Pacific States Savings & Loan Co. v. Hise

These appeals are taken from orders and a judgment made and entered in an action brought to challenge the propriety of the seizure by the Building and Loan Commissioner of the State of California of the business and assets of Pacific States Savings and Loan Company, a corporation.

Pacific States was incorporated as a building and loan association in 1889, and continued to do business until its seizure on March 4, 1939. State Guaranty Corporation was organized in 1927 and shortly thereafter acquired all of the guaranty capital stock of Pacific States and all of the outstanding stock of another allied company, Pacific States Auxiliary Corporation. A majority of the stock of State Guaranty is owned by the general public, but at the time of the seizure, State Guaranty Auxiliary owned a large block of its stock. Pacific States and Pacific States Auxiliary are operating companies while State Guaranty and Guaranty Auxiliary are holding companies. The commissioner has contended throughout that Robert S. Odell, who became president of Pacific States in 1928, and the ‘ ‘ Odell group ’ ’ either directly or through proxies

In 1929 Pacific States was in a good financial condition. Its assets exceeded $53,000,000, of which approximately $7,000,000 were in cash and government bonds and $46,000,000 in mortgage loans on. real estate. It had also a capital surplus and undivided profits, substantial holdings in real estate, and there were no unpaid withdrawal notices on file. As a result of the depression that followed, real estate holdings in large numbers were forced upon the company through surrender and foreclosure. By December, 1933, Pacific States had taken over some 3,870 widely scattered small parcels of property. Sales or rentals of such properties became stagnated and the aggregate expense of maintenance became burdensome. Prevailing conditions caused borrowers to default in the payment of their loans, made potential investors unable or unwilling to invest in building and loan associations, and prompted many of the old investors to demand withdrawal. In the interim, the Fidelity Savings and Loan Association of Los Angeles became involved in financial difficulties and Pacific States took over its assets and obligations. In this transaction, Pacific States took over assets (no cash or liquid assets) of an approximate value of $40,000,000, issued definite term certificates in excess of $24,000,000 and assumed liabilities in excess of $13,000,000. At one time the outstanding investment certificate liability of Pacific States approximated $91,000,000.

Over a period of years and up to the time of the seizure here challenged, the certificate liability of Pacific States was reduced to $46,000,000. The commissioner challenges most of the transactions by which the certificate liability was so reduced urging, among other things, that Pacific States, with the assistance of Pacific Auxiliary, intended to freeze out its certificate holders for the purpose of enhancing the value of State Guaranty stock to the ultimate benefit of Odell and his associates, and that by these transactions Pacific States ceased tó be a building "and loan association but became in fact a real estate holding company. These contentions were upheld by the trial court, but for reasons later appearing it is un

On March 4, 1939, the commissioner, acting under section 13.11 of the Building and Loan Act (Stats. 1931, pp. 483-539; Deering’s Gen. Laws, Act 986), took possession of the business and assets of Pacific States and placed a custodian in charge. Two days later, Pacific States, as an aggrieved party, challenged the seizure under section 13.12 of the act and prayed the superior court to enjoin the commissioner from further proceeding and to direct return of its business and assets. The commissioner filed an answer alleging the facts that in his opinion justified his action. The trial commenced immediately and continued more than two years. The transcript of the evidence exceeds 26,000 pages and the parties have filed briefs running into hundreds of pages. Briefs have been filed by several amici curiae. The commissioner has assigned and the trial court has found many reasons assertedly justifying the seizure. We shall herein discuss only two of these reasons. Our conclusion with respect thereto makes it unnecessary to express an opinion as to the others. It is immaterial that other grounds also may exist in support of the seizure.

Preliminarily, it is essential that we have before us the provisions of section 13.11 which, under the circumstances and conditions therein prescribed, authorize the commissioner summarily to seize and take over the business and assets of a building and loan association. The section reads: “If the commissioner as the result of any examination or from- any report made to him or to any association doing business in this state or its investors or any thereof, shall find that such association is violating the provisions of its articles of incorporation or charter or by-laws or any law of this state, or is conducting its business in an unsafe or injurious manner, he may by an order addressed to such association direct a discontinuance of such violations or unsafe or injurious practices and a conformity with all the requirements of law; and if such association shall not comply with such order within the time specified therein, or if it shall appear to the commissioner that any association is in an unsafe condition or is conducting its business in an unsafe or injurious manner such as to render its further proceeding hazardous to the public or to any or all of its investors, or if he shall find that

