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Timestamp: 2019-12-10 02:34:42
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Matched Legal Cases: ['§ 77', '§ 5', '§ 77', '§ 77', '§ 77', '§ 77', '§ 2', '§ 8', '§ 77', '§ 4', '§ 77', '§ 77', '§ 77', '§ 2', '§ 2', '§ 67', '§ 107', '§ 77', '§ 57', '§ 93', '§ 77', '§ 77', '§ 77', '§ 77']

US Supreme Court Decisions On-Line> Volume 294 > CONTINENTAL ILLINOIS NAT. BANK V. CHICAGO, R.I. & P. RY. CO., 294 U. S. 648 (1935)
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Continental Illinois Nat. Bank v. Chicago, R.I. & P. Ry. Co., 294 U.S. 648 (1935)
4. The expression "unable to meet its debts as they mature," used in § 77 of the Bankruptcy Act as an alternative to "insolvent," means something less than "bankruptcy" or "insolvency," and may be construed to include a debtor who, although unable to pay promptly, may do so if given time. P. 294 U. S. 672. chanroblesvirtualawlibrary
13. The power given the Reconstruction Finance Corporation, by § 5 of the Act creating it, to take over and liquidate collateral accepted by it as security does not render it more immune than other lenders to the control of the bankruptcy court over the sale of bonds pledged by railroads in proceedings under § 77 of the Bankruptcy Act. P. 294 U. S. 684. chanroblesvirtualawlibrary
On June 7, 1933, the Chicago, Rock Island & Pacific Railway Co. filed a petition seeking a reorganization under chanroblesvirtualawlibrary
Practically all of the collateral held by the banks and the Reconstruction Finance Corporation consists of bonds of the debtor and its subsidiaries. These bonds are secured by mortgages on the property of the system, and the collateral therefore constitutes fractional interests in the liens created thereby. The collateral pledged to the banks consists of bonds of the Rock Island or of bonds (guaranteed by the debtor) of one of the subsidiary corporations, wholly owned and operated under lease by the chanroblesvirtualawlibrary
debtor. Six of the collateral notes, aggregating.$13,659,877.58, are held by the Reconstruction Finance Corporation and are secured by collateral of the face value of $41,702,465.85. [Footnote 1] The remaining notes, aggregating $4,125,000 in amount, and secured by collateral of the face chanroblesvirtualawlibrary
value of $14,409,000, [Footnote 2] are held severally by five banks: the Chase National Bank and the New York Trust Company, of New York City, the Continental Illinois National Bank & Trust Company and Harris Trust & chanroblesvirtualawlibrary
None of the noteholders was a party to the proceeding. No noteholder was ever served with process, and only the two Chicago banks were residents of the district. But notice of the intention to present the petition for instructions had been sent by registered mail to each of the noteholders, and also to the five protective committees representing security holders of the system. [Footnote 3] All of these parties were represented at the hearing. The holders of the collateral notes appeared specially, and objected to the jurisdiction of the court on the ground that (1) it had no jurisdiction of the person; (2) no jurisdiction over, or possession of, the property, the sale of which was about to chanroblesvirtualawlibrary
By the Act of March 3, 1933, c. 204, 47 Stat. 1467, original jurisdiction, in addition to that theretofore exercised in voluntary and involuntary proceedings to adjudge persons bankrupt, was conferred upon courts of bankruptcy chanroblesvirtualawlibrary
Upon approval by the commission, the judge, after hearing, shall confirm the plan if satisfied, among other things, that the plan affords adequate protection for the realization by creditors of the value of their securities, liens and claims in one of the ways pointed out by the section. Upon confirmation of the plan, it is to be binding not only upon corporation and all stockholders and creditors generally, but upon all secured creditors of each class of which two-thirds in amount shall have accepted the plan. For convenient reference, various pertinent excerpts from § 77 are reproduced in the margin. [Footnote 4] chanroblesvirtualawlibrary
On November 22, 1933, the district court, after a hearing, entered an order reciting that each of the collateral notes contained provisions that, in case of the insolvency chanroblesvirtualawlibrary
of the railway company or the appointment of a receiver or the nonpayment of interest when due, the holder thereof might sell and dispose of the collateral; that there was chanroblesvirtualawlibrary
