Appendix — Wallace v. Securities & Exchange Commission

Supreme Court brief1979

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€8-1168 FILED

| JAN 25 1979

IN THE

Suprenw Court of the United

OCTOBER TERM, 1978

RODAK, JR4 CLERK

heen

No. 78-

MONTE J. WALLACE AND NEIL W. WALLACE,

Petitioners,

SECURITIES AND EXCHANGE COMMISSION, CONTINENTAL

INVESTMENT CORPORATION, AND CREDITORS COMMITTEE

OF CONTINENTAL INVESTMENT CORPORATION,

Respondents.

APPENDICES TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FIRST CIRCUIT

IRVING WIDETT

STEPHEN F’., GORDON

WIDETT, WIDETT, SLATER AND

GOLDMAN, P.C.

100 Federal Street

Boston, Massachusetts 02110

ARTHUR F.. MATHEWS

MICHAEL R. KLEIN

CHRISTOPHER R. LIPSETT

WILMER, CUTLER & PICKERING

1666 K Street, N.W.

Washington, D.C. 20006

Attorneys for the Petitioners

January 25, 1979

WILSON - EPES PRINTING Co.. INC. - 789-0096 - WASHINGTON, D.C. 20001

INDEX OF APPENDICES

APPENDIX A—Opinion of the Court of Appeals.........

Judgment of the Court of Appeals...

Order of the Court of Appeals

pS bi

APPENDIX B—Opinion and Order of the District

APPENDIX C—Opinion and Order of the Bankruptcy

Court Denying Motion of SEC To

Proceed Under Chapter X .......0........

APPENDIX D—Sections 141, 146, and 328 of the

ID FRI Siccceicikcccacetgesdetisnceens

APPENDIX E—Order of the Bankruptcy Court Con-

firming Chapter XI Plan of Arrange-

IE ciekcdapsid hinsitenckdjsusbas silks acta eaten

APPENDIX F—Appendix A to the District Court

Brief of Debtor/Appellee Continental

Investment Corporation ............0.00......

APPENDIX G—Letter of Counsel for Continental

Investment Corporation to the Clerk

of the Court of Appeals ......000000000000..

17a

19a

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

Nos. 78-1204

78-1205

78-1238

In re

CONTINENTAL INVESTMENT CORPORATION,

Debtor,

MONTE J. WALLACE AND NEIL W. WALLACE,

CONTINENTAL INVESTMENT CORPORATION,

AND CREDITORS’ COMMITTEE,

. Appellants,

SECURITIES AND EXCHANGE COMMISSION,

Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[HoN. FRANK J. Murray, U.S. District Judge]

Before CoFFIN, Chief Judge,

CAMPBELL and BOWNES, Circuit Judges.

Charles P. Normandin, with whom Richard W. South-

gate, Reed Witherby, and Ropes & Gray, were on brief,

for Continental Investment Corporation.

Frederick G. Fisher, Jr., with whom Hale & Dorr, was

on brief, for Creditors Committee.

Arthur F. Mathews, with whom Irving Widett, Stephen

F. Gorden, Widett, Widett, Slater and Goldman, P.C.,

Michael R. Klein, Alexander F. Wiles, and Wilmer,

Cutler & Pickering, were on brief, for Monte J. Wallace

and Neil W. Wallace, intervenors.

David Ferber, Solicitor to the Commission, with whom

Marvin E. Jacob, Associate Administrator, Jerome Feller,

Special Counsel, Philip M. Mandel, Special Counsel, and

Irving H. Picard, Assistant General Counsel, were on

brief, for Securities and Exchange Commission.

October 27, 1978

CorFIN, Chief Judge. The debtor, Continental Invest-

ment Corporation (CIC), a committee of its creditors,

see 11 U.S.C. § 738, and the debtor’s principal stockhold-

ers have appealed from the decision of the district court

granting a motion by the Securities and Exchange Com-

mission (SEC) to transfer proceedings from Chapter XI

to Chapter X of the Bankruptcy Act pursuant to 11

U.S.C. § 728.1 We are required to explore the boundaries

1 Section 328 of the Bankruptcy Act, 11 U.S.C. § 728 reads:

“The judge may, upon application of the Securities and Ex-

change Commission or any party in interest, and upon such

notice to the debtor, to the Securities and Exchange Commis-

sion, and to such other persons as the judge may direct, if he

finds that the proceedings should have been brought under

chapter 10 of this Act, enter an order dismissing the proceed-

ings under this chapter, unless, within such time as the judge

shall fix, the petition be amended to comply with the require-

ment of chapter 10 for the filing of a debtor’s petition or a

creditor’s petition under such chapter, be filed. Upon the

filing of such amended petition, or of such creditors’ petition

of the rule promulgated by SEC v. American Trailer

Rentals Co., 379 U.S. 594 (1965), and the extent of its

exceptions,

CIC is a holding company operating through subsidi-

aries providing financial services. In 1974 CIC defaulted

first on obligations to 16 banks holding senior debt and

then on interest payments to subordinated public de-

bentureholders. As a consequence, negotiations began

among CIC, the banks, a Debentureholders Protective

Committee formed by institutions holding about ten per

cent of the outstanding debentures, and another institu-

tional holder of 16 per cent of the debentures. These

negotiations produced a plan of arrangement agreed to

in principle by all parties on July 29, 1975, and filed

under Chapter XI on April 30, 1976. See 11 U.S.C. § 7238.

Before filing the plan CIC submitted it to its public stock-

holders and debentureholders via a combined registration

and proxy statement processed by the SEC. About 90

per cent of the stockholders and 82 per cent of the de-

bentureholders approved the plan. The percentage of

debentureholders had risen to about 90 by the date of the

district court opinion.

As of June 30, 1975, CIC owed the banks about

$61,000,000. As part of the agreement, but not con-

tingent upon the Chapter XI proceedings, the banks

purchased one of CIC’s subsidiaries for $34,000,000, re-

ducing the senior debt to $27,000,000. Under the plan of

arrangement, if approved, the banks would receive

$20,000,000 in Senior Term Notes and $7,000,000 in

Senior Preferred Stock with attached warrants to pur-

chase 600,000 shares of CIC common stock.

CIC owed the approximately 1,600 public investors

about $42,000,000 as of May 1, 1975. Under the plan

. . . Such amended petition or creditors’ petition shall there-

after . . . be deemed to have been originally filed under such

chapter.”

they would receive $3,500,000 of Subordinated Interest-

Inclusive Debentures, $22,500,000 of Junior Preferred

Stock, and $16,000,000 of Convertible Preferred Stock.

The Junior Preferred Stock carries warrants to buy

1,780,000 shares of common stock, and the convertible

stock can be converted to 4,000,000 shares. Dividends

on the new securities will be paid only if all more senior

obligations are satisfied. Unpaid dividends will not ac-

cumulate. The holders of the Convertible Preferred Stock

will elect a majority of the board of directors of CIC.

If all warrants were exercised and all convertible shares

converted, the outstanding common stock would be di-

luted by about one-third.

The plan’s purpose is to greatly reduce CIC’s annual

debt service obligations. Combined with steps already

taken by management to divest CIC of marginal and un-

profitable subsidiaries and to reduce costs, the parties

hope to return CIC to profitable operation. Indeed CIC

has been able to produce positive operating revenue in

1976 and 1977.

On June 18, 1976, six weeks after the Chapter XI peti-

tion was filed, the SEC moved the bankruptcy judge to

transfer the proceedings from Chapter XI to Chapter X.

The bankruptcy judge denied the motion without making

explicit reference to SEC v. American Trailer Rentals

Co., 379 U.S. 594 (1965), and confirmed the plan. The

district court reversed, holding that American Trailer

Rentals required the case to proceed in Chapter X. This

appeal is taken from the district court’s order.

Our starting point for analysis must be American

Trailer Rentals, wherein Justice Goldberg, speaking for a

unanimous Court, explained in great detail the relation-

ship between Chapters X and XI and the factors de-

termining the choice between those chapters in a par-

ticular case. Though the decision to transfer is com-

mitted to the district court’s discretion, Schreibman Vv.

LIED SENG EERIE POINTE Lo

Mason, 377 F.2d 99, 102 (1st Cir. 1967); see 11 U.S.C.

§ 728 (note 1, supra), that discretion must be exercised

in reliance on the principles stated in American Trailer

Rentals, 379 U.S. at 619, which reaffirms and explains

the decisions in General Stores Corp. v. Schlensky, 350

U.S. 462 (1956), and SEC v. United States Realty &

Improvement Co., 310 U.S. 4384 (1940).

The Supreme Court’s examination of the legislative his-

tory * of the Bankruptcy Act revealed that Chapter XI

was created “‘to provide a quick and economical means of

facilitating simple compositions among general creditors

who have been deemed by Congress to need only the mini-

mal disinterested protection provided by that Chapter.”

379 U.S. at 606-07. The purpose of Chapter X, on the

other hand, is “to afford greater protection to creditors

and stockholders by providing greater judicial control

over the entire proceedings and impartial and expert ad-

ministrative assistance . . . through appointment of a

disinterested trustee and the active participation of the

SEC.” 379 U.S. at 604. “The basic assumption of Chap-

ter X ... is that the investing public dissociated from

control or active participation in the management, needs

impartial and expert assistance in the ascertainment of

facts, in the detection of fraud, and in the understanding

of complex financial problems.” 310 U.S. at 448-49 n.6.

On the basis of the above distinctions, Congress drafted

the two chapters to meet different ends. “In enacting

these two distinct methods of corporate rehabilitations,

Congress has made it quite clear that Chapters X and

XI are not alternate routes, the choice of which is in

the hands of the debtor. Rather, they are legally, mu-

tually exclusive paths to attempted financial rehabilita-

tion.” 379 U.S. at 607. Compare 11 U.S.C. § 546(2)

2 We rely on the Supreme Court’s fuller discussion of the legis-

lative history of the Bankruptcy Act in SEC v. American Trailer

Rentals Co., 379 U.S. 594, 603-07 (1965).

with 11 U.S.C. § 728. Congress has allocated corporate

rehabilitation schemes between Chapters X and XI on

the basis of assumptions properly within the legislative

domain. The task of the courts is to determine in which

chapter a particular scheme belongs.

