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vicious scheme, I feel confident you will heartily co-operate with me in this fight to protect my equity and save your investment. By working together we can win. Please write immediately that you are with me. Respectfully yours,
(Signed) E. W. BACKUS, President Backus-Brooks Company and
Minnesota and Ontario Paper Company. JANUARY 5, 1934 BAKER BUILDING, MINNEAPOLIS, MINN. The Legal Proceedings herein set forth are as follows:
I. Petition asking for Removal of Receivers Robinson and Jaffray, for inefficiency, incompetency and maladministration.
II. Answer of E. W. Backus and other defendants, to the suit brought by Receivers, which answer sets forth that the action is based solely on desire to destroy business reputation of Mr. Backus.
III. Complaint in suit brought by Mr. E. W. Backus against R. H. M. Robinson and C. T. Jaffray asking $2,000,000 damages for Libel.
I. PETITION ASKING FOR REMOVAL OF RECEIVERS ROBINSON AND JAFFRAY, FOR
INEFFICIENCY, INCOMPETENCY AND MALADMINISTRATION
IN THE DISTRICT COURT FOR THE UNITED STATES IN AND FOR THE DISTRICT OF
MINNESOTA FOURTH DIVISION
(Equity No. 1950)
Wirt Wilson & Company, a Corporation, Complainant,
Petition for removal of receivers
To the Honorable Judges of the United States District Court in and for the
Fourth Division of the District of Minnesota:
The petitioners, Minnesota and Ontario Paper Company and Backus Brooks Company, bring this their petition against R. H. M. Robinson and C. T. Jaffray, receivers in this cause, and pray an appropriate order of the court removing such receivers and appointing a successor receiver or receivers for the administration of the properties involved in this proceeding, and thereupon allege and state to the court as follows:
1. That your petitioner, Minnesota and Ontario Paper Company, is the defendant in the above entitled cause and owner of the various properties involved in the pending receivership administration; that your petitioner, the Backus Brooks Company, has, at all times since the inception of the receivership, been the owner and holder, and still is the owner and holder, of approximately ninety (90) per cent of the total outstanding shares of capital stock of the said Minne sota and Ontario Paper Company; that your petitioners are the owners and holders of outstanding first mortgage bonds of said Minnesota and Ontario Paper Company, secured by that certain mortgage or deed of trust executed by the last named company to The Minnesota Loan and Trust Company as trustee under date of April 1, 1925.
2. That under the order of the court made and entered in this cause on or about the 30th day of November, 1931, the aforesaid R. H. M. Robinson and C. T. Jaffray were designated as receivers of the properties and affairs of the said Minnesota and Ontario Paper Company, and on or about the same date said last named parties qualified as such receivers and have ever since continued as such receivers in the handling and administration of the estate herein; that by the order of appointment, such receivers were authorized to carry on and conduct the business which the said Minnesota and Ontario Paper Company was conducting and carrying on at the date of the receivership herein and since their appointment as such receivers, they have at all times been engaged and still are engaged in the ostensible carrying on and conducting of such business.
3. That in the administration of such receivership estate and the carrying on and conduct of the business aforesaid by the last named receivers, such receivers have been guilty of various and sundry acts of misfeasance, nonfeasance, and negligence, owing to inexperience, inefficiency, lack of knowledge of the practical requirements of the business committed to their administration, misconduct and lack of business judgment, as a result whereof, the creditors interested in said estate as well as the owners of the equity therein, have heretofore sustained great and irreparable loss and damage for which they are without adequate or any redress and which, if continued, will result in the sacrifice and dissipation of the receivership estate.
4. That in the inception of the administration of the receivers herein mentioned, the estate and property of said Minnesota and Ontario Paper Company (including that of its subsidiaries), at a fair and reasonable valuation, was largely in excess of the amount of its outstanding debts and obligations, funded as well as current, and such Minnesota and Ontario Paper Company and its stockholders were possessed of a large and valuable equity in such properties and estate. That due and owing to the utter incapacity and incompetency of the receivers herein mentioned, such value has been largely dissipated and sacrificed; the business of the Minnesota and Ontario Paper Company has been demoralized and the standing and prestige of the last named company in the commercial world, has been largely sacrificed and ruined.
