In re Evansville Television, Inc.

• Decision Date: 05 January 1961
• Docket Number: 13056,13168.,No. 13024,13024
• Citation: 286 F.2d 65
• Parties: In the Matter of EVANSVILLE TELEVISION, INC., Debtor. Rex SCHEPP and Benjamin F. Shepp, Appellants, v. PRODUCERS, INC., et al., Appellees. Stephen W. LANGMADE, Appellant, v. PRODUCERS, INC., et al., Appellees. Rex SCHEPP, Petitioner, v. Honorable Cale J. HOLDER, Judge of the United States District Court for the Southern District of Indiana, Evansville Division, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

286 F.2d 65 (1961)

In the Matter of EVANSVILLE TELEVISION, INC., Debtor.

Rex SCHEPP and Benjamin F. Shepp, Appellants, v. PRODUCERS, INC., et al., Appellees.

Stephen W. LANGMADE, Appellant, v. PRODUCERS, INC., et al., Appellees.

Rex SCHEPP, Petitioner, v. Honorable Cale J. HOLDER, Judge of the United States District Court for the Southern District of Indiana, Evansville Division, Respondent.

Nos. 13024, 13056, 13168.

United States Court of Appeals Seventh Circuit.

January 5, 1961.

Paul Y. Davis, Indianapolis, Ind., Davis, Hartsock & Wright, Indianapolis, Ind., of counsel, for appellants.

Stephen W. Langmade, Phoenix, Ariz., in pro. per.

Isidor Kahn, Harry P. Dees, Evansville, Ind., for debtor-appellee. Kahn, Dees, Donovan, Kahn & Shrode, Evansville, Ind., of counsel.

Leonard Gesas, Chicago, Ill., John E. Early, Isadore J. Fine, Paul F. Arnold, Evansville, Ind., Michael Gesas, Chicago, Ill., of counsel, for appellees Producers, Inc. and others.

John K. Rickles, Indianapolis, Ind., Charles H. Sparrenberger, Evansville, Ind., Bamberger & Feibleman, Indianapolis, Ind., and Fine, Hatfield, Sparrenberger & Fine, Evansville, Ind., of counsel, for appellee, Douglas H. McDonald, Trustee.

John L. Carroll, Evansville, Ind., Johnson and Carroll, Evansville, Ind., of counsel, for appellees Red Spot Paint & Varnish Co., Inc. and others.

Before DUFFY, KNOCH and CASTLE, Circuit Judges.

CASTLE, Circuit Judge.

Rex Schepp and Benjamin F. Shepp, appellants, stockholders of Evansville Television, Inc., seek by their appeal (No. 13024) to set aside an order of the District Court entered February 12, 1960 in a chapter X Reorganization Proceeding, 11 U.S.C.A. § 501 et seq., which approved and declared filed in good faith a petition to reorganize the subject corporation.¹ The appeal also seeks reversal of a February 10, 1959 order enjoining the calling or conducting of a meeting of stockholders for the purpose of electing directors until further order of court.

The appeal (No. 13056) by Stephen W. Langmade, also a stockholder, seeks to set aside the order of February 12, 1960.¹

The petition for reorganization of the subject corporation invoked the District Court's jurisdiction under 11 U.S.C.A. §§ 526, 530 and 531, was filed by creditors, and alleged insolvency and the commission of an act of bankruptcy within the preceding four months. The debtor corporation filed a consenting answer. Appellants Rex Schepp and Benjamin Shepp each filed a controverting answer. The District Court, after hearing evidence, made findings of fact and entered its conclusions of law on which the order of February 12, 1960 is based.

The appeals present the following contested issues:

(1) Whether the provision of 11 U.S.C.A. § 526 which authorizes the filing of a petition for reorganization by "three or more creditors" was satisfied.

(2) Whether the subject corporation was insolvent.

(3) Whether the petition was filed in good faith.

(4) Whether a timely appeal was perfected from the injunctive order and, if so, did the court err in entering such order.

The debtor, Evansville Television, Inc., was incorporated in 1951 with authorized capitalization of 25,000 shares of Class A no par voting stock and 25,000 shares of Class B equally participating no par non-voting stock. It is engaged in the operation of a television broadcasting station in Evansville, Indiana, under a temporary permit granted by the Federal Communications Commission on the VHF Channel 7, and is known as Station WTVW. The station began broadcasting in August of 1956. It was one of four applicants in 1952 for the one VHF channel in Evansville. It was awarded the channel on December 27, 1955. During pendency of the application others obtained construction permits for two UHF channels, one in Evansville and one in Henderson, Kentucky, and began broadcasting in 1953. Upon the grant of the VHF permit to the debtor corporation both UHF stations petitioned the Commission to revoke it on the basis that the superior signal would cause them great economic injury. These petitions were denied but there is pending before the Commission a Rule to Show Cause why the corporation should not be required to relinquish its temporary VHF permit and receive a UHF permit in lieu thereof.

