Petition for Writ of Certiorari — Calhoun v. Hertwig

SUBJECT INDEX

OPINIONS BELOW —_____ oc

_ JURISDICTION OF THIS COURT._____ 2...

CONSTITUTIONAL QUESTIONS | 2&3:

‘OTHER QUESTIONS PRESENTED. '3

CONSTITUTIONAL PROVISIONS i ey ke 4

STATEMENT OF CASE. niaeenl

_ ARGUMENTS its aM

CONCLUSION . A ALSIDRS: |

TABLE OF. GASES. ii

_ INDEX TO APPENDIX & EXHIBITS __28

___ APPENDIX ONE & EXHIBITS_.___24 et seq.

Stes fk ye Er

¥ ard TABLE OF CASES

Page

; Cohsolidated Rock Products Co. v. DuBois ies

- $12 USS. 510; 61 S.Ct. eee? | a

Fe

First National Bank v. Flershem

290 U.S. 504; 54 S.Ct. 298

sao aad 14, 17, 20 Be

In-re: C Consolidated ‘Motor Parts, tee |

~~ 82, 24. 579 (C.A2) ——_. 4, 11, 14, 20

‘ Irwin ¥, Life Ins. Company of Tennessee :

80t Ga. 48. j . a 12

—~ Los Angeles Lumber i- v.. tiie 4

308 US. 106;' 60 S.Ct. 1 3, 14, 20°

Northern Pacific R.R. Co. v. Boyd | '

228 tos 482; 38 S.Ct.. 554__ . 3, 11, 14, 20°

s “ / : ; Po ke

_ Pepper-v. Litton . Pscealhs A tela ie Reh ee ai 3

508: US. 296; 60 S.Ct: 238 —_—4,'6, 11, 14, 20 ©

Security Mortgage Co. v: Powers

978 U.S. 149; 49°S.Ct. 84: She nee, oe

IN THE

Saree Court of the United States

Ss a chee teninciets

JOHN K. CALHOUN, Individually and as Attorney

for the ESTATE OF C. F. CALHOUN,

; '_- Petitioners

VS.

CHARLES Cc. ‘HERTWIG, Trustee, Et Al,

ees

i

The Petition of John K. Calhoun, ‘et al, for Writ of

Certiorari to thé United States Circuit Court of

Appeals for the Fifth Circuit

OPINIONS BELOW

‘The denial of the Extraordinary Motion for Rehear-

ing and Intervention in the Circuit Court ‘of Appeals

on October 20, 1966, appears as Exhibit B, attached

after. Appendix One and Exhibit A.

_ The denial of the Motion for Rehearing and Interven-

IExhibit it isa copy of the Order extending: the Stay of Mandate

to January 29, 1967. - | ; esis \

; oes

a pqurtyr rc superar:

tid: in ‘the: Cirenit Court of “Appeals, filed poe ead

1966, Record. Vol. II, page 772, appears as Exhibit C,

attached.

The opinion and Ruling of the Circuit Court of Ap 3

peals of June 28, 1966, R. Vol. II, page 699, to which

this appeal is directed, appears as Exhibit D, attached,

rand is published as 363 F2D 257.

The relevant pages from the Order of the District

- Court Riwnenetes,

all Creditors’ claims to be less than $400,000.00, R. Vol.

I, pages 371-372, appear as Exhibit E, attached.

‘The Judgment of the District Court finding

_'$1,238,500.00 subject to Dea-Nap Liabilities, also before .

‘the Circuit Court on another appeal, appears in the

Record as Exhibit B-to Appellants’ Extraordinary Mo-

tion for Rehearing, appears here as Exhibit F, attached.

The Opinion and: Ruling of the District Court on : 7

June 14, 1965, R. Vol. I, pages 249-262, Exhibit G. .

_. JURISDICTION

_ Notice of judgment of the Court of Appeals denying |

the Extraordinary Motion for Rehearing upon its judg-.

ment of June 28, 1966, was given by letter to the parties

tise indicated in the attached Exhibit B on October 20, 1966.

. ‘The’ jurisdiction of this Court is invoked by II U.S.C.

