Smith v. Chase Nat. Bank of City of New York, 10538

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Citation: 84 F.2d 608
• Docket Number: 10627,10539,10628.,No. 10538,10538
• Parties: SMITH et al. v. CHASE NAT. BANK OF CITY OF NEW YORK et al. (four cases).
• Decision Date: 09 July 1936

84 F.2d 608 (1936)

SMITH et al. v. CHASE NAT. BANK OF CITY OF NEW YORK et al. (four cases).

Nos. 10538, 10627, 10539, 10628.

Circuit Court of Appeals, Eighth Circuit.

July 9, 1936.

R. R. Brewster, of Kansas City, Mo. (C. A. Randolph, R. T. Brewster, and J. Robertson Clagett, all of Kansas City, Mo., on the brief), for appellants.

Herman M. Langworthy and Jesse Andrews, both of Kansas City, Mo. (Elliott H. Jones, Carl D. Matz, Scarritt, Jones & North, and Langworthy, Spencer, Terrell & Matz, all of Kansas City, Mo., on the brief), for appellee Herbert V. Jones.

Before GARDNER, SANBORN, and BOOTH, Circuit Judges.

SANBORN, Circuit Judge.

These appeals are from orders dismissing appellants' "amended and supplemental ancillary and dependent petitions in equity," one of which was filed in the Matter of Fox Midland Theatre Company, bankrupt, a bankruptcy proceeding pending in the United States District Court for the Western District of Missouri, and the other in the Matter of Fox Rocky Mountain Theatre Company, bankrupt, a similar proceeding in the same court. The petitions are identical, and their prayers are for orders vacating the adjudications in bankruptcy, and for other relief.

The two theater companies filed their voluntary petitions in bankruptcy on March 8, 1933, and were adjudicated bankrupts on that day. At the time the bankruptcy petitions were filed, the companies were engaged in the business of owning, leasing, managing, and operating motion picture theaters in various states, and in holding the stock of other companies engaged in like business. Herbert V. Jones was first appointed receiver in bankruptcy of each bankrupt, and thereafter trustee in bankruptcy of each, and was authorized to continue their business. Frequent applications to the court for instructions and orders relating to the conduct of the business were made by him, and he was several times authorized to borrow necessary funds and to issue trustee's certificates therefor. On December 10, 1934, appraisers were duly appointed by the referee, and on April 5, 1935, their reports were filed, containing their estimates of the value of the assets of the bankrupts. In the proceeding affecting the Fox Midland Company, a substantial controversy arose with Herbert M. Woolf and M. B. Shanberg, who petitioned the court to vacate the adjudication in bankruptcy of that company. See Woolf et al. v. Reeves et al. (C.C.A.8) 65 F.(2d) 80. That controversy was compromised, and, in that connection, the Chase National Bank of the City of New York joined with Woolf, Shanberg, and others in a petition to set aside the order referring the controversy to the referee in bankruptcy. During the course of the administration of these estates in bankruptcy, a large number of claims were filed; a total of $9,303,000 against the Fox Rocky Mountain Company, of which $4,505,156.83 were allowed, and $5,397,591.17 against the Midland, of which $3,120,435.28 were allowed.

On April 12, 1935, the administration of both estates had proceeded to such a stage as to justify a sale of the assets. At or about that date, the National Theatres Corporation submitted to the trustee offers for the purchase of the assets of each of the bankrupts, which offers were submitted to the bankruptcy court by petitions. The referee thereupon called meetings of creditors for April 23, 1935, to consider the petitions of the trustee for orders authorizing him to sell the assets of each of the bankrupt estates at private sale, pursuant to the terms of the offers made by the National Theatres Corporation. On the day before that on which the meetings of creditors were to be held, Jacob Smith, Lee H. Hamlin, and William Snower, three of the appellants, presented to the District Judge their "ancillary and dependent petition in equity," entitled in both proceedings, and procured from him an order staying all proceedings in the two bankruptcies until the further order of the court. Thereupon the trustee filed his petition in each of the proceedings, praying the vacation of the injunctional order, and the court, after notice and a hearing, vacated the stay. The creditors' meetings, which had been adjourned from April 23d, were held on April 26, 1935. The petitions of the trustee for leave to sell the assets of the bankrupts at private sale were thereafter heard, and an order was made and entered in each proceeding, directing the consummation of the sales of the assets to the National Theatres Corporation in accordance with its offers. The only objectors to the granting of the trustee's petitions for leave to sell were Lee H. Hamlin, as a creditor and holder of two claims (one against the Midland for $21.84, which he had purchased for about 25 cents on the dollar, and one against the Rocky Mountain for $1,625.80, which he had acquired for $325.16), and Lee H. Hamlin, William Snower, and Jacob Smith, as bondholders of General Theatres Equipment, Inc., claiming liens upon the assets by reason of the matters asserted in their "ancillary and dependent petition in equity." As directed by the referee, the assets of each estate were sold on May 4, 1935, and the trustee conveyed them to National Theatres Corporation. The purchase price was then paid by that corporation, in accordance with its offers. The purchaser did not pay cash, since it owned the claims against the bankrupts and in effect used the claims to purchase the assets, agreeing to pay, in addition, all unpaid expenses of administration.

