Petition — Woolsey v. Trustees for Westgate-California Corp.

IN THE OCT

Supreme Court o: or the United tae. ott

i

October Term, 1979

f 4 oY

m 4

4

Petitioner,

Roy B. Woo.LseEy,

vs.

TRUSTEES FOR WESTGATE-CALIFORNIA CORPORATION,

a Nevada corporation,

Respondents.

Petition for Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit.

ROY B. WOOLSEY,

2099 San Joaquin Hills Road,

Newport Beach, Calif. 92660,

(714) 640-0800,

In Propria Persona.

Of Counsel:

WOOLSEY, ANGELO & THATCHER.

Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622

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SUBJECT INDEX

I Page

Meseremces to Copuons Bciow .................................. 2

Il

Dee Ge ee SUE ........................................ 2

Il

The Questions Presented for Review ...................... 3

IV

Constitutional Provisions and Statutes .................... 4

V

Neen nnn ec cceecasccnncscceccecs 5

VI

Reasons Why the Writ Should Be Granted .............. 10

A. The Decision of the Court of Appeals to the

Effect That the Controlling Majority Share-

holders May Take the Equity From the Mi-

nority Upon a Showing of Mere “Independ-

ent, Legitimate Business Reasons” Conflicts

With the Applicable California Law .......... 10

B. Respondents Did Not Satisfy Their Federal

Fiduciary Duties; Whether or Not Such a

Duty Will Bar the Exercise of a Power to

Merge Corporations Has Not Been and

Should Be Settled by This Court .................. 15

C. Lengthy Findings, Proposed by Counsel and

Adopted Verbatim by the Court on the Day

of the Decision and Before Service on Op-

posing Counsel, Should Be Given Little

Weight and This Court Should Settle the Ex-

tent to Which Such Findings Be Given

iN yendsavakcnceeereoscessereseseee-ooee 16

Page TABLE OF AUTHORITIES CITED

D. Only by Such a Departure by the Lower Cases Page

Court From the Accepted and Usual Course ,

of Judicial Proceedings as to Call for an Abney v. United States, 431 U.S. 651 (1977) .... 30

Exercise of the Supreme Court's Power of American Service Co. v. Henderson, 120 F.2d 525

Supervision, Did the Court Make the A a) OD. conde casa ceackeanecscexucvnaienina smkensancons 11

Clearly Erroneous Findings That the Plan : Anderson v. General Dynamics Convair, etc., 589

and Its Implementation Were Fair, Just and fo er, 2 Be ARR 5 | eee nCnpme nn nna 21

mene) Ae het Se Srasiees and Nr. B-F Building Corporation v. Coleman, 284 F.2d

James W. Leisner (a Director of Both Air 679 (6th Cir. 1960) .......ccccscecesceccecesceceeseeeeseeeesees 11

Cal and Westgate) Satisfied Their Fiduciary ees

Obligations to Shareholders of Air Cal ........ 20 ae re ee Reem, OF Fae oe Ae 32

E. The Opinion Below That the Consummation ne aes

of the Merger Without Petitioner’s Obtaining Caplin v. Marine Midland Grace Trust Co., 406

a Stay Rendered the Appeals Moot Raises a 3c Bewed caniin guerpee| ext ecapenmat caine area wien i

Question Not Heretofore Settled Which Castle v. United States, 399 F.2d 642 (Sth Cir.

Should Be Settled Contrary to the Position 5 MRR eer Rest ater en Ana) GRD Rt panes Ravenna SPER 30

Taken by the Court Below ......0000..00000000...... 28 Cities Service Co. v. Dunlap, 308 U.S. 208 (1939)... 21

Combined Metals Reduction Company, In_ the

Matter of, 557 F.2d 179 (9th Cir. 1977) ......

ie al Leash eet deatabuer spain taeneeiuecnciok 13, 20, 295 a

Crain v. Electronic Memories & Magnetics Corp.,

50 Cal.App.3d 509; 123 Cal.Rptr. 419 (1975) .. 13

Credit Manager’s Association v. Superior Court, 51

Cal.App.3d 352; 124 Cal.Rptr. 242 (1975) ...... 21

Edward B. Marks Music Corp. v. Colorado Mag.,

Inc., 497 F.2d 285 (10th Cir. 1974) ............ 18

Fisher v. Pennsylvania Life Co., 69 Cal.App.3d

TOE Be CREE De ac cxteccneripccascinaras 12

Frazier v. Alabama Motor Club, Inc., 349 F.2d

a ee re Basses cena rchincaeeieeeenstaerecans 18

iv.

Page

Green v. Santa Fe Indus., Inc., 533 F.2d 1283 (2d

Cir. 1975), reversed Santa Fe Indus., Inc. v.

Geownm, 630 ULB Sie CRED cccccncteceeccees 14, 15

Jones v. H. F. Ahmanson & Co., | Cal.3d 93: 81

Cal.Rptr. 592, 460 P.2d 464 (1969) _........... 12, 21

Kemp v. Angel, 381 A.2d 241 (Del.Ch. 1978) .... 14

Klaus v. Hi-Shear Corp., 528 F.2d 225 (9th Cir.

ED TDD. . casavedesncnubosincpidsiasnicnee iene aaa 13

Las Colinas, Inc., In Re, 426 F.2d 1005 (Ist Cir.

BOTY: © pcccccca ss cccecceae eee 18

Lenters, In Re, 225 Fed. 878 (E.D. Pa., 1915) .... 16

Marshel v. AFW Fabric Corp., 533 F.2d 1277 (2d

Cie. TRB) 6 cccdinacidacn eee 14

Meinhard v. Salmon, 249 N.Y. 458; 164 N.E. 545 .. 15

Mills v. Electric Autolite Co., 396 U.S. 375 (1970)

Moulded Products, Inc., In the Matter of, 474 F.2d

220 (8th Cir. 1973), cert. den. 412 U.S. 940 ....

Mueller v. MacBan, 62 Cal.App.3d 258; 132 Cal.

Rew. 222. CIPPO) 3a ee 21

Pepper v. Litton, 308 U.S. 295 (1939) ....000000.... 13, 20

Ramberg v. American Investment Co. of Illinois,

231 F.28 S33 CP Ca Pe cee 32

Schwerman Trucking Co. v. Gartland Steam Ship

Co., 496 F.2d 466 (7th Cir. 1974) ~.A7, 18

Security Financial Co., In Re, 49 Cal.2d 370; 317

P26 1 CFR) 2323 12

Sherr v. Winkler, 552 F.2d 1367 (10th Cir. 1977).. 15

Santa Fe Industries, Inc. v. Green

4360 U.S. O62 €E508s. saxcac } te 6. ae

Page

Singer v. Magnavox, 380 A.2d 969 (Del. Supr.

I le iti cepa a copesbeeneabennponninrcninks 14

Tanzer v. Intl. Gen. Ind., Inc., 379 A.2d 1121 (Del.