danger that the holders would claim that one or more of the events entitling them to sell such collateral had occurred; that a sale of the collateral or any part thereof by the Reconstruction Finance Corporation or by the banks would be inconsistent with the purposes of § 77 and would hinder, impede, obstruct, delay, and, in effect, prevent the orderly preparation and consummation of a plan of reorganization; that the district court, under § 77, had exclusive jurisdiction of the debtor and its property wherever located; that, under paragraph 15 of § 2 of the Bankruptcy Act, the court had power to make such orders, issue such process, and enter such judgments as might be necessary for the enforcement of the act, and that it was chanroblesvirtualawlibrary
Article I, § 8, cl. 4, of the Federal Constitution vests Congress with the power "to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States," and the simple question is: does § 77 constitute a law on the subject of bankruptcies? While attempts have been made to formulate a distinction between bankruptcy and insolvency, it long has been settled that, chanroblesvirtualawlibrary
In 46 U. S. 42-43; Panama R. Co. v. Johnson,@ 264 U. S. 375, 264 U. S. 385-387. chanroblesvirtualawlibrary
The same, it was said in the Waring case, is true in respect of other grants of power, and the bankruptcy clause was cited, p. 46 U. S. 458, as an example. 42 U. S. 186. Whether a clause in the Constitution is to be restricted by the rules of the English law as they existed when the Constitution was adopted depends upon the terms or the nature of the particular clause in question. Certainly these rules have no such restrictive effect in respect of any constitutional grant of governmental power (Waring v. Clarke, supra), though they do, at least in some instances, operate restrictively in respect of clauses of the Constitution which guarantee and safeguard the fundamental rights and liberties of the individual, the best examples of which, perhaps, are the Sixth and Seventh Amendments, which guarantee the right of trial by jury. That guaranty has always been construed to mean a trial in the mode and according to the settled rules of the common law, including all the essential elements recognized in this country and England when the Constitution was adopted. Patton v. United States, 281 U. S. 276, 281 U. S. 288, and cases cited. See also Callan v. Wilson, 127 U. S. 540, 127 U. S. 549; Dimick v. Schiedt, 293 U. S. 474, 293 U. S. 476, 293 U. S. 487; West v. Gammon,@ 98 F.4d 6.
But, while it is true that the power of Congress under the bankruptcy clause is not to be limited by the English or Colonial law in force when the Constitution was adopted, it does not follow that the power has no limitations. Those limitations have never been explicitly defined, and any attempt to do so now would result in little chanroblesvirtualawlibrary
more than a paraphrase of the language of the Constitution without advancing far toward its full meaning. Judge Cowen, in Kunzler v. Kohaus, 5 Hill 317, 321, a decision which was approved by this Court in Hanover National Bank v. Moyses, supra, said that the power was the same as though Congress had been authorized "to establish uniform laws on the subject of any person's general inability to pay his debts. . . ." Probably the most satisfactory approach to the problem of interpretation here involved is to examine it in the light of the acts, and the history of the acts, of Congress which have from time to time been passed on the subject; for, like many other provisions of the Constitution, the nature of this power and the extent of it can best be fixed by the gradual process of historical and judicial "inclusion and exclusion." Compare Davidson v. New Orleans, 96 U. S. 97, 96 U. S. 104; Federal Trade Comm'n v. Raladam Co., 283 U. S. 643, 283 U. S. 648.
The first act, that of 1800, so far ignored the English law, which was confined to traders, as to include bankers, brokers, and underwriters as well. The act of 1841 added merchants, and other additions have been made by later acts until, now, practically all classes of persons and corporations are included. See Friday v. Hall & Kaul Co., 216 U. S. 449, 216 U. S. 454. The act of 1800 was one exclusively in the interest of the creditor. But the act of 1841 took what then must have been regarded as a radical step forward by conferring upon the debtor the right by voluntary petition to surrender his property, with some exceptions, and relieve himself of all future liability in respect of past debts. The act of 1800, like the English law, was conceived in the view that the bankrupt was dishonest, while the act of 1841 and the later acts proceeded upon the assumption that he might be honest but unfortunate. One of the primary purposes of these acts was to
and to give him "a new opportunity in life and a clear filed for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co. v. Hunt, 292 U. S. 234, 292 U. S. 244.
