In re AC Becken Co.

• Decision Date: 02 April 1935
• Docket Number: No. 5307.,5307.
• Citation: 75 F.2d 681
• Parties: In re A. C. BECKEN CO. MORRIS et al. v. HUMMEL.
• Court: U.S. Court of Appeals — Seventh Circuit

75 F.2d 681 (1935)

In re A. C. BECKEN CO. MORRIS et al. v. HUMMEL.

No. 5307.

Circuit Court of Appeals, Seventh Circuit.

February 12, 1935.

Rehearing Denied April 2, 1935.

Beverly B. Vedder, Allan J. Carter, T. C. Strachan, Jr., and Herbert Pope, all of Chicago, Ill., for appellants.

Ralph F. Potter, William H. King, Jr., and William R. Rodenberg, all of Chicago, Ill., for appellee.

Before EVANS, SPARKS, and FITZ HENRY, Circuit Judges.

SPARKS, Circuit Judge.

This appeal is from an order of the District Court affirming an order of the referee, which disallowed appellants' claims filed in the bankruptcy proceeding, and denying a petition to review the referee's order.

The claims arose out of the sale of appellants' stock in Otto Young & Company to A. C. Becken, Jr., the president of the bankrupt, A. C. Becken Company, and the acquisition of the assets of the Young Company by the bankrupt. Peter T. White filed a similar claim, and by stipulation it will be governed by the outcome of this appeal.

The main question involved is whether appellants are entitled to share in the bankrupt's estate for the unpaid balance of the purchase price of the Young Company stock sold to A. C. Becken, evidenced by his unendorsed notes, which were secured by preferred stock of the bankrupt and other collateral.

Prior to the transactions out of which these claims arose, the Young and Becken companies were old and successful wholesale jewelry houses located in Chicago. The Young Company was under the management of Peter T. White who owned fifteen per cent of its capital stock, the remainder being owned equally by appellants, who are sisters. The Becken Company was controlled by Becken who with his mother and sister owned ninety-four per cent of its stock, the remainder being owned by that company's employees.

In December, 1928, Arthur W. Reebie (husband of appellant Reebie) and E. J. Lehman, representing appellants, together with White, suggested to Becken that the bankrupt purchase the assets of Otto Young & Company. Becken replied that the bankrupt had already agreed to purchase the assets of another company, and hence could not assume the liabilities necessary in taking over the Young Company without adversely affecting bankrupt's balance sheet. He suggested, however, that he personally would assume such liabilities. Subsequent meetings of the parties' representatives were had, and the record discloses no disagreement as to the value of the Young Company assets. Young & Company was willing to sell its capital stock at its book value, plus $75,000, and Becken and the Becken Company were willing to pay that price. In fact, they agreed to abide by the determination of the book value by Arthur Andersen and Company, Certified Public Accountants. All the parties understood that the Becken Company desired to take over the assets of Young & Company, and that if the sale should be made to Becken personally, he would be making the purchase for and on behalf of the Becken Company, and would contemporaneously therewith turn the property over to the Becken Company. As a preliminary to the signing of the agreement, it was stated by the Becken Company in the presence of all the interested parties, including appellants' representative, Mr. Reebie, and their attorney, that the final agreement must be in such terms that a certified accountant would agree that the price to be paid was not a direct or contingent liability of the Becken Company, as that company had always issued statements to trade agencies, and if such statements to be issued carried such a liability, the company's capital rating and standing would be materially affected. It was agreed by all parties that the wishes of the Becken Company should be complied with in that respect, as they did not wish anything to appear in the statements issued by that company which might have a bad effect upon its credit rating. How to accomplish this result was the question which delayed the consummation of the deal, and they finally adopted the procedure of selling the Young Company properties to Becken personally.

The first written agreement was executed on January 23, 1929. The parties to it were appellants, White, the Becken Company, and Becken. The material provisions of this contract were:

First, it was agreed that Becken, individually, should buy all of the capital stock of the Young Company from Morris, Reebie, and White, at a price which was to be the book value as determined by an audit to be made by Arthur Andersen and Company, plus $75,000 for good will. Becken was to make a down payment of $100,000 in cash, and give his personal notes, payable over a period of nine years, for the balance.