PN Be crores les iy dlcngessd caticncntpssnnnntnies 13, 23

United States v. Crescent Amusement Co., 323 U.S.

ai, Sa catgynediianacrauataniseniwesbeasions 17

United States v. El] Paso Natural Gas, 376 U.S. 651

Loa uses sh chsicandedenuveme omnes 18

Wolf v. Weinstein, 372 U.S. 633 (1963) .............. 15

Young v. Valhi, Inc., 382 A.2d 1372 (Del. Ch.

cis, ca asiccaaacaielantnnnhooks LS, 23,20

Rules

American Bar Association, Code of Professional

Responsibility, Rule DR 7-110(A) .................... 17

Federal Rules of Civil Procedure, Rule 52(a) ....18, 19

Federal Rules of Civil Procedure, Rule 62(a) ....28, 29

Federal Rules of Evidence, Rule 302 .................... 21

Federal Rules of Evidence, Rule 1101 .................... 21

Rules of Professional Conduct of the State Bar of

I, RUN FOO cece cnrocenwentwpancecwasahaanevonen 17

Securities Exchange Commission Regulations, Rule

ee Oe eck es BR ND sessieccstscennendecrantecenss 14

Statutes

Securities and Exchange Act of 1934, Sec. 10 ........ 14

United States Code, Title 11, Sec. 47(c) .........220022... 2

United States Code, Title 11, Sec. 75 ............ 4, 11, 16

United States Code, Title 11, Sec. 586 .......... 4,11, 16

Vi.

Page

United States Code, Title 11, Sec. 589 ...0..00000..... 4, 16

United States Code, Title 11, Sec. 704 ...........00000.... 4

United States Code, Title 11, Secs. 1106-08 ........ 4

United States Code, Title 28, Sec. 1254(1) ....000..... F

United States Constitution, Fifth Amendment .......... 4

Textbooks

Carter, Judge James M. and Bruce D. Wagner,

Findings of Fact, 1 San Diego Law Review, pp.

Be A | a Am 18

4 J. Corp. Law, No. 1, pp. 122, 124 (Fall, 1978)

Bee arate lb SCTE Se DONA NE OH TORTIE cd REA MEROE OIE 22; 20

O’Neal and Derwin, “Oppression of Minority

II 3 IG AN Coa nce enetacncctnsstded yl noe dioenas 27

IN THE

Supreme Court of the United States

October Term, 1979

IAS cacocesatensannana

Roy B. WooL_LSEY,

Petitioner,

vs.

TRUSTEES FOR WESTGATE-CALIFORNIA CORPORATION,

a Nevada corporation,

Respondents.

Petition for Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit.

Petitioner hereby requests a writ of certiorari to

review the judgment of the United States Court of

Appeals for the Ninth Circuit (J. Carter) affirming

an order of the District Court for the Southern District

of California, the “Reorganization Court” herein (J.

Nielsen), in proceedings under Chapter X of the United

States Bankruptcy Act, to reorganize Westgate-Cali-

fornia Corporation, “Westgate” herein, debtor. Said

Order of the Reorganization Court authorized a merger.

In addition to the reasons stated herein, Petitioner

requests the Writ for the reasons in the petition to

be filed by C. Neil Ash and Elaine T. Ash for certiorari

to review said judgment.

OE

I

REFERENCES TO OPINIONS BELOW.

The opinion of said Circuit Court of Appeals (A.

1-19)" is reported in 601 F.2d 395 (9th Cir. 1979).

Its order denying petitions for rehearing (A. 20) is

not reported.

The only opinion of the Reorganization Court was

the unreported “Findings of Fact, Conclusions of Law

and Order” (A. 21-46; Clk. R. 384-408," exclusive

of exhibits thereto).

II

JURISDICTION OF THIS COURT.

The judgment of said Court of Appeals, the review

of which is sought hereby, was entered on May 30,

1979 (A. 1-19). On June 13, 1979, petitioner filed

a timely petition for rehearing which was denied by

order entered on August 6, 1979 (A. 20).

The statutory provisions which confer jurisdiction

on this court are 11 U.S.C. §47(c) and 28 U.S.C.

§1254(1).

‘Citations herein to A. are to the Joint Appendix, a separate

volume prepared for use herein and in the petition by C.

Neil Ash and Elaine T. Ash for certiorari.

“Citations to “Clk. R.” are to Clerk’s Record. Pages 1

to 382 thereof are in the Record on Appeal 77-3662 (the

Ashes’ appeal); pages 384-490 thereof are in the record on

this Petitioner’s appeal 78-1227; pages 491-1980 thereof

are in the Record on Appeal 77-3388 (Valley National Bank’s

appeal).

Citations to “Rptr.” are to the Reporter’s Transcript of

Hearings, in the Record on Appeal 77-3662.

Citations to “Info. Stmt.” are to the definitive “Information

Statement in Connection with a Special Meeting of Shareholders

of Air California to be Held on December 21, 1976”, in

the First Supplemental Record on Appeal 77-3662.

Each of the foregoing records is part of the record on

Petitioner’s appeal (Clk. R. 440-441).

pee Tee

Ill

THE QUESTIONS PRESENTED FOR REVIEW.

1. Whether the decision of the Ninth Circuit Court

of Appeals, that a controlling shareholder of a corpora-

tion may effect a cash freeze-out of the minority share-

holders without showing a compelling business purpose

for the controlled corporation, conflicts with the Cali-

fornia law governing such transaction?

2. Whether, in addition to the California require-

ment aforesaid, the Trustee of the controlling share-

holder in reorganization proceedings has a federal fi-

duciary duty to the minority shareholders of the con-

trolled solvent subsidiary and the extent of such duty?

3. Whether the plan of merger and its implementa-

tion were fair to the minority?

4. Whether the Court’s adopting, verbatim, the writ-

ten findings proposed by counsel without prior service

on Petitioner, affects the weight to be given such find-

ings?

5. Whether the opinion of the Court of Appeals

sanctioned such departures by the lower court from

the accepted and usual course of judicial proceedings

as to call for an exercise of this Honorable Supreme

Court’s power of supervision?

6. Whether consummation of the merger on the

day the Reorganization Court made its oral decision

and written order authorizing the merger and Peti-

tioner’s not seeking a stay bars all equitable relief

and whether the foregoing render the appeal moot?

4

IV

CONSTITUTIONAL PROVISIONS AND STATUTES.

Amendment 5 to the United States Constitution pro.

vides:

“No person shall . . . nor be deprived of life,

liberty or property without due process of law”;

At all times material herein, 11 U.S.C. $586 pro-

vided:

“A trustee . . . shall be vested with title as

a trustee under Section 72 of this title would

have.” (new §$1106-08 include provisions similar

to above [former $586] ).

11 U.S.C. §75 provided:

“(a) Trustees shall (1) collect and reduce to

money the property of the estates for which they

are trustees, under the direction of the court,

and close up the estates as expeditiously as is

compatible with the best interests of the parties

in interest . . .”. (mew $704 includes provisions

similar to the above [former $75] ).

