Marshall v. Lovell

• Decision Date: 18 March 1926
• Citation: 11 F.2d 632
• Parties: MARSHALL v. LOVELL.
• Court: U.S. District Court — District of Minnesota

11 F.2d 632 (1926)

MARSHALL v. LOVELL.

District Court, D. Minnesota, Third Division.

March 18, 1926.

Denegre, McDermott, Stearns & Weeks, of St. Paul, Minn., and Franklin F. Phillips, Jr., of Boston, Mass., for plaintiff.

Shearer, Byard & Trogner, of Minneapolis, Minn., for defendant.

JOHN B. SANBORN, District Judge.

This cause came on to be heard before the court at a term thereof held in the city of St. Paul, Minnesota, on the 28th day of November, 1925. Denegre, McDermott, Stearns & Weeks, of St. Paul, Minn., and Franklin F. Phillips, Jr., of Boston, Mass., appeared as solicitors for the plaintiff, and Shearer, Byard & Trogner, of Minneapolis, Minn., for the defendant.

Walter D. Lovell, an engineer, contractor, and business man of St. Paul, Minn., in 1910 was heavily interested as a bondholder in the Wenatchee Valley Gas & Electric Company. The business of that company was the manufacture and sale of electricity in central Washington. The company got into financial difficulties soon after it was organized. There was a default in interest on its bonds in 1913. In 1914 the bondholders made a loan to take care of interest. In 1915 the same situation occurred. Prices of all materials were going up, and rates were not increasing proportionately. The bondholders voluntarily reduced the interest upon their bonds, and a bondholders' advisory committee, consisting of W. D. Lovell and W. S. Taylor, was formed. It acted in an advisory capacity to the president of the company from February 4, 1915, until December 10, 1919.

On December 10, 1919, the bondholders appointed a committee, consisting of W. D. Lovell, John B. Fassett, and W. S. Taylor, the duties of which were to protect the interests and enforce the rights of the bondholders. The title to all of the bonds deposited was placed in the members of the committee in trust for the depositors. The agreement creating the committee contained the usual provisions of such agreements. Its effect was to place all of the bonds in the hands of the committee, with full power to them to do such things as were necessary to protect the interests of the bondholders. In case of reorganization of the company, the agreement required that it be submitted to the bondholders for their approval or rejection.

Mr. Lovell eventually became possessed of some 233 bonds, of the par value of $1,000 each. Mr. Walter Remley, his brother-in-law, owned 79 bonds, R. T. Lovell, a brother, 7, and there were other bonds which were occasionally represented by Mr. Lovell. Because of the bonds which he owned, those which he controlled, his knowledge, ability, and practical experience, he was the dominating personality of the bondholders' committee. The committee commenced an action for the foreclosure of the trust deed securing the bonds, and secured the appointment of Mr. Lovell's brother, Robert J. Lovell, as receiver. In order to operate the property, he was obliged to issue receiver's certificates, which, together with the expenses of administration of the receivership, constituted prior liens upon the company's property. Under all of the circumstances, it was the desire of the committee to dispose of this property as soon as a reasonable price could be obtained. Mr. Lovell was active in endeavoring to find a purchaser.

The Washington Coast Utilities Company was the owner of a hydroelectric property situated near the west coast of Washington. Its president and general manager from 1919 to 1923 was Frederick B. Nims, an engineer and a man of ability. Warner Marshall, a resident of New York and an investment banker, had been instrumental in its organization and promotion, and was its first president. Its common stock was owned by Marshall & Co., of Boston, which was controlled by Mr. Marshall up until about March, 1921. Marshall, or Marshall & Co., had sold the securities for the Washington Coast and had acted as its fiscal agent.

In 1917 it had first been suggested that this company might be interested in buying the properties of the Wenatchee Valley Gas & Electric Company, and between that time and the spring of 1921 negotiations had been had looking toward a consolidation of the properties, or a sale of the properties of the latter company. Mr. Nims and Mr. Marshall in the fall of 1920 had had a consultation with Mr. Lovell with reference to a purchase of the properties, but nothing had come of it. In the spring of 1921 Mr. Lovell sent word to Mr. Nims that he was on his way East; that he had negotiations on with Stone & Webster, and others, who might be interested in the purchase of the properties of his company, and requesting Mr. Nims to assist him in these negotiations. An arrangement was made whereby Mr. Nims was to assist Mr. Lovell. If the properties were sold to any one except the Washington Coast Utilities Company, the expenses of Mr. Nims were to be paid by the bondholders' committee. He met Mr. Lovell in Boston, and told him that, while he was dealing with Stone & Webster and others, he would not make any proposition to him on behalf of his own company, but that, if he failed to make a sale to them, he would endeavor to bring about a purchase by his company.

