Shores v. Hendy Realization Co.

• Decision Date: 24 February 1943
• Docket Number: No. 10085.,10085.
• Citation: 133 F.2d 738
• Parties: SHORES et al. v. HENDY REALIZATION CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

133 F.2d 738 (1943)

SHORES et al. v. HENDY REALIZATION CO. et al.

No. 10085.

Circuit Court of Appeals, Ninth Circuit.

February 24, 1943.

Byrne, Lamson & Jordan and Paul S. Jordan, all of San Francisco, Cal., for appellants.

Marshall P. Madison, Francis R. Kirkham, Gerald S. Levin, Stanley Pedder, Kenneth Ferguson, Percy V. Long, Bert W. Levit, and William H. Levit, all of San Francisco, Cal. (Pillsbury, Madison & Sutro and Long & Levit, all of San Francisco, Cal., of counsel), for appellees.

Before MATHEWS, STEPHENS, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

This appeal concerns the jurisdiction of the district court, sitting in bankruptcy, to entertain a supplemental suit for the interpretation and protection of its decree confirming a plan of corporate reorganization.

Appellee Hendy Realization Co., formerly the Joshua Hendy Iron Works, is a California corporation. Until the sale of its plant in 1940, it had for many years been engaged in the machinery and foundry business at Sunnyvale. In 1935, the corporation being then in receivership, an involuntary petition in bankruptcy was filed at the instigation of creditors and proceedings were had for reorganization pursuant to §§ 77A and 77B of the Bankruptcy Act, 11 U.S.C.A. §§ 206, 207. A plan of reorganization was proposed. At the hearings thereon appellants Shores and Behneman appeared as stockholders, the former to accept and approve the plan, the latter to oppose it. At that time the corporation was financially in a bad way. During the previous twenty months' operations it had lost $183,000, its physical plant was in need of replacement or repair, and it had outstanding obligations of $644,732 plus accrued interest. It was in fact insolvent and its stock worthless. The corporate books did not reflect actual values or conditions.

The plan of reorganization, which the creditors accepted and the court confirmed, provided for the scaling down of obligations to the extent of 10 or 15%, depending upon whether they were secured or unsecured. The creditors received for these reduced obligations long-term notes bearing a lesser rate of interest. Paragraph 6-G of the approved plan provides the subject matter of the present controversy. The paragraph is copied on the margin.¹ In conformity with the provision therein all shareholders except Behneman deposited their stock with the directors of the corporation. Behneman did not deposit his shares until June 1940.

Appellees Bassick, Hyland, and Levit served as managing president and vice presidents, respectively, from the confirmation of the plan in March 1936 until November 15, 1940, receiving only partial compensation for their services in the understanding that, as soon as the affairs of the corporation warranted, they would receive supplemental cash bonuses and that upon the rehabilitation of the corporation the shares held by the directors as voting trustees would be distributed in conformity with the provisions of the quoted paragraph. While minor bonuses were disbursed during this period, it was understood that these officers would ultimately be paid what was coming to them by a distribution of cash and the stock aforesaid. The financial health of the corporation steadily improved under the direction of its new officers. Between June 1936 and November 1940 the corporation, after adequate deductions for interest and depreciation, had a net income of almost $200,000 and had paid off more than 50% of its receivership obligations. Its net worth had risen from a deficit of $61,787 to a positive worth of $206,330. In addition, the plant equipment had been renovated.

On November 4, 1940, the board of directors² granted an option to McDonald & Kahn, Inc., to purchase the Sunnyvale plant for $426,000 in cash. No objection was interposed by any stockholder, and the option was shortly exercised. On November 19, 1940, in accordance with the terms of sale, the corporate name was changed from the Joshua Hendy Iron Works to Hendy Realization Co.

On December 4, 1940, the board made a cash distribution to various officers and employees of the company, including Bassick, Hyland, and Levit. These distributions, so far as concerns these three officers, were considered as partially compensating them for their services. In this way Bassick received $40,000, and Hyland and Levit $20,000 each. In the subsequent proceeding from which this appeal was taken the court found that the cash distribution, taken either alone or with the salaries and bonuses previously paid, did not fully compensate these officers for their services.

On December 20, 1940, a resolution was passed authorizing the distribution to these three men of the 2,212½ shares of stock held by the directors pursuant to subdivision 2 of paragraph 6-G of the plan. The resolution stated that it was passed pursuant to the plan and that the conditions thereof, namely, the successful rehabilitation of the corporation, had been fulfilled. The resolution further stated that the participants in the stock distribution had agreed, as a condition to receiving the shares, to waive the right to receive any dividends or distribution upon the stock out of the first $85,848 available for dividends or distribution, in dissolution or otherwise, so that the named sum might be prorated and distributed solely to the beneficial owners of the remaining shares, these shares being still in the hands of the directors as voting trustees. The purpose of the waiver was to equalize the liquidating dividends as between the officers on the one hand and the beneficial owners of the remaining stock on the other. Upon receipt of the waivers the board distributed the shares among the three officers. The court found that neither the cash payments nor the stock distributions were excessive or unreasonable as compensation.

On December 21, 1940, it was voted voluntarily to dissolve the corporation and proceedings were commenced to that end. On the same day the board declared a first liquidating dividend of $85,848, or $45 per share upon the shares beneficially owned by the old stockholders. Shores and Behneman, along with the other stockholders, had notice of these proceedings, and each claimed and received the liquidating dividend without objection. The trial court, in the proceeding subsequently instituted, found that the stock distribution to Bassick, Hyland, and Levit was pursuant to the order, authority, and direction of the plan of reorganization.

Prior to the distribution, Behneman informed the directors that in his opinion the affairs of the company had not been successfully rehabilitated, and he requested that he be notified in advance of any stock distribution. In January 1941 he began an action in the state court asking that the stock distribution be declared illegal, that the officers be required to surrender the shares for cancellation and that the directors be compelled to account for any dividends thereon. He alleged that the managing officers had been fully compensated and that the corporation had not been rehabilitated within the meaning of the plan of reorganization. Shortly thereafter Shores filed an almost identical action, also in the state court. This latter suit was removed to the court below and motion to remand was denied.

On February 19, 1941, the corporation and the other appellees, including Bassick, Hyland, and Levit, filed a petition in the proceeding for corporate reorganization, setting forth the foregoing facts and praying for an order effectuating and protecting the reorganization decree. Later in the same month Behneman filed in the state court an action for supervision over the corporation's dissolution. There followed further jockeying for position which we need not stop to describe. Enough to say that the district court temporarily enjoined Behneman from proceeding with his actions elsewhere; and the court approved, over objection, the report of a special master recommending that jurisdiction be taken of appellees' petition. The removed "Shores" case was ordered consolidated with the pending petition in the reorganization proceedings, this being done pursuant to stipulation of the parties. Judgment was thereafter rendered in favor of appellees; the court finding that it had jurisdiction over the subject matter of the action, and that appellees had properly complied with the plan of reorganization. The state court suits were permanently enjoined.

1. By the final decree in the reorganization...