Section 77 advances another step in the direction of liberalizing the law on the subject of bankruptcies. Railway corporations had been definitely excluded from the operation of the law in 1910 (c. 412, § 4, 36 Stat. 838, 839), probably because such corporations could not be liquidated in the ordinary way or by a distribution of assets. A railway is a unit; it cannot be divided up and disposed of piecemeal like a stock of goods. It must be sold, if sold at all, as a unit and as a going concern. Its activities cannot be halted, because its continuous uninterrupted operation is necessary in the public interest, and, for the preservation of that interest, as well as for the protection chanroblesvirtualawlibrary
As outlined by that section, a plan of reorganization, when confirmed, cannot be distinguished in principle from the composition with creditors authorized by the act of 1867, as amended by the act of 1874. It is not necessary to the validity of either that the proceeding should result in an adjudication of bankruptcy. The constitutionality of the old provision for a composition is not open to doubt. In re Reiman, 20 Fed.Cas. pages 490, 496, 497, cited with approval in Hanover National Bank v. Moyses, supra. That provision was there sustained upon the broad ground that the "subject of bankruptcies" was chanroblesvirtualawlibrary
nothing less than "the subject of the relations between an insolvent or nonpaying or fraudulent debtor, and his creditors, extending to his and their relief." That it was not necessary for the proceedings to be carried through in bankruptcy was held not to warrant the objection that the provision did not constitute a law on the subject of bankruptcies. The same view sustains the validity of § 77. Both contemplate an adjustment of a failing debtor's obligations, and although actual bankruptcy may not supervene in either, they are nonetheless laws on the subject of bankruptcies. With due regard for consistency, the constitutional validity of the one cannot well be sustained and that of the other denied, as this Court quite evidently recognized in Canada Southern Ry. Co. v. Gebhard, 109 U. S. 527.
That case involved an act of the Canadian Parliament by which railway companies unable to meet their engagements might unite with their creditors in the preparation of "schemes of arrangement" to be filed in the court of chancery. A scheme was deemed agreed to by the holders of mortgages, bonds, stocks, rent charges, and preferred shares when assented to in writing by a designated majority of the holders of each class of security. The scheme, when confirmed by the court, became binding upon the nonassenting minority, and this Court held it to be thus binding upon bondholders who were citizens of the United States and who sued in courts of the United States to recover on their bonds. The "scheme" of the Canadian law was not unlike the "plan" of § 77. The significant part of the court's opinion, so far as the question now under discussion is concerned, is the following, which appears at p. 109 U. S. 536:
After pointing out that the Canadian law was in accordance with the policy of the English and Canadian governments in dealing with embarrassed and insolvent railway companies, that it took the place in England and Canada of foreclosure sales in the United States "which in general accomplish substantially the same result with more expense and greater delay," the Court added (p. 109 U. S. 539):
Second. Under § 77, does the bankruptcy court have authority to enjoin the sale of the collateral here in question if a sale would so hinder, obstruct, and delay the preparation and consummation of a plan of reorganization as probably to prevent it? By § 2 of the Bankruptcy Act (U.S.C. Title 11), courts of bankruptcy are invested "with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings." They are essentially courts of equity, and their proceedings inherently proceedings in equity, the words "at law" probably having been inserted only with regard to clause (4) of § 2, which confers authority to arraign, try, and punish bankrupts and others for violations of the act. Local Loan Co. v. Hunt, 292 U. S. 234, 292 U. S. 240. Their adjudications and orders constitute in all essential particulars decrees in equity. Idem, 292 U. S. 241. The power to issue an injunction when necessary to prevent the defeat or impairment of its jurisdiction is therefore inherent in a court of bankruptcy, as it is in a duly established court of equity. Section 262 of the Judicial Code, which authorizes the United States courts "to issue all writs not specifically provided for by statute, which may be necessary for the exercise of their respective jurisdictions," recognizes and declares the principle. An example of its application is found in Kline v. Burke Constr. Co., 260 U. S. 226, 260 U. S. 229, where we held that a federal court, having first acquired jurisdiction of the subject matter, could enjoin the parties from proceeding in a state court of concurrent jurisdiction "where the effect of the chanroblesvirtualawlibrary
action would be to defeat or impair the jurisdiction of the federal court." An injunction may be issued in such circumstances for the purpose of protecting and preserving the jurisdiction of the court "until the object of the suit is accomplished and complete justice done between the parties." Looney v. Eastern Texas R. Co., 247 U. S. 214, 247 U. S. 221.
