Court Opinion

ID: 9421249
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:57:37.124734+00
Date Added: 2024-06-11T17:22:29.433634
License: Public Domain

Mr. Justice Frankfurter,
whom Mr. Justice Burton joins,
dissenting.
This is a proceeding for confirmation of an arrangement under Chapter XI of the Bankruptcy Act, 11 U. S. C. § 701 et seq. The controlling facts are these. Petitioner is a corporation with a simple capital structure, with its common stock, which is traded on the American Stock Exchange, held in the hands of 7,000 stockholders. The proposed arrangement exclusively affects the unsecured creditors, including wage earners whom the Bankruptcy Act accords priority of payment. All these creditors strongly support confirmation of the arrangement. The Securities and Exchange Commission, in its capacity of protector of public investors, opposed the resort to Chapter XI and insisted on the reorganization procedure defined by Chapter X. The stockholders themselves have not opposed the arrangement, barring only a single stock*469holder representing two-tenths of one percent of the common stock of the debtor. There is no suggestion of fraud or other improper behavior on the part of the management of the debtor, which has suffered business misadventure apparently attributable to changes in consumer response to the type of business conducted by the original Schulte tobacco stores. The District Court dismissed the petition under Chapter XI, with leave to the debtor to meet the requirements of reorganization under Chapter X.* 129 F. Supp. 801. A divided Court of Appeals sustained the District Court, 222 F. 2d 234, and its judgment is here affirmed.
The essence of this Court’s decision is that the District Court acted as it did in the exercise of allowable discretion. But if the exercise of discretion by the District Court was guided by inappropriate standards, its exercise of discretion is left without a supporting basis and cannot stand. Such, I believe, is the situation here.
The District Court was set on its course by what it deemed the guiding ruling of this Court in Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U. S. 434. But the usually careful district judge misconceived the demands of that case upon him by relying on some general observation without the qualifying illumination of the literary and factual context of what he quoted from the opinion in that case. The District Court found guidance in the statement that “the two chapters [X and XI] were specifically devised to afford different procedures, the one adapted to the reor*470ganization of corporations with complicated debt structures and many stockholders, the other to composition of debts of small individual business and corporations with few stockholders 310 U. S. 434, 447.
In the first place, his quotation breaks into a sentence, which plainly enough indicated that what the district judge quoted was not the ratio decidendi of the Realty case but a loose generality. The district judge left unquoted the qualifying introduction, “While we do not doubt that in general,” with the further cautionary phrase, “as will presently appear more in detail . . . .” The later details derive significance from the wholly different set of facts in the Realty case. In that case the arrangement for which shelter was sought under Chapter XI involved changes affecting security holders, and those changes, the Court found, easily might adversely affect the creditors. This precluded a finding that the arrangement was “for the best interests of the creditors,” which is an essential requisite for confirmation. The Court was very careful to say that the application it gave to Chapter XI in the Realty case “does not mean that there is no scope for application of that chapter in many eases where the debtor’s financial business and corporate structure differ from respondent’s.” 310 U. S., at 454.
Again, while what was quoted from the Realty case by the district judge seemed to indicate a sharp line between corporations “with many stockholders” and corporations “with few stockholders,” assigning Chapter X to the former and restricting Chapter XI to the latter, the opinion in the Realty case went on to say (what was not quoted below), “we find in neither chapter any definition or classification which would enable us to say that a corporation is small or large, its security holders few or many, or that its securities are ‘held by the public,’ so as to place the corporation exclusively within the jurisdiction of the *471court under one chapter rather than the other.” 310 Ü. S., at 447.
The upshot of the matter is that a critical reading of the extended opinion in the Realty case requires the conclusion that all its general observations must be limited to the particular situation which elicited them. And yet, the controlling consideration in the District Court’s dismissal of the Chapter XI proceeding is fairly attributable to the fact that the plan of arrangement concerned “a corporation with 7,000 holders of two and a quarter million shares of stock listed on the American Stock Exchange and recently selling at under two dollars a share.” 129 F. Supp. 801, 805. Such a basis for judgment disregards the informal, efficient, and economical procedure for financial readjustments of a corporation with its creditors where no change in the capital structure is involved, where no charge of impropriety in corporate management is intimated, where all the creditors urge that the proposed arrangement is for their “best interests” (§ 366 of the Chandler Act, 52 Stat. 840, 911), and where a refusal to entertain the arrangement would work real hardship to 174 wage claimants.
Not only was the District Court’s exercise of discretion against entertainment of the Chapter XI proceeding based on a misconception of the holding in the Realty case. It was also in disregard of the amendment to Chapter XI by § 35 of the Act of July 7, 1952, 66 Stat. 420, 433. By that amendment Congress eliminated the requirement that a plan of arrangement had to be “fair and equitable.” That requirement was in Chapter XI, as it stood at the time of the Realty decision, and by it Congress had written into Chapter XI the absolute rule for equity reorganizations laid down by this Court in Northern Pacific R. Co. v. Boyd, 228 U. S. 482, and Case v. Los Angeles Lumber Products Co., 308 U. S. 106. (H. R. Rep. No. 2320, 82d *472Cong., 2d Sess. 21.) Even if the “fair and equitable” rule were still in Chapter XI, there is nothing in the facts of this case to show that the arrangement would not satisfy that requirement, for we have noted that the plan of arrangement here, unlike the situation in Realty, leaves untouched the position of the security holders. Since the Realty decision to no small degree turned on the enforcement of the “fair and equitable” rule, it is noteworthy that no consideration was given by the lower courts, and none is given by this Court, to the significance of this amendment by Congress. One would suppose that the elimination, in 1952, of this drastic requirement is the clearest possible indication that Chapter XI should be given a more generous scope than even the narrowest reading of Realty might suggest. Chapter XI should not be shriveled in its availability.
I would reverse the Court of Appeals.

At the time of the Realty decision, if a proceeding was found to have been improperly brought under Chapter XI, it had to be dismissed and a proceeding started anew under Chapter X. Section 30 of the Act of July 7, 1952, amended the law so as to allow a transfer of a Chapter XI proceeding, if improperly filed thereunder, to Chapter X. 66 Stat. 420, 432, and see H. R. Rep. No. 2320, 82d Cong., 2d Sess. 19.