The opinion of the court was delivered by: MURPHY
THOMAS F. MURPHY, District Judge.
These are applications for allowances in a Chapter X proceeding that has been unusually successful. The matter of allowances was the subject of a prior memorandum of the court, dated October 29, 1964. Certain interim dispositions were made therein and the matter was continued because:
"* * * The unanimously expressed gratification with the unusual success in administration of the estate seemed marred only by the necessity of paying the cost of its accomplishment. That thankless task and disagreeable duty must be discharged by the court without 'vicarious generosity.' * * *
"* * * The questions of fact involved in these allowances are among the most important matters which have come before the court for determination in these proceedings. They have been presented on petitions and argument without the safeguards of examination and cross-examination in open court.
"Accordingly, to avoid determination of these important matters upon 'casual conjectures' by anyone and in fairness to all concerned we have decided to take proof of the facts and to conduct further hearings. * * * It is also desirable to bring these proceedings closer to substantial consummation of the Plan of Reorganization before the greater part of the cost of it all is paid out. The success is here but the action of making it more concrete to the shareholders of the Fund in the form of checks representing the return to them of most of their investment remains to be taken."
Since then, proofs of the facts have been taken, and a cash distribution has been made of $1,585,972.50, at the rate of $5.25 per share, to the holders of stock in the Fund.
The amounts of compensation requested by the trustee, his counsel and Mr. Littlejohn are substantially higher than the amounts which have been recommended to the court by or in behalf of the Securities and Exchange Commission (the "Commission"). Specific findings of fact are required.
1. On May 10, 1961, Townsend Growth Fund, Inc. (the "Fund" or the "Debtor"), formerly known as Townsend U.S. & International Growth Fund, Inc., a corporation organized under the laws of the State of Maryland, filed in this court a voluntary petition for reorganization under Chapter X of the Bankruptcy Act. On that day, the petition was approved and the court appointed Leslie Kirsch as trustee (the "trustee") of the Debtor. The affairs of the Debtor have been administered by the trustee from May 10, 1961 to date.
2. This is the first administration in Chapter X proceedings of a mutual fund.
3. On May 10, 1961, there were outstanding 302,090 shares of stock in the Fund, owned in approximately 1,900 accounts by persons (the "shareholders") located throughout the United States and, in part, in certain countries of North and South America, Europe, Asia and Africa. No committees were formed. The trustee has represented the interests of all the shareholders from May 10, 1961, to date. The trustee also acted as such in relation to all creditors of the Fund.
4. The Fund was an open-end, non-diversified, registered investment company subject to the provisions of the Investment Company Act of 1940. Its prospectus had declared a policy of investments in "special situations" and taking "calculated risks." Those in control of the Fund pursued such policy with improvidence. They violated provisions of the Investment Company Act.
5. On May 10, 1961, when the trustee took possession of the Fund and its properties, it had "investments at cost" of $2,129,375. It had only $62,534 in cash. Its total assets, including the "investments at cost," were stated at $2,228,700. Its liabilities to creditors were stated at $338,108, including its past due bank loan of $300,000. Its total capital and surplus, including "investments at cost," were stated at $1,890,592.
6. Approximately $1,560,000 or 65.3% of all such "investments at cost" were stated by the Debtor in its petition for reorganization to be "frozen." The realizable value of the capital and surplus of the Fund on May 10, 1961, was substantially less than $1,890,592.
7. The Fund, as is customary in the mutual fund business, was obligated to redeem its shares of stock for cash at any time upon request of any shareholder.
8. From September 1, 1960 to May 3, 1961, the Fund was drained of a large part of its capital by paying out $1,762,227 in cash for redemptions of 272,224 shares of its own stock. Amounts paid on such redemptions were fixed, without independent valuations, on the basis of "investments at cost" in several large investments that could not be sold at such cost.
9. On or about August 31, 1960, the registration statement of the Fund under the Securities Act of 1933 ceased to be effective, and thereafter it sold no more of its capital stock. It failed to offset the depletion of its capital resulting from the redemptions from September 1, 1960 to May 3, 1961. During that period it sold liquid security investments to satisfy the demands for redemption. On May 10, 1961, the court enjoined further redemptions. The injunction remained in effect until January 11, 1965.
10. The remains of the Fund on May 10, 1961, were in the ostensible form of 319,512 shares of stock, and $547,333 face amount of unsecured notes, in 30 corporations. In reality they were, to the extent of 65% of all such remains at cost, the "special situations" or "calculated risks" referred to above.
11. Among them was the Fund's stock and notes in Office Buildings Corporation of America ("OBCA"), representing a 60% equity interest in the leasehold of an office building in Tulsa, Oklahoma.
12. Early in the proceeding, the court appointed an expert appraiser to determine the value of such equity. Upon the basis of his appraisal, its value was $153,000 as of September 15, 1961. The Fund had paid $444,000 for it, and included it at that amount in "investments at cost" in its balance sheet of May 10, 1961.
