# Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson

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United States Supreme Court
390 U.S. 414
Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, Trustee in Bankruptcy, et al.
Certiorari to the United States Court of Appeals for the Fifth Circuit
No. 38. Argued: November 7-8, 1967. --- Decided: March 25, 1968
TMT Trailer Ferry, Inc. (TMT), the debtor in this protracted reorganization proceeding, was incorporated in 1954, and engages in transporting loaded truck trailers and other freight between Florida and Puerto Rico on sea-going barges. TMT incurred substantial debts and losses from the unsuccessful conversion of a Navy LSD by a drydock and repair company (M-S). Between 1954 and 1957 TMT issued more than 4,000,000 shares of common stock, many of which were acquired by insiders at low prices and disposed of to the public in alleged violation of the Securities Act of 1933 at relatively high prices. As a result of these and other transactions TMT became unable to meet its obligations and a reorganization proceeding was stated by an involuntary petition filed against TMT in June 1957. In 1959 the District Court, solely on the basis of documents and records and without a hearing, declared TMT insolvent. It held that the original stockholders had no further interest in the reorganized company, and confirmed a reorganization plan which would have given control of TMT to the holders of preferred ship mortgages on TMT's vessels (the "Caplan mortgage") even though the District Court had questioned, and the trustee (respondent Anderson) had objected to, the validity of the claims. A successor trustee thereafter petitioned in effect that the order confirming the plan be vacated because of an allegedly illegal agreement between the Caplan mortgage holders and M-S. The petitioner Committee appealed, objecting to the trial court's failure to make an investigation and to conduct a hearing on insolvency. The SEC then petitioned the trial court to investigate its claims that the plan was unfair. The parties agreed on an investigation, which respondent Anderson as reinstated trustee conducted. Anderson's investigation concluded that TMT's business had been "wrecked by gross mismanagement" and "unsound expansion," that TMT had substantial causes of action against the principal Caplan mortgage holders for diverting corporate opportunities through flagrant abuse of their control and inside positions, and that the mortgage was "a fraudulent transfer not given for fair consideration." Thereafter the trial court vacated its order confirming the 1959 plan and the Court of Appeals affirmed. After the trial court set aside the 1959 plan, no hearings were held on the trustee's and the SEC's objections to the Caplan mortgage claim. The mortgage was not set aside as a fraudulent transfer, nor was it decided to use the claims against the Caplan mortgage holders as setoffs. The SEC, which contended after its own investigation that there were grounds for disallowing the M-S claims, filed detailed specifications of its objections to those claims based upon M-S' alleged negligence and other factors. The SEC and trustee sought reference of the M-S claims to a master but later the trustee moved for the allowance of the claims on the ground that there was only a "remote" possibility of materially reducing them. Despite his own doubts, and without further investigation, the trial judge ultimately confirmed the M-S claims in full as unsecured claims. In 1962 two new reorganization plans were proposed; the "internal plan," recommended by Anderson, involving issuance of new common stock to creditors and "compromises" of (1) the Caplan mortgage whereby the mortgage holders were to receive in cash what they had put up for the mortgage, plus interest on the principal from the original due date, and (2) the M-S claims whereby they were also allowed in their full amount as unsecured claims, under an arrangement whereby M-S would receive 40% of the reorganized company common stock; and the "cash plan" involving similar "compromises" and selling the debtor's assets for cash to persons unconnected with the company, the cash to be distributed to creditors. The Committee and the SEC objected, inter alia, that TMT's stockholders were excluded from both plans. Following valuation hearings which did not include full testimony about the company's future prospects, the District Court concluded that its going-concern value, based on current earnings, was $2,780,000. Since creditors' claims were almost twice that much, the court found the debtor to be insolvent and excluded TMT's stockholders from participation in the reorganized company. The District Court approved both plans, observing in connection with "compromising" the Caplan mortgage and M-S claims that successful litigation against the claimants "would take possibly years to conclude" and holding the compromises "fair and equitable" under the circumstances. A majority of all classes of creditors accepted the internal plan, which