47 ¢, Il U.S.C. 48, 28 USC. 1954.

| THE CONSTITUTIONAL QUESTIONS |

1.. | Whether the construction given Georgia Laws:

. 1953,. page 545:

_ “Obligations to pay attorney’ s fees upon any note .

¢ Plan of Reorganization setting __

. Shall be valid and enforceable, and collective as part a

-

of such debt, if such note... , be collected a or

through an attorney after maturity . .

which takes from/ Secured Creditors, Class ° not leas esr

. $10,000.000 of, the payment provided for and already ©

paid to.them for their claim under the Chapter X Plan

on the ground that this payment was collection attorneys’ _

fees provided for in their secured notes, which for this .

_ reason belongs to their attorneys and is not the property

and right of these Secured Creditors, Class 2, is illegal

and contrary. to the Fifth Amendment of > Constitu-

ie tion of the United States.

2. Whether the refusal of the Court of “Appaale to

allow these minors to intervene and be heard as the par- _

ties in whom the recovery, of the Secured Creditors,

Class 2, was then vested. after its decision’ to divest them.

of their property is in violation of due process under the -

Fifth Amendment of the .Constiution of the ‘United :

_ States, 2

. |. OTHER QUESTIONS ; PRESENTED :

A. Whether a Court of Appeals may hold the failure

of a Charter X Plan for a solverit Debtor to pay a se-

cured creditor its full claim to be fair_ahd equitable in’

facé of the Los Angeles Lumber* and cat decisions

of this Court? —

B. Whether the Court of ; Appeals may hold the iatlane ei

. of a Chapter X Plan for a solvent Debtor to compensate

attorneys for work which raised a 35-40 per cent plan

to a 89-100 per cent plan to be fair and equitable in face

of these same decisions of this Court without being in

Los Angeles Lumber Co. v. Case, 308 U.S. 106; 60 S.Ct. 1 (6) .

-8Northern Pacific RR Co. v. Boyd, 288 U.S. 482; 33 SCt. 554* ~p

* *Excerpts in poe in Appendix. One, attached. - aseaes

4

actual conflict with the Consolidated Motor Parts‘ deci-.

of the Court of Appeals for the Second: Circuit.

6G Whether i in face of the F lershem® and Pepper* deci-

sions this Court of Appeals may refuse to recognize the

solvency of ‘this Denter, either: -

By refusing to recognize the teens of the District

Court of December 18, 1964, confirmed January - 26,

1965, finding all the net assets of this aporipos seg, a.

subject to Den-Nap — to be $1,238,500.00 .

ie °

-By refusing to recognize the Judgment of the District

Court approving the Plan of Reorganization ged the

_total debt claims payable at under $40,000.00. . Or.

. By failing to recognize that the Consolidation of the

Assets and the Subordination of the Claims of the Con-

trolling Stockholders which make the solvency of this

Debtor undeniable, are essential requirements for any

fair and equitable plan in this Chapter. X.

é

=

f*

~

: Mf ve: Consolidated. ‘Motor Parts, Inc., 82 F2D 579 (CC. 2) °

5First. National Bank of Cincinnati v. Flershém, 290 U:S. 504;

54 S.Ct. 298°

¢Pepper v. Litton, 308 U.S. 295; 60'S.Ct. 238"

*Excerpts in point attached in Appendix One.

=

| CONSTITUTIONAL PROVISIONS INVOLVED |

U. S. CONST. AMEND. V | a

“No person shall be held to answer for a capital, or

__ otherwise infamous crimé, unless on a presentment

' ° or indictment of a Grand Jury, except in aris- -

ing in the land ‘or naval forces, or in the, Militia,

.when in actual service in time of War or public dan-

<ger; nor shall any person be subject for the. same

offense to be twice put in jeopardy. of life or linib;

- nor shall be compelled in any criminal case to be a

witness against himself, nor be deprived of life, lib-

erty or property, without due process of law; nor

shall private property be taken for public use, with-

out just compensation.” See ree tee

STATEMENT OF THE CASE

x One man invented a practical means of accurately en:

graving any tire design into a solid mold for retreading

automobile and airplane tires at low cost.