13. On May 10, 1961, the Fund's investment in OBCA did not have a realizable value of $444,000, but at least $291,000 less than that.
14. Another of the Fund's "special situations" or "calculated risks" was its investment in 100% of the stock of Kite Broadcasting Company ("KITE"), which owned a radio broadcasting station in San Antonio and adjacent Terrell Hills, Texas.
15. Early in the proceeding, the court appointed an expert appraiser to determine the value of the investment in KITE. The appraisal was of two dates. As of December 31, 1959, the date practically proximate to the acquisition date of February 24, 1960, the appraised value was $256,098 on terms of installment payments. The Fund had paid $458,331 on terms.
16. As at August 31, 1961, the appraised value of KITE was $339,822, subject to the following qualifications and terms: (i) installment payments of the purchase price with 29% paid in cash, and the balance payable with interest of 5-5 1/2% in equal installments over five years; (ii) 20% less for complete payment in cash; (iii) 20% more if installment payments were extended over ten years.
17. On May 10, 1961, the Fund's investment in KITE did not have a realizable value of $458,331, the amount included in "investments at cost," but on a cash basis at least $186,473 less than that.
18. Another "calculated risk" was the Fund's exchange transaction with Great American Industries, Inc. ("GAI"). The Fund exchanged 85,179 shares of its stock redeemable in cash for 222,222 shares of the nonredeemable stock of GAI. The exchange was made in violation of the Investment Company Act. The Fund was mulcted of $534,224 cash when GAI induced the Fund to redeem the stock GAI had gotten in such exchange. On May 10, 1961, the Fund had left 121,822 shares of the GAI stock. It was included in the Fund's balance sheet in "investments at cost" at $274,099.50, or $2.25 per share.
19. The GAI stock was listed on the American Stock Exchange. But the trustee could not sell GAI stock in May 1961. He held the GAI stock for rescission by suit of the entire illegal exchange transaction.
20. The stock of GAI had the Standard & Poor's rating of "C", meaning "Lowest." On an earnings basis, the GAI stock on May 10, 1961, had a value of about 60 cents per share, but, held as it was for rescission, it was not practicable to ascribe to it any amount of realizable value on that day. Its realizable value was to be created in the ensuing Chapter X proceedings.
21. Another of the Fund's "calculated risks" was its investment in June 1959 in Taurcanis Mines, Ltd. ("TAURCANIS"). The Fund paid $30,197.51 for it, or $30.20 per share. Since March 1958 TAURCANIS stock had been on the Canadian "Restricted List" of the Commission. It could not be lawfully bought or sold through a broker in the United States. No "quote" for it could be procured even in Canada. As of February 28, 1962, TAURCANIS had current assets of $5,924 and current liabilities of $1,282; the rest of its assets consisted of capitalized mining claims, exploration expenditures and miscellaneous items. On May 10, 1961, the Fund's TAURCANIS stock had no realizable value. Its realizable value was to be created in the ensuing Chapter X proceedings.
22. On May 10, 1961, the Fund held 38,125 shares, or a minority interest of 8%, of the stock of Modern Engraving and Machine Company ("MEMCO"). It was included in "investments at cost" at $66,521.25, or $1.74 per share. It had no market. The rest or 92% of the MEMCO stock was owned by Townsend Corporation of America ("TCA"). On May 10, 1961, the Fund's investment in MEMCO had no realizable value. Its realizable value was to be created in the ensuing Chapter X proceedings.
23. The Fund held $100,000 face amount of debentures of TCA, included in "investments at cost" in that amount. TCA was involved in an equity receivership in New Jersey, wherein payment of the debentures was enjoined. They later went into default. There was no market for them. Their realizable value on May 10, 1961, was speculative.
24. The Fund held 2,500 shares of stock of Pan American Fund, Inc. ("PAN"), included in "investments at cost" at $25,000. There was no market for it. PAN was a small company whose investments were in Latin America, beset with problems of expropriation, inflation, exchange obstacles, and general decline in value. On May 10, 1961, the realizable value of its stock was speculative.
25. The Fund held 44,300 shares of the stock of Academy Life Insurance Company ("ACADEMY"), included in "investments at cost" at $111,905, or $2.52 per share. ACADEMY was a recently organized company selling life insurance to war veterans by mail. Of the lot, 4,300 shares were free of sale restriction, but 40,000 shares were restricted from sale by an investment letter. After the trustee sold 2,100 of the free shares, there was no market for the rest. As at August 31, 1961, the book value of ACADEMY stock was $1.08 per share. The realizable value of the 40,000 restricted and 2,200 unrestricted shares of ACADEMY on May 10, 1961, was speculative.
26. The smaller the cost of a stock the larger is the percentage of its price fluctuation up or down.
27. The Fund held certain large blocks of listed shares subject to that kind of fluctuation: e.g., the 121,822 shares of GAI stock at a cost of $2.25 per share; 38,000 shares of National Bellas Hess, Inc. ("HESS"), at an average cost of $7.81 per share. Blockage discount from quotations for small or normal lots was not taken for such stocks.
