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Matched Legal Cases: ['§ 77', '§ 77', '§ 5', '§ 5', '§ 77', '§ 77', '§ 77', '§ 5', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 2283', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 265', '§ 2283', '§ 77']

CALLAWAY V. BENTON, 336 U. S. 132 (1949) - US SUPREME COURT DECISIONS ON-LINE
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CALLAWAY V. BENTON, 336 U. S. 132 (1949)
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(c) The Bankruptcy Act does not give the Commission or the court the right to require acceptance by a lessor not in reorganization chanroblesvirtualawlibrary
of an offer for the purchase of its property, and no such power was asserted by the Commission in this case. P. 336 U. S. 141.
A federal district court having jurisdiction of a proceeding to reorganize a railroad under § 77 of the Bankruptcy Act enjoined further proceedings in a state court to determine the rights inter sese under state law of stockholders of another railroad not in reorganization to sell to the railroad being reorganized certain property leased to and operated by the latter. The Court of Appeals reversed. 165 F.2d 877. This Court granted certiorari. 333 U.S. 853. Affirmed, p. 336 U. S. 151. chanroblesvirtualawlibrary
Under the plan of reorganization of the Central promulgated by the Interstate Commerce Commission and approved by the district court, South Western is given the alternative of selling its property to the reorganized company in return for a fixed amount of bonds of the latter or of having the lease disaffirmed by the debtor, and its property returned. [Footnote 1] South Western appeared specially chanroblesvirtualawlibrary
in the reorganization proceedings and asked that its lease be adopted by the reorganized company, but, on the basis of studies and estimates not now open to challenge, the Commission rejected the proposal and found that the amount offered for its properties appears "fair and equitable, and to equal the value of the transportation property, and [is] approved." [Footnote 2]
Following Commission and court approval of the plan, South Western's officers, reversing their previous stand, urged acceptance of the offer by its stockholders and signified their intention of conveying the company's property to the Central if a majority of the stockholders voted to accept. Thereupon, the respondents, who are individual stockholders of South Western, brought an action in the Superior Court of Bibb County, Georgia, where South Western's principal office is located, asking for an injunction against South Western, its officers and directors, restraining them from certifying the company's acceptance of the offer to the Interstate Commerce Commission or from selling the railroad's property to the reorganized debtor if, upon a vote of the stockholders, a "mere majority" of the stock was voted in favor of the plan. The basis of the petition for injunction was the contention that, under the laws of Georgia, where South Western was incorporated, chanroblesvirtualawlibrary
Before a decision was reached in the state court action, a meeting of South Western's stockholders was held at which the offer of purchase incorporated in the Central's plan of reorganization was considered. 30,137 shares were voted in favor of acceptance against 9,057 shares favoring rejection. Petitioner, acting as Trustee of the Central, which was not a party to the state court suit, then filed a petition in the bankruptcy court asking that respondents and other stockholders of South Western be enjoined from further prosecution of the state court action, and a temporary restraining order was entered as prayed. Thereupon, the state court, of its own motion, entered an interlocutory injunction restraining the officers and directors of South Western from selling its property, on the ground that such a sale, under Georgia law, requires unanimous consent of the stockholders. Petitioner then amended his petition in the bankruptcy court by bringing to its attention the injunctive order of the state court, and, after holding hearings, the federal district court granted a permanent injunction restraining further prosecution of the state action, and declared the state court's temporary injunction null and void as in excess of its jurisdiction. Upon appeal, the Court of Appeals for the Fifth Circuit, one judge dissenting, reversed the order of the district court, 165 F.2d 877. We granted the petition for a writ of certiorari [Footnote 3] because of the conflict between state and federal authority and the importance of the question in the administration of the Bankruptcy Act.