The invention, the patents, and the machines embody-

ing them, and other inventions and improvements were

sold to Den-Nap Electric Mold Company of Macon; |

Georgia, by contract in 1946. : | :

The greatly improved retreading molds which re-

sulted coupled with the stronger tire. bodies then being —

made brought forin a wide variety of safe and handsome

retreads which revolutionized the industry. Retreaded

tires won national consumer acceptance and a near de-

funct little company, Den-Nap, was raised overnight. to

the nation’s # 2 mold producer with an annual gross of

$1,000,000.00 to $2,000,000.00. . .— co

‘ ‘

®

~s

The overall compensation, ten per cent: of gross, to

‘which this inventor was entitled exceeded $1,000,00.00

under this original contract. Had the inventor been paid

this sum, two million in the company earnings -would

have remained, one each for the two controlling stock-—

holders. However, by vatious strategems on. the part of

the two controlling stockholders, this inventor’s right.

was effectively reduced by roughly 50 per cent on two ©

separate occasions so that the residual amount due to the

inventor's estate in this Chapter X is a remainder of

* about one-fourth of the original obligation to him. .

Meanwhile, ‘during the -same period, the controlling |

_ stockholders have taken out over $2,000,000.00 and have

- still.ended up with more than $3,000,000.00 in debt.

claims against. ‘their’ corporation, which causes that cor-

poration to appear to be insolvent, although the District

Court actual ajudged -its net. assets to npereomeny -

$1,300,000.00 in Chapter X.

On the facts, this is sts. cael v. Litton’ put into Chap

ter X.

. Here, the stockholders in control of a solvent corpora-

tion, before and during Chapter X, almost forced the

creditors to take 40 per cent. This they did fraudulently _

> by taking out $2,000,000.00 in cash and other assets, by

taking $3,000,000.00 more in debt claims against the |

corporation to be later asserted as Chapter X claims, by

diverting the manufacturing and sales to other plants to

force a shut-down. of the corporation, and then, at last

putting this corporation they cman to _— insolvent

into Chapter X. ?

., One creditor alone put upa ight. but all of the credi-

Supra.

at \

z. :

tors got substantially 100 per cent by the subordination

of the $3,000,000.00 unpaid remainder of these fraudu-

lent stockholder claims and the reconsolidation of the —

$1,300,000.00 of Den-Nap assets which resulted from

this one creditnor’s fight.° "tet wages

The reorganization is ‘over, The creditors have their

money. The controlling stockholders have rung out this

_ creditor or as a creditor and a minority stockholder and

now have all the assets. But, fortunately, $56,000.00 re- -

mains in: cash with the trustee’, which may yet afford

appellants their fair compensation. . 2

On the rulings below, this is the Flershem*® case with

but one difference. The lower Courts are now letting the

_ controlling ‘stockholders tut the one fighting’ creditor

back down to somewhere near the original 40 per cent

offered. This amounts to construing the plan approved

and consummated to authorize the cutback, although the

language of the plan itself provides that this one cred-

itor, being one of the two secured creditors, is to be paid

100 per cent of the contract of debt," just like the other.

. Cutting back this ‘recovery of the minors in whom it

is now vested is done’a new and different way in two"

Steps. First, bya refusal to reimburse their attorneys who

are the appellants for the substantial expenses incurred

Creditors’ Petition for Subordination, R. Vol. I, pp- 263-296,

Controlling Stockholders’ answer, R. Vol. I, pp. 326-341, and

Bound Volume of Original Exhibits to Petition, tendered to

lower Courts, Appendix Two, unattached.

*R. Vol. I, p. 380, last paragraph.

| 10Supra, .

“'Stockholders’ Private Purchase Plan Composition, R. Vol: I,

pp. 356-7-8. : 4 ;

8

and for the considerable work done in raising the plan

up sixty points to 100 per cent. Secondly, by grounding:

this refusal on the fiction’? that $10,000.00 of the claim ~

has actually been paid to these appellants, their attorneys

_ under this plan, and that $16,000.00 more, or a total of

$26,000.00" of the recovery of these secured creditors,

is a bonus to which they are not entitled, and which

appellants, their lawyers, have constructively received

"and must consider in lieu of any additional payment on

their fees to themselves.

