Matter of Equity Funding Corp. of America

• Decision Date: 08 December 1975
• Docket Number: No. 73-03467.,73-03467.
• Court: U.S. District Court — Central District of California
• Parties: In the Matter of EQUITY FUNDING CORPORATION OF AMERICA, a Delaware Corporation, Debtor.

416 F. Supp. 132

In the Matter of EQUITY FUNDING CORPORATION OF AMERICA, a Delaware Corporation, Debtor.

No. 73-03467.

United States District Court, C. D. California.

December 8, 1975.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

O'Melveny & Myers by Everett B. Clary, A. Robert Pisano, Robert J. White, Los Angeles, Cal., for Robert M. Loeffler, as Trustee.

Grant G. Guthrie, Washington, D. C. and Richard Castro, Los Angeles, Cal., for S. E. C.

Shearman & Sterling by George J. Wade, Robert H. MacKinnon, New York City, for First National City Bank, as agent.

Whitman & Ranson by Dugald Campbell Brown, New York City, and Irell & Manella by Richard L. Bernacchi, Joan L. Lesser, Los Angeles, Cal., for U. S. Trust Co. of New York, successor indenture trustee for 5½% Convertible Subordinated Debentures due 1991.

McCutchen, Black, Verleger & Shea by G. Richard Doty, Roger A. Ferree, Los Angeles, Cal., for Chemical Bank, indenture trustee for 9½% Debentures.

Corinblit & Shapero by Jack Corinblit and Schwartz, Alschuler & Grossman by Marshall B. Grossman, Los Angeles, Cal., and Kirsch, Arak & Bulmash by Jay S. Bulmash, Beverly Hills, Cal., for Certain Class 8 Creditors.

Adams, Duque & Hazeltine by Perry Hirsch, Los Angeles, Cal., for Chase Manhattan Bank as Indenture Trustee for 5¼% Convertible Subordinated Debentures.

Jones, Day, Reavis & Pogue, Los Angeles, Cal. by Ellis McKay, Cleveland, Ohio, for BancOhio Corp.

Sulmeyer, Kupetz, Baumann & Rothman by Irving Sulmeyer, Los Angeles, Cal., and Burton M. Freeman, New York City, for Bankers Trust Co.

Hirschler & Fleischer by Everette G. Allen, Jr., Richmond, Va., Belcher, Henzie & Bieganzahn by Leo Bieganzahn, Los Angeles, Cal., for Fidelity Corp.

Baker, Hostetler & Patterson by Maurice M. Sayre, Cleveland, Ohio, for Certain Class 7 and 8 Creditors.

Diamond, Tilem, Colden & Emery by Herbert Colden, Los Angeles, Cal., for Certain Class 8 Creditors.

Feinerman, Furman & Klein by Stanley A. Furman, Beverly Hills, Cal., for Certain Class 8 Creditors.

David B. Gold, San Francisco, Cal., for Certain Class 5 Creditors.

Kadison, Pfaelzer, Woodard, Quinn & Rossi by Alan R. Woodard, Los Angeles, Cal., for Conservator of Equity Funding Life Ins. Co.

McDermott, Will & Emery by Wilber H. Boies, Chicago, Ill., for Certain Class 7 and 8 Creditors.

Abeles & Markowitz by Judith A. Gilbert, Beverly Hills, Cal., for Danning, Bankruptcy Trustee for Solomon Block.

Karns & Karabian by John H. Karns, Los Angeles, Cal., Bernstein, Golan & Yalowitz, Ltd. by Arthur J. Bernstein, Chicago, Ill., for 9½% Bondholders Protection Committee.

Bader & Bader by I. Walton Bader, New York City, for Independent Investor Protective League.

MEMORANDUM AND ORDER APPROVING PLAN OF REORGANIZATION

PREGERSON, District Judge.

On April 5, 1973, this Court approved the petition of Equity Funding Corporation of America ("EFCA") for protection and reorganization under Chapter X of the Bankruptcy Act (11 U.S.C. § 501 et seq.).¹ On October 24, 1974, after soliciting suggestions for a plan pursuant to Section 167(6) of the Bankruptcy Act 11 U.S.C. § 567(6), Robert M. Loeffler, the duly appointed and acting Trustee of EFCA, filed a proposed Plan for its reorganization.

Pursuant to Section 169 of the Bankruptcy Act (11 U.S.C. § 569), and after due notice to the Debtor, its creditors and stockholders, the Securities and Exchange Commission, the indenture trustees and the Secretary of the Treasury, as required by Section 171 of the Bankruptcy Act (11 U.S.C. § 571), hearings were held on that proposed Plan commencing December 9, 1974 and continuing from time to time until December 8, 1975. During that period the hearings consumed 28 court days. In the course of the hearings, the proposed Plan has undergone a number of amendments. The final amended Plan is dated December 5, 1975. In this Memorandum the term "Plan" refers to the December 5, 1975 amended version unless otherwise noted. An earlier version, identical in substance to the Plan, has been reviewed by the Securities and Exchange Commission, and its Advisory Report dated November 25, 1975 ("Advisory Report") has been received by the Court. The Advisory Report concludes that the Plan "may be found to be fair and equitable and feasible." The Court has considered that report, as well as all the evidence adduced at the hearings, the memoranda filed by the parties, the arguments of counsel, and the files and records in this entire proceeding. Accordingly, it is now appropriate for the Court to determine whether the Plan should be approved.

