Court Opinion

ID: 9447227
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:29:29.128035+00
Date Added: 2024-06-11T17:30:57.234957
License: Public Domain

SHACKELFORD MILLER, Jr., Circuit Judge
(dissenting).
I fully realize the prolonged period of time during which this reorganization has been in litigation and the sincere desire of those interested in it that it be *515brought to a conclusion. But, as the numerous appeals to this Court, referred to in the majority opinion, will show, the operation of the debtor corporation by the Trustee has been most successful over such period of years, with the most unusual result that successive delays have been necessary in order that proposed plans of reorganization could be amended or a new plan submitted so as to properly reflect for the benefit of creditors the materially improving financial and economic condition of the debtor under the management of the Trustee. Our previous treatment of this proceeding clearly shows that we have consistently recognized that the equitable treatment of creditors under materially improved financial conditions fully justified additional delay in bringing the proceeding to a conclusion. It is against this background that we must consider the present appeals. I see no reason why we should now reject that principle if materially changed conditions again warrant a further delay.
The majority opinion gives little, if any, consideration to the fact that the real reason for considering another amendment at the present time is that the proposed amended Plan makes available for certain creditors approximately $3,500,000 more in cash for the payment of their claims than is available under the present Plan. The proper and equitable distribution of this additional money is not provided for by the present Plan. Courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity. Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S.Ct. 695, 78 L.Ed. 1230. I do not believe that, based on reasons largely technical and on the fact that this reorganization has lasted for an unusually long time, we are justified in closing our eyes to this available increase in asset value of the debtor corporation, and in failing to allocate it among the creditors in some orderly and equitable manner.
The present situation is the result of the following developments. The Plan which has been approved and confirmed, but not consummated, was proposed in February, 1958, on the basis of the financial conditions prevailing as of December 31, 1957. Subsequent to confirmation by this Court on January 15, 1959 (262 F.2d 510) and denial of certiorari by the Supreme Court on April 27, 1959, Kern v. Columbia Gas System, 359 U.S. 979, 79 S.Ct. 979, 3 L.Ed.2d 928, responsible bankers and underwriters interested in reorganizing the debtor made commitments for debt financings and stock underwritings aggregating more than $9,-000,000, the effect of which was to produce for reorganization purposes approximately $3,500,000 more in cash than is provided by the present Plan. These commitments recognized and gave effect to a materially improved financial condition of the debtor corporation. It is true that this original commitment was subject to a time limitation of August 31, 1959. But, by a written letter of August 28, 1959, the date of October 31, 1959, was substituted for August 31, 1959, together with the statement that it was realized that further extensions might be necessary and it was the present intention, assuming no substantial change in general market conditions, to make any necessary extensions, although there was no commitment to do so. The proposed changes in the Plan give effect to this increased value of the assets of the debtor corporation.
For our present purposes it is sufficient to briefly summarize the difference between the treatment of creditors under the present Plan and the proposed treatment under the amended Plan in view of the increased asset value of the debtor corporation. Both the present Plan and the proposed amended Plan deal mainly with the rights and priorities of three classes of creditors, (1) American Fuel public creditors, (2) Kentucky Fuel public creditors, and (3) Columbia Gas. Both Plans provide for the payment in full in cash of the American public creditors in the approximate amount of $4,-900,000 and, by agreement of the parties, these creditors have been paid. The issue involved is accordingly the treatment to be received by, and the allocation of assets between Kentucky public credi*516tors and Columbia Gas. This Court has heretofore adjudicated the priorities between these creditors. The claim of Columbia Gas is subordinated to the claims of all other creditors. Columbia Gas & Electric Corp. v. United States, 6 Cir., 151 F.2d 461, modification denied 6 Cir., 153 F.2d 101, certiorari denied 329 U.S. 737, 67 S.Ct. 48, 91 L.Ed. 636; In re Inland Gas Corporation, 6 Cir., 241 F.2d 374, 381-382. After the payment of the principal of the claims of Kentucky public creditors, but without post-bankruptcy interest, Columbia is entitled to the payment of its claim, without post-bankruptcy interest on the unsecured portion thereof. In re Inland Gas Corporation, supra, 6 Cir., 241 F.2d 374, 382. This is now the law of the case.
The present Plan was based upon this law of the case. After payment of the principal of the claims of Kentucky public creditors in the amount of $2,466,316, the Plan allocates to Columbia all of the new common stock of the reorganized company, valued at $3,021,576, which is less than the principal amount of its claim with interest on the secured portion thereof, totaling $5,780,664. If this valuation had remained constant, the Plan would be fair and equitable.
But, the new financing commitments of 1959 recognized materially increased value of the common stock of the reorganized company, with the probable result that Columbia would receive through the common stock allocated to it more than $5,780,664, which is the total amount of its subordinated claim, while Kentucky public creditors, to which Columbia is subordinated, would only receive the principal of their claims without post-bankruptcy interest. This is directly contrary to the ruling which this Court had previously made and consistently adhered to, that the rights of Columbia are completely and fully subordinated to the claims of all other creditors (151 F.2d 461; 153 F.2d 101; 241 F.2d 374, 381-382). Considering what this Court said in 151 F.2d 461 about the conduct of Columbia in causing the financial collapse of the debtor corporation, I am unable to see how, at the present time, we can judicially approve the consummation of a plan which, in effect, will pay post-bankruptcy interest in part on the unsecured claim of Columbia and at the same time deny any post-bankruptcy interest on the claims of the Kentucky public creditors unless such result is now required by the applicable statutory provisions.
