In re Eilers Music House

• Decision Date: 14 February 1921
• Docket Number: 3529,3548.
• Citation: 270 F. 915
• Parties: In re EILERS MUSIC HOUSE (two cases). v. SITTON (two cases). OREGON EILERS MUSIC HOUSE
• Court: U.S. Court of Appeals — Ninth Circuit

270 F. 915

In re EILERS MUSIC HOUSE (two cases).

OREGON EILERS MUSIC HOUSE v. SITTON (two cases).

Nos. 3529, 3548.

United States Court of Appeals, Ninth Circuit.

February 14, 1921

This matter arises out of the bankruptcy of Eilers Music House, an involuntary bankruptcy proceeding instituted in February 1918, with respect to the Eilers system of houses in certain fields of mercantile business. In the matter of Eilers Music House, a corporation, bankrupt, petition was filed in the District Court to require surrender and delivery of bankrupt's property, and thereupon order to show cause was issued and served upon the Oregon Eilers Music House. The Oregon Eilers Music House replied, and after preliminary motions the court made an order of reference of the proceedings to a special master, who thereafter filed findings and conclusions, and recommended a decree requiring the surrender of the assets of Oregon Eilers Music House to the trustee in bankruptcy of Eilers Music House. To the report of the master Oregon Eilers Music House filed exceptions, and thereafter the District Court in bankruptcy affirmed the report of the special master and by decree awarded possession of the assets of Oregon Eilers Music House to the trustee of Eilers Music House, bankrupt. By petition to superintend and revise the decrees, and by appeal, Oregon Eilers Music House asks reversal of the order of the District Court. Inasmuch as the issues and the evidence pertaining thereto are so fully stated in the report of the special master, we append such report, which is as follows:

'It is claimed by the petitioner that Oregon Eilers Music House is an agent or subsidiary of the bankrupt. It is alleged that Eilers Piano House, the predecessor of the bankrupt, and indeed, the bankrupt, under another name, in the year 1908 purchased Graves & Co., a corporation, acquiring its capital stock through officers and directors of Eilers Piano House in trust for the corporation, and that the Music House has ever since owned and possessed Graves & Co., now Oregon Eilers that, while Oregon Eilers is doing business as a separate corporation, it is nevertheless, and in fact, an agent or representative of the bankrupt, and should be required to turn over the assets in its possession to the trustee.

'Oregon Eilers Music House totally denies the allegations in the petition as appertains to the ownership of Oregon Eilers, claiming that the bankrupt corporation, long prior to bankruptcy, disposed of all the stock of Graves & Co., or Oregon Eilers, and disclaims that Eilers Music House ever owned Oregon Eilers, or any part of it. Extensive hearings have been had upon the issues described and a large amount of testimony has been taken. Prolonged analysis of this testimony, much of which is immaterial, would result in making this report burdensome, so the facts found will be stated in narrative form, together with such inferences and conclusions as I deem them to warrant. For convenience the bankrupt, Eilers Music House, will herein be called 'Music House,' Oregon Eilers Music House, 'Oregon Eilers,' and the Graves Music Company, or Graves & Co., 'Graves Company.'

'Prior to the year 1902, H. J. Eilers, familiarly known as Hy. Eilers, A. H. Eilers, and S. J. McCormick were engaged in the business of selling musical instruments in Portland, Or., the firm being known as Eilers, McCormick & Co., In that year these individuals incorporated their business under the name of Eilers Piano House, and continued to operate as such until the year 1910. They were the sole owners of the business, except as a few shares of stock became scattered now and then among a few of their employees, associates, or relatives. In the main, H. J. Eilers was the owner, manager, and directing head of this corporation. It transacted a large business in the piano field, both wholesale and retail, and for the greater portion of the time, up to and including 1910, and as far as 1912, did an exceedingly prosperous business according to the books, and as the testimony developed.

