, W. D.

October 15, 1932.

John S. Leahy and Walter H. Saunders (of Leahy, Saunders & Walthers), both of St. Louis, Mo., and Floyd E. Jacobs, and M. J. Henderson (of Jacobs & Henderson), John T. Barker, Charles P. Woodbury, Phineas Rosenberg, David M. Proctor, and Charles C. Madison, all of Kansas City, Mo., for complainants.

Jesse Andrews, R. R. Brewster, Cornelius E. Lombardi, Flavel Robertson, and David E. McLean, all of Kansas City, Mo., for defendants.

OTIS, District Judge.

In the answer filed in each of these consolidated cases is contained the following paragraph: "For a further, separate and distinct defense in point of law arising upon the face of the said amended bill of complaint herein, these defendants say that the facts alleged in said amended bill of complaint are insufficient to constitute a valid cause of action in equity."

The issue thus made, considered as equivalent to a motion to dismiss, has been presented and submitted upon oral and written argument, and is now for decision.

As to each of the two bills, defendants contend that it does not state facts sufficient to constitute a valid cause of action in equity for that —

I. The complainant is a simple contract creditor so far as the contract securing the payment of the bonds held by complainant, and, being such, is not entitled to have a receiver appointed of any of the unmortgaged assets of the defendants.

II. The complainant, being a simple contract creditor, cannot maintain a suit in equity to set aside the transfer of assets from the Long Bell Lumber Company to the Long Bell Lumber Sales Corporation even if that transfer was fraudulent.

III. The complainant cannot maintain an action against officers of a corporation to compel an accounting, because he is a simple contract creditor whose claim has not been reduced to judgment.

IV. The complainant is not entitled to the appointment of a receiver as to property covered by the mortgage securing the payment of the bonds held by the complainant, for the reason that such mortgaged property is not located within the Western district of Missouri.

The bills are essentially identical. One only will be considered. What is said as to that and the motion to dismiss it will apply with equal force to the companion bill.

As a preliminary to the consideration of the motion, it is necessary to set out precisely what the bill alleges as to the complainant's connection with the business of the defendants by reason of which connection he claims a right to the relief sought by him.

In case No. 1832 the complainant alleges that he owns five mortgage bonds of the Long Bell Lumber Company, "all of the said above described bonds being secured by direct first mortgage on the unincumbered standing timber of said defendant, The Long Bell Lumber Company, and all plants, mills and property of the said defendant company hereinafter referred to, which said mortgaged property is located in the states of Louisiana, Texas, California, Oregon, Washington and other states."

Something of the history of the Long Bell Lumber Company is then recited, and it is alleged that that company had built up a valuable good will, the continued existence of which depends upon the continuity of its business activities, and that such good will "is of immense importance to the complainant." The nature of the business of the company is then described and the relationship of the several defendants with it. It is alleged that in October, 1930, the Long Bell Lumber Company transferred "certain asserts of that company" to the Long Bell Lumber Sales Corporation. Follow allegations touching a certain "syndicate loan agreement" entered into by the Long Bell Lumber Sales Corporation and with certain banks and the guaranty by the Long Bell Lumber Company of loans made by such banks to the Long Bell Lumber Sales Corporation. It is alleged that the value of assets conveyed to the Long Bell Lumber Sales Corporation, less liabilities assumed, resulted in a paid-in surplus for the sales corporation of $10,793,336.60. It is alleged that this transfer of assets was illegal and fraudulent, and that "the direct effect thereof (has) been and will be to deplete, dissipate and waste the assets of the said The Long Bell Lumber Corporation without any consideration therefor, to the injury, prejudice and detriment of the complainant. * * *"

