Court Opinion

ID: 9461843
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:25:57.032727+00
Date Added: 2024-06-11T17:37:17.444949
License: Public Domain

ROBERT P. ANDERSON, Circuit Judge
(dissenting):
The majority holds that it is “fair and equitable” under § 221 of the Bankruptcy Act (Act), 11 U.S.C. § 621, to disregard corporate lines and to consolidate or pool assets and liabilities for purposes of dealing with unsecured claims but not to do so for purposes of dealing with secured claims. On the basis of the facts before the court, I respectfully dissent.
James Taleott, Inc. (Taleott), the appellant, was the principal financier or “factor”1 for hoth Continental Vending Machine Corp. (Continéntal), a manufacturer of vending machines, and for Continental Apeo, Inc. (Apeo), a Continental sales subsidiary. Although Taleott received mortgages on vending machines and other security devices from Continental covering its indebtedness, and assignments of accounts receivable, chattel security devices and various other liens covering Apco’s indebtedness, the written security agreements covering the obligations of Continental and Apeo each contained a provision which provided, in relevant part:
“You [i. e. Taleott] shall be entitled to hold all sums and all property of the undersigned, at any time to its credit or in your possession or upon or in which you may have a lien or security interest, as security for any and all obligations of the undersigned at any time owing to you and/or to any company which may now or hereafter be your subsidiary, no matter how or when arising and whether under this or any agreement or otherwise, and including all obligations for purchases made by the undersigned from any other concern factored by you or such subsidiary.”
As noted by the majority opinion, however, neither security agreement contained a cross-collateralization provision, and neither Continental nor Apeo formally guaranteed the other’s indebtedness.
On April 8, 1963, a conservator was appointed for Continental on the application of the Securities and Exchange Commission. An involuntary petition in bankruptcy was filed on July 5, 1963, but this proceeding was superseded when involuntary petitions for reorganization were filed on July 10, 1963 and October 4, 1963, under Chapter X of the Bankruptcy Act with respect to Continental and Apeo, respectively.
Upon commencement of the conservatorship for Continental and successive reorganization proceedings of Continental and Apeo, Taleott began and thereafter continued liquidation of its security, which, as noted in the majority opinion, left a surplus of approximately $380,000 in the Apeo account and a deficiency of approximately $820,000 in the Continental account. Taleott also made numerous loans during this period to the conservator and to the trustee, secured by trustee’s certificates, none of which had been repaid by the time this appeal was commenced.
Although as early as 1964, Talcott’s counsel advised the trustee that there would probably have to be a consolida*1003tion of the two proceedings, it was not until June 13, 1969, when the trustee filed his report pursuant to § 167(5) of the Act, that he proposed such a consolidation. Thereafter, on June 20, 1969, he filed a consolidated plan of reorganization. About a year later, after several hearings on the proposed reorganization plan, an amended plan of reorganization was filed on June 15, 1970, which contained the proviso “Anything herein contained to the contrary notwithstanding, nothing in the Plan shall be, or be deemed to be an elevation or improvement of the status of a claim filed by any creditor in Class 5 [secured creditors] as a result of the consolidation of the Debtors’ Estates.” On May 20, 1971, an order, with findings, was entered approving the amended plan, but on January 14, 1972, Talcott filed objections to its confirmation. Although a hearing was held on January 21, 1972, an order overruling Talcott’s objections and confirming the amended plan was not entered until August 12, 1974 — over two and one-half years later. This appeal followed.
In refutation of Talcott’s argument that the broad language of its security agreements permits its lien on the Apeo surplus to cover the Continental deficit upon consolidation of the debts and assets of Apeo and Continental, the majority holds that Talcott did not possess a valid lien on the Apeo surplus at the time the consolidation was approved because, as a result of Talcott’s prior liquidation of the Apeo collateral the obligation of Apeo had been paid in full. Although In re Cichanowicz, 226 F.Supp. 288 (E.D.N.Y.1964), stands for the proposition that under New York law a mortgage or other security agreement providing for future advances does not cease to exist merely because all earlier advances have been completely paid off (see G. Gilmore, Security Interests In Personal Property, Vol. II, § 35.3, at 924, n. 8 (1965)), the security agreement remains in existence only as to future advances of the “same class as the primary obligation . . . and so related to it that the consent of the debtor to its inclusion may be inferred.” National Bank of Eastern Arkansas v. Blankenship, 177 F.Supp. 667, 673 (E.D.Ark.1959), aff’d sub nom. National Bank of Eastern Arkansas v. General Mills, Inc., 283 F.2d 574 (8 Cir. 1960). See also G. Gilmore, Security Interests In Personal Property, Vol. II, § 35.2 at 920; § 35.3 at 924-925; § 33.5 at 932 (1965). Any surplus remaining after the security of the defaulting debtor has been liquidated to satisfy the debt is, at least in the absence of an explicit agreement by debtor and creditor to the contrary, clearly not of the same class as the periodic future advances to a non-defaulting debtor contemplated under the typical inventory financing or . receivables financing agreement.
If the validity of Talcott’s claim necessarily depended upon the continued existence of a consensual lien on the Apeo surplus under the broad provisions of Talcott’s security agreement once the collateral had been liquidated, as assumed by the court below and as argued by the trustee on appeal, I would be in complete agreement with the majority’s holding. As the majority opinion recognizes, however, there still remains the broader question whether differentiation between secured and unsecured creditors in a consolidation upon reorganization is proper under the Act. Under the circumstances present in this case, I believe that question must be answered in the negative.
In his June 13, 1969 report, filed pursuant to § 167(5) of the Bankruptcy Act, the trustee made the following statement based upon his investigation of the affairs of the two debtors:
“It is clear that the debtors were operated as a single economic unit with little or no attention paid to the needs of Apeo or to Continental’s other subsidiaries. Any plan of reorganization which is proposed for said debtors should provide for a merger of the assets and liabilities of the debtors and consolidation of the within proceedings.”
*1004Accordingly, in the plan of reorganization, filed June 20, 1969, the trustee proposed that “All Properties of Continental, Apeo, Coast Automatic Vending Corp., Continental Apeo of Canada, Ltd., and any of their subsidiary or affiliated corporations and their Trustee . be dealt with by the Plan, on the basis of a merger or consolidation thereof.” The trustee also stated:
