Smith v. Robinson

• Decision Date: 04 March 1965
• Docket Number: No. 9500.,9500.
• Citation: 343 F.2d 793
• Parties: O. Bruton SMITH, Appellant, v. Robert N. ROBINSON, Trustee in Reorganization of Charlotte Motor Speedway, Inc., Appellee. In the Matter of CHARLOTTE MOTOR SPEEDWAY, INC., Debtor.
• Court: U.S. Court of Appeals — Fourth Circuit

343 F.2d 793 (1965)

O. Bruton SMITH, Appellant, v. Robert N. ROBINSON, Trustee in Reorganization of Charlotte Motor Speedway, Inc., Appellee In the Matter of CHARLOTTE MOTOR SPEEDWAY, INC., Debtor.

No. 9500.

United States Court of Appeals Fourth Circuit.

Argued October 9, 1964.

Decided March 4, 1965.

Francis O. Clarkson, Jr., Charlotte, N. C. (Craighill, Rendleman & Clarkson, Charlotte, N. C., on brief), for appellant.

Jack T. Hamilton, Charlotte, N. C. (Robert G. Sanders, Fairley, Hamrick, Hamilton & Monteith, and Sanders & Walker, Charlotte, N. C., on brief), for appellee.

Before SOBELOFF, Chief Judge, and BOREMAN and J. SPENCER BELL, Circuit Judges.

BOREMAN, Circuit Judge:

This appeal is from an order of the District Court in a reorganization proceeding under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. On November 3, 1961, Charlotte Motor Speedway, Incorporated (hereinafter Speedway), filed a petition for corporate reorganization under Chapter X which was approved by the court on the same day and a Trustee in Reorganization was appointed. Smith, appellant, an officer and director of the corporation, filed five claims against the Trustee alleging that Speedway was, for various reasons, indebted to him. The Trustee objected to Smith's claims and filed eight counterclaims asserting that Smith was indebted to Speedway. The claims and counterclaims were consolidated for hearing, the court heard the evidence and entered an order allowing some of the Smith claims, denying others, allowing some of the counterclaims and denying others.

The underlying facts leading to the filing of the petition for reorganization are briefly stated. Speedway was conceived, organized and promoted in 1959 by the appellant, Smith, and one Curtis Turner for the purpose of constructing and operating near Charlotte, North Carolina, one of the largest automobile speedways in the United States. Prior to this time Smith and Turner had been in the automobile racing business. Both owned interests in several small race tracks and Turner was a promoter and race driver. From the inception of Speedway in 1959 until June of 1961, Turner served as its president and a member of the board of directors. For approximately the same period Smith served as executive vce-president, general manager and a member of the board of directors. From June of 1961 until the petition for reorganization was filed in November, Smith served in the capacity of promotion director, Smith and Turner were substantial shareholders in Speedway. At the time of the hearing Smith stated he owned approximately 34,000 shares and Turner stated he owned 29,450 shares.

Soon after the corporation was organized it acquired a 550-acre tract of land on which to build the raceway. A contract was negotiated with W. Owen Flowe & Sons Construction Company to do the necessary grading and the work began in the early fall of 1959. Completion came in the spring of 1960 and the first race was held in June of that year. During this period of construction Smith was actively engaged in managing Speedway and devoted his time and energy toward the completion of the track. In this same period most of the acts which led to the present controversy took place.

It appears that Speedway had financial problems from the beginning. The financial situation became more acute when the grading contractor encountered rock formations which had to be removed at extra cost. When the speedway was finally completed and opened for racing events, obligations had been incurred which could not be met. A change in management a year later apparently did not help and, after approximately another six months, the petition for reorganization was filed.

At the beginning we recognize the limitations upon the scope of review to be exercised by this court. The case was heard by the District Court and we are bound by the findings of fact unless they are clearly erroneous. F.R.Civ.P. 52(a); Austin v. National Discount Corp., 322 F.2d 928 (4 Cir. 1963). With this principle in mind, we turn to a consideration of the specific issues raised on this appeal.