First. The district court's injunction was based primarily on the premise that the plan of reorganization requires the inclusion of South Western's lines within the chanroblesvirtualawlibrary
Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., 318 U. S. 523, 318 U. S. 550 (1943). The plan itself recites that the leased lines are to be acquired only "if they can be acquired on the chanroblesvirtualawlibrary
terms hereinafter set forth." [Footnote 4] Otherwise, the lease is to be disaffirmed, and the property returned to the lessor. In addition, the record is replete with statements by the Commission, the court, and the parties that South Western's stockholders are to have the choice open to any offeree: an unfettered right to accept or reject. [Footnote 5]
Under these circumstances, we can see no reason why the ordinary incidents of a sale of the assets of a corporation should not be applicable. One of the most important of these is, of course, the question of the proportion of a corporation's stock which must be voted in favor of accepting the offer of purchase in order to make its acceptance effective. Since, as the district court held, this would ordinarily be a question of Georgia law, we believe that substitution of any other rule of law is erroneous. [Footnote 6] chanroblesvirtualawlibrary
But neither the two-thirds vote provision nor the so-called "cram-down" provision applies to a lessor not in reorganization or its stockholders. They apply to "creditors of each class whose claims have been filed and allowed in accordance with the requirements of subsection c of this section," which obviously does not include a lessor offeree. [Footnote 7] And, although South Western is a "creditor" under the specific terms of § 77(b), its stockholders, individually, are not.
The district court sought to find a federal rule permitting acceptance by a simple majority vote of the shareholders in the provisions of § 5(11) of the Interstate Commerce Act. [Footnote 8] But that section relates to voluntary mergers, chanroblesvirtualawlibrary
not to the purchase of a leased line as part of a plan of reorganization. The Commission can undoubtedly carry on § 5 proceedings simultaneously with § 77 reorganization proceedings, see United States v. Lowden, 308 U. S. 225 (1939), but that procedure was not followed in this case. The Commission preferred, instead, to carry out the consolidation under the authority of § 77(b)(5) of the Bankruptcy Act, which provides that the plan of reorganization may include "the merger or consolidation of the debtor with another corporation or corporations." That power flows from a different source than the power over consolidations under the Interstate Commerce Act. While some of the findings required of the Commission under the two Acts are similar, and § 77(f) provides that consolidation and merger of the debtor's property shall not be inconsistent with the provisions and purposes of chapter 1 of the Interstate Commerce Act, their procedural and jurisdictional requirements do not overlap. [Footnote 9] It may be noted, in addition, that § 5(11) contains a proviso that the majority vote provision shall not apply if "a different vote is required under applicable State law, in which case the number so required shall assent." Whether that proviso is operative when a state's law requires unanimous consent of the shareholders is a question we need not decide.
Nothing that we have said derogates in any way from decisions of this Court upholding the power of the Interstate Commerce Commission, in the exercise of its statutory obligations, to override state laws interposing chanroblesvirtualawlibrary
obstacles in the path of otherwise lawful plans of reorganization. We have recently reaffirmed that power in cases arising under the Interstate Commerce Act. [Footnote 10] Nor is the ambit of federal power less broad in cases arising under the bankruptcy laws of the United States. Section 77(f) of the Bankruptcy Act specifically provides that the plan of reorganization shall be put into effect "the laws of any State or the decision or order of any State authority to the contrary notwithstanding." The statute does not, however, give the Commission or court the right to require acceptance by a lessor not in reorganization of an offer for the purchase of its property, and no such power has been asserted by the Commission in this case. The plan of reorganization in effect hands South Western a contract of sale. Whether or not South Western signs the contract must depend not only upon its business judgment, but also upon the charter of the company and the laws of the state of its incorporation. There is therefore no occasion to override state law. The plan implicitly accepts it as controlling. The fact that the law may make acceptance of the offer less likely than would be the case if the offeree were incorporated elsewhere does not change the picture. We do not believe that Congress intended to leave to individual judges the question of whether state laws should be accepted or disregarded, Palmer v. Massachusetts, 308 U. S. 79 (1939), or to make the criterion to be applied the effect of the law upon the prospects of acceptance by the offeree.
