Brief for the Petitioner — Securities & Exchange Commission v. United States Realty & Improvement Co.

Supreme Court brief1940

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No. 796.

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‘nthe Supreme our of the ited Sites. |

OctonER TERM, we...

_ SECURITIES AND Excuanar Comission; PETITIONER

P2506 . v 7

Unqyeo Sates REALTY AND Tutbrovement

CoMPANY

QN WRIT OF CERTIORARI T0 THE UNITED STATES CIRCUIT

-COURT OF APPEALS FOR THE SECOND CIRCUIT —

| BRIEF: FOR THE PETITIONER

INDEX

Opinions below. . .-. _- i caine ddtadcustivacveandmcsLiieae en

I oe awnduatvedivecdsghenes awantendbvidesdetiis

Questions preaented___.__-___- gedbaneewh Lae sihdaci atts Gs

Statute involved. ..-.--...---.--..-- A Ry GO Le il SAS BE

Statement... .__. ne ulebuin wore odeneawdbiaid

Specification of errors to be urged. a ar DEY PP cue ation

earn Gf Aomnment.. ..... ws . < lec nn cecdcccdeoscseaccos

Argument:

I. Chapter X is the exclusive method by which corpora-

tions with securities outstanding in the hands of the

public may reorganize under the Bankruptcy Act. 12

A. The evidence of congressional intent within

; the provisions of the statute... __. _- a ae 16

B. The evidence of congressional intent contained

in the legislative history of the statute_.-_- - 28

Il. The District Court should have dismissed the petition

because no “fair and equitable” plan for the debtor

can be consummated under’Chapter XI and no

: arrangement can be proposed in géod faith_. - 33

1]. The Commission was properly permitted to intervene

for the purpose. of objecting to the jurisdiction of

the District Court and a gould appeal from an adverse’

a Gaan sows snxbaeudeeuwnees d a 39

Conclusion. - Pipher tad © ele AE: 53

Appendix. ___.._- ieee owe ‘ieerharcts 54

; CITATIONS

Cases: .

Amergcan Security Co, v. District of Columbia, 224 U.S. 491. 14

Case v. Los Angeles Lumber Products Co., Ltd., 308 U. 8. 106. - 20,

33, 34, 35

Chicago v. Chicago Rapid Transit Co., 284 U: 8. RV...... 51

Church of the Holy Trinity v. United States, 143.U. 8. 457- 14

Coleman v. Miller,,307 U. 8. 433. ..-..-- 22.2222. 42, 61

Credit Service, Inc., In re, 30 F. Supp. 878... .- .. rap 14

'. Debs, In re, 158 U. 8, 564...-..<.- 7S 0 ae

' Duparquet Huot & Moneuse Co. v. Beans, 297 U. s. 216_. 15

The Eachange, 7 Craiich 116." .... cceleeews “see-sece 44,50

Fishman, Inc., In re Maz, 27 F. Supp. EE CARRE 24

’ Fleishmann & Devine v. Saul Wolfson Dry Goods Co., 299

e,. S Fos FS Pee oc seen 36

General American Tank Car Corp. v..El Dorado Terminal

Co., No,. E98, poosont Form... ...............5--.-2-- 38

222251—40-—1 | | ,

(¥

setae. 8

a .

ae I

‘eibsiiiciteaiia Page ©

.@ Helvering v:\Davis, 301 U. CS eee Gikdeucaatisacd “eM

Helvering v. Morgan's, Inc., 293 U.S. 121-.--.----,.----- 1

» Hopkins Savings Ass'n v. Cleary, 906 U. 8. 395.......... 40.

bs + Iselin v. United States, By ie We Oi oc cane nmeaus ROE |

Interstate Commerce Commission y. Oregon-Washington R. j

Co., 288 ¥. 8. “ie Li nis Sy a a ae peaaamnaie werncnteerats 46, 51

_ John Hancock Mutual Life~ .'Co. v. Bartels, No. 33, *

present Term, decided December 4, 1939--_-~----.---- 36

Johnson v. United States, 163 Fed. ers Se ee 16, 33

» + Jordan, Ex parte, 94 U.S. 248. \_---- gia ke oa amcaiod 51

Keifer & Keifer v. Reconstruction Yinance ChPp,, 306 U. 8...

