Petition for Writ of Certiorari — Securities & Exchange Commission v. United States Realty & Improvement Co.

Q

ree ence —

~ ~~

. MAR 7 1946

3 EL CRE EROPLEY

whe

_ Sate Supreme Court of the Wied Sat

OcrosER TERM, |

1939 .

\_SECURITIES. AND Benson COMMISSION, PETITIONER

v.

igh x ; P : He

Untrep States REALTY aND IMPROVEMENT CoMPANY -

©

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

* CIRCUIT

STATES CIRCUIT COURT OF APPEALS FOR THE SECOND

>

2

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y- :

INDEX

Opinions below.-.--.- ~~. --- Gcucwaun ptbvcaodeacema

ic ane dilee ward bee ey APR, Ree er CENE Spee

Questions presented... ......-.------ ~~ ---- +--+ 2-2 ------

Statute involved.._....-----.-- Sa SP NORE AT

6 ee Pe gE AN Wie Be ee caasudinatenerd

- Bpecification of errors to be urged RRR LAE NM es Re WS Yo

Reasons for granting SN aa crac act asic sas antuariic alarm eean ete

Conclusion elescedpeangntal es Rata hci aad ales Gat a omoaradas

CITATIONS

Cases: moh ao

‘American Security Co. v. District of Columbia, 224 U. 8. 491_

Case v. Los Angeles Lumber Products Co., Ltd., Nos: 23 and

~ -24, present Term, decided November 6, 1939

Church of the Holy Trinity v. United States, 143 U. 8. 457_-

‘Credit Service, Inc., In me Matter of, January 18, 1940 (D.

ee

NE erat it Meera Te eee ee oh

Coleman v.: Miller, 307 U. ES IE

Debs, In re, 158 U. S. 564___-- Dinctunecosshaseneebungees

Exchange, The, 7-Cranch 116___.......------- deelsinnasac nee

Helvering v. Davis, 301 U. 8. 619__._--.- SOE Ie OTE

: Helvering v. Morgan, Inc., 296 U. 8. 281_...--------. aioe

* Interstate Commerce ‘Commission v. Oregon-Washington R.

ia Ig A asa Sas og Corus are reins ss a Aap ecae i

: Keifer & Keifer v. Reconstruction Finance Corp., 306 U. 8.

PkGh nas plgddlimanuinasacltaihavasetececudibaenen

Lau Ow Bew v. United States, | SS See

New York v. New Jeremy, M6 U.-B. BRB... cccclkcceci-co8.

Norman v. Consolidated Edison Co. of a. York, 89 F. (24)

fo wee En Le Le ren OPOR eke NE EME Penn Sent eee

Northern Pacific Ry. Co. v. Boyd, 228 ae See

O'Connor v. Mills, 90 F. (2d) €66...-.....-....------..-

Pennsylvania v. Williams, 294 U. 8. 176_.....-.--.------

Percy Summer Club v. Astle, 110 Fed. 486.-..,.--.--=-:-

Reo Motor Car Co., In re, October 3, 1939 (E. D. Mich. y

Stanley v. Schwalbiy, Oe RR oe eee '

Tennessee Publishing Co. v. American Nat. ‘Bank, 299 U. 8.

5: a RS ee Re a eee Re Aid pr SOAR ala ee NER

_ Texas v. Anderson, Clayton & Co., 92 F, (2d) 104, certiorari

denied, 302 U. S. 747...-.-.. poi Suseensseiuseccdl

21445840 —1

“1 OO <3 Go 6 bo bo to

ms

id

=

Cases—t ‘ontinued.

United States v. C. M. Lane Lifeboat Co., 25 F. Supp. i10..

United States v. Jim Puey Moy, 241 U. S. ARR Se ee

United States v. Katz, 271 U. 8. 354_..-------2------.---

United Siates v. aoe eee. 270 U. 8. 381__.....----..---

Bankruptcy: Act (11 U. 8S. ©. Supp. IV, Sees. 501 et seg.

and 701 et “er 7

iadtaes ain tas lac taa of He aio o> Oe wee a aaah raed

EE AR rae Suey eas ar aaa

ing quinn & ste alec kasd ela a aonitnd eee oe meeme

oe epnesacceccSwscene Loxewloae

SAR oo ce eta ie to Kneacheneestehi pa enaiaeie

BERETS S EERE SE:

Sec. 357, oe Sak Ran ea a ee

Sees. 362 367__ iA cuawskeea Ghee genes dekeeee

See. Piiimichnpes sik names enwens pare eee Se

Securities Act of 1933, ¢ a 38, 48 Stat. 74 (5 UL. s. C. Sees,

BR ER RUE ae nae eee aoe te

Securities Exchange Act of 1934, ec. 404, 48 Stat. 881 as

Publie Utility Holding Company Act of 1935, c. 687, “49

Stat. 838 (15 U. 8. C. S2e. 19). 2...

Trust Indenture Act of 1939, c. ‘411, 53. Stat. “1149 (15

U.S. C. A. Secs. 77aaa-77bbbb). 2.2

Miscellaneous: ;

Hearings. before the House’ Committee on the Judiciary on

H. R. 8046, 75th Cong., Ist Sess______.-

Hearings before a Subcommittee of the Senate Committee /

on the Judici@®y on H. R. 8046, 75th Cong., 2d Sess. _ -

H. ‘Rept. No. 1409 on H: Ri 8046, 75th Cong., Ist-Sess__.

. of . Pian

+)

eo ; ?