The Supreme Court has rejected the SEC’s suggestion

that the structure of a corporation or the structure of

its public debt automatically determines the appropriate

chapter. All corporations with public investors need not

submit to Chapter X, 379 U.S. at 607, nor must all cases

directly affecting the rights of public investor creditors

of a publicly held debtor proceed in Chapter X, 379 U.S.

at 611. The Court has, however, endorsed a general rule

that normally Chapter X is “adapted to the reorganiza-

tion of corporations with complicated debt structures and

many stockholders” and Chapter XI is adapted “to com-

position of debts of small individual business and cor-

porations with few stockholders’, 379 U.S. at 608, quoting

United States Realty, 310 U.S. at 447. CIC does have

a complicated debt structure and many stockholders.

Therefore, it falls within the general rule.

The fact that the Court has chosen a general rule

rather than an absolute rule means, of course, that there

are exceptions. But the exceptions are very narrow, 379

U.S. at 614, and must be related to the unique purposes

of Chapter XI. United States Realty, which first ex-

pressed the general rule, pointed out that “[a] large

company with publicly held securities may have as much

need for a simple composition of unsecured debts as a

smaller company. And there is no reason we can see

why c. XI may not serve that end.” 359 U.S. at 466.

American Trailer Rentals elaborated on the purpose of

the exception. “ ‘Simple’ compositions are still to be

effected under Chapter XI. Such a situat. | even where

public debt is directly affected may exist, for example,

where the public investors are few in number and fa-

Ab ET POS EEO “ORT

simian ie ae

miliar with the operations of the debtor, or where, al-

though the public investors are greater in number, the

adjustment of their debt is relatively minor, consisting,

for example, of a short extension of time for payment.”

379 U.S. at 614. These two situations are given only as

examples. The Court has not excluded the possibility

that there may be other situations in which the rights

of public investor creditors can be adjusted in Chapter

XI. We conclude, however, that any such situations would

have to fall within the definition of “simple composi-

tion’”.’ Neither American Trailer Rentals nor United

States Realty gives any indication that the narrow ex-

ception to the general rule can extend beyond simpie

compositions.

Moreover, extending the exception beyond simple com-

positions would frustrate the legislative assumptions as

explained by the Court and set out above. For if a

substantial number of public investors are involved in

any reorganization the fairness of which is not facially

apparent, a decision to allow the matter to proceed in

Chapter XI is to substitute a court’s faith in the good-

will, fairness, and competence of those representing the

debtor and the creditors for the congressionally mandated

protections of Chapter X.

We are bolstered in this reading of American Trailer

Rentals by other passages in the opinion. The clearest

statement comes in the Court’s application of the rule

to the facts of that case:

“Here public debts are being adjusted. The investors

are many and widespread, not few in number inti-

3 The Supreme Court uses the term “simple composition” as the

complement of “major reorganization”. We think it clear that

“simple composition” includes minor reorganizations directly affect-

ing publicly held debt where the public impact is minimized, for

instance, by the small number of public investors or their close

ties to the debtor’s operations. 379 U.S. at 614.

mately connected with the debtor, and the adjust-

ment is quite major and certainly not minor. These

facts alone would require Chapter X proceedings

under the above-stated principles.” 379 U.S. at 615

(emphasis added).

The Court’s ensuing discussion of facts indicating man-

agement wrongdoing and the need for an independent

trustee are additional factors not necessary to the hold-

ing in that case. Later, in a footnote discussing the scope

of discretion accorded the district court, the Court re-

fers to the factual question “whether or not that par-

ticular debtor needed a more pervasive reorganization

than a simple composition under Chapter XI.” 379 U.S.

at 619 n.18. The phrasing of this question indicates that

pervasive reorganizations belong in Chapter X. See 379

U.S. at 614-15.

All parties concede that the reorganization proposed

in this case is major, greatly altering the rights of nu-

merous widespread public investors.‘ Therefore, this cor-

porate rehabilitation, if it is to go forward at all, must

proceed in Chapter X. It is the exact kind of case for

which Congress intended Chapter X.

We do not think our holding or our reasoning is in

any way inconsistent with the Supreme Court’s repeated

*Under the plan of arrangement, the debtor would have eight

layers of securities. The banks would hold $20,000,000 of Senior

Term Notes, $7,000,000 of Senior Preferred Stock, and warrants

attached to the preferred stock to purchase 600,000 shares of com-

mon stock. The public debentureholders would have $3,500,000 of

Subordinated Interest-Inclusive Debentures, $22,500,000 of Junior

Preferred Stock, warrants attached to the preferred stock to buy

1,780,000 shares of common stock, and $16,000,000 of Convertible

Preferred Stock. The holders of the existing 13,000,000 shares of

common stock would retain those shares. All of the various layers

above the common stock would be newly created. Currently CIC’s

capital structure is relatively simple, consisting of two issues of

subordinated debentures, one due in 1985 and the other in 1990,

as well as the common stock and the bank debt.

statements that the particular “needs to be served”

rather than an absolute rule should control the outcome.

See, e.g., 379 U.S. at 610; 350 U.S. at 466. One of the

factors determining the needs to be served is “the need

to readjust a complicated debt structure requiring more

than a simple composition of the unsecured debt.” 379

U.S. at 610; 350 U.S. at 467. We interpret American

Trailer Rentals to hold that this one factor requires

transfer to Chapter X. Only where it is absent is it

possible for a reorganization affecting publicly held debt

to go forward in Chapter XI. When the reorganization

is not major the court must go on to consider other

factors such as whether “there is evidence of manage-

ment misdeeds for which an accounting might be made,

. a need for new management, or the financial con-

dition of the debtor requires more than a simple com-

position of its unsecured debts.” 379 U.S. at 615. These

factors must then be weighed to determine whether

Chapter X or Chapter XI best serves the particular

needs of a debtor and its public investors.

To sum up, we think the Supreme Court has established

a two-step test to determine whether a corporate re-

habilitation affecting publicly held debt can go forward

in Chapter XI or must be transferred to Chapter X.

First, looking at the plan of arrangement the court

must decide whether the plan proposes a major reor-

ganization or a simple composition. Only the latter is

eligible for Chapter XI treatment. Relatively minor ad-

justments of publicly held debt may be simple composi-

tions. See 879 U.S. 614; note 4, supra. Second, if the

proposed plan gets by the first test—if it does not out-

line a major reorganization—then the court must go

beyond the face of the plan to examine such factors as

“requirements of fairness to public debt holders, need

for a trustee’s evaiuation of an accounting from manage-

ment or determination that new management is neces-

sary, and the need to readjust a complicated debt struc-

10a

ture requiring more than a simple composition of un-

secured debt.” 3879 U.S. at 610; 350 U.S. at 466-67.°

There need not be a detailed weighing of factors where

the plan proposes a major reorganization. Conversely

a proposed simple composition cannot escape careful

factual analysis.

Appellants argue with some force that in many ways

this reorganization, though major, is appropriate for

Chapter XI. They suggest that many of the safeguards

provided by Chapter X have been taken care of or are

not needed in this case. The creditors, on their own

behalf, have investigated the debtor, and the bankruptcy

judge found “that there is insufficient evidence in the

record to warrant a finding that a further investigation

of the affairs of the debtor by an independent trustee

would be either useful or productive.” Some doubt is cast

on the adequacy of the investigation both by the fact

that its results do not appear in the record and by the

district court’s finding that “there is need of an inde-

pendent investigation into the pending lawsuits against

CIC to establish whether there is likelihood that present

management would continue to operate for the best in-

terests of the public investors.”° It is clear, however,

* The last factor listed is not simply a restating of the first step

test. Rather it requires a court to consider whether a plan propos-

ing a simple composition will adequately rehabilitate the corpora-

tion, or whether a more pervasive plan will ultimately be necessary.

®The Federal Rules of Bankruptcy, Rule 810, extend the clearly

erroneous rule to bankruptcy proceedings. “The court shall accept

the referee’s findings of fact unless they are clearly erroneous,

and shall give due regard to the opportunity of the referee to

judge of the credibility of the witnesses.” Our holding, of course,

does not turn on whether or not we accept the district judge’s

finding. In any event, in this instance, we see no conflict between

the finding of the bankruptcy judge and the district court. The

bankruptcy judge spoke only of “the affairs of the debtor” and

rejected the need for further investigation for lack of evidence.

He did not mention the pending litigation against the debtor.

Strictly speaking, this litigation may not be one of “the affairs

ee een

lla

that this is not the case contemplated by Congress where

the creditors were forced to proceed without getting

questions answered or solely on the basis of manage-

ment representations.

Moreover, the parties to this negotiation were all so-

phisticated. The debentureholders’ representatives were

institutions with significant holdings capable of under-

standing the financial complexities and protecting their

own interests. Though not intimately connected with the

debtor, these were not the widespread public investors

unable to band together or hire representatives to pro-

tect themselves and unable to understand their predica-

ment whom Congress intended to protect. See 310 US.

at 448-49 n.6. The parties to the negotiation were deal-

ing at arm’s length. None of them represented more

than one class of creditor or security holder. About ninety

percent of CIC’s shareholders and of the debenture-

holders’ as well as every one of the banks holding

senior debt have approved the plan.

The bankruptcy judge found that the plan so ne-

gotiated “is feasible and in the best interests of the

creditors” (emphasis in original). All parties make

significant sacrifices under the plan although no finding

has been made that it is “fair and equitable” as would

be required under Chapter X. 11 U.S.C. § 621(2). Un-

like the situation in American Trailer Rentals, manage-

of the debtor.” But even if it were, the district judge was entitled

to consider it important and arrive at the “firm conviction that a

mistake ha[d] been committed.” Jd., Editorial Comment, § 810.1,

*The Second Circuit has said that “[w]hen confronted with a

Chapter XI arrangement that is overwhelmingly approved by the

holders of the debtor’s public debt, as in this case, the courts are

usually reluctant to order conversion to Chapter X.” Jn the Matter

of Alrac Corp., 550 F.2d 1814, 1819 (2d Cir. 1977). But this

reluctance cannot override the principles of American Trailer

Rentals. See Norman Finance and Thrift Corp. v. SEC, 415 F.2d

1199, 1202 (10th Cir. 1969).