At the time construction was authorized and the temporary VHF permit issued in December of 1955 Rex Schepp, his wife, Mary Eaton Schepp, and his brother, Benjamin F. Shepp held approximately 72% of the corporation's stock, including 16,875 shares of the Class A voting stock. Ferris E. Traylor, Freeman Keyes and John B. Moser, executor, held a total of 4,125 shares of Class A and 3,158 of Class B stock; various others, smaller amounts. All stockholders except the Schepps² were obligated on unpaid stock subscriptions. As a condition of paying the balance of their subscriptions Traylor, Keyes, Moser and another stockholder, Krueger, required a reallocation of the Schepp stock interest, a voting trust to control election of directors, and a buy-sell agreement. The agreement reduced the Schepp holdings to 15,000 shares of Class A stock, gave the minority group the option to purchase the Schepp stock at appraised value (not less than $15.00 per share) exercisable two years and ten days after WTVW went on the air, and placed all voting stock in the hands of Krueger, as trustee, to vote for a board of directors consisting of Rex Schepp and four members of the minority group, which was to continue until the option expired.

Schepp was made president and employed as general manager of the corporation. He had had previous experience in the television field. Station facilities were constructed and WTVW went on the air in August of 1956. In November of 1956 Schepp was discharged as president and general manager. The reasons given, as shown in the corporation's minutes, were disloyalty, unfaithfulness, neglect of duties, wilful mismanagement and harassment of employees resulting in inefficient operation.

The purchase option expired August 31, 1958 without being exercised. The return of Schepp to control of the corporation at the February 1959 annual meeting was assured by reason of his control of the voting stock. There were various negotiations for the purchase from or sale to Schepp of the capital stock of the corporation. Traylor was willing to pay $10.00 a share for the stock.

Producers, Inc., one of the petitioning creditors, is a corporation to which the debtor corporation owes $300,000.00, plus interest, as evidenced by twenty-seven promissory notes. The notes were originally given to Ferris E. Traylor for loans and advancements made to the corporation when money was immediately needed, at most times to cover overdrafts, between December 12, 1956 and May 9, 1958. Traylor assigned them to Producers, Inc. on November 20, 1958.

Traylor Bros., Inc., a petitioning creditor, is a corporation engaged in the construction business. Schepp, while president, hired it in connection with the construction of the station facilities and improvement of its studios. The claim of Traylor Bros., Inc., in the amount of $65,675.15 is for work performed and materials furnished.

Industrial Contractors, Inc., a petitioning creditor, is a corporation engaged in the plumbing, heating and air conditioning and roofing business. The debtor corporation through its chief engineer issued direct orders to it for work and materials which were performed and furnished, and for which it issued invoices directly to the debtor corporation. The amount of its claim is $41,163.53.

The stock ownership of Traylor Bros., Inc. is 50% in Ferris E. Traylor and 50% in his brother. The stock of Producers Inc. is similarly owned. Traylor and his brother each own 25% of the stock of Industrial Contractors, Inc., and the remainder is held by employees of the three companies.

Other creditors, who were permitted to intervene as petitioning creditors, are Carl Wolfe, d/b/a Ohio Valley Sound Co., Smith and Butterfield, Inc., and Red Spot Paint and Varnish Company, Inc.

The petition for reorganization was filed December 19, 1958.

The District Court, after exhaustive hearings extending over a period from February 26, 1959 to January 7, 1960, found and concluded that the corporation was insolvent and that the petition for reorganization was filed in good faith. In so far as these determinations rest on factual considerations they are not to be disturbed on review unless clearly erroneous. The District Court is charged with the duty of ascertaining the existence or non-existence of the fact. In re Loeb Apartments, 7 Cir., 89 F.2d 461, 463.

We have carefully reviewed the record and are of the opinion that the finding of insolvency is supported by substantial evidence including the testimony of an expert witness in the field of evaluating television and radio properties and that of a certified public accountant who had made extensive examination of the corporation's records. The evidence was ample that the corporation's assets were insufficient to meet its liabilities.

This Court had occasion to consider the criteria by which the "good faith" requirement in chapter X proceedings is to be determined in In re Diversey Hotel Corporation, 7 Cir., 165 F.2d 655, 658. It was there pointed out that what is meant in chapter X by "good faith" is not the same as breach of fiduciary integrity but is a restriction on the use of this remedy to prevent its misuse. And it was pertinently observed that the District Court, charged with the duty of preventing this misuse being "in a favored position, it can well judge of the disposition and intent of those who knock at its door and seek admission".

There was testimony that the corporation had never had an annual profit, could not even approximate the payment of current liabilities, that attempts to get financing had been going on for two years with no avail and that the corporation was "at the end of its rope" in so far as borrowing money...