Hit.

a R . é

Miscelliineous—Continued. tts Page

Rules of Fetieral Procedure, Rule: ORs. 2. cnc ceet hae dence 21

Securities and Exchange Commission Report on the Study

and Investigation of the Work, Activities, Personnel and

Functions of Protectiv e and Reorganization Committees, “See

es tt deli chawdaseu’ 16

8S. Doc. No. 65, 72d Cong., Ist Sess... Re eae eee 15

S. Doe. No. 268, 74th Cong., 2d Sess., pp. 9-10....-.-... . 16

S. Rept. No. 1916 on H. R. 8046, 75th hatte 3d Sess._.. 16

‘2

a

é

Inthe Sagres Gourt of the Wnited Sates

aes ‘TERM, 1989

¢ : No. — S ‘

é

SECURITIES AND EXCHANGE COMMISSION, PETITIONER

v.

Unitep STaTes REALTY AND IMPROVEMENT CoMPANY

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SECOND

CIRCUIT

The Solicitor Siac on behalf of the Securities

and Exchange Commission, prays that a writ of |

certiorari be issued to review the judgment of the

' United | States Circuit Court of Appeals for the

' Second \Cireuit, entered February 2, 1940, (1) re-

versing ‘an order of the United States District

Court for the Southern. District of New York al-.

lowing the Commission to intervene in proceedings

under Chapter XI of the Bankruptcy Act, and (2) —

dismissing appeals taken by the Comission from

_ two orders of the District. Court, one of which

denied the Commission’ s motion to dismiss the pro-

‘ceedings for lack of jurisdiction of the Debtor

under Chapter XI, and the other of which referred

the proceedings to a referee for further action.

(2)

\

>,’

2

OPINIONS BELOW 6°:

The District Court filed no written opinion. It

expressed its views and announced its decision in

open court (R. 336-339).. The opinion of the Cir- /

cuit Court of Appeals (R. 420) is not yet: reported

. “ roe ci . . O

' JURISDICTION

“The judgment of ‘the e Circuit Court of ‘Appeals

was entered F ebruary! 2 2, 1940 (R. 480). . The ju-

risdiction’ of this Court is invoked under Section

240/( 1) of the Judicial Code, as ‘amended by the Act

of Fe ‘bruary 13, 1925.

QUESTIONS PRESENTED

1. Whether a corporation which has securities ,

outstanding in the-hapds of the public may institute

a proceeding: for an arrangement under Chapter

XI of the Bankruptcy Act or whether it ean reor-

ganize under the Bankruptey Act only. pura to

the provisions-of | Chapter X. :

_ 2. Whether a petition for an arrangement under

Chapter XI-should bé dismissed when the facts dis-

close that no fair, equitable, and feasible plan may.

be consummated under Chapter XT.

3. Whether the Securities and Exchange Com-

misison, as an agen¢y charged with the duty. of

administering the safeguards provided by Congress

for public investors in reorganizations under Chap-

ter X, was properly permitted to intervene in pro-

‘ceedings instituted under Chapter XI by a publicly-

held corperation fer the e limited purpose of moving

2

, 3

to distnisa those proeeedings on the ground that the

Débtor could reorganize under the Bankruptey Act

_ ~ only under Chapter X, and, if so, whether it was

entitled to appeal from an adverse order. |

; - STATUTE INVOLVED | 3

Chapters X and XI of. the Bankruptcy. Act rate

U.S. C. Supp. IV, Sees. 501 et seq. and 701 et seq.) -

are involved in ‘this proceeding substantially. in

their entirety. Becagse of ‘their length they are

not printed as parts of this -petition, but copies

. thereof have been filed with the Clerk for the con-

} venience of the Court. .

i

STATEMENT

The Debtor, a New Jersey eorporation having

- its principal place of business in New York City,

owns and manages real estate investments (R. 6-7,

103). It owns .all the ‘capital stock of Trinity

Buildings. Corporation of New York (hereinafter

‘called Trmity) (R. 7). The Debtor and Trinity

.have outstanding three classes of securities which

are widely held by the public (R.:7, 11.1, 134).

The Debtor is guarantoy of the.principal, inter-

est and: sinking. fund payments on publicly held

“first mortgage certificates issued by Trinity (R: ?)..

- On June 1, 1939, the principal of tue Trinity certifi-

‘cates, amounting to $3,710,500; hecame due (R.7-8).

Both Trinity and the Debtor defaulted in the pay-

iment of the principal of these certificates, as well

as in the payment ot an installment of interest

amounting to $102,038, which became’ due at the

same tinte (R. 171).

io

» In addition to its liability on its guaranty of. the *

- Trinity certificates, the Debtor has liabilities total--

ing $5,551,416 (R. 375). Included in these liabil-

ities are. two series of publicly held debentures,

aggregating $2,339,000, which will mature on Jan-

-uary 1, 1944 (R. 375). Both series of debentures °

are'sectred by a pledge. of’ admittedly valueless

stock owned by the Debtor (R. 211-212, 227, 382).

The Debtor has outstanding 900,000 shares of stock .

| which aré listed on the New. York Stock Exchange

(R. 111, 134). an | os

Pais claimed value of the Debtor’ ’s assets is $7,-

076,5 5 (R. 375), of which $5,200,000 represents an .

NE in a building: mortgaged to secure a

$3,000,000 bank loan ,(R. 192-194, 375). The |

Debtor’s current assets total less than $400, 000 (R.

375)... Each year since 1936, the Debtor has suf-

feréd a net loss, not: including interest charges

under the guaranty of the ‘Tr inity certificates (R.