__In this way the Courts below are allowing the control-

__ ling stockholders to subtract from the one fighting credi-

tor group’s fair debt contract recovery the cost of that

work which forced these controlling s stockholders to add

$250, 000. 00 to-their Purchase Plan and to pay all the

creditors. substantially 100 per cent.

In effect, the holding is approval of a penalty to be |

asserted against the fighting creditor for defeating the -

- fraudulent scheme of the controlling stockholders. “Fhe

cholding takes from the fighting creditor $26,000.00 and

“takes from appelants, their lawyers, the additional com-

pensation they should receive for their work, expense,

and accomplishments ‘for which $45,000.00 was prayed.

12This Court’s own decision by Justice ‘Brandies in Security

Mortgage Co. v. Rowers, 278 U.S. 149; 49 S.Ct. 84*, and in the

Géorgia cases cited in that decision hold contrary as a matter of

Georgia law’ and Chapter X_ law.

18The -total of the collection charges and the post-Chapter X

interest fraction of the claim contracted for in the secured notes

by this solvent debtor is due and payable to this secured creditor

as a matter of right under Consolidated Rock Products v. —

312 U.S. 510; S.Ct. 6752 .

*Excerpts in point are smn in Appendix One.

s—

[2g

The execution of the error begins with t the District

Court. On July 14, 1965, it holds this work done by

appellant-attorneys is not entitled to compensation as a

matter of Chapter X law. Another ground given for re-

fusing appellants’ fee is bar.** ‘

The District Court ruling of July 14, ‘1965, has already

been held to be error under Chapter x by the Fifth Cir-

cuit Court of Appeals, which holds at page 9 of its pres-

ent =

‘ appéllants did Been such benefits as would

bring them within the fee allowance section. II -

U.S.C.A. 643 ra in light of the. liberal appli-

cation of thé test ‘...to insure the vigorous ‘Tepre-

sentation of all security holders and ‘the protection

of minority groups ...’”

14The. controlling stockholders then and now yaaa contend

appellants and in favor of the controlling stockholders, who are

the ones who pay the fees under their Private Purchase Corposi-

tion Chapter X Plan. This District Court making the ruling had

' this reorganization only the last of its four years’ duration. This

Court may not be conscious of the inequitable acts of the control-

ling stockholders which would rule out any equitable bar,’ and

this may account ;for its “bar’ ‘error.

However, this District Court ruling, Exhibit G, appears ‘to defi-

nitely find .as a fact that these attorneys were actually paid by

a $26,000.00 bonus given to their clients under the plan. This

must be the basis for the “bar”; Le. a result of compensation

that an equitable bar operates against-this~one cteditor “and °

already having been received by. a bonus paid to their clients.

Since the- Court has corrected the District Court’s error that no

fee was earned, if this “payment” to. appellants is the basis for

the “bar”, the now uncorrected error of the District. Court which

: remains: is identical to the now uncorrected error of the Circuit

Court which holds very plainly that appellants have metnasd

been paid $10,000.00. to $26,000.00. -

cS wii

‘

10

But, on page 10 of its opinion, the Fifth Circuit Court

of Appeals ‘in effect finds that appellants lost their

es Chapter X fee rights when appellants attorneys accepted

the plan for their estate clients during a plan hearing on

the fairness and equitability of plans, because, in the

sequence of the Court: , :

1A ppellants and appellants’ clients got $26, 000 extra .

(this is enlarged upon in last sentence, below)

2. ‘Appellants failed to speak of their Chapter X fees. .

‘when the matter of the settlement (composition? ) was

before the Court ...and. !

1. ‘Appellants got $10,000 as attorneys fees...

_ (out of the $26,000 referred to in 1 above) .. .’

—In short, ‘These Chapter X rulings amount to a holding:

A. It is fair and equitable to pay this secured creditor

less than 100 per cent and to earmark a portion of what

this creditor is paid as aan to its a in “e

case; or, in the alternative... *

B. It is fair and equitable n not to compensate these at-

torneys for work which caused the increase from a 40 to

a 100 per cent pay out in this Chapter X plan because

their clients were paid in full and because they orally

accepted a plan to pay their clients in full without stating .

they intended to follow Chapter X provisions for appli-

cation for their own compensation as provided for under

© The Bankruptcy Act. 11 U.S.C. 648, 647.