CLAIM #60

A few days before March 8, 1960, Turner as president and Smith as vice-president of Speedway issued in Smith's name stock certificate #1799 for 12,500 shares of Speedway stock which had a fair market value of $25,000. At the same time certificate #1800 for 12,500 shares was issued in Turner's name. There was no consideration at that time for the issuance of either certificate. Smith and Turner pledged the two certificates with the Toledo Trust Company (herein called Toledo) as collateral security for a personal loan to them of $50,000. The loan proceeds were divided equally and Smith deposited $25,000 in his personal account in the Bank of Charlotte. By his personal check #148 dated March 8, 1960, Smith transferred $25,000 to Speedway. On the same day a demand note, bearing interest at six per cent in the face amount of $25,000, was executed in Speedway's name payable to Smith. The note was signed by Turner as president and Smith as secretary of Speedway. A similar procedure was followed for Turner. This $25,000 note issued to Smith was the basis for his claim #60 against the Trustee.

The effect of the transaction up to and including the execution and delivery of the note may be summarized as follows: Speedway had received $25,000 in cash from Smith but parted with 12,500 shares of its capital stock having a value of $25,000 and had executed and delivered to Smith its note for $25,000; Smith had ostensibly acquired 12,500 shares of Speedway stock which he used as collateral to protect himself in borrowing $25,000 from Toledo and had obtained Speedway's note for $25,000; for the stock and note Smith had paid to Speedway the sum of $25,000.

Approximately a year later on March 1, 1961, Turner was advised and he then informed Toledo that certificates #1799 and #1800 had been improperly issued and would have to be recalled and cancelled, but other certificates would be sent to replace them. On March 3, 1961, Toledo received by registered mail certificate #3407 in Smith's name for 12,500 shares to replace certificate #1799. (It also received certificate #3408 to replace #1800 but that part of the transaction involving Turner's rights is not presented in this controversy.) Toledo returned certificate #1799 to Turner by mail but what happened to it thereafter remains uncertain. There was evidence that the upper left-hand corner of a stock certificate with the number 1799 on it was stapled to the stub in the stock certificate book. The remainder of the certificate was not accounted for but there was testimony that detaching a corner of a stock certificate was not the proper cancellation procedure. On the stub of the certificate there was a written inscription which a witness identified as being in Smith's handwriting as follows: "Samp. for Attorneys for SEC — OBS." This supposedly indicated that the certificate had been sent to the Securities and Exchange Commission. Smith contended, however, that this was not his writing and that certificate #1799 was returned and cancelled.

In February of 1961 when stock certificate #3407 was issued in his name, Smith surrendered to the corporation a $12,500 note which had been executed by Speedway to him. The consideration he had given for this note does not appear but the Trustee conceded that it was lawfully issued and did not contest the note's validity. When the exchange took place, Smith contended the fair market value of the stock was less than $1.00 a share. The Trustee asserted that the value was $2.00 a share and that a corporate resolution prohibited any sale by the corporation for less than $1.80 per share, net to Speedway. Smith admitted he knew of the resolution but stated that exceptions had been made in the past. In an attempt to show his good faith, Smith introduced evidence that in the fall of 1961 he had agreed to return certificate #3407 and take back the $12,500 note but that the officers of Speedway at the time thought it would be best for Speedway's financial situation if Smith retained the shares.

Smith's position during the proceedings was that the $25,000 note was a valid corporate obligation because stock certificate #1799 had been returned to Speedway and cancelled; consequently, the note evidenced Speedway's indebtedness to him for his $25,000 check. Further, certificate #3407 for 12,500 shares of Speedway stock was issued to him when the fair market value of the stock was less than $1.00 per share in exchange for a $12,500 note plus accrued interest which validated this exchange.

The District Court found that certificate #1799 was made out to Smith and that Smith falsely wrote on the stub that the certificate had been sent to the Securities and Exchange Commission as a sample; that Smith took this certificate to Toledo, represented that he was the legal owner, pledged it as collateral and obtained a personal loan of $25,000; that Smith deposited this in his personal bank account and gave his own check to Speedway for that amount; that these funds were actually received by Speedway; that Smith at that time caused the $25,000 note to be executed to him; that on or about February 28, 1961, certificate #1799 held by Toledo was replaced by certificate #3407 representing the same number of shares; that what appeared to be the upper left-hand corner of the certificate was stapled to the stub of the certificate in the stock book; that the remainder of certificate #1799 was not accounted for; that when certificate #3407 for 12,500 shares was issued to Smith in exchange for the Speedway $12,500 note in March 1961, the fair market value of the stock was approximately $2.00 per share and a corporate resolution was then in effect that no Speedway stock could be sold for less than $1.80 per share, net; and that Toledo presently held certificate #3407 as collateral for the loan to Smith.

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