59). . as

- Prior to the maturity of the Tr inity certificates,

the Debtor and Trinity jointly proposed a Plan

and Arrangement to the certificate holders for the

purpose of modifying their respective ebligations

_ on the ceftificates, but’ which .was to leave unaf-

- -feeted the ‘other indebtedness and stock of the

Debtor (R.:30, 40-41). The maturity of the certif-

icates was to be extended, the interest reduced, and --

the sinking-fund payments modified. The Debtor’s

- guaranty was to be modified to conform to these -

changes in principal and interest, and its present .

-

w

9) : iS Sy ne

guaranty of sinking-fund gaienutd was to be elim- .

inated entirely (R. 39). }

The Plan and Asvahobeus was to be consum-

‘mated by the institution of two proceedings: a pro-

ceeding instituted by the Debtor under Chapter XI

of the Bankruptéy Act for an arrangement, to

modify its guaranty of the Trinity certificates, and

_ asubsequent proceeding to be instituted by Trinity.

ih the state courts under the Burchill Act (New

York Real Property Law, Sees. 121-123) to con-

aranty (R. 33-34). The Plan provided, how-

ever, that the modification of. the Debtor’s guar-

y in the Chapter XI proceeding was. to stand

even though the state court should subsequently.

‘refuse to confirm the propdésed modification of .

Trinity’s obligation (R. 34). |

~ On May 31, 1939, pursuant'to this Plan, the pres-

ent proceeding was commenced by the filing of a,

| petition under Chapter XI, ‘accompanied by a plan bs.

of arrangement embodyi ing the proposed modifica-,

tion pf the guaranty. On July 18, 1939, the Securi-:

ties and Exchange Commission | asked leave to

intervene in the proceeding for. ‘the purpose of

‘objecting by appropriate motions to the jurisdic-

_ tion of the court and of appealing in ‘the event

; * Debtor's counsel stated that the Debtor desired prior |

‘ approval of the arrangement by the United ae

_* Court fox the “pressure” it would put on the tate court

—* before which the Bure hill Act proceedings would be brought

(R. 277).

(%)

for n Trinity’s primary obligation to the modified es

‘ 6

en its motions were denied (R. 133-138). The

District Cout entered an order. on J uly 28, 1939,.

: permitting the Commission to intervene (R. 142-

143). The Commission then moved the court

to vacate-the order approving the ‘Debtor’ s petition,

_to dismiss the proceeding, and to deny confirma- °

tion of the proposed arrangement en the grounds:

(1)- that thé courte did not have jurisdiction over

the proceeding because Chapter XI dees not

apply. to a debtor corporation which has securi-

ties oytstanding in the ‘hands of the. public; and

(2) that the proposed arrangement could not prop- .

erly be confirmed ‘under Chapter XI, because,

among other reasons, the purpose of the proceeding’

- was to modify the Debtor’s obligation, on. its guar-

anty while léaving its stock issue and other obliga--

. tions unaffeeted (R. 145-146). The Commission’s

“motions were denied (R. 149-150) and the cause

~ referred to a referee for further « préceedings

(R. 151).

The Commission thereupon appealed to the court

yelow both fr om the order denying its motions and

_ from the order refer ring the proceeding to a

‘referee’ ‘( R. .392-393). An appeal was also.taken

- by the Debtor from the order of the District Court

. permitting the Commission to intervené. (R.394).

The court below (Clark, J., dissenting) held: (1).

that the proceedings were properly brought under

Chapter XI and the District Court consequently

had jurisdiction; and (2) that the District Court

erred in allowing the Commission to intervene.

te

“

7

x |

The court below consequently reversed the order of

intervention and granted a motion by the Debtor

to dismiss the Commission’s appeal (R. 430).’

¢

SPECIFICATION OF ERRORS TO BE URGED

The, court below. erred : ©.

(1) In failing: to hold that the District Court

lacked jurisdiction of the Debtor, as a corporation

with publicly held securities, under Chapter XT.

(2) In holding that any corporation which.could

_ become a bankrupt may file a — for an a ar-

_Tangement under Chapter XI. - |

. (3) In failing to hold that the District _—

seals permitted tle Commission to intervene

for the purpose of moving to dismiss the Debtor’ ~

petition under Chapter XI, and to appeal.’

(4) In reversing’ the order granting the Com-

-, mission leave to intervene:

(5) In dismissing the Commission’s appeal from

the orders denying its motion to dismiss the.pro-

ceeding ana referring the proceeding to a referee

for further action. ts

.* The judgnient of thé court below Parens the appiel

(R. 430). The majority of the co irt, however, ruled upon

the merits, concluding’ (Clark, J., rhein that any cor-

poration whjch can be a bankrupt may file“under Chapter.

XI (R. 422-493). ‘Consequently, , a mere reversal of the

* judgment Aismissing the appeal and a remand of the case

.for consideration on the merits by the court below would

grant the petitioner. no relief. If the writ-is granted, there--

fore, the megits myst be-considered, as well as the standing

_of the Commission to intervene and appeah

?

. porations with securities outstanding’ i in the hands

on the question of whether a corporation which has securi-

- by the District Court for the Eastern District of Michigan

ow

_we Bilieve, plainly. warranted. The decision below,

-potent in a large class of cases to perform the duty

in corporate reorganization proceedings, and will to

- a large extent millify tlie Congressional safeguards

written into Chapter X of the Bankruptcy Act.