ERE EP eae Rees” A

_ Law Ow Bew v. United States, 144 U. 8. 47... --- eee. Tek

. Manati Sugar Co. v. Mock, (i fey aoe ba

Marshall:v. Dye, 231 U.S. 250... ..-------.------- ae si

- . McKesson & Robbins, In re, No,.72697 (S. D. N. Y.)----- 14

_ National Surety Co. v. Coriell, 289 Sao a 20

" New York v. New Jersey, 256 U. 8. 296.._---.--- a a “47

Norman v. Consclidated Edison Co. of New York, 89 F. on

SM, SRAME SO NP MaRS tt mes op Aah a he Be EE eh st Ae Te: 45

Northern Pacific Ry. ‘Co. v. Boyd, 228 U. 8. 482. --~_.. 33, 34, 35

Northeastern Water Companiés,-Inc., In re, 24 F. Supp. 653 _ — 37

‘O'Connor v.‘ Mills, 90 F. (2d) 665_...--...---.--- See 36

O'Gara Coal Co.,.In a rr ec ea canwaews 17_° |

Osaka Shosen Line v. United States» 300 U.S. 98..-..-... . 16

>... + Palmer v. Massachusetls, 308 U.S. 79........-.------12- 15

Pennsylvania ve Williams, 294 U.S.176_.-...... .,.. 38, 42, 50

~ Pepper v. Litton, No: 39, present Term. -. - - ie wie ales 38

- Percy Summer Club v.’ Astle, 110 Feet. 486....._._., _-_. “45, 48

Provident Mutual Life Ins. Co. v. L ented tvangelical

Lutheran Church, 90 F. (2d) 992_- . "a.

Realty Associates Securities. Corporation, b n re, 69 F. (2d)

41, certiorari denied, 292 U. S. 628. : ane 17 -

spike Car Co., In re, 30 F. ry 785. . eae 13

c . Céntrat R. R. Co., 93 U. 8. 412_- ; .-- 50,51

probe ve Jesup, 106 U. 8. aS nn oe ‘51

Stanley v. Schwalby, 147 U, 8. 508....--_-. ye

/ State vy. Bullock; 78 Fla. 321, 82 So. 866, affirmed, on4 V. $.-

wo f - 513, pO en act bP ek) iat A ee a tem pla DT SS AN ee 46

, State v. . "Superior Court of Marion C ounty, 202 Ind. 589,

177 N. E. 322..... eee ees dace Abe ap i 42, 44

” State v. Superior Court for Walla Walle County, 159 Wash.

Sn Ee s Ravcncnnisedads lantde stan menrdes 42.

Tennessee Publishing Co., In re, 81 F. (2d) 463, affirmed, ;

Gt Maio ee oe a eee 37

Tennessee Publishing Co. v. American Nat. Bank, 299 U.S.

laces cate sedelesdeke anion EC Mae AR SE Wee is _.--- 36, 37

Ill

Qasee—Contined. Page

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

GEIS Oa WP oink s Wiener ses ductccaesctehs 50

Thompson v. Magnolia Petroleum Co., No. 481, seluilas .