12a

ment of the debtor here has not clearly been guilty of

extensive misappropriation, self-dealing, or securities

fraud. Present management has already divested CIC

of many marginal and unprofitable subsidiaries and op-

erated profitably in 1976 and 1977. The bankruptcy

judge found “no evidence of wrongdoing on the part

_ of the management of the debtor. There is insufficient

evidence in the record to warrant a finding that new

management of the debtor is needed.‘

None of these factors, however, allow us to ignore Con-

gress’ division of corporate rehabilitations between Chap-

ters X and XI. At best, the facts of this case suggest

that some of the assumptions Congress made may be

outmoded and have been overtaken by changing patterns

of public investment. Perhaps the Bankruptcy Act now

cuts too broadly in assuming that all public investors of

corporations need SEC protection in order to make and

safeguard their investment decisions. If so, though,

Congress is the appropriate body to consider amending

the law. A court cannot make an exception to a statu-

tory rule on the basis of that court’s determination that

Congress established the rule on the basis of a faulty

set of assumptions. And this court is bound by the Su-

preme Court’s determinations of legislative history and

purpose.

We would add one consideration of a more positive

nature. The present litmus test, at least as we have in-

terpreted the law, for determining whether the threshold

requirement for Chapter XI has been met, i.e., whether

nothing more than a simple composition affecting pub-

§ The district court questioned this finding because it interpreted

the facet of the plan giving the power of electing a majority of the

board of directors to the debentureholders as indicating lack of

confidence in the existing management. Giving the public investors

veto power falls far short of finding that new management is

needed. On this basis alone we could not reject the finding of the

bankruptcy judge. See note 5, supra. js

a ee

13a

lic investors is contemplated, has the merit of simplicity.

To the extent that complex arrangements be permitted

to qualify for Chapter XI treatment, if widely approved,

if deemed eminently feasible, if found “fair” to public

investors, if the public investors are found to be fully

informed, ete., judgment calls may vary and litigation is

invited. Decisions ought not to turn on “the ‘particular

experience and predilections’ of the district judge in-

volved.” 379 U.S. at 620, quoting SEC v. Canandaigua

Enterprises Corp., 389 F.2d 14, 19 (2d Cir. 1964).

Our decision is not irreconcilable with other courts’

resolutions of the issue. The Second Circuit recently al-

lowed a publicly owned corporation to proceed under

Chapter XI with a plan for rehabilitation that directly

affected publicly held debt. In the Matter of Alrac Corp.,

550 F.2d 1814 (2d Cir. 1977). The Second Circuit’s

analysis was somewhat different from ours in that it con-

sidered the extent of the reorganization as only one factor

to weigh against others—particularly the likelihood that

the debtor might not survive Chapter X proceedings, see

infra, the fact that the debt holders had overwhelmingly

approved the plan, and the fact that the SEC had not

chosen to intervene. But it did conclude that in com-

parison to those factors the adjustment of the publicly

held debt was insubstantial. Indeed, that plan called

for full cash payment of that debt. “[T]he adjustment af-

fected only the timing of the payments and the note

holders’ right to interest after August 20, 1974.” Id. at

1319. Such an “adjustment of their debt is relatively

minor” and may, therefore, qualify as a “simple composi-

tion” under American Trailer Rentals, 379 U.S. at 614,

thus justifying the more probing second stage weighing

process. Clearly the reorganization in our case, com-

pletely rearranging the relationship between the debtor

and its creditors and introducing complicated new layers

of securities, is far more pervasive than that in Alrac.

l4a

Similarly In re KDI Corp., 477 F.2d 726 (6th Cir.

1973), is distinguishable. There the Sixth Circuit af-

firmed a denial of a motion to transfer the readjustment

of debt of a public corporation from Chapter XI to Chap-

ter X. The court acknowledged the Supreme Court’s in-

sistence that major reorganizations of public debt pro-

ceed in Chapter X, id. at 736, but found that KDI had

no publicly held debt. Therefore it was appropriate for

it to examine other factors to determine whether Chapter

X might be required anyway. Cf. Posi-Seal International,

Inc. V. Chipperfield, 457 F.2d 287 (2d Cir. 1972) (allow-

ing Chapter XI where no prejudice to public investors

and no public debentureholders) ; Norman Finance and

Thrift Corp. v. SEC, 415 F.2d 1199 (10th Cir. 1969)

(transferring to Chapter X where “drastic readjust-

ment” of rights of public creditors) ; In re Peoples Loan

& Investment Co. of Fort Smith, 410 F.2d 851 (8th

Cir. 1969) (transferring to Chapter X where adjust-

ment not minor); Manufacturers Credit Corp. v. SEC,

395 F.2d 833 (3d Cir. 1968) (transferring to Chapter X

where radical readjustment of debt structure) ; SEC v.

Canandaigua Enterprises Corp., 339 F.2d 14, 21 (2d Cir.

1964) (requiring transfer to Chapter X when publicly

held debt subjected to substantial adjustment departing

from “fair and equitable” rule); In re Meister Brau,

355 F. Supp. 515 (N.D. IIl., 1972) (requiring transfer to

Chapter X whenever complicated debt structure requires

pervasive reorganization).

Appellants also pursue a distinct line of argument.

They raise the possibility that the added delay, expense,

and uncertaintly inherent in transferring the case to

Chapter X at this point might doom the corporation to

liquidation or at least needlessly weaken its recovery.

Such considerations may not be legitimate ones. SEC v.

Burton, 342 F.2d 783, 785 (1st Cir. 1965), but see In the

Matter of Alrac, supra, 550 F.2d at 1319. Chapter X’s

very purpose is to insure an exhaustive investigation and

15a

careful consideration of the interests of public investors.

The essential question is whether such extra protection

is required. It would be circular to find Chapter X were

required but should not be resorted to because it would

be too costly. It is natural for a debtor to prefer Chapter

XI’s speed and economy, but the Supreme Court took

care in American Trailer Rentals to dispose of the argu-

ment:

“In this area, as with other statutes designed to

protect the investing public, Congress has made the

determination that the disinterested protection of the

public investor outweights the self-interest ‘needs’ of

corporate management for so-called ‘speed and econ-

omy.’ In fact, experience in this area has confirmed

the view of Congress that the thoroughness and dis-

interestedness assured by Chapter X not only result

in greater protection for the investing public, but

often in greater ultimate savings for all interests,

public and private, than do the so-called ‘speed and

economy’ of Chapter XI. ... Moreover the require-

ments of Chapter X are themselves sufficiently flex-

ible so that the District Court can act to keep ex-

penses within proper bounds and insure expedition

in the proceedings. We also reject respondent’s fur-

ther argument that the time and expense of a Chap-

ter X proceeding would be so great that the ultimate

result might be straight bankruptcy liquidation. .. .

In addition to the above answers to respondent’s

general-time-and-expense argument, we feel compelled

to point out, without indicating any opinion as to

the ultimate outcome of the attempted financial re-

habilitation in this case, that it must be recognized

that Chapters X and XI were not designed to pro-

long—without good reason and at the expense of the

investing public—the corporate life of every debtor

suffering from terminal financial ills.” 3879 U/S.

at 617-18 (footnotes and citations omitted).

16a

Even if the arguments were legitimate, we could not

assume that dire consequences must result. As the Court

noted, Chapter X is flexible. If adequate investigations

have in fact been carried out, the trustee ought to be

able to compress his investigation accordingly. If the

plan worked out is indeed the best one for all parties

concerned, it is likely the trustee can utilize substantial

parts of it. If the groundwork has all been laid, imple-

mentation of the final plan could be expedited. The bank-

ruptcy judge noted that there is some uncertainty whether

CIC would be able to take advantage of a $28,000,000

loss carry forward were the proceedings to be trans-

ferred to Chapter X. The outcome turns on -ongressional

action, however, and we must assume that Congress has

in mind the effect its tax laws have on its bankruptcy

laws. We must assume that the result of the Chapter

X proceedings will be the result intended by the law as

administered to the best of all parties’ abilities. Finally,

we note that if delay does result, that delay is ultimately

chargeable to the debtor for having failed to read Ameri-

can Trailer Rentals literally. The choice between Chap-

ters X and XI is not left to the debtor, 379 U.S. at 607,

and the Court stated in no uncertain terms that major

reorganizations of publicly held debt where the investors

are many and widespread must proceed in Chapter XI.

379 U.S. at 615.

Affirmed.

17a

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

No. 78-1204.

IN THE MATTER OF:

CONTINENTAL INVESTMENT CORPORATION,

Debtor.

MONTE J. WALLACE, ET AL.,

Intervenors, Appellants.

No. 78-1205.

IN RE

CONTINENTAL INVESTMENT CORPORATION,

Debtor, Appellant.

No. 78-1238.

IN RE

CONTINENTAL INVESTMENT CORPORATION,

Debtor.

CREDITORS COMMITTEE,

Appellant.

JUDGMENT

Entered October 27, 1978

This cause came on to be heard on appeals from the

United States District Court for the District of Massa-

chusetts, and was argued by counsel.

18a

Upon consideration whereof, It is now here ordered,

adjudged and decreed as follows: The orders of the dis-

trict court are hereby affirmed.

By the Court:

/s/ Dana H. Galiup

Clerk.

19a

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

No. 78-1204.

IN THE MATTER OF:

CONTINENTAL INVESTMENT CORPORATION,

Debtor.

MONTE J. WALLACE, ET AL.,

Intervenors, Appellants.

No. 78-1205.

IN RE

CONTINENTAL INVESTMENT CORPORATION,

Debtor, Appellant.

No. 78-1238.

IN RE

CONTINENTAL INVESTMENT CORPORATION,

Debtor.

CREDITORS COMMITTEE,

Appellant.

20a

ORDER OF COURT

Entered: October 31, 1978

It is ordered that the opinion in the above entitled

cases dated October 27, 1978, be amended as follows:

On page 16, line 5, the Roman numeral “XI” should

be changed to Roman numeral “X”,

By the Court:

DANA H. GALLUP, Clerk

By:/s/ Grace V. Carey

Senior Deputy Clerk.