11 U.S.C. §589 provided:

“A trustee or debtor in possession, upon author-

ization by the judge, shall operate the business

and manage the property of the debtor during

such period, limited or indefinite, as the judge

may from time to time fix, and during such oper-

ation or management shall file reports thereof

with the: court at such intervals as the court

may designate.” (new §1108 contains provisions

similar to above {former $589] ).

=

V

STATEMENT OF THE CASE.

The order of the Reorganization Court granted the

respondent’s application for approval of, and authority

to effect, the merger of Air California, “Air Cal”

herein, a California Corporation 81% owned by West-

gate, into a wholly owned California subsidiary of

Westgate thereby freezing out the minority shareholders

(A. 22-46). Petitioner was a shareholder of said Air

Cal.

In 1967 Air Cal commenced operations as an airline.

In 1970, it issued sufficient new shares to Westgate

so that, along with the promotional shares acquired

by Westgate, at all times thereafter, Westgate held

over 78% of the outstanding stock in Air Cal (Clk.

R. 1974; Rptr. 1-14-77, p. 52).

In 1972, Air Cal made a profit; thereafter its profit

before income taxes increased about 20% annually

(Clk. R. 1975; Rptr. 1-14-77, p. 52) and such in-

creases were assumed for the future in determining

reorganization value (Cadenasso’s depo. 62 to 64).

It added routes or flights each year from 1971 to

1976 (Rptr. 1-14-77 p. 89).

PSA offered $15.75 per share for stock in Air Cal

(Rptr. 1-14-77, pp. 86, 87).

The Securities and Exchange Commission, “SEC”

herein, caused the suspension of trading in the stock

in Air Cal from May 11, 1973 to February 28, 1974

(Info. Stmt. 11).

In July, 1973, respondent Herbert Kunzel became

a director of Westgate and in October, 1973, its presi-

dent (Info. Stmt. 28).

On February 26, 1974, Westgate filed a petition

under Chapter X of the Bankruptcy Act, and respond-

: linn

ents Curvin J. Trone, Jr. and Herbert Kunzel became

respectively its trustee and additional trustee. In 1974,

Messrs. Kunzel, Trone and James W. Leisner, a director

of Westgate, became directors of Air Cal and the Fed-

eral Deposit Insurance Corporation sued Air Cal for

$6,950,000.00 principal and interest due on notes, the

loan proceeds of which were not received by Air Cal,

and for a like sum as punitive damages (Info. Stmt.

28, App. V, pp. 42, 45 and F-25).

Also, in January, 1975, the Trustees made a contract

with Air Cal that Air Cal pay to Westgate 82%

of Air Cal’s tax savings by reason of the filing of

consolidated tax returns with Westgate (Info. Stmt.

25, 26).

The high bid and asked over-the-counter prices for

Air Cal stock were, in 1974: $113%4 to 12%; in 1975:

84% to 9; and in the first one-half of 1976: 9 to

9% (Info. Stmt. 11), notwithstanding that it had sold

as high as $26.00 a share before 1971 (Clk. R. 1975:

Rptr. 1-14-77, p. 52).

For each accounting period during the Chapter X

proceeding, Westgate suffered operating losses while

Air Cal made profits.

Although faced with large requirements for “reequip-

ment” (Rptr. 1-14-77, p. 77), Air Cal called its seven

percent (7%) convertible debentures for redemption

as of August 10, 1976. Such debentures with a par

value of $3,361,000.00 were redeemed for $3.-

492,000.00 and debentures with a par value of $73.-

000.00 were converted into common stock (Info. Stmt.

F-58).

In early October, 1976, Mr. Kunzel informed Air

Cal’s president Robert Clifford that Westgate was con-

=

sidering a merger of Air Cal; until then Mr. Clifford

had never considered the possibility of any reorganiza-

tion for Air Cal (Rptr. 1-14-77, pp. 74-75). Shortly

thereafter Westgate and Air Cal jointly retained two

investment bankers to give an opinion to Westgate

and Air Cal together of the value of minority holders’

shares in Air Ca! (Rptr. 1-14-77, p. 69).

On November 16, 1976, Messrs. Kunzel and Trone,

in the presence of the attorney for them in their capacity

as Trustees of Westgate, participated in the discussions

and unanimous vote of the Board of Directors of

Air Cal to approve the merger of Air Cal into West-

gate’s wholly-owned subsidiary.

The agreement of merger so approved provides that

Air Cal shareholders receive a “Westgate Common

Equivalent Certificate”, “certificate” herein. Said certifi-

cate is not assignable and can be surrendered for $13.00

cash, or more as determined by the Reorganization

Court. In the event that certain conditions occur (in-

cluding that Westgate not be adjudged bankrupt, that

it be reorganized, that the plan call for a corporate

survivor and said survivor issue stock) the certificate

will be converted into stock of the new Westgate and,

at holder’s option, the stock will still be convertible

into cash (Info. Stmt. 4, and Ex. A to App. II).

The common stock of new Westgate into which

a certificate will be converted will be such number

of shares of new Westgate, if any, as have a reorganiza-

tion value to be determined at some future date equal

to the cash value of such certificate (A. 32-34; Info.

Stmt., Appendix II, Exhibit A, page 1; Rptr. 10-

4-77, pp. 25-26). Trustees’ experts appraised stock in

Air Cal at $12.50 per share based on earnings shown

oscil

in financial statements for periods through June 30,

1976, less than 7 times the then current annual earn-

ings. Mr. Cadenasso’s studies on the reorganization

value used 9 and 9.1 times the expected future earnings,

including post June, 1975 earnings of Air Cal which

would, but for the merger, have been attributable to

minority shareholders (Rptr. 1-14-77, pp. 96, 102;

Valley’s Exhibits A, B and C), assuming over 20%

per annum increases in earnings (Mr. Cadenasso’s depo..

62 to 64). Mr. Cadenasso’s predicted reorganization

value assumed the value of stock in Cal Air at $25.00

per share (Mr. Cadenasso’s depo., 19 to 22; 100

A).

Proxies were solicited by Air Cal for prior share-

holder’s meetings but not to vote on the merger. Among

other papers, an Information Statement concerning the

merger was mailed to each shareholder. On December

21, 1976, Westgate’s 81% of the outstanding stock

of Air Cal was voted for, and the minority shares

were voted 10 to 1 against the merger (Clk. R.

1978, Rptr. 1-14-77, p. 52).

On August 1, 1977 the California Commissioner

of Corporations, in a separate proceeding, ruled that

the merger would constitute a distribution on the 121,-

427 promotional shares in Air Cal held by Westgate,

prohibited by the permit for the promotional shares

until cash investors shall have received a sum in excess

of the cash invested plus 5% a year. The Commissioner

released the conditions on the promotional shares on

condition that no less than $15.00 in cash per share

be paid to the minority shareholders and that the

merger be determined to be fair by the Reorganization

Court (Clk. R. 2493, 2510, 2576).

