S.E.C. v. An-Car Oil Co., Inc.

• Decision Date: 27 August 1979
• Docket Number: AN-CAR,No. 78-1540,78-1540
• Citation: 604 F.2d 114
• Parties: , Bankr. L. Rep. P 67,192 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v.OIL COMPANY, INC., et al., Defendants-Appellees, Cyrus W. Partington et al., Intervenors-Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 114

604 F.2d 114

5 Bankr.Ct.Dec. 830, Bankr. L. Rep. P 67,192

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. AN-CAR OIL COMPANY, INC., et al., Defendants-Appellees Cyrus W. Partington et al., Intervenors-Appellants.

No. 78-1540.

United States Court of Appeals First Circuit.

Argued April 3, 1979.

Decided Aug. 27, 1979.

Edward Woll, Jr., Boston, Mass., with whom George P. Michaely, Jr., Robert N. Hickey, Washington, D. C., and Sullivan & Worcester, Boston, Mass., were on brief for intervenors-appellants.

Frank D. Kirby, Boston, Mass., with whom Steven J. Marullo, and Catherine M. Oliver, Boston, Mass., were on brief for defendants-appellees An-Car Oil Co., Inc., et al.

David Ferber, Sol. to the Commission, Washington, D. C., with whom Jacob H. Stillman, Associate Gen. Counsel, and Judy L. Chesser, Atty., Washington, D. C., were on brief for plaintiff-appellee, Securities and Exchange Commission.

Neal E. Satran, Boston, Mass., on brief for Official Creditors' Committee of An-Car Oil Co., Inc., et al., amicus curiae.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

BOWNES, Circuit Judge.

This appeal is brought by Cyrus W. Partington, et al., putative intervenors in a securities fraud case brought by the Securities and Exchange Commission (SEC) plaintiff-appellee, against defendants-appellees, An-Car Oil Company, Inc. (An-Car), Calvin Oil Co., Ltd., Wichita Drilling Corp., Shelwell Services, Inc., John C. Sterge, Stanley H. Sichel, Donald M. Patten, Mary L. Savery, James I. F. Matthew, and Clyde Shelton. The appeal is from an order of the District Court for the District of Massachusetts dated September 14, 1978, granting Sterge's application on behalf of An-Car and Wichita Drilling Corp. for leave to file voluntary petitions in bankruptcy pursuant to Chapter XI of the Bankruptcy Act and granting Sterge's request that the equity receivership established at the request of the SEC on May 24, 1976, be terminated. Appellants also appeal the district court's denial, on November 3, 1978, of their motion for reconsideration of its September 14, 1978, order. Additionally, they appeal the district court's failure to act on their two separate motions to intervene in the SEC case, filed on February 24, 1977, and May 15, 1978.

Appellants urge before us that, although they are not parties, they have standing to appeal; that the district court erred in failing to make findings of fact and rulings of law with respect to the order of September 14, 1978; that the court had jurisdiction to continue the equity receivership; and that termination of the receivership was an abuse of the district court's discretion.

The appellees, An-Car, et al., refute squarely appellants' arguments and ask for attorney's fees as well as costs.

The SEC takes the ambivalent position that, while continuation of the receivership would have provided the greatest protection for investors, the investors' interests can probably be safeguarded in the Chapter XI proceedings.

In their amicus brief, the Official Creditors' Committee of An-Car posits that reinstatement of the receivership would deprive the creditors of their claims, thus working an inequity. They report that there have already been several conferences with the bankruptcy judge and meetings of the Creditors' Committee at which it has been established that the claims of the investors at a minimum, will be treated the same as the claims of the creditors.

Facts

On December 31, 1975, six of the eventual thirty-four Partington plaintiffs ¹ filed a complaint against An-Car, Sterge, its president, treasurer, and director, Patten, a vice-president and a director, Sichel, a vice-president, Matthew, a vice-president, and Savery, the secretary and a director of An-Car. They alleged that the defendants violated various provisions of the Securities Act, the Securities Exchange Act, and Colorado statutes, ² and committed common law fraud, breach of contract and breach of trust. Appellants had purchased working interests in oil and gas wells and leases and limited partnership interests in oil and gas exploration programs. They sought $397,269.85 in actual damages and $1,000,000 in punitive damages, plus interest and attorney's fees. This action was drawn to Judge Caffrey of the United States District Court for the District of Massachusetts.