The injunction does not infringe § 67(d), U.S.C. Title 11, § 107(d). The substance of that provision is that bona fide liens shall not be affected by anything contained in the Bankruptcy Act. The injunction here in no way impairs the lien, or disturbs the preferred rank of the pledgees. It does no more than suspend the enforcement of the lien by a sale of the collateral pending chanroblesvirtualawlibrary
further action. It may be, as suggested, that, during the period of restraint, the collateral will decline in value; but the same may be said in respect of an injunction against the sale of real estate upon foreclosure of a mortgage, and such an injunction may issue in an ordinary proceeding in bankruptcy. Straton v. New, 283 U. S. 318, 283 U. S. 321,, and cases cited. A claim that injurious consequences will result to the pledgee or the mortgagee may not, of course, be disregarded by the district court, but it presents a question addressed not to the power of the court, but to its discretion -- a matter not subject to the interference of an appellate court unless such discretion be improvidently exercised. So far as constitutional power is concerned, there is no difference between an injunction restraining the enforcement of a real estate mortgage and one restraining the enforcement of a pledge by the sale of collateral security. Such differences as exist affect not the power, but the propriety, of its exercise -- that is to say, the discretion of the court. Such an injunction, as just indicated, is within the contemplation of § 77, and we need not inquire whether it would be admissible under the act in force prior to the adoption of that section. Compare Straton v. New, supra. Nor does § 57(h), 11 U.S.C. § 93(h), also invoked by petitioners, have any pertinent application to the question under discussion in the light of the provisions, purpose, and aim of § 77.
Petitioners urge that the injunction is precluded by a consideration of subdivision (1) of § 77, which confers authority upon the court to enjoin or stay the commencement or continuance of any judicial proceeding to enforce any lien upon the estate until after final decree. The point made is that the granting of this express power to enjoin judicial proceedings brought to enforce liens negatives the authority to stay the enforcement of liens by nonjudicial proceedings, in accordance with the maxim, "expressio unius est exclusio alterius." But clause (15) of chanroblesvirtualawlibrary
Third. It is evident that the effect here wrought by the menace of impending sales of the collateral would seriously embarrass and probably prevent the formulation and consummation of a plan of reorganization. Both courts below so found. The findings of the district court are in the form of recitals in the order, but are nevertheless in substance and in effect findings of fact. The circuit court of appeals approved these findings, and added that, without some control over the disposition of the collateral, "the presentation of a satisfactory plan of reorganization might as well be abandoned." These concurrent findings of the two courts, as this Court has often held, should be accepted as conclusive unless clearly erroneous. United States v. Commercial Credit Co., 286 U. S. 63, 286 U. S. 67; Stuart v. Hayden, 169 U. S. 1, 169 U. S. 14; Dun v. Lumbermen's Credit Assn., 209 U. S. 20, 209 U. S. 23-24.
We are not impressed with the attempt of petitioners to show that the record entirely fails to justify the conclusion of the courts below in that regard. I t must be borne in mind that, in addition to the collateral aggregating more than $54,000,000, held by petitioners, there was outstanding additional collateral pledged as security in the sum of over $145,000,000, bringing the total up to approximately $200,000,000, a sum equal to nearly half of the capital then issued and in the hands of the public. At the time the injunction was applied for, there was danger that the noteholders would claim that the right of sale under the terms of the collateral notes had been brought into existence, and, with the pendency of the reorganization proceedings and the suspension of the payment of interest, it well cannot be doubted that there also was danger that the noteholders would proceed to exercise chanroblesvirtualawlibrary
It must be apparent, if we consider only the impressive facts set forth in the forepart of this opinion in respect of the extensive operations of the railway company and its subsidiaries, the extent, multiplicity, and variety of their obligations, the complicated nature of their capital structure, the great volume of their securities held as collateral by many and widely separated creditors, and other circumstances, that, without the maintenance of the status quo for a reasonable length of time, no satisfactory plan could be worked out. The preparation of any plan the important details of which could survive the changes in, and the consequent fluctuation and disturbance of, the financial structure brought about by recurring sales of collateral would seem to be a practical impossibility. Under all the circumstances, we are of opinion that the district court properly exercised its discretion in favor of respondents. chanroblesvirtualawlibrary
