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Mattson v. Birkett

November 26, 1952

MATTSON ET AL.
v.
BIRKETT ET AL.



Author: Finnegan

Before KERNER, DUFFY and FINNEGAN, Circuit Judges.

FINNEGAN, Circuit Judge.

Plaintiffs appeal from an order of the District Court, which dismissed for want of jurisdiction their complaint to enjoin an action brought by the defendants in the Circuit Court of Will County, Illinois. The state action charged acts of waste, mismanagement of corporate affairs, and fraudulent conduct of the officers and directors and voting trustees of the James G. Heggie Manufacturing Company, an Illinois corporation.

It appears that on July 13, 1934, James G. Heggie and Sons, an Illinois corporation, instituted reorganization proceedings under Sections 77A and 77B of the Bankruptcy Act, 11 U.S.C.A. ยงยง 206, 207. An amended plan of reorganization was adopted and confirmed by a decree entered in the United States District Court for the Northern District of Illinois, Eastern Division, on March 14, 1939, by the terms of which the assets of the debtor corporation were transferred to a new corporation organized for that purpose, under the laws of Illinois, James G. Heggie Manufacturing Company. Three classes of stock in the new corporation were provided for: first preferred stock, consisting of some 10,500 shares of the stated par value of $25 per share; second preferred stock consisting of some 20,704 shares of the stated par value of $10 per share; and common stock consisting of some 21,000 shares of the stated par value of $1.00 per share.

A board of voting trustees was created consisting of Harry I. Mattson, Charles V. Wellner, William A. Kaffer, George A. Barr and Charles A. Russell, in whom was vested the legal title of all the stock in the new corporation for the benefit of both the preferred and common shareholders. The stock thus held by the trustees was represented by certificates of beneficial interest issued to the various creditors and shareholders of the debtor corporation.

The trust certificates evidencing the 10,500 shares of first preferred stock went to holders of the debtors' outstanding first mortgage gold bonds; the certificates evidencing the 20,704 and a fraction shares of second preferred stock went to the unsecured creditors of the debtor, and the trust certificates evidencing the common stock went to the shareholders in the debtor corporation, James G. Heggie & Sons.

The defendants-appellees are now the owners of 6,727, or more than 68% of 9,905 issued and outstanding voting trustee certificates with respect to first preferred shares in the James G. Heggie Manufacturing Company; they owned 19,867 3/4, approximately 96% of a total of some 20,704 issued and outstanding voting trustee certificates with respect to second preferred shares of said corporation; and they likewise owned 11,216, or more than 76% of a total of 14,600 issued and outstanding voting trustee certificates with respect to the common shares of such corporation.

The plaintiffs, Harry I. Mattson, Charles V. Wellner and William A. Kaffer, are the remaining acting trustees undedr the voting trust with respect to the shares of such corporation which was established, as we have already indicated, pursuant to the plan of reorganization. These reorganization proceedings were terminated and finally closed by a decree entered in the United States District Court for the Northern District of Illinois, Eastern Division, on September 27, 1940. That decree after extensive findings to the effect that the plan of reorganization had been "fully executed, carried out, accomplished and finally consummated," provided in paragraph 8 thereof:

"That this case entitled 'In the Matter of James G. Heggie & Sons, a corporation, Debtor, proceedings for reorganization under Sections 77A and 77B Cause No. 56598', be and the same is hereby terminated and finally closed."

Upon the entry of this decree on September 27, 1940, the new corporation assumed the conduct of the business and has operated it for more than 12 years without any reports or reference to the bankruptcy court, so far as this record shows, and without the voting trustees being subject to the administration of that court in any manner whatsoever.

Two of the original voting trustees, James W. Barr and E. J. Stephen, resigned as trustees and directors on January 8 and 10, 1952, respectively.

On January 28, 1952, the defendants-appellees filed suit in the Circuit Court of Will County, Illinois, which charged acts of waste and mismanagement of the corporate affairs, and fraudulent conduct by officers and directors and voting trustees of the James G. Heggie Manufacturing Company, all of which were alleged to have occurred after the entry of the decree of September 27, 1940.

On February 11, 1952, plaintiffs filed a suit in the United States District Court for the Northern District of Illinois, Eastern Division, seeking and moving for an injunction against further prosecution of the state court action. Defendants filed a motion to dismiss the complaint on the ground that the federal District Court was without jurisdiction of the subject matter.

On April 15, 1952, the District Court denied plaintiffs' motion for an injunction and dismissed the complaint, which is the order appealed from in these proceedings. The sole question presented here is: Did the United States District Court, under the facts and circumstances shown by this record, have jurisdiction to hear and determine the controversy over the ...


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