Source: https://supreme.justia.com/cases/federal/us/311/138/case.html
Timestamp: 2017-05-24 02:08:37
Document Index: 206480592

Matched Legal Cases: ['§ 3', '§ 83', '§ 83', '§ 403', '§ 12', '§ 403']

American United Mut. Life Ins. Co. v. Avon Park (full text) :: 311 U.S. 138 (1940) :: Justia U.S. Supreme Court Center Log In
› American United Mut. Life Ins. Co. v. Avon Park
American United Mut. Life Ins. Co. v. Avon Park 311 U.S. 138 (1940)
U.S. Supreme CourtAmerican United Mut. Life Ins. Co. v. Avon Park, 311 U.S. 138 (1940)American United Mutual Life Insurance Co. v.City of Avon Park, FloridaNo. 31Argued November 12, 1940Decided November 25, 1940311 U.S. 138CERTIORARI TO THE CIRCUIT COURT OF APPEALS
2. Whether the fiscal agent's compensation for services rendered would exceed the "reasonable compensation" authorized by § 3(b) of the Act requires evaluation of the aggregate of all benefits which might accrue to it under the plan, including its speculative interests. P. 311 U. S. 144. Page 311 U. S. 139
11. The provision of § 83(b) for allowance of "reasonable compensation" for "services rendered" necessarily implies "loyal and disinterested service in the interest of the persons" for whom the claimant purported to act. P. 311 U. S. 147. Page 311 U. S. 140
The District Court confirmed a plan for the composition of the debts of respondent under Ch. IX of the Bankruptcy Act, 50 Stat. 653, 52 Stat. 939, 940. [Footnote 1] The Page 311 U. S. 141 Circuit Court of Appeals affirmed that order. 108 F.2d 1010. Petitioner, a creditor of the city, having objected to the confirmation in the courts below, brought the case here on a petition for certiorari, which we granted in view of the importance of the problems in the administration of the composition and reorganization provisions of the Act.
The city's composition was a refunding plan worked out by it and its fiscal agent, [Footnote 2] R. E. Crummer & Co. Pursuant to the fiscal agency contract, both parties were to use their best efforts to induce the creditors to participate in the plan. The city was not to pay any of the costs of the refunding, as Crummer was to defray all expenses incident to assembling the bonds, printing the refunding bonds, representing the city in proceedings to validate the new bonds, obtaining a legal opinion approving the bonds, etc. The fiscal agency contract provided that Crummer was to be compensated for its services and reimbursed for its expenses by assessing charges against the participating bondholders. This charge was $40 for each $1,000 bond, or, in case the bondholders elected to sell Crummer the interest coupons, accrued to July 1, 1937, at one-third of their face amount, [Footnote 3] the charge was to be $20 per $1,000 bond. Page 311 U. S. 142
Crummer solicited assents to the plan. Approximately 69% of the bondholders accepted. But for the claims held by the Crummer interests, [Footnote 4] and voted in favor of the plan, the requisite two-thirds statutory vote, however, would not have been obtained. Some of these claims had been purchased prior to the fiscal agency contract, some later. The average price was apparently about 53¢ on the dollar. The inference seems clear that some of them were acquired in order to facilitate consummation of the composition by placing them in friendly hands. But the record does not show whether or not Crummer disclosed to the bondholders when their assents were solicited that it was a creditor as well as the city's fiscal agent, the extent of the claims held by it and its affiliate, the circumstances surrounding their acquisition, Page 311 U. S. 143 and its intent to vote those claims in favor of the plan. No such disclosure was made in the plan.
The court found that the first of these items was reasonable. But it apparently deemed the others irrelevant to the inquiry. Page 311 U. S. 144
Hence, the lack of that essential finding would be fatal in any case. It is especially serious here in view of the fact that, without the vote of the fiscal agent, the requisite two-thirds acceptance would not have been obtained. Where it does not affirmatively appear that full and complete disclosure of the fiscal agent's interests was made to the bondholders when their assents were solicited, it cannot be said that those assents were fairly obtained. Cf. Rogers v. Guaranty Trust Co., 288 U. S. 123, 288 U. S. 143. And where, without such disclosure, the fiscal agent's vote was cast for acceptance of the plan, it cannot be said that such acceptance was in "good faith" within the meaning of § 83(e)(5), 11 U.S.C. § 403(e)(5). Here, the fiscal agent was acting in a dual capacity. While Page 311 U. S. 145 it was representing the city, it likewise purported to represent the interests of bondholders. The very minimum requirement for fair dealing was the elementary obligation of full disclosure of all its interests, and the burden was on it to show at least that such disclosure was made. Equity and good conscience obviously will not permit a finding that an acceptance of of a plan by a person acting in a representative capacity is in "good faith" where that person is obtaining an undisclosed benefit from the plan.