These holdings become worth this Court’s correction

because in this case the Debtor is solvent as a matter of

18This paragraph appears at page 10 of this nena een

attached as Exhibit D.

i

law. Two unreversed Judgments of the District Court, _

one finding $1,238,500.00 in net assets subject. to the

debts’*, and the other approving $40,000.00 total debt

liabilities payable in the Plan’, establish that this debt-

or’s assets cover its liabilities three times and over. Being ©

solvent this Debtor must ‘pay all legitimate administra-

_ tive costs and all its creditors in full, unless this-Court

finds some new’ principle of law-which relieves this

Debtor from ‘its contracts, and unless this Court wishes .

\ to reject-the Consolidated Motor Parts'® decision of the

_‘\Second Circuit. ee Fe ot

| ARGUMENTS |

_As in the Flershem, Boyd, and Pepper cases", the

lower Courts have not appreciated the duty of care

placed upon controlling stockholders; or, the duty upon »

reorganization Courts to see to its performance, or even

the essentiality of the reorganization Court’s understand-

ing of the true condition of each debtor in order to per-

form its duty to be certain that every reorganization plan

approved is fair and equitable. Despite the effort: of ap-

-pellants and their clients to make it clear, the absence of _

concern and, independent inquiry on the part of the

lower Courts has prevented their penetration of the

screen” built by the controlling stockholders to conceal

from the Courts the fact that this debtor was solvent and

is solvent for all purposes, and that this particular statu-

16Exhibit F, attached.

‘Exhibit E, R. Vol. I, p. 356, et seq.

18Supra. fe xy 0 3

2°All Cited supra. , e |

2Made by their fraudulent fragmentation of the’. going-concern

and their near impenetrable contract and accounting maze,

12

tory Federal Equity Reorganization under Chapter X has

_been used to accomplish some grossly inequitable results.

Instead, the lower Courts completely inverted the

Equitable reorganization and the Chapter X statutory

duties prescribed for these parties. The result has been.

to relieve the controlling stockholders of the duties that _

the Congress and the decisions place upon them and to

place unfair anf unlawful duties of notice” and burdens

of proof upon the creditors and their attorneys.

Use by the District Court of mistaken bases. for its

£-eruling” must be considered in light of the finding of the

District Court that appellants were not helping but were

hindering this Chapter X Estate by raising the 40 per

cent payment plan to a,100 per cent payment. plan, and

that appellants are not entitled to any a cients un-

eder any circumstances.

The. Fifth Circuit Couri decision in. this « case a ;

decides the matter of law in the only possible layful way:

It states that the Re oR a must be paid a nl |

fee as a matter of Chapter X law...

21The District Court decision i in elieci holds the giving of notice

at the plain hearing is prerequisite to compensation.

2The success of the controlling stockholders in the District

Court decision may depend in part upon the mistaken belief in

-the controlling stockholders’ right to an equitable bar against

. appellants despite Irvin v. Life of Tennessee, 204 Ga. 582.° -

This success may depend i in part upon the mistaken belief that —

the multi-party composition plan as confirmed included a bi-

lateral settlement of appellants’ compensation, which for some —

reasosn did not have to be written into the composition plan to’

become effective despite the requirements of law of compositions

and requirements of Chapter X plan and composition provisions.

“Excerpts in Append One.

ee ee

13

_ But, this Circuit Court decision then goes:on. to find

that: actual payment of $10,000.00 to $26,000.00 has

been made to appellant-attorneys.

This factual. finding is clearly erroneous 1s factually and

_ impossible legally* and, constitutionally. This finding

may be reached ‘only, by a refusal to give effect to. the

plain language of the plan, which gives 100 per cent to —

all secured creditors, or a refusal to recognize the judg-

“ments of the District Court positively establishing the

__ debtor's solvency, which requires shat all must réceive

100 per cent of their contract claims. _ *. !

