Court Opinion

ID: 9642444
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:58:18.772353+00
Date Added: 2024-06-11T18:10:47.870201
License: Public Domain

*259CLARK, Circuit Judge
(dissenting).
Public Utility Holding Company Act of 1935, § 3(a), 15 U.S.C.A. § 79c (a), authorizes the Securities and Exchange Commission to exempt certain holding companies of a predominantly intrastate character from the provisions of the Act, "unless and except insofar as it finds the exemption detrimental to the public interest or the interest of investors or consumers”; but under § 3(c), it “shall” revoke the exemption whenever, on its own motion or upon application of a company involved, it "finds that the circumstances which gave rise to the issuance of such order no longer exist.” This power and duty of revocation was stressed by the S. E. C. in granting exemption to this defendant in 1936.1 Just as the S. E. C. was about to proceed to a scheduled hearing of petitions for revocation of the exemption, defendant, assuming to proceed under authority of a hesitant decision of the State Public Service Commission, took precipitous action to put into effect a plan of recapitalization which would change the status of the preferred stockholders — the very matter at issue in the proceedings pending before the S. E. C. That this action, if not restrained, would indubitably scramble the interests of these stockholders, perhaps beyond recall, is obvious; that it is the duty of the S. E. C., upon a finding that the conditions rather strongly indicated prima facie do exist, to attempt to unscramble them notwithstanding any obstacles placed in its way seems equally obvious. This duty is certainly not made less insistent by the Supreme Court’s solicitude for the observance of security priorities under this Act, shown once again in Otis & Co. v. S. E. C., 65 S.Ct. 483. Nor, indeed, is it lessened by the constitutional overtones apparent by the decision and already introduced into this case by the contention of the preferred stockholders before the State Commission, which that Commission did not attempt to resolve.
Hence the need of the preventive protection of equity is great; such scrambling and unscrambling of securities can do hardly any one any real good and may do innocent investors, lacking inside knowledge, quite grievous harm. In fact, the only ones who may gain- from. the company’s actions, outside of those frankly speculating or betting on the outcome, are seemingly the management and the common stockholders, who alone can vote and for whom the management is acting. But these, too, can profit only to the extent that presenting a fait accompli to the S. E. C. may discourage that body from further activity. Its past record of assiduity in protecting the public interest suggests that even the hope of such a consequence may be in vain.
My brothers’ opinion tends to give the picture of an orderly proceeding under state supervision rudely interrupted by the attempted interference of a federal agency to vindicate in an academic way a power which it has not invoked and may never wish to utilize. Since the issue below was strictly limited to one of power and jurisdiction alone and the S. E. C. with great circumspection has attempted to avoid prejudging the issues which may later come before it, the weight of the case against the defendant is perhaps unimportant at this stage of the proceedings. But denial of relief has been rested to a considerable extent upon what is concluded to be the vagrant nature of the federal interest herein. Hence I deem it necessary to emphasize how differently this matter appeared to the State Commission itself than as here stated. That Commission’s criticism of the *260defendant for voting huge dividends to the common stockholders in the- past and for denying representation to the preferred stockholders, notwithstanding that their dividends were greatly in arrears, its regret at its own lack of power to rectify the situation, and its final vote of only three favor of what appears hardly more than washing of its hands of the matter, over the protest of its able chairman and another commissioner deploring action while, matters were “in a crucial-stage before the Securities and Exchange Commission,” amount to an excoriation of the officers and management which I should have thought- they would have wished show undeserved at the earliest opportunity possible. And certainly no better forum could have been offered them than that of the scheduled hearing before the S. E. C. The support which defendant appears to draw from the State Commission’s action seems somewhat odd; for that action is almost a direct invitation or appeal to the S. E. C. to afford the relief the State agency cannot.2
