Document: 390 U.S. 414 88 S.Ct. 1157 20 L.Ed.2d 1 PROTECTIVE COMMITTEE FOR INDEPENDENT STOCKHOLDERS OF TMT TRAILER FERRY, INC., Petitioner,v.C. Gordon ANDERSON, Trustee. No. 38. Argued Nov. 7 and 8, 1967. Decided March 25, 1968. Rehearing Denied May 6, See 391 909, 1649. [Syllabus from pages 414-417 intentionally omitted] Irwin L. Langbein, West Palm Beach, Fla., for petitioner. David Ferber, Washington, D.C., the United States. William P. Simmons, Jr., Miami, M. James Spitzer, New York City, respondent. Mr. Justice WHITE delivered opinion of Court. This case involves a corporate reorganization under Chapter X Bankruptcy Act, 52 Stat. 883, 11 U.S.C. §§ 501—676. In most recent proceedings1 District Court approved an amended plan discharged petitioner Committee.2 The Appeals Fifth Circuit affirmed, 364 F.2d 936 (1966). We granted certiorari, 387 929, 87 2048, 18 989 (1967), because this presents important questions bankruptcy laws. Since we believe erred in affirming decision Court, reverse judgment remand further proceedings consistent with views expressed below. I. 2 debtor, Trailer Ferry, Inc., was incorporated 1954. Its principal business is transporting freight between Florida Puerto Rico. It pioneered 'fishy-back' transport, ocean-going equivalent 'piggy-back' transport. Freight loaded into highway trailers rolled on off sea-going barges without rehandling. its original operations used rented tugs to tow converted Navy LST's such other freight. Later it undertook convert self-propelled LSD use business. Substantial debts losses arose unsuccessful conversion consequent failure service ship, dubbed Carib Queen. 3 addition, 1954 1957, more than 4,000,000 shares common stock were issued, many them acquired at low prices by persons close company disposed public relatively high prices. As result these transactions others, became unable meet obligations, proceeding initiated against involuntary petition June 1957. debtor consented reorganization, C. Anderson appointed trustee. motion holders preferred ship mortgages debtor's vessels (the Caplan mortgage) foreclose their liens denied trial court. On appeal order, pointed out that no had yet been proposed, possibility successful not explored, evidence received support any court's orders. reversed remanded instructions mortgage be permitted unless adequate provision made protect interests or they would prejudiced delay. 4 Upon court held appropriate hearings. determined being operated manner which produce substantial profits. A proposed have given group all reorganized company, portion stock, control board directors. February 1959, hearing called purpose solely basis documents records, declared insolvent stockholders interest corporation. 1959 confirmed, resigned as trustee become president company. new appointed, he sought effect vacate order confirming plan. His alleged Merrill-Stevens Dry Dock & Repair Co. (M—S), another creditor, entered undisclosed agreement violation § 221 X, 897, 621, according pay M—S procure consent reorganization. denied, successor removed, reinstated 5 Committee appealed Objection investigation claims certain creditors conduct insolvency. While pending, group, supported Anderson, petitioned consummate confirmed Securities Exchange Commission, however, filed seeking investigation.3 disclose unfair turned corporation over who dealt extensively probably illegal. agreed among parties should made. 6 his re-established role trustee, conducted investigation. Fourteen days hearings held, 2,200 testimony transcribed, some 60 exhibits collected. Anderson's report covers 40 record. He concluded 'wrecked gross mismanagement, unwise unsound expansion financed primarily through sale securities disregard protective provisions Act 1933,' causes action mortgage. recommendation vacated plan, affirmed.4 Early 1962 two plans proposed. 'internal plan,' recommended provided reorganizing issuing involved 'compromises' claims. 'cash plan' entailed similar well selling assets cash unconnected distributing creditors. Neither participation stockholders. Committee, SEC, objected exclusion both plans, opposed internal contemplated After valuation, found fair, equitable, feasible. majority classes States accepted 1963. appealed, arguing wrongly excuded improperly president. ruled, reaching contentions, permissible contemplate president,5 but separate defective giving priority Government's nontax claims.6 accordingly determination whether feasible if full priority. 