- Wes wagienoees imkaheesamecwiexcheancd sae

United States v. Jin Fuey Moy, 241 U. 8. ei ccoleanes 14

United States v. Katz, 271 U. 8. 354_--------- ties 14

United States v. Lane Life Boat Co., 25 F. Supp. 410. Soe 48

‘United States v. Minnesota, 270 U.- 8. ee eee 45

United States vy. Missouri Pacific R. R. Co., 278 U. 8. 269_- 15

United States v. Ryan, 284 U.S. 167-_- Ba FE et el 14

United Sates Trust Co. v. C 'hicago Ferminal T. R. Co.,

>. 188 Fed 202... .. es POR Ly GF ale iy ae . 48

Wallace v. Cutten, 298 U. S. 229 cabwaccadvenevose See

Williams v. Morgan; 111 U.S. eee awe tawe saan we 51

Williamsport Wire ‘Rope Co., In re, 10 F. Supp. “481, appeal

dismissed, 78 F..(2d) 1023..... __-. Sine ahaa 37

Wincla Lake & Land Co. , Ine. 3 Vv. Gorham, 17 F. Supp: 75.. 45

Witters, R: L., Associates, Inc. v. Ebsary Gypsum _ 93.

BP dion tecear, tO CA. cued doe cee auanuas sass ‘36

Statutes: ,

Bankruptcy Act, ¢. 541, 30 Stat. 544 (11 U.S. C., Seer 1

ie iad ae aoe wai Nea a al =e 12°

a < 17, 32, 36, 38

; : 51

: : x 5L

te ene 17

SMa eet Oe a a ta cine waa s 36

LGW eas eee Oey atbae aa eae oe a 29

Soule suk x sieeve eee eeeee i, ‘28

ae ; Sa Pee ae 39

+ SEP ew an oe usdutvhvdudaswctues Teguousescna 22, 39

PTs os = cao neco cso sls venees ; Se Sat is 18

Sec. 163__... ' Paral ERS, Cee tea 19

BOG Siete a phn cg wa bodna nase ae whan cP 19

Sec. 167 (3) (5) Ca SAPS Pe ennai pee eee 19

Wee, 1002.0 .52,. FB 2. 4. 222 2 sk Sviveke tate aetts 19

See. 172:_._- ae Ties ene ee

a a, Spee ee ae

e Geet. 176.......-. vane pints eae aces de wt 19

Sec. 206... _- ne eaanen inns 19

Sec. 208_..... : Selo ae ——— 7

Maree. to. lee anaw ore amdetees peed ees 19

See. 211.....: WW uucinas tee ike ake nees AL of

Wee. B94. .......<. * ghey : abso meine 19

en ee

Pry F : .

=e -.. Ww

° F %y

Statutes—Continued. ‘ : =e Page.

Bankruptcy .Act-—Continued. aE

Se 8 ) San arene EA roid ea ORE Oe Mie

OE SAIC Sa pee cape i a a ae Re oy

Sec. 323 a ay Sere arcade oy aks an esta Oct ea cal ne el oe oad Odin a eat aorea

Sec. 334._:.- » ee ee eueta weercene ee oe

c. ~~ tee eee ye ae her ot is oes ae

SS I oe er as ee, ae pase are ead

EE PE tT ee ea en aoe Se me

Burchill Act (New York Real Property Law, Secs. 121- 123) -

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

Stat. 838 (15 U. S. C. Sup. v, See. 79)... -..--___--

Securities Act of 1933, c. 38, 48 Stat. y4 (15 U.S. C., Sees.

~ 77a-TTaa, 77e) -

Securities Exchange Act of 1934, ¢. 404, 48 Stat. 881 “(15

18, 24

U. 8. C.,- Sec. 78 _..: a os

Trust Indenture Act of 1939, | c. sit, § 53 Stat. 1149 (15 U.

8S. C. Supp. v, Sees. 77aaa-77bbbb).... - ew -. 18 .

Miscellaneous: .

Annual Reports of the Attorney General of the. United

¢ States, 1932 to 1938, Exhibit 3 in each report— RAs 7

General Orders in Bankruptey, Paragraph 37. - mvp 47,50...