ae

_REASONS FOR GRANTING THE, WRIT

“The deéision below is one of-first impression in

the Circuit Courts of Appeals.’ Although there is,

therefore, no conflict ‘of decisions, the questions

raised are of such large importance in the admin- -

istration of the corporate reorganization provisions

of thé Bankr ‘uptey Act that review by this Court is, 7

if allowed to stand, will render the mmission im-

entrusted to it by Congress of protecting investors

The principal issue in the case is the relationship

between Chapters X and XI of the Act. Petition-

er’ 8 position is that Congress intended Chapter X |

oie to be the exclusive method by which cor-

of the public can reorganize in bankruptcy and that

* There is, however, a conflict among the district courts

outstanding in the hands of the public may file a peti-

ion under Chapter XI. The decision of the District Court

for the District of Maryland in 7n the Matter of Credit

Service, Ipic., No. 9340, decided January 18.1940, is in ac-

cord with \he decision below. Aéeyntrary ruling was made

in Jn re Reo Motor Car Co., No. 24816, decided October 3,

1939. In the latter case the gourt, holding that the publicly

reld securities of the debtor made Chapter X proceédings

appropriate, overruled a motion to dismiss a Chapter X

proceeding which was based. on the asserted availability of |

Chapter XI. ‘

9

the District Court therefore had no jurisdiction

' . over the proceedings instituted by the Debtor under

Chapter XI. Petitioneralso contends that, as the

agency charged by Congress with the duty of ad=.

‘ ministering the safeguards provided for investors _

in Chapter X, it was properly permitted to inter-

vene in the present proceeding under Chapter >

for the purpose of moving to dismiss the petition on

the ground that the Debtor could aa cow cael in =

bankruptcy only under Chapter X..

I. The court below, in holding that the petition |

was properly filed under Chapter XI, read the

statute with literal exactness. Section 322 pro-

vides that a. “debtor” may file a petition under

Chapter’ XI, and Section 306. (3) provides that

' “debtor’? means a person who could become a

bankrupt under Section’ 4. Since the respondent. |

could become a bankrupt under Section 4, the

statute, construed” literally and without regard to.

the purposes sought. to be achieved by its enact-

ment, permitted the’ procedure adopted... *

Admittedly, in the usual case, the eourts m: a

not go behind the express language of a statute,

for the pr esumnption is strong that the. words used

in the statute’express the intention of Congress

~ in enacting it. But where, as here, it is perfectly

plain from the structure of the statute as a whole; *

as well as from: its legislative history, that. Con-

_ gress did not intend the résult which would follow

from literal ‘application of the definition provi-/

sions, the presumption is overcome and the clear

Pe

7

10

- purpose of Congress must be given effeci. Church:

of the Holy Trinity v. L Tnited States, 143 U.S. 457

American Security Co. v. District of Columbia, 224 >

U.S. 491. -See‘also Kicfer & Kiefer v. Reconstruc-

tion Finance Corp., 306 U.S. 381, 391; United

States v. Ryan, 284 U. S. 167; United States: v.

Katz, 271 U. S. 354; United States v. Jin Fuey

| Moy, 241 U.S. 394; Lau Ow Bew v- United States,

144 U.S. 47. As this Court said in Helvering v.

Morgan ’s, Fne., 293 U.S. 121, 126:

* * * the true meaning of a single sec-

tion of a statute in a setting as complex.as

that of the revenue acts, however precise its

language, cannot be ascertained if it be con-

sidered apart from, related sections, or if

the mind be isolated from the history of the

income tax legislation of which it is an-

integrai part. * * *

Chapters X and XI were enacted in 1938. as ae

- of a general revision — Bankruptcy Act. In

this revision, specialized types of proceedings were

segregated in separate chapters.’ Chapter X pro-_

‘Chapters I- VII were retained for ordinary bankruptcy

proceedings and several types of specialized proceedings

were provided for in Chapters VIII-XIV. Chapter VIII

contains provisions applicable to farm debtors and to yéfil-

roads ; lhe 2 1X contains provisions applicable to fiunici-

pal corporations; Chapter X relates to corporate ganiza-

tions; Chapter XI relates to arrangements of- ynsecured

debts; Chapter XII relates to real property arrangements

by persons other than corporations: Chapter XIII relates

to wage earners’ ‘plans; and Chapter XIV relates to Mari-

time Commission liens,’

11

°

vides a special procedure for the reorganization of

corporations; Chapter XT provides for “arrange-

ments” of the unsecured debts of any person who

could become a bankrupt. The two chapters em-

body strikingly different schemes of reorganization.

Chapter X, replacing former Section 77B, estab-

lishes comprehensive administrative machinery

and protective provisions for the benefit of public

investors, resting on_ the assumption that such in-

westors, dissociated from control or active particj-

pation in the management, need impartial and

expert administrative assistance in the ascertain-

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

Sievdindlaw of complex financial problems.’ In

contrast, Chapter XI, replacing the ‘‘composition”? —

procedure formerly embodied in Sections .12 and .

74, establishes a rudimentary system of creditor

control, resting on the assumption that the problem

of rehabilitating debtors filing petitions under

Chapter XI ean be substantially settled at a single

creditors’ meeting.

Thus, except where the ‘liabilities are under

$250,000, Chapter X requires the appointment of.

a disinterested trustee (Sees. 156-158). The trus- —

®° This basic assumption underlies all of the federal sec uri-

ties legislation adntinistered by the Commission, of which

Chapter X is an ‘integral part: Securities—Aet-of1933, 48 -

Stat. 74, 15 U. S. C. Sees. 77a-T7aa; Securities Exchange

Act of 1934, 48 Stat. 881,15 U.S. C..Sec. 78a; Public Utility

. Holding Company Act of 1935, 49 Stat. 838, 15. U.S. C. Sec.

19; Trust Indénture Act of 1939, 53 Stat. 1149, 15 U.S

CA. Secs. 77aaa-77bbbb.

12

. _

‘

tee is required to make a thorough examination

aud study of the debtor’s financial: problems and—.

| management (Sec., 167 (3) (5)). He prepares 2.

