Source: https://www.legalcrystal.com/case/99093/general-stores-corp-vs-shlensky
Timestamp: 2019-04-23 10:52:46+00:00

Document:
Petitioner instituted proceedings under Chapter XI of the Bankruptcy Act, alleging inability to pay its debts as they matured. It had been converted from an operating company to a holding company with the shares of the subsidiaries pledged to creditors; and it had heavy short-term loans. It had no publicly held debts, but had over 2,000,000 shares of common stock listed on the American Stock Exchange and held by over 7,000 shareholders. A shareholder owning 3,000 shares, and the Securities and Exchange Commission, moved that the proceedings be dismissed unless the petition be amended to comply with Chapter X of the Bankruptcy Act.
Held: in deciding that proceedings under Chapter X, rather than Chapter XI, were appropriate, the discretion exercised by the District Court and the Court of Appeals did not transcend allowable bounds, and their judgment is affirmed. Pp. 350 U. S. 463 -468.
(a) In determining whether Chapter X or Chapter XI affords the appropriate remedy, the question is whether, on the facts of the case, the formulation of a plan under the auspices of disinterested trustees, as assured by Chapter X and the other protective provisions of that Chapter, would better serve the public and private interests concerned, including those of the debtor, than the simpler arrangement under Chapter XI. Pp. 350 U. S. 465 -466.
(b) The essential difference in the choice between Chapter X and Chapter XI is not between the small company and the large company, nor in the nature of the capital structure, but between the needs to be served. Pp. 350 U. S. 466 -467.
(c) The record in this case supports the view of the two lower courts that petitioner may need a more pervasive reorganization than is possible under Chapter XI. Pp. 350 U. S. 467 -468.
divided vote. 222 F.2d 234. The case is here on certiorari. 350 U.S. 809.
Petitioner, formerly known as D. A. Schulte, Inc., has operated for some years a chain of stores for the sale of tobacco and accessory products. Petitioner has also had a chain of difficulties. Its financial problems go back at least to 1936, when it filed a petition for reorganization under former § 77B of the Bankruptcy Act. After its reorganization was completed in 1940, it had a few years of prosperity followed by a postwar decline in volume of business, a rise in costs, and substantial losses. During these years, $600,000 cash was raised by the sale of stock, and a new management installed with a view to converting some existing stores into candy, food, and drink establishments. That idea was abandoned, and the proceeds of the stock sale were used for general corporate purposes. It was then decided to liquidate the existing specialty stores and to have petitioner acquire the stock of two existing retail drugstore chains -- Stineway Drug Company and Ford Hopkins Company. The Stineway stock was acquired for $1,220,320, petitioner borrowing $870,000 from Stineway for the purpose. Later, petitioner borrowed an additional $440,000 from Stineway to help make the down payment on the Ford Hopkins stock, making a total indebtedness to Stineway of $1,310,000, represented by two non-interest-bearing notes. The Ford Hopkins stock was acquired for $2,800,000, the down payment being $735,000, the balance being payable in a yearly amount of $200,000 with 4 per cent interest and secured by the Stineway and Ford Hopkins stock.
While the two drug chains were being acquired, petitioner started the liquidation of its own stores, a process that was completed under c. XI of the Bankruptcy Act. The disposition of those stores involved the rejection of numerous leases and the creation of claims of landlords against petitioner.
The arrangement proposed by petitioner under c. XI would extend its unsecured obligations and provide for a 20 per cent payment on confirmation of the plan and 20 per cent annually for 4 years thereafter. The claims listed were the $1,310,000 debt to Stineway and $525,000 unsecured claims, exclusive of claims by landlords. We were advised on oral argument that, during the course of the c. XI proceedings, it was decided that this offer was not feasible, and that the unsecured creditors are now offered the equivalent of 40 per cent of their claims in full satisfaction.
States Realty case presented a rather simple problem. There, one class of creditors was being asked to make sacrifices, while the position of the stockholders remained unimpaired ( id., 310 U. S. 453 -454, 310 U. S. 456 ), contrary to the teachings of Case v. Los Angeles Lumber Products Co., 308 U. S. 106 . Moreover, the history of the company raised a serious question "whether any fair and equitable arrangement in the best interest of creditors" could be effected "without some rearrangement of its capital structure." Id., 310 U. S. 456 . For those reasons, c. X was held to offer the appropriate relief.
The character of the debtor is not the controlling consideration in a choice between c. X and c. XI. Nor is the nature of the capital structure. It may well be that, in most cases where the debtor's securities are publicly held, c. X will afford the more appropriate remedy. But that is not necessarily so. A large company with publicly held securities may have as much need for a simple composition of unsecured debts as a smaller company. And there is no reason we can see why c. XI may not serve that end. The essential difference is not between the small company and the large company, but between the needs to be served.