Hearings before the House Committce the Judiciary on

| ; H. R. 8046, 75th Cong., Ist Seas., pp. 36-39, 45-47, 167-

° See a 31, 32 ©

Hearings before Subcommittee of Senate Committee on

Judiciary on HM. R. 8046, 75th Cong., 2d Sexs., pp. 9-15,

93-101. __. ~ rae . 3

H. Rep. 194, 73rd Cong., Ist Seas.” 5 18

H. Rep. No. 1409, 75th Cong., Ist Sess_. a 17, 20, 29, 31, 32

Procecdings of the Instjtute on Federal Rules at Cleveland

(Am. Bar Assn.), pp. 265-266. - 50

Proceedings of the Institute of Federal . Rules at E wreay

‘ ton, D. C. (Am. Bar Agssn.), p. 67___- ; 49

Rostow and Cutler, Competing Systems of Reorganization,

48 Yale L. J. 1334, 1336 Pre , ...,--. 396,99

Federa! Rules of Civil Procedure: | ‘ ’

Rule 12 (b)_....- os an 49

; / LS een Sore ae

6 . Rule 24 (b) (23_- ences 47,

Rule 77B-2 (i) of the District Court for the Southern Dis- ye

trict of New York_- : 38

Securities and Exchange Commission Re sport 0 on . the Study

and Investigation of the Work, Activities, Personnel, and

Functions of Protective and Reorganization Committees. 31

—-

. f Vv.

a ontinued.

Page

S. Doc. No..65, 72nd Cong., Ist oa’ . 18, 28

S. Doc.. No. 268, 74th Cong., 2¢ sche ATS .. 18, 29

S. Rep. No. 365, 73rd Cong., 2d Sess., pp. 1-3 17

S. Rep. No. 1916, 75th Cong., 3d Sess........ ‘aa 21, 31, 42

e, i , :

Suthe Suprene Gourt of the Binited Sine

_OctoBeR TERM, 1939

No. 796

SECURITIES AND ExCHANGE COMMISSION, PETITIONER

| v.

UNITED STaTEs REALTY AND IMPROVEMENT

‘COMPANY.

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR THE PETITIONER

OPINIONS BELOW

-The District Court filed no ‘written opinion. It

expressed its view. and announced its decision in

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

cuit Court .of Appeals (R. 420) is ik oraaat in 108

F. (2d) 134. . |

J URISDICTION

The judgment of the Gireuit Court of Appeals

was entered February 2, 1940 (R.- 430). The

petition for writ of certiorari was filed March 7, -

ise and pet April 1, 1940. The’ jurisdic-

(1)

a — |

tion of this Court rests upon Severn 240 (a) of

the Judicial Code, as amended i the Act of Feb. .

Faney. 13, 1925. ° .

_ QUESTIONS PRESENTED

1. W nether a corporation which has sécurities

outstanding in ‘he hands of the public may insti-

tute a proceédicg for-an arrangement under Chap-

ter XI of the Bankruptey Act or whether it ¢an

reorganize under the Bankruptcy Act only pursu-

ant to the provisions of Chapter X.

2. Whether a petition for an arrangement under

Chapter XI should be dismissed when the facts dis-

“ elose that no fair and equitable plan.can be consum-

mated under Chapter XI and that no arrangement

can be proposed in good faith.

3. Whether the Securities and Exchange Com-

mission, as an agency charged with the duty of ad-

ministering the safeguards provided by Congress

. for public investors in reorganizations under Cha

ter X, was properly permitted by the District Court

to intervene in proceeditigs instituted under Chap-

ter XI by a publicly-held corporation, for the lim-

ited purpose of moving to dismiss those proveed-

ings on the ground that the Debtor could reor-

ganize -under the Bankruptcy Act only under

Chapter X; and, if so, whether it was entitled to —

appeal from an adverse order. :

STATUTE INVOLVED

Chapters X and XI of the Bankruptcy Act (11

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

oe ae

are involved. in this proceeding substantially in

their entirety. Because of their length they are

not printed as part of this brief, but copies thereof —

have —— the Clerk for. the convenience

of the Cou | ,

_ STATEMENT

The Debtor, a New J ersey corpor ation having its

principal place of business i in New York City, owns

and manages real estate investments (R. 6-7, 103).