.—-——~yeport thereon, which is sent to security holders

with a notice to submit to him proposals for a plan

of reor ganization (Sec. 167 (6)). The trustee then

' formulates a plan, or, reports the reasons why a

plan cannot be’ effected (See. 169). To preserve

for the court freedom to consider the plan on its .

merits, unhampered by the appearance of an ac-

complished fact, Section 176 voids consents toa

plan obtained prior to its initial approval by the

judge.

Chapter X also. prov ides for participation in the

proceedings by the Securities and Exchange Com-

‘mission. If the judge finds that a plan presented

is worthy of consideration, he may refer the plan

to the Commission f8r a‘ report, and must do so

where the liabilities of the debtor (as in-the present :

case) exceed $3,000,000 (Sec. 172). When the plan

is submitted’ to creditors after approval by the

judge, it is accompanied by the report of the Com-

- mission and the opinion of the judge (Sec. 175).

By this meantis investors are provided with an ex- °

pert impartial analysis of the plan and: of the.

debtor’s financial condition, in the light of which

tie plan may be intelligently. appraised. In-addi-~

‘tion, the Commission is authorized to participate

generally im the proceedings as a party with the

permission of the court, and with the duty to do so—

upon the request of the court (See. 205).

“13

a

In contrast, Chapter-XI provides‘a skeleton pro-

cedure for the modification of unsecured debts and >

contains no provision for the modification of se-

cured debts or stock. The debtor files a petition

which is: accompanied. by its proposed: arrange- - |

ment (Secs. 308 (1), 323, 357). Thereafter a .

meeting of the creditors is called (Sec. 334) at .

which. creditors may elect a creditors’ committee

(See. 338). After acceptance by a majority’ in

number and amount of the unsecured creditors, the

proposal becomes effective upon a finding that it

coniplies.with the kequirement of the statute (Secs.

3624367). In substance, that is all.- There are no |

provisions for an independent study of the debtor’s

affairs, for making the information so obtained

available to the « curity holders, or for assuring

security holders adequate information before they

ee vote upon a plan. There is no provision for the

proposal of plans by anyone except the debtor, or -

for the participation i in the proceedings of an 1 inde-

pendent trustee or an advisory agency.

- The contrast between the procedures : prescribed

bt these two’chapters makes it plain that they were

intended to be mutually exclusive.“ The problem, |

therefore, is to determine the precise sphere within

which each chapter was intended by Congress to .

operate. :

Under the decision of the court ie: ied.

natien of the appropriate chapter depends solely

on whether the debtor prepose s to modify any of its

obligations other than’ ‘wiisecured debts; if it seeks

214455—40— 2 ray

ima”,

AN atin Pines

ona .

14

’

to modify only unsecured obligations, it may re-_

‘ sort to Chapter XI, despite the fact that its un-

secured obligations are widely held by the public

and despite the fact that. the proceeding neces-

'. sarily discriminates against the’ holders of the un-

. secured obligations in favor of the debtor’ s other.

*

security holders. _The decision thus imputes to .

_ .Céngress the irrational intention of providing safe-

-guitds for mortgage. bondholders but not for un-

*’ secured debenture holders, or for unsecured deben-

-ture holders when secured debts are also to be

affected but not when the secured: debts are to be

left untouched. In our view, the obvious intent of.

Congress} was rather that all public security holders

should: have the protection afforded by Chapter xX

and that Chapter XI should be confined to corpo- *

rations with only trade. and commercial creditors.

Congress had a good reason for prescribing dif-

ferent procedures for corporations with a publie

investor interest and for corporations without such

‘an investor Poterest. Trade and’ commercial

ereditors who are equipped to evaluate plans ‘in

terms of self-intefest and business knowledge may

safely be left to appraise thé infirmities of a pro-

“posed arr angement. But public investors, stich as

* the holders of the Trinity mortgage certificates, .

who are uninformed, unorganized, and widely

seattered, are obviously not qualified to make a

similar appraisal. Yet, finder the decision below,

the question of. whether these certificate holders

- shall have the protection of the safeguards pro-

* 15

vided for them by Congress depends solelv on the

decision of the “management whether tc seek an

arrangement of the unsecured debts of the company

under Chapter XI or to seek Serna: of the

colipany under Chapter X.

The legislative history of Chapters X and XI

confirms the fact that the. decision below’ does not’

properly reflect the ‘intention of Congress. . Ty 1932

_ the Solicitor General, in a report on bankruptcy

administration transmitted to Congress by the

“Pr -esident, recommended that a statutory scheme

for the reorganization of corporations be adopted

- (Senate Document No. 65, 72d Cong., Ist Sess.).

The Solicitor General explained that such a statute

was necessary and desirable to save a failing busi-

ness conducted ‘‘by a corporation having securities

outstanding inthe hands of the public representing

various. interests in its property”’ (id. p. 90). Pur-

suant to this recommendation, Congress in 1934 en-

- acted Section 77B of the Bankruptey Act (c. 424,

48 Stat. 912). Thereafter, a Special Senate, Com-

‘mittee to Inv estigate Receivership ahd Bankruptcy

Proceedings filed with Congress the report of its .

counsel, showing that Section 77B had been im- .

properly’ resorted to by small cor porations. The

report drew a distinction between small privately .