————————

APPENDIX B

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

No. 76-1158-M

In the Matter of

CONTINENTAL INVESTMENT CORPORATION,

Debtor

MEMORANDUM AND ORDER

Murray, Senior District Judge

This consolidated appeal presents the issues whether

on the factual record the motion of the Secrities and

Exchange Commission (SEC) to transfer the proceedings

to Chapter X of the Bankruptcy Act should have been

granted, and the plan of arrangement under Chapter XI

approved, by the Bankruptcy Judge. Detailed findings

and conclusions were filed by the Bankruptcy Judge after

hearing the motion to transfer, and they need not be

repeated here. The findings of fact are to be accepted

“unless they are clearly erroneous”. Rule 810, Rules of

Bankruptcy Procedure.

In SEC v. American Trailer Rentals, 379 U.S. 594, 618,

615 (1964) the Court said:

... [A]lthough there is no absolute rule requiring

that Chapter X be utilized in every case in which the

debtor is publicly owned, or even where publicly held

debt is adjusted, as a general rule Chapter X is the

appropriate proceeding for adjustment of publicly

held debt.

... [I]t is obvious that Chapter X is the appro-

priate proceeding for the attempted rehabilitation of

respondent in this case. Here public debts are be-

ing adjusted. The investors are many and wide-

spread, not few in number intimately connected with

the debtor, and the adjustment is quite major and

certainly not minor. These facts alone would require

Chapter X proceedings under the above-stated prin-

ciples.

Continental Investment Corporation (CIC) is a di-

versified financial services holding company operating

through subsidiaries, whose operations have included

mortgage insurance, life insurance, advising mutual funds

and large private accounts, land development, and oil and

gas development. In the case here on appeal CIC as of

December 31, 1975 owed a group of 16 banks approxi-

mately $64 million, including principal and accrued but

unpaid interest, on various loans extending back to 1973.

Beginning late in 1974 and extending through 1975, ne-

gotiations were conducted among representatives of CIC,

its lending banks, a Debentureholders Protective Com-

mittee, formed by institutions holding in the aggregate

about 10 per cent of the outstanding debentures, and an

additional institutional holder of approximately 16 per

cent of the debentures. CIC entered into pledge agree-

ments with the banks, whereby CIC pledged, inter alia,

all of the outstanding common and preferred stock of

Investors Mortgage Group, Inc. (IMG) and all of the

outstanding common stock of ConVest Energy Corpora-

tion (ConVest), two of its subsidiaries, to secure pay-

ment of the bank debt. It also sold several other sub-

sidiaries and curtailed its expenses, but the parties to

the negotiations agreed that more drastic measures would

be needed. In July of 1975 they executed a nonbinding

agreement which contemplated a substantial restructur-

ing both of CIC’s unsecured debt under a proposed Chap-

ter XI arrangement and of CIC’s debts to the banks,

outside of the arrangement. The proposed restructuring

was implemented in January of 1976 by an Omnibus

Refinancing Agreement between CIC and the banks. Pur-

suant to that agreement, the banks purchased IMG, thus

effecting a reduction of $34 million in CIC’s debt to them.

In addition to the bank debt, which is the senior debt,

the remaining debt and equity is as follows:

(a) $37,158,900 of 9% subordinated debentures due

1985 held by approximately 1,387 persons of

record,

(b) $1,511,000 of 9% convertible debentures due

1990 held by approximately 255 persons of rec-

ord, and

stock owned by approximately 4,100 share-

holders in the United States.

CIC defaulted in payment of interest due on both series

of debentures; the accrued and unpaid interest as of

April 30, 1976 approximated $6,960,000. The debentures

have been declared due and payable.

The plan of arrangement under Chapter XI filed by

CIC contemplated restructuring both of CIC’s unsecured

debt under Chapter XI, and, outside Chapter XI, of CIC’s

debt to the banks. Under the terms of arrangement, still

to be carried out, the banks and debentureholders would

receive, in exchange for the debts remaining, new is-

sues of notes and securities. The details may be sum-

marized:

(1) The banks are to accept $20 million in Senior

Term Notes with an extended payout and a lim-

ited interest rate, with warrants attached, and

$7 million in Senior Preferred Stock. The Sen-

ior Term Notes are to be paid in quarterly in-

(2)

(3)

(4)

stallments, the bulk of the total from 1979 to

1984. Should a final judgment against CIC in

excess of $10,000 remain unpaid for more than

60 days, CIC would be in default on the Senior

Term Notes, and they could be declared im-

mediately due and payable.

The debentureholders are to be issued $3.5 mil-

lion of Subordinated Debentures, $22.5 million

of Junior Preferred Stock with warrants at-

tached, and $16 million of Convertible Preferred

Stock. The Subordinated Debentures will be sub-

ordinate to the Senior Term Notes and to any

other indebtedness of CIC for money borrowed

but not to the Senior Preferred Stock. No in-

terest will be paid on the Debentures; they are

due in 1984, and CIC is to make annual pay-

ments to a sinking fund for their redemption.

There are provisions for dividends for the new

stock issues, but dividends for each are con-

tingent upon CIC’s compliance with the provi-

sions of every issue more senior. There are

also provisions for retirement or redemption of

the new issues, and the dollar value assigned to

them reflects the price CIC is to pay for them.

If all the warrants for purchase of stock are

exercised, and if all the Convertible Preferred

Stock is converted, the presently outstanding

Common Stock will be diluted by approximately

33 per cent. Until amortization and redemp-

tion payments aggregating $70 million and divi-

dend payments of approximately $23 million are

made with respect to the new issues, the holders

of the new Convertible Preferred Stock will

elect a majority of CIC’s board of directors, and

holders of the Common Stock will not partici-

pate in distribution of assets should CIC be liq-

uidated.

The proposed arrangement would not affect CIC’s

trade debt. The obligation of the banks to go forward

under this arrangement is conditioned upon confirmation

of a Chapter XI plan for CIC. The Chapter XI plan

has been approved by holders of 89 per cent of the stock

outstanding, and by holders of 90 per cent of the de-

bentures outstanding.

After sale or discontinuance of a number of its sub-

sidiaries, CIC now has three in operation: Waddell &

Reed, Inc. (W&R), United Investors Life Insurance Co.

(UILIC), and ConVest. W&R serves as investment man-

ager and distributor of a number of mutual funds, the

largest of which is United Funds, Inc. In addition, a

subsidiary of W&R manages a number of private ac-

counts. W&R’s sales representatives also distribute life

insurance written by UILIC and oil and gas partnership

units originated by ConVest, accounting in 1975 for the

sales of about 95 per cent of the policies written and units

sold.

This is obviously a case in which public debts are

being adjusted, investors are numerous and widespread,

and the debt adjustment is major. Moreover, although

the Bankruptcy Judge found that there was no sufficient

showing of need of new management of CIC, it is sig-

nificant that the proposed plan provides for the transfer

to the holders of the new Convertible Preferred stock

power to elect a majority of the directors. Thus, the

present holders of 76 per cent of the common stock would

lose control over the management of CIC, and this strong-

ly suggests a deliberate move to displace present man-

agement, or at least to closely monitor it with power

to veto its policies and practices. This recognition by

the creditors of the need to change control at the di-

rector level is evidence reflecting adversely on the pres-

ent management and indicating the need for change.

The existence of several pending lawsuits in which CIC

is a defendant has serious portent. These cases for the

most part involve alleged contract violations or securities

fraud on the part of CIC or its subsidiaries. In a num-

ber of them plaintiffs would have to pierce the corporate

veil to reach CIC; a number of the others might be dis-

charged by confirmation of a Chapter XI arrangement.

Several of the cases allege willful torts, however, which

would not be discharged under Chapter XI, and there

is no way on the record before the court to forecast

the outcome of these cases. In light of the provision of

the refinancing arrangement specifying that existence

of a judgment in excess of $10,000 not satisfied within

60 days constitutes default of the Senior Term Notes,

the existence of these lawsuits constitutes a real threat to

CIC’s continuing operations.

SEC bases its argument for a transfer to Chapter X

primarily on the case law, asserting that the facts here

bring the case under the rule of American Trailer Rent-

als. That case clearly held, inter alia, that a district

court does not have open-ended discretion to decide on a

case-by-case basis “whether in its opinion it would be

better for a particular debtor to be in Chapter X or

’ Chapter XI”. 379 U.S. at 619. The district court is re-

quired to observe and apply the principles of that case in

reaching the factual question of whether or not the debtor

is in need of a more pervasive reorganization or re-

adjustment than is available under Chapter XI.‘ It is

clear from the undisputed facts that there is need of an

1 “Simple” compositions are still to be effected under Chapter

XI. Such a situation, even where public debt is directly affected

may exist, for example, where the public investors are few in

number and familiar with the operations of the debtor, or

where, although the public investors are greater in number, the

adjustment of their debt is relatively minor, consisting, for

example, of a short extension of time for payment

SEC v. American Trailer Rentals, 379 U.S. 594, 614 (1965).

independent investigation into the pending lawsuits

against CIC to establish whether there is likelihood that

present management would continue to operate for the

best interests of the public investors.

The conclusion of the Bankruptcy Judge that there

was no evidence that investigation of CIC’s affairs by a

trustee as contemplated by Chapter X would be useful

or productive, and no evidence that terms more favorable

to the public debtholders could have been negotiated,

seems to imply the need of SEC to demonstrate the like-

lihood that reorganization under Chapter X could be ac-

complished. But the district court is not required in this

proceeding to make that determination. It is enough to

show that “all issues relevant to the possible financial re-

habilitation of [the debtor] must . .. be determined

within the confines of a Chapter X, rather than a Chap-

ter XI, proceeding”. SEC v. American Trailer Rentals,

supra at 620, n.20. The pertinent facts here demonstrate

that this case does not fall within the exceptions to the

general rule that proceedings for adjustment of publicly

held debt should appropriately be in Chapter X.

Accordingly, the orders of the Bankruptcy Judge are

reversed, and the case is remanded to the Bankruptcy

Court with directions to allow the motion to transfer

the case to Chapter X.

