Source: https://supreme.justia.com/cases/federal/us/317/78/
Timestamp: 2019-04-21 04:17:58+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 317 › Marine Harbor Properties, Inc. v. Manufacturers Trust Co.
Marine Harbor Properties, Inc. v. Manufacturers Trust Co.
1. In exercise of the federal bankruptcy power, Congress may exclude every competing or conflicting proceeding in state or federal tribunals. P. 317 U. S. 83.
Bankruptcy Act, the bankruptcy court may not in such case approve the petition unless it appears that the interests of creditors and stockholders would not be best subserved in the prior proceeding. P. 317 U. S. 83.
3. The party filing a petition under Ch. X while a prior proceeding is pending in a state or federal court has the burden of showing that the interests of creditors and stockholders would not be best subserved in the prior proceeding. P. 317 U. S. 83.
4. When a prior proceeding is pending, a petitioner's showing of "need for relief" under Ch. X, which § 130(7) requires that every petition contain, must demonstrate that at least in some substantial particular the benefits, advantages, or protection which Ch. X affords to creditors or stockholders are unavailable in the prior proceeding. P. 317 U. S. 84.
5. That a debtor was seeking to escape the jurisdiction of a state court to which it had theretofore voluntarily submitted is immaterial in the determination of whether its petition under Ch. X was filed in "good faith" within the meaning of § 146(4). P. 317 U. S. 84.
6. The issue as to the adequacy of the prior proceedings as compared with Ch. X is the same whether the petition is filed by the debtor or by creditors. P. 317 U. S. 85.
7. Whether filed by the debtor or by others, all petitions under Ch. X must show the "need for relief" (§§ 130-131), and the bankruptcy court must be satisfied in every case that the petition has been filed in "good faith" (§§ 141-144). P. 317 U. S. 85.
8. In this case, wherein prior proceedings were pending in a state court and the value of the property of the debtor was less than the amount of a first mortgage indebtedness thereon, held that the debtor, petitioning under Ch. X, had not sustained the burden which was upon it of showing that the interests of creditors and stockholders would not be best subserved in the prior proceedings in the state court. P. 317 U. S. 85.
(a) The rule of full priority of creditors over stockholders, applied in § 77B proceedings, obtains also in proceedings under Ch. X. P. 317 U. S. 85.
(b) It did not sufficiently appear in this case that the stockholders were willing to make a fresh contribution in money or in money's worth in return for a participation reasonably equivalent to their contribution. P. 317 U. S. 85.
them. The full priority rule which obtain under Ch. X protects the rights of senior creditors against dilution either by junior creditors or by equity interests. P. 317 U. S. 86.
(d) It did not sufficiently appear in this case that a state foreclosure proceeding, instituted for and on behalf of first mortgage creditors exclusively, was inadequate, measured by Ch. X standard, to protect their interests. P. 317 U. S. 87.
Certiorari, 315 U.S. 794, to review the reversal of an order of the District Court, 41 F.Supp. 814, approving a petition under Chapter X of the Bankruptcy Act filed by a debtor corporation.
The question in this case is whether the Circuit Court of Appeals was in error in holding that a debtor's petition filed by petitioner under Ch. X of the Bankruptcy Act, 52 Stat. 883, 11 U.S.C. § 501 et seq., was not filed in "good faith."
The debtor's sole asset is an apartment building in New York City which is subject to a first mortgage of $370,000. This mortgage is held by the respondent, Manufacturer's Trust Co. (successor to The Mortgage Corporation of New York) as trustee for certificate holders. There are also junior mortgages and other claims, including an unspecified amount of unsecured indebtedness. Concededly the property of the debtor is worth less than the amount of the first mortgage debt. The first mortgage was originally created in 1931, and was held by Title Guarantee and Trust Co., which issued and sold to the public certificates of participation, guaranteed as to principal and interest by Bond and Mortgage Guarantee Co. The latter company became involved in financial difficulties in 1933, and was taken over by the Superintendent of Insurance of New York for rehabilitation. [Footnote 1] Pursuant to provisions of the Schackno Act (N.Y.Laws 1933, c. 745), the Superintendent of Insurance promulgated in 1934 a plan for the readjustment of the rights of the certificate holders in the mortgage by which the mortgage was extended to December 1, 1937, and the interest reduced. Over two-thirds of the certificate holders consented to the plan, and the debtor joined in the extension agreement. The New York court approved it. In 1935, the New York Mortgage Commission succeeded the Superintendent of Insurance as administrator of certificated bonds and mortgages.