— on

Although the Trustees’ application for authority to

effect the merger alleged certain business reasons for

the merger, the Reorganization Court sustained the

Trustees’ objection to cross-examination by the objecting

minority shareholders on the alleged reasons for the

merger as being irrelevant (Rptr. 1-14-77, pp. 44 and

57) and said that the issue was whether or not the

$15.00 per share was fair (Rptr. 10-4-77, pp. 24-

25).

On May 23, 1977, the Trustees gave a notice of

further hearing on their application to effect a merger

with Air Cal in which they stated that there wer

problems relating to tuna and pet food operations.

“which, apart from Air California, constitute Westgate’s

major continuing business” and, “pending clarification of

these current uncertainties in the outlook for the sea

food operations, the Trustees anticipate that they will

delay the presentation of a proposed plan of reorgani-

zation for Westgate” (Clk. R. 2553).

The Trustees recommended that the price be raisec

to $15.00 per share in Air Cal. Mr. Kunzel testified

that the Trustees had yet to formulate a plan and

that the proposed Air Cal merger was an initial step

towards the reorganization (Rptr. 10-4-77, pp. 19, 20).

On January 14, 1977 and October 4, 1977, the

Reorganization Court took evidence and on October

12, 1977, made its decision to grant the application

and signed the findings and order (A. 21-46).

On appeal the Ninth Circuit affirmed the order (A.

1-19).

—

VI

REASONS WHY THE WRIT SHOULD BE GRANTED.

A. The Decision of the Court of Appeals to the Effect

That the Controlling Majority Shareholders May

Take the Equity From the Minority Upon a Show-

ing of Mere “Independent, Legitimate Business

Reasons” Conflicts With the Applicable California

Law.

The state question decided herein is especially im-

portant to the administration of estates under the United

States Bankruptcy Act. It is contrary to the best

interests of those estates to permit a trustee to take

from the minority shareholders of a solvent subsidiary

of the debtor or bankrupt. One of the impediments

to successful proceedings under the Bankruptcy Act

is the reluctance of potential investors, creditors and

customers of solvent and profitable subsidiaries or other

entities of the bankrupt or debtor to deal with such

subsidiaries and entities because of the insecurity and

uncertainties caused by the power of the trustee and

the court to affect their investment or other rights.

Shares in such subsidiaries, held by such minority,

trade at lower prices than they would without the

proceeding under the Bankruptcy Act. Such lower price

hampers the raising of equity capital and credit for

the use of the profitable subsidiary and the debtor.

These factors reduce the chances of successful reorgani-

zations.

The minority shareholders are entitled to rely on

the separateness of corporate existence of a solvent

subsidiary of debtor or bankrupt and the shareholders’

interest should not be subject to the uncertainties and

the administrative costs of bankruptcy or reorganization

a wa

proceedings which so often consume so much of the

estate as to leave the equity holders and even the

creditors unsatisfied.

The expansion of jurisdiction of bankruptcy courts

under the Bankruptcy Reform Act of 1978 makes pro-

tection of third parties more important.

This case is appropriate for a decision on the question

raised because there was no testimony nor findings that

the merger was not for the purpose of freezing the

minority out, nor was there any evidence or any finding

to the effect that there was a compelling purpose.

Likewise, the limitation imposed under the California

case law on the exercise of corporate statutory powers

by fiduciaries (controlling shareholders and _ direc-

tors) is an important state law matter. Protection of

the minority encourages investment to the benefit of

the entire economy.

The Court of Appeals’ opinion herein correctly as-

sumed that, in exercising debtor’s powers, the Trustees,

as controlling shareholders and as directors of Air

Cal, were required to comply with California fiduciary

duties (A. 8 and 11-12). In this case, the Trustees

merely exercised powers of the debtor succeeded to

under the Bankruptcy Act, 11 U.S.C. §§586 and 75,

and stood in the shoes of the debtor with no greater

rights than the debtor had: American Service Co. v.

Henderson, 120 F.2d 525, 530 (4th Cir. 1941). See

also, Caplin v. Marine Midland Grace Trust Co., 406

U.S. 416, 428-429 (1972), and B-F Building Corpora-

tion v. Coleman, 284 F.2d 679, 682 (6th Cir. 1960).

However, the Court of Appeals came to the erroneous

conclusion herein that, under California law, the con-

trolling shareholders may take advantage of their power

esis Disian

over the minority by depriving the latter of their equity

in, and forcing them out of, an enterprise when the

majority will acquire that equity if merely “(1) the

merger . . . has independent legitimate business reasons

and benefits the corporation, and (2) the minority

are treated fairly and without disadvantage.” (A. 12).

The business reason or “business judgment” test of

corporate action applies where the controlling share-

holder takes nothing from the beneficiary of the fi-

duciary duty; for example, forcing a minority to give

up its interests upon a merger into a third party

under a plan pursuant to which the majority also gives

up its interest on the same terms.

However, where the fiduciary takes from the minority,

California cases require that either there be “no alterna-

tive” to the corporate action or there be a “compelling

business purpose” for it. The opinion herein incorrectly

states the rule of each of the cases cited therein on

this point (A. 12). In Jones v. H. F. Ahmanson

& Co., 1 Cal.3d 93, 110; 81 Cal.Rptr. 592, 460

P.2d 464, 471 (1969), the court held that relief was

available to the minority because the majority did not

show that there was no alternative to the action taken

and in Fisher v. Pennsylvania Life Co., 69 Cal.App.3d

506, 513; 138 Cal.Rptr. 181 (1977), because a com-

pelling purpose was not shown. In Jn Re Security

Financial Co., 49 Cal.2d 370, 376; 317 P.2d 1 (1957),

the California Supreme Court said:

“. . . He did not act in bad faith in doing

so for a shareholder . . . may protect his investment

by dissolution . . . when, as in this case, all

alternative methods are foreclosed, no advantage

is secured over other shareholders, and no rights

of third parties will be adversely affected.”

=

The Ninth Circuit stated in Klaus v. Hi-Shear Corp.,

528 F.2d 225, 233 (9th Cir. 1975);

“. . . But language in Ahmanson requires man-

agement to demonstrate more than that the cor-

poration derived some advantage from its actions.

The majority shareholders in Ahmanson exercised

control over the corporation for their own advan-

tage:

without regard to the resulting detriment to

the minority stockholders and in the absence of

any compelling business purpose .. . At the

trial they may present evidence tending to show

such good faith or compelling business _pur-

pose that would render their action fair under

the circumstances.” [Emphasis added].

Crain v. Electronic Memories & Magnetics Corp.,

50 Cal.App.3d 509, 522; 123 Cal.Rptr. 419 (1975)

states the rule as requiring that there be no alterna-

tive.

In Pepper v. Litton, 308 U.S. 295, 308 and 311

(1939), this Honorable Court said that the majority

shareholders and directors have fiduciary duties to the

minority and cannot take a benefit from the latter.

There is a growing recognition in the courts of

the fiduciary duty of a controlling shareholder to the

minority in merger transactions. In Tanzer v. Intl.

