In re Federal Facilities Realty Trust

• Decision Date: 21 September 1950
• Docket Number: 9936.,No. 9935,9935
• Citation: 184 F.2d 1
• Parties: In re FEDERAL FACILITIES REALTY TRUST. DARROW v. MOSSER. GUILD v. DARROW.
• Court: U.S. Court of Appeals — Seventh Circuit

184 F.2d 1 (1950)

In re FEDERAL FACILITIES REALTY TRUST.

DARROW v. MOSSER.

GUILD v. DARROW.

Nos. 9935, 9936.

United States Court of Appeals Seventh Circuit.

August 14, 1950.

Rehearing Denied September 21, 1950.

Irving Herriott, and Urban A. Lavery, Chicago, Ill., for Paul E. Darrow.

C. W. Mulfinger, J. Edgar Kelly, Chicago, Ill., for Stacy C. Mosser.

Thomas B. Hart, J. Kirk Windle, John I. Mayer, all of Chicago, Ill., for Securities and Exchange Commission.

Jacob B. Courshon, Chicago, Ill., for John W. Guild.

Before KERNER, DUFFY and FINNEGAN, Circuit Judges.

FINNEGAN, Circuit Judge.

Two appeals in separate reorganization proceedings under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, are involved in case 9935. They were ordered consolidated by the District Court. The first appeal is by Paul E. Darrow, former trustee of the Federal Facilities Realty Trust, a common law trust. The second is by the same Paul E. Darrow, former trustee of the National Realty Trust, also a common law trust. In these appeals Darrow seeks to reverse an order of the District Court, entered on April 12, 1949, which surcharged him as former trustee with the sum of $43,447.46, and also to reverse all parts of such order which find that he was guilty of wrong doing or negligence as trustee in said proceedings.

Case 9936 is a cross appeal by John W. Guild, successor trustee under a trust indenture of mortgage issued by Federal Facilities Realty Trust on October 1, 1929. The cross appeal seeks to have this court declare a resulting trust in certain securities and assets of both Federal Facilities Realty Trust and of the National Realty Trust.

It appears from the record that on October 15, 1943, Paul E. Darrow, as former trustee of the Federal Facilities Realty Trust, filed his final report and account, and that thereafter and on February 11, 1944, he filed, pursuant to the order of the District Court, detailed schedules supplementing his final report and account. It likewise appears that on October 15th, 1943, said Paul E. Darrow, as former trustee of the National Realty Trust, filed his final report and account, and on April 21, 1944 again pursuant to an order of the District Court, filed detailed schedules supplementing such final report and account.

On May 15th, 1944, the Securities and Exchange Commission filed objections to each of said final reports and accounts as supplemented. Objections were also filed by Stacy C. Mosser, as successor trustee in both reorganization proceedings. In the Federal Facilities Realty Trust proceedings, objections were also filed by John W. Guild, successor trustee, under a mortgage indenture of said Federal Facilities Realty Trust, dated October 1, 1929.

The various objectors to the trustee's reports and accounts of October 15, 1943, claim among other things, that discrepancies existed in his accounts; that there was a failure to show correct accrued interest and earnings on holdings of certain subsidiaries; that loans of trust funds were made and not accounted for; that items in operating expense were not properly explained; that profits made in trading with Jacob Kulp and Myrtle Johnson in bonds of subsidiaries were not stated; that the trustee failed to explain his actions in failing to prosecute certain causes of action; that the trustee's requested compensation should not be allowed; that he failed to state profits he made in connection with the purchase, through one Goldman, of certain securities; that there was a failure to disclose commissions or discounts paid to the trustee on account of certain insurance purchases; and that there was failure to disclose fully business transactions and profits made with Colonial Securities Company.

The District Court referred the accounts and reports, together with the objections thereto, to a Special Master, directing him to conduct full and complete hearings and to report to the court his findings of fact and his conclusions of law thereon.

The hearings began on October 25, 1944 and concluded on May 28, 1947. More than 2500 pages of testimony were taken. Counsel for the various parties conducted extended examination upon all matters contained in the reports and accounts of Darrow, as former trustee, and filed written briefs with the Special Master.

On April 29, 1948, the report of the Special Master was filed.