Again the opinion stresses the difficulty under which an exempted company must operate if it must fear the renewed control of the S. E. C. at any time. I cannot avoid the feeling that practically this is an exaggeration of conditions; in daily life milk producers still seem to -operate, notwithstanding numerous city health require*261ments, we all survive various traffic, police, and oilier regulations, and light and power companies and their holding parents and grandparents are yet operating, in spite of the ministrations of the S. E. C. But the point is that these provisions are announced by the Congress as a part of a general plan of what it considers wise public policy; and we cannot eliminate them, even if we would like to do so. Whatever this court does, indeed whatever may be the end of this present proceeding, the law will remain and the duty of the S. E. C. to hear and decide — if necessary, in a new proceeding and under another section of the statute — will still exist. There are questions here involved too important not to survive a mere ruling of the court’s lack of jurisdiction to interfere at a primary stage of the dispute. In fact, one wonders whether defendant is well advised in seeking to shut off an early adjudication of these important issues, in view of what would seem the well-nigh inevitable consequence of rendering its new securities largely unmarketable during the period of uncertainty.3
In view, therefore, of the undoubted need of a remedy, I think we should direct our attention to possible ways and means to that end, rather than confine ourselves to discovering objections to tbe method which the S. E. C. has determined upon. After all, we are agreed upon the need of a temporary stay; the District Court is not very far distant from the offices of the S. E. C. in Philadelphia; and a group of preferred stockholders is already before us as amicus curiae and obviously ready for greater participation if justified in law. I do not think it would tie difficult for my brothers — upon finding doubts I do not share as to the procedure actually followed • — to find and state a procedure which will accomplish whatever is necessary. And I conceive it a court’s duty to do so, particularly in view of the patent admonition of Congress to that effect, in the first section of the Act, where is set forth at length the evils which gave rise to this legislation4 and the broad public policy intended to be subserved by it. The legislators wisely knew that they could not foresee all the holes which astute counsel might discover in legislation so far-reaching; and so with foresight they stated a broad policy to guide courts in their approach to statutory interpretation. Certainly they could hardly have foreseen a lacuna destructive of the very purposes of specific sections of the Act and resting merely upon the celerity with which a company acts when faced with a call for a hearing before the S. E. C.5
Moreover, this very approach was followed in Securities and Exchange Commission v. U. S. Realty & Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293, which reversed this court’s conclusion, In re U. S. Realty & Improvement Co., 2 Cir., 108 F.2d 794, that nothing could be done about a more serious gap in the Chandler Act dealing with corporate reorganizations. Now, after the event, we seem inclined to *262discover grounds showing that result predestined and easily distinguishable from our present case. Actually, however, the problem of interpretation there was initially much more difficult than the one here. For there, unlike our case, the fundamental jurisdiction of the S. E. C. to act at all was most doubtful, and there appeared to be also positive prohibitions against the S. E. C.’s right even to raise the question. The Chandler Act, in providing for corporate reorganizations under Chapter X and for arrangements under Chapter XI, had set forth overlapping and in part conflicting provisions without any definite suggestion for their reconciliation. Accordingly the Realty Company sought the protection of Chapter XI (wherein the S. E. C. had no rights or duties of any kind), and nothing in express terms negatived its right so to proceed. This initial question of bankruptcy jurisdiction under the statute was the one which proved most difficult throughout the proceedings; out of a total of twelve judges who heard the case at different stages, six were of the view that the company’s right to petition only for an arrangement could not be denied. The eventual denial of that right had to rest, therefore, upon an interpretation of the purposes of the Chandler Act and an exposition of how these would be frustrated by the contrary holding. As to the S. E. C., its only standing, by the terms of the statute itself, was to report upon a plan in a Chapter X proceeding, under certain conditions and with a right of intervention in such a proceeding, but with an express prohibition against appeal, § 208, 11 U.S.C.A. § 608, which suggested a lack of status beyond the limited one expressed. The District Court, however, had allowed the S. E. C. to intervene to protect the public interest involved; and while this part of the court’s judgment was reversed by this court, 108 F.2d 794, 797-799, it was approved by the Supreme Court as a discretionary ruling under Federal Rules of Civil Procedure 24(b), thus establishing the standing of the S. E. C. to litigate in support of its public responsibilities.6