8 feasible, amendments authorized immediate payment Government. regarded orders affirmance them, refused consider again contentions SEC. and, objections SEC fair affirmed it. ruled earlier left open issues terms discussed decided.7 Passing fact considered erroneous legal perspective, emphasizing obligation determine judge 'abused discretion' reached conclusions 'clearly erroneous,' case. Stating '(t)his * litigation must long last brought end,' judgments has presented number certiorari Court.8 Because view take case, necessary only error affirm Court's approval compromises insolvent, when rendered considering future estimated earnings II. 9 Compromises are 'a normal part process reorganization.' Case v. Los Angeles Lumber Prods. Co., 308 106, 130, 1, 14, 84 L.Ed. 110 (1939). administering economical practical will often wise arrange settlement there reasonable doubts. At same time, essential every receive 'informed, independent judgment' National Surety Coriell, 289 426, 436, 53 678, 682, 77 1300 (1933). requirements 174 221(2) 891, 574, 621(2), 'fair equitable,' apply just aspects reorganizations. Ashbach Kirtley, 159 (C.A.8th Cir. 1961); Conway Silesian-American Corp., 186 201 (C.A.2d 1950). courts do ordinarily scrutinize merits suits individual litigants cannot affect duty compromise forming equitable. re Chicago Rapid Transit 196 484 (C.A.7th 1952). There can informed equitable until apprised himself facts intelligent objective probabilities ultimate success claim litigated. Further, form educated estimate complexity, expense, likely duration litigation, possible difficulties collecting might obtained, factors relevant assessment wisdom compromise. Basic instance, course, need compare rewards litigation. here start present 10 mortgage, consisting vessels, bears face amount $330,000. paid $280,500 Under compromise, five annual installments, plus due date.9 estate totaled $1,628,284, $574,580 said secured maritime vessels. allowed full, after reducing status unsecured claims, wind up holding approximately 40% company.10 glance makes clear involve recognition debtor. Whether compromising creditors, depends upon proper allegedly M—S. focal point 1960 Anderson. shortly before filed. needed raise payments extensive investigation, fraudulent transfer consideration. succinctly stated unfairness mortgage: 12 'The Group expenses transaction. $330,000 payable seven months convertible option holders, one share each $1.25 gave effective rate 30% per annum prior maturity opportunity straddle feature. If prospered, could little $1.00 share; did not, Mortgage senior position constituted lien TMT's prime assets, absolutely Company's operation. Queen broken down, encumbered main producers income company.' 13 'ample evidence' therefore treated null void. So treating release repay money received, claiming higher general creditors.11 14 Abrams, Shaffer, Erdman, diverted opportunities flagrant abuse control, fiduciary inside positions, account profits Nearly half roughly outstanding via purported private offerings Abrams Shaffer. These men exercised degree affairs Erdman went along participated transactions. three occupied relationship TMT, least insofar issuance capital concerned. 'They took advantage obtain less market price sold registration apparent offering exemption issued.' activities substantially lessened chances obtaining financing reputable financial institutions 'and time executed dictate forced accept.' continued: 15 'It Shaffer come barred equity profiting expense. Their reduced sales investment purposes, law great profit themselves. either admitted readily ascertainable returned 16 Characterizing acquiring unregistered intention 'fraud,' indicated liability SEC's Rule 10b—5.12 minimum subordinated those innocent creditors.13 17 vacated. Both claim, grounded reasons never objections. set aside transfer, nor decided setoffs means subordinating Rather, providing 'compromise' lines already indicated. what put date.14 Separate M—S, charge converting trailership christened $1,000,000 unpaid balance Maritime owned worth States, creditor stating none entitled 'for reason year commencement herein.' also contended 'it recognized principle Admiralty construction reconstruction give rise liens.' asserts actually determined. amounted allowing entirety 19 maiden voyage series boiler failures caused vessel break down necessitated repairs. November 1958 notified 'series catastrophes' befallen 'faulty design, inadequate inspection, work remodeling later repair hasty improper preparations hazardous sea utilization she fitted unseaworthy condition.' thought lead recovery sums money. Although subsequent associated mention grounds disallowing matter referred special master Trustee reference master. September 1961, detailed specifications based own them. 