Mr. Lovell was unable to make a satisfactory arrangement with others, and early in April Mr. Nims, Mr. Marshall, and Mr. Lovell negotiated a tentative agreement for the sale of the Wenatchee properties to Mr. Marshall. The Washington Coast Utilities Company could issue bonds and preferred stock, but had no cash to invest. The receiver's certificates and prior liens upon the Wenatchee properties amounted to about $200,000, and, in order that the properties might be delivered to the Washington Coast Utilities free and clear of encumbrances, it was arranged that Mr. Marshall should buy the properties from the receiver of the Wenatchee Company and should transfer them to the Washington Coast. That company agreed with Mr. Marshall that, if he could arrange for a purchase and transfer of these properties, it would transfer to him, as the purchase price thereof and his compensation, $225,000 of its common stock, $350,000 of its preferred stock, and $760,000 of bonds. The tentative agreement which was reached by Mr. Nims, Mr. Lovell, and Mr. Marshall was that the bondholders of the Wenatchee Company should receive for each $1,000 bond which they held $500 of preferred stock and a $500 bond of the Washington Coast, and that, in addition, Mr. Marshall should pay off the receiver's certificates and all prior liens in cash. It would require $327,000 of this preferred stock and an equal amount of bonds to carry out the agreement with the bondholders of the Wenatchee Company. It would require about $250,000 of bonds to raise the money to pay off prior liens. That would leave Mr. Marshall as his compensation $225,000 of common stock, $23,000 of preferred stock, and about $183,000 of bonds, a total of about $431,000 par value of securities. These securities were at that time not worth par, but had a very substantial value.

The tentative arrangement was that the bondholders' committee should bid in the properties of the Wenatchee Company at the foreclosure sale, and should then transfer them to Mr. Marshall. After the tentative arrangement had been made, a meeting of the bondholders' committee was called at the Pennsylvania Hotel in New York City, on or about the 9th day of April, and it was then agreed, after a memorandum had been drawn up and signed by Mr. Marshall, Mr. Nims, and two of the committeemen, Messrs. Taylor and Fassett, that the arrangement was approved by the committee, and that it should be submitted to a meeting of the bondholders of the company for ratification. Mr. Nims, Mr. Fassett, and Mr. Taylor then left the place of meeting, leaving Mr. Marshall and Mr. Lovell together. Mr. Marshall states that, after Nims and the others had gone, Mr. Lovell told him, in substance, that the deal would never go through unless he received substantially $200,000 of securities; that he would vote against its ratification otherwise. Mr. Marshall says that this came as a complete surprise to him; that he realized that Mr. Lovell was in a position to defeat the ratification of this agreement by the bondholders; that he (Marshall) was faced with the alternative of losing his entire profit or losing a considerable portion of it, and that he decided upon the least of the two evils from his point of view, and acceded to Lovell's demand that he have a very substantial personal compensation. He says that, after Nims returned, he advised him of the situation, and in effect told him to make the best arrangement with Lovell that he could, and that he then left for Boston, where he was residing at that time. Mr. Lovell's claim is that he and Mr. Nims had discussed the matter of personal compensation before, and that it was understood by both Mr. Nims and Mr. Marshall that he was to have such compensation.

Mr. Lovell and Mr. Nims worked out the terms of the agreement to be signed by Warner Marshall and the bondholders' committee. This agreement was dated the 14th day of April, 1921, and provided for the bidding in of the property at the receiver's sale and for the payment of the bondholders in accordance with the arrangement previously referred to. This agreement was subject to approval by the bondholders.

At the same time an agreement between Mr. Lovell and Mr. Marshall was drawn up, without the knowledge of any of the other members of the bondholders' committee, pursuant to which Lovell agreed to use his best efforts to bring about the adoption of the agreement, to defray the expenses of the bondholders' committee, to give advice on engineering matters, to give advice concerning business and financial affairs, to represent Marshall in negotiating with banks and others, if it became necessary, to pay any allowance made by the court for compensation to the receiver in excess of $7,500 a year, and to deliver to Marshall, after the sale was...