In Re Joe Newcomer Finance Company

226 F. Supp. 387, 1964 U.S. Dist. LEXIS 7564
CourtDistrict Court, D. Colorado
DecidedFebruary 13, 1964
Docket34452
StatusPublished
Cited by4 cases

This text of 226 F. Supp. 387 (In Re Joe Newcomer Finance Company) is published on Counsel Stack Legal Research, covering District Court, D. Colorado primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In Re Joe Newcomer Finance Company, 226 F. Supp. 387, 1964 U.S. Dist. LEXIS 7564 (D. Colo. 1964).

Opinion

DOYLE, District Judge.

The movants herein are holders of debenture notes issued by the Joe Newcomer Finance Company, the debtor herein. 1 They seek a determination by this court that they are entitled to the status of general creditors. It would appear that there are some 63 such note holders and that the face value of these obligations totals $210,793.52. These were long term obligations which paid high interest rates ranging from six per cent to twelve and one-half per cent per annum. The sums which were invested by these debenture note holders followed an intensive, indeed, a saturation advertising program. In the year 1962 the sum of $132,000.00 was spent; in 1961 the advertising expenditure was $100,000.00; in 1960, it was $39,000.00 and in 1959 it was $23,000.00. Apparently, the intensity of the advertising solicitation campaign was in direct proportion to the unfavorable financial condition; the debt- or’s finances became progressively worse year by year. Although the debtor was ostensibly a loan company, relatively little effort was expended in making small, or consumer loans. Seemingly, the debt- or’s officers invested the funds of the depositors, whether debenture holders or demand note holders, in business ventures of various kinds. These ventures invariably failed.

The basis for the present motion is: first, that the notes in question are securities which were not registered in accordance with either the State or Federal securities laws; and, secondly, that fraud was practiced in obtaining the deposits. A third point urged is that the debenture notes are so vague and am *389 biguous that the subordination provisions are not enforceable.

It is to be noted that the Trustee has taken the position that under all of the circumstances it would be highly inequitable to uphold the subordination provision. On the other hand, the demand note holders who are the largest group of creditors 2 oppose the petition on various grounds, including the statute of frauds, limitations provisions, and, more importantly, that fraud is incapable of adjudication in a summary proceeding such as the present one.

As a further prelude to a discussion of the legal issues, it is important to further note the provisions of the subject debenture notes, a copy of which note is appended hereto. This is a gilt-edged document which promises much, but at the same time actually guarantees little, if anything, beyond acknowledging receipt of the money and declaring the terms of the obligation. 3

Our view of the case does not require consideration of all of the contentions and counter-contentions of the parties. The threshold issues as to whether the document in issue, by its terms, actually subordinates the claims of the holders, and if so, whether such provisions should be enforced, are determinative.

I.

Whether the so-called subordination provisions effectuate the subordination purpose.

There are two provisions in the note which at least arguably have to do with subordination. The first of these provides:

“ * * * The interest on these notes shall be payable only out of earnings of the corporation and the principal represented hereby, and interest thereon, shall be subordinated to the claims of all other general creditors, secured or unsecured, including banks.”

The question is whether the payment of principal or of interest, or both, was by reason of the above clause subordinated to other debts. In order to conclude that principal was subordinated one would have to insert a semicolon after the word “corporation.” As it is written, it provides that the interest shall be payable only on earnings of the corporation and the principal represented. It then goes on to say that “interest thereon” shall be subordinated. Although the comma after “thereon” detracts somewhat from this meaning and although such a meaning makes little sense, it nevertheless strongly suggests that it was interest thereon which was subordinated. It may well be that the officers of the debtor intended to have both principal and interest as a subordinated debt. On the other hand, it may well be that they intended to create such an ambiguous provision that no one could be certain what, if anything, was subordinated.

Some clue to the debtor’s intention can be obtained from the actual operation of the company. Its policy was to credit interest from incoming funds (its widespread advertising kept the money coming in), at least until the last few months of its existence. When a creditor requested interest, such payment came from funds furnished by other depositors, since it is not apparent that there were any genuine earnings, at least during the latter phase of the operation. Thus, the company could well have intended to pay interest out of principal and therefore the conduct of the debtor does not help the demand note holders.

The ambiguity in the wording makes it difficult to hold that general subordina *390 tion was an express provision of the instrument.

The second provision which deals with subordination is found in the last paragraph of the instrument. This provides:

“As further security of the payment of these notes, there has been transferred, assigned, and pledged by the undersigned, to Joe W. Newcomer, as Trustee, its accounts receivable, notes and bills receivable, not otherwise pledged, choses in action, franchises, contracts, and all other intangible rights of every kind and description, and all additions thereto or replacements thereof, which pledge is subject to the provision that it shall not affect the right of the company to sell, assign or discount its accounts, bills, or notes receivable, either with or without recourse, or to assign or pledge its accounts receivable, notes and bills receivable, choses in action, franchises, contracts, and other intangible rights for the purpose of obtaining credit, and which pledge likewise is subordinated to the claims of all other general creditors, whether the said creditors be secured or unsecured.”

It is noteworthy that although this provision speaks of further security, there was no “other” security provided, if indeed this could be regarded as security. This paragraph purports to set up a trust with Joe Newcomer as trustee. The trustee supposedly presides over an “open bottom” sinking fund. It is not apparent from the evidence that this trust was ever set up or that it was even contemplated. Yet, had such a trust been created, no doubt the claims of the debenture holders would have been subordinated to other general creditors at least as far as any special fund is concerned. This, however, falls short of creating a general subordination. Its manifest purpose Was merely to create an impression that the debenture holder had some kind of security.

Regardless of what was intended, it is clear that since no fund was created, there are no assets which could be distributed on a preferred basis. Thus it must be concluded that this clause is likewise ineffectual in terms of creating a preference.

II.

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Bluebook (online)
226 F. Supp. 387, 1964 U.S. Dist. LEXIS 7564, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-joe-newcomer-finance-company-cod-1964.