Second. The district court further held that, even if Georgia law governs the question of the authority of South Western's officers to sell its properties, the bankruptcy court has exclusive jurisdiction to decide the state chanroblesvirtualawlibrary
law question. We have held that a court of bankruptcy has exclusive and nondelegable control over the administration of an estate in its possession. Thompson v. Magnolia Petroleum Co., 309 U. S. 478 (1940); Isaacs v. Hobbs Tie & Timber Co., 282 U. S. 734 (1931). There can be no question, however, that Congress did not give the bankruptcy court exclusive jurisdiction over all controversies that in some way affect the debtor's estate. [Footnote 11] One exception is found in the express language of the statute. [Footnote 12] What it did give is exclusive jurisdiction of the debtor and its property wherever located. § 77(a). The interest held by the debtor in South Western's lines was a leasehold estate. Such an estate is the debtor's "property" within the meaning of the Act. Any controversy involving that estate would have been within the exclusive jurisdiction of the bankruptcy court.
Here, however, the question involves not the debtor's leasehold, but the reversion in fee held by South Western as lessor. South Western was not in reorganization jointly with its lessee, nor could it have been reorganized in the Central's proceedings. [Footnote 13] The controversy which chanroblesvirtualawlibrary
In Ex parte Baldwin, 291 U. S. 610, at 291 U. S. 615 (1934), we said:
In the Baldwin case, this Court upheld the bankruptcy court's exclusive jurisdiction under § 77 to adjudicate the question of forfeiture by the debtor of an easement of right of way -- clearly a part of the property of the debtor of which it claimed ownership. See Thompson v. Magnolia Petroleum Co., supra. In Warren v. Palmer, 310 U. S. 132 (1940), where the debtor under § 77, the New Haven Railroad, was lessee of property, but had rejected the lease and was operating the property for the account of the lessor under § 77(c)(6), we held that the bankruptcy court had exclusive jurisdiction to fix the amount of the deficit resulting from such operation, and to declare it a chanroblesvirtualawlibrary
Equally clear, however, is the fact that the internal management of the lessor is not properly subject to the court's control. The anomaly of petitioner's position is demonstrated by the facts of the case just discussed. The New Haven reorganization was proceeding in a Connecticut federal district court, while the lessor railroad, the Boston & Providence, was in reorganization under § 77 in a Massachusetts district court. The plan of reorganization of the New Haven, like the Central's plan in this case, contemplated the purchase of the lessor's property. Since the Boston & Providence reorganization court had exclusive jurisdiction of its property, it can hardly be contended that the New Haven reorganization court could assume exclusive jurisdiction to decide questions arising, for example, between different classes of creditors of the Boston & Providence as to whether the New Haven's offer should be accepted. Such a result would be incompatible with the Massachusetts district court's exclusive jurisdiction over the property of the Boston & Providence under § 77(a). [Footnote 14] Insofar as the power of the court reorganizing chanroblesvirtualawlibrary
Further support for this position is found in our decision in Group of Institutional Investors v. Chicago, M. St. P. & P. R. Co., supra. The Milwaukee reorganization, in one of its aspects, presented a situation analogous to the one now before us: the lessee was in reorganization under § 77, but no proceedings had been instituted for the reorganization of the lessor of some of its lines, the Chicago, Terre Haute & Southeastern Railway Company. The reorganization plan provided for a new lease to be offered the Terre Haute, which required that the latter scale down its bonded indebtedness so that the interest thereon, which was the rental under the lease, would be substantially reduced. The plan did not, however, differentiate chanroblesvirtualawlibrary
between the four classes of bonds of the lessor with respect to the earning power and character of the security of each, as is required in the reorganization of properties of the debtor. Certain bondholders accordingly attacked the plan as unfair because it did not attempt to preserve the respective priorities of these bond issues. But we said, 318 U.S. at 318 U. S. 546:
It is abundantly clear that, in the case before us, the interest of South Western was similarly considered. [Footnote 15]
Other provisions of § 77 lend no support to petitioner's contentions. Section 77(b), which makes South Western a creditor in the proceedings, does not, as we have pointed out, give the bankruptcy court any control over its internal organization. It is not a creditor which can chanroblesvirtualawlibrary
be bound by the plan without its assent, except to the extent of its claim for damages for breach of the lease and for amounts due it from the lessee. [Footnote 16] Section 77(b)(1) provides that the plan may alter the rights of creditors, while § 77(b)(5) requires that the plan provide adequate means for its execution, which may include merger or consolidation of the debtor with another corporation. This subsection also permits rejection of executory contracts and unexpired leases.
