In re Fox West Coast Theatres

Citation25 F. Supp. 250
CourtUnited States District Courts. 9th Circuit. United States District Court (Southern District of California)
Decision Date27 April 1936

25 F. Supp. 250


District Court, S. D. California, Central Division.

April 27, 1936.

25 F. Supp. 251
25 F. Supp. 252
25 F. Supp. 253
Walter K. Tuller, Pierce Works, Homer I. Mitchell, and W. B. Carman, Jr., all
25 F. Supp. 254
of Los Angeles, Cal., for Charles P. Skouras, Charles C. Irwin, O'Melveny, Tuller & Myers, and Reuben G. Hunt

William H. Neblett and R. Dean Warner, both of Los Angeles, Cal., for petioners T. L. Tally and Corbar Corporation.

Oscar Lawler, of Los Angeles, Cal., Alfred Sutro, of San Francisco, Cal., and Alfred Wright, of Los Angeles, Cal., for National Theatres Corporation and Twentieth Century-Fox Film Corporation.

John B. Bertero, of Los Angeles, Cal., for Fox West Coast Theatres and Fox West Theatres Corporation.

P. N. McCloskey, of Los Angeles, Cal., for Samuel W. McNabb.

Walter H. Moses, of Los Angeles, Cal., for Earl E. Moss.

JAMES ALGER FEE, District Judge.

The Fox West Coast Theatres, a corporation, was upon voluntary petition filed February 27, 1933 adjudicated a bankrupt. Upon the day following the filing of the petition and prior to the adjudication, a receiver was appointed and after the adjudication the case was referred to the Hon. Samuel W. McNabb, one of the referees in bankruptcy. The cause proceeded through regular course of administration and after the claim of the Wesco Corporation, the sole stockholder and principal creditor of the bankrupt corporation, had been considerably reduced, the property was sold at a private sale to it for the sum of Fifteen Million, Four Hundred Forty Three Thousand, Eighty Eight Dollars and Sixteen ($15,443,088.16) Cents. This sale was confirmed by the Referee, November 22, 1934. The court upon review, sustained this order December 17, 1934. Of this sum Eight Hundred Thirty Three Thousand, Nine Hundred Forty Nine Dollars and Fifty Three ($833,949.53) Cents was paid in cash and the balance by the cancellation of the indebtedness to the Wesco Company. Following the assumption by the purchasers of the claim of the Government for taxes on property so transferred and the entry of a stipulation that the Wesco Company would hold the property in part for a period of two years in order to protect the trustees of the bankrupt corporation from personal liability, the estate was declared fully administered and closed in regular course on September 18, 1935. Thereafter and upon the fifth day of December, 1935, T. J. Tally and the Corbar Corporation, each alleging that as holder of a lease of different properties to the bankrupt which in each instance had been disaffirmed by the trustees to the damage of the petitioner joined in a petition to set aside the adjudication. This petition was amended upon December 28th by expansion, to include certain matters questioning the jurisdiction of the court. This amendment will be treated as a portion of the original. The petitioners pray the adjudication be set aside; that the court appoint a receiver for the bankrupt and its subsidiaries; that the Chase National Bank, Wesco Corporation and National Theatres Corporation pay into the court such sum as the court may fix as damages up to Twenty Five Million ($25,000,000) Dollars and render judgment against the bankrupt, its attorneys, two of the three trustees, Charles C. Irwin and Samuel W. McNabb, for the amount paid to them as fees and expenses of administration with interest "and be required to pay to the receiver the entire amount of the claimed indebtedness at the time of the bankruptcy"; that all interest on the disaffirmed leases be paid to date in accordance with original obligation; that attorneys' fees be allowed to petitioner; and that summons issue to Fox West Coast Theatres, Fox West Coast Theatres Corporation, Wesco Corporation, National Theatres Corporation, Fox Film Corporation, Chase National Bank of New York, O'Melveny Tuller & Myers, Reuben G. Hunt, Charles P. Skouras, Charles C. Irwin, and Samuel W. McNabb. The allegations of the petition as amended review the adjudication on voluntary petition of Fox West Coast Theatres, a California Corporation, and on information and belief set up charges of fraud upon the court which are outlined in the following paragraphs.