The Constitution, as it many times has been pointed out, does not in terms prohibit Congress from impairing the obligation of contracts as it does the states. But, as far back as 3 U. S. 388, it was said that among other acts which Congress could not pass without exceeding its authority was "a law that destroys or impairs the lawful private contracts of citizens." The broad reach of that statement has been restricted ( 79 U. S. 549-550); but the principle which it includes has never been repudiated, although the extent to which it may be carried has not been definitely fixed. Speaking generally, it may be said that Congress, while without power to impair the obligation of contracts by laws acting directly and independently to that end, undeniably, has authority to pass legislation pertinent to any of the powers conferred by the Constitution, however it may operate collaterally or incidentally to impair or destroy the obligation of private contracts. Legal Tender Cases, supra; Louisville & Nashville R. v. Mottley, 219 U. S. 467, 219 U. S. 480-482, 219 U. S. 484; Highland v. Russell Car & Snowplow Co., 279 U. S. 253, 279 U. S. 261. And, under the express power to pass uniform laws on the subject of bankruptcies, the legislation is valid though drawn with the direct aim and effect of relieving insolvent persons in whole or in part from the payment of their debts. See Hanover National Bank v. Moyses, supra, at p. 186 U. S. 188. So much necessarily results chanroblesvirtualawlibrary
Fifth. It is next contended that the court was without power to issue the injunction in a summary proceeding. Obviously, an application for an injunction against the immediate enforcement of a remedy is not the assertion of an adverse claim. The bonds deposited as collateral were not in the hands of purchasers, but in the hands of creditors as security. That the equity which the debtor retained was a property interest was not and could not be disputed by the creditors; nor was the claim of the creditors in respect of their rights in the collateral security or the rank of their liens questioned by the debtor. In short, no adverse claim was brought forward by either of the parties to the controversy. The only question was in respect of the creditors' remedy, and the sole point is as to the authority of the bankruptcy court to delay for a reasonable time an interference with the reorganization proceeding which would result from an immediate sale of the collateral. The court below dealt adequately with the situation, and its conclusions find ample support in the decisions. See, for example, In re Purkett, Douglas & Co., 50 F.2d 435, 438; John Matthews, Inc. v. Knickerbocker Trust Co., 192 F.5d 7; Allebach v. Thomas, 16 F.2d 853.
The Reconstruction Finance Corporation raised the question in the district court by a demurrer, asserting that the allegations of the debtor's petition were insufficient. chanroblesvirtualawlibrary
But, in a summary proceeding, as the term itself implies, the merits of the controversy are determined without the formality in respect of pleadings which is required in actions at law or suits in equity. In such a proceeding, we see no reason why the allegations of the petition may not be helped out by timely affidavits. Doubt has been expressed by lower federal courts as to the propriety of a demurrer in such a proceeding. In re Snelling, 202 F.2d 8, Judge Morton aptly said:
See also In re Rockford Produce & Sales Co., 275 F.8d 1, 813. In any event, we think, as against demurrer, conceding its propriety, the petition is sufficient. Pertinent allegations are epitomized in the early part of this opinion.
Congress may authorize the civil process of a federal district court to be served upon persons in any other district. 37 U. S. 328; United States v. Congress Construction Co., 222 U. S. 199, 222 U. S. 203-204; First Natl. Bank v. Williams,@ 252 U. S. 504, 252 U. S. 510. There are other cases to the same effect, but it is unnecessary to cite them. Section 77 deals with railway corporations whose lines and activities are not confined to a single district or a single state, but in numerous instances reach into many districts and many states. The lines of the Rock Island system extend into twenty districts and fourteen states. Jurisdiction over reorganization proceedings, however extensive the railway lines may be, is conferred upon a single district court. The usefulness of the section would be greatly minimized and in some instances destroyed if that court were powerless to send its process into any state when necessary to effectuate the purposes of the law. As has already been shown, the equity in the collateral remaining in the railroad company is property, and over this property, wherever located, the federal district court is given exclusive jurisdiction by the precise language of § 77, just quoted. As a necessary consequence of that jurisdiction, the court must have the power to preserve and safeguard the property for the benefit of the trust estate so far as that is compatible with the rights of the pledgees. Jurisdiction over the property wherever located carries with it jurisdiction to enjoin, in a proper case, interferences with the property, and that includes, by necessary inference, the power to send process to that end for service upon the persons to be enjoined wherever they may be found within the United States.
It is said that the words "wherever located" mean wherever located within the district. But, considering the nature of the property involved, the number of districts and states over which it is distributed, and the chanroblesvirtualawlibrary
Finally. Petitioners insist, with much force, that the injunction, granted in November, 1933, and still operative, is likely, if continued, to result in irreparable injury. We do not interpret the order, as suggested by the Reconstruction Finance Corporation, as continuing the injunction in force until a plan of reorganization is effected or the proceeding under § 77 dismissed. On the contrary, chanroblesvirtualawlibrary