Court Opinion

ID: 9639497
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:20:31.715662+00
Date Added: 2024-06-11T18:10:19.236421
License: Public Domain

GARRECHT, Circuit Judge
(dissenting).
Appellants insist that the Pacific States Savings & Loan Company occupies before this court the position of an ordinary purchaser, in good faith and for value, of the bonds of the debtor appellee, and their citations of many authorities with the arguments based thereon apply to such a situation.
Appellees do not deny “that generally, under normal conditions and in the absence of inequitable conduct a party may, after adjudication in bankruptcy, sell his claim against the bankrupt at a discount to a third person, who, in turn, can file it against the estate of the debtor for its face value.” But in this case appellees “seek to hold the assignee to the costs and expenses incurred in purchasing the claims because of its boldly avowed and ruthless efforts to subvert the purposes for which section 77B was enacted.” They further argue: “It is the inequitable and willful conduct of 'the claimant that has impelled us to ask that the conscience of equity find expression in applying a constructive trust or other fraud rectifying remedy in favor of the Debtor’s estate. If this were an equity receivership or a regular bankruptcy proceeding, the- relief we ask would be equally authorized. It is not a new doctrine that we here invoke. We assert that section 77B has enlarged the powers of the Court in giving new relief to distressed debtors but apart from such enlargement we are asking only that the old principles be applied to a situation which is new only in the manner and extent in which the Appellants’ inequitable conduct has expressed itself.” It is asserted that the prize at stake in this suit is 21,000 acres of the finest land in the state of California, now of great value and of even greater potential value in the near future.
Appellant the Pacific States Savings & Loan Company, in a letter addressed to the Building and Loan Commissioner of California under date of January 2, 1935, among other things- stated: “ * * * While it is true that the bonds have been in default for some time, and the properties securing them are now being operated by a receiver, and the debtor corporation has filed proceedings for a reorganization in the District Court of the United States, it is reasonably certain that if more than two-thirds of the bonds could be acquired, the owner of such percentage of the bonds could effectually control foreclosure proceedings and, by making some form of reasonable settlement with the equity owner, could obtain title and possession to the properties securing the bonds. This particular holding is one of the most famous farming properties in the'State of California. If Pacific States Savings could acquire this holding, on the basis which has been offered to it, in exchange for its foreclosed real properties, it is almost certain that the investors of Pacific States Savings would reap great benefit therefrom.”
With this letter there was inclosed a copy of the report of Mr. C. A. Melcher, the farming expert for the corporation, which set forth descriptions, statistics of returns, appraisal, and other data which demonstrate the great value of this tract of land.
In his report this expert further stated that an appraisal made about six years before by the executive president of the Bank of America, a man who had lived many years in the vicinity and who was thoroughly familiar with the property, had placed the value at $2,005,000.
After careful consideration, the author of the report states that he is convinced that the value of the property at the time of the report was approximately $1,363,040. The facts and figures upon which he based this opinion will be more fully stated hereafter.
In this report it is further stated: “The property has great possibilities if properly financed and managed and with only a moderate increase in price for the products of the area it would show a satisfactory return on a valuation of double of today.”
*565This information procured by the appellant to enable it to act with full knowledge of the situation convinced the District Court that the debtor had a very considerable equitable interest in the premises.
The decree of the District Court is predicated upon findings to the effect that after the initiation of these proceedings in bankruptcy, and with full knowledge of a plan for reorganization certain interested parties, among them these appellants actuated by a purpose to wipe out this admittedly valuable interest of the appellee debtor, and as well all claims of unsecured creditors, entered into a scheme or combination to prevent fair competition whereby they were able to purchase the bonds of the debtor which were under the control of appellants at a price less than their real value with the further intent of blocking any reorganization plan pending or which might be proposed in the bankruptcy court. Under the circumstances shown to exist, the court determined that the acquisition of these bonds was tainted with fraud.
Under section 77B (b), 11 U.S.C.A. § 207(b), the court had power to approve a plan of reorganization where adequate protection was provided for claims or liens by payment in cash of the value of such claim or lien. This section concludes with this significant language: “Provided, That the judge shall scrutinize and may disregard any limitations or provisions of any depositary agreements, trust indentures, committee or other authorizations affecting any creditor acting under this section and may enforce an accounting thereunder or restrain the exercise of any power which he finds to be unfair or not consistent with public policy and may limit any claims filed by such committee member or agent, to the actual consideration paid therefor. The running of all periods of time prescribed by any other provisions of this title, and by all statutes of limitations, shall be suspended during the pendency of a proceeding under this section.”
