Berl v. Crutcher

60 F.2d 440, 1932 U.S. App. LEXIS 2535

• Court: Court of Appeals for the Fifth Circuit
• Decided: July 20, 1932
• Docket: 6596
• Status: Published

Opinions

FOSTER, Circuit Judge.

This is an appeal from an interlocutory decree refusing to vacate the appointment of a receiver and a special master, under the provisions of section 129, Jud. Code (28 USCA § 227). The record is made cumbersome by the inclusion therein of much irrelevant matter. Disregarding this, the material facts, stated as briefly as possible, are as follows:

On January 29, 1923, the Virginia Oil & Refining Company, a Delaware corporation, was adjudicated bankrupt in the Northern District of Texas at Fort Worth. It owned property and did business at Fort Worth, and had an office in that city, where all its meetings of stockholders and directors were held, and all of its books and records were kept, as permitted by the provisions of its charter and the laws of Delaware. It neither did business nor owned property in Delaware. A trustee was appointed and proceeded to administer the property, paying some dividends to creditors who had proven their claims. The trustee filed a final return on October 19, 1926, and was discharged. However, the bankruptcy proceedings were not formally closed, and the bankrupt was not discharged.

Part of the assets surrendered consisted of oil and gas leases to several thousand acres of land in Gregg county in the Eastern District of Texas. This property was thought to be of so little value that the trustee did not attempt to administer it and did not take the trouble to formally abandon it. About four years after the trustee was discharged, oil was discovered in the vicinity of this property and it became very valuable, perhaps worth between one and two million dollars. As soon as this became known, many persons began reaching out for control of these valuable assets.

In November, 1930, Gaines B. Turner, its last president, procured the appointment of a receiver for the corporation by a state court of Texas. This receiver took possession of the property and proceeded to administer it. It is unnecessary to review this proceeding except to say that Turner alleged he owned 1,000,000 shares of the stock of the bankrupt and brought the suit against his two sisters, also alleged to be stockholders. He appeared merely as a stockholder and not as president. The corporation was not made a party, and no one at all was served with process.

In February, 1931, a few months after the Turner suit was filed, the bankruptcy proceedings were revived, and the present trustee, B. K. Isaacs, was appointed. Persons who had not theretofore done so filed claims as creditors to the amount of over $100,000. Isaacs applied to the state court, and, contradictorily with the receiver, obtained an order from that court returning to him all the property. Later, the state court receiver applied to the bankruptcy court for the return of the property. This was denied, and no appeal was taken. Isaacs has continued to administer the property in bankruptcy. Much of it is in litigation. It is unnecessary to review this administration in detail. It is highly probable that there will be enough realized to leave a substantial surplus after paying the expenses of administration and all creditors asserting claims in full.

Turner continued his activities. The charter of the bankrupt had been repealed by proclamation of the governor of Delaware in January, 1925, two years after bankruptcy, for nonpayment of franchise taxes. The license to do business in Texas also had been canceled. In June, 1931, Turner, pretending to act by virtue of a.resolution adopted by some of the last directors, had the charter renewed in Delaware and the right to do business in Texas revived, for which latter purpose he had the name changed to Virginia Production Company. Since bankruptcy there have been no meetings of stockholders, and, except as just stated, the officers and directors have not attempted to act at all.

In September, 1931, Mr. and Mrs. Crutch-er, alleging themselves to be the owners of 32,240 shares of stock in the bankrupt, brought a suit against the bankrupt and other persons claiming to be stockholders, some of which claims they denied, on behalf of themselves and all other stockholders, in the federal court for the Northern District of Texas, wherein the bankruptcy proceedings were pending. The bill showed diversity of citizenship and a sufficient amount involved, and, by appropriate allegations, set up the facts above outlined, and prayed for the appointment of a receiver and a master in chancery. Service of subpoena was made on the corporation through Turner as president. The corporation and other defendants appeared through counsel and joined in the prayer for a receiver and master. On this bill the court appointed a special master to receive the claims of stockholders, take the evidence as to ownership and report to the court, his conclusions not to be filial. The court also appointed a receiver to take over from the trustee any surplus remaining after the conclusion of the administration in bankruptcy, and authorized him to join with the trustee in pending litigation.

In October, 1931, after the filing of the Crutcher hill, Harry B. Staver, alleging himself to he a stockholder of the Lewis Oil Corporation, another dormant Delaware corporation, filed a hill in a state court of Delaware for tho appointment of a receiver over that company. The hill alleged that the Lewis Company, together with other assets, owned 1,378,000 shares of stock in the bankrupt. Evidence in the record supports the conclusion that Turner and Staver were acting in harmony. On this bill E. N. Berl and Paul L. Hart were appointed receivers.

