In re Los Angeles Lumber Products Co.

• Decision Date: 29 September 1941
• Docket Number: No. 31352.,31352.
• Citation: 46 F. Supp. 77
• Court: U.S. District Court — Southern District of California
• Parties: In re LOS ANGELES LUMBER PRODUCTS CO., Ltd.

46 F. Supp. 77

In re LOS ANGELES LUMBER PRODUCTS CO., Ltd.

No. 31352.

District Court, S. D. California, Central Division.

September 29, 1941.

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Gibson, Dunn & Crutcher, of Los Angeles, Cal., for debtor.

Warren E. Libby, of Los Angeles, Cal., for bondholders' committee.

George R. Larwill and Frank S. Balthis, Jr., both of Los Angeles, Cal., for intervening bondholders.

Faries & McDowell, of Los Angeles, Cal., for David R. Faries.

Dryer, Richards & Page, of Los Angeles, Cal., for District Bond Co. and Deposited Bonds & Shares Corporation.

Chas. F. Johnson, of Los Angeles, Cal., for SEC.

Thomas K. Case, of Los Angeles, Cal., in pro. per.

William Schoenau, Jr., of Los Angeles, Cal., in pro. per.

JENNEY, District Judge.

This matter is before the court, primarily, upon the petition of a Bondholders' Committee filed February 19, 1940, now joined in by debtor, praying for the cancellation or reduction of certain claims on debtor's bonds, filed by David R. Faries. The bonds of debtor herein referred to are in most instances represented by Trust Certificates or Certificates of Deposit for Trust Certificates, which, for convenience, will be herein referred to as "bonds of debtor", without attempting to distinguish such certificates from actual bonds.

On February 23, 1940, the court issued an order restraining the disposition of any bonds acquired by Mr. Faries subsequent to June 30, 1936, until hearings could be held and a decision reached upon this petition. At the request of all counsel this decision has been delayed from time to time in order that additional briefs might be filed. On October 12, 1940, Mr. Faries filed a petition praying for an order approving the purchase of these bonds. Another petition by Mr. Faries filed November 7, 1940, asks approval by the court of the proposed sale to Annie K. Borbridge of one certificate of deposit representing a one-thousand-dollar bond and two shares of the class "B" stock. On February 3, 1941, District Bond Company, a corporation, filed a petition requesting that the restraining order of February 23, 1940, be dissolved as to $67,500 principal amount of bonds which it alleged was its share of bonds purchased by it in joint account with Mr. Faries. This petition was denied. All of the bonds in question are now in possession of the court by virtue of an order issued March 6, 1941, impounding the same.

The court, by appropriate orders, has heretofore confirmed debtor's plan of reorganization dated February 1, 1940. At the request of all counsel, confirmation of the plan did not await the outcome of legal questions arising in connection with these claims on bonds owned by Mr. Faries or held by him in joint account. The plan of reorganization has been made sufficiently elastic to provide for any disposition of these claims which the court may desire to make. The reorganization has been proceeded with, a new company has been organized and is now actively engaged in carrying on the business of debtor under a new Board of Directors approved by the court. As a matter of fact, the company has made tremendous strides under present management and is engaged in filling government orders for navy ships and facilities in an amount of approximately $81,839,700.

Hearings in connection with the bond claims of Mr. Faries were held before Special Master Reuben G. Hunt. District Bond Company did not actively participate in these hearings, except that certain of its officers and employees appeared as witnesses. At the conclusion of these hearings all parties, except District Bond Company, entered into a Stipulation of Facts dated August 27, 1940. This stipulation was approved by the Special Master and it was agreed that the court might consider the same in arriving at its decision herein.

Hearings were held before United States District Judge James Alger Fee of Portland, Oregon, in connection with the bonds of debtor held by Mr. Faries and District Bond Company in joint account. Following that hearing Judge Fee signed findings of fact, conclusions of law and a decree under date of March 6, 1941, all of which were approved by counsel for the bondholders' committee, the debtor, Mr. Faries, District Bond Company and Securities and Exchange Commission. Paragraph IV of the decree specifically reserves for decision by this court all questions as to the legal effect upon Mr. Faries or District Bond Company or its subsidiary of or growing out of any of the acts and things so found and set forth in said findings. The Commission is participating in this proceeding with the approval of this Court, pursuant to the provisions of Section 208 of the Bankruptcy Act of 1898, as amended by the Chandler Act of 1938, 11 U.S.C.A. § 608.

