Source: https://supreme.justia.com/cases/federal/us/326/536/
Timestamp: 2019-04-19 02:40:19+00:00

Document:
of bondholders had approved the plan, that the irrigation district was unable to meet its debts as they matured, that the plan was fair, equitable, and for the best interests of creditors, and that it did not discriminate unfairly in favor of any creditor, approved the plan. Mason, who owned some of the old bonds and had opposed the plan, appealed, contending that, since he and the RFC were put in the same class, they should be treated alike, and he should receive 4 percent refunding bonds, instead of 52.521 cents in cash on each dollar of principal. There was no showing that the full value of his claim was more than 52.521 cents on the dollar.
Held: that this Court is unable to say that the bankruptcy court was not warranted in finding that the cash offer was fair and equitable. P. 326 U. S. 546.
2. The mere fact that the RFC holds the vast majority of all the bonds and is in a dominant position in the reorganization does not mean that it is entitled to preferred treatment. P. 326 U. S. 541.
3. However, those who put new money into a distressed enterprise may be given preferred treatment. Pp. 326 U. S. 541, 326 U. S. 543.
4. Congress intended the RFC to be treated in such situations as a creditor. P. 326 U. S. 542.
5. The securities acquired by the RFC pursuant to the plan of composition are not extinguished, and may be computed in determining the percentage of consenting creditors necessary for the filing of a petition under Chapter IX. P. 326 U. S. 542.
6. Since there was no showing that 52.521 cents in cash was not as advantageous as 52.521 cents in refunding bonds, it is impossible for this Court to say that, although a difference in treatment was warranted, any discrimination in favor of the RFC was so great as to be unfair. P. 326 U. S. 543.
7. While the provision of 11 U.S.C. § 403(b) to the effect that holders of all claims payable without preference from the same source shall be put in one class states the general rule, the bankruptcy court has the power to make a different classification where inequitable results would otherwise obtain. P. 326 U. S. 544.
8. Under § 403(j), the securities acquired by the RFC may be included in the percentage of consenting securities necessary for the filing of a petition under Chapter IX. P. 326 U. S. 544.
9. Section 403(d), requiring approval by creditors "holding at least two-thirds of the aggregate amount of claims of all classes," is construed to mean two-thirds of the total amount of all claims in all classes, and not two-thirds of each class. P. 326 U. S. 544.
would be thwarted or impeded if Chapter IX were given a construction which placed the fate of composition plans in the hands of minority nonconsenting bondholders. P. 326 U. S. 545.
11. Provision "for the protection" of the claims of nonassenting creditors, as provided in § 403(d), could be made by leaving them undisturbed; but, if the nonassenting creditors had the option to come in under the plan or to retain their old securities, the debtor would be unable to get the relief which Chapter IX affords, or could do so only on such terms as a minority dictated. P. 326 U. S. 545.
12. Assuming that provision "for the protection" of the claims of nonassenting creditors could be made under § 403(d) in ways other than by leaving the claims undisturbed, there would seem to be no reason why payment in cash of the full value of their claims would not be adequate. P. 326 U. S. 546.
Certiorari, post, p. 704, to review affirmance of a decree approving a plan of composition of the debts of an irrigation district under Chapter IX of the Bankruptcy Act -- limited to the question whether it was proper to approve a plan which treated petitioner differently from the Reconstruction Finance Corporation.
Respondent is organized under the laws of the California, and located in the County of Butte of that State. It experienced financial difficulties in the 1930's. It had outstanding $476,000 principal amount of bonds bearing interest at the rate of 6 percent. Being unable to collect taxes sufficient to service the bonds, it tried to work out a debt readjustment program. It applied for a loan from the Reconstruction Finance Corporation. A loan of $252,500 was arranged, provided all the holders of the outstanding bonds agreed to the refinancing program.
the old bonds so acquired remained obligations of respondent, were held by the Reconstruction Finance Corporation as security for its advances, and are to be exchanged under the plan for 4 percent refunding bonds. The Reconstruction Finance Corporation, as holder of about 92 percent of the bonds, approved the plan prior to the filing of the petition under Ch. IX.
the Circuit Courts of Appeals, [Footnote 7] limited to the question whether it was proper to approve a plan which treated petitioner differently from the Reconstruction Finance Corporation.
Petitioner argues that, since he and the Reconstruction Finance Corporation were put in the same class, the rule of "equality between creditors" applicable in bankruptcy proceedings, Clarke v. Rogers, 228 U. S. 534, 228 U. S. 548, required that they be treated alike. In other words, he contends that, instead of being required to take 52.521 cents in cash on each dollar of principal, he should receive 4 percent refunding bonds.
to their contribution. Case v. Los Angeles Lumber Products Co., 308 U. S. 106, 308 U. S. 117, 308 U. S. 121-122, and cases cited; Ecker v. Western Pacific R. Corp., 318 U. S. 448, 318 U. S. 486-487. That rule is based on practical necessities. Without the inducement, new money could not be obtained.