In January, 1932, after the appointment of the master and receiver in this case, William P. Brockermann, Jr., filed a hill in the United States District Court for the, District of Delaware, against the Virginia Production Company, alleging Dial he owned 4,640 shares of its stock; that there had been issued and were outstanding approximately 1,900,000 shares of stock; that numerous other persons were asserting claims to stock, one person claiming to own 4,000,000 shares; that these claims east a cloud upon the title to his stock. Tho bill prayed for the appointment of a special master to determine the trne ownership of the stock in the company. A master was appointed, hut, so far as the record discloses, no other proceedings were had.

The total authorized capital stock of the bankrupt was 6,000,000 shares of $1 par value. All of its books and records have been lost or destroyed. In approximately five months persons residing in 35 different states have filed 1,943 interventions with the master, claiming ownership of approximately 7,000,000 shares of stock. This includes the claims of Turner and Brockermann but not that of the Lewis Company, making a total of 8,378,000 shares, to which title is asserted. About half of the claimants have presented stock certificates. Others have filed affidavits of loss of certificates. There are conflicting claims to the same shares. Some ara claiming an interest in the bankrupt by virtue of stock ownership in corporations alleged to have been merged with the bankrupt or an interest in property alleged to have been transferred to the bankrupt. The stock claimed by tho Lewis Company is also claimed by a number of individuals.

The Virginia Production Company, through Turner as attorney, Isaacs, trastee, C. V. Noble and J. E. Doyle, stockholders, and Berl and Hart, receivers, all intervened in the Crutcher suit and moved for the setting aside of the order appointing the receiver and tho master, on various grounds, to be discussed later’. This appeal is from the interlocutory judgment overruling these motions, and is only on behalf of Berl and Hart, and Doyle, appearing for himself and representing Isaacs.

As no attempt has been made to take tho property out of the hands of Die trustee pri- or to its final administration in bankruptcy, ho is without substantial interest, and the appeal on behalf of Isaacs may bo dismissed from further consideration.

It is contended on behalf of the other appellants that the District Court for the Northern District of Texas is without jurisdiction, on the following grounds: That the suit is of a local nature because the subject-matter is the stock of the corporation, which stock is located in Delaware; that the suit involves the internal affairs of the corporation; and that only the courts of Delaware have jurisdiction. In the alternative, it is urged that, if the court be hold to have jurisdiction, it should not exercise it, but should refer the parties to the courts of Delaware for their remedy. It is further contended that the appointment of the receiver should be set aside for the following reasons: That the corporation is a valid, existing entity, and is entitled to receive the surplus from the trustee; that a receiver has been appointed in pending prior proceedings in a state court of Texas ; and that the court has no property of the corporation within its territorial jurisdiction.

These contentions overlook the fundamental principles governing the case. Conceding that the stock has a situs in Delaware and the courts of Delaware, state or federal, would have jurisdiction to entertain a suit to determine tho status of the stock and to bring in the necessary parties for that purpose, such jurisdiction is not exclusive. A court of a state wherein a foreign corporation owns property and does business, having jurisdiction over the corporation and the stockholder's, also has jurisdiction to determine questions arising as to the ownership of the stock, which in a proper case it will exercise. Burnrite Coal Briquette Co. v. Riggs, 274 U. S. 208, 47 S. Ct. 578, 71 L. Ed. 1002; American Creosote Works v. Powell (C. C. A.) 298 F. 417; Fudickar v. Louisiana Loan & Inv. Co. (D. C.) 13 F.(2d) 920 ; Williamson v. Missouri-Kansas Pipe Line Co. (C. C. A.) 56 F.(2d) 503. In this ease it could not be questioned that the balance of convenience is with the federal court in Texas, as it is apparent that’a great majority, if not practically all, of those claiming to be stockholders, are already before that court. It would be unfair to remit them to the courts of Delaware to begin their litigation anew.

The District Courts of the United States now have complete equity jurisdiction. Pri- or to the abolition of the circuit courts and the vesting of their jurisdiction in the District Courts by the adoption of the Judicial Code, as of January 1, 1912, the District Courts were given the widest equity powers in proceedings in bankruptcy by section 2 of the Bankruptcy Act of 1898 (11 USCA § 11 (15), especially clause 15, which gives them authority to “make such orders, issue such process, and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this title.”