/s/ Grant J. Murray

Senior District Judge

Dated March 31, 1978

APPENDIX C

“UNITED STATES OF AMERICA

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

No. 76-1158-G

In the matter of

CONTINENTAL INVESTMENT CORPORATION

Debtor

In Proceedings for an Arrangement under Chapter XI

FINDINGS OF FACT, CONCLUSIONS OF LAW AND

ORDER IN THE MATTER OF MOTION BY THE

SECURITIES AND EXCHANGE COMMISSION TO

HAVE THIS CASH PROCEED UNDER CHAPTER

X OF THE BANKRUPTCY ACT

INTRODUCTORY STATEMENT

This matter of the Motion by the Securities and Ex-

change Commission to have this case proceed under

Chapter X of the Bankruptcy Act was brought on for

hearing before the undersigned bankruptcy judge pur-

suant to Section 328 of the Bankruptcy Act (11 U.S.C.

Sec. 728) and Rule 11-15 of the Bankruptcy Rules.

On April 30, 1976, the debtor, a Massachusetts cor-

poration, filed its petition under Section 322 of the Bank-

ruptey Act (11 U.S.C. Sec. 722).

Pursuant to an Order of this Court, the debtor was

continued in possession of its properties and assets.

The debtor is a diversified financial service holding

company operating through subsidiaries.

Its liability and equity structure is as follows:

It has issued and there is outstanding 12,944,533 shares

of .10 par value common stock, owned by approximately

4100 holders throughout the United States.

The debtor has outstanding two series of debentures:

1. 9% Subordinated Debentures due 1985 in an ag-

gregate principal amount of 37,158,900 held by approxi-

mately 1387 persons of record.

2. 9% Convertible Subordinate Debentures due 1990

in an aggregate principal amount of 1,511,000 held by

approximately 255 persons of record.

Several record owners are brokers holding in street

name for the accounts of customers.

The debtor defaulted in the interest payments due on

both series of debentures in November, 1974.

Accrued and unpaid interest as of April 30, 1976, the

date on which these proceedings were commenced, to-

taled approximately 6,960,000.

The debentures have been declared immediately due

and payable by the trustees under the indentures relat-

ing to the debentures.

Both series of debentures and the debtor’s common

stock were formerly listed for trading on the New York

Stock Exchange but were delisted subsequent to the fil-

ing of the Chapter XI petition.

Debtor owes approximately $32 million for principal

and accrued interest to a consortium of sixteen banks.

The bank debt has been declared immediately due and

payable and by its terms ranks senior in right of pay-

ment to the debentures. The banks have entered into an

Omnibus Refinancing Agreement with the debtor provid-

ing that the banks will accept $20 million in Senior

Term Notes payable over a period of nine years and $7

million liquidation preference/redemption price of Senior

Preferred Stock and warrants to purchase up to 600,000

shares of common stock in exchange for all outstanding

bank debt provided the Plan of Arrangement filed in

these proceedings is confirmed and consummated by De-

cember 31, 1976.

An ad hoc committee known as the Debentureholders

Protective Committee was organized by aagroup of de-

bentureholders in October, 1974, and has conducted an

independent investigation of the debtor’s pre-bankruptcy

business activities and transactions. The debtor has ade-

quately explained the history of its operations including

the complex causes of its business failure.

Prior to the filing of the Chapter XI petition, various

subsidiaries and business operations of the debtor which

had been unprofitable were liquidated or sold. A major

subsidiary which was profitable (Investors Mortgage

Group, Inc.) was purchased by the debtor’s lending banks

on April 27, 1976, and the sum of $34,000,000 was

credited to the bank debt then outstanding. The remain-

ing subsidiaries of the debtor are Waddell & Reed, Inc.

and its subsidiary, United Investors Life Insurance Co.,

which are engaged in the business of mutual fund man-

agement, distribution of mutual fund shares and other

securities and the sale of life insurance, and ConVest

Energy Corporation which is engaged in oil and gas ex-

ploration through a series of limited partnerships. They

are not debtors within the jurisdiction of the Bankruptcy

Court, and accordingly their operations are outside the

jurisdiction of the Bankruptcy Court. The consolidated

operations of the debtor, including the operations of the

wholly owned subsidiaries which are named above, would

nuw be profitable, on a pro-forma basis, giving effect to

confirmation and implementation of the proposed Plan of

Arrangement.

It appears that the relationship of Waddell & Reed,

Inc. to the mutual funds managed by it might be detri-

mentally affected by a conversion of these proceedings

from Chapter XI to Chapter X. Since Waddell & Reed’s

salesmen also act as salesmen for United Investors Life

Insurance Co. and participate in the offering of limited

partnership interests by ConVest Energy Corporation,

it appears that any detrimental effect suffered by Wad-

dell & Reed, Inc. might adversely affect the operations

of United Investors Life Insurance Co. and ConVest

Energy Corporation.

The debtor has expended substantial efforts and in-

curred substantial expenses in negotiating and in ob-

taining Acceptances and Consents to the Plan of Ar-

rangement, and in obtaining related stockholder ap-

provals and reaching agreement with its lending banks.

The fruits of all or part of said efforts and expenses

will be lost if the present proceedings are converted from

Chapter XI to Chapter X.

The debtor presently has a net operating tax loss

earry forward for federal income tax purposes of ap-

proximately $28,000,000. This loss carry forward, if it

can be utilized, represents a potential benefit to creditors

of several million dollars. There is a probability that said

loss carry forward can be preserved and at least par-

tially utilized, for the benefit of creditors and the debtor,

if the Plan of Arrangement is confirmed. If the proceed-

ings are converted to Chapter X, it is questionable

whether the loss carry forward can be preserved.

FINDINGS OF FACT

1. I find, as a fact, that the debtor has formulated

and filed a Plan of Arrangement and has solicited Ac-

ceptances and Consents to that plan. The solicitation

was made pursuant to a combined Registration State-

ment on Form S-1 under the Securities Act of 1933 and

Proxy Statement under the Securities Exchange Act of

1934. The Registration Statement containing the solicit-

ing materials was filed with the Securities and Exchange

Commission (the “Commission”) on September 29, 1975,

was processed by the Commission’s staff and was de-

clared effective by the Commission on March 19, 1976.

So far as appears from the record herein the Proxy

Statement included within the Registration Statement

contained a full and fair disclosure of all material facts

required to be made known to the holders of the debtor’s

public debt in connection with the solicitation of their

Acceptances and Consents.

2. I find, as a fact, that at all times the Commission

was fully aware that the debtor might seek to implement

its Plan of Arrangement by a proceeding under Chapter

XI of the Bankruptcy Act. If, at the time it completed

its processing of the Debtor’s Registration Statement on

March 19, 1976, the Commission had concluded that a

proceeding under Chapter XI would not be adequate, and

if it had notified the debtor that it intended to bring

instant motion in the event that the debtor proceeded

under Chapter XI, the debtor would have been obligated

to disclose that fact in its soliciting materials. No such

communication was nade until after the solicitation was

substantially complete.

8. I find, as a fact, that the Plan of Arrangement

provides for an exchange of debentures and preferred

stocks for the presently outstanding publicly held sub-

ordinated debentures of the debtor. In view of the total

amount of the outstanding debentures and the total

amount of senior bank debt, it is unlikely that any ar-

rangement or reorganization could be accomplished with-

out materially modifying the publicly held indebtedness.

The terms of the securities to be issued in exchange for

the publicly held indebtedness were negotiated by ex-

perienced businessmen representing financial institutions

owning a substantial portion of the outstanding debt.

4. I find, as a fact, that the terms have been accepted

by the holders of more than eighty per cent in principal

amount of the publicly held debt. The Plan provides for

significant payments to be made to the holders of the

public debt before the senior bank debt is paid in full,

which could not be done under the existing terms. It

also gives the holders of the public debt the right to elect

a majority of the Board of Directors of the debtor.

5. I find, as a fact, no evidence in the record on

which to base a finding that terms more favorable to the

public debtholders could have been negotiated. The terms

of the securities to be issued in exchange for the publicly

held debt appear to be fair to the holders thereof.

6. I find, as a fact, that the Commissions’ instant

motion was filed on June 18, 1976.

7. I find, as a fact, that the Court held a hearing, as

previously scheduled, June 22, 1976, on the confirmation

of the Plan of Arrangement, but the order thereon has

not been entered pending the disposition of the present

motion by the Commission.

8. I find, as a fact, that on the basis of the evidence

adduced at that hearing, the Plan of Arrangement is

feasible and in the best interests of the creditors.

9. I find, as a fact, that the Court held a hearing,

August 3, 1976, on the present motion. The Commission

appeared by counsel and submitted in support of its

motion affidavits and certain documentary material. The

debtor submitted affidavits and additional documentary

material. The official Creditors’ Committee submitted

an affidavit of its Chairman. The documentary material

was admitted into the record by agreement.

10. I find, as a fact, that the arrangement and its

acceptance are in good faith and have not been made

or procured by any means, promises or acts forbidden by

the Bankrutcy Act. There is no evidence of wrongdoing

on the part of the management of the debtor. There is

insufficient evidence in the record to warrant a finding

that new management of the debtor is needed.

11. I find, as a fact, that there is insufficient evidence

in the record to warrant a finding that a further investi-

gation of the affairs of the debtor by an independent

trustee would be either useful or productive.

12. I find, as a fact, that there is no need, in the

event the Plan of Arrangement is confirmed, to take any

action affecting the rights of secured creditors or holders

of certificates of beneficial interest, other than imple-

mentation of the Omnibus Refinancing Agreement with

the banks, which will require no further action by the

Court.

18. I find, as a fact, that there is insufficient evidence

in the record to warrant a finding that relief under

Chapter XI of the Bankruptcy Act would not be adequate.

CONCLUSIONS OF LAW

The determination of a Motion by the Securities and

Exchange Commission under Section 328 of the Bank-

ruptcy Act (11 U.S.C. See. 728) and Rule 11-15 of the

Rules of Bankruptcy Procedure, to have a case filed

under Chapter XI of the Bankruptcy Act proceed under

Chapter X of the Bankruptcy Act is addressed to the

sound discretion of the Bankruptcy Court exercised on

the basis of the facts and circumstances of the case in

question.

in the first decision of the United States Supreme

Court resolving a problem of jurisdictional conflict be-

tween the reorganization of a corporation under Chapter

X and rehabilitation under Chapter XI, the Court stated:

“In this situation, we think the court was as free

to determine whether the relief afforded by Chapter

XI was adequate as it would have been if respond-

ent had filed its petition under Chapter X. What the

court can decide under Section 146 of Chapter X

as to the adequacy of the relief afforded by Chapter

XI, it can decide in the exercise of its equity powers

under Chapter XI for the purpose of safeguarding

the public and private interests involved and pro-

tecting its own jurisdiction from misuse.” SEC v.

