In re The Van Sweringen Company

• Citation: 119 F.2d 231
• Decision Date: 16 April 1941
• Docket Number: No. 8646,No. 8655.,8654,8646,8655.
• Parties: In re THE VAN SWERINGEN COMPANY. TERMINAL & SHAKER HEIGHTS REALTY COMPANY v. VAN SWERINGEN COMPANY. In re THE VAN SWERINGEN CORPORATION. THE TERMINAL & SHAKER HEIGHTS REALTY COMPANY v. THE VAN SWERINGEN CORPORATION et al. In re THE VAN SWERINGEN CORPORATION and THE CLEVELAND TERMINALS BLDG. COMPANY. THE TERMINAL & SHAKER HEIGHTS REALTY COMPANY v. THE CLEVELAND TERMINALS BLDG. COMPANY.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

119 F.2d 231 (1941)

In re THE VAN SWERINGEN COMPANY.

TERMINAL & SHAKER HEIGHTS REALTY COMPANY v. VAN SWERINGEN COMPANY.

In re THE VAN SWERINGEN CORPORATION.

THE TERMINAL & SHAKER HEIGHTS REALTY COMPANY v. THE VAN SWERINGEN CORPORATION et al.

In re THE VAN SWERINGEN CORPORATION and THE CLEVELAND TERMINALS BLDG. COMPANY.

THE TERMINAL & SHAKER HEIGHTS REALTY COMPANY v. THE CLEVELAND TERMINALS BLDG. COMPANY.

Nos. 8646, 8654, No. 8655.

Circuit Court of Appeals, Sixth Circuit.

April 16, 1941.

William H. Thompson, of Indianapolis, Ind., and Charles S. Wachner, of Cleveland, Ohio (Everett Warner, of Muncie, Ind., on the brief), for appellants.

Frederick L. Leckie and Joseph G. Fogg, both of Cleveland, Ohio (Arthur E. Petersilge and Kenneth Resseger, both of Cleveland, Ohio, on the brief), for Van Sweringen Corporation.

I. Walter Sharp and J. Hall Kellogg, both of Cleveland, Ohio, for Cleveland Terminals Bldg. Co.

Edward T. Butler, Jr., of Cleveland, Ohio, for Van Sweringen Company.

Joseph L. Stern, of Cleveland, Ohio (Meyer Abrams and Harry Myerson, both of Chicago, Ill., on the brief), for intervenors A. B. Gochenour and others.

Before ALLEN, HAMILTON, and MARTIN, Circuit Judges.

MARTIN, Circuit Judge.

In these three cases, which were argued together, The Terminal and Shaker Heights Realty Company (formerly Midamerica Corporation) has appealed from orders of the District Court in separate bankruptcy proceedings under former Section 77B, Bankr.Act, 11 U.S.C.A. § 207, in which its large claims as a creditor of the three respective debtor corporations were allowed only for insignificant sums.

In No. 8646, In re The Van Sweringen Company, debtor, the claim of appellant for $8,177,023.99, on account of the debtor's notes held by it, was allowed in the sum of $1, with interest at 6 percent from October 1, 1935; In No. 8654, In re The Van Sweringen Corporation, debtor, the claim of appellant for $13,787,000, on account of that debtor's notes likewise held, was allowed in the sum of $887 and interest at 6 per cent from October 1, 1935; in No. 8655, In re The Van Sweringen Corporation, debtor, and The Cleveland Terminals Building Company, subsidiary debtor, the claim of appellant for $1,348,614.99, on account of bonds and interest thereon of the subsidiary debtor acquired by appellant, was allowed in the sum of $2, with interest at 6 percent from October 1, 1935.

The District Court found that the foregoing allowances were the amounts shown on the books of Midamerica Corporation as the purchase price of the notes and bonds of the respective debtors acquired by Midamerica at auction sale on September 30, 1935; that Midamerica Corporation was a combination in corporate form, participated in by directors of the respective debtor corporations, formed and utilized for the purpose, among other things, of divesting the debtor corporations of their properties or of obtaining claims against them at a sacrifice for the profit of the combination at the expense and to the detriment of the debtor corporations; that the debtor companies were insolvent on the date of the auction sale and could not meet their maturing obligations, their assets at a fair valuation not equalling their liabilities; that bad faith and breach of fiduciary duty were implicit in the purchases by the officers of the company of the corporate securities for their personal advantage; that the Midamerica Corporation acquired and holds the notes and bonds as trustee for the respective debtor corporations and that appellant, as its successor, is entitled to allowance of its respective claims only for the amounts paid for the same, together with interest thereon. We find that the record in each of the three cases abundantly supports these findings of the District Court.