The court determined that by reason of the fraudulent conduct of appellants their claim could only be allowed for the money actually paid for the bonds, with interest, payment for which in full was provided for by the reorganization plan offered in the decree. This placed these claimants in the position where their acceptance' of the plan was not necessary because they were awarded complete compensatory protection to the full amount of any claim that could be allowed.
One of the purposes, if not the chief purpose, conferred by section 77B of the Bankruptcy Act, was to enable the bankruptcy court to grant relief to debtors, who had large holdings of property the real value of which had been greatly reduced by the depression leaving the owner for the time being, financially helpless. This was a lawful purpose. The Supreme Court has decided that the powers of Congress extends to the relief of debtors as well as to the assistance of creditors and definitely established the proposition that a bankruptcy law enacted for the relief of debtors was within the purview of the Constitution. Hanover Nat. Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113; Collins v. Welsh (C.C.A.) 75 F.(2d) 894, 99 A.L.R. 1319.
Courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity. Continental Illinois Nat. Bank & Trust Co. v. Chicago, Rock Island Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110.
After the parties are brought into the bankruptcy court, the interests of all, creditors and debtor alike, are to be determined according to the principles of equity. Viewed in this light, let us look at the record. The report of the master accepted by the court, inter alia, says:
“It seems to me that it would be most inequitable-to permit this creditor to make a profit off this debtor of something like a million dollars by the means which it pursued. It claims that there was no equity in the properties for the corporation debtor nor for its stockholders. But this is as typical a case of frozen assets as can be found anywhere in the United States.
“According to the appraiser who examined the properties involved for the Pacific States Auxiliary Corporation and for the Pacific States Building and Loan Company before the deal by which these bonds were acquired was consummated, it is the richest land in California. This agent of the purchaser appraised the property as of the present value of One Million Three Hundred Sixty Thousand and Forty Dollars ($1,360,040.00). In good times, when prices of farm products were normal, land in the neighborhood similar to some of these tracts sold as high as Three Hundred and Fifty Dollars ($350) per acre. An adjoining tract sold during the depression at Fif*566ty Dollars ($50.00) an acre, but. that was a panic price. With products of the time of the report of this appraiser, with the price of products as of that time, the estimated value was One Hundred and Fifty Dollars ($150) to Two Hundred Dollars ($200) an acre. The land is assessed for One Million Eighty-one Thousand Three Hundred and Twenty Dollars ($1,081,320.00) by the County Assessor of San Joaquin County, This is said by the Assessor to be on the basis of forty per cent (40%) of its real value. This would build up the actual value to Two Million Seven Hundred Three Thousand Five Hundred Dollars ($2,703,-500.00). This, is, therefore, strictly a case of frozen assets, the kind of cases which section 77B of the National Bankruptcy Act was formulated and enacted to meet.
“Thus it will be seen, that barring the depression of the past four or five years, there was a good margin of value over the bonded indebtedness. It is really a magnificent property.
“Take the property at what is clearly its actual value, and the profit of the purchaser of these bonds, if permitted to receive a hundred cents on the dollar for the bonds, would be, upon the figures of the County Assessor, the difference between the price paid for the bonds and Two Million Seven Hundred Three Thousand and Five Hundred Dollars ($2,703,500.00). Add the money in the hands of the trustee as shown by his recent report, namely, $70,000.00, and on their own expert s figures, the actual value that they would obtain for their bonds is One Million, Four Hundred Thirty Thousand Dollars ($1,430,-000.00). For this value, they paid not far from Eight Hundred Thousand Dollars ($800,000.00). Upon their own agents appraisal, the profit will 'be over half a million dollars. Upon the Assessor s figures the profit would be nearer Two Million. Counting out ten per cent, a most liberal reduction for levees and ditches and waste lands and figuring the value as in prosperous times, the value now would be four and a half million dollars. Of course, this is an extravagant figure at present. The sale at Fifty Dollars ($50) in the neighborhood took place at a^time when there was no market.
