Appeals from the District Court of the United States for the Northern District of Illinois, Eastern Division; Walter C. Lindley, Judge.
Before EVANS and SPARKS, Circuit Judges, and FITZHENRY, District Judge.
Each of the two original suits was brought for the avowed purpose of obtaining the appointment of receivers, who in turn were to protect the property from loss through sale under the present unfavorable conditions, which are alleged to be abnormal. The Insull Utility Investments, Inc., it appears, was a corporation, commonly described as a holding company, organized for the purpose of speculating in stocks, chiefly utility, issued by companies which were controlled or manipulated by a group of men in Chicago headed by one Samuel Insull. Generally speaking, there were four companies whose securities were thus acquired: Commonwealth Edison Company, Public Service Company of Northern Illinois, The Peoples Gas Light and Coke Company, and the Middle West Utilities Company. The latter was itself a holding company.
The stock of the Insull Utility Investments, Inc. consisted of 60,000 shares of $5.50 Prior Preferred Stock without par value, 40,000 shares of Preferred Stock 1st Series without par value, 450,000 shares of Preferred Stock 2nd Series, and 3,636,622 shares of Common Stock without par value. It is inferable from the complaint that this stock is valueless and never will be of value because of the existence of outstanding funded indebtedness consisting of $2,469,000 of 5% Gold Debentures, Series A, due January 1, 1949, $55,256,000 of Ten Year 6% Gold Debentures, Series B, due January 1, 1940, and $45,000,000 of other notes. These debentures were unloaded on the public in prosperous times and were outstanding at the time of the application for the appointment of a receiver. A petition in bankruptcy has been filed against this company, which is insolvent.
The capital set-up of the Corporation Securities Co. was as follows: 1,000,000 shares of Prior Preferred Stock; 1,000,000 shares of Preferred Stock; and 6,000,000 shares of Common Stock. 4,569,019 shares of the common stock and 742,019 shares of the preferred stock are outstanding. The inference is strong that this stock is valueless because of the outstanding funded indebtedness of $24,033,000, represented by 5% Serial Gold Notes, and the existence of about $26,000,000 of notes payable.
This company too was engaged in speculating in the stock of the above-named four companies, controlled by the same group of individuals and headed by the same Samuel Insull.
The plaintiff in each case is the holder of five one thousand dollar notes or debentures.
Notwithstanding the outstanding indebtedness represented by gold notes and debentures, the officers in charge of the Insull Utility Investments, Inc. and of the Corporation Securities Co. borrowed large sums of money from various banks and deposited the securities which they had purchased out of the proceeds of the sale of stock, the gold notes, and the said debentures as collateral for such loans. As the securities fell in price and as the loans increased, a larger percentage of the holdings of the two companies was thus pledged as collateral with said banks. It appears that practically all of the assets of both corporations have been thus hypothecated, and yet the market value of the pledged securities when the injunctional orders were entered was insufficient to cover the indebtedness to the banks. The stock, the gold notes, and the debentures are thus left with no securities to give them value.
It is alleged in the bill as the sole basis for the appointment of the receiver, and is urged here in support of the orders appealed from, that the present market value of the securities is such that great sacrifices will occur if the collateral be sold at this time. As the assets were all pledged and as the market value of the securities was less than the indebtedness, the real purpose of the litigation was to prevent the sale of the securities until a better price could be obtained.
Material parts of the injunctional order are set forth in the margin.*fn1 A similar order was entered in the other cause.
The orders granting the injunctions were entered upon the verified petitions of the receivers, but without oral testimony to support them. In these petitions, the receivers alleged that the Corporation Securities Co. and the Insull Utility Investments, Inc. had made "large loans of money from various banks located in the city of New York, New York, and pledged as collateral to secure such loans, large amounts and blocks of the stocks, bonds and other securities * * * belonging" either to said Corporation Securities Co. or to the Insull Utility Investments, Inc. They further alleged that "the stocks, bonds and securities so pledged have, at the present time, a certain definite market value, determined by the market quotations of various stock exchanges * * * and * * * such certain definite market value is not a fair actual or intrinsic value of such stocks, bonds and securities * * * but is purely fictitious. * * * the fair, actual and intrinsic value of such stocks, bonds and other securities so pledged * * * is greatly in excess of the indebtedness * * * (to the New York banks) and the * * * Receivers, have a substantial interest in and to such stocks, bonds and other securities * * * which * * * amounts to large sums of money, to-wit, millions of dollars"; that the receivers had been notified that such collateral would be sold at public auction; and that they had no money with which to buy these securities at the sale or with which to pay off the indebtedness, etc.
The question which confronts us may be stated thus: May the United States District Court for the Northern District of Illinois which has, upon proper application, appointed receivers of an involved or insolvent corporation, and whose receivers have taken possession of the property of such insolvent company, restrain the sale of stock of other Illinois corporations, belonging to the involved corporation, which stock, prior to the appointment of the receivers, had been pledged or hypothecated with a New York bank to secure loans made by the said insolvent company of said New York bank?
In approaching this question it should be stated that both the Insull Utility Investments, Inc. and the Corporation Securities Co. were Illinois corporations with principal offices in Chicago, which is in the Northern District of Illinois. The companies, the stock of which was pledged by the insolvent companies, were also mainly those of Illinois corporations, and their principal places of business were likewise Chicago in said Northern District of Illinois. The only shares of stock ...