"that this Court, having assumed jurisdiction of this proceeding, shall retain jurisdiction hereof until the complete liquidation of the Trust Estate and the termination of the trust, and the Trustee, or any other interested party herein, may apply at the foot of this Final Order, upon such notice as the Court may direct, for such other and further relief as to the Court may seem just and proper."
"good faith." That motion was denied. 41 F.Supp. 814. The Circuit Court of Appeals reversed, one judge dissenting, 125 F.2d 296. We granted the petition for certiorari because of the importance in the administration of the Bankruptcy Act of the problems involved.
"Without limiting the generality of the meaning of the term 'good faith,' a petition shall be deemed not to be filed in good faith if --"
"(4) a prior proceeding is pending in any court and it appears that the interests of creditors and stockholders would be best subserved in such prior proceeding."
"stop the removal of prior pending cases from other courts where the interests of creditors and stockholders would be better served by retaining and continuing the prior proceedings."
"a need for the machinery of § 77B as an essential in accomplishing a reorganization because other procedures were either unavailable or more cumbersome and expensive"
led courts to find an absence of "good faith," in the sense that no "need for relief" had been established, where 77B was sought to be employed by a debtor as "a mechanism for preserving equities at the expense of creditors." See Report on the Study and Investigation of the Work, Activities, Personnel, and Functions of Protective and Reorganization Committees, Securities and Exchange Commission, Pt. VIII, p. 94 (1940).
In view of that history, it seems clear that, when a prior proceeding is pending, a petitioner's showing of "need for relief" under Ch. X, required to be contained in every petition by the express provisions of § 130(7), must demonstrate that, at least in some substantial particular, the prior proceedings withhold or deny creditors or stockholders benefits, advantages, or protection which Ch. X affords. In absence of such a showing, the "need for relief" has not been established, and the District Court is not enabled to make an informed judgment on the "good faith" issue.
under Ch. X. That the desire of the petitioner to escape the prior proceedings is immaterial to that inquiry is supported not only by the language of § 146(4), but also by the fact that § 256 expressly sanctions the filing of petitions under Ch. X although prior proceedings are pending. To disqualify a petitioner under Ch. X merely because he had in some way participated in the prior proceeding would effect a substantial impairment of § 146(4), since it would be the exception, rather than the rule, where both the debtor and the creditors had not taken some part in the prior proceedings. Furthermore, the issue as to the adequacy of the prior proceedings as compared with Ch. X, is the same whether the petition is filed by creditors or by the debtor. All petitions, whether filed by the debtor or by others, must show the "need for relief," §§ 130, 131, and, in every case, the bankruptcy court must be satisfied that the petition has been filed in "good faith." §§ 141-144.
that the equity owners desire to make a contribution on that basis and that, unless they are allowed to do it under Ch. X, they will be barred. All that the record shows is an affidavit by one Silverman that, "if the creditors desire liquidation of their claims on the basis of present actual values, rather than on the face amount of their claims," $50,000 in cash could be raised. Ch. X would not permit such a dilution of creditors' interests. Hence, such a showing does not establish on behalf of the stockholders that "need for relief" which § 130(7), read in light of § 146(4), requires. In fact, the approval of the petition on that ground would be giving the equity owners a nuisance value wholly unjustified by the reorganization standards which are incorporated into Ch. X.
Lumber Products Co., supra, p. 308 U. S. 119, note 14. That rule protects the rights of senior creditors against dilution either by junior creditors or by equity interests. See id., p. 308 U. S. 123; Consolidated Rock Products Co. v. Du Bois, 312 U. S. 510, 312 U. S. 525-526, 312 U. S. 529-530.
that assets subject to the payment of the certificates are being neglected. Thus, it is not shown that the claim against the guarantee company is not being pursued, or that its collection could better be handled in proceedings under Ch. X. There is no showing that the machinery employed or available in the state foreclosure proceeding to safeguard and protect the interests of those creditors after the sale is not comparable to that contained in Ch. X for the consummation of plans which are not only fair but feasible. § 221(2). In view of the burden on a petitioner to make the showing required by § 130(7) and § 146(4), the bankruptcy court is not warranted in assuming, without more, that a state foreclosure proceeding instituted for and on behalf of the first mortgage creditors exclusively is inadequate, measured by Ch. X standards, to protect their interests. The contrary course would result in Ch. X's making greater inroads on prior proceedings than § 130(7) and § 146(4) indicate was the purpose.
See generally Report of Commissioner George W. Alger to the Governor of the New York, Oct. 5, 1934.
On the activities of the Commission, see Annual Report 1939, N.Y.Leg.Doc., No. 94.

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 § 130
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 § 77
 § 501
 § 77
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 § 256
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 § 221
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