The proposed alterations prevent this result. The additional cash now available will be used to pay off in full in cash the total claim of Columbia in the amount of $5,780,664. Certainly, Columbia, a subordinated creditor, can have no reasonable valid objection to being paid in full in cash. The Kentucky public creditors will receive in lieu of the cash payment of $2,466,316 provided by the present Plan, new common stock of the par value of $3,265,160, plus the right to subscribe to $694,650 par value of new common stock. The underwriting commitment makes it possible for any Kentucky public creditor who prefers cash to sell the stock issued to him at its par value to the underwriters.
It will thus be seen that the proposed amended Plan will not only pay Columbia in full and at the same time keep it in its subordinated position to Kentucky public creditors, but will result in substantial increased payments to the Kentucky public creditors over what they would receive under the present Plan. This appears to me to be the proper equitable result and one which should be made effective unless we are barred from doing so by the applicable statutory provisions.
There is no legal bar to the alteration of the Plan at the present time, even' though it has been confirmed. Sec. 222 of the Bankruptcy Act, Sec. 622, Title 11, U.S.C.A., provides that a plan may be altered or modified, with the approval of the judge, after its confirmation “if, in the opinion of the judge, the alteration or modification does not materially and adversely affect the interests of creditors or stockholders.” The majority opinion points out numerous differences between the present Plan and the proposed amended Plan, taking the position *517that the proposed changes constitute more than an alteration or modification. But, the statutory test is not the difference in form, but whether the alteration materially and adversely affects the interests of creditors or stockholders.
The essential difference between the two Plans is that the present Plan gives the available cash to Kentucky public creditors and the stock of the new company to Columbia, while the proposed amended Plan pays cash to Columbia instead of stock and gives the stock to Kentucky public creditors instead of cash. Clearly, this does not materially and adversely affect the interests of creditors, as such interests are now defined by the law of the case. Its effect is a more equitable distribution of the available assets. Changes in the proposed corporate setup to make this more equitable distribution effective are, of course, necessary, but I do not regard such formal changes as being more than a necessary alteration of the present Plan in order to give the stock to Kentucky public creditors instead of to Columbia. Nor, do the proposed changes, as hereinafter pointed out, depart from the law of the case. On the contrary, in the light of present developments, the present Plan no longer follows the law of the case and changes are necessary to carry out those rulings. Accordingly, I do not regard the proposed changes as anything more than necessary alterations permissible under the statute. Any legal bar to its adoption, if any exists, would come from Sec. 229 of the Bankruptcy Act, Sec. 629, Title 11, U.S.C.A., which provides that when a plan has been substantially consummated, as defined in that section, it may not thereafter be altered or modified so as to adversely affect the participation provided for any class of creditor's or stockholders by the plan. The present Plan has not been substantially consummated as therein defined.
The record indicates that the District Judge refused to consider or discuss the merits of the proposed changes, but made the order rejecting them and ordering consummation of the present Plan because he was of the opinion that the changes were predicated solely on an asserted right on the part of the public holders of Kentucky bonds and debentures to post-bankruptcy interest, and that such asserted right had already been adjudicated adversely to said public holders of Kentucky securities on two prior occasions by this Court. No hearing was held on the merits of the proposed changes. I construe the ruling as one of law holding that the proposed changes were not legally entitled to consideration, rather than an exercise of discretion in deciding whether the merits of the proposed changes were such as to receive his approval, which was necessary under the statute.
Considering it as a legal question, I am of the opinion that the ruling was incorrect. As pointed out hereinabove, this Court held in In re Inland Gas Corporation, supra, 241 F.2d 374, 381-382, that Kentucky public creditors were not entitled to post-bankruptcy interest. No doubt, the District Judge had reference to that opinion. The proposed changes pay to Kentucky public creditors a portion (but not all) of post-bankruptcy interest on their claims. The reason for the ruling in 241 F.2d 374, 381-382, was that it w?as the well established general rule that creditors in bankruptcy are not entitled to post-bankruptcy interest on unsecured claims, and the Kentucky public creditors, under the facts then existing, did not come within any of the three recognized exceptions to the rule. One of the recognized exceptions referred to in the opinion is that if the alleged “bankrupt” proves solvent, creditors receive post-bankruptcy interest before any surplus reverts to the debtor. At the time when the proposed changes were offered, the debtor had become solvent within the meaning of that exception. American Fuel creditors were being paid in full, and under the proposed changes Columbia would be paid in full, leaving Kentucky public creditors as the only class of creditors remaining. They are, accordingly, entitled to post-bankruptcy interest, insofar as remaining funds are *518available to do so, before any surplus reverts to the debtor. American Iron & Steel Manufacturing Co. v. Seaboard Air Line Railway, 233 U.S. 261, 266, 34 S.Ct. 502, 58 L.Ed. 949; City of New York v. Saper, 336 U.S. 328, note 7, page 330, 69 S.Ct. 554, 93 L.Ed. 710; Littleton v. Kincaid, 4 Cir., 179 F.2d 848, 852; In re F. P. Newport Corp., Limited, D.C.S.D.Cal., 123 F.Supp. 95, 99, appeal dismissed F. P. Newport Corp. v. Sampsell, 9 Cir., 216 F.2d 344; Marcalus Manufacturing Co. v. United States, Ct.Cl., 169 F.Supp. 821.
It may be that upon a hearing and discussion of the proposed changes, their merit may or may not be as strong as they now appear in the absence of a hearing and a critical analysis thereof. But, the proposed changes appear to me on their face to have sufficient merit to entitle the proponents thereof to a hearing and consideration of them on their merits. I think it was error to reject them without such a hearing.
I would reverse the judgment and remand the case for a hearing and a consideration of the proposed changes on their merits in accordance with the views expressed herein.