Court Opinion

ID: 9449539
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:14:34.278886+00
Date Added: 2024-06-11T17:31:52.255020
License: Public Domain

CLARK, Circuit Judge
(dissenting).
The present petition would seem to present an a fortiori situation for a rehearing by the full court under any and all of the principles heretofore suggested for in banc hearings. See Walters v. Moore-McCormack Lines, 2 Cir., 312 F.2d 893, 894. The decision itself, which appears to be contrary to decisions of this court and of the Supreme Court, affects a great number of persons interested in this far-flung corporate empire. But further, it puts in jeopardy practically all attempts by the SEC to execute its statutory responsibility to investigate and supervise the reorganization of large corporations in this circuit, since the denial of such power in a case with the complexity of corporate relations here shown presages a potential battle in practically all such cases in the future. And the disagreement with previous precedents is highlighted by an interpretation of statutory amendments of 1952 at variance with our previous views. The confusion in legal principle thus engendered in the circuit having traditionally the greatest number of corporate reorganizations of the country seems to me thus quite obvious and to merit consideration by the full court.
To particularize further, it should first be noted that we have here all the criteria emphasized by the Supreme Court in the leading decisions of Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293, and General Stores Corp. v. Shlensky, 350 *951U.S. 462, 76 S.Ct. 516, 100 L.Ed. 550, as requiring reorganization under SEC supervision in Chapter X proceedings, rather than an unsupervised arrangement under Chapter XI. The debtor’s commercial empire is indeed expansive, including not only its own nationwide chain of women’s and children’s apparel shops, but also the operation of 130 women’s apparel stores of Darling Stores Corporation pursuant to an operating agreement and the control of A. S. Beck Shoe Corporation, which manufactures shoes and owns and operates a retail shoe store chain of over 250 units. Until October, 1962, the debtor, through its “Peerless-Willoughby” division, was the largest retail seller of photographic and audio equipment and supplies in the United States. Grayson’s common stock is listed on the New York Stock Exchange and is held by approximately 3,470 investors. As of August 14, 1962, 803,507 shares of ■common were outstanding. The stock of Grayson’s subsidiary A. S. Beck is listed ■on the American Stock Exchange. Thus the public nature of the debtor would seem beyond debate.
Furthermore, the possibility that new management is sorely needed is suggested from the fact that until November 1960, when the present management gained control of Grayson, the debtor had enjoyed many consecutive years of profitable operation. It had a good ratio of ■current assets to current liabilities; and with but one minor exception, its assets were free from liens. The expansion program undertaken by the debtor’s pres•ent management proved disastrous. As the Supreme Court noted in General Stores Corp. v. Shlensky, supra, 350 U.S. 462, 76 S.Ct. 516, 100 L.Ed. 550, the need for an accounting by the management for misdeeds which caused the debacle ■ and the need for new management are ■ sure indicators of the desirability of a Chapter X proceeding, rather than one under Chapter XI.
The “Plan of Arrangement” — accepted by the district court and our panel here— .also presents curiosities which would appear to require SEC expertise for its proper evaluation. It calls for no sacrifices from the stockholders, save only the surrender by Gluck, the chairman of the debtor’s board of directors, of part of his Grayson stock holdings, with the right to repurchase any time in the next three years. Since, on its face, this aspect of the plan appears to be the necessary cost to Gluck of prolonging his management which heretofore has been so disastrous for the debtor, independent appraisal of whether Grayson got the better end of the bargain would seem imperative. Essentially the plan is but a long moratorium on any collection of the debtor’s heavy liabilities. For the unsecured debts, including claims arising from the rejection, prior to confirmation, of execu-tory leases and contracts, are to become “General Debentures” payable only in minimum fixed annual installments beginning in January 1965 and continuing for eleven years from the date of confirmation. There are no changes proposed in the debtor’s structural ties with its related and subsidiary corporations; and while some safeguards are placed on further outlays of funds, raises in compensation of certain executives, and the like, it would seem that future financial exigencies, of the kind which are thought to call for hurried action here, may well lead to recurrent crises.
In other words, the optimistic predictions of management which has shown itself at the very least inept in the past do not deserve to be taken at face value, as is being done here and below. Indeed, as a practical and common-sense matter, the situation would seem compelling to call for that careful investigation which is the SEC’s reason for existence. It parallels very closely the General Stores case, as well as Securities and Exchange Commission v. Liberty Baking Corp., 2 Cir., 240 F.2d 511, cert. denied 353 U.S. 930, 77 S.Ct. 719, 1 L.Ed.2d 723, and Mecca Temple of Ancient Arabic Order of Nobles of Mystic Shrine v. Darrock, 2 Cir., 142 F.2d 869, cert. denied 323 U.S. 784, 65 S.Ct. 271, 89 L.Ed. 626.