Second, Becken was to deposit $400,000 of the preferred stock and $150,000 of the common stock of the Becken Company with an escrow agent or trustee as collateral to secure the payment of his notes. The Becken Company, which had been capitalized at $100,000, was to increase its capital so that it would have $1,000,000 of capital stock issued, outstanding and fully paid, of which $400,000 was to be preferred and $600,000 common stock. In addition to the stock, Becken was to procure and deposit a policy of insurance on his life in the amount of $200,000.

Third, the interest rate on Becken's notes, the dates of their maturity, and Becken's right to anticipate them, were to be so synchronized with the dividend rate, redemption, and retirement provisions of the preferred stock that, while only Becken was to be liable for the purchase price, the dividends on and retirement of the preferred stock collateral were to coincide with the interest and principal payments to be made by Becken on the notes to be given by him.

Fourth, an agreement was to be made by Becken and the Becken Company which would give the noteholders the right to name one of the seven members of the board of directors of the Becken Company, would limit the salaries to be paid, would restrict the amount of dividends to be paid on junior securities, would prohibit the creation of liens against the Becken Company's assets and the assumption of any obligations in excess of $50,000, unless to be repaid within a year, except with the consent of all of the directors. There were other provisions to insure that the company would be prudently managed and the value of the collateral maintained.

Fifth, the deal was not consummated by the agreement, but was to be completed within five days after delivery to the Becken Company and to Morris, Reebie, and White, of the certificate of Arthur Andersen and Company showing the book value of the Young Company.

Sixth, the escrow agreement provided for the return from time to time to Becken of such amount of the preferred stock as at par equaled the amount of the notes given thereunder when and as the same were paid by Becken. All stock deposited with the escrow agent was to be issued in the name of Becken and endorsed in blank by him. He was to have the right to vote that stock unless default occurred in the payment of the principal or interest on the notes or in any of the agreements; and, until there had been a default by Becken, all dividends on the stock held by the escrow agent should be paid to Becken.

It was subsequently agreed by the parties that the return of stock mentioned in the first clause of the last paragraph referred only to the $400,000 series of notes.

The contract of January 23, 1929, was authorized at a special meeting of bankrupt's board of directors on the same day. That resolution in substance authorized its president and secretary to enter into contracts on behalf of the bankrupt with appellants and White for the purchase of the stock of the Young Company, or its assets, and to become a party to any contracts made by Becken with them for the purchase of the stock or assets of that company, and gave him discretionary power as to the terms of the contract.

On the day before the contract just referred to was signed, Becken arranged with the Union Trust Company for an increase in the bankrupt's line of credit with that bank from $200,000 to $500,000 upon Becken's representation that the contract was substantially as provided in the contract of January 23, and that $400,000 of the purchase price would become a capital stock obligation of the bankrupt. On January 23, the Union Trust Company accordingly loaned bankrupt $175,000, of which $100,000 was used in making the initial cash payment under the contract, of which fact appellants had knowledge. In February, 1929, the Union Trust Company merged with the First National Bank, which retained the $500,000 line of credit as its commitment. Arthur Andersen and Company reported on March 7, 1929, that the net worth of the Young Company was $539,922.92, which with the good will value of $75,000 made the total purchase price $614,922.92.

On March 16, 1929, the transaction set forth in the contract of January 23, was closed, and at the same time two contracts were entered into. The first was a trust agreement signed by appellants, White, Becken, the bankrupt, and the Foreman Trust and Savings Bank as Trustee.

The trust agreement recited that appellants and White had sold and delivered to Becken for the benefit of the bankrupt all of the capital stock of the Young Company for the total purchase price of $614,922.92 and had delivered to Becken the resignation of its officers and directors; that Becken had paid to appellants and White $100,000 in cash and had given his promissory notes dated February 1, 1929, for the balance; that Becken had deposited with the Trustee a $200,000 life insurance policy; that the bankrupt had by due corporate action authorized the execution of the agreement, and that Becken had deposited with the Trustee 4000 shares of preferred stock and 1500 shares of common stock of the bankrupt, all of which were fully paid and non-assessable. These recitals indicated that the agreement was intended to serve as a...