'has meritorious defenses off-set counterclaim (a) properly vessel; (b) comply contract; (c) (d) performed furnished materials price; failed establish value materials.' 21 described particularity led conclusion. related occurred voyage. Within 48 hours sailing Jacksonville, Florida, bound San Juan, Rico, discovered several tubes leaking. Tubes overheated, ruptured, distorted scale formed inner surfaces. attributed M—S' negligence running boilers raw water. priming first trip installation incorrect baffles undertaken make required repairs, negligently, leading tube failures. Part charges work. answer suffering 'certain deficiencies,' liability. asserted manner. 22 hearing, ever held. Instead, subsequently moved summary allowance ground 'remote' materially litigating cause 'unnecessary delay.'15 during explanation provided. Counsel protested 'this report, bare statement conclusion.' importance question. said: 23 'I am concerned myself. I know whoever Queen) loose it, somebody bad mistake. don't was.' 24 over, Department Justice, Notwithstanding objections, doubts expressed, 25 July 11, 1962, approving contained 'compromising' With regard sets apparent' 'would possibly years conclude. *' 26 circumstances hereby inclusion Internal Plan. approves attorney better obtained prospect material reduction does warrant otherwise required, recoveries beyond urged Commission Stockholders' too remote serious alternative heavy expense unnecessary delay contrary intent Act.' 27 constitutes only, last,16 word Without record tending cast doubt bald despite once void sizeable holders. placed why completely field though understandably eager protracted proceedings, nowhere appears trustee's cursory, conclusory 'compromises,' perfunctory, almost offhand, recommendation. 28 quoted consideration pursuing potential harm delay, fairness settlement, then question justifiable approve compromises. essential, reviewing distinguishing well-reasoned arrived comprehensive factors, mere boilerplate phrased language unsupported evaluation analysis law. Here how strengths weaknesses evaluated creditor's major equitable.' told 'extensive expense' delay,' conclusion Litigation always necessarily reasoned probable outcome complaint voiced counsel compromises, conclusion,' seems equally applicable aspect 29 sentences. Noting complaining, remarking unlikely disallowance solvency, felt 'significant single complained compromise.' 936, 941. insolvency shortly. argument doubly dubious. When fails adequately investigate refuses provide scarcely surprising fail forward Moreover, may even vast it.17 30 respondent supporting 'the district thorough concerning respect claims.' Respondent's Brief points surrounding thoroughly documented difficult see strengthens respondent's position, carefully setoffs. understand blank slate. Respondent various itself, recommendations Creditors' favoring settlement. militate advisability matters consist denials statements compromised. nothing sound concluding unmeritorious.18 showed merit, thinking incident unlikelihood recovery, advisable, indicates 31 contends contains 'an abundance pleadings allegations' respecting 33. To judgment, needs facts, allegations. sufficient record, provides list references places where found. If, indeed, reluctant attack forth based. deficiency merely formal one. analyzed greater length margin.19 enough say extent solid sort appraising virtually existence valid valuable action. Balancing assertions foundations appear. Particularly noteworthy that, frequent requests notwithstanding available M S ordered imagine favor state 32 us leaves uninformed actions prospects problems More this, devoid settled fashion. conclusion, emphasize intimate actual contrary, assessing either, permit Only whether, terms, III. 33 174, 221(2), confirm standard incorporates absolute doctrine participate accordance respective priorities, 'in *.' Realty Improvement 310 434, 452, 1044, 1052, 1293 (1940). junior fully satisfied, excluding excluded finding insolvent. standards neither confirmation stand. 34 valuing undergoing Consolidated Rock Products Du Bois, 312 510, 526, 61 675, 685, 85 982 (1941): 35 'As Holmes Galveston, Harrisburg Antonio Ry. Texas, 210 217, 226, 638, 639, 1031, commercial property consists expectation it.' Such criterion here, since dealing issue solvency arising connection involving productive properties. earning capacity enterprise freed hand past errors, miscalculations disaster, allocation claimants application requires prediction occur future, estimate, distinguished mathematical certitude, But embraces hence worth, including, nature condition properties, indicate reliable performance.'20 36 book 31, $1,887,185.77. Claims $5,447,370.05. total $2,238,387.62 net $1,978,481.73. figures show liabilities far exceeded controlling importance. going-concern value, appraisal govern concedes depended 'not inherent maintaining level earnings.' 