It has outstanding 900,000 shares of no par stock

‘which are listed on the New York Stock Exchange

(R. 134). It has direct liabilities of $5,551,416, -of

which only $74,916 are current liabilities. “The

liabilities include two series of publicly held deben-

tures, aggregating $2,339,000, which will mature on

January 1, 1944, and a $3,000,000 note, due on.

August 12, 1939 (R. 375). . The two series of de-

bentures are secured solely by a pledge of admit-

tedly valueless stock (R. 211-212, 227, 382): the

$3,000,000 note is secured by a first mortgage

owned by the Debtor. © )

In addition\to the Debtor’s direct liabilities it -

is hiable as a guarantor of first fnortgage certificates

of Trinity Buildings Corporation of New York

(hereinafter called Trinity). All Gf the capital ~

psa Trinity is owned by the Debtor (R: 7).

‘Trinity’s principal liabilities are notes of

$10,442,483 due to the Debtor and first mortgage

certificates in the amount of $3,710,500, held by the

public (R: 7, 51). These certificates are secured

‘y 222251—40—-2

by the real estate and buildings whieh are Trinity’s |

only substantial assets (R. 51, 169). They are

, guaranteed as. to principal, interest, and sinking

_ fund payments by the Debtor. The principal be-

came due on-June 1, 1939 (R. 7-8). Both Trinity -

and the Debtor defaulted in its payment of the cer-

tificates, as well as in the payment of an interest

installment of $102,038, which became due at the

same time (R. 171, 175). ;

The claimed value of the Debtor’s snnete « is

$7,076,515. $5,200,000 is represented by the stock

of a subsidiary and a first mortgage on a building —

owned by the subsidiary; the mortgage is pledged.

~~ to secure the $3,000,000 note mentioned above.

‘Current assets are less than $400,000. The balance

of the claimed assets consists chiefly of mortgages,

loans, and other securities in. the. amount of

$555,655; an investment of $477,300 in securities of

an independent company; unimproved real estate

valued at $290,000; and a note receivable from a

subsidiary for $137,500 (R. 375).. ,

Each year since 1936 the Debtor has suffered a

net loss, not including interest charges under the

guaranty of the Trinity certificates (R. 59).

‘ Prior to the maturity of the Trinity certificates,

the Debtor and Trinity jointly preposed a Plan

and Arrange ment to the certificate holders for the

purpose of inodifying their respective obligations

won the certificates, but which was to leave unaf-

fected the other indebtedness and stock of the

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

tificates was to be extended, the interest reduced,

and the. sinking-fund payments modified’ The

Debtor’s s guaranty was to be modified to: conform

to these changes in principal and interest, and its

present guaranty of sinking-fund payments was

to be eliminated entirely -(R. 39).

The Plan and Arrangement was to be consum-

mated by the institution of two proceedings: a

proceeding instituted by the Debtor under Chapter’

XI of the Bankruptey Act for an arrangement

to modify its guaranty of the Trinity certificates,

‘and a subsequent proceeding to be instituted for

Trinity in the state courts under the Burchill Act

to conform Trinity’s primary -obligation.to the

modified guaranty (R. 33-34)... The Plan pro-

‘The maturity of the certificates was to be extended for *

ten years and one month and the interest was to be reduced

rom a fixed rate of 514% per annum to a fixed rate-of 3°7,

With additional interest, if earned, of 1% witil July 1, 19H,

and thereafter of 2% to maturity, but the additional in-

terest was to be paid at maturity whether or not earned.

‘The sinking-fund obligations of $200,000 per year (R. 22-

27) were to be replaced by “if earned” obligations, with

permission to use the fund to ‘purchase certificates in the

open market without, as at present, first exhausting tenders

(R. 35-38).

