Court Opinion

ID: 9883630
Source: CourtListenerOpinion
Date Created: 2023-10-06 02:02:27.105976+00
Date Added: 2024-06-11T07:48:16.601400
License: Public Domain

CLARK, Circuit Judge
(dissenting).
Chapter X was designed to insure the reorganization of large corporations with a maximum of safety for the investing public. Chapter XI was enacted to permit the rehabilitation of small commercial enterprises with a maximum of convenience for the oppressed debtor. Quite naturally, there are vast differences in both method and result between the procedures of the two chapters. Especially significant is the close judicial and administrative supervision over the activities of all persons specified by Chapter X, compared with the freedom of maneuver permissible under Chapter XI. I do not believe we are justified in opening a hole in the Chandler Act, 11 U.S.C.A. § 1 et seq. through which great corporations may escape from Chapter X. And I think it particularly unfortunate to do so by (as it seems to me) disregarding the interrelation of these two chapters, when read together in the light of their purpose, for a literal and mechanical interpretation of a section or two of the Act specifying who may be bankrupts.1
I believe that X and XI are mutually exclusive, that a corporation which is amenable to one is not amenable to the other, and that the proper place for the United States Realty and Improvement Company is in a X proceeding. If this much be so, it was the duty of the district court, on its own motion or as soon as the matter was in any way called to its attention, to dismiss the XI petition.
Though the debtor contends otherwise, it seems hardly open to argument that had this company filed a voluntary petition under X, or had an involuntary petition been filed against it under X, the district court would have found it necessary to approve the petition as properly filed. The corporation’s deficit stands at $18,000,000. It has assets, based on June 1, 1939, market values, of $7,076,515, and liabilities of $5;551,416, excluding the contingent liability of over $3,800,000, the modification of which is the sole object of this XI proceeding. There are almost 900 individual investors holding the share certificates representing this contingent liability. Public investors are interested in other debenture issues of the debtor, due in 1944, and the company’s stock, of which 900,000 shares are outstanding, is listed and traded in on the New York Stock Exchange. In view of the corporation’s size, character, and degree of insolvency, the appropriateness of a Chapter X proceeding, had a Chapter X proceeding been initiated, could not be denied.
Under § 146(2) of Chapter X, 11 U.S. C.A. § 546(2), a petition filed under that Chapter may not be approved if the judge believes that adequate relief would be obtainable under Chapter XI. Had this debtor filed a Chapter X petition, the court would have been compelled to make an affirmative finding that adequate relief could not be obtained under XI. If the initiation of a X proceeding by this debtor would necessarily have led to such a finding, the same finding should be made when, as here, the debtor has filed under XI. The adequacy pf relief under XI is clearly the same issue whether it arises in the setting of a Chapter X petition or in the setting of Chapter XI.
It is true that there is no provision in Chapter XI authorizing the court to dismiss petitions as improperly filed. But there is no such provision in the sections of *800the statute dealing with ordinary bankruptcies, and yet petitions have been dismissed and adjudications have been vacated over and over again, on.grounds that were jurisdictional and on grounds that were not. See, particularly, In re Nash, D.C.S.D.W. Va., 249 F. 375; Blackstock v. Blackstock, 8 Cir., 265 F. 249; Vassar Foundry Co. v. Whiting Corp., 6 Cir., 2 F.2d 240, 241 (“whether or not this objection is called jurisdictional, it is one upon which creditors must have a right to be heard”). This follows the well settled view that a bankruptcy proceeding is, after all, an action in equity and subject to the rules governing suits in equity. Pepper v. Litton, 60 S. Ct. 238, 84 L.Ed.-; Kroell v. New York Ambassador, Inc., 2 Cir., 108 F.2d 294.
Whether a corporation with securities so widely and publicly held, with investors so scattered, so numerous, that they cannot be given adequate protection under the machinery of XI, can secure adequate relief for its financial distress, and whether any plan inaugurated under those limited auspices can properly satisfy the requirements of fairness, equity, and feasibility required under § 366 before the court may approve it is an issue which the court must face and adjudicate. It is suggested, however, that this is not a matter of jurisdiction. Just what that chameleon word actually means here is not clear. If it means safe from collateral attack, that may be conceded. Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104. If it means a necessary prerequisite to judicial action, then we are dealing with jurisdictional requirements. Without placing too much emphasis on a question-begging label, we can say that here we are dealing with prime necessities of judicial action, and that whenever the court finds they are not present, it is its duty to cease to act.