United States Realty and Improvement Co., 310

US. 434, 456 60 S.Ct. 1044, 1053 (1940)

In General Stores Corp. v. Shlensky, 350 U.S. 462,

76 S.Ct. 516, (1956) the Court rejected the positions

taken by the Securities and Exchange Commission that

Chapter X affords relief for corporations with publicly

held securities while Chapter XI is available to those

whose stock is closely held. At page 466, the Court

stated: .

“The character of the debtor is not the controlling

consideration in a choice between C.X and C.XI.

Nor is the nature of the capital structure. It may

well be that in most cases where the debtor’s se-

curities are publicly held C.X will afford the more

appropriate remedy. But that is not necessarily so.

The essential difference is not between the small

company and the large company but between the

needs to be served.”

. SAR TO

In In the Matter of Wilcox-Gay Corp., 133 F. Supp.

548 (W.D. Mich. 1955), the district court denied the

application of the Securities and Exchange Commission

to transfer the Chapter XI proceeding to Chapter X,

and the court of appeals unanimously affirmed this de-

cision, SEC v. Wilcox-Gay Corp., 231 F. 2d 859 (6th

Dir. 1956). The appellate court stated that it had with-

held its decision until the Supreme Court had rendered

its opinion in the General Stores v. Shlensky case. Its

conclusions from the Court’s analysis were that the

discretion of the district court which had relied upon

the case In the Matter of Transission, Inc., 217 F. 2d 243

(2d Cir. 1954), cert. denied, 348 U.S. 952 (1955), was

a sound exercise of discretion.

The basis of such discretions was rooted in the follow-

ing factors: a feasible plan; a reasonable likelihood of

rehabilitation of the debtor; a benefit to stockholders

only in the event that operations were profitable; adop-

tion of the creditors’ assertion that existing management

was necessary for the continuation of the business; an

opportunity open at all times for interested parties to

call any irregularities to the attention of the court; the

probability that a transfer to Chapter X might be preju-

dicial to the ultimate success of the plan; the fact that

there was no public interest as distinguished from public

ownership which required the intervention of the Com-

mission; and, finally, the fact that further investigation

was unnecessary in view of the active participation of the

various interests involved, including a creditors’ com-

mittee. SEC v. Wilcox-Gay Corp., 231 F. 2d 859, 860-

861.

The undersigned bankruptcy judge has found that the

holders of the publicly held debt were represented by a

Debentureholders Protective Committee and that the

Chapter XI Plan of Arrangement has been accepted

by the holders of more than eighty per cent in the

10c

principal of such debt. Sec. 362(1) of the Bankruptcy

Act.

The undersigned bankruptcy judge has found that

under Section 366 of the Bankruptcy Act (1) the pro-

visions of Chapter XI have been complied with; (2)

that the plan is for the best interests of the creditors

and is feasible; (3) that the debtor has not been guilty

of any of the acts or failed to perform any of the duties

which would be a bar to the discharge of a bankrupt;

and, (4) the proposal and its acceptance are in good

faith and have not been made or procured by any means,

promises or acts forbidden by this Act.

An order confirming the Plan of Arrangement by the

Bankruptcy Court has been withheld pending the final

disposition of the present motion of the Securities and

Exchange Commission.

The burden of establishing that adequate relief may

not be obtained under Chapter XI is on the Securities

and Exchange Commission, as moving party, and it has

not sustained the burden.

In view of the very substantial investment of effort

and expense whicn the debtor and others have made in

formulating and implementing the Plan of Arrangement

under Chapter XI of the Bankruptcy Act, the accept-

ance by over 80 per cent of the debenture holders to the

Plan of Arrangement, the tax and practical advantages

of proceeding under Chapter XI, the commitments made

by the debtor and its creditors in reasonable anticipation

of consummation of the Plan of Arrangement, the con-

duct of the Securities and Exchange Commission in fail-

ing to make objection at an earlier point, and relief

under Chapter XI being adequate, this case should con-

tinue to proceed to confirmation under Chapter XI of the

Bankruptcy Act, the undersigned bankruptcy judge hav-

ing found that the Plan of Arrangement is in the best

interests of the creditors and is feasible and meets the

other requirements of Chapter XI of the Bankruptcy

Act.

lle

UNITED STATES OF AMERICA

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

No. 76-1158-G

In the matter of

CONTINENTAL INVESTMENT CORPORATION

Debtor

In Proceedings for an Arrangement under Chapter XI

ORDER

At Boston, Massachusetts, in said District, this 9th

day of November, 1976, for the reasons set forth in the

foregoing Findings of Fact and Conclusions of Law,

IT IS ORDERED, ADJUDGED AND DECREED af-

ter hearings at which interested parties were repre-

sented, as follows:

That the Motion By The Securities And Exchange

Commission To Have This Case Proceed Under Chapter

X Of The Bankruptcy Act is denied.

/s/ Paul W. Glennon

PAUL W. GLENNON

Bankruptcy Judge

APPEARANCES:

MARVIN E. JACOB, Esquire

Associated Regional Administrator

Attorney for

Securities and Exchange Commission

26 Federal Plaza

New York, New York 10007

12¢

CHARLES P. NORMANDIN, Esquire of |

Ropes and Gray

Attorneys for the Debtor

- 225 Franklin Street

Boston, Massachusetts 02110

FREDERICK G. FISHER, JR., Esquire of

Hale and Dorr

Attorneys for the Creditors’ Committee

28 State Street

Boston, Massachusetts 02109

WILLIAM R. CARRUTH, Esquire

Attorney for Certain State of Louisiana

Pension Funds

Capitol Station

P.O. Box 4405

Baton Rouge, Louisiana

STEPHEN F, GATES, Esquire of

Choate, Hall & Stewart

Attorneys for First National Bank of Boston, as

Indenture Trustee for Debtor’s 1990 Debentures

28 State Street

Boston, Massachusetts 02109

JON SCHNEIDER, Esquire

Goodwin, Proctor & Hoar

Attorneys for Bankers Trust Company, as

- Indenture Trustee for Debtor’s 1985 Debentures

28 State Street

Boston, Massachusetts 02109

HENRY S. HEALY, Esquire

Bingham, Dana & Gould

Attorneys for First National Bank of Boston,

as Debtor’s Lead Lending Bank

100 Federal Street

Boston, Massachusetts 02110

APPENDIX D

Section 141 of the Bankruptcy Act, 11 U.S.C. § 541,

provides:

“Upon the filing of a petition by a debtor, the judge

shall enter an order approving the petition, if satis-

fied that it complies with the requirements of this

chapter and has been filed in good faith, or dis-

missing it if not so satisfied.”

Section 146 of the Bankruptcy Act, 11 U.S.C. § 546,

provides:

“Without limiting the generality of the meaning of

the term ‘good faith’, a petition shall be. deemed

not to be filed in good faith if—

“(1) the petitioning creditors have acquired their

claims for the purpose of filing the petition; or

“(2) adequate relief would be obtainable by a

debtor’s petition under the provisions of chapter XI

of this Act; or

“(3) it is unreasonable to expect that a plan of

reorganization can be effected; or

“(4) a prior proceeding is pending in any court and

it appears that the interests of creditors and stock-

holders would be best subserved in such prior

proceeding.”

Section 328 of the Bankruptcy Act, 11 U.S.C. § 728,

provides:

“The judge may, upon application of the Securities

and Exchange Commission or any party in interest,

and upon such notice to the debtor, to the Securities

and Exchange Commission, and to such other per-

sons as the judge may direct, if he finds that the

proceedings should have been brought under chapter

X of this Act, enter an order dismissing the pro-

ceedings under this chapter, unless, within such

time as the judge shall fix, the petition be amended

to comply with the requirements of chapter X for

the filing of a debtor’s petition or a creditors’ pe-

tition under such chapter, be filed. Upon the filing

of such amended petition, or of such creditors’ pe-

tition, and the payment of such additional fees as

may be required to comply with section 132 of this

Act, such amended petition or creditors’ petition

shall thereafter, for all purposes of chapter X of

this Act, be deemed to have been originally filed

under such chapter.”

APPENDIX E

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

No. '5-1158-G

In re

CONTINENTAL INVESTMENT CORPORATION,

Debtor

In Proceedings for an Arrangement Under Chapter XI

ORDER CONFIRMING PLAN

The debtor’s proposed plan, filed on April 30, 1976,

having been transmitted to creditors; and

The deposit required by Chapter XI of the Bankruptcy

Act having been made; and

It having been determined after hearing on notice:

1. That the plan has been accepted in writing by the

creditors whose acceptance is required by law; and

2. That the plan has been proposed and its acceptance

procured in good faith, and not by any means, promises,

or acts forbidden by law, that the provisions of Chapter

XI of the Act have been complied with, that the plan is

for the best interests of the creditors and is feasible,

and that the debtor has not been guilty of any of the acts

or failed to perform any of the duties which would be

a bar to the discharge of a bankrupt;

It is ordered that:

A. The debtor’s plan filed on April 30, 1976, a copy

of which is attached hereto, is confirmed.

B. Except as otherwise provided or permitted by the

plan or this order:

(1) The debtor is released from all dischargeable

debts;

(2) Any judgment heretofore or hereafter ob-

tained in any court other than this court is null and

void as a determination of the personal liability of

the debtor with respect to any of the following:

(a) debts dischargeable under § 17a and b of

the Act;

(b) unless heretofore or hereafter determined

by order of this court to be nondischargeable,

debts alleged to be excepted from discharge

under clauses (2) and (4) of § 17a of the Act;

by order of this court to be nondischargeable,

debts alleged to be excepted from discharge un-

der clause (8) of § 17a of the Act, except those

debts on which there was an action pending on

April 30, 1976, the date when the first petition

was filed initiating a case under the Bankruptcy

Act, in which a right to jury trial existed and

a party has either made a timely demand there-

for or has submitted to this court a signed

statement of intention to make such a demand;

(d) debts determined by this court to be dis-

charged under §17c(3) of the Act.

