In re Scranton Corp.

37 F.R.D. 465, 1965 U.S. Dist. LEXIS 9956
CourtDistrict Court, M.D. Pennsylvania
DecidedMay 11, 1965
DocketNos. 11338, 11402
StatusPublished
Cited by6 cases

This text of 37 F.R.D. 465 (In re Scranton Corp.) is published on Counsel Stack Legal Research, covering District Court, M.D. Pennsylvania primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re Scranton Corp., 37 F.R.D. 465, 1965 U.S. Dist. LEXIS 9956 (M.D. Pa. 1965).

Opinion

SHERIDAN, Chief Judge.

This is a motion by Hal E. Roach, Sr., a creditor of Hal Roach Studios (Roach Studios), which, together with The Scranton Corporation (Scranton), are debtors in reorganization proceedings under Chapter X of the Bankruptcy Act, for an order requiring the co-trustees for the debtors to produce for inspection a memorandum, prepared by the firm of Morgan, Lewis and Bockius, of Philadelphia, Pennsylvania, special attorneys for the co-trustees.

During 1958 and 1959, F. L. Jacobs Company, Detroit, Michigan (Jacobs), Scranton and Roach Studios came under the domination of Alexander Guterma and associates. Jacobs held the majority of Scranton’s outstanding capital stock and Scranton held all of the stock of Roach Studios. Guterma was chairman of the boards of directors of the three concerns. During this time also, Roach Studios wholly owned or had 50 percent stock interests in Rabco TV Productions, Inc. (Rabco), W-R Corporation, Passing Parade Films, Inc. and R. & M. Productions, Inc. The trustees’ investigations showed that these companies and others had been involved in numerous intricate financial transactions apparently outside the ordinary course of business. Many of the transactions were not recorded on the books and records of,the company and others were unauthorized. The officers of the companies, other than the Guterma group, were unaware of many of the transactions which included joint acquisition of companies, unusual borrowings, and guarantees by one company of the borrowings of another.

In September, 1958, Scranton and Roach Studios purchased all of the capital stock and certain loans receivable of the Mutual Broadcasting System, Inc. (Mutual). Roach Studios furnished the $250,000 down payment. For the balance of the purchase price Roach Studios and Scranton jointly made notes, guaranteed by Jacobs and Guterma as guarantors and Scranton issued 20,000 shares of its common stock. Apparently there is no evidence as to how the ownership of Mutual was to be considered between Scranton and Roach Studios. Six months later Mutual was sold at a substantial loss. By that time Scranton had become guarantor of substantial obligations of Mutual. As a part of the sale consideration the purchaser agreed to furnish Scranton and Roach Studios commercial [467]*467announcement time at an approximate value of $1,350,000. Mutual filed a petition for arrangement under Chapter XI of the Bankruptcy Act. Its arrangement called for a payment of 10 percent to general creditors, but after negotiations, it agreed to fully abide by its agreement to furnish Scranton and Roach Studios with the commercial announcement time. Roach Studios had no use for this time and so it was used by Scranton alone. For bookkeeping purposes only the trustees have considered Scranton the owner of Mutual, and the amounts advanced by Roach Studios for the purchase of Mutual have been reflected as advances to Scranton.

Beginning in July, 1958, many unusual bank accounts were opened by Guterma and his associates for Scranton, Roach Studios and Rabco. The accounts were unauthorized. They reflect millions of dollars of receipts and disbursements. Guterma and his associates incurred many loan obligations in the name of Scranton, Roach Studios and Rabco. Many of these were not authorized, and the purported borrowers usually did not receive any benefit from the loans. The proceeds usually were deposited in “unrecorded” bank accounts and can be traced from there to Jacobs and others, to whom those funds had been immediately transferred. The lender in most instances was Reldan Trading Corporation (Reldan), a New York lending agency. Reldan claimed that the various loans to Rabco were guaranteed by Scranton, Roach Studios and Jacobs and the loans to Roach Studios were guaranteed by Scranton. Subsequently, the court approved without objection the settlement of the debtors’ claims by and against Reldan and Jacobs without adjusting, however, the debtors’ claims against each other.

In 1959, Guterma was convicted of violating federal securities laws and has since pleaded guilty to many other charges. Shortly after Guterma’s arrest, Scranton, Roach Studios, Jacobs and Rabco filed petitions for reorganization under Chapter X of the Bankruptcy Act. Proceedings under the Bankruptcy Act have been filed by other firms, not mentioned herein, which were also involved in the unusual transactions. The issues of Mutual’s ownership and liability for its debts, and the rights and liabilities of the debtors inter se for the loan guarantees and other unusual transactions will be determined by this court.

Prior to the settlement of the Reldan claims, the trustees, with court approval, engaged the law firm of Morgan, Lewis and Bockius as special counsel to assist the trustees in determining their position in connection with the loans, guarantees and other transactions involving the debtors and Reldan. This firm undertook to become familiar with the complicated factual situations underlying the Reldan claims against Scranton, Roach Studios and Rabco and the trustees’ counterclaims. A memorandum was delivered to the trustees on April 24, 1962, for their guidance in deciding on the course of action to be followed. Movant seeks to inspect this memorandum.

The motion, while not denominated as such, will be considered as a motion pursuant to Rule 34 of the Federal Rules of Civil Procedure, which is applicable to proceedings under the Bankruptcy Act. Bankruptcy Act, Sections 102, 21, sub. k, 11 U.S.C.A. §§ 502, 44, sub. k; 6 Collier, Bankruptcy, Para. 7.19 [1] n. 13 at p. 2034 (14th ed.); 2 id. Paragraphs 21.-34, 18.41 [7]. The trustees contend the information sought is irrelevant and immaterial to the determination of the intercompany claims; it represents counsel’s “work product” for which good cause has not been shown to justify its discovery ; and it is privileged.

The trustees have submitted the memorandum for in camera inspection by the court. The stated purpose of the memorandum was to provide guidance to the trustees in their consideration of the Reldan claims against Scranton, Roach Studios and Rabeo. It recites that “The [468]*468factual information on which the memorandum is based has been supplied to us by Scranton counsel.” One of the counsel for the trustees testified that the memorandum contains facts summarized from records examined primarily in counsel’s office in Scranton, Pennsylvania. The memorandum is divided into a section for each loan under which the facts related thereto are set forth, and under a subsection denoted as “comment”, legal opinion as to rights and liabilities based on those facts is related. The memorandum concludes, in part:

“In view of the extreme complexity and number of issues involved in this matter, the conclusions reached in this memorandum must be recognized as being purely preliminary and tentative. The facts, as we understand them, necessarily are incomplete at this stage of the proceeding. Furthermore, the legal conclusions reached are not based on exhaustive research because of the number of issues and the various jurisdictions whose laws could be found to be applicable.”

Judge Wyzanski summarized the attorney-client privilege in United States v. United Shoe Machinery Corp., D.Mass.1950, 89 F.Supp. 357:

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Bluebook (online)
37 F.R.D. 465, 1965 U.S. Dist. LEXIS 9956, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-scranton-corp-pamd-1965.