Gen. Ind., Inc., 379 A.2d 1121, 1124 (Del. Supr.

1977), the court said that the interest of the majority

must “. . . not be suspect as a subterfuge, the real

purpose of which is to rid itself of unwanted minority

shareholders .. .”. In Young v. Valhi, Inc., 382 A.2d

1372, 1378 (Del. Ch. 1978), the court said the purpose

must not be contrived.

a 7) oan

It was held that the majority's taking the equity

from the minority by a merger violated SEC Rule

10b-5 in Marshel v. AFW Fabric Corp., 533 F.2d

1277 (2d Cir. 1976); a concurring judge said also

that there was a breach of fiduciary duty under New

York law. In Green v. Santa Fe Indus., Inc., 533 F.2d

1283 (2d Cir. 1975), reversed in Santa Fe Indus., Inc.

v. Green, 430 U.S. 462 (1977), a concurring opinion

quoted The Wall Street Journal:

“*fa| move to go private ordinarily creates a

conflict of interest...”

and Barron’s that:

“Generally, it is the low price of the stock rather

than declining earnings which sends firms private

...” (page 1294).

This Honorable Court, in Santa Fe Indus., Inc. v. Green,

supra, held that the mere breach of a fiduciary duty

is not a violation of SEC Rule 10b-5 or $10 of the

Securities and Exchange Act of 1934; fiduciary duties

are provided by State law and vary from State to

State. However, the Marshel and Green cases represent

sound decisional law on New York and Delaware merg-

er laws, and Delaware immediately adopted the rule

in the landmark Singer v. Magnavox, 380 A.2d 969

(Del. Supr. 1977) as to statutory long form mergers

overruling prior case law and applied the rule to short

form mergers in Kemp v. Angel, 381 A.2d 241 (Del.

Ch. 1978).

|

B. Respondents Did Not Satisfy Their Federal Fidu-

ciary Duties; Whether or Not Such a Duty Will

Bar the Exercise of a Power to Merge Corpora-

tions Has Not Been and Should Be Settled by This

Court.

The existence and extent of Trustees’ federal fiduciary

duty arising out of Trustees’ powers and duties under

the bankruptcy laws involves an important question

of federal law for the reasons stated at the beginning

of Point A, hereinabove.

We find no decision by this Honorable Supreme

Court determining whether the Trustee in a reorgani-

zation or other bankruptcy proceeding has a federal

fiduciary duty to the minority shareholders of the sub-

sidiary controlled by debtor. Santa Fe Indus., Inc. v.

Green, supra, in which this court ruled that a breach

of fiduciary duty by the majority in merging a partially

owned subsidiary into the majority did not constitute

a breach of federal securities laws, does not bar a

federal fiduciary duty for federally appointed trustees

or mergers of solvent subsidiaries into a debtor under

the Bankruptcy Act.

Trustees are charged with a “level of conduct...

higher than that trodden by the crowd.”: Meinhard

v. Salmon, 249 N.Y. 458, 464: 164 N.E. 545, and

a similar standard was required in In the Matter of

Combined Metals Reduction Company, 557 F.2d 179,

196-197 (9th Cir. 1977).

Trustees are fiduciaries with a duty to treat all

parties fairly as held in Sherr v. Winkler, 552 F.2d

1367, 1374-75 (10th Cir. 1977), citing Wolf v. Wein-

stein, 372 U.S. 633 (1963) and In the Matter of

Moulded Products, Inc., 474 F.2d 220 (8th Cir. 1973),

—

cert. den. 412 U.S. 940. The trustee is a fiduciary

and stake holder as held in Jn Re Lenters, 225 Fed.

878, 883 (E.D. Pa., 1915).

A fair construction of the powers of the trustee

under the Bankruptcy Act, particularly 11 U.S.C. $$75,

586 and 589 then in effect (See IV above), over

assets of the debtor and power to affect the rights

of third persons interested in assets such as solvent

subsidiaries of debtor imposes on the trustee a duty

to be fair to such third person. The rule should give

as much protection as the California rule requiring

that there be no alternative or a compelling business

purpose before taking from the minority to give to

the majority.

C. Lengthy Findings, Proposed by Counsel and Adopt-

ed Verbatim by the Court on the Day of the

Decision and Before Service on Opposing Counsel,

Should Be Given Little Weight and This Court

Should Settle the Extent to Which Such Findings

Be Given Weight.

Although this Honorable Court has indicated that

a Court may adopt findings proposed by a party,

what is meant by their being less helpful or that

they are not given the same weight as other findings

needs clarification. Also, we find no federal appellate

decision settling the question as to whether the Court

may adopt such findings when presented by a party

without prior service on opposing counsel and opportu-

nity to voice objections and comments. Where the

action authorized by an order can be taken, absent

a stay of the order, the effect on the right of appellate

review of making such findiags and the order thereon

on the very day of the decision, this question beeemes-

more important. \

M Ak Es

=

Mid morning, on October 12, 1977, the clerk said

that the Reorganization Court had decided the matter

and would sign an order that day. The findings (A.

21-46), 20 printed pages exclusive of the several exhib-

its attached thereto, were presented to the Court for

signature and signed verbatim without having first been

presented or mailed to petitioner. The names and ad-

dresses of Trustees’ counsel were in the upper left

of the first page and the name and address of the

firm of such counsel were printed in the left margin

of each of the other pages.

Rule 7-108, Rules of Professional Conduct of the

State Bar of California provides that a member of

the Bar shall not, in the absence of opposing counsel,

communicate with a judge except in open court upon

the merits of a contested matter pending before such

judge:

“nor shall he, without furnishing opposing counsel

with a copy thereof, address a written communica-

tion to a judge . . . concerning the merits of

a contested matter pending before such judge

... the rule shall not apply to ex parte matters.”

A.B.A. Rule DR 7-110(A), Code of Professional Re-

sponsibility, provides that a lawyer shall not contact

the judge as to the merits in adversary proceedings

except in the course of official proceedings and “(2)

In writing if he promptly delivers a copy to opposing

counsel. ..”.

This Honorable Court approved the trial court’s tak-

ing the findings verbatim from a brief of a party,

see United States v. Crescent Amusement Co., 323

U.S. 173. 184 (1944); in Schwerman Trucking Co.

v. Gartland Steam Ship Co., 496 F.2d 466, 475

ottltiin.

(7th Cir. 1974), it was said that the appellate court

could not ignore the District Court’s findings unless

they were clearly erroneous.

On the other hand, in several cases, courts have

said that findings proposed by counsel and adopted

by the court are less helpful or of less weight than

those prepared by the Court: United States v. El Paso

Natural Gas, 376 US. 651, 656 (1964): Edward

B. Marks Music Corp. v. Colorado Mag., Inc., 497

F.2d 285, 287 (10th Cir. 1974); In Re Las Colinas,

Inc., 426 F.2d 1005, 1009 (1st Cir. 1970), saying

that the courts do not look with favor on the practice

of adopting proposed findings verbatim and it should

be limited to extraordinary cases where the subject

matter is technical requiring expertise which the court

does not possess.