-It is unfortunate that the Circuit Court erred in fail-

ing to recognize that this debtor is solvent under the Dis-

trict Judgments*, But, it is even moye unfortunate that

the Circuit Court could fail to recognize its duty to

independently inquire into the actions and the plans of

the controlling stockholders and to inquire into and

independently understand the debtor's condition. The

first of these errors caused injustice in this one case. But, -

the second of these errors is general in nature and unless

corrected by this Court shall cause a great ‘number of

similar errors in this and all the other Circuits.

Controlling stockholders too often rebel at the duty of

| 2Stockholders’ Private. Purchase Plan Composition Plan, R. Vol.

I. pp. 356-7-8.

In that the constitution does + prec private property.”

- 31 the Circuit Court could recognizé this one fact, it would see

' that to take from the one dissenting cteditor the payment which

these appellant-attorneys must receive, to avoid the initial error- .

of-law, is to commit a second error-of-law against the’ dissenting

- ‘qreditor and to destroy the fairness of the _ after its consum-

3 mation. — ;

“_

ee 16,

protection the people wish to see given to creditors. Too

often ways are sought to avoid this duty as set out by the

people in Congress via the Chapter x legislation. In this

\ ie proceeding one new and different way to evade this duty

has been. discovered{ Unfortunately, thus far this new .

_evasion scheme has succeeded. This Court must once >

again speak out to protect and more clearly define the

congressionally declared duty owed by controlling stock-

holders to all creditors Aen this new ic: Aaa en-

croachment. ‘~

_ What is the controlling stockholders’ duty as now de-

fined by the Pepper® decision, the Los Angeles Lum-—

ber**, and the Boyd™, Consolidated Motor Pott", and

_ the Flershem™* holdings? ,

* Does Pepper say that controlling stockholders ‘erie :

‘ing the unique sovereign power of the national govern-

ment to relieve and revise-their contracts with creditors

in reorganization must begin and end with completely .

undivided openness, honesty, and fairness?

.». Have these stockholders measured up to the ee )

qualification? =

Do Los Angeles and Boy establish that the conn.

ling stockholders must first pay all administrative ex-

penses; second, secured creditors in full, then general

creditors in full, and last (but equally ” “gue all stock-

holders what is left? .

‘Have these controlling stockholders met aang Los

Angeles-Boyd requirements? ©

Is it necessary for the controlling stockholders to pay

reasonable compensation to creditors’ attorneys—who

succeed in blocking the controlling stockholders’ efforts

3 2*Supra, excerpts attached in Appendix One. |

é is 1

to coerce acceptance of ‘an ‘unfair plan, and who hen oo

fairly induce a_fair, full payment plan—as the Second

Circuit Court declared i in its Consolidated Motor. Parts fs:

decision. | oo ag

Has this Consolidated Motor Parts requirement been |

met here.,Has it been met in actual fact, or even com-

paratively when $150,000.00 in fees were paid or set for.

the trustee and other attorneys for the 40 per cent plan, .

and then, after the plan was raised 60 points to 100 per

cent, ‘no compensation of any kind was payable ‘to the

appellant attorneys for their own 60 per cent additional —

accomplishment. (Except the $10,000 to $26,000 now |

supposed to be taken from the hapless minor es to

satisfy the ‘law’.)" *

_. The only and obvious answer is: NO!

‘Pepper, Los Angeles-Boyd, and Consdlidated all have

been ignored. They have been ignored | individually. _

They have been ignored even more all-together, as. one ©

whole, composite standard of. conduct required of..con-- .

trolling stockholders in ree mea

Why? How?

There are many partial answers. But, there i is only one |

whole answer. This one whole answer is that the Fler-

shem holding was not applied. Because this holding was

mot applied, equity. failed; injustice occurred, and in-

justice will recur until this Court acts to make this duty

~— applicable i in all cases of this kind. .

: Contests between stockholders in control and minority

objecting creditors are by their nature quite one-sided.

