In re Los Angeles Land and Investments, Ltd.

• Decision Date: 21 February 1968
• Docket Number: No. BK 67-352.,BK 67-352.
• Citation: 282 F. Supp. 448
• Parties: In the Matter of LOS ANGELES LAND AND INVESTMENTS, LTD., a Corporation, Debtor.
• Court: U.S. District Court — District of Hawaii

282 F. Supp. 448

In the Matter of LOS ANGELES LAND AND INVESTMENTS, LTD., a Corporation, Debtor.

No. BK 67-352.

United States District Court D.Hawaii.

February 21, 1968.

William F. Thompson, III, Honolulu, Hawaii, for James R. Light and Los Angeles Land and Investments, Ltd.

Ralph S. Aoki, Trustee of L. A. Land & Inv., Honolulu, Hawaii, H. William Burgess, Honolulu, Hawaii, for trustee.

Arthur E. Pennekamp, W. Stevens Tucker, C. J. Odenweller, Jr., Allen F. Corotto, San Francisco, Cal., by C. J. Odenweller, Jr., San Francisco, Cal., One of the Counsel for the Securities and Exchange Commission.

DECISION

TAVARES, District Judge.

This matter involves a corporate reorganization proceeding under Chapter X of the Bankruptcy Act (11 U.S.C.A. Sec. 501 et seq.). The issue presented concerns the proper classification of the creditors and stockholders of the debtor company pursuant to Section 197 of the Bankruptcy Act, 11 U.S.C.A. Sec. 597.

Los Angeles Land and Investments, Ltd., debtor herein, was created under the laws of the State of Hawaii for the purpose of purchasing, selling and developing land in the Antelope Valley of Los Angeles County, California. It was promoted by James R. Light and Laura C. Light who together own all of the issued and outstanding shares of common stock of the debtor.

The principal acquisitions of land consist of two tracts. One, commonly known as portions of Sections 10 and 15, consists of approximately 200 acres. The second, commonly known as Section 27, consists of approximately 620 acres. The first tract was acquired on July 26, 1964, for $38,000.00 with a down payment of approximately $9,000.00 and assumption of mortgage liabilities of approximately $29,000.00. The second tract was acquired in quarter sections, the first on October 19, 1964, and the remaining quarters on February 26, 1965. It was acquired for an aggregate price of $186,000.00 with down payments of approximately $46,500.00 and assumption of approximately $139,490.00 for mortgage obligations on the tracts.

The debtor commenced selling, under California Real Estate Association Standard Form Agreements of Sale parcels consisting of 2½ acres undivided interests in either the first tract or a quarter section of the second tract. The parcels were sold from a "grid" since no tract or plat map had at that time either been approved or recorded. The contracts were initially offered for $2990.00 each with a down payment of $690.00 and the balance payable in monthly installments over approximately a 100-month period. Subsequently the contract purchase prices were increased in stages to a final price of $5990.00 with a down payment of $990.00 and the balance payable monthly over approximately a 100-month period. The increases in price were made without any appreciable changes in the land values to justify the change. The mark-up over cost ranged from five times to twelve times the purchase price.

Subsequently the debtor offered for exchange and did exchange with a large majority of the original contract holder "investors" the original standard form contract for a new contract which contained additional provisions which granted to the debtor the sole and exclusive right to manage, subdivide, encumber and sell the parcels purchased by the investors and after deducting all costs and expenses and a commission, to distribute the balance, if any, pro rata amongst the investors. The new contract form also: 1. omitted the provision which entitled the purchaser to a deed for his "parcel" upon payment in full, and 2. obligated the purchaser to pay a pro rata share or additional development expenses.

The State of California issued a Desist and Refrain Order and the State of Hawaii issued a warning letter concerning the selling of further contracts.

The Securities and Exchange Commission instituted a proceeding in this Court (Securities and Exchange Commission v. Los Angeles Land and Investments, Ltd., et al., Civil Action No. 2486) to enjoin further sales. A Permanent Injunction by consent was entered on February 17, 1966, which incorporated by reference a stipulation between the parties permitting the debtor to continue to collect the monthly installments from the investors and to use same "only for the purpose of benefitting the interests of the investors," to satisfy existing mortgages and other reasonable expenses to carry out the terms of the existing contract.