The federal court for the Northern District of Texas has exclusive jurisdiction over the property of the bankrupt wherever situated, and ancillary jurisdiction to determine any controversy between third parties as to the title and ownership of that property, with authority to bring in all parties necessary for the complete determination of the controversy. Whitney v. Wenman, 198 U. S. 539, 25 S. Ct. 778, 49 L. Ed. 1157; In re Wood & Henderson, 210 U. S. 246, 28 S. Ct. 621, 52 L. Ed. 1046; Murphy v. John Hofman Co., 211 U. S. 562, 29 S. Ct. 154, 53 L. Ed. 327; Lazarus, Michel & Lazarus v. Prentice, 234 U. S. 263, 34 S. Ct. 851, 58 L. Ed. 1305.

Except by necessary implication, the Bankruptcy Act makes no provision for the disposal of a surplus of the property surrendered remaining after payment of the costs of administration and all creditors in full, but in the exercise of its equity jurisdiction it is the duty of the court to return it to the bankrupt. Johnson v. Norris (C. C. A.) 190 F. 459, L. R. A. 1915B, 884. As this is a part of the administration of the bankrupt’s estate, the returning of the surplus is a proceeding in bankruptcy.

Generally speaking, a corporation. is a separate entity distinct from the stockholders, but as between itself and its stockholders this is a mere fiction, and the equitable ownership of all its property is in the stockholders, subject to the prior rights of creditors. 7 R. C. L. 27, § 4, “Corporations.”

It is the general rule in the United States that, where the charter or by-laws of a corporation provide for the annual election of officers and directors, and no election is held, the former officers hold over until their successors are elected. But this applies to a going concern, where there is no break in the exercise of the duties of the officers and directors. In this ease the by-laws provide for annual elections of officers and directors by the stockholders. Since the date of bankruptcy, January, 1923, there have been no meetings of stockholders and no elections. The corporation was insolvent, and with the adjudication in bankruptcy all of its property passed out of its control, and the officers and directors ceased to function. Its charter was repealed two years after bankruptcy. When that occurred, the corporation might be-considered dissolved by operation of law. Rochester R. Co. v. Rochester, 205 U. S. 236, 27 S. Ct. 469, 51 L. Ed. 784. We are not required to determine whether the act of Turner in having the charter revived again vested the corporation with legal existence, but it would be ridiculous to say that the former officers and directors have any authority at this time to represent the corporation or its stockholders in any disposition of its property. Any authority they may be given hereafter must come from the stockholders.

In the performance of its duty to turn the surplus over to the bankrupt, it was necessary for the District Court to determine who are the stockholders: The propriety of appointing a receiver to hold that surplus in the interim is apparent. In the exercise of their equity jurisdiction, courts of bankruptcy may appoint special masters to facilitate the trial of issues before them. In re Lacov (C. C. A.) 134 F. 237. There eould be no doubt that the appointment of a master was necessary in this case, as neither the trustee nor the referee would be vested with jurisdiction to determine the ownership of the stock by virtue of their respective offices. Whether the corporation is to be continued or the surplus distributed to the stockholders is a matter to be decided in the future. With that we have no concern on this appeal.

The contention that prior receivership proceedings are pending- in a state court of Texas of competent jurisdiction is- easily disposed of. On the face of the papers, the proceeding in which the receiver was ax^pointed was c-ollnsive. Tho corporation was an indispensable party to that proceeding, and was not brought in. High on Receivers, § 290; Irvin v. Anthony Shoals Power Co. (C. C. A.) 277 F. 926. It is plain that this was recognized by the state court in entering the order returning the property to the trustee in bankruptcy. This proceeding may bo considered a nullity, to be disregarded by the federal court. McDonald v. Mabee, 243 U. S. 90, 37 S. Ct. 343, 61 L. Ed. 608, L. R. A. 1917E, 458.

It is apparent that the door is wide open for the entrance of fraud, and the strong arm of a court of equity is required to preserve tho property for its true owners and to do justice to all parties in interest. It was more convenient to set up an' agency to determine the ownership of the stock while the bankruptcy proceedings were still pending rather than to wait for their termination. Therefore the appointment of the master was not premature. As the receiver was not authorized to interfere with the custody of the property in the bands of the trustee, no complaint could be made as to his appointment at the time the order was entered. If the powers given him are too broad, that is a question not involved in tliis appeal. Vio express no opinion on this point. All that is presented is the propriety of appointing a receiver to stand by representing the corporation to take and hold tho surplus, if there is one, for the benefit of the parties in interest as may be ultimately decided by the court. Any other question touching his administration remains open for future consideration.

Equity regards substance rather than form. Regardless of every other consideration, the Crutcher suit may be considered ancillary to the bankruptcy proceeding’s and the court had ample jurisdiction to make the orders complained of. No abuse of discretion is shown in doing so.

The judgment appealed from will be affirmed, the costs of appeal to be paid equally by the appellants, and not to be taxed against tile fund.

Affirmed.