_ * Debtor's counsel stated that the Debtor desired. prior

approval of the arrangement by the United States District

Court for the “pressure” it would: put on the state, court

‘before which the Bure hill Act proc ceding, wots be brought

(R. 277). :

The Burchill Act iN. : & Real Property Law, Secs, 121-

123) -provides for reorganization of property.covered by a

trust mortgage, the plan to be binding upon all holders

of bonds and certific ates ules on@third dissent.

vided, however, that the modification of the Debt-

or’s guaranty in the Chapter XI proceeding was °

te.stand even though the state court should subse-

quently refuse to confirm the proposed modifica-

tion of Trinity’s obligation (R. 34). ,

On May 31, 1939, pursuant to this Plan, the

present proceeding was commenced by the filing —

of a petition under Chapter XI, accompanied by

a plan of arrangement embodying the. proposed |

modification of the guaranty. Prior to filing the

petition, however, the Debtor had solicited the éon-

sent of the Trinity certificate holders to the plan;

these security holders were asked to execute a sin-

gle instrument indicating their ac ceptance of both

the arrangement to. be proposed under Chapter |

XI and of the plan to be proposed in the Burchill

Act. proceeding (R. 65). About,.53 percent of the

holders of the certificates consented to the arrange

ment (R. 298). .

On July 18, 1939, the Secur ities and ———

Commission asked leave to intervene in the pro-

ceeding for the purpose’ of objecting. by appropri-

ate motions to the jurisdiction of the court and of

appealing in the event that its motions were denied

.(R. 133-188). The District Court éntered an order

on July 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 © desiy confirmation of the proposed axrengemen'

(

on the nem (1) that the court did not have

jurisdiction over the proceeding because Chapter

XI does not apply to a debtor corporation which

_ has securities outstanding in the hands of the pub-

lie; and (2) that the proposed arrangement could

not properly be confirmed under -Chapter XI, be-.

cause, among other reasons, the purpose of the —

proceeding was to modify the Debtor’s obligation

on its guaranty while leaving its stock issue and

other obligations unaffeeted, and because the ar-

rangement was not proposed in good faith (R.

. 145-146). The District Court, although expressing.

the view that ‘‘the proper mene is for the *. *. *

company to reorganize all of “*, * * its inter-

company obligations, and the obligations of its

subsidiaries under Chapter X’’ (R. 347), denied

the Commission’s motions (R. 149-150) and re-

ferred: the cause to a referee for further proceed-

ings (R. 151)..

The Commission thereupon appealed to the court

below both from the order denying its motions and

from the order referring ‘the proceeding to a

refere.. (R. 392-393). An appeal was also taken

-by the Debtor from the order of the District Court

permitting the Commission to iritervene (R. 394).

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

the proceedings were properly brought under

Chapter XI because under Section 306 (3) any

person who could become a bankrupt under Sec-

tion 4 of the Act may institute Chapter XI pro-

-¢s

ailliiits. (ay THe Commission had no right to

intervene ii a Chapter XI proceeding, even to.

object to the jurisdiction of the court, because the: : \

was, \in contrast~to Chapter .X, no statutory au- \

thority. to intervene and a nonpecuniary govern- —

mental interest was insufficient ; accordingly there

was no_right to appeal:. The court below conse-

quently reversed the order of intervention _ and

dismissed 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 XI.

(2) In holding that any corporation which could

become a bankrupt may file a petition fer. an ar-

‘angement under Chapter XI.

-(3) In failing to hold that the District Court

properly permitted the Commission to intervene

for the purpose of moving to dismiss the Debtor’s

petition under Chapter XI, and to appeal.

*The judgment of the court below dismisses the appeal

(R. 480). The majority of the court, however, ruled upol

the merits, concluding (Clark, J., dissenting) that any cor-

poration which can be a bankrupt may file under Chapter

XI (R. 422-423). Under these circumstances, a mere re-

versal of the judgment disniissing the appeal and a remand

of the case for consideration on the merits by the court

below would grant the petitioner no relief. Consequently.

disposition of the case requires consideration of the merits

as well as of the standing of the Commission to intervene

an appeal. ’

(4) In reversing the order granting the Commis-

sion leave to intervene.