The two Van Sweringen Brothers, big operators in corporate finance and industrial combination, expansion and control through the media of holding companies and interlocking directorates, were officers, directors and majority stockholders of the Vaness Company, a Delaware corporation which owned the majority of the capital stock, carrying voting control of the two debtor corporations, The Van Sweringen Company and the Van Sweringen Corporation, in which the brothers were also officers and directors. The debtor, The Van Sweringen Corporation, owned all the capital stock of the subsidiary debtor, The Cleveland Terminals Building Company, of which the Van Sweringens were likewise officers and directors.

The Vaness Company and the subsidiary debtor, The Cleveland Terminals Building Company, on October 31, 1930, borrowed on pledged securities an aggregate sum of $39,500,000 from the New York banking house of J. P. Morgan & Company. Notes were issued for the loans; and, subsequently $1,200,000 of second mortgage bonds of the subsidiary debtor found their way as collateral into the files of the New York Bankers. The Van Sweringen Brothers were endorsers of the notes and guarantors of the loans.

In May, 1935, the loans were defaulted; and, on September 13, 1935, J. P. Morgan & Company gave notice that the collateral securities fully listed in the notice would be sold at public auction on September 30, 1935. Earlier notice of the proposed sale had been given to the Van Sweringens, individually, but not to the corporate entities controlled by them.

Early in August, 1935, the brothers, O. P. Van Sweringen and M. J. Van Sweringen, began negotiations with G. A. Tomlinson and George A. Ball which resulted in the organization of Midamerica Corporation, the name of which was subsequently changed to The Terminal and Shaker Heights Realty Company (appellant herein). At that time, the Van Sweringen Brothers were in extreme need of financial assistance to conserve their individual pecuniary interests. Their attorney, J. P. Murphy, had drafted numerous tentative plans to relieve his clients from their endorsement of the Morgan held notes, namely that of the subsidiary debtor for $23,500,000 and that of the Vaness Company for $16,000,000, and at the same time to retain for the Van Sweringens control, direction and management of their industrial empire.

Ultimately, there was a meeting of minds, evidenced in a formal letter, dated September 21, 1935, signed by Ball and Tomlinson and addressed to the Van Sweringen Brothers. It has been established that this letter was drafted by the Van Sweringens, or their attorneys. Among the stipulations in the letter, which became the contract between the parties, was a provision that Midamerica should bid at the advertised auction sale in accordance with the determination of its Board of Directors. It was provided that, for the first three years, the Board should be composed of six members, three of whom must be O. P. Van Sweringen, M. J. Van Sweringen, and Charles L. Bradley, their business associate. The other directors named were Ball, Tomlinson, and F. B. Barnard. Before the auction sale, the directors were elected as agreed, and O. P. Van Sweringen was also elected President, M. J. Van Sweringen, Vice-President, and Charles L. Bradley, Vice-President of the Midamerica Corporation.

The letter stipulated that Ball and Tomlinson would subscribe for $2,000,000 of preferred stock at par value and for 15,000 shares of common stock without par value at $1 per share. The Van Sweringens were granted a ten-year irrevocable option to acquire 55 percent of the common stock of the new corporation, representing voting control, in the manner carefully provided in Clause (3) of the letter proposal formally accepted by the Van Sweringens.

The opening paragraph of the letter read: "You have called to our attention an investment possibility in the proposed sale in New York of certain securities pledged to secure collateral notes of the Vaness Company and The Cleveland Terminals Building Company. The more important of these securities are those of companies created and developed under your control, direction, or management. These companies, in the main, prospered up to the time of the depression. We believe that under the same control, direction and management they will again prosper if the present improvement in business conditions shall continue, as we believe it will. If we did not so believe, we should not be interested in acquiring these securities, in whole or in part, under any circumstances. As it is, we should be interested if, but only if, we could be assured that you will participate actively in their direction and management."

The all important paragraph (3) of the contract-letter provided: "In furtherance of our desire for your active participation in the management and direction of the new corporation, we also desire that you become interested in the ownership of such corporation, and to this end we will, upon the issuance of these shares and upon the corporation having purchased at such...