In re Burton Coal Co.

• Decision Date: 24 October 1944
• Docket Number: No. 69296.,69296.
• Citation: 57 F. Supp. 361
• Parties: In re BURTON COAL CO. et al.
• Court: U.S. District Court — Northern District of Illinois

57 F. Supp. 361

In re BURTON COAL CO. et al.

No. 69296.

District Court, N. D. Illinois, E. D.

October 24, 1944.

John J. Dowdle, of Chicago, Ill., for Fred A. Burton.

Thomas B. Hart, of Chicago, Ill., for Securities and Exchange Commission.

Henry S. Blum, of Chicago, Ill., for Material Service Corporation and Continental Illinois Nat. Bank & Trust Co.

J. Roy Browning, of Chicago, Ill., for Trustee.

Victor E. LaRue, of Chicago, Ill., Special Master.

CAMPBELL, District Judge.

This matter comes on to be heard on the petition of Fred A. Burton, charging a conspiracy among the three respondents, J. Roy Browning, reorganization trustee, Material Service Corporation, and The Continental Illinois National Bank and Trust Company of Chicago, to deprive him of alleged interests in the debtor companies, and praying, among other things, that the order confirming the plan of reorganization be vacated and that Burton be permitted to establish his position as the sole stockholder of Burton Coal Company.

On September 7, 1938, separate involuntary petitions for the reorganization of Burton Coal Company and of its two subsidiaries, Freeman Coal Mining Company and Seymour Coal Mining Company, were filed under Section 77B, 11 U.S.C.A. § 207, and were approved on September 9, 1938, on which date the late Judge Woodward named J. Roy Browning trustee of the debtors. Since the approval order was entered within three months prior to the effective date of Chapter X, the provisions of that Chapter are applicable. Section 276, sub. c(1), 11 U.S.C.A. § 676, sub. c(1). The trustee presented a plan of reorganization dated January 15, 1942, which was ultimately confirmed by Judge Woodward on March 27, 1942. In accordance with the provisions of this plan, the Freeman Coal Mining Corporation, organized for the purpose, took over the assets of the debtors and issued its securities therefor. By October 1, 1942, the plan was entirely consummated.

On October 29, 1942, Fred A. Burton asked leave to file his petition. It alleges that Burton is entitled to all the common stock and preferred stock of Burton Coal Company but that he was deprived of it through the action of respondents, and that the stock was improperly excluded from participation in the plan since no insolvency finding was made by the Court. The petition further alleges that the Continental Bank sold to Material Service Corporation all interest in its claim of some $370,000 against the debtors, and attacks the sale as having been made through the "cooperation" of the Bank and the trustee and without the knowledge of Burton. The petitioner also states that purchases made by Material Service Corporation of other claims against Burton Coal Company should be nullified because the original claimants were deceived into disposing of their claims at a low price. Burton further alleges that the trustee should not have transferred the assets to a new corporation, as provided in the plan, but should have continued to operate the business until the debts were liquidated, after which the property would have reverted to him as sole stockholder.

As to the common stock of Burton Coal Company, the petitioner had caused it to be issued to himself and each of four employees in equal shares. Shortly before the filing of the petitions for reorganization herein, the Continental Bank discovered that a large number of accounts receivable, previously pledged by Burton Coal Company to secure loans of money from the Bank, were spurious. Thereupon the petitioner, on behalf of Burton Coal Company, assigned all of such common stock to the Bank as further security for the indebtedness of the company to the Bank. The validity of the Bank's lien upon this stock, arising out of the assignment, has been established by order of Court affirmed on appeal. In re Burton Coal Company, 7 Cir., 1942, 126 F.2d 447.

During the course of these proceedings, pursuant to notice to petitioner and to the four employees of the Burton Coal Company in whose name the common stock was registered, the Continental Bank sold said stock at public sale to Material Service Corporation for $25.00. It is contended that this stock in the hands of the Bank was not subject to sale and also that Material Service Corporation, having purchased the Bank's interest in the claim which the stock was pledged to secure, became the pledgee of the stock and subject to the rule that a pledgee may not be the purchaser at a sale of his collateral. This stock through assignment was pledged by petitioner to secure the indebtedness of the Burton Coal Company to the Bank evidenced by certain notes each containing express provisions permitting the sale of the collateral and authorizing the holder to purchase the collateral at a sale. Such provisions are not unlawful. Hiscock v. Varick Bank, 1907, 206 U.S. 28, 27 S.Ct. 681, 51 L.Ed. 945, affirming In re Mertens, 2 Cir., 1906, 144 F. 818; Bush v. Adams, C.C.S.D.N.Y.1908, 165 F. 802; Turner et al. v. Metropolitan Trust Co., 9 Cir., 1913, 207 F. 495; Shafer et al. v. Spruks et al., 3 Cir., 1915, 226 F. 922.

As to the preferred stock, petitioner had deposited it to secure his personal note to the Bank in the amount of $157,097 and the Bank sold this stock, also to Material Service Corporation, after notice to petitioner. This sale of the collateral similarly would appear valid under the equally broad provisions of sale contained in the note secured thereby.

The petitioner, therefore, had no interest as a stockholder in the proceedings.

With respect to the exclusion of the stock from participation in the plan of reorganization although no specific finding of insolvency was made, it appears that petitioner had lost his stock interest by the sale of the security and stands in no position to complain. The Court did have before it certain evidence indicating that the debtors were insolvent. At the hearing on the plan apparently no attempt was made to establish a valuation of the enterprises on the basis of reasonably prospective earnings, and a timely objection to the approval or confirmation of the plan on this ground might properly have been interposed. Consolidated Rock Products Co. v. DuBois, 1941, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982. However, the failure to raise this issue until after the plan had been approved by Judge Woodward, after his order of confirmation had become final, and after consummation of the plan, precludes the Court from considering it now. In re Utilities Power & Light Corporation, 7 Cir., 1942, 125 F.2d 343; Clinton Trust Co. v. John H. Elliott Leather Co., 2 Cir., 1942, 132 F.2d 299.

The contention that the sale of the Bank's claim to Material Service Corporation should be set aside appears to be based upon the allegation that the...