Kenny v. The Allerton Corporation

• Decision Date: 28 July 1930
• Citation: 17 Del.Ch. 219,151 A. 257
• Court: Court of Chancery of Delaware
• Parties: EDGAR KENNY, on behalf of himself and all other stockholders of the Allerton Corporation, similarly situated, v. THE ALLERTON CORPORATION

151 A. 257

17 Del.Ch. 219

EDGAR KENNY, on behalf of himself and all other stockholders of the Allerton Corporation, similarly situated, v. THE ALLERTON CORPORATION

Court of Chancery of Delaware, New Castle

July 28, 1930

BILL FOR RECEIVER based on insolvency. Revised Code 1915, § 3883.

At the close of the complainant's testimony, the defendant moved under Rule 75 of this court that the bill be dismissed for lack of sufficient testimony to sustain such allegations of the bill as might entitle the complainant to have relief.

Bill dismissed.

Aaron Finger, of the firm of Richards, Layton & Finger, and David W. Kahn and Samuel Hoffman, both of New York City, for complainant.

Christopher L. Ward, Jr., of the firm of Marvel, Morford & Ward, John F Caskey, of the firm of Hughes, Schurman & Dwight, of New York City, for defendant.

OPINION

THE CHANCELLOR

Insolvency under the statute may consist of two types. It exists where the liabilities exceed the assets, or where there is an inability to meet current maturing obligations in the ordinary course of business. The bill relies on insolvency in the latter sense. Insolvency in the sense of a deficiency of assets below liabilities, is not only not alleged, but appears to be admitted not to exist in point of fact.

Even when insolvency is shown, the appointment of a receiver will not follow as a matter of course. Whether the appointment should be made is always a question that rests in the sound discretion of the Chancellor. Jones v Maxwell Motor Co., 13 Del.Ch. 76, 115 A. 312; Freeman v. Hare & Chase, 16 Del.Ch. 207, 142 A. 793.

Furthermore the insolvency alleged must be shown to have existed at the time the bill was filed, Manning v. Middle States Oil Corp., 15 Del.Ch. 321, 137 A. 79; and, though shown then to exist, yet if the condition of insolvency has been since removed, discretion will be exercised against the appointment of a receiver. Freeman v. Hare & Chase, supra.

Inasmuch as insolvency is a jurisdictional fact, proof in support of it must be clear and convincing and free from doubt. Whitmer v. Wm. Whitmer & Sons, 11 Del.Ch. 222, 99 A. 428; Manning v. Middle States Oil Corp., supra. "To doubt in such a case is to deny," is the language of the Vice-Chancellor in Atlantic Trust Co. v. Consolidated Electric Storage Co., 49 N.J.Eq. 402, 23 A. 934, 935.

With these principles in mind it is now in order to turn to the facts with the view of seeing whether they support a case in which receivership relief should be afforded.

The defendant is what is familiarly known as a holding company. This view is disputed by the complainant, but wrongly so I think. It is true the defendant exercises a very close supervision over the affairs of its subsidiaries and directs in an intimate way their operations. But the corporate identities are strictly observed and each company in the group apparently carries on its affairs in strict conformity with its existence as a distinct corporate creature. Each holds its own assets, current receipts are not commingled and current liabilities are separately charged and borne by each. There has been considerable inter-corporate lending and borrowing, but these are reflected on the books of each as though each had no common bond of interest with another. It is true that the defendant as the parent prepares a consolidated balance sheet from time to time. But this is only in conformity with common practice in such cases and amounts to nothing more than a convenient method of disclosing for its own information the status and current condition of its investments in the various constituents. All that the defendant owns consists of shares of stock in its subsidiaries. It borrows from one and lends to another. Outside of funds received from borrowings, either from its own subsidiaries or from the public, its only receipts so far as the record discloses are derived from dividends declared on the stocks of the subsidiaries held by it.

The defendant's investments are in the field of the apartment hotel business. It owns the entire outstanding capital stock of the following New York corporations:

Allerton Realty Company, which owns a four story hotel building of one hundred and fifty rooms at Twenty-Second Street and Eighth Avenue, New York City.

Allerton 55th Street Corporation, which owns a sixteen story hotel building of four hundred rooms at Fifty-Fifth Street and Madison Avenue, New York City.

Allerton New York Corporation, which owns a seventeen story hotel building of four hundred and fifty rooms at Fifty-Seventh Street and Lexington Avenue, a sixteen story hotel building of three hundred and ninety-one rooms at 143 E. Thirty-Ninth Street, and a seventeen story hotel building of four hundred and fifty rooms at Thirty-Eighth Street and Madison Avenue, all in New York City.

Allerton Operating Corporation, which is a mere operating company in which is centered the paying of bills, the hiring and dismissing of employees for the various hotels. It has no assets.

Allerton House Company, which owns stock in Allerton-Cleveland Company, hereinbelow referred to, an investment of about $ 90,000 in another corporation known as Allerton Fifty-Ninth Street Corporation, which investment is likely to be shortly realized, and an interest in a Country Club property at Rye, New York.

In addition to owning the entire interest in the foregoing New York corporations, the defendant in its own name and through its wholly owned subsidiary, Allerton House Company, owns the following controlling but not entire interests in two other corporations:

Allerton-Cleveland Company, a corporation of Ohio, all of the one thousand shares of outstanding Class A common stock, twelve hundred and eighty shares out of twenty-five hundred outstanding of the Class B common stock, and none of the four thousand and fifty-seven shares of outstanding preferred stock.

Allerton Company of Chicago, a corporation of Illinois, fifteen hundred and ten out of the thirty-eight hundred and twenty-five outstanding shares of preferred stock and thirty-seven hundred and twenty-five out of the fifty-three hundred and nineteen outstanding shares of common stock.

These two corporations respectively own and operate a hotel in each of the cities of Cleveland and Chicago.

The complainant placed a value on the New York hotels, which, it may be said, appear to be quite profitable and exceedingly well located, of $ 9,451,695. The funded mortgage indebtedness of them is $ 5,307,500, which, on the value given, shows an equity of $ 4,144,195.

The defendant has an outstanding issue of debentures in the amount of $ 1,862,000, secured by a pledge of all the stock of the New York corporations other than of Allerton House Company, and of the stock in the Ohio and Illinois corporations directly held by it.

The above is a summary of the defendant's assets and funded liabilities. The Chicago and Cleveland properties appear to have been thus far unprofitable. As of April 30, 1930, they have borrowed from the defendant on open account something over $ 1,500,000, and the defendant in turn has borrowed from its wholly owned subsidiaries, Allerton New York Corporation and Allerton 55th Street Corporation, $ 582,557.14. This latter intercorporate borrowing was, I believe, necessitated by the needs of the Illinois and Ohio companies.

Because of the Chicago and Cleveland ventures, the defendant appears to have been confronted with some troublesome cash problems. Had its New York properties been the only ones in its system, its investments would on the whole be showing most satisfactory results. But the investments in Chicago and Cleveland have thus far been unprofitable and have been the chief if not the sole cause for what cash difficulties the defendant has recently encountered in the management of its subsidiaries and their affairs.

It is the occurring of these cash difficulties that the complainant points to as justifying his charge that the defendant, while solvent in the bankruptcy sense, is nevertheless insolvent in the sense that it is unable to meet its current obligations in the ordinary course of business. The particulars of these difficulties will now be referred to and the weight of them considered as bearing on the question of whether a case for a receiver has been made out.

(a) Under this head it is pointed out that on May 1, 1930 interest amounting to about $ 47,500 which fell due on the bonds of the Allerton-Cleveland Company was not paid. The significance of this is that while...