And see Pepper v. Litton, 308 U. S. 295, 308 U. S. 304 et seq. These principles are a part of the control which the court has over the whole process of formulation and approval of plans of composition or reorganization, and the obtaining of assents thereto. As we said in Case v. Los Angeles Lumber Products Co., 308 U. S. 106, 308 U. S. 114, "[t]he court is not merely a ministerial register of the vote of the several classes of security holders." The responsibility of the court entails scrutiny of the circumstances surrounding the acceptances, the special or ulterior motives which may have induced them, the time of acquiring the claims so voting, the amount paid therefor, and the like. See Continental Insurance Co. v. Page 311 U. S. 146 Louisiana Oil Refining Corp., 89 F.2d 333. Only after such investigation can the court exercise the "informed, independent judgment" (National Surety Co. v. Coriell, 289 U. S. 426, 289 U. S. 436; Case v. Los Angeles Lumber Products Co., supra, p. 308 U. S. 115) which is an essential prerequisite for confirmation of a plan. And that is true whether the assents to the plan have been obtained prior to the filing of the petition or subsequent thereto.
Where such investigation discloses the existence of unfair dealing, a breach of fiduciary obligations, profiting from a trust, special benefits for the reorganizers, or the need for protection of investors against an inside few or of one class of investors from the encroachments of another, the court has ample power to adjust the remedy to meet the need. The requirement of full, unequivocal disclosure; the limitation of the vote to the amount paid for the securities (In re McEwen's Laundry, Inc., 90 F.2d 872); the separate classification of claimants (see First National Bank v. Poland Union, 109 F.2d 54, 55); the complete subordination of some claims (Taylor v. Standard Gas & Electric Co., 306 U. S. 307; Pepper v. Litton, supra) indicate the range and type of the power which a court of bankruptcy may exercise in these proceedings. That power is ample for the exigencies of varying situations. It is not dependent on express statutory provisions. It inheres in the jurisdiction of a court of bankruptcy. The necessity for its exercise (Pepper v. Litton, supra, p. 308 U. S. 308) is based on the responsibility of the court before entering an order of confirmation to be satisfied that the plan in its practical incidence embodies a fair and equitable bargain openly arrived at and devoid of overreaching, however subtle. Neglect of that duty is apparent here by inclusion of the vote of the claims held by the Crummer interests in computing the requisite statutory assents, without protection of the public investors through the Page 311 U. S. 147 requirement of full disclosure and of other appropriate safeguards. By the same token, allowance of compensation to Crummer without scrutiny of Crummer's speculation in the securities does not comport with the standards for surveillance required of courts of bankruptcy before confirming plans of composition or reorganization or before making such allowances.
Beyond that is the question of unfair discrimination to which we have adverted. Compositions under Ch. IX, like compositions under the old § 12, envisage equality of treatment of creditors. Under that section and its antecedents, a composition would not be confirmed where one creditor was obtaining some special favor or inducement not accorded the others, whether that consideration moved from the debtor or from another. In re Sawyer, Fed.Cas. No. 12,395; In re Weintrob, 240 F. 532; In re M. & H. Gordon, 245 F. 905. As stated by Judge Lowell in In Re Sawyer, supra, "if a vote is influenced by the expectation of advantage, though without any positive promise, it cannot be considered an honest and unbiased vote." That rule of compositions is but part of the general rule of "equality between creditors" (Clarke v. Rogers, 228 U. S. 534, 228 U. S. 548) applicable in all bankruptcy proceedings. That principle has been imbedded by Congress in Ch. IX by the express provision against unfair discrimination. That principle, as applied Page 311 U. S. 148 to this case, necessitates a reversal. In absence of a finding that the aggregate emoluments receivable by the Crummer interests were reasonable, measured by the services rendered, it cannot be said that the consideration accruing to them under or as a consequence of the adoption of the plan likewise accrued to all other creditors of the same class. Accordingly, the imprimatur of the federal court should not have been placed on this plan. The fact that the vast majority of security holders may have approved a plan is not the test of whether that plan satisfies the statutory standard. The former is not a substitute for the latter. They are independent. See Case v. Los Angeles Lumber Products Co., supra, pp. 308 U. S. 114-115.
Since the cause must be remanded, there are two other matters which should be mentioned. Section 83(d), 11 U.S.C. § 403(d), provides that, in computing the statutory two-thirds vote necessary for confirmation of a plan, all claims "owned, held, or controlled" by the city shall be excluded. So far as appears, the claims held by the Crummer interests were not owned by or held for the city. Yet it is by no means clear that they were not "controlled" by the city within the meaning of the Act. Claims held by a city's fiscal agent presumptively would seem to fall in that prohibited category. The abuse at which the Act is aimed is not confined to those cases where the holder of the claims is an agent of the city within the strict rules of respondeat superior. Rather, the test is whether or not there is such close identity of interests between the claimant and the city that the claimant's assent to the plan may fairly be said to be more the product of the city's influence and to reflect more the city's desires than an expression of an investor's independent business judgment. Here there was such a close identity of interests between Crummer and the city Page 311 U. S. 149 vis-a-vis the refunding as to raise grave doubts as to the propriety of allowing those claims to vote in any event. That, however, is a question for appropriate findings by the court should another plan be presented.