'As appears by the minutes of the Piano House, in February, 1908, it purchased Graves & Co. in accordance with the desires of its owners, A. H. and S. J. Eilers and S. J. McCormick, and agreed to pay for the stock of that company $48,000, paying $1,000 in cash and executing 47 $1,000 notes. The capital stock of Graves & Co. was thereupon taken over in the name of the two Eilers and McCormick, as the minutes state, in trust for the Piano House. H. J. Eilers took 50 shares, A. H. Eilers and S. U. McCormick 24 shares each, and 1 share each was apportioned to G. A. Hoffman and F. W. Graves; thereafter the Piano House, or its stockholders, operated the Graves Company business. It was conducted, as it had been theretofore, in the same location, and it did the same general character of business down to the year 1916. There is no doubt that the Piano House in the first instance paid the consideration due to Graves Company for the transfer. It pledged the sum of $94,000 of its liquidated assets to the stockholders of Graves Company as collateral to secure the payment of its $47,000 notes. It went its security at the banks, guaranteed the payment of its real estate rental leases and other obligations, and the transaction was entered upon the Piano House books as a purchase by it.

'In April, 1910, the Music House, the bankrupt, came into existence through the initiative of the same individuals, H. J. and A. H. Eilers and S. J. McCormick, and it thereupon took over all of the assets and assumed all the obligations of the Piano House. Its capital stock was apportioned to, or taken by, the same individuals, substantially in its entirety. During this time, as heretofore stated, the Piano House was in a prosperous condition, entirely solvent, and was at all times able to meet and discharge its obligations to all its creditors, among whom were the stockholders of Graves Company, since payment of the purchase price due on that transaction had not been completed when the Music House came into existence. The same solvent condition existed in February, 1908, when that purchase was made. It is asserted by Eilers and his associates, and I find it is proven by the testimony, books of the bankrupt, and documents in evidence, that while, apparently, the purchase of Graves & Co. was made to appear, by the minutes of the bankrupt and method of bookkeeping, as a purchase by the Music House of the Graves & Co. corporation, it nevertheless was purchased by and in the interests of the individual stockholders, and that the alleged purchase by the Piano House or the Music House was a paper transaction altogether. The testimony had developed the fact that the corporation was used by these stockholders as their banking house. Whatever individual income they possessed or acquired was deposited with the corporation, for which they were given credit; dividends were frequently declared from the profits made by the corporation and these stood on its books to their credit in large sums. They checked through the corporation in payment of their private individual obligations and all such payments were debited against them upon its books. In fact, the corporation was their bank; the testimony showing that none of the three carried any individual deposit in any bank.

'It further appears that the payment of the obligations due the stockholders of Graves & Co., as they came due, were immediately charged on the books of the bankrupt to the account of the several stockholders. For example, whenever one of these notes of $1,000 and accumulated interest was paid by the bankrupt with its check, the amount of such payment was uniformly charged upon its books against the accounts of the several stockholders in proportion to the amount due from each upon such payment. Memoranda of these charges are found running through what is termed B. O.'s, C. O.'s, or D. O.'s. These payments were entered through what was known on the books of the company as Graves Music Company Investment Account, so that, if the bankrupt was called upon to pay, let us say, $1,175 to the stockholders of Graves & Co. upon a note falling due for that amount, including interest, there would be made a memorandum of the transaction, to be posted in the journal, charging A. H. Eilers, S. J. McCormick, and H. J. Eilers with their proportion of that payment and the investment account would be credited therewith. Such practices continued until the said purchase price was fully paid, and hence there can be no reasonable doubt that Eilers and his associates at all times considered that they, and not the corporation, purchased the stock of Graves & Co., and that they merely used the Music House as a medium to accomplish the transaction. Furthermore, neither the stock or assets of Graves & Co. were at any time carried upon the books of the Music House as an asset, as was done in the case of subsidiary concerns and corporations, as to the ownership of which by the Music House there has never been any contention. Hence I find as a fact that, if it was permissible for the stockholders of the Music House, while the corporation was entirely solvent, and while they had upon its books credits to an extent more than sufficient to cover the payments made by it on their behalf and charged back to their private accounts, to make this purchase for themselves in contradiction to the recorded acquisition of the same in trust for the corporation, as declared in its minutes, it was accomplished by what took place at the time.

'When the Music House came into existence, in 1910, it was called and considered by those interested as a consolidation, that is to say, Eilers and his associates had gradually spread out, since the original incorporation of the...