In re Charles Nelson Co., 27277

Decision Date25 May 1939
Docket NumberNo. 27277,27503.,27277
Citation27 F. Supp. 673
PartiesIn re CHARLES NELSON CO. In re NORTHERN REDWOOD LUMBER CO.
CourtU.S. District Court — Northern District of California

Philip S. Ehrlich, of San Francisco, Cal., for petitioners.

Sterling Carr, of San Francisco, Cal., for trustee.

Heller, Ehrman, White & McAuliffe, of San Francisco, Cal., for Wells Fargo Bank & Union Trust Co.

Chickering & Gregory, of San Francisco, Cal., for Detroit Trust Co. and McPherson Browning, trustees.

Lillick, Olson, Levy & Geary, of San Francisco, Cal., for Bondholders' Committee, Northern Redwood Lumber Co.

ST. SURE, District Judge.

The question is whether a trustee under Sec. 77B of the Bankruptcy Act as amended in 1934, 11 U.S.C.A. § 207, shall be required to pay as an administrative expense taxes, penalties, and interest charged against real property subject to an executory contract neither adopted nor rejected.

The Charles Nelson Co., a corporation, hereinafter called Nelson Co., having its principal place of business in San Francisco, was organized for the purpose of engaging in the steamship transportation business between seaports on the Atlantic and Pacific coasts and to certain foreign ports. This business was carried on through the Nelson Steamship Company, a corporation, a wholly owned subsidiary, which acted as agent. Nelson Co. also owned timberlands and a lumber mill at Port Angeles, Washington, which was closed down in July, 1930. Nelson Co. also owned all of the stock of various corporations engaged in the business of cutting timber and manufacturing lumber, among which was Northern Redwood Lumber Co., a corporation, hereinafter called Redwood Co.

Redwood Co. had its principal place of business at Korbel, Humboldt County, California, and was engaged in the business of cutting timber and manufacturing lumber. It owned extensive timberlands in Northern California and operated the Arcata and Mad River Railroad in connection therewith. The company defaulted in the payment of the interest on its bonds in June, 1935.

Nelson Co., being unable to meet its debts as they matured, began reorganization proceedings under Sec. 77B of the Bankruptcy Act on February 5, 1936 (No. 27277-S). Redwood Co., for similar reasons, commenced like proceedings on April 1, 1936 (No. 27503-S). Sidney M. Hauptman was appointed and qualified as trustee in both proceedings. On October 14, 1938, the trustees of the Merryman Estate Trust, successors to Merryman Fruit, Land & Lumber Co., a corporation, hereinafter called Merryman Co., filed in each proceeding a petition asking, among other things, that the court direct Hauptman as trustee to pay forthwith all taxes, interest, and penalties that have accrued under the contract hereinafter described, since the inception of the 77B proceedings. Answers were filed by trustee Hauptman in both proceedings; and by Detroit Trust Company and McPherson Browning as trustees under first mortgage or deed of trust securing 6% gold bonds, in Redwood Co. proceeding. The issues in both matters were heard and will be considered together.

Merryman Co., on April 30, 1924, entered into an agreement with Nelson Co., by the terms of which the former agreed to sell, and the latter agreed to buy 12,746 acres of timberland for $1,500,000. The sum of $200,000 was to be paid upon execution of the agreement; $125,000 on May 1, 1925; $75,000 on May 1st of each succeeding year to and including May 1, 1940; $50,000 on or about May 1, 1941, which would complete payment; in 1930, under the terms of the contract, there was a deferment of one annual installment, postponing maturity until 1942. All deferred installments were to bear interest at the rate of 5% per annum, payable on May 1st of each year beginning 1925. The contract provided that if Nelson Co. failed strictly and literally to perform its agreements, Merryman Co. would be relieved of its obligation to convey the property, and Nelson Co. would forfeit all rights under the contract and any moneys paid thereunder as liquidated damages. A deed to the property was executed and placed in escrow.

On August 17, 1925, Redwood Co., desiring to provide for new capital, entered into an agreement with Detroit Trust Co. Thereafter Redwood Co. executed and delivered to Detroit Trust Co. and McPherson Browning as trustees a first mortgage deed of trust securing an authorized issue of $3,500,000 6% first mortgage gold bonds of which there are now issued and outstanding bonds in the principal amount of $1,700,400. In said mortgage mention is made of the Merryman contract as follows: "Whereas, as the Company is not seized of a fee simple title to the so-called `Merryman Tract,' but has an equitable interest only therein by virtue of a certain contract dated April 30th, 1924, the Company, as additional security for the payment of said bonds * * * has assigned all of its right, title and interest in said contract to Trustee."

On November 27, 1925, Nelson Co. assigned its interest in the Merryman contract to Redwood Co.

On December 30, 1930, Merryman Co., Nelson Co., Redwood Co., and Detroit Trust Company and McPherson Browning, as trustees, entered into an agreement whereby certain lands owned by Redwood Co., which were subject to the indenture securing its bonds, were exchanged for certain of the Merryman lands. These exchanges increased the total acreage of the Merryman tract to 13,836.64, upon which it is estimated there is 758,822,000 feet of timber.