Among the grounds relied upon by the commissioner in support of his seizure, and found to be true by the trial court, is the destruction of certain papers or records after demand had been made for their inspection by an examiner representing the commissioner. As appears above, it is made a ground of summary seizure under the section “if any association shall refuse to submit its books, papers and accounts to the inspection of the commissioner or any of his examiners, deputies or assistants. ...” The facts surrounding the destruction of certain of the papers or records of Pacific States are set forth in the following finding of the trial court: Shortly prior to February 20, 1939, the Commissioner determined to make an extra examination of and to devote extraordinary attention to the affairs of Pacific States, and he authorized his Chief Examiner, Milton 0. Shaw, to make such examination, with such assistants as he might choose. On February 17, 1939, pursuant to such authority, Shaw appeared at the office of Pacific States and demanded that he be permitted to make such examination without any restrictions on his activities by Pacific States in so doing. Pacific States refused to permit him to make such examination but on February 20, 1939, Pacific States stated that it would permit such an examination and thereupon the examination commenced. Shortly thereafter Shaw found on the books and records of Pacific States certain figures which were designated ‘S.T.P.’ and ‘S.C.P.’ He was informed by its employees that these symbols respectively designated ‘sacrifice term price’ and ‘sacrifice cash

The evidence supports this finding of destruction of records, and the facts so found justify the seizure. The company may not successfully urge as a defense that the papers contained in great part data relating to obsolete cases, or that the same or similar data could be obtained from other records. It cannot make itself the judge of the importance or relevancy of the documents. If demanded documents are part of the corporate records, the refusal to produce them justifies a seizure regardless of whether it is subsequently discovered

Section 13.11, as shown, empowers the commissioner to take summary possession under prescribed circumstances. Once he has done so, he operates the company. The jurisdiction of the superior court in a proceeding such as this, challenging the seizure under section 13.12, is limited to determining the validity of the takeover. If it be determined that the seizure was invalid, the court may direct the commissioner to return the company. But if it is found on competent evidence that the commissioner has validly taken pos-, session for any of the reasons designated in section 13.11, then he alone is charged with the duty of determining in his discretion whether to continue the business after correcting abuses, whether to t reorganize, or whether the best interests of the investors and the public will be served by liquidation. In North American Building etc. Assn. v. Richardson, 6 Cal. 2d 90 , 100 [ 56 P.2d 1221 ], it was urged that at most a technical impairment existed and that the superior court had power in a proceeding under section 13.12 to determine, even though the seizure was proper, that the retention of possession was unjustified. After stating that the cited section protected an association from any arbitrary or unjust seizure, this court held: “We find no merit in appellant association’s further contention that the retention of the business, property and assets of the association by the commissioner was not justified. The statute provides that the commissioner shall retain possession ‘until such association shall with the consent of the commissioner, resume business, or. until its affairs be liquidated. Such association may, with the consent of the commissioner, resume business upon such conditions as may be approved by him. ’ It appears from this language that the

It thus appears that the seizure of Pacific States finds ample justification in the unlawful destruction of some of its records after demand therefor. Independently of that ground of seizure the commissioner urged as a further justification for the seizure, and the trial court found, that on March 4, 1939, the assets of the company were materially impaired within the meaning of section 13.11 of the act above quoted. If these findings are supported by substantial evidence they demonstrate not only that the seizure was justified but also that after the seizure there was no abuse of discretion on the part of the commissioner in retaining the assets and in refusing to return the company to its old management. Moreover, the determination of whether the trial court correctly found that the assets were impaired is indispensable in passing on the propriety of its rulings on the motions for attorneys’ fees. The propriety of the commissioner’s retention of the assets after the seizure should not be confused, however, with the question whether or not he abused his discretion in determining some months after the seizure to liquidate the company. Section 13.12 under which this proceeding was commenced, does not provide for a review of the determination to liquidate, and the trial court in this action challenging the validity of the take-over could not, and did not, pass on the propriety of any contemplated liquidation. As a matter of fact, the court.found that “a judgment for the commissioner in this action will not necessarily result in the liquidation of Pacific States. The determination which the Commissioner has made to liquidate Pacific States is subject to his right to make such other disposition of all or any part of its business, affairs and assets as is or may be authorized by law. ” In other words, liquidation is not the inevitable result of a valid seizure.