42. 37 valuation structure resulted of.$2,031,403.72. expert $1,607,692 $1,800,000. multiplying 7.7, figure assumption 13% value. taxes $327,500, price-earnings ratio 13.8, $4,519,500. intermediate position. By projecting current remainder year, pre-tax $568,000. Reduced capitalized 10%, yielded going concern $2,780,000. fell below $5,477,370.05 confirmed. 38 feasibility 'more now 1962,' declined initial projected year. decline volume grown substantially, increased competition large steamship serving Rico lower rates thus margin profit. reaffirmed appeal, accurately computed, erroneous.' affirmed. 39 complex province attempt retry litigated Indeed, stated, much weight familiarity Judge witnesses testified presence. conflicting earnings, adopted between. dispute However, examination demonstrates relating assess concern. steadfastly proceedings. error, infected Evaluations accurate evaluations. plays minor unique carrying goods domestic off-shore trade highly competitive generally unprofitable. density, volume, operating-cost flows North Atlantic ports. operating triangle confined South trade. carries about 2% dominant carrier direct home port Jacksonville. novel idea roll-on roll-off towed ripe innovation sort. ills plagued early threw Prevented exigencies capitalizing introduced, watched development container shipping, taken States-Puerto hoped compete. Nonetheless, remains trade, seen 10% 20% frequency interchange piggyback rail Despite inability capitalize idea, remained strong Trade steadily rapidly, commensurately. destructive war markedly lowered revenues earned voyage, revenue $3,801,000 $4,779,000 1964, latest Between 1965 fleet truck 350 670. manager forthcoming installment reconversion significant indebtedness. continued unsubsidized increase revenue, rising costs drop regained established tax-loss carry-over expired, federal taxes. picture flux, continuing revision uses old replacement. supply nearly dried up, understood replacement built scratch. 41 short, seem established, preserved, intense crises. operates change itself faced imminent re-equip fleet. circumstances, notion looking past. Against background examine information TMT. basic source was, manager. short highlights demonstrate inadequacy making crucial determination. 42 attempted next four years, projections was. attained maximum voyages had, looked chartering additional replaced predict cost. asked foreseeable room business, objection scope hearing. projection turn wholly earnings. Those drawn conceded differently able dividends investments soak replied think legitimate. reasonably changes improvements predictions. 43 second expenses, income, passed outlook firm different. interim older ships, impact acquisition newer craft stern, apt cost $1,250,000 $1,500,000 each. studies inquiries conducted, final definite drawings ships. new, better, efficient soon improve company's situation, planning obtained. first, administration increasing, ways. Though Rican remaining comparatively constant, certain. attributable interchange. 44 data submitted undoubtedly experiencing Given, small young rebuilding economic technological change, gained prospects. perfectly obvious introduced gaining rough 45 fundamental insufficient unalterably hostile directed future. During following place cut aimed determining southbound traffic off-peak season: 46 'Q. it? 47 COURT. Well, organization in. Let's assume stay right try get reorganized. 'Mr. MASON. trying 49 That me. exists done proceedings.' 50 way preempted remarking, Witness, want possibilities.' Still later, 51 'All bother waited thing years. gone poorhouse up.' One easily sympathize desire terminate frequently protracted. expedition, justification abandoning standards. easy promptly possible. hung proceedings; sedulously eliminating inquiry may, context, rights relinquished default. elapsed displayed unwillingness tried subject, dialogue occurred: 54 GONSEN. startling figures, 55 on. greatest world go bankrupt few months. fact, succeeded you problem sold. 56 Do Your Honor me evaluation? 57 You do.' 58 Perhaps reading reluctance longer discussing issues. judge's view, Appeals' speak affirmance. pains ruling exclude limit developments unfeasible light necessity expected examined foreclosed having again, still clearly erroneous. 