‘owned corporations with trade and commercial ¢

- debts, on the one hand, and large corporations with

securities held by the public, on the other hand; it |

recommended that the former be remitted-to the

ee ie 8

composition procedure in bankruptey and that Sec-

tion 77B or its equivalent be reserved for the latter

(Senate Document No. 268, 74th €ong., 2d Sess.,

_ pp. 9-10). Relying in part on this report. and in

part on a study by the Securities and Exchange

Commission of the dggree 6f protection afforded to

public investors in rédrganizations," ea en-

acted Chapter x:

The hearings before the House and Senate Com-

mittees on'the bill which as enacted included, Chap-

ter X,’ and the reports of those committees on the

bill,* show clearly that.Congress intended to supply

an impartial administrative machinery to assist the

courts and public investors in the solution of the

- complex problems which arise in the reorganiza-

tion of corporations having securities outstanding

_ in the hands of the public. ' * The same hearings and

reports show that Chapter XI was ‘designed to af-

ford small enterprises, in which there is no publie

_investor interest, a simple system of debt adjust-

“Securities and -Exchange Commission Report on the

Study and Investigation of the Work, Activities, Personnel,

and Functions of Protective and Reorganization Commit- \

tees, Part 1 (1937). ° “<

-? Hearings before the Mies Committee on the Judiciar y

en H. R. 8046, 75th Cong., st Sess., pp. 36-39, 45-47, 167,

199:/ Hearings before a Subcommittee of the Senate Com-

mittee on the Jiidiciary on H. R. 8046, Tth Cong., 2d Sess.,

PP. 9-15, 93-101.-

_ SH. Rept. No» 1409 on H.R. 8046, 5thOC ‘ong., Ist Sess.

pp. 37-51; S. Rept. No. 1916 on H. R. 8046, 75th Congs 3d

Sess., pp. 1-31. ;

—_—-—>

17

ment under the tr aii bankruptey miethod of

direct creditor control. | Se es

2. The District Court lacked | jurisdiction | over

the Debtor under Chapter.XI, not only because the

Debtor had securities outstanding i in the hands of

the ‘publie but also because, as the record discloses,

no **fair and equitable’? plan can be consummated -

in the proceeding and no arrangement can be pro-

posed in good faith. Section 366 (3) of the Act,

which provides that an arraugement may not be

¢ onfir ‘med unless it is “fair and equitable and feasi-

ble,’” makes applicable to Chapier: XI proceedings | * |

the rules of law enunciated in N orthern Paci ific Ry.

Co. Vv. Boyd, 228 U: S. 482. See Case v. Los Angeles

Lumber Products Co., Ltd., Nos. 23-and 24, present

Term, decided November 6, 1939. -No plan for

this Debtor under Chapter XI can be fair and

equitable within the meaning of Section 366 (3)

_ because under Chapter XI only unsecured obliga-

' tions may be modified. Under this chapter, thete- —

fore, any modification of the Debtor’s guaranty on

' the Trinity certificates must be accomplished with-

’ out altering the Debtor's large debenture and stock

issues. Yet-the Trinity certificate holders have a

claim against the Debtor which must be satisfied

before the stoékholders receive any thing and which

ranks on a par with that of the debenture holders,

‘. Since the security behind the debentures is value-"

~ less.: Under the doctaine of the Boyd and Los -

Angeles Lumber Co. cases, no plan for the debtor.

18 .

would be fair and equitable which modified the

debtor’s obligation on the guaranty but left the

debenture holders*and stockholders unaffected—

yet .such a plan is the only one which can be con-

suimmated under Chapter XI. :

Under these circumstances, and: particularly in

view of the inappropriateness of the remedy sought:

- to be employed by the Debtor, no arr angement f pro- |

posed ‘can meet the requirement of “good faith’’

contained int Seetion | 16 (5). In this connection,

it is also material that the debtor proposes to effect.

what is-actually one plan of reorganization by the

piecemeal use of courts of two different jurisdic-

_.tions.- Neither the federal nor the state court will:

have jurisdiction over the plan as a whole, in con-

trast to the complete supervision which the federal «

court would have over both the Debtor and its sub-

sidiary in a proceeding under Chapter X.”

The majority of the court below expressed the

view that these matters.should be left for deeision ©

until the plan eame up for confirmation. But Nd

our view, a disclosure that a plan cannot be ed -

summated ‘in the proceeding goes to the jurisdic-

tion and requires dismissal. Cf. Tennessee Pub-

lishing Co. v. American Nat.. Bank, 299 U.. S. 18;

O’Connor v. Mills, 90 F: (34) 665 ie CA. 8th) ;

*¢ ‘hupter X provides for. the filing ofa petition for a

subsidiary corporation in the same court which has ap-

proved the petition of the parent corporation (Sec. 129).

Chapter at contains no such provision.

ue

NS , 3

—

°

19

R. L: Witters ‘Associates, Inc. v. Ebsar y GI ypsum

Co., 93 F. (2d) 746, 748-749 (C. C. C. A. 5th). Any

other course must result in needlessly - clogging

court calendars with. litigation. predestined to be-

fruitless. Cf. Tennessee Publishing Co. v. Ameri-

_ can Nat, Bank, supra.

3. The holding of the court below that the Dis- °

‘trict Court should not have permitted the Commis-

sion to intervene in the proceeding is, we bélieve,

clearly erroneous and:conflicts with the applicable

decisions. of this Couift. The decision in effect’

establishes the principle that, in the absence of

express statutory provision, a governmental agency

may never intervene to protect the public from

~ evasion or emasculation of the statute under which

the agency functions, unless the agency has some

property or. pecuniary right affected by the liti-

gation. This principle places such a drastic and

‘far-reaching limitation upon the power, not only

of the Securities and Exchange Commiission but of

all governmental agencies, to protect the public

interest as‘plainly to call for*review by this Court.