"Any agency of the United States holding securities acquired pursuant to a contract with any petitioner under this chapter shall be deemed a creditor in the amount of the full face value thereof."
percentage of consenting creditors necessary for the filing of a petition under Ch. IX. [Footnote 10] If the Act were construed as requiring the Reconstruction Finance Corporation in situations like the present to be treated as every other creditor of the same class, the fact that it had underwritten the whole refinancing program would be considered irrelevant. But, as we have seen, he who furnishes new capital to a distressed enterprise has long been accorded preferred treatment. The Reconstruction Finance Corporation contributes something that Mason does not. It furnishes the underwriting which makes the refinancing possible. It gives something of value for the preferred treatment which it receives. The other security holders of the same class give nothing new. That difference warrants a difference in treatment. Case v. Los Angeles Lumber Products Co., supra; Ecker v. Western Pacific R. Corp., supra. The plan, of course, must be fair and equitable, and it must "not discriminate unfairly" in favor of any creditor. § 403(e). A secret advantage would not meet that test. American United Ins. Co. v. Avon Park, supra. But here, there was full disclosure to the security holders and to the court. Petitioner receives 52.521 cents on each dollar of principal amount of his bonds. The Reconstruction Finance Corporation receives new and refunding bonds in the face amount of its cash advances. It is, of course, possible that 52.521 cents in cash may not be as advantageous an offer as 52.521 cents in new and refunding bonds. But there is no showing that it is not. Hence, it is impossible for us to say that, although a difference in treatment was warranted, any discrimination in favor of the Reconstruction Finance Corporation was so great as to be unfair.
A different question arises when we come to the classification of creditors for voting on a plan of composition.
creditors could be made by leaving them undisturbed. But the purpose of Ch. IX is to provide taxing agencies with a method of scaling down their debt structures and reducing their debt service requirements when the need for relief is shown. If the nonassenting creditors had the option to come in under the plan or to retain their old securities, the debtor would be unable to get the relief which Ch. IX affords, or could do so only on such terms as the minority dictated. The other alternative would be to abandon this type of refinancing. But, as we have seen, it has statutory sanction. It is said, however, that provision "for the protection" of the claims of nonassenting creditors could be made in ways other than leaving the claims undisturbed. If, arguendo, we assume that is true, we see no reason why payment in cash of the full value of the claims would not be adequate. That is permissible in connection with reorganizations under Ch. X, 52 Stat. 840, 11 U.S.C. § 616(7). It is indeed the historic method of dealing with dissenters under plans of reorganization. Case v. Los Angeles Lumber Products Co., supra, p. 308 U. S. 121, note 15. No reason is apparent why, under our assumption, the same could not be done under Ch. IX. Yet, even in that view, the present plan was properly confirmed. For there is no showing whatsoever that the full value of Mason's claims is more than 52.521 cents on the dollar which he receives in cash. The District Court, indeed, found that the cash offer was fair and equitable, and we are unable to say that that finding was not warranted.
"creditors of the petitioner owning not less than 51 percentum in amount of the securities affected by the plan (excluding, however, any such securities owned, held, or controlled by the petitioner), have accepted it in writing."
"the holders of all claims, regardless of the manner in which they are evidenced, which are payable without preference out of funds derived from the same source or sources shall be of one class. The holders of claims for the payment of which specific property or revenues are pledged, or which are otherwise given preference as provided by law, shall accordingly constitute a separate class or classes of creditors."
Sec. 403(d) provides that a plan of composition shall not be confirmed, with exceptions not material here, "until it has been accepted in writing, by or on behalf of creditors holding at least two-thirds of the aggregate amount of claims of all classes affected" by the plan, excluding "claims owned, held, or controlled by the petitioner."
Sec. 403(a) requires the petition to state that the petitioner is "insolvent or unable to meet its debts as they mature." Among the findings required by § 403(e) for confirmation of a plan is that it "complies with the provisions of this chapter."
That finding is required by § 403(e).
Texas v. Tabasco Cons. Ind. School Dist., 132 F.2d 62, 133 F.2d 196, decided by the Fifth Circuit Court of Appeals, is to be contrasted to the decision below and to West Coast Life Ins. Co. v. Merced Irrig. Dist., 114 F.2d 654, decided by the Ninth Circuit Court of Appeals, and also to Luehrmann v. Drainage Dist., 104 F.2d 696, decided by the Eighth Circuit Court of Appeals.