C. All creditors whose debts are discharged by this

order and all creditors having claims of a type referred

to in paragraph (B) (2) above are enjoined from insti-

tuting or continuing any action or employing any pro-

cess to collect such debts as personal liabilities of the

above-named debtor.

D. The securities to be distributed to creditors hold-

ing Class 3 claims pursuant to the plan are hereby

valued, solely for the purpose of computing the pay-

ment to the salary and expense fund required under Sec-

tion 40c(2) of the Bankrupicy Act, at $223.54 per $1,000

of Class 3 claims proved and allowed.

E. This court has previously denied a motion of the

Securities and Exchange Commission to have this case

transferred to Chapter X of the Bankruptcy Act. Noth-

ing in this order shall moot or impair the right of the

Securities and Exchange Commission to appeal from the

order denying its transfer motion, and this order shall

not be considered a final order for purposes of Article

VI of the plan until any appeal by the Securities and

Exchange Commission from the order denying the trans-

fer motion, as well as any appeal from this order, have

been finall:’ determined. No consideration shall be dis-

tributed to creditors, and no other action shall be taken,

under the plan until after final disposition of any appeal

by the Securities and Exchange Commission from the

order denying the transfer motion, as well as any appeal

from this order. This court retains jurisdiction pursuant

to Sections 368, 369 and 387 of the Bankruptcy Act,

and to Article V of the plan, to consider revocation or

modification of the plan and of this order if any such

appeal from the order denying the transfer motion or

from this order is successful.

Dated: November 30, 1976

/s/ Paul W. Glennon

PAUL W. GLENNON,

Bankruptcy Judge

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

Bankruptcy No. 76-1158

In re

CONTINENTAL INVESTMENT CORPORATION

Debtor

PROPOSED ARRANGEMENT

Continental Investment Corporation, a Massachusetts

corporation (“CIC”), proposes the following Arrange-

ment (the “Arrangement”) with certain of its unse-

cured creditors.

I. ADMINISTRATION EXPENSES AND

PRIORITY CLAIMS.

All claims for costs and expenses of administration,

and all other claims of creditors entitled to priority

under Section 64a of the Bankrupty Act, as filed and

allowed, shall be paid in full, in cash, within 30 days

after the Closing Date, as hereinafter defined, or after

allowance of such claims, whichever shall be later, or in

accordance with such terms as may be agreed upon by

CIC and the creditors holding such claims.

II. DIVISION OF GENERAL CREDITORS

INTO CLASSES.

Claims of general creditors shall consist of three

classes, as follows:

Pennant Mineo ames asnsnin ne

Class 1. All claims of trade creditors (not in-

cluding directors, officers or employees of CIC or

of any subsidiary or affiliate of CIC) for merchan-

dise sold or services rendered to CIC in the ordinary

course of business of such trade creditor and CIC.

Class 2. (a) Any indebtedness of CIC to certain

banks and the Federal Deposit Insurance Corpora-

tion (the “Banks”) under (i) the 1973 Refunding

Loan Agreement dated as of February 28, 1974, as

amended, (ii) the Credit Agreement dated as of

September 3, 1974, as amended, (iii) the Short

Term Refunding Agreement dated as of December

5, 1974, and (iv) the Reorganization Credit Agree-

ment dated as of October 3, 1975, each among CIC

and The First National Bank of Boston, as Agent,

and one or more of the Banks, and any related fees

and payments.

(b) Any indebtedness of CIC to Diversified Ad-

visers, Inc. (“DAI”) as described in an agreement

dated February 11, 1976 between CIC and DAI

(the “DAI Agreement’’).

Class 3. All other unsecured claims of whatever

character, including without limitation, claims with

respect to CIC’s presently outstanding 9% Con-

verti’ |e Subordinated Debentures due 1990 and 9%

Subordinated Debentures due 1985.

III. PROVISIONS FOR THE ALTERATION AND

MODIFICATION OF RIGHTS OF CREDITORS.

Class 1. Claims within this Class shall not be affected

by the Arrangement, and such claims shall be paid by

CIC in accordance with the respective terms thereof, or

in accordance with such other terms as may be agreed

upon by CIC and the creditors holding such claims.

Class 2. Claims within this Class shall not be affected

by the Arrangement, and shall be disposed of (a) in the

case of claims held by the Banks, by agreement between

CIC and the Banks pursuant to the Omnibus Refinancing

Agreement among CIC, the Banks and the Agent dated

as of January 12, 1976 (the “Omnibus Refinancing

Agreement”), and (b) in the case of claims held by

DAI, in accordance with the DAI Agreement.

Class 8. Claims within this Class in an aggregate

amount not exceeding $50,630,482 shall be paid, within

30 days after the Closing Date, as hereinafter defined, or

after allowance of the claim, whichever is later, by the

issuance, in full settlement and satisfaction thereof, of

securities of CIC as hereinafter provided. Assuming

claims within this Class aggregate $45,630,482, securities

will be issued at the following rate per $100 of claim:

(a) $7.670308 in amount of CIC’s Subordinated In-

terest-Inclusive Debentures due 1984, plus (b) 2.4654562

shares of CIC’s Junior Preferred Stock with warrants

attached at the rate indicated below, plus (c) 1.7532133

shares of CIC’s Convertible Preferred Stock, with the

amounts of Interest-Inclusive Debentures and the shares

of Convertible Preferred Stock and Junior Preferred

Stock to be rounded to the nearest whole dollar and share.

The maximum amounts of securities issuable to holders

of Claims in Class 3 are as follows, before any adjust-

ments for rounding to eliminate fractions of dollars and

$3.5 million of Interest-Inclusive Debentures

1,260,000 shares of Junior Preferred Stock with war-

rants attached to purchase 1,993,575 shares

of Common Stock

896,000 shares of Convertible Preferred Stock.

Oe et at i er creer ee tle

In the event that allowed claims in Class 3 exceed

$45,630,482, with the result that insufficient Interest-

Inclusive Debentures are available within the $3.5 million

limit, the formula stated above shall be adjusted so that

$3.5 million of Interest-Inclusive Debentures shall be

distributed pro-rata among holders of allowed Class 3

claims and any decrease in the amount so distributed per

$100 of claims shall be compensated for by an increase

in the shares of Junior Preferred Stock with warrants

attached and Convertible Preferred Stock so distributed,

with the amount of increase measured by the $20 liquida-

tion preference of the shares of each class, and with the

class distributed in the same ratio as is provided in (b)

and (c) above, all subject to adjustment to eliminate

fractions of dollars and shares. If allowed claims in

Class 3 exceed $50,630,482, modification of the Arrange-

ment will be required prior to confirmation. Any such

modification will be subject to the approval of the Bank-

ruptcy Court. Certain provisions applicable to the In-

terest-Inclusive Debentures, the Convertible Preferred

Stock and the Junior Preferred Stock are stated in the

related Debenture Indenture between CIC and Bradford

Trust Company as Trustee dated as of , 1976

and in CIC’s Restated Articles of Organization.

IV. EXECUTORY CONTRACTS.

CIC reserves the right to apply to the Bankruptcy

Court, prior to confirmation of this Arrangement or any

modification thereof, to reject any and all contracts which

are executory in whole or in part, as provided in Section

313(1) of the Bankruptcy Act, except that CIC shall

not reject the Omnibus Refinancing Agreement or the

related Pledge Agreement.

V. RETENTION OF JURISDICTION.

The Bankruptcy Court shall retain jurisdiction of this

case, pursuant to the provisions of Sections 368 and 369

of the Bankruptcy Act, until the final allowance or dis-

allowance of all duly filed claims affected by this Ar-

rangement or any modification thereof, in respect to the

following:

A. To enable CIC to consummate any and all

proceedings which it may bring to set aside liens or

encumbrances, or to recover any preferences, trans-

fers, assets or damages to which they may be en-

titled under applicable provisions of the Bankruptcy

Act or other federal, state or local law;

B. To enable CIC to consummate any and all

proceedings which it may bring to reject executory

contracts, including leases;

C. To hear and determine all claims arising from

the rejection of any executory contracts, including

leases;

D. To liquidate damages in connection with

claims arising from the rejection of executory con-

tracts, including leases, or in connection with any

other contingent or unliquidated claims;

E. To adjudicate all claims to a security interest

in any property of CIC or in any proceeds thereof;

F. To adjudicate all claims or controversies aris-

ing out of any purchases, sales or contracts made

or undertaken by CIC during the pendency of this

Chapter XI case;

G. To recover all assets and properties of CIC,

wherever located ;

H. To authorize CIC to borrow money and to

issue certificates of indebtedness therefor upon such

terms and having such priority as the Bankruptcy

Court may determine; and

ee ee

- A ines ne a ete ees,

I. To accomplish any other purpose for which

relief may be granted under the provisions of the

Bankruptcy Act.

The Bankruptcy Court shall also retain jurisdiction

of this case pursuant to the provisions of Section 368

of the Bankruptcy Act for the purposes set forth in

Section 387 of the Bankruptcy Act and Rule 11-40 of

the Rules of Bankruptcy Procedure, and in Section 377

of the Bankruptcy Act and Rule 11-42 of the Rules of

Bankruptcy Procedure; provided, however, that if a clos-

ing has been held under the Omnibus Refinancing Agree-

ment on or before the Closing Date, as contemplated by

Article VII hereof, no modification or alteration of this

Arrangement shall be made or requested which would

affect the rights of the holders of the Refinancing Se-

curities or the Senior Income Debentures, each as de-

fined in the Omnibus Refinancing Agreement. Failure

to hold a closing under the Omnibus Refinancing Agree-

ment on or before the Closing Date, as contemplated by

Article VII hereof, shall constitute a default under the

terms of this Arrangement. Upon the occurrence of such

default the Bankruptcy Court shall retain jurisdiction

to enable CIC to propose a post-confirmation modification

of the Arrangement, to dismiss the Arrangement pro-

ceeding, to transfer the case to a case under Chapter X

of the Bankruptcy Act as provided in Section 328 of the

Bankruptcy Act and Rule 11-15 of the Rules of Bank-

ruptcy Procedure, or to adjudicate CIC a bankrupt and

direct that bankruptcy be proceeded with.