The dominant stockholders begin with the legal control

~. and the knowledge, and the power over the assets as well |

16)

as the income ‘in. their. hands, This one-sidedness grows |

with the uniqueness, the complexity, the size, the geo-\

graphic spread, the accounting obscurity”, the opera-

-., tional secretiveness, and the profitability of the opera-

__ tions controlled by the stockholders. Each of these factors

add additional weight to the already heavily weighted

. adyaiitage of the stockholders in control.

On the other hand, eath passing day subtracts from .

each creditor’s, interest, courage, and capacity to fight in»

. the naturally increasingly impotent condition each cred-

itor finds himself in as time goes by. In a short time the

fainhearted creditors no longer care, after. two or three,

-or four-years, all creditor resistance is near zeo.

The Trustee is actually, powerless to protect: these

eciuilieiies Even in those rare ‘cases where the creditor’s -

attorneys are able to fight the battle through to a plan

fair and equitable on its face without the’ trustee’s help,

they and the dissenting creditors are still quite vulner-

able. to attack from the controlling stockholders with

their unlimited, ‘tax-free resources to finance their of- .

-fense. As can be seen in this case, unless they are given

the informed and concerned protection of the Courts,

j dissenting creditors arid their attorneys cannot. protect

- themselves from campaigns for ex post, facto. rulings,

which construe a fair and equitable plan into an unfair

and inequitable plan, after its consummation just in. or-

der to make it possible to penalize them.

al

Each time a lower court merely umpires a contest be-

tween controlling stockholders and creditors, that court

peeremesey Jake é .

271f this Court would also establish the right of Sinilindes ‘td

coherent, consolidated accounting information, in multi-corporate :

reorganizations this would : ely immeasurably.

~

: a

“unwittingly turns its back on Flershem and in effect

hands its sword to the controlling stockholders. Flershem

_dermands, active and informed concern to forestall the

unfairness and inequity which too often and too easily

results without this counterforce of concern from a just

and informed court to re-balance the scales in reorganiza-

tion situations, = 8 - - . -

The crux of Flershem* is the standard of special care _

and concern for the creditors and the duty of independ- |

ent inquiry into the fairness of all actions of those in

control of reorganizations and their plans which Fler-

shem places upon ali the lower —— in reorganizations.

Flershem ‘insists that reorganization proceedings are

special and different from ordinary cases and that reor-

ganizations call for a considerably different, higher .

standard of responsibility from the lower courts. Reor-

ganizational courts are called to actively and intelligently

protect all “dissenting creditors from the condition of _

impotency so frequently occupied by minority stockhold- ©

ers” and the injusticies which too often result from the

weakness of their position. |

Today F lershem i is too often forgotten, as it was in this

case. Today injustice comes in where the application: of

Flershem ends. But, the problem does not end with over-

_ sight. Today. Flershem is construed to end with protec-

tion for the dissenting creditors. By ending at this point

Flershem even fails to adequately protect these creditors

themselves. -

‘Until Flershem is revitalized, updated, and extended,

it is a suit of armor which fails to Cover the dissenting

28In 54.S. Ct. 298, 302 to 306;. In 290 US. 504,515, 517 to 523.

18

_ creditors’ arms and legs by failing to protect their attor-

_" neys as they move to protect these creditors. Until the

attorneys who fight the battles are protected by the

Flershem standard of extraordinary protection: from the

lower Courts, dissenting creditors are still without rea-

sonable protection’ from the overwhelming power of

position and maneuver of stockholders i in control of their

corporations.

One case in a hundred may happen where the unfair-

« ness to the dissenting creditors is so obvious and so gross

that the reorganization court will disregard the pressure

of the majority and the dominant stockholders, without

- any considerable investigatory effort and expense, or

legal effort on the part of the objecting creditors and

their attorneys. One case in.a million may find creditors -

with attorneys who will shoulder the expense and effort.