59 argued vigorously judge. require so, addressed contention reorganization: Stockholders insist, estimates substitution type equipment, expanded management. (n)or anticipate do, different operation speculative unreliable.' correct incumbent 'all including earnings) performance.' supra. shown performance, performance inquiring 'mathematical certitude' required. 62 engaged hotly market, severe alter relative standings competitors. whole witnessing innovators. considerable expansion. contradiction replace static hypothesizing unforeseeable structure. evident specific predictable alterations equipment market. shut eyes so doing ignored cardinal evaluation. IV. 63 relied concern, directions hold valuation. prejudging issue, II reconsidered, valued taking prospects, participate. is, therefore, juncture stockholders' will, insolvency, discharging doing, reflects arguments discharged. Finally, deal deemed advisable intervening altered participants. protract aside. 64 For opinion, opinion. 65 Reversed remanded. 66 MARSHALL 67 HARLAN, whom STEWART FORTAS join, dissenting. 68 my remotely justify presence virtue office, disqualified selected decide review massive six occasions stages, task Believing bodes bringing feel justified voting dismiss writ improvidently granted, unrestricted writ. reach 'disqualification' inappropriate me, express reported decisions following: 256 416 (C.A.5th 1958); 259 283 Inc. 292 455 1961), cert. sub nom. 368 956, 82 395, 388 (1962); 334 111 Cir.), 379 879, 147, 86 (1964); 118 C.A.5th 1964). modified prosecute appeals decision. party Appeals, appeared unnamed 890, 894, 572, 608. requested Government stage, 386 901, 866, 779 (1967). positions Committee. (1962). Committee's attacking consolidated mooted vacating confirmation. (1964). Protective etc. 939 1966). issues, briefed length, brief SEC: '1. disinterested precluded assuming presidency company; contemplates '4. refusing violations '5. completed, insolvent.' 2, 3. $250,000 date consummation rather rest numerous scattered argues S' ownership working Petitioner's 28, 29. Accordingly, cash, preferment allows pro rata 1,300,000 CFR 240.10b—5; promulgated pursuant 10(b) 1934, 78j. subordination effectively eliminate modified, n. 9, him follows: '(T)he assistance attorneys office counsel, investigated Merrill-Stevens. consisted assembled together copies individuals Also SEC.' findings course 'investigation,' reasoning 'considered opinion' full. December production Queen, alleging group. acted collusion members management defraud Administration misrepresentation contract premature compliance contract. bear propriety Administration, turning wished access motion, saying 'there shows Court.' reconfirming remand, added text, erroneously Appeals. '(W)here *. Congress percentages class security former substitute latter.' Id., 114, 6. occupies Aside conceded, opposes estoppel, laches, res judicata, reliance. details amounts examined, remote, delay.' record: (1) proof included record). claimed secure (2) letter good recovery. accused (3) report. breakdown her incurred (4) detail 'M—S (5) specifications. principally document argument. deficiencies '(6) behalf summarized hearings, unsuccessfully reduce recovering explained. (7) Objections above motion. status. They arisen reconstructing liens. (8) transcript pages. Most devoted filing memorandum objecting lawyers papers, No presented. someone fault breakdown. (9) specification 35-page contract, charged faulty construction, ships worked responsibility swamping trip, failing Coast Guard other. account, management, collusive designed cheaply purchased inflated values. Some factual abbreviated subheadings growing certificates completion affecting classification rating vessel, fit riveted crack-arresting seams, 3,050 shaft-horsepower shaft, propeller speed 216 r.p.m., 1/2 knots, rating, (e) clean chemically, (f) assumed protected conversion, (g) distilled water preliminary boilers, (h) connected piping, (i) installed baffle plates, (j) performing work, (k) install ventilating system properly, (l) evaporator, (m) feed regulator pump governor (n) compound injector pump, (o) coping excessive oxygen content system, (p) responsible electrical system. guarantee obligation, upon. (10) while agreeing allegations demonstrated prove judicial addition refers accepting Matters subject notice unavailing review. Further J. Bonbright, Valuation Property 880—881 (1937); 6A Collier, 10.13 11.05 (14th ed. 1965); H. Guthmann Dougall, Corporate Financial Policy 656—657 (4th 1962). Frank, Epithetical Jurisprudence Work N.Y.U.L.Q.Rev. 317, 342, 'Value anticipated directly dependent earnings; latter guide

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