Court Opinion

ID: 9650420
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:36:17.585829+00
Date Added: 2024-06-11T18:12:21.409461
License: Public Domain

DAWKINS, District Judge
(dissenting in part).
In 1919 Virginia Oil Company, Ine., was organized under the lows of Delaware, with an authorized capital of six million shares, of tho par value of $1 each. The name was later changed to the Virginia Oil & Refinding Company, and in December, 1922, it was adjudged a bankrupt in the Northern District of Texas. All of its business, property, and operations were in Texas. Among its assets were several thousand aeroe of mineral leases, principally in Gregg county, Eastern District of texas, which were reported worthless by the trustee prior to Ms discharge in 1926. The bankrupt was never discharged. Late in 1930, oi' early in 1931, oil was discovered in tho vicinity of these properties, and they became quite valuable. The principal moving spirit in the organization, promotion, and operation of the corporation, was one Gaines B. Turner of Fort Worth, Tex. After the discovery of oil, he had a receiver appointed in tho state court of Texas, in a proceeding wherein his two sisters alone were made defendants, but who were never served with process. The receivership continued for some months, and some of the properties were sold or leased. Subsequently the bankruptcy proceedings were reopened and a new trustee selected, to whom the property was surrendered by the state receiver. The state receiver later intervened in this case and sought return of the property, which was denied, but no appeal has been prosecuted, and that question has become final.
In the meantime, the authority of the corporation to do business in both Delaware and Texas had been revoked for nonpayment of franchise taxes. In 1931 these rights were restored, and the name was again changed, this time to the Virginia Production Company. These things were done at the instance of Turner, who purported to act as president of the company.
September 12, 1931, the present suit was filed by Mrs. M. J. Crutcher and her husband, citizens of Texas, against the corporation and certain other individual defendants, as stockholders, alleged to be citizens of Tennessee, Oklahoma, and California. Plaintiffs claimed to own 30,000 and 2,240 shares, respectively, in the company, and alleged that they were suing on behalf of themselves and all other persons or stockholders in the same class who might wish to join therein. Tho basis of jurisdiction was diversity of citizenship. The petition alleged that the records, books, and papers of the corporation had boon lost or destroyed and it was impossible to tell how much stock had been issued or who were the owners thereof; that there was no one to act for and on behalf of the company, and it was necessary that a receiver be appointed to take charge of and hold the surplus of funds and property which would remain after the full payment of creditors and costs of administra*446tion in the bankruptcy proceedings; and, further, that a master should be appointed and appropriate proceedings had for the determination of the names of the persons holding and the amount of outstanding legal stock.
On October —, 1931, there was filed on behalf of the defendant corporation an appearance (by what authority does not appear), together with the other individual defendants named in the bill, “each and all (of whom) waive the issuance of service of process and citation herein and hereby make and file their appearance in said ease as defendants and in the capacities in which they are respectively sued.” The facts alleged in the petition were neither admitted nor denied, but they “say there is confusion and great uncertainty as to the exact amo.unt of outstanding stock in the Virginia Oil & Refining Corporation, or as to the validity of the ownership thereof,” and that it was to the interest of all concerned to have the same determined, and they joined in the prayer for appointment of a receiver and master. Service for the corporation was made upon Gaines B. Turner, “as President of the Virginia Oil & Refining Corporation.” December 14th the defendant corporation filed a supplemental answer, admitting the necessity for the appointment of a receiver, and joined in the prayer of the plaintiffs therefor. On the day following, December 15th, the court below appointed a receiver, with authority to take charge of the property of the corporation, subject to the administration in bankruptcy for the benefit of creditors. He was given the usual powers. Again there was nothing to show who acted for the company in this last appearance except that the pleading was signed by counsel. On January 4th there was filed what was styled an intervention, asking that the appointment of the receiver be vacated. ■ This was signed by the said Turner, representing himself as attorney for the company. On the same day, January 4th, the trustee in bankruptcy moved to dismiss the bill herein on the ground that the bankrupt court was vested with full power and authority to deal with the estate and to determine who was entitled to receive the surplus, after payment of debts. These motions and exceptions of the trustee and the corporation were put at issue and duly overruled on January 16, 1932. February 10, 1932, leave was granted to Berl and Hart, as receivers of the Lewis Oil Corporation, to file a special appearance, which was done, and they alleged that the oil company which they represented was the owner of approximately a million shares of stock in the Virginia Oil & Refining Corporation, and that' the court below was without jurisdiction to appoint a receiver and master, for the reason that this right was vested exclusively in the courts of Delaware, which alone could determine effectively who were stockholders of said company; and, further, that one William P. Brock-man, alleging ownership of 6,440 shares in said Virginia Oil & Refining Company, had, since the filing of the present bill, instituted a similar proceeding in the District Court of the United States for Delaware. February 13th, the former order, appointing a receiver and master, was set aside and additional evidence taken.