Readjustment of all or a part of the debts of an insolvent company without sacrifice by the stockholders may violate the fundamental principle of a fair and equitable plan, see Case v. Los Angeles Lumber Products Co., supra, as the United States Realty Co. case emphasizes.
Readjustment of the debt structure of a company, without more, may be inadequate unless there is also an accounting by the management for misdeeds which caused the debacle.
Readjustment of the debts may be a minor problem compared with the need for new management. Without a new management, today's readjustment may be a temporary moratorium before a major collapse.
These are typical instances where c. X affords a more adequate remedy than c. XI. The appointment of a disinterested trustee, § 156, his broad powers of investigation, § 167, the role of the trustee in preparing a plan, § 169, the duty of the Securities and Exchange Commission to render an advisory report on the plan, § 172, the requirement that the plan be "fair and equitable, and feasible," §§ 174, 221, the power to include the subsidiaries, Stineway and Ford Hopkins, in the reorganization of petitioner, § 129 -- these are controls which c. X gives to the entire community of interest in the company being reorganized, and which are lacking under c. XI. These controls are essential both where a complicated debt structure must be readjusted and where a sound discretion indicates either that there must be an accounting from the management or that a new management is necessary. Those conditions only illustrate the need for c. X. There may be others equally compelling.
a merger of the subsidiaries with the holding company, and, second, a funding of the unsecured debt and a realignment of debt and stock so as to give a balanced capital structure. The old business has been liquidated, and the new one launched with heavy borrowings on a short-term basis. If the new one is to succeed, it may well need a more thoroughgoing capital readjustment than is possible under c. XI. That was the view of two lower courts. We could reverse them only if their exercise of discretion transcended the allowable bounds. We cannot say that it does. Rather, we think that the lower courts took a fair reading of c. X and the functions it serves and reasonably concluded that this business needed a more pervasive reorganization than is available under c. XI.
representing two-tenths of one percent of the common stock of the debtor. There is no suggestion of fraud or other improper behavior on the part of the management of the debtor, which has suffered business misadventure apparently attributable to changes in consumer response to the type of business conducted by the original Schulte tobacco stores. The District Court dismissed the petition under Chapter XI, with leave to the debtor to meet the requirements of reorganization under Chapter X. * 129 F.Supp. 801. A divided Court of Appeals sustained the District Court, 222 F.2d 234, and its judgment is here affirmed.
The essence of this Court's decision is that the District Court acted as it did in the exercise of allowable discretion. But, if the exercise of discretion by the District Court was guided by inappropriate standards, its exercise of discretion is left without a supporting basis, and cannot stand. Such, I believe, is the situation here.
of corporations with complicated debt structures and many stockholders, the other to composition of debts of small individual business and corporations with few stockholders. . . ."
310 U. S. 310 U.S. 434, 310 U. S. 447 .
"does not mean that there is no scope for application of that chapter in many cases where the debtor's financial business and corporate structure differ from respondent's."
310 U.S. at 310 U. S. 454 .
court under one chapter rather than the other."
310 U.S. at 310 U. S. 447 .
"a corporation with 7,000 holders of two and a quarter million shares of stock listed on the American Stock Exchange and recently selling at under two dollars a share."
129 F.Supp. 801, 805. Such a basis for judgment disregards the informal, efficient, and economical procedure for financial readjustments of a corporation with its creditors where no change in the capital structure is involved, where no charge of impropriety in corporate management is intimated, where all the creditors urge that the proposed arrangement is for their "best interests," § 366 of the Chandler Act, 52 Stat. 840, 911, and where a refusal to entertain the arrangement would work real hardship to 174 wage claimants.
Cong., 2d Sess. 21.) Even if the "fair and equitable" rule were still in Chapter XI, there is nothing in the facts of this case to show that the arrangement would not satisfy that requirement, for we have noted that the plan of arrangement here, unlike the situation in Realty, leaves untouched the position of the security holders. Since the Realty decision to no small degree turned on the enforcement of the "fair and equitable" rule, it is noteworthy that no consideration was given by the lower courts, and none is given by this Court, to the significance of this amendment by Congress. One would suppose that the elimination, in 1952, of this drastic requirement is the clearest possible indication that Chapter XI should be given a more generous scope than even the narrowest reading of Realty might suggest. Chapter XI should not be shriveled in its availability.
* At the time of the realty decision, if a proceeding was found to have been improperly brought under Chapter XI, it had to be dismissed, and a proceeding started anew under Chapter X. Section 20 of the Act of July 7, 1952, amended the law so as to allow a transfer of a Chapter XI proceeding, if improperly filed thereunder, to Chapter X. 66 Stat. 420, 432, and see H.R.Rep. No. 2320, 82d Cong., 2d Sess. 19.

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 § 156
 § 167
 § 169
 § 172
 § 129
 § 366