The bankruptcy power unquestionably gives the Commission and court, working within the framework of the Act, full and complete power not only over the debtor and its property, but also, as a corollary, over any rights that may be asserted against it. These rights may be altered in any way thought necessary to achieve sound financial and operating conditions for the reorganized company, subject to the requirements of the Act. The purchase of formerly leased properties does not involve rights asserted against the debtor, however. [Footnote 17] This Court has said that
Meyer v. Fleming, 327 U. S. 161, 327 U. S. 164 (1946). [Footnote 18] We conceive the jurisdiction asserted by the district court over a solvent lessor not in reorganization to be an extension of these traditional powers not justified by any provisions of the Bankruptcy Act.
A serious practical problem would arise if the consequence of rejection of the offer and return of the properties to South Western would be cessation of railroad service on the formerly leased lines. Congress has foreseen that difficulty, however. Under § 77(c)(6), if the lessor is unable to operate the leased lines following rejection of the lease, the duty devolves upon the lessee to continue to operate the leased lines for the account of the lessor, [Footnote 19] and such operation may continue after completion of the reorganization of the lessee. [Footnote 20] We need not speculate upon the eventual disposition of South Western's properties. Until some final disposition is made, however, we chanroblesvirtualawlibrary
Reliance upon these cases is based, however, upon the fallacy previously adverted to. The action in the Georgia courts in this case does not embarrass or delay the formulation or promulgation of a plan of reorganization. The plan has been formulated and approved. It leaves open to South Western the alternative of selling its properties to the reorganized debtor or of facing disaffirmance of the lease and the risks of separate operation of its lines. No chanroblesvirtualawlibrary
suggestion has been made that a final decision of the state law question will be unreasonably delayed. Under these circumstances, we do not believe that the Rock Island decision provides any support for the district court's action. [Footnote 21] As we held in Thompson v. Texas Mexican R. Co., 328 U. S. 134, at 328 U. S. 142 (1946):
We conclude that, under the narrow facts presented here, the bankruptcy court erred in enjoining the state court suit leading to a determination of the requirements of Georgia law with respect to sale of the entire assets of South Western. This question was already in litigation in the state court when first raised in the federal court. Title 28 U.S.C. § 2283 forbids this exercise of power, since, as we hold, the controversy does not involve property of the debtor within the jurisdiction of the bankruptcy chanroblesvirtualawlibrary
court, and the assertion of jurisdiction by the state court is not inconsistent with the provisions of the Bankruptcy Act. [Footnote 22]
It is also pointed out that, when the rights of bondholders of the lessor may be affected, as was the case with Terre Haute bondholders in the Milwaukee Railroad reorganization (see Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., 318 U. S. 523, and discussion infra), nearly unanimous consent of such bondholders may be required before the changes can be made effective. The Interstate Commerce Commission took that position in the Milwaukee case, and provided that the offer to Terre Haute should not be deemed accepted unless substantially all of its bondholders voted to accept. Chicago, M., St. P. & P. R. Co. Reorganization, 239 I.C.C.Rep. 485, 536-538; 240 I.C.C.Rep. 255, 270-271. See also 318 U.S. at 318 U. S. 532-533.
Seaboard Air Line R. Co. v. Daniel, 333 U. S. 118; Schwabacher v. United States, 334 U. S. 182; Texas v. United States, 292 U. S. 522.