Follow allegations of the interdependency of the defendant corporations and that the property and assets of each constitute and are part of the property and assets of the defendant, the Long Bell Lumber Corporation, and that such property and assets are located in Jackson county, Mo., and various counties in other states. The secured indebtedness (evidenced by bonds) of the defendant, the Long Bell Lumber Company, is then described, the amounts thereof, and other indebtedness, as well as the indebtedness of certain of the subsidiaries of that company guaranteed by it. It is then alleged: "That said bonds were purchased by the purchasers thereof, including this complainant, upon the faith of the assets of The Long Bell Lumber Company shown in the circulars of the bankers and brokers, issued in connection with and in the name of the said Long Bell Lumber Company and as an aid to the sale of said bonds to the general public; and upon the faith of these statements in the said circulars that the said Long Bell Lumber Company had for many years been a going and prosperous business and was operating as a complete industrial unit and was so in fact, the said bond purchasers, including this complainant, believing said statement and further believing that the said The Long Bell Lumber Company would continue in business as a complete industrial unit, purchased the said bonds. That the said transfer herein pleaded, destroyed the continuity of said business, dismembered the said industrial unit and terminated the same and thereby damaged said plaintiff. * * *"

Follow allegations that the officers and directors of the Long Bell Lumber Company organized the Long Bell Lumber Sales Corporation and transferred to it "all of the free, unpledged and unincumbered assets of said company and its subsidiaries, approximately $27,000,000 in value; * * * that by said transfer the said The Long Bell Lumber Company stripped itself of all of its available free, unpledged and unincumbered assets, to the detriment and prejudice of its secured and unsecured creditors." And it is further alleged that this transfer was illegal and that in making it the officers and directors of the Long Bell Lumber Company were guilty of a breach and abuse of trust and of a fraud upon the bondholders to their injury and detriment. It is alleged that this transfer of assets and the plan and scheme in connection with which it was made destroyed the credit of the Long Bell Lumber Company necessary to enable it to carry on continued operations, and that what has been done "has so depreciated the value and assets of the said lumber company and of its subsidiaries that it has greatly impaired the securities of the said complainant and of other bondholders, and that if said plan and scheme remains unquestioned, the said securities of said complainant and of other bondholders will be so depreciated that they will lose a large proportion of their said investment."

Other matters are then alleged which it is charged will result in detriment to the complainant and lessen the value of the bonds owned by him, including overexpenditure for operating expenses by the officers and directors of the Long Bell Lumber Company, on account of all of which it is alleged that the business of the defendant should be taken over by the court and operated by it through receivers.

It is not alleged that the Long Bell Lumber Company is insolvent, that it does not still possess and own all of the properties covered by the mortgage, or that any of those properties have been wasted or have suffered depreciation through any act of mismanagement.

This brief summary of the allegations of the bill may be epitomized as follows: The complainant is a secured creditor of the Long Bell Lumber Company. The company's debt to him is secured by a mortgage on certain assets of that company, and is evidenced by bonds held by him. He purchased these bonds upon the security of a mortgage on certain assets and upon the representation that the company would continue as a going concern, maintaining the valuable good will it had built up through a long course of successful business. The officers and directors of the Long Bell Lumber Company have illegally and in fraud of creditors transferred assets other than those covered by the mortgage, and so have destroyed the credit and good will value of the company and its ability to carry on. By this and other alleged mismanagement of the company's affairs the value of the complainant's bonds has been lessened and his investment jeopardized.

Perhaps a clearer understanding of the case made by the bill will be had if its necessary intricacies and voluminous allegations are set to one side and we suppose the case concerns a small corporation engaged in the sale of merchandise as, for example, lumber. Let us call it the A B Lumber Company. X, an individual, holds the note of that company as evidence of its debt to him in the amount of $1,000. The note is secured by a mortgage upon the real estate owned by the company. When X made a loan to the company and took its note, it was represented to him that the investment was a good one, not only because of the value of the real estate covered by the mortgage, but also because the business had been profitable. He believed the business would continue to be carried on and would continue profitable. The officers of the company, after the note was given, managed the affairs of the company in an extravagant and...