In Frazier v. Alabama Motor Club, Inc., 349 F.

2d 456, 458 (Sth Cir. 1965), the court said that

findings of fact based solely on undisputed evidence

where there is no issue of credibility need not be

given weight usually accorded findings.

Judge James M. Carter, author of the opinion below,

and Bruce D. Wagner, Findings of Fact, 1 San Diego

L. Rev. 13 (1964), point out that general order 37

in bankruptcy makes Fed. R. Civ. P., Rule 52(a)

applicable in bankruptcy cases, and findings by the

referee, unless clearly erroneous, must be accepted:

“However, where the referee reaches a conclusion

from given facts, neither the district court nor

the court of appeals is so limited, and in such

a situation either court can reach a proper conclu-

sion from the given facts.” (pp. 23-24).

“eé

. if the findings are based on documentary

and other :ondemeanor testimony, or on infer-

=

ences, deductions or conclusions from uncontra-

dicted . . . fact, the findings are subject to a

lesser degree of weight.” (p. 25).

“A practice in... many western states is

to ask the lawyers to prepare the findings of

fact, conclusions of law and judgment. Judge Skel-

ly Wright states that all the circuits except one

have denounced this practice, and quite properly

so if the trial court automatically signs them.

. . . However, it is proper to have the lawyers

submit their findings; but the judge should study

them, . . . and, if necessary, completely revise

them or send them back for revision . . .” (p.

32).

“There should be no question that the formal

findings should reflect the facts as honestly found.

In some courts the judge will literally ‘sew up’

a party by finding facts in such a way as to

negate an appeal.” (p. 35).

The California requirement that findings be served

and be signed only after time for objections by the

party who did not prepare them should be adopted

for federal procedure. If the court is not going to

prepare its own findings, each party should have a

voice in the findings, which should then be settled

by the court. Although such practice and the California

Rule of Professional Conduct was called to the appellate

court’s attention (Petitioner's Opening Brief, pp. 7,

51, 52), the appellate court failed to discuss the effect

of the foregoing and ruled that not obtaining a stay

together with the consummation of the merger on the

day of the oral decision and the signing of the findings

_ precludes an appeal.

=

This case clearly illustrates the vice of the verbatim

adoption of findings. Many findings were clearly erro-

neous as a matter of law and the court found on

subjects it had ruled to be irrelevant (D below). Fur-

thermore, on the day on which the oral decision was

made, in San Diego findings were signed, while in

Sacramento the merger was consummated, making it

difficult to obtain a stay so that appellees could contend

that failure to obtain a stay renders the appeal moot

and that errors of the trial court became immune

from review on appeal.

D. Only by Such a Departure by the Lower Court

From the Accepted and Usual Course of Judicial

Proceedings as to Call for an Exercise of the

Supreme Court’s Power of Supervision, Did the

Court Make the Clearly Erroneous Findings That

the Plan and Its Implementation Were Fair, Just

and Equitable, and That the Trustees and Mr.

James W. Leisner (a Director of Both Air Cal

and Westgate) Satisfied Their Fiduciary Obliga-

tions to Shareholders of Air Cal.

The findings should be given little, if any, effect

for reasons stated in C above; those and reasons stated

below make supervision necessary. In this case, the

evidence should be reweighed on appellate review.

Appellees had the burden of proof that the merger

was fair and not a breach of their fiduciary duty.

In Pepper v. Litton, 308 U.S. 295, 306, this Honor-

able Court said:

“The burden is on the . . . (controlling share-

holder or group of stockholders) not only to prove

good faith . . . but also to show its inherent

fairness from the view point of the corporation

and those interested therein .. .”.

— | ae

The above was quoted in Jones v. H. F. Ahmanson

& Co., 1 Cal.3d 93, 108 and in Mueller v. MacBan,

62 Cal.App.3d 258, 274; 132 Cal.Rptr. 222 (1976),

S.Ct. hear. den. See also Credit Manager’s Association

v. Superior Court, 51 Cal.App.3d 352, 361; 124 Cal.

Rptr. 242 (1975), S.Ct. hear. den. The burden of

proof that the trustee as successor to the debtor met

debtor’s California fiduciary duty, A above, is governed

by California law: Cities Service Co. v. Dunlap, 308

U.S. 208 (1939), Rule 302, Fed. R. Evid.; Rule

1101, Fed. R. Evid. provides that the same applies

in bankruptcy proceedings.

In this case, the party with the burden as to the

California and Federal fiduciary duty failed to carry

that burden so that the judgment should be reversed

as in Anderson v. General Dynamics Convair, etc.,

589 F.2d 379, 402 (9th Cir. 1978).

The Reorganization Court found that the implemen-

tation of the merger was fair (A. 8, Note 5; A. 33).

There was no evidence that the directors of Air Cal

acted independently in approving the merger; yet the

following was said:

“THE COURT: It wouldn’t have made a bit

of difference whether they [the trustees] voted

or not, though, would it, because it was a unani-

mous vote of the Board of Directors [of Air

Cal].

“MR. WOOLSEY: Yes, your Honor, and with

the attorney for Westgate present and all of the

directors under the control of and acting at the

pleasure of the majority shareholder, eighty per-

cent, I think the whole thing should be looked

upon with suspicion.

—

“THE COURT: You don’t know those direc-

tors as well as I do, Mr. Woolsey. If you can

find anybody more independent than Dean Gordon

Schaber of the law school up there, and Bill Black,

I don’t know tixm.” (Rptr. 10-4-77, p. 195:5-

16).

Matters should be decided on the evidence presented

in court, not what is learned outside of the courtroom.

The presence of the Trustees and their counsel during

the deliberations and voting by the directors of Air

Cal was inherently unfair to the minority shareholders.

The Reorganization Court found that the plan and

the certificate were fair (A. 36). There was no testi-

mony that it was fair. The taking of the equity from

the minority and giving it to the majority shareholder,

absent a compelling purpose, is inherently unfair and

cannot meet the requirement to which the Ninth Circuit

Court gave lip service that:

“The minority shareholders are treated fairly and

without disadvantage.” (A. 12).

The certificate was the only evidence on its fairness.

The title was misleading since there was no assurance

that it could result in stock of Westgate. The exchange

rate described hereinabove in the statement of the

case was unfair. The $15.00 per share of Air Cal

stock was about seven times current earnings and the

value of Westgate for purposes of the conversion

will be reorganization value determined by 9 or 9.1

times estimated annual earnings for periods after the

proposal of a plan of reorganization. Those estimated

earnings include earnings on the interest in Air Cal

assets taken from the minority.

—

The Reorganization Court found that the Trustees

and Mr. Leisner satisfied their fiduciary duty (A. 8,

Note 5; A. 33). There was no evidence that such

was the case. The merger, the plan and the implementa-

tion of it, were, as matter of law, contrary to this

finding.