My brothers do not now choose to consider whether this debtor could properly have filed under Chapter X; instead they say that so long as the debtor could become a bankrupt, it has an indefeasible privilege to file under XI. Without discussing whether they are precluding the approval of a petition under X as to this debtor, they add that they see no reason why “a large” corporation with publicly held securities may not obtain adequate relief under XI. “Adequate relief” is a flexible phrase, but presumably it refers to relief for all the parties to the reorganization. “Adequate relief” is .also an empty phrase, as empty as its companion “fair and equitable,” until its meaning has been filled in by a series of judicial decisions. It seems to me clear that the investing public cannot obtain adequate relief in a Chapter XI proceeding; such, indeed, is fhe whole meaning and purpose of the safeguards imposed by Chapter X. An independent trustee is not required under XI, as it is under X; investors may not propose plans under XI, as they may under X; acceptances may be solicited prior to confirmation under XI, as they may not under X; voters are not entitled to the S. E. C.’s disinterested advice as an experienced financial counsel, as they are in X. Additional differences in protection can be and have been pointed out. In re Reo Motor Car Co., Debtor, D. C. E. D. Mich., 30 F.Supp. 785.
In addition to the problems presented by the wide public ownership of the debtor's securities, note may be made of another consideration which prevents these creditors from obtaining adequate relief under Chapter XI. It may be easily demonstrated that this debtor is insolvent. On the debtor’s own figures, its assets barely exceed $7,000,000, while its liabilities total $5,551,416, without including the “contingent” liability of $3,800,000 here to be modified. The principal obligation which the debtor guaranteed matured on June 1, 1939, and this indebtedness is no longer contingent, as the institution of the XI proceedings so clearly shows. Since the company is insolvent, application of the principles of Northern Pacific Ry. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931, demands that the stockholders be eliminated, for their equity has disappeared, they have made no new cash contribution, and the preservation of their interest is not shown to be essential to the successful continuation of the enterprise. Case v. Los Angeles Lumber Products Co., 60 S.Ct. 1, 84 L.Ed.
Yet Chapter XI affords no method of eliminating stock interests, unless it be by importing the bankruptcy sale. Section 357, 11 U.S.C.A. § 757, specifying what an arrangement may include, makes no mention of provisions affecting stock. That the principles of the Boyd case are nevertheless applicable to proceedings under Chapter XI can hardly admit of doubt; an arrangement may not be confirmed unless it is found to be “fair and equitable and feasible,” § 366 (3), 11 U.S.C.A. § 766 (3), words which *801we are told are words of art, incorporating the rules laid down in Northern Pacific Ry. v. Boyd, supra; Case v. Los Angeles Lumber Products Co., supra. If creditors of this debtor may invoke the Boyd case in XI to eliminate the stockholders, yet find the machinery of XI powerless to accomplish the elimination, they may plausibly contend that in XI they cannot obtain adequate relief. And if the Boyd case is not the law of Chapter XI,2 perhaps that fact alone would be sufficient reason for declaring that for this debtor and its creditors,3 the relief offered by XI is inadequate.
If my brothers are correct it is possible for any large corporate debtor, untroubled by the necessity of adjusting a secured debt, to choose between proceeding under Chapter X and under Chapter XI. Far too often XI will be chosen, because of its undoubted swiftness and its happy immunity from judicial and administrative control. A temporary palliative for an incurable financial disease may often be obtained under XI by adjusting a single indebtedness, and the usually optimistic management may put off for a time the evil day of reckoning when the drastic remedies of Chapter X become inescapable. Here the district judge announced from the bench that he was of the opinion that a Chapter X reorganization would be preferable, and, upon being assured by counsel for a creditor group that an involuntary X petition would be filed immediately, he stated his intention to dismiss the XI proceeding. Counsel for the debtor and for other creditors interposed, and in open court counsel for the debtor agreed to make an immediate interest payment of 1% per cent, for the admitted purpose of dissuading the creditor from filing a petition under X. The creditor consented, the court approved, and the XI proceedings were continued.