“There has been no market and is no adequate market now. To value this land as of the present market is, in my 'opinion, to ignore the intent with which section 77A and section 77B of the National Bankruptcy Act [11 U.S.C.A. §§ 206, 207] were passed. Both apply here. Section 77B is declared by section 77A to confer upon the court in addition to other bankruptcy proceedings, ‘additional original jurisdiction for the relief of debtors’. The Congress had the debtor chiefly in mind when it passed section 77B. It is the primary purpose of section 77B to relieve debtors whose assets are frozen by lack of market, of which this is a typical case. Of course, creditors cannot be overlooked; this in-eludes unsecured creditors, as well as secured, however, I am satisfied that there is substantial equity in the property over the bond issue for unsecured creditors and even for the stockholders of the debtor,
“In the absence of direct fraud) nothing could be more inequitable than to permit the Pacific States Building and Loan Company, after purchasing these bonds by preventing fair and open bidding for them, to deprive this debtor of its equity in this property by taking advantage of a frozen market. I conceive it to be the duty of the court to protect the equity of a debtor so far as it can do so without injury to the creditor. Here, this creditor would not be injured in the least by the plan proposed. It will get all it paid for these bonds and its interest.”
Further, paragraph IV of the findings of fact adopted by the court is as follows: “The Pacific States Building and Loan Company acquired bonds owned by it from the owners thereof by preventing open and free kidding therefor. It made its purchase through an associated corporation, the Pacific States Auxiliary Corporation, which was the active agent in the purchase of the bonds and was controlled by a holding company, which also controlled the Pacific States Building and Loan Company. The three companies are practically one organization, and for business purposes and in this transaction, the three corporations were so closely identified as to be one legal entity. The Pacific States Auxiliary Corporation acquired these bonds for the account of the Pacific States Building and' Loan Company by combining and agreeing with the officers and agents of the trustee under the bond issue and the Rindge Land and Navigation Company Bondholders’ Protective Committee and its officers and agents to prevent, and did prevent, open and free and fair bidding for these bonds, and thereby preventing a bona fide bidder, who stood ready, willing and able to pur*567chase the bonds at the price fixed in the plan or reorganization now proposed, from having an open and equal chance to bid for the bonds with the same information and upon the same terms as were given to the Pacific States Auxiliary Corporation, the agent which purchased the bonds for the Pacific States Building and Loan Company. The attorneys and agents of the Bondholders’ Protective Committee and of the Pacific States Auxiliary Corporation contrived together to withhold information from this bidder upon which he could base an intelligent offer for the bonds and did this for the purpose of assisting Pacific States Auxiliary Corporation to purchase the bonds at the price which they agreed to pay and did pay therefor.”
These findings are supported by evidence of a combination participated in by appellants with the avowed purpose of depriving the debtor of every interest in its property. This is disclosed by the letter written by the attorney for the bidders to the attorney for the committee which appears in the record, which begins as follows :
“Pacific States Auxiliary Corporation, as you undoubtedly know, has finally terminated all negotiations with the Rindge Land and Navigation Company, and has no intention of resuming any negotiations with it. I feel that we are entirely free to align ourselves definitely with the bondholders and from now on completely disregard the equity holder.
“I have definitely come to the conclusion that it is necessary for the committee to carry the fight to the Rindges and make a knock-down drag-out battle of the matter,; and that it is equally imperative for us to line up with the committee, and for all of us to take the view now to fight out the matter along the lines of wiping out the stockholders entirely.”
And which concludes in this forceful and suggestive language: “I wish you would call a committee meeting to discuss the entire matter de novo in the light of our new offer, as I think it changes.your entire strategy and supplies you with a weapon to annihilate the equity owner.”
The foregoing are only a few excerpts from a mass of evidence of similar import.
The master reported to the court “that the- Committee and trustees did not act in good faith, * * * that the Bondholders’ Committee did not get the best possible bid for the bonds as it was their duty to do. They combined with the Auxiliary Corporation and prevented the debtor corporation from getting anything out of the deal when it is clear that they could have secured the same price that they got for the bonds and something for the debtor corporation as well.”
It is no answer to say that the original bondholders are not here complaining. Some of them may never have known the facts; others may have been more interested in the acquisition of the property. In any event, the debtor and the unsecured creditors were deprived of their rights, and they are demanding redress.
