Security-First Nat. Bank v. Rindge Land & Navigation Co.

• Citation: 85 F.2d 557
• Decision Date: 17 August 1936
• Docket Number: No. 7965.,7965.
• Parties: SECURITY-FIRST NAT. BANK OF LOS ANGELES et al. v. RINDGE LAND & NAVIGATION CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

85 F.2d 557 (1936)

SECURITY-FIRST NAT. BANK OF LOS ANGELES et al. v. RINDGE LAND & NAVIGATION CO. et al.^*

No. 7965.

Circuit Court of Appeals, Ninth Circuit.

August 17, 1936.

Orrick, Palmer & Dahlquist and Garret W. McEnerney, all of San Francisco, Cal., for appellant Pacific States Savings & Loan Co.

Newlin & Ashburn, Gurney E. Newlin, A. W. Ashburn, and Clyde E. Holley, all of Los Angeles, Cal., for appellant Security First Nat. Bank of Los Angeles.

John W. Preston and Agnew & Boekel, all of San Francisco, Cal., Rea, Free & Jacka, of San Jose, Cal., and Marvin Osburn, of Los Angeles, Cal., for appellee Rindge Land & Navigation Co.

Before WILBUR, GARRECHT, and DENMAN, Circuit Judges.

DENMAN, Circuit Judge.

This case is before us upon appeals from an order and decree of the District Court confirming a plan of reorganization proposed by the Rindge Land & Navigation Company, hereafter called "Debtor," pursuant to section 77B of the Bankruptcy Act (11 U.S.C.A. § 207), denying a petition by appellant Pacific States Savings & Loan Company to dissolve an order staying a trustee's sale upon property of the Rindge Company and denying a petition by the same appellant to dismiss the bankruptcy proceedings.

The Debtor was, in 1929, the owner of four tracts of land in California, three lying in San Joaquin county and the fourth in Contra Costa county. The total area of these tracts is upwards of 21,000 acres, 19,000 of which are agricultural lands leased to tenant farmers. In 1929 Debtor issued 6 per cent. bonds in the aggregate principal amount of $1,820,000 secured by a trust indenture on the real properties mentioned. Appellant bank is the trustee under the indenture. Of the bonds so issued, $1,781,000 are still outstanding. Interest on the bonds was to be paid semiannually, and the trust deed authorized the trustee (on written direction of 25 per cent. of the bondholders) upon default in the payment of any installment of interest to declare the entire principal sum immediately due and payable.

On July 1, 1932, Debtor defaulted in its interest payments, which default has continued down to the time of this action. A bondholders' committee was formed in October, 1932, which committee acquired more than 90 per cent. of the outstanding bonds. In June, 1933, the trustee bank, acting on orders from holders of more than 25 per cent. of the bonds, declared the entire amount of the bonds due and payable, and demanded, without success, that Debtor turn over the properties to the trustee.

An action to force the debtor to deliver the properties to it was then commenced by the trustee in the superior court of California for San Joaquin county, such action being based upon a covenant in the trust indenture that upon default in payment the Debtor would convey the properties to the trustee. A receiver was appointed for the Debtor. At the same time, the trustee bank noticed a sale of the property pursuant to the trust deed provisions. The sale was halted by temporary injunction in an action instituted by the Debtor in the state court. While this action was pending, various negotiations were had between the Debtor and the bondholders' committee looking to a settlement by means of the Debtor taking over the bonds at rates not more than 30 cents on the dollar. These negotiations failed, the injunction action was dismissed, and the trustee noticed a sale of the properties for September 24, 1934.

On September 21, 1934, Debtor commenced this action in the United States District Court, by filing a petition for reorganization under section 77B. The petition set forth that the assets of the Debtor consisted almost exclusively of the lands covered by the deed of trust securing the bonds; that there was outstanding some 25,000 shares of common capital stock of the Debtor, of an aggregate par value in excess of $2,500,000; that the Debtor's liabilities included the bond obligations in the amount of $1,781,500, together with interest thereon, $200,000 owed to unsecured creditors, and $70,000 in unpaid taxes, totaling $2,051,500, plus interest; that the Debtor was informed and believed that the land subject to trust deed was reasonably worth $2,614,421.25, but that due to the prevailing economic situation it would be impossible to obtain a fair price on the proposed trustee's sale; that if the sale were not enjoined, there would be realized thereon only sufficient to pay the bondholders a small fraction of the face value of their holdings, leaving nothing for the unsecured creditors or the stockholders; that if Debtor was permitted to do so it would prepare a plan of reorganization suitable to all parties and to the court. The petition concluded with a prayer for approval and for a decree staying the proposed trustee's sale.