The court below, we submit, took a wrong ap-

proach to’ the problem. It pointed out first that

Chapter X contains an express provision for Com-

mission intérvention while Chapter XI does not,

and. stated that this “raises a\ strong implication

_ against intervention by the Commission” in. Chap-

ter XI proceedings (R. 423). It then addressed

itself to the question of whether the interest of the

a

a

sS

> 20.

Commission in the litigation was so“direct and im-”

mediate as to entitle it to intervene as of right and’

_ held that, since the Commission did not “stand -

gain or lose directly by the decision of the co

it did not have such an interest (R. 424), el

is no‘ discussion .in the: opinion of whether the

‘Commission’ SS) ‘interest in the action ° ‘is such > as

entitles it to intervene with the permission of the

court. Since the District Court granted the Com-

mission’s s motion, to. intervene, it.is not necessary

_in this case to determine more than that the action

‘of the District Court. permitting intervention did

te constitute an abuse of discretion, although we :

also believe that the Commission was entitled to .

intervene. as of right (infra, p p. 25).

. The reliance of the court below upon the pro-

vision of Clapter X expressly providing for Com-

mission intervention is, we believe, misplaced. The

purpose of this provision is ebviouslx to allow the. _

Commission properly to perform the advisory func-

.. tions. with which it is charged in Chapter X pro-

oF

ceedings. Since the Commission has no. similar

functions to perform in ‘Chapter XI proceedings, a

provision hiving it a genéral right to participate i in

Chapter ‘XT. proceedings would be both inappro-

priate and superfluous.

Fhe Commission did not eee | here in order’

to perform advisory functions, but to object against

an improper exercise of the court’s jurisdiction

which, -in the opinion of the Commission, nullifies

the protection provided by Congress for investors.

21

"Its standing to intervene, therefore, does not de-

vend on the provisions of Chapter XI but upon the

general principles governing intervention in the

_ federal courts, as codified in Rule 24 of the Rules

‘of: Federal Procedure.

This Court has recognized that public officials

and. administrative commissions, federal and state,

have a legitimate interest fn resisting any endeavor °

to evade the provisions of the statutes in relation

to which they have official duties. Cf. ‘Coleman v.

Miller, 307 U.S. 433, 442, 466; Pennsylvania v. Wil-

hams, 294 U. 8. 176. The Williams case is strik-

| ingly similar to the present one. _ There a receiver-

ship proceeding was commenced in the federal

court, The State of Pennsylvania-filed a petition

for leave to intervene and for an order directing

the receiver to surrender the assets of the defend-

ant association to the State Secretary of Banking

_ for liquidation iinder the provisions of state law.

The District Court denied the petition but this

Court reversed, holding that the District Court; in -

the exercise of, its diseretion,: should have dis-

charged the receivers and directed the surrender of

the property in their possession to the Secretary.

The granting of this relief necessarily implies that: .

the state had an interest suffic “ient to give, it stand-

ing to intervene. . ae

The majority opinion below attedante to distin-

; ane the Williams case on the ground that the

' state‘ ‘claimed a right to full possession and control

e . 2 i)

. .

’

wall ° ‘

° ©@

° .

:

o~%,

Ww

Mee 22

of the assets of the insolvents, not merely a right:

to advise or protect the public interest” (R. 423—

424). The distinction, we submit, is unsound, for

_ the interest of the state in the receivership proceed-

‘ing was plainly not a property or possessory

‘interest, but an interest in the enforcement of the - “

&tate liquidation statutes for. the protection of the —

public. That is precisely the type of interest which

the Commission has in the present case. The fact’

that Congress sought to protect the investing publie-

by making the Commissign an,advisory, rather than

a liquidating, agency is Immaterial; in each case the

administrative body has the same interest in as-

suring that the public will receive the. protection

which the’ageney was designed to afford it.”

The decision of this Court in he Exchange, 7

Cranch 116, likewise supports thé’ Commission’s

position, That, case involved a libel filed by Ameri-

an Cit Zens s against a schoone: which the libellants.

claimed to be their property. The schooner was in

fact a French vessel.of war in possession of French:

naval officers, although it was within the waters |

__ of the United States. After the libel was filed the

United States District Attorney filed a ‘‘sugges-

See also Jnterstate Commerce Commission vy. Oregon-

Washington R. Co., 288 U.S. 14, 25, a suit brought to en-

join an order of ‘the Interstate Commerce Commission, in

which the Court held that state utility commissions, who

had intervened in the suit, were “aggrieved” parties and .

therefore had a statutory right of appeal “because they

officially represent the interest of their states in ’ diadtie

adequate tri ansportation service.” »

- 23

tion”? setting forth-the facts and praying that the

schooner be released. " “The District Court dis-

missed the libel, but on appeal the Cireuit Court

reversed.” The . District Attorney thereupon ap-

pealed to this Court, whiich revers sed the judgment

~ of the Circuit: Court and affirmed th@judgment of

the’ District Court dismissing the bill. The Court, -

first expressing the opinion that an American citi- _

zen cannot assert, in ari: American court, title to a

public armed vesse] in the service of a foreign

sovereign, added (p, 146): “If this opinion be

correct, there seems to be a necessity for admitting

that the fact might be disclosed to the court by the

_ suggestion of the attorney for the. United States.”’

_ The course sanctioned by this Court in The Ez-

change Was almost identical with the course: pur-

sued by the Commission. here. “There the: United °

States appeared in the preceedings in order to move

their dismissal on the ground that the court had no

jurisdiction and that an improper exercise of juris-

' diction would be contrary to the public interest ; its

contentions having been overruled in the Circuit .

