Lincoln Printing Co. v. Middle West Utilities Co.

• Decision Date: 26 April 1934
• Docket Number: No. 11654.,11654.
• Citation: 6 F. Supp. 663
• Parties: LINCOLN PRINTING CO. v. MIDDLE WEST UTILITIES CO. (POLLAK, Intervener).
• Court: U.S. District Court — Northern District of Illinois

6 F. Supp. 663

LINCOLN PRINTING CO. v. MIDDLE WEST UTILITIES CO. (POLLAK, Intervener).

No. 11654.

District Court, N. D. Illinois, E. D.

April 26, 1934.

Mayer, Meyer, Austrian & Platt, of Chicago, Ill., for Continental Illinois Nat. Bank & Trust Co. of Chicago.

Samuel A. & Leonard B. Ettelson, of Chicago, Ill., for Pollak.

Cutting, Moore & Sidley, of Chicago, Ill., for preferred stockholders' committee.

Burry, Johnstone, Peters & Dixon and Schuyler, Weinfeld & Hennessy, all of Chicago, Ill., for Charles A. McCulloch.

Ryan, Condon & Livingston, of Chicago, Ill., for Edward N. Hurley Estate.

Kirkland, Fleming, Green & Martin, of Chicago, Ill., for noteholders' committee.

Hopkins, Sutter, Halls & DeWolfe, of Chicago, Ill., for First Nat. Bank of Chicago.

Jacobson, Merrick, Nierman & Silbert, of Chicago, Ill., for petitioning creditors in bankruptcy.

Taylor, Miller, Busch & Boyden, of Chicago, Ill., for stockholders' committee.

LINDLEY, District Judge.

On January 10, 1934, this court announced that for reasons then stated a hearing should be had promptly to determine whether the appointment of receivers for Middle West Utilities Company, hereinafter termed Middle West, was the result of collusion and fraud upon the court.

Middle West was one of the group of so-called Insull corporations which included among others two investment trusts, Insull Utility Investments, Inc., and Corporation Securities Company.

On April 16, 1932, Calvin Fentress was appointed receiver for Insull Utility Investments, Inc., and, later, ancillary receiver in New York, and subsequently receiver in bankruptcy. Petition for compensation for services as receiver of Insull Utility Investments, Inc., by Calvin Fentress and petitions for compensation for legal services rendered to said receiver having been filed, the same were heard by the Hon. Evan A. Evans, one of the judges of the Circuit Court of Appeals of this circuit sitting in this court (6 F. Supp. 653). In the opinion filed in said proceedings Judge Evans said: "It is quite impossible to separate the application for the appointment of a receiver in the Insull Utility Investments, Inc., from like applications in Middle West and Corporation Securities Companies. Three companies were organized and promoted by the so-called Insull interests. They all revolved about the activities of one Samuel Insull, Sr. One company, the Middle West, was a holding company, and the other two are investment trusts."

After reviewing the evidence submitted before him, Judge Evans said, as to Insull Utilities Investment, Inc.: "Upon this showing, and bearing in mind that the suit was one for the appointment of a receiver, a finding that the suit was collusively brought is unavoidable."

The value of Mr. Fentress' services as receiver in the equity case and in the ancillary proceedings and as receiver in bankruptcy was fixed at $12,500, which sum he had already been paid. Further allowance of fees to him, therefore, was denied. Proper allowance of compensation to each of the two law firms representing said receiver was fixed at $12,500, which had already been paid to them. Allowance of further or additional fees as counsel for said receiver, therefore, was denied.

It was because of the language of the opinion of Judge Evans in the case referred to that I deemed it incumbent upon this court to initiate and conduct this inquiry. Rightly or wrongly I regarded that opinion as containing an implication of fraud upon the court in procuring the appointment of receivers for Middle West, and announced that, independent of any action by any party litigant, it is always the duty of a court, the moment a substantial suggestion of fraud comes to it, upon its own motion, to institute an inquiry into all the facts; and that in the present case the court had formed the conviction that, whether or not any interested party should so request, it should, sitting in chancery, cause to be initiated proceedings looking to a complete investigation and final adjudication of the question of whether this court has been the victim of a fraud perpetrated upon it.