The facetious allusion in the majority opinion to the feminine movie fan, whose distaste for red hair betrayed her into foolish financial conduct, has no application to the facts in this case, and the diversion fails to justify the inequitable conduct of the appellants as appears from the record, or destroy the force of the findings of the District Court.
We are not dealing with any innocent or capricious bondholder or even with one who has purchased a defaulted bond as an honest investment. These appellants were not among these innocent original bondholders who had paid full value in money for their bonds and who had been edged out of the proceedings at 40 cents on the dollar, nor were they even speculators in doubtful equities. No. They were corporations whose adroit manipulations were comparable to the clever tricks of the sure-thing artist. It is not strange that the tactics resorted to by appellants in the proceedings before a court of equity shocked the conscience of the chancellor.
Here the appellants first formulated a scheme the effect of which was not only to deprive the legitimate bondholders or original owners from receiving the actual value of their bonds, but particularly to defeat the approval by the court of any plan whereby the debtor might satisfy all of his creditors and have something left. The court which found that such an inequitable plot had been perpetrated could not permit the parties to profit by their wrongdoing, and the rights of the debtor and unsecured creditors to' be defeated or swept away by conspiracy and' deceit. Settled principles of equity should prevent this purchaser of the bonds from enforcing any claim for more than the amount paid with interest and expenses as was determined *568by the District Court. In re McCrory Stores Corporation, 12 F.Supp. 267. Further, as pointed out In re Cosgrave (D.C.) 10 F.Supp. 672, in the enactment of the Bankruptcy Act it was not the intention of Congress to afford relief to speculators in equities.
Provisions in bankruptcy statutes authorizing competition have been held not to be contrary to the Fifth or Fourteenth Amendment. Moreover, in this case we need not be concerned with either of these amendments because they are not pertinent in view of the findings made which should be accepted as based on the evidence. The appellants, who have acquired bonds through fraudulent manipulation in the matter pending before the court, are not in position of the assignors and are not assignees in good faith, and their position is no longer that of preferred lien creditors to the full amount of the bonds. This preferred status they forfeited by their inequitable conduct and thereby subjected themselves' to the equity powers of the court to determine that the only claim which could be considered was for the return of the money, interest, and costs and this the court ordered.
A court of bankruptcy, being a court of equity, looks through the form to the substance of the transaction. In re Knickerbocker Hotel Co. (C.C.A.) 81 F.(2d) 981.
Equity will not aid those who defraud or deceive. In Re Wision & Golub, Inc. (C.C.A. 2) 84 F.(2d) 1, decided June 15, 1936.
As sustaining the proposition that a different measure of consideration may be extended to a bondholder who was the good-faith holder of the obligation before the litigation commenced from that shown to a mere speculator who after the property has passed under the control of the court, buys an interest in what may be saved out of the wreck, the following cases may be cited, Guaranty Trust Co. v. Chicago, Milwaukee, & St. Paul Railway Co. (D.C.) 15 F.(2d) 434; Palmer v. Bankers’ Trust Co. (C.C.A.) 12 F.(2d) 747.
The case of Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555; 55 S.Ct. 854, 79 L.Ed. 1593, 97 A.L.R. 1106, cited by appellants, is not in point. Issues like these here were not involved. In that case, speaking of the Bankruptcy Act, the court remarked, 295 U.S. 555, at page 589, 55 S.Ct. 854, 863: “But the effect of the act here complained of is not the discharge of Radford’s personal obligation. It is the taking of substantive rights in specific property acquired by the bank prior to the act. In order to determine whether rights of that nature have been taken, we must ascertain what the mortgagee’s rights [that is the suitor’s rights] were before the passage of the act.” That case, as other cases cited by appellants, and the majority opinion as well, are based on a legitimate claim.
The able briefs and argument of counsel for appellants rest primarily upon the position that appellants were free from inequitable conduct in acquiring the bonds which is contrary to the findings of the District Court.
Thus the basic issue in this suit is ignored and the fraudulent acquisition of this claim by appellants after the inauguration of the bankruptcy proceedings for the purpose of defeating the processes of the court, damaging the debtor, and harming the general unsecured creditors, is lost sight of and disregarded.
The controversy between the parties is narrowed to the question: Is there in the record sufficient evidence of collusion, unfair dealing, inequitable conduct, or fraud upon the part of appellants, to support the findings of the District Court? In my opinion there is, and therefore the decree should be affirmed.