Although the Reorganization Court found that the

Westgate certificates were to be issued pursuant to

a plan of reorganization (A. 36), such finding was

clearly erroneous and contrary to the uncontradicted

testimony of Trustee Kunzel, that the Trustees had

not formulated any plan (Rptr. 10-4-77, p. 19); as

admitted in the May 23, 1977 notice, no plan was

submitted because of problems relating to the tuna

and pet food operations “which, apart from Air Cal,

constitutes Westgate’s major continuing business” (Clk.

R. 2553).

The Reorganization Court found that the benefits

to Air Cal would be significant only if Westgate is

reorganized (A. 32). There was no assurance that

it will be reorganized. It was unfair to take the equity

from the minority before it was determined that West-

gate would be reorganized.

The alleged benefits to Air Cal did not constitute

purposes of the merger even under the Delaware test,

that is, not to be suspect of subterfuge, the real purpose

of which is to eliminate unwanted minority share-

holders: Tanzer v. International Gen. Ind., 379 A.2d

1121, 1124 (Del. Supr. 1977) which must not be

contrived as said in Young v. Valhi, Inc., 382 A.2d

1372, 1378 (Del. Ch. 1978). In the latter case. a

merger to eliminate potential conflicts of interest and

to obtain the 80% ownership required for consolidated

a

tax returns (which could have been accomplished by

buying some shares, not all) were contrived. If the

reasons found in this case were sufficient, the require-

ment for a reason or purpose would be absolutely

meaningless. In any merger, such benefits can be

claimed to cover the purpose to take the benefit from

the minority for the purpose of enhancing the position

of the majority.

The reasons cited by the Ninth Circuit (A. 12-

13; 31-33) were:

1. Relief from “the reporting requirements imposed

on public corporations” (A. 12-13, 31, Clk. R. 393).

The uncontradicted testimony by witnesses for the

Trustees was that there was no Saving in operat-

ing costs (Rptr. 1-14-77, p. 36). The uncontra-

dicted testimony was that the same audit expenses

would be required of Air Cal even as a wholly-owned

subsidiary of Westgate, if and when stock of Westgate

be publicly traded (Rptr. 10-4-77, pp. 109, 110).

The Trustees contemplated that if Westgate be reor-

ganized, stock of the new Westgate would be publicly

traded. Air Cal, as the only profitable subsidiary of

Westgate, would bear 100% of the expenses. There

was no finding concerning the net savings over the

costs of the merger estimated at $350,000.00 by re-

spondents; there was no balancing of detriments in

losing the public market and its advantage for key

employee stock options and other advantages. There

was no finding that the expenses saved were material.

When Westgate bought Air Cal stock, it knew that

Air Cal was publicly traded with the reporting require-

ments which it probably considered to be an advantage.

=

As stated by Steven W. Hamilton in 4 J. Corp.

Law, No. 1, 122 (Fall, 1978), such purported savings

by avoiding reporting is specious and:

“Such a result is harmful to investor confidence

and the securities markets and courts should not

sanction such majority conduct without substantial

justification.”

2. The alleged greater access to capital markets

after reorganization of Westgate (A. 13, 31-32) because

Westgate intended to maintain 80% ownership required

for consolidated tax returns and had no intention of

selling its shares in Air Cal or permitting a dilutive

equity offering (Info. Stmt. 2; Clk. R. 393). Whether

Westgate would permit such was ruled to be immaterial

(Rptr. 1-14-77, p. 48). Air Cal’s president testified

that diversification would be an advantage only if the

assets were viable and worthy (Rptr. 10-4-77, p. 91).

Westgate’s assets other than Air Cal produced losses

prior to and during the Chapter X proceeding. Air

Cal did not need financing at the present time, but

would in three or four years (Rptr. 1-14-77, p. 48).

The need for capital was disproven by the redemption

by Air Cal on August 10, 1976, of $3,361,000.00

par value of its 7% debentures due in 1988, for

$3,492,000.00. The undisputed testimony was that Air

Cal would have better access to equity capital and

credit than a company in reorganization under the

Bankruptcy Act (Rptr. 10-4-77, p. 108 and 1-14-77,

p. 38). If equity financing is needed, the majority

shareholder’s duty would be to permit an equity offer-

ing. Presumably Westgate will not have the tax losses

which justify filing consolidated returns indefinitely.

Some of the loss producing assets were sold before

the merger but not the cannery business (Rptr. 1-

= =

14-77, p. 64); the Trustees may sell the remaining

loss producing assets. Capital requirements with respect

to Airport facilities were ruled by the court to be im-

material (Rptr. 1-14-77, p. 88).

3. The removal of potential conflicts of interest

(A. 13 and 31) is likewise contrived as held in

Young v. Valhi, supra. Although Westgate acquired

its ownership in Air Cal in 1970, there was no evidence

of any problem arising out of any conflict of interest.

On the contrary, Air Cal pays to Westgate affiliates

82% of the tax savings by the filing of consolidated

tax returns, leases aircraft from a Westgate affiliate,

participates in Westgate’s retirement plan and has com-

mon directors (Info. Stmt. 25, 27, and 28). Hamilton,

4 J. Corp., Law at 124, disapproves of removal of

conflicts as a ground of a merger.

4. Greater availability to Air Cal of Westgate’s

management skills (A. 10 and 32). The President

of Air Cal, as a witness for Trustees, testified that

management assistance was not necessary in Air Cal’s

operations (Rptr. 1-14-77, p. 79). The only evidence

of management skills was Messrs. Kunzel and Trone’s

alleged management expertise. The court knew that

Mr. Kunzel would not stay on and that he was mad

that the court had appointed him* and Mr. Kunzel

testified that he did not intend to stay on after the

Chapter X proceeding (Rptr. 1-14-77, p. 57); the

court sustained Trustees’ objection to interrogation as

to whether or not Mr. Trone had indicated that he

would stay on after the proceedings as irrelevant (Rptr.

1-14-77, pp. 56-57). If, after the merger, management

8A certain familiarity between trustees and the court is

unavoidable. However, information so obtained should be kept

out of the decision making process in litigated matters.

= wa

in Westgate be available to Air Cal, the uncontradicted

testimony was that it would be available even if Air

Cal remained only a partially-owned subsidiary (Rptr.

10-4-77, pp. 110-111).

The Reorganization Court’s on the one hand pre-

cluding evidence on several of the alleged benefits

of or reasons for the merger as irrelevant and, on

the other hand, making findings that there were such

benefits and reasons is gross error.

No cash dividends have been paid by Air Cal and

yet the trial court prevented as immaterial inquiries

as to why (Rptr. 1-14-77, p. 42). As said by O’Neal

and Derwin, “Oppression of Minority Shareholders”,

page 62:

“The withholding of dividends is by far the

most frequently used squeeze-out technique.”

The Reorganization Court heard and decided the case

on the theory that no purpose was required and sus-

tained objections to the materiality of cross-examination

on such evidence and said it had to determine whether

$15.00 was fair and, nevertheless, made findings of

benefits to Air Cal.

There was no evidence presented by the Trustees

that the only alternative for the future of Air Cal

was a complete takeover by its controlling shareholder.