VI. CONFIRMATION AND CLOSING DATES.

For purposes of this Arrangement: The “Confirma-

tion Date” shall be the date on which a final judicial

order shall have been entered confirming the Arrange-

ment and all applicable appeal periods shall have ex-

pired without the filing of an appeal, or, if an appeal

10e

shall have been filed such appeal shall have been dis-

missed (or such order shall have been affirmed) and all

applicable periods for the filing of further appeals shall

have expired. The “Closing Date” shall be the third

business day after the Confirmation Date.

VII. OTHER APPROPRIATE PROVISIONS NOT

INCONSISTENT WITH CHAPTER XI.

A closing is to be held by CIC and the Banks on or

before the Closing Date, pursuant to Section 3 of the

Omnibus Refinancing Agreement. Consummation of the

Arrangement, including payment of claims in Class 3

as provided in Article III hereof, and the discharge of

CIC, are contingent upon the consummation of such

closing.

Boston, Massachusetts

April 30, 1976

CONTINENTAL INVESTMENT CORPORATION

Its Attorney, CHARLES P. NORMANDIN

Ropes & Gray

225 Franklin Street

Boston, Massachusetts 02110

617-423-6100

Ne a ne ct nme Bi TT

at LY tes esas eee eres dom a -

NE ee AO a i tt A MO oe Nae lt PS ig 2

APPENDIX F

APPENDIX A

Summary of some recent Chapter XI proceedings in

which major adjustments of publicly held debt were

effectuated.*

1. NATIONAL MORTGAGE FUND (N.D. Ohio #B-

76-1150). Chapter XI petition filed 6/30/76, plan con-

firmed 12/14/76.

Publicly held debt consisted of 814% Senior Subordi-

nated Notes, 7% Subordinated Convertible Notes, and

7% Subordinated Convertible Debentures totalling (with

interest) $8.8 million and held by 1,540 holders. The

plan offered two options for these holders: (a) 10% in

cash plus 50% in shares of beneficial interest (the equiva-

lent of common stock) at $2.50 a share (shares traded

in April between 14 and 3%); or (b) 5% in cash plus

30% in shares of beneficial interest at $2.50 per share,

plus 65% in new noninterest-bearing subordinated notes

due in 8, 9 and 10 years respectively (depending upon

which category of debt was previously held). Accept-

ances were solicited prior to filing of the Chapter XI

petition pursuant to a proxy statement filed with the

Commission under its proxy rules. 'The Commission did

not file a transfer motion, and such a motion filed by

private parties was denied.

* This Appendix has been largely prepared from certified court

records but also includes information obtained from proxy state-

ments and discussions with counsel involved.

2. CAVANAGH COMMUNITIES CORPORATION

(S.D.N.Y. #75-B-243). Chapter XI petition filed 2/8/75,

plan confirmed 12/13/76.

Publicly held debt consisted of $8.1 million of 9%

Convertible Subordinated Debentures held by about 1,500

holders. Under the plan, each $1,000 principal amount of

Debentures (unpaid interest to be waived) is to be ex-

changed for either (a) $40 plus 10 shares of $1 par value

Convertible Preferred Stock (carrying the right to ad-

ditional cash distributions in the succeeding four years

of $8, $8, $3 and $3 per share), or (b) a $1,000 9%

Revised Subordinated Debenture maturing in 1991, with

interest payable until 1985 in cash or in common stock,

at the debtor’s option, and payable in cash thereafter.

The Commission several times gained extensions of time

for filing a transfer motion, but never did so.

8. DAYLIN, INC. (C.D. Cal., #BK 75-02958 JM).

Chapter XI petition filed 2/26/75, plan confirmed

10/20/76.

Publicly held debt included $28.3 million principal

amount of 5% Debentures with 3,200 holders. The plan

provided that these would be satisfied with (1) nonin-

terest-bearing short-term (3 year class B) Notes in the

aggregate principal amount of $2.46 million plus (2) sub-

ordinated long-term (23-year class B) Debentures in the

aggregate principal amount of $930,00-, carrying 8%

interest after five years, plus (3) shares of common

stock equal to about 33% of the total common stock for

the balance. The solicitation was made through a com-

bined proxy statement/registration statement. In the

Chapter XI proceedings the Commission filed for exten-

sions of the time permitted for its motion to transfer

totalling at least half a year, but in the end the Com-

mission never moved to transfer the proceedings to Chap-

ter X.

4, ESGRO, INC. (C.D. Cal. #73-02510). Chapter XI

petition filed 3/13/78; plan confirmed 5/18/76.

Publicly held debt consisted of $6 million in 6% Con-

vertible Subordinated Debentures held by 560 persons

of record, but the actual number of beneficial owners

was at least 675. This was satisfied as follows: (1)

10% cash, pius (2) an additional 10% in cash during

and within a year, plus (3) $1 million (spread evenly

among all general unsecured creditors, including about

$4 million due to trade creditors, thus amounting to about

another 10%) in 7% four-year subordinated notes, plus

(4) about 480,000 shares class A no par stock (actually

800,000 shares for the total $10 million general unse-

cured debt). The Commission filed a transfer motion

which was denied by the Bankruptcy Court, which found,

among other things, that the plan materially modified

the terms of the publicly held debentures. The Com-

mission appealed, but later withdrew the appeal with

prejudice.

5. SHERWOOD DIVERSIFIED SERVICES, INC.

(S.D.N.Y. #738-B-213). Chapter XI Petition filed

3/2/73; plan confirmed 4/12/76.

There were two outstanding categories of publicly held

debt: (1) 654% Convertible Subordinated Debentures,

totalling $9.68 million and held by 1,816 holders and

(2) 6% Convertible Subordinated Debentures totalling

$3.89 million and held by 666 holders. Under the plan,

holders of the 654% debentures received 40 shares of

New Common Stock per $1,000 principal amount; holders

of the 6% debentures would receive 20 such shares. These

were projected to constitute about 69% and 13% of

post-confirmation outstanding stock, respectively. There

was no transfer motion.

4f -

6. ASSOCIATED MORTGAGE INVESTORS (S.D.

N.Y. #74-B-312). Chapter XI Petition filed 3/15/74;

plan confirmed 9/9/75.

Publicly held debt consisted of $10 million principal

amount of 10% Senior Subordinated Debentures which

had been due 12/15/73 as to which debtor had defaulted.

This was satisfied with cash payments of $500,000 upon

confirmation, $1 million on each June 1 of 1976, 1977

and 1978, and $214 million on each of 12/1/78, 4/15/79,

and 12/1/79, plus 300,000 shares of beneficial interest.

The Commission gained over a year of extensions for

filing a transfer motion, but such a motion was never

filed.

7. SHEFFIELD WATCH CORPORATION (S.D.N.Y.

71-B-544). Involuntary petition in bankruptcy filed

6/2/71; Chapter XI petition filed by debtor 6/3b/72;

plan confirmed 8/21/74.

Publicly held debt included 714% Convertible Subordi-

nated Debenture Bonds amounting to $2.48 million held

by approximately 335 holders. Under the plan, these

holders received 6% in cash. There was a complicated

side agreement, disclosed to the court but not part of the

plan, under which another 10% or so was disbursed to

the debenture holders. (This complication arose from

the myriad of claims involving ten subsidiaries, which

claims were pooled.) There was no transfer motion by

the Commission.

8. HORN & HARDART (E.D. Pa. #71-752).

(Detailed information not obtained).

9. FAS INTERNATIONAL, INC. (S.D.N.Y. #72-B-

128). Chapter XI petition filed 2/8/72; plan confirmed

8/2/78.

Publicly held debt included $16.3 million principal

amount of 5% Convertible Subordinated Debentures held

by approximately 550 persons. The debenture holders

received 20% of the post-confirmation stock. The Com-

mission did not file a transfer motion.

APPENDIX G

ROPES & GRAY

225 Franklin Street

Boston 02110

October 26, 1978

Dana H. Gallup, Clerk

United States Court of Appeals

for the First Circuit

Post Office and Courthouse Building

Boston, Massachusetts 02109

In re Continental Investment Corporation

Appeals Nos. 78-1204, 1205 and 1238

Dear Sir:

The appeals referred to above, which were argued on

September 13, 1978, involve the issue of whether the

debtor’s reorganization should proceed under Chapter X

or Chapter XI of the Bankruptcy Act. I wish to call the

Court’s attention to a development occurring since the

appeals were briefed and argued which, I believe, may

be of some significance and interest. I refer to the re-

cent enactment by Congress of H.R. 8200, which rep-

resents a comprehensive revision and reform of the bank-

ruptcy laws. The legislation has not yet been signed by

President Carter, but his signature is anticipated in the

immediate future.

Under the new legislation, reorganization of a finan-

cally distressed business, whether privately held or hav-

ing publicly held debt or stock, will take place under

a new, unified Chapter 11, which replaces Chapters X,

XI and XII of the present Bankruptcy Act. Thus, a

dispute such as that involved in these appeals will not

arise in the future. A copy of the new Chapter 11 is

enclosed.

The new bankruptcy law will not become effective until

October 1, 1979, and will apply only to cases initiated

after that date. It is not, I recognize, directly applicable

to the appeals involving Continental Investment Cor-

poration’s reorganization. But, in so far as those ap-

peals involve questions of public policy, and the views of

Congress with respect to corporate reorganization, the

new legislation is of significance.

In particular, I would call the Court’s attention to re-

marks by Congressman Edwards and Senator DeCon-

cini, Chairmen of the House Subcommittee and Senate

Committee having jurisdiction over the legislation, ap-

pearing at 124 Congressional Record pages H11,100-

11,105 (September 28, i978) and pages S.17,417-17,421

(October 6, 1978), a copy of which is enclosed.

I have enclosed extra copies of this letter which I would

appreciate your transmitting to the Court.

Very truly yours,

/s/ Charles P. Normandin

CHARLES P. NORMANDIN

CPN/vbb

enclosures

ec: Counsel listed on attached page

——— se

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.