‘needed to protect their clients from any fraud, inequity,

or unfairness which the controlling stockholders attempt,

_ however great or difficult to bear this effort and expens@

may be. However, until the.comprehensive protection of

the reorganization court is extended to their attorneys in

keeping with Flershem, objecting or dissenting creditors _

in reorganization will find themselves with -no effective

defense against this fraud, inequity, and unfairness in

those 99 cases out of 100 where considerable investment

in professional accounting and investigation and legal

preparation and action is required to expose and defeat .

the fraud of the controlling stockholders. Until such pro-

tection from the lower Courts is extended to their attor-

neys in all reorganizations, the choice of objecting or dis-

senting creditors lies between accepting the penalty of

' the loss by fraud from the controlling stockholders’ ac-

tions directly or accepting the penalty of the expense of

19

| investigation sind litigation to defeat’ the fraud: Heads |

the creditors loses; Tails the creditor also loses—the only

_ open question is, how much? To preserve the protection

intended for the creditors in Chapter X reorganization

proceedings, another general affirmation of the Policy of

congress is needed in at least three areas,

The first need is for this Court’ $ enunciation. of the

very basic point that a solvent debtor may not use Chap-

ter X as a device to coerce a creditor to accept less than

’ the full amount of his contract a

The second need is for ‘this Court to affirm the. Con-

solidated Motor Parts decision of the Second Circuit, to

place beyorid discretion the denial of Chapter X compen-

sation from solvent debtors for those creditors’ attorneys

who must expose themseives to the inevitable and deter-

mined opposition of the controlling stockholders and the

trustee to their fees, by blocking the coerced acceptance

of an unfair plan and by taking the action needed to.

make certain that the creditors do receive equity under _

a fair and equitable plan.

The third and greatest need is for this Court to reaf-

_ firm the.doctrine of the Flershem Case and to extend it.

That dissenting creditors need the protection of the

lower Court has been established. ‘Now we can see that

their attorneys need the Court’s protection just as much.

In fact, in this case we can now see that the dissenting

_ creditors need the protection of the Courts extended to

their attorneys to make the protection of. the Courts

effective for them.

20

CONCLUSION - oie

As Sorokin’ sees ‘through the eyes of Petrajitzsky:?

“Without law we would do nothing unpleasant or

hard; we would not dare to require service of other

men ... we would not have the prising (or courage,

or résources) *to oppose a strong man . .. to fight for

our rights (or our client’ s rights) * in case of their

transgression.” |

The mere passage of time ‘since ie Pepper* and the

Boyd* and the Los. Angeles Lumber* statements argues

for re-statement of the duty of care owed to creditors by

controlling stockholders to enable them to face the hard

and unpleasant tasks which the performance of this duty

calls for in reorganization situations. The need to

strengthen the authority of ‘the Consolidated Motor

Parts* decision of the Second Circuit by its inclusion in

- such a re-statement is another i important reason for such

re-statement now.

Yet, it is the need for the enlargement of the d e duty of ©

concern and inquiry for the protection of reorganization

creditors by the lower Court as stated in Flershem* and

Boyd* which even more urgently cries out for action

today. At stake is the question of whether, today cred-

itors shall be able to dare to require the performance of -

the duty or to find attorneys with the energy (or courage .

or resources) to oppose the strong, entrenched, well-

Gnanced controlling stockholders, to fight for the —

‘Sorokin, P., Contemporary Socialdgical Theories, p. 702, 703.

*Petrajitzsky,.L., Theory of Law, Vol. I-II, and Introduction.

3Added by this writer. :

“Supra.

21

_ of their creditor clients or their own rights under Chap-

‘ter X when these rights are transgressed.

This Court can and this Court should help resolve this :

| question at this time by a clear reaffirmation of this 7

: Flershem-Boyd duty of concern and inquiry upon the

' Courts in reorganization situations. This Court's reaffir-

mation should include a broadening of this duty to en-

compass the protection of dissenting creditors’ attorneys

along with their clients, in order to complete the protec. |

tion given to the dissenting creditors in the reorganiza-

tion of a solvent corporation.

Joun K. CatHoun

Individually and. as Attorney for

estate of C..F. Calhoun

: 2B

‘CERTIFICATE OF SERVICE

I, John K. Calhoun, certify t that a copy of this petition

has been furnished by mail" ‘to counsel of record for

Charles C. Hertwig; et al, Charles Cork, Paul R. Erwin,

Wallace Miller, Jr., Baldwin Martin, Jr. and George

Saliba, Esquires, at their respective addresses. |

This 17th day of March, 1967.

( {s/f Joun K. CALHOUN