5. That up to the date of the receivership herein, the business of the Minnesota and Ontario Paper Company had been profitably conducted and no default at any time made in meeting both the principal and interest of its obligations as they respectively matured; that its business had been constantly expanding and the scope of its various industries enlarged in the United States, Canada, and Europe; that during the year preceding the receivership, its capital expenditures, in the expansion of the field of its operations, amounted to approximately $3,000,000.00, and that as a result of sound progressive business policy, it had achieved recognition and standing as one of the leading industries of its character on the American continent,
6. That, during the administration of said estate under receivers Robinson and Jaffray, nothing of a constructive nature whatsoever has been accomplished by said receivers on behalf of said estate; that, on the contrary, the administration of this estate is a glaring example of mismanagement of the affairs of an industry perhaps never equaled in the industrial history of this nation; that, under the administration of the receivers herein mentioned, there has been committed a colossal wastage and loss of the assets of said estate, all of which were avoidable and could have, and would have, been saved under competent management; that properties have been ruthlessly sacrificed to provide funds to defray the expenses of extravagant administration wholly re gardless of the ultimate effect of such procedure upon the estate in its entirety ; that illy advised policies and inexperienced management have been responsible for heavy and wholly unnecessary losses in business volume; that the interest of all parties concerned in such estate are seriously jeopardized, and particularly the interest of thousands of small investors who are holders of bonds of said Minnsota and Ontario Paper Company, and which bondholders and other creditors have suffered, and will continue to suffer, from such misguided methods and policies; that the bondholders have been lulled into a sense of false security and led to assume that their interests are being adequately protected by the so-called Bondholders Protective Committee; that said committee has utterly failed to exercise the proper initiative or attention to the affairs of said estate, and apparently has carelessly and negligently relied upon and accepted without question the gross mismanagement of the affairs of said estate by said receivers, Robinson and Jaffray.
7. That under the unwise and wasteful administration of receivers, Robinson and Jaffray, the monies and properties of this estate were and are being recklessly dissipated, resulting in the stupendous aggregate loss to date of approximately
TWELVE MILLION TWELVE THOUSAND FIVE HUNDRED SEVENTY AND 96/100 DOLLARS
all of which has jeopardized and gravely impaired the interests and security of thousands of bondholders, creditors, and owners of said estate. That said unwarranted losses and expenditures are made up of the following major items, to wit:
1, 095, 000.00
1, 718, 570. 96
(a) Cash paid for receivers' and attorneys' fees since the incep
tion of the receivership, approximately-
of sundry accounts receivable due Minnesota and Ontario
Paper Company, and subsidiaries ---
owed by International Paper Company (a company oper-
which was settled for $50,000.00, a net loss of_
pany (a Minnesota and Ontario Paper Company sub-
(From the above-total cash losses—$1,795,000.00.)
ating policies and excessive overhead expenditures-----
daily newspaper constituting part of the assets of said
Receivers' Report dated September 30, 1933_--
ging operations of International Lumber Company (a Min-
of necessary camp buildings_.
into by Minnesota Forest Products Company (a Minnesota
and Ontario Paper Company subsidiary) due to unsound
present receivership; and cut in inventory -
mills and subsidiary properties, including loss in manu-
loss in burning sawmill materials----
bination in Restraint of Trade, restricting newsprint paper
of the estate and bondholders..
Company (a Minnesota and Ontario Paper Company sub-
of permits, and sacrifice sales of timber.
to Great Lakes Paper Co. and of commissions.
1, 250, 000.00
12, 012, 570. 96 8. That, at the time of receivership, there was cash on hand in excess of One Million Dollars ($1,000,000.00), which amount was credited by bank creditors on notes payable held by them on the understanding that a working fund of Three Million Dollars ($3,000,000.00) would be made available by them on receivers' certificates and that the former management should act as receiver; that as a result of said bankers' acts at the inception of this receivership, there was no cash whatsoever on hand with said estate; that at the inception of this receivership, E. W. Backus was named as one of the three receivers serving as such for a period of nine (9) months; that, because of lack of co-operation on the part of big Eastern banking creditors in particular, the said E. W. Backus voluntarily resigned as such receiver on the 30th day of November, 1931; that during said nine months' period, the said E. W. Backus was acting as such co-receiver, the affairs of said estate were largely under his control and subject to his direct management, and, during such time, there was accumulated a cash working fund for said estate, by reason of the efficient management of its affairs, in the sum of over Two Million Dollars ($2,000,000.00) in cash including Five Hundred Thousand Dollars ($500,000.00) through receivers' certificates; that since December 1, 1931, and during the administration of said receivership by Robinson and Jaffray, the present receivers, said Two Million Dollars ($2,000,000.00) cash working fund was reduced and dissipated by mismanagement and waste by said present receivers to an amount of approximately One Million Dollars ($1,000,000.00).
9. That neither of such receivers at the date of their appointment as such, as aforesaid, had any practical knowledge or experience in or respecting any of the various lines of business in which the said Minnesota and Ontario Paper Company was engaged ; that neither thereof had any familiarity with the intricate and widely diversified details of such business nor any knowledge or acquaintance with the local conditions affecting such business in the various localities where such business was being conducted and carried on; that neither of such receivers had any acquaintance with the personnel of the complicated operating organization nor as to the .capacity and qualifications of the members of such organization; that shortly following the date of their appointment, solely with the objective of creating an administrative organization beholden and committed to themselves, said receivers substituted for the previously existing experienced administrative organization, one, newly created by themselves, with the result that the affairs and business of the Minnesota and Ontario Paper Company was largely disorganized and demoralized in that persons were appointed to managerial positions who were utterly lacking in capacity or experience for their new responsibilities, the business now being largely committed to untrained and incapable individuals. That as a result of the matters in this subdivision stated, the operations of such business have sustained losses aggregating, as petitioner is informed and believes, a sum approximately as hereinbefore set forth.
