Before CLARK, Chief Judge, WATERMAN, Circuit Judge, and GALSTON, District Judge.
This is an appeal by the trustee in bankruptcy of Riverside Iron and Steel Corporation, a Nevada corporation, from a judgment of the District Court which dismissed appellant's complaint on the merits.
The trustee in bankruptcy seeks to recover, except as to the sums of $5,000 to Long and $2,500 to West (to cover certain expenses) funds distributed to those defendants on November 21, 1950 by the clerk of a California court, pursuant to the judgment of that court. The plaintiff alleges that such payments to West and Long were fraudulent and preferential, and in violation of § 67, sub. d(2) (a); of § 70, sub. e. and of § 60 of the Bankruptcy Act, 11 U.S.C.A. §§ 107, sub. d(2) (a), 110(e), 96.*fn1
This action is, therefore, something in the nature of an aftermath of the litigation in California in which the California Superior Court rendered judgment on July 28, 1948 in a trial in which E. T. Foley (hereinafter referred to as Foley) sought a declaratory judgment against the Riverside Iron and Steel Corporation (hereinafter referred to as Riverside), Harlan H. Bradt (hereinafter referred to as Bradt), the defendants Hewitt S. West (hereinafter referred to as West), W. Lunsford Long (hereinafter referred to as Long) and others. The California action was brought to resolve conflicting claims made by the defendants to certain funds held by Foley. These funds were the proceeds of the sale by Foley to the Kaiser Co., Inc. of a certain lease with an option to purchase the Iron Chief iron mine in the County of Riverside and State of California.
Plaintiff, however, meets with considerable difficulty in that the defendants contend that the payments made to them pursuant to the California judgment in no way, as alleged, constitute a preference whether by transfer or other form of conveyance of funds of the bankrupt. The defendants also contend that the payments made to them pursuant to the California judgment were not fraudulent as the plaintiff alleges. The defendants contend also that Riverside was not bankrupt or insolvent at the time of the California judgment nor at the time the payments were made. Moreover, they contend that the payments made to the defendants were not moneys of the bankrupt.
The District Court's findings of fact cover a long range of time, beginning in 1936, and continuing to and including December 12, 1955. Because the involved underlying facts in this case have been so admirably presented in the lengthy opinion below, we mention them here only as it becomes essential to do so in our discussion of the several claims of error advanced by appellants. In part they disclose that Iron Chief was a valuable body of iron ore; that prior to April 24, 1940 Bradt negotiated with the Southern Pacific Land Company, the owner of the Iron Chief property, for a lease to the Bralowe Corporation. Bradt, West and Long were the stockholders of Bralowe and controlled the corporation. Bradt had consulted West and Long and sought to have the lease executed in favor of Bralowe, even though Bralowe were unable to carry the venture through. Bradt's belief was that the identification of the lease with that corporation could be capitalized to the joint advantage of Bradt, West and Long.
The Land Commissioner of the Southern Pacific Land Company had advised Bradt that a proposed lease in the name of Bralowe had been approved by the directors of the Southern Pacific Land Company. The Land Commissioner assured Bralowe that if the lease went through in the name of Bralowe, Southern Pacific would approve assignment of the Iron Chief lease to a company Bralowe would form.
West and Long were informed of this proposed plan. In this entire negotiation among Bradt, West and Long it clearly appears that Bralowe was acting simply as a medium to facilitate transfer. In April 1940, Long became interested with Bradt in the Iron Chief lease and sale agreement on a fifty-fifty basis, and later in the year West also became interested on an equal basis with Bradt and Long. Controversy followed between Bradt on the one hand and West and Long on the other as to how the development of the Iron Chief and a certain manganese mining claim, designated as The Three Kids, was to be financed. Finally, after months of discussion and dispute, a settlement agreement was entered into by West, Long and Bradt.Bradt organized Riverside on March 1, 1941, which corporation was to accept the assignment and assume all of the obligations under the lease agreement.