*952The only countervailing reasons for excluding the government agency charged with representing the public from considering a situation so requiring its study is that the creditors for the most part seem to be approving and that there is need for haste lest the business be disrupted. These would seem rarely controlling to furnish overriding objections to a case which the SEC on preliminary investigation believes should be the subject of further agency supervision. As the Supreme Court well said in the pioneering case of Securities and Exchange Commission v. United States Realty & Improvement Co., supra, 310 U.S. 434, 448, n. 6, 60 S.Ct. 1044, 1050, 84 L.Ed. 1293: “The basic assumption of Chapter X and other acts administered by the Commission is that the investing public dissociated from control or active participation in the management, needs impartial and expert administrative assistance in the ascertainment of facts, in the detection of fraud, and in the understanding of complex financial problems.” It is quite natural for creditors threatened with the loss of all to accept a proffered half or a quarter loaf or less without full knowledge of corporate history which the SEC has the skill to develop. So the emphasis on speed is a customary step in pressure upon the creditors; it would seem of more doubtful validity even than usual here, where the only substantial action called for is that creditors bar themselves from pressing their claims for many years.
Finally the action of the panel in employing the 1952 amendments to Chapter XI as a means of substantially nullifying the United States Realty case requires the most careful review by the entire court. Actually the stated purpose of the legislators was to codify the holding of the United States Realty case. See H. R. 2320, 82d Cong., 2d Sess. 2, 3, 19; S.Rep. No. 1395, 82d Cong., 2d Sess. 20, U. S. Code Congressional and Administrative News 1952, p. 1960. Thus the addition of § 328 to Ch. XI provided an effective means of shifting a case from Ch. XI to Ch. X, the procedure here sought by the SEC. The amendment to § 366 so relied on had nothing whatsoever • to do with the question of which procedure was to be required in a particular case; it dealt only with the confirmation of an arrangement after that procedure had been decided upon and substantially completed. Our understanding that no change in the criteria stated in the United States Realty case had been made by this amendment is clearly shown in our reference to it in General Stores Corp. v. Shlensky, 2 Cir., 222 F.2d 234, and in Securities and Exchange Commission v. Liberty Baking Corp., supra, 2 Cir., 240 F.2d 511, cert. denied 353 U.S. 930, 77 S.Ct. 719, 1 L.Ed.2d 723. The Supreme Court’s affirmance of our holding in the General Stores case, in General Stores Corp. v. Shlensky, 350 U.S. 462, 76 S.Ct. 516, 100 L.Ed. 550, without questioning this conclusion, though the amendment was heavily relied on by the two dissenting justices (350 U.S. 468, 471-472, 76 S.Ct. 520, 521-522, 100 L.Ed. 550), shows that our view was approved. Both in view of the statutory terms and of this background the panel repudiation of the conclusion appears doubtful.
The trend of the law as shown by this case fills me with a deep sense of nostalgia. When I came to the court a quarter century ago I was faced almost at once with the determination of my colleagues to reverse a district court decision that the United States Realty & Improvement Co. could not seek an arrangement under Ch. XI, but was limited to reorganization with SEC intervention under Ch. X. The arguments then made seem substantially those repeated in the panel opinion herewith. But we had the background of the monumental study conducted by Professor (later Mr. Justice) Douglas on the gross evils of the traditional equity reorganization of corporations, culminating in the extensive report of the Securities and Exchange Commission (pursuant to the direction of Congress), which sparked the Chandler Act revision of the Bankruptcy Act to *953provide for agency supervision of large corporate reorganizations. And the question of choice between Ch. X and ■Ch. XI proceedings had been well covered in the prescient article by Rostow & ■Cutler, Competing Systems of Corporate Reorganization: Chapters X and XI of the Bankruptcy Act, 48 Yale L. J. 1334 (1939). So I summoned courage to dissent, In re United States Realty & Improvement Co., 2 Cir., 108 F.2d 794, 799-802; and in due course the Supreme ■Court reversed in a decision by Mr. Justice Stone (with three justices dissenting) to establish the principles as we now know them. Securities and Exchange Commission v. United States Realty & Improvement Co., supra, 310 U.S. 434. And in the three cases from this circuit cited above, we have filled in further details of this exposition; in two of these the Supreme Court denied certiorari, and in the third (the General Stores case) it affirmed in a reasoned opinion. Moreover, we have often expressed grateful appreciation to the SEC for its effective work in this field and have at times expressed regret that we have not had more of it. See Greene v. Dietz, 2 Cir., 247 F.2d 689, 695, 696, and cases cited.
So it would have seemed that these principles had been so firmly set that they could not be rejected in the summary and almost casual fashion as they are here disposed of. Now it appears that the battle for public supervision won in 1940 has all to be done again— if it can be rewon after this setback. It has been vigorously asserted that the regulatory agencies have been grievously at fault in not announcing rules and principles upon which they act. As concerns this agency, however, it would seem that it has had to expend so much of its time and energy in even maintaining a foothold on that regulation for which Congress had created it that it has little opportunity to build much beyond this. ■Compare Securities and Exchange Commission v. Capital Gains Research Bureau, 2 Cir., 300 F.2d 745, 751-754; ;s.c., 306 F.2d 606, 611-620, cert. granted 371 U.S. 967, 83 S.Ct. 550, 9 L.Ed.2d 538. So I hold that before we require such extensive refighting of old battles won, we should take time for a resurvey by the full court.
I dissent from the denial of a rehearing in banc.