It is pertinent to note here that Darrow's special report in Federal Facilities Realty Trust covers his entire trusteeship from April 25, 1935 to August 13, 1943. In the National Realty Trust proceeding Darrow filed a report on November 30, 1940 which was approved on January 31, 1941. In this proceeding therefore the report and account here involved covered the period from December 1, 1940 to August 13, 1943. The finding of the Master was: "During the eight and one-third years of Darrow's trusteeship he filed no reports of his administration of Federal and only one of his administration of National."

On April 12, 1949, the trial court overruled Darrow's objections to the report of the Special Master, and surcharged him as former trustee with the sum of $43,447.46 because of profits made by two of his employees in dealing in underlying securities, consisting of bonds of subsidiaries of the Debtor Trusts.

The order of April 12, 1949 further provides: "The determination of the ownership of certain securities described (in the Master's report) as `securities in Lot 2'; whether or not Paul E. Darrow should be further surcharged for profits made in dealing in the securities involved in Seligman v. Kulp; whether or not Paul E. Darrow should be surcharged for conduct in connection with the purchase of certain assets of Kulp & Company by his employee, Myrtle Johnson; and whether or not Paul E. Darrow should be paid additional compensation requested in his final reports and accounts will undoubtedly throw further light on the question whether Paul E. Darrow should be allowed the requested compensation, and therefore the foregoing matters are referred to a Special Master, in accordance with the general order of reference entered herein June 10, 1948."

Said order of April 12, 1949, also reserves the right to make further orders.

There is little, if any, controversy as to the facts pertinent to the problems presented in these appeals.

For many years prior to 1929, one Jacob Kulp had been engaged in constructing buildings in various localities throughout the country. He had erected twenty-seven such buildings, the majority of which had been leased to the Government of the United States for post office purposes. He had caused corporations to be organized to take title to all these properties save one, which was later incorporated. Individually and through a corporation, Kulp and Company, which he appears to have controlled, he had marketed securities of these various corporations and also those of the one unincorporated property. From the beginning Myrtle Johnson was associated with Mr. Kulp in these activities.

In 1929 and 1930 Jacob Kulp and Miss Johnson caused two common law trusts, Federal Facilities Realty Trust and National Realty Trust to be created. Thereupon Kulp transferred to Federal all of the capital stock of fourteen of these building corporations, and to National he transferred the stock of twelve such building corporations together with the title to the one (then unincorporated) piece of property. These building corporations and the unincorporated piece of property had various outstanding bond issues. They and their securities are referred to throughout the record as "subsidiaries."

When the common law trusts were organized certificates of beneficial ownership were issued. Most of these went to Jacob Kulp in exchange for the stock of the building corporations and for title to the unincorporated property. Federal Facilities Realty Trust also issued bonds in the principal amount of $550,000, of which Kulp received $300,000 in principal amount as additional consideration for the transfer of stock in the fourteen building corporations turned over to that trust.

The securities of the subsidiaries had been marketed by Jacob Kulp through Kulp and Company, as well as by other organizations dealing in such securities. Kulp and Company also managed the various subsidiaries, and their properties and also other property not involved in these proceedings.

In 1931, Kulp and Miss Johnson organized the Colonial Securities Company, which engaged in general securities business in Chicago, and dealt in the securities of the subsidiary corporations.

Some time before 1933, the Post Office Department of the United States changed its policy of renting post offices and inaugurated a policy of erecting its own buildings. This made it difficult, if not impossible, to refinance the subsidiaries of the Federal Facilities and National Trusts because it was found that the Post Office Department would not renew existing leases. An investigation was made by the Department of Justice of the Federal and National Common Law Trusts and their subsidiaries. As a result Kulp, in July 1933, transferred all of the Certificates of Beneficial Ownership of Federal and National, together with his Collateral Trust Bonds issued by Federal to a Trustee, George H. Andresen, under a trust agreement referred to in the record as the Andresen Trust. Thereafter Andresen through Federal and National took over the management of the twenty-seven subsidiaries and continued such management for nearly two years, or until the appointment of Darrow as trustee. During all of Andresen's administration of Federal and National Trusts and their subsidiaries, he employed Jacob Kulp and Miss Johnson on a part-time basis, with the agreement that they would be allowed to operate the business of their Colonial Securities Company.

The present proceedings were instituted on December 26, 1934, by petition under Section 77B of the Bankruptcy Act, filed in the District Court for the ...