Lee H. Hamlin then petitioned for a review of the referee's orders of sale. Smith and Snower did not. The petitions for review were heard on May 13, 1935. While the purchaser, National Theatres Corporation, denied the merits of the petitions to review, it tendered to Hamlin the full amounts of his claims, and paid them into the court. Thereupon, the judge dismissed the petitions for review. On the same day, he made an order that the "ancillary and dependent petition in equity" of appellants Smith, Hamlin, and Snower should stand dismissed on May 23, 1935, unless they filed an amended petition prior to that date. Thereafter, they, together with appellants Jones, Kupper, and Mosher, who joined with them as plaintiffs by leave of court, filed their "amended and supplemental ancillary and dependent petitions in equity." The trustee in bankruptcy filed motions to dismiss, which motions were granted, and thereupon these appeals were taken, one of which was allowed by the District Court in each proceeding, and one by this court in each.

The facts stated by the appellants in their amended petitions are, in substance, as follows:

That the petitioners are the owners of debenture bonds of General Theatres Equipment, Inc. (hereinafter called General Theatres), in the face amount of $100,000. That these bonds are part of a $30,000,000 bond issue dated April 1, 1930, and sponsored and promoted by the Chase National Bank and its subsidiary, Chase Securities Corporation, for the purpose of obtaining funds for the purchase of a controlling interest in Fox Film Corporation (hereinafter called Fox Film). That the entire assets of General Theatres, which was a holding company, consisted of stocks in other corporations. That the Chase National Bank was trustee under the trust indenture pursuant to which the bonds owned by the petitioners were issued. That this indenture provided that the assets of General Theatres stand as security for the holders of its debenture bonds and for the payment of the principal and interest thereof, and contained this provision:

"Section 12. The Corporation (General Theatres Equipment, Inc.) will not, so long as any of the debentures remain outstanding,

* * *

"(c) create or suffer to be created or to exist any pledge, mortgage or other lien of or upon any of the shares of stock of subsidiaries or other assets owned by the corporation, without making effective provision in and by the instrument creating such pledge, mortgage or other lien whereby all of the debentures issued hereunder shall be directly secured thereby at least equally and ratably with the bonds, notes or other obligations issued under or secured by such pledge, mortgage, or other lien. * * *"

That the Chase National Bank, in order to support the market for said bonds artificially and to prevent loss to itself, required General Theatres to go into the market and buy its own securities, and, for that purpose, the bank loaned it money. That to secure its loans, the bank, in violation of the provisions of the trust indenture, required General Theatres to pledge to it 1,221,213 class A shares of Fox Film, a majority of the stock of that corporation and the principal and most valuable asset of General Theatres and the chief security of its bondholders. That the Chase National Bank foreclosed the pledge, and took over the control of Fox Film and its subsidiaries, and proceeded to appropriate their assets to its own use. That foreclosure of the pledge caused General Theatres to default on its bonds, and the bank procured the appointment of a friendly receiver for it (General Theatres) by a state court of Delaware. That the bank also caused a bondholders' protective committee to be formed, composed of the directors and nominees and agents of the bank. That the bank then reorganized the Fox Film Corporation and reduced its capital stock to one share for every six previously held, and issued 2,000,000 new shares to itself in lieu of claims that it had against Fox Film. That Fox Film owned all of the stock of Wesco, a holding company owning the stock of numerous subsidiaries operating theater chains throughout the United States, among which were Fox Rocky Mountain Theatre Company and Fox Midland Theatre Company, the bankrupts. That the bankrupts were wholly solvent, but the bank, in order to divert their valuable properties which were the real security for the bondholders of General Theatres and to acquire them for itself, caused the...