“The bases for applicant’s recommendation [that any plan of reorganization should provide for a merger of the assets and liabilities of the debtors and a consolidation of the within proceedings] are that . . ., (e) there were guarantees and cross-guarantees of each other’s obligations by the debtors which, in addition to the complex pattern of borrowing transactions between the debtors, makes the task of separating the assets and liabilities of the debtors virtually impossible; (f) there is little, if any, likelihood that an attempt to reconstruct all or a substantial portion of the financial transactions which occurred between the debtors would be successful; and, the cost of such an attempt might well exceed $1,000,000; and (g) no assurance can be given that such a division could be accomplished, regardless of the amount of money, time and effort which might be expended in such an attempt.”
These findings were not changed in the amended plan.
It is clear from the foregoing that the instant consolidation merely confirmed an implied merger of the two debtors which pre-dated the filing of the involuntary reorganization petitions. See Page v. Arkansas Natural Gas Corporation, 53 F.2d 27 (8 Cir. 1931), aff’d on other grounds, 286 U.S. 269, 52 S.Ct. 507, 76 L.Ed. 1096 (1932). Because in legal effect Continental and Apeo were one, prior to the initiation of these proceedings, and Talcott’s security agreement with each contained the same broad dragnet clause, it follows that at the time the involuntary reorganization petitions were filed, Talcott’s security agreements with Continental and Apeo were in legal effect, one and the same.2 See Trustees System Go. of Pennsylvania v. Payne, 65 F.2d 103 (3 Cir. 1933), in which the court held that the plaintiffs, as creditors of the parent corporation, had the equitable right to move for ancillary receivers of five subsidiary corporations which had not in fact maintained identities truly separate from the parent, because their character as creditors of the parent corporation extended to all the corporate departments or agencies it embraced; Fitzgerald v. Central Bank & Trust Company, 257 F.2d 118 (10 Cir. 1958), in which a secured claim of a bank, which had lent money under a chattel mortgage to the president of a corporation doing business in his separate legal identity as the corporation’s sales company, was treated as the debt of both the corporation and the sales company.
The absence of a cross-collateralization provision in Talcott’s security agreements is, therefore, irrelevant. Such a provision would only have been necessary if Continental and Apeo had, in fact, been two separate and independent corporations, in which event there would be no need for the consolidation contemplated here, similar to that approved in Chemical Bank New York Trust Company v. Kheel, 369 F.2d 845 (2 Cir. 1966).3
*1005Equitable considerations also prompt me to note that had the trustee proposed a consolidated plan of reorganization pri- or to Talcott’s liquidation of its Apeo collateral,4 he could not have maintained that Talcott did not have a valid lien on the Apeo collateral then in Talcott’s possession, and could not treat the debts of the two ostensibly independent corporations as one. It is hardly equitable now to hold that because the trustee took five years and the court took an additional five years to confirm that Continental and Apeo had long been operated as a single economic entity, Talcott’s claim can now be defeated, because meanwhile it had liquidated its collateral.
The majority, however, takes pains to point out that the court’s power to consolidate is one arising out of equity; that it has the authority under § 2(a)(2) of the Act to insure that injustice is avoided; and that it can subordinate claims or adjudicate equities which have as their bases the relationships among the creditors. Thus, the majority concludes that in the exercise of the bankruptcy court’s equity powers it can treat unsecured claims as consolidated and secured claims as not. I agree, but the majority has failed to demonstrate that equitable considerations justify this result in the instant case. In fact, the equities are in favor of Talcott as previously discussed; and there are no countervailing inequities for which it has been responsible. There is no indication that Talcott is guilty of any fraud or wrongdoing with respect to Continental, Apeo, or any of the other creditors in these proceedings. Even though Talcott may have dealt separately with each debtor and relied on the assets of each for its protection, without knowledge that in fact Continental and Apeo were operating as a hopelessly entwined, single entity, the same can be said for probably most, if not all, of the unsecured creditors. The relative equities of relying creditors versus non-relying creditors, secured and unsecured, were not explored below, and the whole thrust of Kheel is that in the “rare case” such as this, where the hopelessly confused interrelationships cannot be unscrambled without large expenditures of time and money, and even then with no assurance of success, the court may order consolidation “to reach a rough approximation of justice to some rather than deny any to all.” Chemical Bank New York Trust Company v. Kheel, supra, at 847. Although Talcott might secure an advantage through consolidation that it otherwise would not have had, likewise an advantage accrues, solely because of the consolidation, to many of the unsecured creditors who otherwise would not have had it. Moreover, except for Talcott’s large infusions of capital, there might now be nothing at all for the unsecured creditors.
The only equitable rationale put forward by the majority for distinguishing between secured and unsecured creditors in this case is the assertion that “Talcott’s liens were in no way diminished or lien property transferred by virtue of intercorporate dealings.” But there is no supporting evidence in the record and no finding to this effect in Judge Mishler’s order conforming the trustee’s amended plan of reorganization. Moreover, as noted by the court in Kheel and by the trustee in the instant ease, consolidation was properly ordered in this case because it was virtually impossible to reconstruct intercorporate claims, transactions, liabilities and ownership of assets. For these very same reasons Talcott would undoubtedly find it equally impossible to demonstrate that its liens were diminished or lien property transferred even if it occurred. It certainly cannot be asserted with assurance, however, that money loaned by Talcott to Continental, and ostensibly secured, was not in fact turned over to Apeo thereby creating the Continental “deficiency.” It seems to me that *1006the assumption underlying the type of consolidation present here and in Kheel is that the indiscriminate manipulation of the debtors was so extensive that neither the trustee nor the bankruptcy court could begin to sort out how each creditor or even classes of creditors were affected, and that all must have suffered, absent proof to the contrary. There is no such contrary proof here.
For the foregoing reasons, I would hold that Talcott had an equitable lien5 on all the Apeo' collateral, including that now determined to be a “surplus,” dating at the very least from the commencement of the reorganization proceedings. This lien was not dissipated by Talcott’s liquidation of its Apeo collateral, and permits Talcott, upon consolidation, to treat the debts of Continental as the debts of Apeo under its security agreements, and to apply the so-called Apeo “surplus” to the Continental deficiency. Accordingly, I would reverse.