Turning to the question as to whether the assets, of the company were impaired on March 4, 1939, we find that the

These findings are supported by expert testimony indicating that application to the company’s books of the uniform classification of accounting system established and prescribed by the commissioner for all associations and application of other proper accounting practices revealed an impairment of assets in excess of $10,000,000. This impairment was also demonstrated by physical appraisals of the assets of the company. In this latter connection the court appointed certain

The standard set down by the court was contained in the following three instructions or definitions: (1) “Market value is the amount this property would sell for if put upon the open market, and sold in the manner in which property is ordinarily sold for cash in the community in which it is situated, with a reasonable time being given to find a purchaser buying with knowledge of all the uses and purposes to which it is best adapted and for which it is capable of being used and make the sale.” (2) “In considering the value of property ‘Blank’ as of March 4, 1939, and without giving any consideration to what this property was worth to the plaintiff for speculation, or merely possible uses, nor what the plaintiff claims or may claim it was worth to it, nor what it may be worth to the plaintiff for purposes other than the highest and

It was urged upon the trial and is repeated here that the rule of fair market value as defined and adopted by the court was erroneous and that the basis of valuation adopted by it was too narrow and restricted and excluded proper and necessary elements of value. Specifically, it is urged that “(1) the rule of fair- market value, as interpreted by the Court, was adopted as the controlling rule of value, (2) no allowance was made for 'going concern value’; (3) the element relating to value of the amount a prudent owner willing, but not forced to sell, would accept, was excluded; (4) the element of an existing fair market was excluded; [and] (5) the element of a cash price was required, to the exclusion of sales on terms.”

The history of this case definitely indicates that challenge 2, having to do with ‘‘going concern value,” has assumed the position of greatest importance in appellants’ attack upon the trial court’s definitions of value, and we therefore consider it first.

In light of the purpose of section 13.11, authorizing summary seizure of associations under the circumstances there designated, it is obvious that the reason for ascertaining whether assets are impaired within its meaning is not to determine whether the company shall ultimately be liquidated

When the Legislature intended that consideration should be given to “going concern” value of the association, it expressly so provided. In 1935 it adopted an article of the act, as emergency legislation, which did not continue in effect beyond February, 1937, providing for the rehabilitation and reorganization of building and loan associations under certain circumstances (art. XVI, Stats. 1935, p. 814). The plan there provided required the consent of certain creditors, including certificate holders, but eliminated the necessity for the consent of shareholders “if the value of the assets of such association shall be less than the liabilities of such association, including the value of its investment certificates but not including the value of its shares, or if the business, properties and assets of such association be then in the possession of the commissioner. For the purpose of this article, real property, . . . loans, and all other assets (whether like or unlike the foregoing) shall be valued at what may reasonably be expected to be realized therefrom in the orderly and proper conduct of a going business(§ 16.04.) (Italics added.) When it intended to include a “going concern” value, the Legislature expressly provided therefor, and it definitely limited the definition to “the purpose of this article.” Such limitation would be unnecessary had it intended the same definition to be applicable for the purpose of determining whether an impairment of assets existed under section 13.11. Thus, the silence of section 13.11 on the subject and the positive legislative expression thereon in another part of the act can only suggest that the Legislature intended that "going concern” value need not be considered in determining whether an impairment of assets exists within the meaning of section 13.11 to warrant the take-over of an association.

Before leaving the subject of "going concern, ” as an element of value, reference should also be made to appellants’ use of the phrase as meaning the amount by which the value of the assets as a whole, assembled together for the conduct of a business, exceeds the aggregate of the value of the separate items of property. This concept, frequently discussed in rate fixing cases involving the valuation of franchises and public utility properties, can have no reasonable application here where no claim is made of the existence of a possibility of selling all the assets of Pacific States to a single purchaser.

Appellants also urge that while the trial court’s definition of value assumed a willing buyer, it failed to assume a willing seller. That market value is the amount for which a property can be sold by a willing seller to a willing buyer, is quite generally recognized. In its first and third directions to the experts the court provided for “a reasonable time being given to find a purchaser.” This language is not indicative

Nor do we find merit in appellants’ criticism that the court’s definition excluded the element of an “existing” fair market. They urge, in brief, that if the market is in a depressed state when the seizure is made, as of which date the assets must be valued to determine whether there is an impairment within the meaning of section 13.11, consideration should not be given to the amounts for which they actually could be sold on the market, but, rather, to amounts for which they could be sold on a more normal market that might exist some indefinite time in the future. Acceptance of this contention would require a disregard of realities. If the purpose of the valuation is to determine whether the commissioner was justified in seizing the company on the ground of impairment of its assets as of the time of the takeover, and if, as held, an assumed liquidation is to furnish the value test, the question is whether the assets can in fact then be sold for enough to pay the liabilities in full, allowing a reasonable time to complete the sale, but not awaiting the return of a market which is fair or normal to the debtor. (Cf. Johnson v. Land T. B. & T. Co., 329 Pa. 241 [ 198 A. 23 , 25]; Mitchell v. Investment Sec. Corp., 67 F.2d 669 , 671; In re Studebaker Corp., 9 F.Supp. 426 , 427.)