Again, on March 9, 1932, there was filed on behalf of the Virginia Production Company a pleading, asking the court to continue the receivership and that all objections thereto be overruled. This was signed by counsel other than Turner. It alleged that the Virginia Company was originally a “non-incorporated joint stock association,” and that all of the leases in Gregg County had been taken in the name of Gaines B. Turner, as trustee, for the association, and, when the corporation was later formed under the laws of Delaware, most of the stock of the joint association was “converted into stock of the corporation,” but that there are still outstanding and in the hands of the holders and owners thereof certain certificates of beneficial interest, and that the holders and owners of same are asserting title to a proportionate part of the assets and properties in Gregg county, Tex., and that it will have to be determined the extent to which they shall participate therein. This petition further'alleged as follows:
“2. That in addition to the said Virginia Company, an unincorporated joint stock association, and the said Virginia Company, Inc., a corporation, Gaines B. Turner and others organized and incorporated the Virginia Drilling Company, a corporation, the Virginia Refining Company, a corporation, and also the Breekenridge Royalty Syndicate, a Trust Estate, the Six Virginia Syndicates, a Trust Estate, and the Lee Well No. 1 Syndicate and Lee Well No. 2 Syndicate, and of which trust estates one James W. Swayne of Ft. Worth, Texas, (now deceased) was the Trustee.
“That said corporations, and the said syndicates, issued stock to many persons who now claim the right to participate in the assets and properties of the Virginia Oil & Re*447fining Company, now the Virginia Production Company, and the properties claimed by it in Greg-g County, Texas, by reason of certain interrelations and contracts between said corporation and the syndicates and certain mergers, and that in addition to the stock ownership in said Virginia Oil ¿Refilling Company (now Virginia Production Company) it will be necessary for the Master in Chancery to determine the validity of the claims of such persons and whether or not they are entitled to stock in the "Virginia Production Gompany, a corporation, and whether or not they are entitled to a proportionate part of the assets and properties in Gregg County, Texas, or elsewhere, belonging to said corpora-tIon-
It further alleged that the state court re>-ceiver had sold some of the properties and the titles had become involved to such extent as to require tile institution of suits for their recovery.
March 10, 1932, defendant corporation filed an amended motion of intervention to set aside the appointment of the receiver and master, alleg-iug that “there was no service or other process served upon this intervener in this suit”; that it knew nothing of the appointment of the receiver until after it had been done, and, by reason thereof, the court was without jurisdiction “to determine tho issues of fact as alleged in tho bill,” and all corporations created by the laws of Delaware were under the exclusive jurisdiction of courts of that state in matters of this kind, except as to taxes. This pleading was likewise signed by Gaines B. Turner, as “attorney for intervenor, Virginia. Production Company.” Thereafter, on March 10, 1932, C. V. Noble, alleging himself to bo a citizen of Iowa and J. F. Doyle, of Dallas, Tex., filed an intervontion, claiming to bo the owners of 740,000 shares of stock, and asserting that the property and assets of the corporation were under the exclusive jurisdiction and control of the bankrupt court, which had full power and authority to settle all matters involved. They prayed for tho discharge 01 the receiver and master and dismissal of the bill. All pleas to tho jurisdiction and motions to dismiss were overruled by the lower court, and tho receivership and appointment of the master continued in effect. Some 1,900' claimants oE stock have filed their claims before the master, involving fifteen million shares, whereas tho. authorized capital of the company was limited to six million shares.
The only appeals taken were by the re-eeiver of the Lewis Oil Corporation, and Doyle on behalf of himself and for the use and benefit of the trustee in bankruptcy.
Without going into details, it is sufficient ^ appellant receivers make eleven assignments of error: (1) That plaintiffs noj. any ef£orf¡ t0 have the officers of the eorporati0n bring this suit; (2), (3), alld (4) n0 eqUitable grounds were shown for the appointment of a receiver and mas£er. (5) that the court below had no jurisdiction. (6.) (7); and that it had no power p, pasa upon the issues of whether a corporation still existed, or who were stockholders, and the amounts and validity therefo. the reason that this jurisdiction was vested exclusively in the courts of Delaware, and (9) that the record disclosed a proper proceeding for that purpose has been institutcd in the District Conti; of the United States for Delaware; (10) that, even if tho court below was vested with jurisdiction, it should not have been exercised, for the reason that it was incapable of rendering an e£fective judgment binding upon all parties in all jurisdictions; and (11) that the plaintiff and all other stockholders, by the acceptance stock in said corporation, had subscribed to and become bound by tho laws of Delaware and. were estopped to appeal to any other jurisdiction.
Doyle, individually and for the trustee, claims (1) that the action was premature, in that there was no sufficient showing that there would bo a surplus after conclusion of bank-mptey; (2) that the action of the court below was contrary to the provisions of the Bankruptcy Act, giving exclusive jurisdiction to the bankruptcy court over the assets 0£ the estate; (3) that this proceeding will cause unnecessary expense; and (4) that said bankruptcy court is vested with full pow-(ir, jurisdiction, and authority to determine all matters and things herein complained of.