On May 29, 1936, this court made an order in Nelson Co. proceeding requiring creditors to file their claims before August 5, 1936, notice of which was given as provided by law, but petitioners filed no claim. Following a similar order and notice in Redwood Co. proceeding, petitioners, on September 3, 1936, filed a verified claim designated "Secured Claim upon Purchase Price Due under Land Contract"; said claim describes in detail the making of the contract of April 30, 1924, between Merryman Co. and Nelson Co., and the assignment thereof by Nelson Co. to Redwood Co. on November 27; 1925; said claim states that Nelson Co. and Redwood Co. had made certain payments upon principal and interest of the purchase price as follows: $700,000 on the principal, and $485,594.79 for interest; that there are taxes which are a lien upon the property due and unpaid in the sum of $6,486.44; and that there is due under the contract the principal sum of $450,000 together with interest and a further principal payment not yet due in the sum of $350,000.

Petitioners had knowledge of the separate proceedings under 77B begun by Nelson Co. and Redwood Co. respectively. They filed a claim as required by law on the executory contract in the latter proceeding, but failed to file in the former. In the circumstances here they are barred from participation in Nelson Co. proceeding.1

In a tardy attempt to fasten liability upon the trustee of Nelson Co., petitioners urge that the respective corporate entities of Nelson Co. and Redwood Co. be disregarded and the two deemed one. Attention is called to the facts that Nelson Co. owned all of the capital stock of Redwood Co.; that James Tyson was active in both companies and controlled their business policy; and that Nelson Co. acted as the sales agent and banker of the major portion of Redwood Co.'s business. There is additional argument to the same effect, all of which is impotent in the face of the undisputed salient facts and the law. The corporations were separately organized. They were formed for different purposes and had their principal places of business in different localities. They had separate offices and kept separate sets of books. A corporation exists as an entity, and "courts of law will not go beyond the fact of corporate existence in order to examine the real ownership of a corporation."2

Further discussion will relate to petitioners' two remaining points as applied to Redwood Co. proceeding. The first is stated as follows: "A trustee operating and conducting a debtor's estate under section 77B of the Bankruptcy Act must pay as an expense of administration, local taxes assessed and levied against all property in his possession, together with the interest and penalties assessed by reason of their non-payment."

The entire supporting argument is built upon the wording of a statute providing that a trustee appointed by the court to conduct a business, or who conducts a business, shall be subject to all applicable state and local taxes.3

It is admitted, as stated in petitioners' brief, that Nelson Co. assigned the Merryman contract to Redwood Co.; that Redwood Co. regarded the equity in the contract as an asset and mentioned it in the prospectus of 1925 regarding the issuance by it of $3,500,000 first mortgage 6% gold bonds. It is further admitted that Redwood Co. was primarily engaged at that time in "owning and holding timberlands, in logging operations thereon, and in the sale and disposal of lumber." But these admitted facts do not establish that by virtue of his appointment and qualification as trustee Hauptman was authorized by the court to conduct a business with reference to the equity in the Merryman contract, or that he did conduct such a business. The prospectus also shows that Redwood Co. owned "approximately 37,902 acres of timberland in fee simple, together with sawmills, manufacturing plants, logging railroads and equipment." The Merryman contract was mentioned as the "assignment of the present equity of The Charles Nelson Co." in the timber contract consisting of approximately 12,746 acres. The value of the Redwood Co. property was given as $6,820,000. The value of the Merryman timber was estimated at $2,021,000. It should be remembered that the timber on the Merryman tract has at all times and now comprises what timbermen call a "virgin stand." Its extent has since 1924 been augmented by exchanges until the total acreage is now 13,836.64. It is admitted that the timber remains in its pristine...

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4 cases
  • In re Booth
    • United States
    • U.S. Bankruptcy Court — District of Utah
    • April 13, 1982
    ... ... E.g., In re Mercury Homes Development 19 BR 56 Co., 4 B.C.D. 837 (N.D.Cal.1978) (trustee may reject contract but cannot ... 1978); Nambar, Contracts in Bankruptcy 141-152 (1977); Osborne, Nelson and Whitman, Real Estate Finance Law 102-104 (3d ed. 1979); Countryman, ... 1956); In re Swindle, 188 F.Supp. 601 (D.Or. 1960); In re Charles Nelson Co., 27 F.Supp. 673 (N.D.Cal.1939); In re Middleton, 3 B.R. 610 ... ...
  • In re California Pea Products
    • United States
    • U.S. District Court — Southern District of California
    • February 19, 1941
    ... ... See New York v. Irving Trust Co., 288 U.S. 329, 53 S.Ct. 389, 77 L.Ed. 815; 6 Remington on Bankruptcy, 4th ... Hotel Charles, 1 Cir., 84 F.2d 589, and In re Chas. Nelson Co., D.C., 27 F.Supp. 673. It ... ...
  • IN RE TEN EYCK CO., 29421.
    • United States
    • U.S. District Court — Northern District of New York
    • July 23, 1941
    ... ... 775, 40 F. Supp. 272 31 A.B.R.,N.S., 564; In the Matter of Charles Nelson Co., D.C., 27 F.Supp. 673, 40 A.B.R.,N.S., 262 ...         The motion is granted to ... ...
  • Arthur Kicsar, Securities and Exchange Commission
    • United States
    • Comptroller General of the United States
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