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Trustees System Co. v. Payne

May 1, 1933

TRUSTEES SYSTEM CO. OF PENNSYLVANIA
v.
PAYNE ET AL., AND FOUR OTHER CASES



Appeal from the District Court of the United States for the Eastern District of Pennsylvania; George A. Welsh, Judge.

Author: Woolley

Before BUFFINGTON, WOOLLEY, and THOMPSON, Circuit Judges.

WOOLLEY, Circuit Judge.

These appeals are from like decrees of the District Court appointing receivers for the five defendant corporations in very exceptional circumstances. The questions involved are jurisdictional. As questions of jurisdiction are to be determined from the allegations of the bills, not from the facts as they may turn out, Mosher v. City of Phoenix, 287 U.S. 29, 30, 53 S. Ct. 67, 77 L. Ed. 148, and rest accordingly on whether the allegations set forth a substantial claim in equity, Levering & Garrigues Co. v. Morrin, 289 U.S. --, 53 S. Ct. 549, 77 L. Ed. --, we shall decide the case on the bills (all being substantially the same) and on a stipulation by counsel rather than on the evidence. These show that many closely linked corporations were engaged in different ways in a single comprehensive business of lending to homeowners small sums of money, not in excess of $300 to each borrower, and selling to them, or any one else, securities of certain of the corporations.

This business was conducted on a huge scale in eight states through the media of thirty corporations organized in groups of which the Pennsylvania group, the only one with which we are concerned, is an example.

The Trustees System Service Corporation, organized under the laws of Virginia with its main offices at Chicago, was the center of the system and in this litigation is referred to ss the parent corporation. It owned all the capital stock (except qualifying shares) of the Trustees System Company of Pennsylvania which for convenience we shall call Trustees of Pennsylvania. This corporation owned in turn all the stock of the Trustees System Company of Reading and the Trustees System Company of Philadelphia, called, respectively, Trustees of Reading and Trustees of Philadelphia. Trustees of Reading owned all the stock of Trusco Company of Reading, and Trustees of Philadelphia owned all the stock of Trusco Company of Philadelphia, herein referred to, respectively, as Trusco of Reading and Trusco of Philadelphia. The five subsidiaries are, it is averred, corporations of Pennsylvania. Their capital, paid in or earned, is not stated.

The corporate structure of the system however did not end here. Two more corporations were tied up with those we have named. These were the Industrial Loan and Guaranty Company and the Trustees System Extension Corporation, regarded and referred to as affiliates. Their capital structure is not given nor is it important. Enough is stated to show that the Industrial owned in some instances practically all and in others a majority of the several classes of common stock of the parent corporation, and Extension owned certain of its preferred stock. Of the balance much was owned by the public. There is nothing to show who owned the stock of Industrial and Extension.

The six system corporations were organized and they function in this fashion: F. J. Gibbons, the president, and J. G. Born, the secretary-treasurer of the parent corporation, were the president and secretary-treasurer of each of the subsidiary corporations. They also constituted a majority of the board of directors of the parent corporation and, similarly, a majority of the boards of directors of the five subsidiary corporations. Thus all corporate powers were reposed in these two men.

For convenience in illustrating what the systems did in their different spheres of operation, we shall run down the line of descent from the parent corporation at Chicago to its Philadelphia offsprings, the Reading line, and the lines elsewhere, being the same except in name and place.

The system made its profits from interest on money loaned and from the sale of stock of the parent corporation and of "gold notes" of that corporation -- unsecured promissory notes payable in gold -- and gold notes of Trustees Systems in various cities, in this case Trustees of Philadelphia, guaranteed by the parent corporation. (Outstanding guaranteed gold notes of all subsidiaries amount to $5,217,704.) Money acquired from the public flowed through the system in this way: The Truscos were supplied by the parent corporation in Chicago with money with which to make loans to the public. The Trusco of Philadelphia, for instance, on receiving such a loan immediately became a debtor of the parent corporation for the amount advanced. This money was deposited to the credit of Trusco in one bank and was drawn upon for local use. Money received from the public in payment of interest, repayment of loans and purchase of gold notes was placed in another bank not subject to withdrawal locally but to be withdrawn only by the two officers of the parent corporation in Chicago, who, as we have shown, were likewise officers of Trusco of Philadelphia and of the other subsidiaries. In this way money flowed from all the farflung Trusco Companies to a central reservoir at Chicago, that of the parent corporation. But all of it did not stop there, for the reservoir had two outlets. Through them much money flowed to the Industrial and Extension corporations, promotion affiliates, in payment of promotion costs and commissions, amounting in the case of the Extension for the years 1930, 1931 and ten months of 1932 to $5,120,000, and thence on to their stockholders whoever they were.

It should be kept in mind that profits could be earned by one corporation or another only from the use of the parent corporation's money or from the purchase of the corporations' securities by the public, loaned, sold and collected by the Trustees of Pennsylvania, Trustees of Philadelphia and Trusco of Philadelphia, which occupied the same office, had the same controlling officers and were served by the same employees, and that the money so received by one or another of these corporations could be drawn out and sent west by the two officers common to all of them. The precise position of the Trustees of Pennsylvania and Trustees of Philadelphia as money earners in the system is, except as to the sale of notes, a little vague. But it is very clear that by reason of the identity of officers and of a majority of the directors in all the corporations, those officers could at will, according to the money needs of the parent corporation or for any other reason, keep one, or another, or all of the underlying corporations solvent or insolvent.

On October 28, 1932, the District Court of the United States for the Northern District of Illinois appointed receivers for the parent corporation at Chicago. Thereupon the whole thing collapsed. Immediately there sprang up a Protective Committee composed of citizens of New York who, on an averment that they were stockholders and note holders of the parent corporation under a deposit agreement whereby all the right, title and interest of original stockholders and note holders (in excess of $3000) were transferred to them and that "by reason of said agreement" they became creditors and stockholders, respectively, of the five defendant corporations, filed six bills in the District Court of the United States for the Eastern District of Pennsylvania for receivers of the six corporations, one ancillary to the Chicago receivership, the others nominally primary, "in order to preserve the status of the creditors in the State of Pennsylvania with respect to the above corporation(s) in view of the attitude (ability) of the receivers of the parent corporation" to drain the money from the Pennsylvania subsidiaries to the central receivership at Chicago. Regarding the decree for receivers of the parent corporation in Illinois as evidence of a proper case for the appointment of receivers in Pennsylvania, 23 R.C.L. ยง 157; Bluefields S.S. Co. v. Steele (C.C.A.) 184 F. 584, the court appointed ancillary receivers for the parent corporation and "permanent" receivers for each of the subsidiary corporations. The receivers were the same in each case. The main receivers for the parent corporation did not resist nor have they appealed from the appointment of ancillary receivers but the five defendant subsidiary corporations, evidently acting in concert with authorities in Chicago, have appealed from the decrees of the court below on a variety of grounds in which they are wholly right or wholly wrong according to what the bills disclose to be the real situation in equity.

Reduced to simplest terms, appellant-defendants in these five cases contend that the decrees appointing receivers and making them permanent should be vacated and the ...


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