We turn to appellants’ further contention that the trial court’s definition of value required a cash price to the exclusion of sales on terms. If, as we have held, the test is value at an assumed liquidation, cash prices necessarily control rather than sales on terms or exchanges for other property. (Johnson v. Land T. B. & T. Co., 329 Pa. 241 [ 198 A. 23 ]; Mitchell v. Investment Sec. Corp., 67 F.2d 669 ; People v. First St. Bk., 274 Ill.App. 46 .)

In thus defining “fair market value” the court eliminated a forced sale and included a value based upon the highest and best use of the property. It gave the accepted definition of market value. (Sacramento So. R. R. Co. v. Heilbron, 156 Cal. 408 [ 104 P. 979 ]; Oakland v. Pacific Coast Lbr. & M. Co., 171 Cal. 392 , 399 [ 153 P. 705 ]; Estate of Felton, 176 Cal. 663 , 668 [ 169 P. 392 ] ; City of Napa v. Navoni, 56 Cal.App.2d 289 , 299 [ 132 P.2d 566 ]; City of Redding v. Diestelhorst, 15 Cal.App.2d 184 , 192 [ 59 P.2d 177 ]; City of Stockton v. Vote, 76 Cal.App. 369 , 401 [ 244 P. 609 ]; People v. Olsen, 109 Cal.App. 523 , 532 [ 293 P. 645 ]; City of Los Angeles v. Deacon, 119 Cal.App. 491 , 493 [ 7 P.2d 378 ]; Joint Highway Dist. v. Ocean Shore R. R. Co., 128 Cal.App. 743 , 752 [ 18 P.2d 413 ] ; Temescal Water Co. v. Marvin, 121 Cal.App. 512 , 518 [ 9 P. 2d 335 ]; Wild Goose C. Club v. Butte County, 60 Cal.App. 339 , 341 [ 212 P. 711 ].) The fact that the definition so used has most frequently appeared in condemnation cases and in some tax cases does not detract from its applicability here when, as we have held, the liquidation test is to be applied in

We turn to a consideration of the appeals, from the orders denying applications for attorneys’ fees. As regards the appeal of State Guaranty, the so-called parent corporation, it should first be noted that when it sought and procured leave to intervene in the trial court it did so on the representation that it did not “expect to come here asking for leave of the court to pay its expenses in defending its rights as a stockholder.” In addition, it has advanced nothing persuasively suggesting that it should be allowed attorneys’ fees. While a parent company may expend its own funds to defend a company in which it holds the controlling stock (Pratt v. Robert S. Odell & Co., 49 Cal.App.2d 550 [ 122 P.2d 684 ]), it should not be awarded fees from funds in the commissioner’s hands seized from a subordinate company.

As pointed out earlier, the trial consumed approximately two years. Neither at its inception nor at any time during this period did Pacific States ask for an allowance of attorneys’ fees, although it was at all times represented by competent counsel, nor does it now ask for attorneys’ fees for these past services. Its application for an allowance of attorneys’ fees was made after the commissioner had rested his case and was for future legal services to compensate counsel during the production of evidence by Pacific States. During the course of the hearing on the application, Odell, the president of Pacific States, was called as a witness and was examined and cross-examined over a period of weeks. During his examination there was considerable discusstion as to whether Pacific States intended to or could produce evidence of the fair market value of its assets. His testimony reveals that the evidence expected to be produced was predicated upon a “normal” market (the time of the arrival of which he admitted he could not foresee or foretell) and not upon the market that existed at the time of the seizure. This subject is discussed above in another connection. In addition, counsel for Pacific States frankly admitted that if the trial court’s definition of value was correct (and we have

As stated above, Pacific States made no application for attorneys’ fees until the commissioner rested his case. The request was not for fees already incurred but for attorneys’ fees to be incurred in the future in presenting the defense. In denying the application, the trial court had before it the evidence that justified the seizure, and the company, through its officers, was aware of the facts making it subject to lawful seizure. Under all the circumstances, including the admission of Pacific States that it could not offer any evidence to overcome the commissioner’s showing of impairment of assets under the trial court’s definition of value, here approved, we find no abuse of discretion in the trial court’s conclusion that the evidence produced on the application for attorneys’ fees was insufficient to justify an allowance for that purpose.

The judgment and orders appealed from are affirmed.

Edmonds, J., Carter, J., Traynor, J., Schauer, J., and Spence, J., concurred.

Gibson, C. J., did not participate therein.