In our present case the jurisdiction of the S. E. C. to act eventually on the issues presented to it for hearing is beyond dispute under the statute itself; and its duty to appear as a litigant to enforce its orders —eventually—is likewise clear under § 18 (f), and cf. §§ ll(d)-(f), 25. The real issue, as developed in the opinion herewith, is whether or not this action is premature. (Of course, as a practical matter, action must be taken now to be really effective.) This is demonstrated by the emphasis in the opinion upon an existing jurisdiction of the court as ground for distinguishing cases such as Continental Illinois Nat. Bank & Trust Co. of Chicago v. Chicago, R. I. & P. R. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110, Commonwealth of Pennsylvania v. Williams, 294 U.S. 176, 55 S.Ct. 380, 79 L.Ed. 841, 96 A.L.R. 1166, and Graselli Chemical Co. v. Aetna Explosives Co., 2 Cir., 252 F. 456. But for my part these cases are authority for the S. E. C. here because its jurisdiction, given it by statute, is being exercised to the fullest extent that is presently .appropriate. It has taken jurisdiction of the petitions and or*263dered a hearing with notice, just as it had committed itself to do on its original grant of exemption. And its jurisdiction, thus properly accepted, is now being flouted as directly as was federal power in the cited cases, or in Securities and Exchange Commission v. U. S. Realty & Improvement Co., supra, where, as we have seen, jurisdiction for the S. E. C. was much more difficult to discover, or in In re Debs, 158 U.S. 564, 15 S.Ct. 900, 39 L.Ed. 1092, which was a still broader assertion of federal power and duly.7 It seems to me that this case is an appropriate vehicle for vindication of an important federal right, brought in the proper federal court within the express language of general federal jurisdiction, 28 U.S.C.A. §41(1).8
But there seems to be a thought that the S. E. C. should first have taken some affirmative action which it could then ask the court to enforce under § 18(f) of the Act. The reasons why the S. E. C. did not itself pass an order of injunction and then ask its enforcement are, as it states, that it wished to proceed with due circumspection and without prejudgment of the case. Further analysis, I believe, will show that it has done all it should properly have done at this stage of the proceedings. It could hardly issue anything like a permanent injunction without due notice and a hearing; this, or its full equivalent, it was proceeding to consider at the appropriate time, and it should be protected against the prejudice to its proper adjudication of the issues which is offered by the hasty action of the respondent in those proceedings before it. If, on the other hand, it should have issued some formal order of temporary restraint —without full hearing, for which time was lacking — mail service from Philadelphia is only overnight and such order can reach the District Court long before our mandate goes down. But in reality what will that add to the steps already taken by the Commission in first ordering a hearing and later in directing its General Solicitor to institute this action and press it for the safeguarding of the hearing as ordered? I assume we are not prepared to question the authorization of the Solicitor to act in the premises; if we are, the order of authorization will hardly be slow in arriving. All these seem to me only formalities, easily satisfied if not already completed, to justify the position of the S. E. C.; if it can come t<D the federal courts after a hearing on December 19 to protect its jurisdiction, it should be entitled to come to us before that date to protect a threat against the fairness of its hearing to determine the exercise of that jurisdiction, and the prejudice resulting from a coup d’etat by the corporation most involved.
Finally, if, notwithstanding these years of operation and the numerous court proceedings where it actually has been heard in protection of the public interest, the S. E. C. is found to have not only no duty, but *264no right, to act in the present situation, then it seems to me the preferred stockholders who are directly threatened with injury have a clear right to ask the court for relief. I should hold that they had such right under the implications of the Act itself, just as has been held with respect to other acts administered by the S. E. C., Baird v. Franklin, 2 Cir., 141 F.2d 238, 244, 245, certiorari denied 65 S.Ct. 38; Charles Hughes & Co. v. Securities and Exchange Commission, 2 Cir., 139 F.2d 434, 437, 438, certiorari denied 321 U.S. 786, 64 S.Ct. 781; Goldstein v. Groesbeck, 2 Cir., 142 F.2d 422, 427, certiorari denied Groesbeck v. Goldstein, 65 S.Ct. 36; but even if they must show diverse citizenship, as well as a federal right, there are undoubtedly persons who can fulfill all such requirements among the group appearing before us as amicus curiae. At least the case should be held below to give them the opportunity to appear as plaintiffs. Cf. Hackner v. Guaranty Trust Co. of New York, 2 Cir., 117 F.2d 95, 98, certiorari denied 313 U.S. 559, 61 S.Ct. 835, 85 L.Ed. 1520.