The SEC commenced the instant suit against An-Car and the other nine defendants on May 21, 1976, about five months subsequent to the suit brought by appellants. The SEC alleged that An-Car, Sterge, and the other defendants violated the registration provisions of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c), and the antifraud provisions of the Securities Exchange Act, 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. 240.10b-5. This action was drawn to Judge Tauro of the United States District Court for the District of Massachusetts. The central figure in both actions is John C. Sterge, the president, director and sole stockholder of An-Car.

The SEC sought an injunction against future violations pursuant to section 20(b) of the Securities Act, 15 U.S.C. § 77t(b) and section 21(e) of the Securities Exchange Act, 15 U.S.C. § 78u(e). It requested the appointment of an equity receiver for An-Car, Calvin Oil, and Wichita Drilling and an order directing disgorgement by all defendants except Shelwell Service and Clyde Shelton.

On May 24, 1976, Judge Tauro conducted a hearing and granted the SEC's application for a temporary restraining order, enjoining all creditors from commencing, prosecuting, continuing, or enforcing suit against An-Car, Calvin Oil, and Wichita Drilling and ordering the defendants to cease participation in the business of An-Car and Calvin Oil. Judge Tauro appointed John P. Driscoll, Jr., temporary receiver of all assets owned by An-Car, Calvin Oil, and Wichita Drilling, empowering him to marshall all assets, prosecute claims, and hire employees as necessary. He also ordered defendants to disgorge funds paid to them by public investors and income therefrom so that the receiver could distribute the money on a pro rata share to those investors.

On the same day that Judge Tauro issued the temporary restraining order relative to the SEC suit, appellants had a hearing before Judge Caffrey concerning their parallel, private suit against An-Car, Sterge, et al. They sought a preliminary injunction enjoining Sterge from transferring certain assets, including his shares of stock in An-Car, and restraining certain banks and corporations from transferring Sterge's record ownership of stock on their books. In deference to Judge Tauro's restraining order, appellants modified their requested order by deleting reference to An-Car. Appellants and Sterge entered into a court-approved stipulation, whereby Sterge was enjoined from transferring certain assets, including a certificate of deposit in the amount of $100,000, issued by the Neponset Valley Bank and Trust Company. In a separate stipulation between appellants and the Neponset Valley Bank, the bank agreed not to transfer the record of ownership of the certificate of deposit.

By the middle of August, 1976, all defendants in the SEC suit, except An-Car, Calvin Oil, Wichita Drilling, and John Sterge, had consented to a permanent injunction and final judgment as to them. On August 17, 1976, Judge Tauro consolidated appellants' action with the Dunbrack case, a similar private securities fraud suit against the same defendants. ³ He denied a motion to consolidate the private action with the SEC action against An-Car. Since August, 1976, there have been no material developments with respect to the private action and we therefore focus on the SEC suit.

On August 18, 1976, a final consent judgment was entered permanently enjoining An-Car, Wichita Drilling, Calvin Oil, and Sterge from engaging in acts or practices which constitute violations of the antifraud provisions of the Securities Exchange Act as set forth in the complaint. The defendants agreed to the temporary continuation of the equity receivership. At the receiver's request, the district court ordered all personal assets of Sterge held for the benefit of An-Car.

On January 13, 1977, the First National Bank of Boston filed a motion to intervene in the SEC suit to protect its interest as assignee in the $100,000 certificate of deposit issued by the Neponset Valley Bank in Sterge's name. Soon thereafter, appellants responded with a motion to intervene of their own, claiming in essence that the district court's order of May 24, 1976, in the private suit against An-Car created a judicial lien on the certificate of deposit in their favor. The SEC opposed intervention by either party. Although the district court never acted on the motions for intervention, on February 7, 1977, it ordered all parties and the receiver in the SEC action to serve all papers on the Partington and Dunbrack plaintiffs and also to notify them of hearings.

The receiver combed through the entangled records of An-Car, Wichita, and Calvin and concluded that Sterge was deeply in debt to An-Car. By stipulation, Sterge acknowledged that he owed An-Car $1,187,939 and agreed to disgorge that amount to the receiver by deeding title to real properties and delivering certain personal property to the receiver. Included in the disgorged assets was all of the issued and outstanding stock of An-Car. The district court ordered disgorgement on April 14, 1977, along the lines of the stipulation agreed to by the SEC and Sterge.

The receiver filed a lengthy report on February 1, 1978, detailing the "abysmal condition" in which he found An-Car's financial ledgers and noting that Sterge "vacillated between wary cooperation with the Receiver and outright duplicity." He recommended that, given the precarious state of its finances, a plan for reorganization of An-Car be formulated. He also suggested that the receivership be terminated, stating:

Indeed the continuation...