that court confirmed in February 1963. The Court of Appeals remanded the case to the District Court to determine the feasibility of the plan if the Government's nontax claims were given priority, which it held if required. The District Court, after hearings, approved the plan as amended to include an immediate cash payment to the Government and assumed that the Court of Appeals had in effect affirmed its other orders and, refusing to reconsider the Committee's and SEC's contentions with regard to the Caplan mortgage and M-S claims, affirmed the plan, which the creditors had accepted. The Committee again appealed. The Court of Appeals ruled that its earlier decision left open all issues not previously discussed or decided but, finding no abuse of discretion or clear error, refused to remand the case and affirmed all judgments and orders of the District Court, stating that "[t]his... litigation must at long last be brought to an end." Dealing with the District Court's approval of the compromises in five sentences, the Court of Appeals noted that "not a single creditor has ever complained of either compromise."
Held:
    1. The Court of Appeals erred in affirming the District Court's approval of compromises involving substantial recognition of the claims against the debtor filed by the Caplan group and M-S in view of the inadequacy of the record for assessing the fairness of the proposed compromises. Pp. 424-441.
       (a) A bankruptcy judge has the duty of determining that a proposed compromise forming part of a reorganization plan is fair and equitable; he must ascertain all facts necessary to determine the probabilities of success should claims be litigated. P. 424.
       (b) The record here provides a reviewing court with no basis for distinguishing between well-reasoned conclusions of the trial court and mere conclusory language unsupported by evaluation of the facts or analysis of law. P. 434.
       (c) An unfair reorganiztion plan may not be approved by a bankruptcy court even though the vast majority of creditors have approved it. P. 435.
       (d) Approval of compromises is more questionable when the available facts indicate the inadvisability of compromise than when there are no facts pointing either day. P. 436.
       (e) The facts in the record indicate the probable existence of valid and valuable causes of action, and since there were no facts permitting a reasoned judgment that these claims should be compromised as the plan provides, approval of the compromises was not justified. Pp. 438-441.
    2. The District Court erred in relying upon only the debtor's past earnings in determining its value as a going concern. Without having evidence relating to the debtor's future prospects, the court could not assess its going-concern value or properly determine that the debtor was insolvent. Pp. 441-453.
       (a) Whether a reorganization plan excluding junior interests (here stockholders) meets the statutory requirement that the plan be "fair and equitable" depends upon the value of the reorganized company. Since the District Court did not apply the proper valuation standards, its determination of insolvency was improper and the reorganization plan cannot stand. P. 441.
       (b) The valuation of a company undergoing reorganization must include an estimate based on an informed judgment embracing all facts relevant to future earning capacity. P. 442.
       (c) The value of the debtor's business depended "not on the inherent value of its assets but primarily on maintaining a high level of earnings." P. 443.
       (d) The trial judge's steadfast refusal to consider the company's value once it was out of the reorganization proceedings constituted an error which infected his conclusion that the debtor was insolvent. P. 444.
       (e) In the circumstances of this case, which involve a company which had established and increased its share of a highly competitive market despite intense competition and major internal crises, an adequate notion of its going-concern value required looking to the future as well as the past. P. 446.
       (f) The information introduced at the two insolvency hearings was inadequate for even a rough evaluation of TMT's future prospects, a situation which resulted from the trial judge's hostility to evidence concerning the company's future. Pp. 447-451.
364 F. 2d 936, reversed and remanded.
Irwin L. Langbein argued the cause for petitioner. With him on the briefs was Irma S. Mason.
William P. Simmons, Jr., argued the cause and filed a brief for respondent Anderson. M. James Spitzer argued the cause for respondents Shaffer et al. With him on the brief were Ronald J. Offenkrantz and Jackson L. Peters.
David Ferber, by special leave of Court, argued the cause for respondent Securities and Exchange Commission. With him on the briefs were Solicitor General Griswold, Ralph S. Spritzer, Daniel M. Friedman, Philip A. Loomis, Jr., and Paul Gonson.

## Notes

This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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