Wesco Corporation, a Delaware Corporation, owned all the stock of bankrupt. All the stock of Wesco Corporation was owned by Fox Film Corporation, a Delaware Corporation. The Chase National Bank of the City of New York, owned or controlled the majority of the stock of the Fox Film Corporation. The gist of the complaint is that these corporations were in effect a single entity and conspired as such to perpetrate the fraud set up in the petition and that "they used in consummation of the fraud the fiction of corporate entity which they manipulated so that they concealed from the court their true relation

25 F. Supp. 255
to each other and thereby practiced extrinsic fraud upon the court in bankruptcy proceedings". As a result of the conspiracy the leases of petitioners held by the bankrupt were disaffirmed with hundreds of others. The purpose of the conspiracy by the three corporations named, was "to simulate fictitious debts of bankrupt and so that it could be put through bankruptcy" winding up with its property owned by this related family group of corporations discharged of these obligations, "all of which was concealed from the court at the time of the adjudication". It is charged that certain overt acts were done pursuant to the conspiracy. These steps are summarized below

The Board of Directors of the bankrupt met upon December 26, 1930 and declared a dividend of Eight Million ($8,000,000) Dollars which was a withdrawal and a reduction of the capital stock of the bankrupt, a California Corporation, prohibited by the California laws, and this action was taken upon direction of the Wesco Corporation. This dividend was never paid although false entries have been made upon the books of the bankrupt as an asset of Eight Million, Five Hundred Five Thousand, One Hundred Eighty Two Dollars and Eleven ($8,505,182.11) Cents. The illegal dividend was more than half of the proved and allowed claims and even constituted over fifty percent (50%) of the bid that was made and accepted by the family holding companies to reacquire the property of their subsidiary which they had thrown into bankruptcy. In violation of certain sections of the law of California, fraudulent transfer was made of all assets of the bankrupt which it was not desired to subject to administration in the bankruptcy court, but that bankrupt retained leases from petitioners to bankrupt and such others as it was desired to have disaffirmed in the bankruptcy proceedings. Such transfer was made without consideration. It was concealed from the court that Wesco Corporation was the sole stockholder of the bankrupt. Appraisers were appointed upon petition of the trustees, who in turn had been elected by the conspirators, who had been elected by the holding corporation voting their fictitious claims. These appraisers appraised the property of the bankrupt at slightly over Twelve Million ($12,000,000) Dollars, whereas claims were approved and allowed in the sum of over Fifteen Million ($15,000,000) Dollars, which amount National Theatres Corporation, formerly Wesco Corporation, bid at private sale and paid by giving a receipt to the trustees for the amount of Fourteen Million, Six Hundred Ten Thousand, Nine Hundred Six Dollars and Fourteen ($14,610,906.14) Cents. The only cash paid was Eight Hundred Thirty Three Thousand, Nine Hundred Forty Nine Dollars and Fifty Three ($833,949.53) Cents, of that sum Six Hundred Thirty Eight Thousand, Seven Hundred Fifty Seven Thousand Dollars and Seventy Eight ($638,757.78) Cents was the cost of the administration, leaving a balance of One Hundred Ninety Five Thousand, One Hundred Ninety Nine Dollars and Seventy Five ($195,199.75) Cents. It is asserted that Wesco Corporation wound up owning the business of the bankrupt which it acquired without cost through the aid of the bankruptcy court and with an increased net earning power over that it had enjoyed prior to bankruptcy of Two Million, Seven Hundred Fifty Thousand ($2,750,000) Dollars per year. The referee in bankruptcy was prevailed upon by the holding companies to accept Seventy Five Thousand ($75,000) Dollars when he would have been entitled to One Hundred Fifty Four Thousand, Four Hundred Thirty Three Dollars and Eighty Eight ($154,433.88) Cents if "the bid had been an honest one". Concealment of all these facts from the court is alleged.

All the records and files in the bankrupt are designated as a part of the petition. Certain allegations tending to show that the court did not have jurisdiction to enter an adjudication or close the estate are hereafter succinctly stated. Albert W. Leeds, a son-in-law of the Hon. W. P. James, was a director and secretary of the bankrupt, devoting his entire time thereto and that on the same day that the resolution was adopted, throwing the corporation into voluntary bankruptcy, Leeds colorably resigned and his resignation was accepted but he remained in the same position throughout the bankruptcy at the same salary and with the exercise of similar authority and that this resignation was collusive and intended to conceal from the interested parties the connection of Leeds with bankrupt. Leeds was, at the time of the filing of the petition, one of the managing officers of the reorganized company, Fox West Coast Theatres Corporation,

25 F. Supp. 256
which received from the bankrupt a fraudulent transfer of its valuable property, above mentioned. Judge James signed the order appointing the receivers and attorneys two days after Leeds had filed the purported resignation, and that on the following day, Judge James signed the order of adjudication. As to Samuel W. McNabb, it is stated that the conspirators selected...

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