This court has heretofore rendered its opinion in connection with the application of Messrs. Faries and McDowell for attorneys' fees in connection with this proceeding: In re Los Angeles Lumber Products Co., 37 F.Supp. 708. At the request of Messrs. Faries and McDowell this decision was temporarily vacated by order of this court dated March 31, 1941, pending the filing of further briefs. This matter is likewise now before this court for decision.

The court room is pretty well filled with bondholders, all of the officers and directors of debtor corporation, lawyers, brokers, bankers, trust officers and others who are directly or indirectly interested in these proceedings or in this decision of the court. We shall therefore discuss the problems presented somewhat informally and more fully than would ordinarily be necessary. We believe also that a full statement of the facts, upon which the court's decision is predicated, should be made. Many of those present are either not entirely familiar with what has transpired or have perhaps overlooked the legal significance thereof. In making the following statement of facts, we shall try, in so far as is possible, to follow the wording of the stipulation of facts dated August 27, 1940 and the Findings of Fact of Judge Fee under date of March 6, 1941.

Prior to assuming any official position with debtor, or its predecessors in interest, David R. Faries had represented certain holders of debtor's bonds and was a member, secretary and counsel of an informal bondholders' committee. An immediate reorganization of debtor company was then contemplated. Because of his familiarity with debtor's problems and because he had theretofore so represented bondholders, Mr. Faries was, on June 29, 1936, elected a director and vice-president. Through appointment of his law firm of Faries and McDowell as counsel for debtor, Mr. Faries became its chief counsel. These three relationships continued from June 29, 1936 to April 15, 1940. Thereafter, except in matters in which he or his firm were interested, Mr. Faries and his firm continued to act as counsel for debtor until December 31, 1940. Mr. Faries has personally appeared in this case, as one of the attorneys for debtor, at many hearings and proceedings before the court and before the special master.

Subsequent to his election as director and vice-president and his appointment as attorney, but prior to the actual commencement of these proceedings, Mr. Faries purchased for his own account $14,500 principal amount of debtor's bonds, paying therefor the sum of $1,521.10. These purchases were all made between July 10 and December 23, 1937. Each of the purchases was made at going market prices by J. Clifford Argue, one of Mr. Faries' associates in the law firm of Faries and McDowell. Mr. Argue told brokers to deliver bonds so purchased to T. M. Wurts for payment. Mr. Wurts was at that time employed as an auditor in the offices of Faries and McDowell. Said Wurts, upon instructions from Mr. Argue, but without having consulted Mr. Faries, registered the same in his own name and deposited the bonds with the duly appointed depositary in favor of the plan of reorganization of May 24, 1937, then pending.

Prior to the purchase of these bonds, Mr. Faries had been purchasing bonds for the account of debtor from funds derived from the sale of some of the properties of Masset Timber Company, a subsidiary. These said funds were exhausted on or about July 6, 1937, and no other funds of debtor were available for the purchase of bonds, except possibly a fund in the possession of Security-First National Bank of Los Angeles, as trustee, of approximately $2,900, which had likewise been derived from the sale of properties of Masset Timber Company. Debtor's board of directors had under contemplation the release of these funds for use in the purchase of additional bonds and had instructed its attorneys, Messrs. Faries and McDowell, to attempt to obtain the release thereof for that purpose.

Mr. Faries purchased the $14,500 principal amount of bonds with the intention of delivering them to debtor, if said fund was released, or keeping them himself if said fund could not be so released. Mr. Argue had instructed Mr. Wurts to register them in his own name until that question was determined. It does not appear however that this fund was ever so released. The purchase of these bonds, or any of them, by Mr. Faries personally was not taken up as a matter of business at any directors' meeting or with the court, nor were they subsequently approved by the board or by the court. However, immediately following a regular meeting Mr. Faries informed Directors Powell, Spicer, Bagley and Watson, and also Secretary Ingoldsby, that he intended to buy some bonds for his own account if the debtor could not buy them. Three directors and the secretary testified at the hearing before the special master that they had heard from time to time that Mr. Faries was buying bonds.

The filing of the petition for cancellation or reduction of Mr. Faries' claim now before the court was the first intimation that reached the court of these or subsequent purchases on the market.

At a meeting of the...