. The term “factor,” while traditionally referring to a “sales agent who receives goods and sells them for a commission, having a possessor lien on such goods or their proceeds,” today generally denotes “a person who lends or advances money on the security of inventory or accounts receivable.” 68 Am.Jur.2d Secured Transactions, § 133 (1973). Taleott was a factor of the second variety.

. Talcott is not contending, of course, that a creditor secured solely by an identifiable piece of property belonging to one of the debtors could improve his secured position by consolidation. It is the breadth of Talcott’s dragnet clause and its inclusion in identical form in each agreement, which necessitates different treatment.

. The court in Kheel, when discussing the necessity for substantive consolidation based upon the hopelessly intertwined dealings of the debtors gave no indication that such consolidation was to be used solely for the benefit of unsecured creditors. Similarly, Kheel, did not distinguish between secured and unsecured creditors when acknowledging the possible unfairness of consolidation to creditors who dealt solely with, or relied wholly on the assets of one of the debtors to be consolidated. While that question was not directly before the court, it was obvious that unsecured, as well as secured creditors, could so rely.

. Cf. Chemical Bank New York Trust Company v. Kheel, 369 F.2d 845 (2 Cir. 1966), in which consolidation was approved pursuant to a motion by the United States, a major creditor, prior to the preparation and submission of a plan of liquidation.

. The lien here invoked is the kind which the chancellor creates to do equity under the peculiar circumstances of the case, and, in particular, by the bankruptcy chancellor to implement a just reorganization. It can be described as a right, not existing at law, to have specific property applied in whole or in part to the payment of a particular debt and is based on general considerations of right and justice as applied to the relationship of the parties in the instant dispute. See generally, 51 Am.Jur.2d Liens §§ 22-25 (1970).