Source: https://www.legalcrystal.com/case/97510/fidelity-assur-assn-vs-sims
Timestamp: 2017-09-21 08:58:08
Document Index: 26909297

Matched Legal Cases: ['§ 146', '§ 146', '§ 146', 'Art. 9', '§ 17', '§ 146', '§ 144', '§ 77', '§ 236', '§ 128', '§ 2']

Fidelity Assur Assn Vs Sims - Citation 97510 - Court Judgment | LegalCrystal
Fidelity Assur. Assn. Vs. Sims - Court Judgment
LegalCrystal Citation legalcrystal.com/97510
Case Number 318 U.S. 608
Appellant Fidelity Assur. Assn.
.....thereby created. a number of state officers are parties. fidelity assurance association, a west virginia corporation, filed its petition for reorganization in the district court for southern west virginia. the judge made an order approving the petition as properly filed. he also entered orders enjoining state officials from dealing with property held by them. [ footnote 2 ] state banking and insurance commissioners and state court receivers answered, asserting that the debtor could not avail itself of the act because it was an insurance company [ footnote 3 ] and, in any event, the petition was not filed in good faith, as the phrase is defined in § 146(3)(4) of chapter x. [ footnote 4 ] the securities and exchange commission intervened at the request of the.....
Fidelity Assur. Assn. v. Sims - 318 U.S. 608 (1943)
U.S. Supreme Court Fidelity Assur. Assn. v. Sims, 318 U.S. 608 (1943)
1. In the light of the character and history of the business of the insolvent corporation in this case, held that its petition for reorganization under Chapter X of the Bankruptcy Act should have been dismissed as not filed in "good faith" within the meaning of § 146 (3), (4), since it was unreasonable to expect that the company could be reorganized as a going concern, and since the interests of creditors would be best subserved in prior proceedings pending in state courts. Pp. 318 U. S. 618 -619.
2. Chapter X of the Bankruptcy Act may not be availed of merely for the purpose of liquidation. P. 318 U. S. 621 .
This case presents important questions concerning the construction of Chapter X of the Bankruptcy Act. [ Footnote 1 ]
Fidelity Assurance Association, a West Virginia corporation, filed its petition for reorganization in the District Court for Southern West Virginia. The Judge made an order approving the petition as properly filed. He also entered orders enjoining state officials from dealing with property held by them. [ Footnote 2 ]
State banking and insurance Commissioners and state court receivers answered, asserting that the debtor could not avail itself of the Act because it was an insurance company [ Footnote 3 ] and, in any event, the petition was not filed in good faith, as the phrase is defined in § 146(3)(4) of Chapter X. [ Footnote 4 ] The Securities and Exchange Commission intervened at the request of the District Court. After trial of the issues, the court formally approved the petition and overruled the motions to rescind the decrees granting injunctions. [ Footnote 5 ] The Circuit Court of Appeals reversed. [ Footnote 6 ]
Art. 9 of Ch. 3 of the Code of West Virginia, [ Footnote 7 ] relating to the selling of annuity contracts and, as therein provided, to the supervision of the Auditor, as ex-officio Insurance Commissioner of the State.
The company was at one time licensed in twenty-nine states, each of which had laws regulating its business; fifteen required a deposit of approved investment obligations with some state official to secure payment of outstanding contracts held by residents; the remainder had no such requirement, but the contracts sold in these states were secured by the deposit made with West Virginia. [ Footnote 8 ] As of the date of the filing of the debtor's petition, the deposits made with various states, including West Virginia, amounted, according to the debtor's figures, to $20,056,680.27, against a net reserve liability of $24,221,651.36. In addition, the company had securities not deposited anywhere valued at $556,467.51, most of which were ineligible for deposit under the laws of any state, and $500,000 in cash.