Arkansas Corporation Commission v. Thompson, 313 U. S. 132; Gardner v. New Jersey, 329 U. S. 565. See Thompson v. Terminal Shares, Inc., 104 F.2d 1. Even when the controversy involves property within the exclusive jurisdiction of the bankruptcy court, that court may, in its discretion, postpone action pending adjudication of the question in another court. Ex parte Baldwin, 291 U. S. 610; Thompson v. Magnolia Petroleum Co., 309 U. S. 478; Order of Railroad Conductors of America v. Pitney, 326 U. S. 561. See Foust v. Munson S.S. Lines, 299 U. S. 77. Cf. Railroad Commission of Texas v. Pullman Co., 312 U. S. 496; Chicago v. Fieldcrest Dairies, 316 U. S. 168. Whether, if the bankruptcy court had had exclusive jurisdiction in this case, it should have withheld decision of the state law question pending the outcome of the state court action we need not decide.
Kline v. Burke Construction Co., 260 U. S. 226; Ex parte Baldwin, 291 U. S. 610; Mandeville v. Canterbury, 318 U. S. 47.
On February 11, 1947, the Commission submitted the plan to all creditors, including South Western, for acceptance or rejection on or before midnight March 28, 1947. On March 13, 1947, the directors of South Western accepted the plan subject to the assent of the holders of chanroblesvirtualawlibrary
The plan must first be approved by the Commission, and then certified to the court. § 77(d), (e). The court, after hearing, passes on the plan, and, if the court approves the plan, it certifies that fact to the Commission. § 77(e). The Commission then submits the plan to creditors and stockholders, § 77(e), the lessor and its security holders being included in the definition of creditor. § 77(b). See Group of Institutional Investors v. Chicago, Milwaukee, St. P. & P. R. Co., 318 U. S. 523, 318 U. S. 549. The Commission must then determine the result of the balloting and certify to the judge "the results of such submission." § 77(e). The court then "shall confirm" the plan if satisfied (1) that the requisite percentage of each class of creditors and stockholders has been obtained, and (2) "that such acceptances have not been made or procured by any means chanroblesvirtualawlibrary
forbidden by law." § 77(e). (Italics added.) On confirmation of the plan by the court, the plan and order of confirmation "shall, subject to the right of judicial review," be binding upon the debtor and stockholders and
"shall have full power and authority to, and shall put into effect and carry out the plan and the orders of the judge relative thereto, under and subject to the supervision and the control of the judge, the laws of any State or the decision or order of any State authority to the contrary notwithstanding."
The control of the court over the acceptance of the plan and over its confirmation is one of the historic instances of the "exclusive jurisdiction" vested in the court by § 77(a). The exclusive jurisdiction of the reorganization court is one which heretofore we have zealously guarded against encroachments by state courts. See Thompson v. Texas Mexican R. Co., 328 U. S. 134. That exclusive jurisdiction is not restricted to protection of the court's possession of the property and operation of the business. Section 77(e) gives the reorganization court the sole authority to determine whether the acceptances chanroblesvirtualawlibrary
This is precisely one of those situations where the bankruptcy court, if its exclusive jurisdiction is to be maintained, must have the power to enjoin action in state courts. It has long been recognized to have that authority in order to protect its decree. See Local Loan Co. v. Hunt, 292 U. S. 234. And the policy reflected in old § 265 of the Judicial Code, now 28 U.S.C. § 2283, which frowned on the stay of state proceedings by federal courts, has for years recognized bankruptcy jurisdiction as an exception. See Toucey v. New York Life Ins. Co., 314 U. S. 118, 314 U. S. 132. It was in recognition of the necessity for that power that Congress wrote subdivision (j) into § 77.
If a state court can hold invalid acceptances whose validity has been approved by the Commission and the District Court, then the federal agencies have lost much of the exclusive jurisdiction which Congress granted them. There are myriad questions of state law underlying the consummation of every plan of reorganization. There is the question whether the new company is validly organized; whether proxies are executed in pursuance of the provisions of the state code; whether the charter of a chanroblesvirtualawlibrary