The receiver, Charles A. McCulloch, has also filed a petition setting forth in some detail the history of his appointment as receiver, subsequent developments and accomplished results of the receivership. Therein he said, "If there is a cloud on petitioner's title as receiver he desires it removed," and prayed that a rule be entered upon all interested parties to answer and set forth grounds of objection, if any, which they might have to his continuance as receiver, and that full investigation be made and his appointment confirmed.

The court granted leave also to Sidney B. Pollak to file an intervening petition, wherein it was alleged that he is the owner of 2,200 shares of common stock of Middle West; that the receivership proceedings had been fraudulently instituted and were and are a fraud and imposition upon the court; that, prior to the time receivers were appointed, certain secret meetings had been held, attended by Samuel Insull, his personal counsel and executives of certain creditor banks, for the purpose of formulating a specific plan and procedure for placing Middle West and certain other so-called Insull Corporations in receivership; that at said meetings Samuel Insull, Edward N. Hurley, and Charles A. McCulloch were collusively selected to be suggested as receivers and the two law firms appointed as counsel for the receivers were likewise collusively selected; that no debenture holders, unsecured creditors, or stockholders were represented; and that said meetings were held, and the selections of nominees made, solely in the interest of Samuel Insull and the secured bank creditors, who, it was alleged, were interested in protecting for themselves certain collateral placed by Insull with them to secure loans procured by him in his prior unlawful management of the corporation.

This petition also charged that full and fair disclosure was not made to the court of the meetings or of what there occurred, as to how or by whom the recommendations had been agreed upon; that about the same time a petition in bankruptcy was filed in this court against the company and is still pending; that the selection of receivers and solicitors was in violation of the practice approved by the Supreme Court; and that the receivers herein and their attorneys and solicitors are, as a result disqualified and their appointments illegal and void.

The relief prayed in the petition is in the alternative: That the bill of complaint and all proceedings herein be forthwith dismissed; or that the orders appointing the receivers and their counsel be vacated, and that this court select and appoint a receiver and counsel therefor; that, upon such dismissal, the receiver and his solicitors be required to return to the estate all moneys received by them on account of fees; that an order be entered requiring the filing of a claim against the estate of Edward N. Hurley, now deceased, for the amount by him received as fees as receiver; and that, if the estate has suffered any loss through the payment of unlawful expense on account of the receivership, the same be paid by counsel who were responsible for the imposition of the alleged fraud.

A rule was entered upon all parties in interest to answer both the petition of the receiver and that of the intervening petitioner, and various answers of interested parties were filed.

The court stated its determination to have developed every fact and circumstance tending to shed light upon the subject-matter of the inquiry, and appointed counsel entirely disinterested in the result of the inquiry, and wholly disassociated with any of the various interests involved, to appear, advise, and assist in the conduct of the hearing to the end that the court might be fully and completely advised upon all issues bearing upon the suggestion of fraud upon the court and upon the ultimate basic and most important question of what is for the best interests of the trust estate.

Mr. Pollak filed his formal answer to the receiver's petition, and appended thereto as an exhibit a copy of an intervening petition presented to the court by him on June 7, 1932, with a motion for leave to file the same. This motion was denied on or about August 12, 1932.

Since in the answers filed by other interested parties and at the hearing reference was made to this Pollak intervening petition previously presented, some consideration of the character thereof is appropriate.

In this previous petition Sidney B. Pollak alleged that he was the owner of 2,800 shares of common stock of Middle West, and, upon information and belief, that there were outstanding 15,641,983 shares of said common stock. He recited the filing of the bill herein, the hearing had pursuant thereto, and the entry of the order appointing Samuel Insull, Edward N. Hurley, and Charles A. McCulloch receivers. He alleged that the law firms of Burry, Johnstone, Peters & Dixon and Schuyler, Dunbar & Weinfeld had been appointed and were acting as solicitors for the receivers; that the proceeding was a consent receivership procured by Middle West and engineered by Samuel Insull, and that the latter had exercised a dominating and controlling power in the company, and was continuing to dominate and control the policies and financial transactions of the company and affiliated corporations.

This previous intervening petition also charged that Samuel Insull had been guilty of gross misconduct, prior to receivership, in the conduct of the business of said company, to the great financial injury of and loss to the stockholders, and to the wreck and ruin of the company.

In this prior petition Sidney B. Pollak prayed that he be admitted as an intervener to protect his rights as the owner of common stock; that the order appointing receivers be modified by vacating the appointment of said Insull and appointing some disinterested and...