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Gruenwald v. Moir Hotel Co.

May 11, 1938


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; James H. Wilkerson, Judge.

Author: Lindley

Before MAJOR and TREANOR, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

Plaintiff appeals from a decree of the District Court dismissing his bill of complaint. The defendants include the Moir Hotel Company, a corporation, Bosmor Corporation, A. C. Allyn & Co., a corporation, Edward W. Thomas, Warren W. Jones, Perry G. Anderson, Leonard Hicks, John C. Meiners, Continental Illinois National Bank & Trust Company of Chicago, and First National Bank of Chicago. The decree complained of was entered upon motions to dismiss, interposed by the several defendants, upon the ground that the bill was multifarious and stated no cause of action. The court expressed doubt as to whether plaintiff had the right to maintain the bill for the causes of action attempted to be asserted, saying that they were largely maintainable by the corporation rather than by its creditors; that damages on account of alleged fraudulent misrepresentations could be recovered only at law, not in a representative or class equity suit, and that the suit was subject to the objections of multifariousness and masjoinder. No leave to amend was requested.

The averments of fact upon which the prayer for relief was granted are rather complicated, verbose, and difficult of clear analysis. Reduced to direct averments of fact, they are substantially as follows: On June 1, 1928 the Moir Hotel Company, owner of the Morrison Hotel and the leasehold on which it was located, executed its 5 1/2 per cent. bonds in the face amount of $6,000,000 secured by deed of trust, to the Continental Bank as trustee, upon the leasehold and the hotel property. The mortgagor defaulted under the trust deed in May, 1931, by failing to comply with the sinking fund requirement and on June 1, 1931, by failing to pay the semi-annual interest then maturing. The trustee took no action and the hotel continued in possession and management of the premises and paid "large" salaries to its officers and directors.

The Continental was the bank of deposit for the hotel company and had on deposit $125,000 belonging to the company. It had loaned to the depositor the sum of $150,000 and when the defaults occurred, the bank set off the funds in the deposit account against its loan and collected $12,500 from collateral it held and the balance from the hotel company.

Allyn & Co. is an investment house.It underwrote various bond issues of the hotel company and in 1928 purchased the entire amount of $6,000,000, then issued sold the same to the public, and realized a profit thereby of $360,000. In achieving success with the sale of these bonds in 1928, the hotel company, the Allyn Company and "their officers and directors" issued certain literature from which was omitted certain information and which contained misleading information.

When the defaults by the hotel company were imminent, "the defendants devised a scheme" and caused to be organized a bondholders' protective committee of whose members, only John C. Meiners is defendant. A protective deposit agreement was prepared; the contents were not revealed to the leaseholders. The committee sent out misleading communications to the bondholders.

On June 1, 1931 the underwriting company entered into an agreement with Moir, now deceased, president of the hotel company any largely the owner of its common and preferred stock, wherein it was recited that the underwriting company was able to provide and would furnish capable hotel management; agreed that Moir deliver his stock to be underwriter and cancel his contract of employment by the hoel company and that, in event of foreclosure, the stock should be so voted and such action had as would effectively assign the equity of redemption as might be directed by the Allyn Company. The latter agreed to use its best efforts to procure the employment of Moir and not to vote the stock in favor of assignment of the equity of redemption unless the protective committee should release his guarantee of the bonds deposited with the committee. The contract was ratified by the hotel company. Defendant Hicks was employed at a salary of $15,000; Moir at the same salary; Thomas and Anderson at $500 per month each. Defendants Jones, Anderson and Thomas were elected directors. They were already directors of the Allyn Company, and Anderson was secretary of the bondholders' committee.

The hotel company paid the premiums on an insurance policy for $425,000 on the life of Moir until December 21, 1933, when, in order to avoid suits by John Griffith & Son against Moir, its directors adopted a resolution to release the rights of the company in the insurance. Moir died in December, 1934. The "bondholders" lost the insurance. Moir was never sued on his guarantee of the bonds.

The Allyn Company, with individual defendants, "confederated and conspired" against the bondholders and formed the Bosmor Corporation to operate the hotel, which company employed defendants Thomas, Anderson, and Hicks at the salaries mentioned. "Defendants passed a resolution" to reorganize the company under section 77B, Bankr. Act, 11 U.S.C.A. ยง 207 and note, for their own benefit and to the detriment of the bondholders, and in pursuance of such resolution the hotel company filed its petition for reorganization on June 21, 1934. Later the Allyn Company, through its vice president, Meiners, prepared a plan of reorganization and filed it with the court. The details of the plan are fully set forth.

The Continental Bank co-operated with the Allyn Company in deceiving bondholders as to the financial status of the hotel company. It failed in its duty as trustee, through its failure to advise bondholders that the Allyn Company had made a profit in selling the bonds of the hotel company and that the hotel company had paid at premium for the retirement of the outstanding bonds. It failed in its duty as trustee to supervise the expenditures for repairs while the hotel was under Allyn Company management, in permitting employment of the parties mentioned and in allowing a default to occur in the payment of ground rent and taxes.

Succinctly stated, the causes of action attempted to be asserted against the Continental include the recovery of $150,000 claimed to have been wrongfully set off by the bank against the note of the hotel company; liability for default by the bank's failure as trustee to see that the taxes were paid for three years; liability for its negligence as trustee in permitting improper management of the hotel, all concluding with a demand that the trustee be removed and a successor appointed.

A preference is valid, in the absence of bankruptcy, and a recovery may be had in bankruptcy only when it occurs within four months prior to the filing of the petition, while the bankrupt is insolvent. These conditions precedent do not exist. Hence this cause of action fails as a suit to recover a preference and, if maintainable at all, it is only as a fraud upon creditors. But there are no allegations, no averments of fact in this connection sufficient to constitute fraud. The bank had a right to set off its debt against the deposit. ...

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