When the Commission discovered that the stipulation, in several respects, was not being complied with, it moved to modify the Permanent Injunction by deleting reference to the stipulation and also moved for the appointment of a receiver. The several mortgages on the property had to be serviced regularly from the monthly installment payments of the investors which the stipulation had permitted the debtor to continue to collect. However, when the Permanent Injunction was modified the debtor could not continue this practice because each monthly payment under the installment contract would constitute a further sale in violation of the Securities Act of 1933 since the sale of a security is not completed until the purchase price has been paid in full. United States v. Kormel, Inc., D.C.Nev., 230 F.Supp. 275; United States v. Robertson, D.C., S.D.N.Y., 181 F.Supp. 158, 162. The debtor in lieu of having a receiver appointed, to fill the void and protect the investors, agreed to file a voluntary petition under Chapter X of the Bankruptcy Act, 11 U.S.C.A. Sec. 501 et seq. The petition, filed on October 24, 1967, was approved and a trustee appointed.

A number of the investors stopped making their monthly payments under the contracts. Some were returned the monies which they had paid while others received nothing. The debtor did not at any time exercise the right to terminate the contract in the event of default and retain the payments as liquidated damages.

A Chapter X proceeding is designed to rehabilitate an embarrassed corporation and, when necessary, to recast its capital structure in order to eliminate financial problems which have caused or may in the immediate future cause the debtor to become a "corporate cripple." This objective is accomplished through the plan of reorganization wherein rights and interests of the creditors and stockholders are modified or changed to obtain the desired objective. One of the functions of the independent trustee is to file the plan of reorganization. Section 169 of the Bankruptcy Act, 11 U.S.C.A. Sec. 569.

An important step "for the purpose of the plan" which must be taken is for the judge to classify the creditors and stockholders "according to the nature of their respective claims or stock." Bankruptcy Act, Section 197, 11 U.S.C.A. Sec. 597; In the Matter of Philadelphia Rapid Transit Co., E.D.Pa. (1935) 11 F.Supp. 865.

It does not appear that there are any classification problems pertaining to the creditors having priority or security or to the stockholders. There is, however, a question involving the class of general unsecured creditors. In resolving the question of who should be included, there must be a determination as to the creditor status, if any, of those persons who purchased the contracts or investment contracts from the debtor.

The debtor, beginning in October, 1964, sold parcels of real estate in its two tracts to approximately 200 persons, practically all of whom resided in the States of Hawaii or California. At no time did the debtor comply with the requirements of the California Administrative Code, Title 10, Sections 11010 and 11018 by notifying the Real Estate Commissioner of its intention to sell or furnishing a copy of a public report of the Commissioner to prospective purchasers prior to the execution of the contract, nor did the debtor comply with the Revised Laws of Hawaii, 1955, as amended, Title 22, Chapter 170, Section 170-33, which required sales in subdivided properties to be registered with the Commissioner and enter into binding contracts only after "all subdivision map requirements, zoning laws, * * * have been met." No registration with either Commission had been made, no public report procured and no subdivision map had been approved or recorded.

Where contracts for sale of real estate in California or Hawaii are not in compliance with the respective laws, the contracts are regarded as void or voidable and the investors may recover all payments made, including interest. Revised Laws of Hawaii, 1955, as amended, Title 22, Chapter 170, Section 170-37; California Administrative Code, Title 10, Section 11018.1; Murphy v. San Gabriel Mfg. Co., 99 Cal.App.2d 365, 222 P.2d 85.

The second contract which was exchanged with the investors was a security as defined in the Securities Act of 1933, 15 U.S.C.A. Section 77a et seq. It was an investment contract or a certificate of interest and participation in a profit sharing agreement since it consisted of agreements by the debtor to sell to the investors fractional undivided interests in certain lands on the terms and conditions, the net effect thereof, in the language of the agreement, being an immediate sale of an undivided interest in land with immediate subsequent agreement wherein the company as agent for buyer manages and undertakes on buyer's behalf the subdividing and sale of the subdivided lots. Securities and Exchange Commission v. W. J. Howey & Company, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); Securities and Exchange Commission v. C. M. Joiner Leasing Corporation, 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943).

The debtor in the sale of the investment contracts misrepresented that the authority of the State of California and the State of Hawaii had approved the project and had "given it their blessing"; the proximity of the site to a shopping center, schools and other developed areas; the availability of potable water at the site; that neighboring properties were being sold for substantially more than the contract sales prices and...