 Thus, after citing the statutory provision, § 3(e) supra, it appropriately said: “The provisions of Section 1(c) and 3(d) are also sufficient to authorize the Commission to modify or amend its order if it shall find that the exemption is detrimental to the public interest, or that of investors or consumers, by reason of any activities of the applicant or of any such subsidiary company in interstate commerce, or directly affecting or burdening interstate commerce. Of course, no such revocation or modification of the order can be made without first giving the parties in interest due notice and opportunity for hearing.” 1 S.E.C. 345, 346, 1936. Inequitable distribution of voting power was held by the Commission to be a ground for refusing exemption under this section in In re Niagara Hudson Power Corporation, Holding Co. Act of 1935, Release No. 5115, June 20, 1944; cf. Ecker v. Western Pac. R. R. Corporation, 318 U.S. 448, 474, 63 S.Ct. 692, 87 L.Ed. 892; Okin v. S. E. C., 2 Cir., 145 F.2d 913. In the present case the Commission was also acting under § 2 (a) (7) (B), petitions under the two sections being consolidated for a single hearing.

 On July 27, 1944, the Commission through Chairman Maltbie rendered an opinion with these significant passages (quoted in the complaint herein):
“It is quite apparent that the common stockholders do not intend that the management and control of the company shall pass out of their hands, regardless of the equities of the situation. But if they sincerely believe that the plan wiE actuaEy deprive the interests which have controlled the company of their control in the' future, what objection do they have to giving aE stockholders voting rights in proportion of their claims against the company? .
“The power .of the Commission to remedy this condition directly is nil. The Security and Exchange Commission has dealt rather summarily with such conditions in companies under their jurisdiction, but we have no power to compel a company, to readjust its Stocks or voting rights in accord with what is considered sound finance and equitable considerations. We can only approve or disapprove, pointing out the facts and the regards in which any proposal fails to deal justly and ■ wisely with the interests affected. Counsel for the company argues that they have ‘made a sacrifice’ because they could have sold their stock prior to the stockholders’ meeting of April 25, 1944 for at least eleven sixteenths dollar per share and received $8.25 for 12 shares (brief p. 11), whereas under the proposed plan each holder of 12 shares is to receive only $5.00 stated value in new common stock. The extent to which -the common stockholders could properly claim the offer is magnanimous and is a sacrificial offering may be open to debate. Having received in recent years four times the stated value of their common stock which would have been more than sufficient to pay all arrearages on the preferred stock, it hardly behooves them to assert their great .virtue. If they had had as much consideration for the preferred stockholders as they purport to have now, the company could have avoided the non-payment of preferred dividends for six years.”
Another opinion, dated October 17, 1944, and adopted December 14, 1944, with Chairman Maltbie and Commissioner Burritt not voting for the reasons stated in the text, went into the “Inadequate Participation by Preferred Stockholders,” the Hmited steps taken to meet the problem, and the question raised whether it woiEd be better to abandon the plan altogether or accept what was proposed. In deciding upon the latter it said that the proposed plan was a step in the right direction from the standpoint of the consumer and that it did place the company’s financial structure upon a more stable basis. Con-timing it said: “However, from the standpoint of preferred stockholders, the plan leaves much to be desired. But the Legislature has not given this Commission the power to formulate a new plan or to engraft changes upon the proposed plan and to compel the company to accept the changes. A11 that we are authorized to do is to approve or to reject the plan proposed by the company. The Legislature has provided a remedy for any stockholder who is dissatisfied with the plan. He may seek an appraisal of his stock and obtain the appraised value thereof upon compliance with the conditions specified in §§ 21 and 88 of the Stock Corporation Law.” Obviously this latter remedy is not appropriate to restore or protect the value which the plan has already threatened to destroy.

 In the light of this situation, resulting from the provisions of the federal statute itself, the memorandum of the Now York Curb Exchange as amicus curiae, suggesting, and apparently objecting, that “the stockholders are in effect frozen and this condition will continue so long as the injunction is in effect,” seems surprising. The Exchange ought hardly to take sides in a dispute between classes of investors. But in any event, the Exchange would seem to have some obligation to warn traders of the defects attaching to the new stock even if and when it becomes unfrozen.

