# Appendix — Wallace v. Securities & Exchange Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_2397%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1979 - **Citation:** 440 U.S. 981 ## Text €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, V. 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 1b le 1d le 1f lg a la 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. 2a 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 8a 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.” 4a 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 ee 5a - 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). 6a 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 Ta 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. 8a 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. 9a 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. ———————— 1b 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. 2b ... [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. I 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- 3b 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 (c) 12,944,583 shares of 10-cent par value common 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) 4b 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. 5b 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. II 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. 6b 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). 7b 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 le 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). 2c 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. 3c 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 4c 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. 5e 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 6c 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 Te 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 8c 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 9c 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 1d 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- 2d 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.” le 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, 2e 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; (c) unless heretofore or hereafter determined 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. 3e 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 4e 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 5e 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. 6e 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 shares: $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 Te 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 8e 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, 9e 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 By 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 1f 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. 2f 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. 3f 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). 5f 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. lg 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 2g 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 <4 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_2397%3A2. Public record. Not legal advice.