The Court finds that the Trustee's Plan complies with Section 216 of the Bankruptcy Act (11 U.S.C. § 616); that the Plan is "fair and equitable, and feasible" within the meaning of Section 174 of the Bankruptcy Act (11 U.S.C. § 574); and that the Plan should be approved. Therefore, pursuant to Section 174 of the Bankruptcy Act (11 U.S.C. § 574), the Court approves the Plan and orders that it be transmitted to the creditors of the estate for their acceptance or rejection, in accordance with the terms of the Orders herein dated December 8, 1975.

I. BACKGROUND OF EFCA AND OF THE FRAUD

A. EFCA as of April 5, 1973

EFCA is a Los Angeles-based holding company. Prior to the filing of the Chapter X petition, its subsidiaries were engaged in a diverse array of businesses. Major subsidiaries included four life insurance companies: Bankers National Life Insurance Company ("Bankers"), chartered in New Jersey and headquartered in Parsippany, New Jersey; Northern Life Insurance Company ("Northern"), chartered in Washington and headquartered in Seattle, Washington; Equity Funding Life Insurance Company ("EFLIC"), chartered in Illinois and headquartered in Los Angeles, California; and Equity Funding Life Insurance Company of New York ("EFNY"), a wholly-owned subsidiary of Bankers chartered and doing business in the state of New York.

EFCA's subsidiaries also included an investment advisory company that managed three mutual funds; a securities and broker-dealer group which licensed EFCA salesmen to sell securities and which had seats on a number of regional stock exchanges; a savings and loan association with three offices in Los Angeles; a foreign financing group organized to obtain Eurodollar and foreign currency borrowings, the leading subsidiary of which was Equity Funding Capital Corporation, N. V. ("NV"), which in turn owned an international merchant bank located in Nassau, Bahamas; and companies engaged in cattle breeding, real estate development, and oil and gas exploration. Other subsidiaries operated a marketing organization consisting of approximately 130 branch offices throughout the United States, staffed by more than 5,000 licensed salesmen. The salesmen marketed a broad range of financial products and services sponsored by both EFCA and other companies, including the Equity Funding Program, described below; life insurance policies; various mutual fund shares; and limited partnership interests in oil and gas, cattle, and real estate ventures.

The Equity Funding Program had been EFCA's most vigorously marketed product. The company initiated the sale of these programs in 1960, the year it was formed. A participant in the program would undertake: (1) to purchase a life insurance policy and (2) to invest in mutual fund shares over a ten-year period. The program worked in this fashion: The participant would annually purchase and pay for a number of mutual fund shares. EFCA would pay the annual premium on the participant's life insurance policy as it came due, recording each payment as a loan to the participant, and retaining the participant's mutual fund shares as collateral for the loan. Each year, the participant reborrowed the outstanding indebtedness and accrued interest, plus the annual premium on his insurance policy, and a promissory note to EFCA for the amount borrowed was executed. Each year the participant had to purchase sufficient mutual fund shares to satisfy the collateral requirements for his note. These programs were sold with the expectation that the mutual fund shares which the participant purchased would increase in value during the life of the program in an amount equal to or greater than the total cost of the life insurance premiums and the accrued interest.

EFCA received commissions from the sale of both the mutual fund shares and the insurance policies it sold to the program participants, and it also received interest on the money it loaned to those participants to pay their insurance premiums. Moreover, sales of Equity Funding Programs could generate income for EFCA from two other sources. If the insurance policy sold was issued by a subsidiary of EFCA, that subsidiary could expect to earn a profit during the time the policy was kept in force. And, if the mutual fund shares were issued by a fund managed by an EFCA subsidiary, the management fees paid by the fund to that subsidiary increased.

By early 1973, EFCA and its subsidiaries maintained more than 200,000 public customer accounts. These public customers included Equity Funding Program participants, life insurance policyholders, participants in programs to purchase mutual funds, and limited partners of EFCA-sponsored partnerships. Not a single public customer has been damaged by these Chapter X proceedings or by the events that gave rise to them, with the exception of some of the participants in funding programs sold before 1963; these customers are provided for in the Plan.

When the Chapter X petition was filed, EFCA had outstanding 7,835,127 shares of common stock. The stock was listed on the New York Stock Exchange and in 1969 had traded as high as 92½. At the close of business on March 16, 1973, immediately before rumors of the EFCA fraud began to affect the market, the stock traded at 25 3/8 . By March 27, 1973, when trading was suspended, the stock had declined to 14 3/8 . The stockholders' interest in EFCA, as such, was...