 One of these was the squeezing out of preferred investors. See Sen.Rep. No.621, 74th Gong., 1st Sess., 1935, 20, 58; lI.It.Rep. No.1318, 74th Cong., 1st Sess., 1935, 12; S.E'.C. Report on Protective and Reorganization Committees, Part VII, 109-187; Dodd, The Relative Rights of Preferred and Common Sliareholders in Recapitalization Plans Under the Holding Company Act, 57 Harv. L.Rev. 295; Dodd, Fair and Equitable Recapitalizations, 55 Harv.L.Rov. 780, 730-800, 810; Latt.y, Fairness — The Focal Point in Preferred Stock Arrearage Elimination, 29 Va.L.Rev. 1, 27-39; Otis & Co. v. S. E. C., 65 S.Ct. 483, supra, pra.

 Defendant stresses the need of speedy action under the order of the State Commission and points to the provision in, the order that it shall report its acceptance within SO1 days after service of the order. But that certainly did not reqiiire action the next day and three days before the date of the S. E. O. hearing. Moreover, ev§n if the acceptance required was other than formal, and called for immediate execution of the plan, the Commission, which had been delaying action to secure better results, would obviously have granted more time upon request for cause shown.

 The opinion suggests that recognition of the S. E. O.’s right to intervene under F.R.G.P. 24 does not support its right to sue directly. It is believed that nothing in Rule 24 supports such a distinction. True, intervention -will not require new grounds of federal jurisdiction — an issue which must be faced on an original suit; and injury justifying intervention may more clearly appear when litigation is already under way than where suit is being instituted against threatened harm. This is brought out by one of the cases cited in the opinion, Pittsburgh & W. Va. R. v. United States, 281 U.S. 479, 486, 50 S.Ct. 378, 381, 74 L.Ed. 980, as follows: “The mere fact that appellant was permitted to intervene before the Commission does not entitle it to institute an independent suit to set aside the Commission’s order in the absence of resulting actual or threatened legal injury to it.” (Italics added.) So the reference in the U. S. Realty case to the 'fact that no personal or pecuniary interest was required for the S. E. C.’s intervention, citing Commonwealth of Pennsylvania v. Williams, 294 U.S. 176, 55 S.Ct. 380, 79 L.Ed. 841, 96 A.L.R. 1166, whgre the Commonwealth was heard under similar conditions, is support for the general authority of the S. E. C. to act in vindication of a public interest, rather than expansion of a procedural rule beyond anything contemplated in its history. See Commercial Cable Staffs’ Ass’n v. Lehman, 2 Cir., 107 F.2d 917; 49 Yale L.J. 927, 934; Commentary, Nature of Permissive Intervention under Rule 24b, 3 Fed. Rules Serv. 704; Berger, Intervention by Public Agencies in Private Litigation in the Federal Courts, 50 Tale L.J. 65.

 Board of Railroad Commissioners of North Dakota v. Great Northern R. Co., 281 U.S. 412, 50 S.Ct. 391, 74 L.Ed. 936, so far as it goes is also a direct authority. There it was held that intrastate railroad rates established by a state commission would not be set aside because of the pendency of proceedings before the Interstate Commerce Commission at the suit of the carriers. The Court says significantly, 281 U.S. at page 430, 50 S.Ct. at page 396: “It is urged that the restraining power of the Court is needed to prevent irreparable injury. But, in this class of cases, the question whether there is injury, and what the measures shall be to prevent it, is committed for its solution .preliminarily to tbe Interstate Commerce Commission.”

 As the S. B. C. urges, it seems an overrefinement, suggesting an unnecessary limitation upon the general broad power of federal courts to protect federal jurisdiction as established by Congress, to place jurisdiction here entirely upon the terms of a single specific statutory enactment and thus circumscribe it by what is there expressed. It seems to me that the S. B. O. should be held entitled to sue here as an officer of the United States enforcing a public right under the laws of the United States. But if it is necessary to look to new grants of power, I suggest that §§ 18 (f) and 25 of the Act do chart the course, and that it is not sufficient to say that they apply only after definite orders of the S. B. O. and for violations thereof. As developed later in the text, it would seem that what the S. B. O. did amounted in substance to a determination that temporary restraint was in order. And rights and duties under the Act were, therefore, definitely threatened, so as to make these statutes applicable if a limited source of jurisdiction is considered thus requisite. Moreover, if there is doubt whether or not the necessary formalities have been completed by the S. B. C., the case should be held, as stated below, until we are sure they have been completed.