"The partial completion or execution of any plan of composition as outlined in any petition filed under the terms of this title by the exchange of new evidences of indebtedness under the plan for evidences of indebtedness covered by the plan, whether such partial completion or execution of such plan of composition occurred before or after the filing of said petition, shall not be construed as limiting or prohibiting the effect of this title, and the written consent of the holders of any securities outstanding as the result of any such partial completion or execution of any plan of composition shall be included as consenting creditors to such plan of composition in determining the percentage of securities affected by such plan of composition."
For a discussion of the history of § 403(j), see West Coast Life Ins. Co. v. Merced Irrig. Dist., supra, note 7 pp. 667-668.
That the Reconstruction Finance Corporation would play an important role in these refinancing programs was in the forefront when this legislation was before Congress. See H.Rep. No. 517, supra, p. 4; 81 Cong.Rec. 6322.
"The force of the bill is directed against that minority present in every effort of debtors and creditors to bring the total of amounts payable within the ability of the debtor to pay. It is the minority who try to take advantage of the general desire to settle to compel an advantage to themselves in order to remove their selfishly interposed obstruction. They are hold-up men operating within the law."
81 Cong.Rec. 6313. The same view was expressed by Senator Pepper, who managed the legislation on the floor of the Senate. 81 Cong.Rec. 8543.
acquired the bonds of the debtor as part of an arrangement which made possible financing of the plan of composition. With this, I agree. But I find nothing in Chapter IX which, while permitting the RFC to be considered a preferred creditor for purposes of distribution, allows it to be classified among ordinary creditors for purposes of voting. Nor do considerations of policy require that the RFC be given such a two-faced character. It is suggested that, if the votes of a preferred creditor in the position of the RFC could not be counted with the votes of the ordinary creditors, that class might not furnish the necessary two-thirds of the aggregate amount of claims of that class. It must be remembered, however, that the mere failure of a class like that of ordinary creditors -- e.g., those having no preferred position in the scheme for distribution -- to accept a plan of composition does not prove that its resistance is improperly or unfairly recalcitrant. Cf. American Insurance Co. v. Avon Park, 311 U. S. 138, 311 U. S. 148. And recognition that bondholders may exercise their statutory rights as common creditors not to assent does not, of course, make of them a separate class of nonassenting bondholders with a veto power over the plan. But, if the recalcitrancy does represent a "dog in the manger" attitude, Chapter IX would seem to have provided for the contingency. According to § 83(d) of the Act, 50 Stat. 653, 657, 11 U.S.C. § 403(d), a plan might be approved without the otherwise necessary vote not only where the claims of the creditors "are not affected by the plan," but also where "provision is made in the plan for the protection of the interest, claims, or lien of such creditors or class of creditors." But, though the bankruptcy court has the power of dispensing with the need of an approving vote by a class of creditors, by protecting that class' interests, it is not available where the court has not, in fact, determined, as it has not in this case, that the dissent of that class was an abusive exercise of their right to veto a plan.
the face value of the same bonds, get different equivalents and are, as to the only thing that matters, not bound together by the same ties, but separated by antagonistic interests. To put these groups with such antagonistic interests into the same class is to contradict the very notion of a class. Reason rejects such classification, and nothing in the statute indicates that Congress intended to define a class as a group with inconsistent interests.
"(3) shall, with respect to creditors whose acceptance is not required under the provisions of subdivision (e) of this section if their interests, claims, or liens, is dealt with by the manner provided in this clause (3), provide adequate protection for the realization by them of the value of their interests, claims, or liens, if the property or revenue affected by such interests, claims, or liens is dealt with by the plan, either as provided in the plan, (a) by the transfer or sale of such property subject to such interests, claims, or liens, or such property shall continue to be held by the taxing district subject to such interests, claims, or liens, or (b) by a sale free of such interests, claims, or liens at not less than a fair upset price in the transfer of such interests, claims, or liens, to the proceeds of such sale, or (c) by appraisal and payment in cash of the value of such interests, claims, or liens, or at the objecting creditors' election, of the securities allotted to such interests, claims, or liens under the plan, if any shall be so allotted, or (d) by such method as will, in the opinion of the judge, under and consistent with the circumstances of the particular case equitably and fairly provide such protection: Provided, That, if provision therefor is made in the plan, the judge may require objecting creditors to accept, in lieu of any cash payment under this subdivision, such security, of any kind, in payment of their interests, claims, or liens as shall, in the opinion of the judge, upon the consummation of the plan, represent the fair and equitable shares of such creditors in the property and revenue of the taxing district available for the payment of its debts. . . ."
H.R. 5267, 73rd Cong., 1st Sess. (1933) § 81(b)(3), as it appears in the Hearings on that Bill at 17.

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