The petition was approved and the stay granted. Between September 21, 1934, the date of this petition, and the end of December, two groups commenced negotiations with the bondholders' committee, each seeking to take over the bonds and the property securing them. One group was the "Free-Reed" syndicate, closely allied to, if not representing, the Debtor. The other was working entirely in the interest of appellant Pacific States Savings & Loan Company. This group will be referred to as "Pacific States." The result of these negotiations was that in the early part of January, 1935, Pacific States purchased from the bondholders' committee 98 per cent. of the outstanding bonds at 40 cents on the dollar, plus $66,000 committee and trustee expenses. The negotiations leading up to this transaction and the struggle between Pacific States and the Free-Reed syndicate to get control of the lands are deemed by the Debtor to be of controlling significance on this appeal. Briefly, they included bids and counter bids on the part of the two interested groups, some of the offers contemplating a purchase of the Debtor's equity in the lands as well as taking over the bonds. Bids for the bonds ranged between 30 and 40 cents on the dollar. At no time did either of the contesting groups offer to the bondholders a better price than that at which the bonds were finally sold to Pacific States.

The Debtor urges and the master found, and for purposes of this appeal we take it as true, that throughout the course of the bidding and counter bidding, the Free-Reed syndicate was placed at a distinct disadvantage due to preference shown by the bondholders' committee to Pacific States. Thus on one occasion the syndicate offered 30 cents and on another 35 cents for the bonds, both offers being a gross price, that is, including trustee and committee expenses. The committee refused the bids on the ground they would consider only net offers, yet prevented the syndicate from making an intelligent net bid by refusing until late in December, 1934, to disclose any estimate of what these expenses might be. It is a reasonable inference that during this interim the Pacific States group had a fairly accurate estimate of the expenses. On December 24, the syndicate was informed that the expenses would be $61,000. On December 26, Mr. Reed of the syndicate came down to Los Angeles from San Jose prepared to offer 35 cents net for the bonds plus $61,094.87 trustee and committee expenses. He had a certified check for the last-named amount which the syndicate had authorized him to give the committee. He was informed then by the committee that the expenses would be $66,000. On December 31, the committee received the offer, which was finally accepted, from Pacific States of 40 cents plus $66,000 expenses, which it immediately communicated to the bondholders with recommendation of acceptance. There is some evidence that the Free-Reed syndicate was kept unadvised of this bid until too late to better it. There is no evidence, however, that Free-Reed would have gone any higher.

During the period of these negotiations preliminary plans of reorganization pursuant to section 77B were being drawn by the Debtor. On February 8, 1935, at which time 98 per cent. of the bonds had passed to Pacific States, Debtor filed its second amended plan of reorganization. This plan contemplated a sale to A. M. Free, of the Free-Reed syndicate and an attorney for the Debtor, of three of the four tracts comprising the Rindge properties. The consideration for this conveyance was to be a sum sufficient to pay bondholders 40 cents on the dollar, plus $66,000 trustee and committee expenses. In addition, the debtor was to have $40,000 with which to develop the fourth or "Palm" tract, not conveyed to Free. In the event that the holders of 76 per cent. of the bonds did not consent to the plan, "* * * then and in such latter event the Debtor Corporation proposes to pay or cause to be paid to each and all of said Bondholders in cash the amount of their claims in full, if, as and when allowed by the Court herein, namely, the actual consideration paid by them for said bonds, together with interest * * * from January 15, 1935 * * *." (Italics supplied.)

As later modified, the plan provided for the payment to Pacific States of 40 cents on the dollar on its 98 per cent. of the bonds, and payment of the remaining 2 per cent. at face value.

After the submission of this plan of reorganization by the Debtor, Pacific States filed a bill in intervention and subsequent motions setting forth that as holder of 98 per cent. of the bonds it did not consent to such plan of reorganization and praying that the stay of trustee's sale be vacated and the bankruptcy proceedings dismissed. The Debtor's plan of reorganization and the motions of Pacific States came on for hearing before the referee, who found the facts substantially as alleged in the Debtor's petition and as set forth herein. The referee concluded that the plan of reorganization was equitable and feasible, and should be confirmed; and that the motions of Pacific States should be denied. On August 3, 1935, the District Court adopted the findings and...