28. The stock of HESS had the Standard & Poor's rating of "B", meaning "Below Average." For the year 1960, it earned 46 cents per share.
29. From May to September 1961, there were wide fluctuations in the prices of HESS stock. Market knowledge, judgment, and skill were required to trade it and other stocks to the advantage of the estate.
30. On May 3, 1961, the Fund permitted Irving Trust Company, which was also the Custodian of the Fund's securities under the Investment Company Act, to accelerate the maturity of its $300,000 bank loan, because the Fund had not maintained securities satisfactory to the bank, listed or traded on the New York or American Stock Exchange, equal in value to at least $900,000.
31. As of May 10, 1961, the cash realizable value of the Fund was within a range of about $755,225 to about $906,270, or about $2.50-$3.00 per share upon its 302,090 shares.
THE ESTATE AFTER ADMINISTRATION.
32. As of September 30, 1964, after three and a quarter years of administration, the cash realizable value of the Fund was $2,159,325, or $7.15 per share.
33. The trustee conducted extensive investigations of the mass of records involved in the case by personally reading, analyzing, and mastering their contents. His investigations were synthesized and recorded in his reports to the court and to the shareholders. He himself wrote all of these reports. Throughout the proceedings his reports have been the basic references for information. The trustee's mastery of the facts was the foundation of the administration and of the law suits projected or brought which resulted in substantial recoveries without trial of a single action.
34. The trustee superseded the 18 officers, directors and Advisory Board members of the Fund, and Townsend Management Company. He did not replace any of them. Throughout the proceedings, the trustee served as the sole management and executive of the Fund in lieu of all of them.
35. The management, directors' and Advisory Board members' fees and expenses were $48,432 for the fiscal year 1959 and $54,675 for the fiscal year 1960; average $51,553.
36. Shortly after May 10, 1961, the trustee secured the resignation of Mr. Keyes as President of OBCA; caused himself to be elected President; became the sole signatory of all checks except those nominal in amount; substituted his nominee as Vice President; elected his nominees as a majority of its board of directors; transferred executive and fiscal control of OBCA from Miami to himself in New York City; and thereafter as such executive head of OBCA conducted its business from New York City.
37. OBCA's real estate business consisted of its nine story office building, with an area of 103,164 square feet of rentable space, with annual receipts of $441,030, and annual expenditures and deductions of $468,377. OBCA never paid a dividend. It failed to earn the interest on its outstanding notes. Ohio Oil Company, which occupied the entire fifth and sixth floors and penthouse space of the building at a rental of $66,780 per annum, was going to move at the imminent expiration of its lease, which represented 15% of the entire rent roll. There were repeated breakdowns of the air conditioning system. Tulsa was ceasing to be the capital of the oil industry, whose center was shifting to Houston. Large areas of rentable office space had become available in Tulsa. Rents were falling. The leases of about 40% of the rentable area of the building, made at good rates after the building had been completed in 1955, were expiring in 1961-1962. The trustee endeavored to persuade the ground lessors to permit OBCA to reorganize under Chapter X of the Bankruptcy Act without forfeiture of the ground lease under its provisions against that contingency, but the proposal was rejected. The Fund's investment in OBCA was imperilled.
38. The trustee applied his prior real estate experience to supervision and control of all income of OBCA, including negotiations for leasing vacant space and renewals of expiring leases, and of all expenditures, including those for salaries and wages, lease alterations, commissions, repairs and maintenance, insurance, accounting, air conditioning, cleaning, supplies, etc.
39. The circumstances of KITE were unsatisfactory. It had poor audience acceptance ratings. Its gross income had been inflated. Supervision was inadequate. No dividends had ever been paid. Its debt to the Fund had never been reduced. Working capital was marginal. There were heavy burdens of secured and unsecured long term debt, payable monthly. A dominating purpose of the purchase of KITE by the former management had been the disposition thereby of 99,400 of the 222,222 shares of GAI stock, in the hope of eventually eliminating the violation of the Investment Company Act committed in the acquisition of the GAI stock.
40. Shortly after May 10, 1961, the trustee visited KITE in San Antonio and Terrell Hills. He superseded the officers and directors of KITE; became its President, Treasurer and sole signatory of its checks; terminated its supervisory manager's contract; discharged the local manager and the three members of his family on the KITE payroll; transferred executive and fiscal control of KITE from San Antonio to himself in New York City; and thereafter as such executive head of KITE conducted its business from New York City. When he procured a new local manager, he acted as Chairman of the Board of Directors and Treasurer.
41. The trustee had had prior experience in the conduct from New York City of business situated in other states. His executive operations of the businesses of KITE and OBCA were conducted by long distance telephone conversations and by a stream of air-mailed directives, discussions, records, reports, and checks.
42. The trustee made a profit of $201,200 upon the 38,000 shares of HESS stock which he sold through eight brokers over a period from May 19 to July 25, 1961, in 107 trades, at an average price of $13.1095 per share. His petition and testimony concerning the work involved in that and other trading out of large blocks of ...