The settlement was in the form of a letter dated March 14, 1941, signed by Bradt individually and also by him as president of the Clark-Mead Corporation and the Riverside Iron and Steel Corporation, and subjoined to the letter is an acceptance by West and Long. But in effect, though the corporations were signers to the agreement, there can be no doubt that Bradt, as sole stockholder, was acting individually with West and Long; for example the letter recites in part:
"You are each to have the same interest or share as I myself retain either in stock or royalties or shares of profits * * *
"Any interest other than compensation for my services as manager or operator is to be divided equally between us; i. e. one-third to each of us."
Since all the profits were thus arranged for, there remained nothing for Riverside by way of profits. Bradt writes also in his letter:
"I am executing this letter not only personally, but as president of both the above-mentioned corporations to the end that you may have a written record that the two corporations are charged with notice of the contents hereof."
The corporation had been organized on March 1, 1941. The validity of the agreement has at no time been challenged. So far as the record discloses Riverside had no creditors at that time.
It is important to understand that there was no direct relationship at any time between Riverside and the defendants in this action. After the March 14, 1941 agreement was executed, West and Long had nothing whatever to do with Riverside. The obligation to carry on under the terms of the lease, and agreement respecting Iron Chief rested solely with Bradt. It was Bradt's inability to carry out his undertaking that compelled him to negotiate with Foley. That negotiation, of course, could not foreclose the rights that Bradt and Riverside had assigned to West and Long. The issue was decided in favor of the defendants in the California action. In a long stretch of years, from 1941 to 1951, when the petition in bankruptcy was filed by Riverside, there were no contacts between Riverside and West and Long, and no contacts indeed between West and Long and any alleged creditors of Riverside.
At no time after March 14, 1941 did Riverside have any rights to any profits that might result from the sale or transfer of the Iron Chief lease and agreement. Despite that rigid limitation the successor of Riverside, the plaintiff herein, seeks to obtain just those very profits.
During the year 1942 Bradt and Riverside were unable to finance the operation of the Iron Chief mining property or to pay the minimum royalties or taxes required by the lease. Bradt, therefore, approached Foley and sought his financial assistance, and pursuant to his rights embraced within the letter or stipulation of March 14, 1941, the Iron Chief lease and sale agreement of April 24, 1940 was later sold and assigned to Foley. At that time the agreement of March 14, 1941 was still in force and effect, as it was right up to the time of the termination of the California litigation, as stated by the trial judge in that action.
The Kaiser Company, on January 26, 1944, had purchased from the Southern Pacific Land Company the fee of the Iron Chief mine, subject to the Iron Chief lease and sale agreement. In the development of the iron mine two other parties appeared, Vinnell and Dunton, who agreed to purchase from Foley all ore for which those men could find a market.
On April 10, 1946, Foley agreed to sell to the Kaiser Company, and Kaiser agreed to buy, the Iron Chief lease and sale agreement for $1,132,811.35.
Controversy then arose because Bradt refused to recognize the claims of West and Long which they claimed stemmed from the agreement of March 14, 1941. Bradt, on July 1, 1946, also challenged Foley's authority to make the sale to Kaiser.Therefore, on October 25, 1946, Foley commenced the action in the Superior Court of the State of California, herein referred to as the California action. That action was concluded on April 29, 1948. So far as West and Long were concerned it was adjudged that out of the proceeds of the sale of the Iron Chief lease and sale agreement West was entitled to $76,898.48, and Long to $81,898.48.Judgment was entered in that California action on July 28, 1948. It was amended on September 24, 1948 by an order which provided that Foley, within ten days after the entry of the judgment, was to deposit with the clerk of the court the proceeds of the sale for distribution in accordance with the judgment of the court, and the order further provided:
"that execution shall not issue from the whole or any portion of this judgment unless the plaintiff should fail to pay to the clerk the funds herein required of him to be paid, or unless the clerk ...