Instead, the record indicates that no other alternative

was considered by Air California’s Board of Directors.

In October, 1976, Air Cal’s president, who had previ-

ously never contemplated a merger or any other reor-

ganization of Air Cal, was informed by Westgate’s

additional Trustee, Mr. Kunzel, that Westgate contem-

plated the takeover (Rptr. 1-4-77, pp. 74-75), and

investment bankers were retained (Rptr. 1-14-77, p.

ennliiaie

69), for an aggregate fee of $125,000.00 to render

their opinion as to only the fair value of the shares

of the minority holders. The proposed merger was

publicly announced on November 6, 1976. The merger

approval by Air Cal’s Board of Directors, with Trustees’

counsel present at all times during the discussion and

vote, was without any independent deliberation but

was dominated by the Trustees. The purported reasons

for the merger were clearly not indicative of a “compel-

ling business purpose.” The evidence presented by the

Trustees was insufficient to meet even the lower stand-

ard under the “Business Judgment” rule.

E. The Opinion Below That the Consummation of the

Merger Without Petitioner’s Obtaining a Stay

Rendered the Appeals Moot Raises a Question

Not Heretofore Settled Which Should Be Settled

Contrary to the Position Taken by the Court

Below.

The question as to whether or not consummation

of the merger on the very day of the court’s decision

and the written order authorizing the merger, bars

an appeal from the order is an important question

which should be settled by this court.

Rule 62(a), Fed. R. Civ. P. provides that proceedings

shall not be taken for the enforcement of a judgment

until the expiration of ten (10) days after its entry.

As said in In Matter of Combined Metals Reduction

Co., 557 F.2d 179, 192 (9th Cir. 1977):

“The district court, while not stating any rea-

sons for its decision, concluded that Fed. R. Civ.

P. 62(a) was inapplicable ‘to orders of a district

court sitting in bankruptcy and relating to sales

of property of the debtor. . . . 2A Collier on

—29.—

Bankruptcy 14th Ed., 25.12, pp. 957-59 (1976)

is to the contrary as is U.S. Manufacturers Equip.

Company v. Rugh, 29 F. Supp. 40 (W.D.Pa. 1939)

. as has been noted above, we cannot reverse

or void the sale; it was completed in accordance

with a valid order of the district court and the

purchaser is not a party to this appeal.”

The rule adopted in the opinion of the court below

has the effect of depriving the parties of the right

to appeal. The parties could not seek a stay during

the short interval between the announcement of a deci-

sion of the court and the signing of the order, not

previously served on counsel, unless counsel had antici-

pated the ruling and the grounds therefor and had

the application prepared before knowing the contents

of the order to be stayed.

The Trustees’ application was before the Reorgani-

zation Court for over nine months. The Trustees’ rush

to get the order signed and the merger consummated

should not immunize the Trustees from appellate relief.

In the spirit of said Rule 62(a), the Trustees should

have paused for a few hours in order that objectors

to Trustees’ application could seek a stay.

Requiring that a stay be sought or obtained as a

condition to a right to appeal implies that, if granted,

the required bond would be put up. A delay in the

merger could have delayed reorganizing Westgate, caus-

ing hundreds of thousands of dollars in administration

and other expenses; a large bond would have been

required.

Such a requirement would effectively insulate the

decision from appellate review in all cases where the

abused holders of minority shares individually hold

a ae

only a small number of shares or are of limited financial

means. The requirement that there be a stay is discrim-

inatory and a stay would have been contrary to the

best interests of debtor. Neither a stay nor an applica-

tion therefor should be required.

Due process of law does not require that an appeal

be available as said in Abney v. United States, 431

U.S. 651 (1977). However, once appellate review

is available, due process requires it be unfettered, Castle

v. United States, 399 F.2d 642, 650 (Sth Cir. 1968).

Valley unsuccessfully sought a stay; for others to

have sought a stay would have been an idle act not

required by the law.

In this case, the opinion on appeal erroneously stated

that the appeal sought to “negate the effects of a

merger” (A. 1) and to the extent appellant seeks a

negation of the merger, the remedy is not available

(A. 17). Petitioner concedes that no shareholders of

Air Cal can be compelled to return the certificate

or cash received for shares in Air Cal. The court

can compel Westgate to (1) return assets to old

Air Cal and stock in Air Cal to former shareholders

who consent to being reinstated; (2) suffer the impres-

sion of a trust on the proportion of shares held by

respondent in the new Air Cal equal to the proportion

of shares in old Air Cal taken from shareholders desir-

ous of giving up the certificate or cash in return for

stock; (3) pay the former minority shareholders of

Air Cal a sum equal to the benefits to Westgate (e.g.

enhancement of reorganization value) in excess of the

$15.00 per share, (4) issue warrants to purchase the

stock, or (5) pay damages equal to the excess ef OvER

$15.00 of the value or price of an appropriate number

a. on

of shares of Westgate stock a reasonable time after

the reorganization, if any, when the market will have

evaluated the stock absent the depressing effect of

reorganization proceedings. In any event, findings that

the implementation of the merger was fair and that

the three Directors of Air Cal who were Directors

and/or Trustees of Westgate satisfied their fiduciary

obligations should be deleted. These findings may influ-

ence the trier of fact in the suit by debenture holders

who seek a remedy because of the calling of the deben-

tures without any disclosure of the plan to merge.

After judgment, petitioner moved to have the findings

amended to state that they are without prejudice to

the rights of the debenture holders (Clk. R. 419 to

423).

Unlike in Jn Matter of Combined Metals Reduction

Co., supra, relied on in the opinion herein, we do

not seek to set aside the merger here (sale there);

we seek only other remedies for the shareholders who

have been deprived of their interest in Air Cal.

In Mills v. Electric Autolite Co., 396 U.S. 375,

387 (1970), this Honorable Court said:

“ . . Possible forms of relief will include setting

aside the merger or granting other equitable relief,

but, as the Court of Appeals below noted, nothing

in the statutory policy ‘requires the court to un-

scramble a corporate transaction’. . . In selecting

a remedy, the lower courts should exercise ‘the

’ 99

sound discretion ...’.

Our case is more like Bosley v. City of Euclid,

496 F.2d 193, 196 (6th Cir. 1974), where the court

held that the demolition of structures the right to posses-

sion of which was in issue did not make the appeal

=

moot because there remained issues of damages and

incidental relief.

As said in Ramberg v. American Investment Co.

of Illinois, 231 F.2d 333, 336 (7th Cir. 1956):

“. . And even where the subject matter has

been so completely destroyed . . . the court still has

jurisdiction to grant incidental relief and the cause

is not moot.”

The cure for the Trustees’ action is straightforward,

an offer to restore to their previous status, the minority

shareholders who opted for cash in the face of a fait

accompli.

DATED: October 19, 1979.

Respectfully submitted,

Roy B. WooL_seEy,

In Propria Persona.

Of Counsel:

WOOLSEY, ANGELO & THATCHER.