This long recital is made for the purpose of showing the utter confusion m the pleadings and contentions of the parties and which is likewise disclosed by the evidence,
I think no one will deny that tho property and assets of the bankrupt corporation are now properly in the hands of the bankrupt court, whose jurisdiction is exclusive, and that it should remain there until the creditors are paid and the costs of administration settled,
The controversy with the state court rece£ver Jmg kegn foreclosed by his failure to appeal from the judgment below, and, besides, I think the aetion of the state court was wholly void for failure to make the cor*448poration a party to the receivership proceedings therein.
When the bankruptcy proceedings axe closed, if there remains a surplus of funds and property, then it rightfully belongs to and should be returned to the bankrupt. In re Lenox (D. C.) 2 F.(2d) 92; In re Hopkins (D. C.) 15 F.(2d) 206. If this had been a Texas corporation, as to whose existence and proper representation no question existed, all that would be necessary would be for it or the trustee to apply to the bankruptcy court for an order to turn the surplus over to the former. Johnson v. Norris (5 C. C. A.) 190 F. 459, L. R. A. 1915B, 884. The entire trouble here grows out of the confused status, both of the bankrupt corporation and those claiming an interest in it, a matter with which the bankruptcy court, primarily, has no concern. The conditions revealed would undoubtedly have justified the court below in appointing a receiver and master, as was done, for a Texas corporation, if the requisite diversity of citizenship existed. A-court of bankruptcy, in my opinion, is not properly constituted to* determine issues of the nature involved here, as would be a tribunal of general equity powers. The bankruptcy statute is wholly void of provision therefor. Johnson v. Norris, supra. The former’s functions are to marshal the assets, determine the rights of creditors, settle their claims, and, if a surplus exists, to return it to the bankrupt. These powers are both express and implied. For this reason, the lower court was justified, I think, in view of this record, in appointing a receiver to take charge of this surplus until the status of the corporation and its stockholders could be determined by a proper tribunal. The serious difficulty in the present proceeding arises, as I see it, not from a want of jurisdiction, for that exists, at least as between the plaintiffs and such other stockholders and persons as have legally appeared, but from the inability of the lower court to draw before it in a lawful manner those claimants of stock and interests in the corporation and its property who have not appeared, , as well as those who are unknown, and who I think are necessary and indispensable parties to any judgment that may ^e rendered. It would seem, since it is not known who are stockholders or how much has been issued, that there is a vital question to be determined, adversely, each one against the other, as to the amount of stock each lawfully owns, and this must necessarily be settled contradictorily between them in a court which can compel their appearance. It cannot be done unless they are legally before the court. In so far as the issues as to who are stockholders and the amounts thereof are concerned, the proceeding in the court below was neither an action of a local nature nor one in rem. The fact that its officers and controlling stockholders carried on its business and conducted its affairs in Texas could not bind those other inarticulate shareholders to submit their interests without actual notice and lawful service, to that jurisdiction. On the other hand, inasmuch as the corporation was created under the laws of Delaware, with its domicile in that state, either a state or federal court possessing jurisdiction over it there could bring them before it in the manner provided by the laws of that state and render a judgment binding upon all. Such a proceeding would be at least quasi in rem, in which substituted process .could be used, and the judgment rendered would be good against the world. Jellenik v. Huron Copper Mining Co., 177 U. S. 1, 20 S. Ct. 559; 44 L. Ed. 647. The same is not true of the court below.
All of the mineral leases are in the Eastern District of Texas, but, since the principal office of the corporation was in Fort Worth, its books and records were kept there where the stock was issued and transferred, and the surplus remaining after the closing of the bankruptcy, in so far as any funds may be concerned, are or will be in the Northern District of Texas, this, together with the acceptance of service and appearances of the defendants below, I think gave the court jurisdiction upon the ground of diverse citizenship sufficient to appoint a receiver, to protect property within' its reach, since the record discloses that there is no one properly authorized to act for the corporation. That officer could then institute ancillary proceedings in the Eastern District of Texas for the purpose of taking charge of the leases and properties until the affairs of the corporation are adjusted in Delaware, so as to have it properly represented in applying to the lower court for a surrender of its property. Through the proceedings in Delaware, it could either be re-established as a going concern s,nd live corporation, or its affairs could be liquidated in such manner as to determine the interest to be paid to each stockholder.
I therefore think that the judgment appealed from should be modified by sustaining the receivership, dismissing the master, and relegating the plaintiffs and other alleged stockholders to the courts of Delaware for a determination of their respective rights as stockholders. The receiver could, in order to protect the interests of the eventual benefi-*449ciarles, be authorized to either join the trustee or separately take all necessary action and prosecute all suits for the preservation and recovery of the corporation’s property, subject, of course, to the prior jurisdiction and right of the bankruptcy court to the extent necessary of satisfying creditors existing at the date of adjudication, and the payment of costs.
I therefore respectfully dissent from that part of the majority conclusion sustaining the appointment of a master and reference to him of issues as to the validity and ownership of stock and the internal affairs of the corporation.