Since the district court, though questioning the success of this proceeding, felt, nevertheless, that it must let it go on to its doubtful conclusion, I would return the order denying dismissal and the order of reference for a reexamination of the problem in the light of the principles just stated. Moreover, since these views lead me directly to the conclusion that the S. E. C. has an important public responsibility of which it cannot be relieved merely by the device of initiating a proceeding designed to exclude it, I think the court exercised a wise and sound discretion in authorizing the Commission to intervene. The cases cited in the opinion to the contrary seem to me merely to support a conclusion from an accepted premise, not to demonstrate the soundness of the choice of premise. Under the view of the Commission’s public obligations which I have suggested, cases such as Pennsylvania v. Williams, 294 U.S. 176, 55 S.Ct. 380, 79 L.Ed. 841, 96 A.L.R. 1166, and Gordon v. Ominsky, 294 U.S. 186, 55 S.Ct. 391, 79 L.Ed. 848, afford direct support of the order below.
Moreover, my brothers have limited their search to one for an absolute right of statutory intervention and overlook the provisions for permissive intervention in the discretion of the court, which are so important and salutary a feature of the new procedure. The references in the opinion to Professor Moore’s treatise on Federal Practice (2 Moore’s Federal Practice 2307, 2327) are limited to those discussing either past history or the absolute right and overlook the more apposite material showing the power of the court to act whenever the intervenor presents a claim or defense which has a question of law or fact in common with the main action and the desirability of such action when thereby important questions will be authoritatively adjudicated and further litigation avoided. 2 Moore’s Federal Practice 2331-2333, 2350-2366; Levi and Moore, Federal Intervention, 45 Yale L.J. 565; Federal Rule 24 (b) (2). I have stated elsewhere my concern at what seems to me undue limitation of these wise provisions. Commercial Cable Staffs’ Ass’n v. Lehman, 2 Cir., 107 F.2d 917. See also 49 Yale L. J. 590, 593, 594. Here are important questions, the ultimate decision of which cannot be avoided. Here and now is the appropriate occasion for their disposition.
*802The final question, whether the Commission may appeal, seems to me more difficult. The curiously truncated privilege of intervention, without the privilege of appeal, given the Commission in Chapter X, § 208, suggests a like limitation here. Why this unusual restriction on intervention was adopted may not be altogether clear; but it seems designed to emphasize the ultimate judicial character of corporate reorganization. So the Commission must place its report on a plan before the court, but the action to be taken thereon is a judicial responsibility entirely. When the Commission intervenes to point out that an arrangement cannot be substituted for a reorganization, a similar restriction on the right of appeal may well be imposed. Here, however, the intervention was for another purpose, the settling of a vital point of statutory construction, something which cannot be accomplished without appeal. Since the general rules of intervention do not prohibit appeal, the court’s further order allowing appeal for a specific purpose seems not .unreasonable.
Since the district court allowed intervention for the one purpose of testing the court’s jurisdiction in the light of the statute, the order of reversal here, strictly speaking, may not prevent intervention on the issue of feasibility of a proposed arrangement., But the language of the opinion goes to the extent of such a prohibition, indeed of any action by the Commission so long as the corporation is within the seclusion of an XI proceeding. This I deplore. It renders the Commission impotent for the public interest in a large class of cases and goes far to render abortive what might have proved one of 'the most important corporate reforms of modern times.

A dissent ought to he brief, and therefore and because it is so well known, I refrain from recounting the persuasive legislative history of the law. Suffice it to say that the Chandler Act was passed after unusual study, including the extensive report of the Securities and Exchange Commission (pursuant to the direction of Congress) on the evils of past reorganization practices, and after a long congressional campaign, wherein every conceivable objection to the new procedure was pressed on the legislative body with the utmost vigor and persistence.

 For a discussion of the applicability of the Boyd case to Chapter XI, see 48 Yale L.J. 1334, 1357-1362.

 The Boyd case will not prevent successful arrangements under XI in corporate situations where creditors can maintain the business as a going concern only by conceding the preservation of existing stock interests. This will be the case, and XI will be appropriate, in every small commercial enterprise where management and stock are identical; it will be less and less the case, and XI will be inappropriate, as the particular business is larger and management and the ownership of stock become the functions of different people.