10. That during the administration of such receivers, the current cash assets of the receivership estate have been reduced from approximately Thirteen Million Two Hundred Forty Thousand Five Hundred Fifty-six and 88/100 Dollars ($13,240,556.88) to Eight Million Five Hundred Sixty-two Thousand Nine Hundred Seventy and 87/100 Dollars ($8,562,970.87), due to the incompetency of such receivers, without any commensurate return to the receivership estate.
11. That said Minnesota and Ontario Paper Company has, at all times, expended the major portion of its monies in the Dominion of Canada ; that shortly after Great Britain went off the gold standard, your petitioner, E. W. Backus, urged upon receiver Jaffray the advisability and necessity of transferring funds of said company on deposit in banks of the United States into Canadian Exchange; that said receiver Jaffray wholly disregarded said urgent advice, thereby forfeiting an opportunity to gain a sum of money for said corporation on the favorable resultant rate of exchange in excess of Two Hundred Twenty Thousand Dollars ($220,000.00).
12. That your petitioners allege that receiver Robinson was, and is wholly unqualified by reason of lack of training and experience to administer the complicated affairs and business of this estate; that said Robinson was recommended for said receivership by certain large Eastern banking interests; that such Eastern banking interests represented that Robinson's alleged broad and varied experience justified his appointment as receiver and the payment to him of an annual salary of Seventy-two Thousand Dollars ($72,000.00); that such Eastern banking interests misled the bondholders, the various protective committees, and the court who made such appointment and approved such salary, through creating the impression that receiver Robinson was a man with an exceptional record of administrative ability in management of vast industries, and that he was ideally qualified to act for the estate; that, as a matter of fact, receiver Robinson had no actual experience in receiverships or otherwise, that would qualify him for management of this or any similar enterprise, and that such representations were false in that he had at no time received a salary equal to that allowed him from this estate; that the loss of over Twelve Million Dollars ($12,000,000.00) as hereinbefore set forth sustained under his administration and policies, demonstrates beyond peradventure his total and abject unfitness to administer the affairs of this estate; that the removal of said receivers Robinson and Jaffray is imperative and absolutely essential if the holding of many thousands of bondholders and the interests of creditors are to be preserved; that receiver Robinson has not devoted a fair share of his time in the interest of said estate and has taken two wholly unnecessary trips to Europe paid for by the estate and bondholders thereof.
That your petitioners, upon information and belief, allege that receiver Robinson, conspiring with Eastern bankers and with Eastern competitive paper mill interests, has recently devoted the major portion of his time to a plan of reorganization which your petitioners believe is designed to deliver to said competitive interests, the vast properties of this estate on a basis so completely disproportionate to their actual present market value as will shock public conscience and constitute the most brazen of many unsavory banking transactions witnessed in the past decade; that receiver Jaffray has devoted practically none of his time to affairs of said estate, but has submitted to the will of receiver Robinson apparently without question; that until January 1, 1933, receiver Jaffray was allowed a salary on the basis of Thirty Thousand Dollars ($30,000.00) per annum, which, together with receiver Robinson's salary to said date of Seventy-two Thousand Dollars ($72,000.00) per annum, made a total aggregate of One Hundred Two Thousand Dollars ($102,000.00) per annum salary to said receivers.
That said receivers approved and recommended payment of local attorneys' fees up to January 1, 1933, on a basis of Fifty-four Thousand Dollars ($54,000.00) per annum, and approved and recommended the aggregate sum of Seven Hundred Thousand Dollars ($700,000.00) actually paid for receivers' and attorneys' fees and traveling expenses since the inception of receivership, all of which constitute a gross violation of the trust imposed upon them. = 13. That such receivers have demonstrated, by reason of the matters herein stated, their utter disqualification for the responsibility and management of said estate and, unless removed, will continue to mulct said estate in excessive costs and expenditures, in unnecessary sacrifice and loss of capital assets and in wholly unjustifiable and inexcusable losses to the receivership estate in the active administration of its affairs.
WHEREFORE, and by reason of the matters in this petition stated, petitioners pray that such receivers be cited and required to be and appear before the court at a time and place designated and then and there make answer to the matters alleged in this petition and then and there show cause why their authority as such receivers should not be revoked and why they should not be removed from the office of such receivers and successor or successors appointed to such office.
Petitioners further pray that an appropriate order of reference may be made herein, for the hearing and determination of the matters herein alleged and particularly for a full and complete accounting of the administration of such receivership and disclosure on the part of such receivers of the matters in their petition referred to and for such other and further relief as to the court shall appear just and equitable and consistent with the matters alleged herein.
This petition will be based on the allegations hereinbefore set forth, and the affidavits hereto attached and hereby made a part hereof as though set out herein in full.
(Signed) DAVIS & MICHEL,
Attorneys for Petitioners,
and JOHN H. HOUGEN
and JOHN C. HOLTEN, 1300 Rand Tower, Minneapolis, Minnesota,