December 14, 1938, the Securities and Exchange Commission sought an injunction in a federal court, alleging the Company was engaged in acts and practices violative of the fraud provisions of § 17(a) of the Securities Act of 1933. [ Footnote 9 ] This suit resulted in an injunction, and was followed by another for appointment of a receiver in a federal court in West Virginia, which was dismissed. [ Footnote 10 ]
Despite enormous sales, [ Footnote 11 ] the company could not attain a solvent position. Moreover, the publicity ensuing the two suits resulted in the surrender of many contracts, the temporary suspension of the sale of new certificates, and a serious diminution of sales when activity was resumed. [ Footnote 12 ]
Pursuant to the Public Utility Holding Company Act of 1935, [ Footnote 13 ] the Securities and Exchange Commission conducted
an investigation and reported its findings respecting Fidelity's business and other matters to Congress on March 13, 1940. As a result, the Investment Company Act of August 22, 1940, [ Footnote 14 ] was adopted. Fidelity's officers and directors realized that the company could not meet the statutory requirements and survive. They therefore cast about for some other business to which the corporate resources might be devoted. They hit upon life insurance.
Section 144 [ Footnote 15 ] requires that, if the judge is not "satisfied" that the petition "has been filed in good faith" he shall dismiss it. The relevant portions of § 146 [ Footnote 16 ] are that
"the possibility that thousands of contract holders could be persuaded to modify their contracts and scale down their claims [ Footnote 17 ] to enable the company to go on is so remote as to exist only in the imagination."
fifteen states in hands of public officials whose duty it is to liquidate them on terms most favorable to those for whose protection they stand pledged. The suggestion that these quasi -trustees will force the securities on the market without regard to its ability to absorb them, to the destruction of their beneficiaries' security, is inadmissible, and, in addition, is contrary to what occurred after the institution of the West Virginia receivership. There is no foundation for the position that the so-called reorganization should take the form of the creation of a new corporation to which all these securities would be transferred for conversion into cash, particularly as the advocates of such a project admit that the application of the security afforded classes of certificate holders according to state law cannot be avoided in any distribution of assets.
It is urged that a plan of liquidation may constitute a reorganization under Chapter X, and decisions are cited to that point, [ Footnote 18 ] but an examination of them will demonstrate that in none save where the corporate purpose of the debtor was, in effect, holding and liquidating securities was the plan such as is proposed here. Under the facts of this case, the suggested plan is but an alternative for ordinary bankruptcy without any readjustment of the rights of creditors and stockholders inter sese, and this fact serves to distinguish the remaining cases on which reliance is placed.
It was suggested at the bar that, even if liquidation is all that can be hoped, this would be better managed by a single bankruptcy court than in several separate proceedings. The difficulty with the suggestion is that Congress did not intend resort to Chapter X to be had for the mere purpose of liquidation. The scheme of the chapter precludes any such conclusion. The mandate of § 144 is clear that, unless the judge is satisfied the petition was filed in good faith, he must dismiss it. Under the predecessor of Chapter X, -- § 77B of the Bankruptcy Act -- the district judge was given authority, by subsection (c)(8), [ Footnote 19 ] under certain circumstances, to "direct the estate to be liquidated, or direct the trustee or trustees to liquidate the estate. . . ." In Chapter X, on the other hand, § 236(2) [ Footnote 20 ] provides that, if no plan is approved or accepted, or if it is not consummated, the judge may, after hearing all persons in interest, adjudge the debtor a bankrupt or dismiss the proceeding as he may decide is in the interest of creditors and stockholders. Thus, the statute does not contemplate a liquidation in a Chapter X proceeding, but a liquidation in ordinary bankruptcy or a dismissal outright.
If the liquidation of Fidelity's affairs in bankruptcy had been proposed at the start, the petition in bankruptcy could not have been filed in the District Court for the Southern District of West Virginia in which this proceedings is pending. A Chapter X proceeding may, under § 128, [ Footnote 21 ] be initiated either at the principal place of business of the corporation or where it has its principal assets. The present proceeding was initiated in the Southern District on the ground that the principal assets of the company are located at Charleston in that district, in the possession of the State Treasurer. Under § 2 of the Bankruptcy
Act, [ Footnote 22 ] an ordinary bankruptcy may be initiated only at the corporation's principal place of business, which is Wheeling in the Northern District of West Virginia.