Court,, an. appeal to this Court was allowed: As

. pointed out in Percy Summer Club vy. Astle, 110

. Fed. 486, 489 (C. C. D.N. H. ), the Erchange ease

illustr ates that the principle allowing intervention

* Although the opinion in The Ewchange does not speak

of intervention, the procédure followed was the same as in--

tervetition, if it was not intervention in fact. This Court so

recognized in Stanley v. Schwally, 147 U.S. 508, 513,

24 ove =

by public authorities where the public interest is

concerned ‘‘is of the broadest character, and is

applied without formalities.”’” .

The assumption underlying the decision. below

that in the absence of statutory provision a govern-_

mental agency may not apply to the courts to pro-

.. tect the public interest, as distinguished from its

own pecuniary interest, is also directly contrary to

_the principle onyneiated i in In re Debs, 158 U. S.

564." There the ic ‘ourt upheld the power of the

United States to file a bill in equity to enjoin ob-

struction by the defendant of the interstate trans-

‘portation of persons and property, as well jas of the

carriage .of the mails ; the decision was expressly

rested upon the* principle that a government en-

trusted ‘“‘with powers and duties to be exercised and

discharged for the general welfare, has, a right te |

apply to its cwn courts for any proper a assistance

in the exercise of the one and the discharge of the

other’? and that it is immaterial that the govern-

ment ‘thas no pecuniary interest in the matter’?

1? Other cases in which governmental interv ention has been

allowed cannot satisfactorily be distiriguished on the ground .

that in those cases a claim of title,-a pecuniary interest, or

a trustee's interest was involved. Those factors are material

as establishing the existence of a public interest; they do

- not limit the character of the public: interest, which, -when

otherwise shown to exist,‘is sufficient to justify intervention:

Cf, Helvering ¥; Davis, 301 U. S. 619; United States v. Min-

nesota, 270 U.S. 181, 194; Norman. v. Consolidated Edison

Co. of New Tok 89 F. (2d) 612 (C. C. A. 2d); Winola

Lake & Land Co., ine. v. Gorham, i F. Supp. 75 (M. D.

Pad. ros

(p. 584). Certainly a nonpecuniary interest suf-

ficient to support an independent . suit for the

' protection of the public is sufficient to. suppo

tervention for that purpose. Cf. New York»:

Jersey, 256 U. 8. 296, 307-308. -

The authorities cited astahlish the C mis-

_-sion’s standing to interveye under: Rule 2

.. that Rule simply amplifies and restates f

“tofore existing practice. See Advisory Commit--

, tee’s Note to ‘Rule. 24. -The Commission may

” intervene either under clause (a) (2) of the Rule,

which provides for intervention as of right ‘‘when

the representation of the applicant’ s interest by

existing parties is or may be inadequate and the

applicant.is or may be bound by a judgment in the *

_ action,”’-or under clause (b) (2) which provides

for permissive intervention “when an applicant’s

claim or defense and the main action have a

question of law or fact in common.” Here the -

Commission’s interest in the litigation is not repre-

sented by any other party and that interest will.

-be foreclosed by an adverse judgment whieh will

effectively prevent the Commission from perférm-

ing its functions in relation to the Debtor under

Chapter X and-will deprive the investors whom the

Commission represents of the safeguards provided -

for them by Congress in Chapter X.* Cf. Percy

Summer Club v. Astle, 110 Fed. 486, 488 (C. C.

D. N. H.) ; United States v. C. M. Lane Lifeboat Co.,

25 F. Supp. 410, al as D. N. Y.). And it is clear .

. 26

that the Commission’s claim raises a question of

law in common with the main action, within the

meaning of clause (b) (2), since the questions

‘aised by the petition to intervene are addressed

directly to the jurisdiction of the court to maintain

the main action; ; ange

4. If the District Court properly caserian its

discretion. in permitting the Commission to inter-

vene, it also properly gaye the Commission a right |

to appeal from the orders denying its motions. An

interest sufficient to warrant intervention is plainly

sufficient to warrant appeal, after intervention, ?

from a decision adverse te that interest. Pennsyl-.

vania V. Williams, supra; The Exchange, supra;

Teas v. Anderson, Clayton & Co., 92 F. (2d) 104

(C. C. A. 5th), certiorari denied, 302: U. S. 747..

The general rules of intervention do not prohibit

Appeal and uo considerations of policy make un-

reasonable the District Court’s order allowing

appeal. .- , |

The fact, adverted to by the court below, that

Section 208 of the Act prohibits appeals by the

Commission in Chapter X. proceedings, does not, —-

. directly or by gmplication, limit the Commission's

right to appeal in this ‘case. The restriction-im-

posed’ by Section 208 was designed to emphasize

the advisor y nature of the Commission’s functions —

under Chapter X and the ultimate judicial char-

acter of the proceedings (see dissenting opinion of

Clark, J., at R. 429). The restriction does not in

5 Se eee Csi

27

_ terms apply to the present case, since this is a

Chapter XI rather than a Chapter X proceeding,

and. the policy reflected by the restriction is like-

- wise inapplicable. The appeal was not. taken by

the Commission from the confirmation of a plan

which it did not deem fair and equitable, but rather _

from an exercise of jurisdiction, based on a vital

point of statutory construction, which the Comnis-

sion believes to be in derogation both of the public

interest and of the duties with which the Commis-_

sion is charged under Chapter X in. Ppreweting that

interest. ah:

CONCLUSION

It is respectfully submitted that this petition for

a writ of certiorari tothe United States Circuit

Court of Appeals for the Second Cir cuit aeaga

granted. : i

FRANCIS Boiex, |

| / OR eek TPF . Solicitor General.

CHESTER T. LANE, | ;

General Counsel,

~ Securities and Exc hange Com mission.

- Marc 1940.

U.S GOVEENEENT PRINTING OFFICE- 1940

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