(5) In dismissing the Commission’s appeal from

the orders denying its motion to dismiss the pro-

ceeding and referring the proceeding to a referee -

for further action.

. SUMMARY OF ARGUMENT

The District Court had no jurisdietion to enter--

tan respondent’s petition under Chapter XI be- -

cause Chapter X is the exclusive miethod by which

corporations with securities ® ‘outstanding -in’ the

hands.of the public may reorganize under the

- Bankruptey Act. Although literal construction of

the definition provisions of the Act would permit a

publicly held corporation.to file under Chapter, XI,

the structure of the Act as a whole as well as its

‘legislative history shows unmistakably that such

literal construction does not reflect the meaning of

Congress. The rule is- firmly established that the

real purpose and intent of the legislative body must

_ prevail over the literal import of the words used.

Chapters X and XI embody strikingly different

schemes of reorganization. Chapter X provides

detailed safeguards designed to protect the inter-

ests of public investors; Chapter XI provides

merely a rudimentary system of creditoi control

_ designed for the corporation which has only trade

and commercial creditors. The éontrast between

the presen prescribed ati it plain that Con-

gress intended that all.public security holders

should have the protection afforded by Chapter X

and‘ that Chapter XI should be confined to: corpo-

rations. with. only trade and commercial creditors.

This conelusion is confirmed ‘by analysis of the

; present record. which strikingly shows the inade-

quacy of the procedure prescribed by Chapter XI

-. for a corporation in whieh there is a public investor

_ interest. It is also confirmed by. the legislative his-

tory of the statute which demonstrates that in

enacting Chapters X and x Congress had clearly

‘in mind the distinction between a closely held cor

poration and. a corporation with securities out-

standing | in the hands of the public... |

| |. Sar ae eerie c

The District Court should have dismissed the pe-

tition because no “fair and equitable’’ plan can be

corisummated. in the proceeding and no arrange-

ment can be proposed i in good faith. Chapter XI .

provides only for the modification of unsecured ob-

_ ligations; under.this chapter, therefore, alteration

of the guaranty on the Trinity certificates must be

: accomplished witho without_altering the Debtor’s large

-—-stock issue and id probably « also without modifying its

ag uartaing Yet the Trinity certificate holders

have a claim against the Debtor which must be:

. satisfied: before the stockholders receive anything

and which ranks on a par with that of the deben-—

“ture holders, since the security behind the. deben-

tures is valueless. No plan which modified the

Debtor’s obligation on the guaranty but ‘left the

required by Section 366 (3) ; yet such a plan is the

‘ only one Which could be consummated under Chap-

‘ter XI. A disclosure that a plan cannot be con-

‘summated in the proceeding goes to the jurisdiction

‘and requires dismissal. | |

| this’ case no arrangement proposed can meet the

requirement of ‘‘good faith’’ contained in Section

366 (5). And, even apart from the “good faith”’

‘ provision, the District Court’should have dismissed

the proceeding on the ground that the procedure

prescribed by Chapter X was more appropriate.

III

The holding of the court below that the District

Court, should not have permitted the Commission

to intervene in the proéeeding is clearly erroneous.

- governmental agency may never intervene to pro-

tect the public from evasion or emasculation of the

affected by the litigation. This drastic restriction

“upon the power of the Government to protect the

* public interest finds no support in precedent or

policy, ?

222251 -—-40-——-2 .

_ stockholders, and perhaps also the debenture hold-

ers unaffected would be ‘‘fair and equitable’’ ‘as:

Moreover, under the circumstances presented im.

In effect, the decision establishes.the principle that, ”

in the absence of express statutory provision, a -

_ statute under which the agency functions, unless:

: the agency has: some property or pecuniary right:

“The interest of the Commission in the ‘present

proceeding is twofold. First, as the ageney desig-

nated by Congress to participate in Chapter X pro-

ceedings on behalf of public investors, it has a very.

-teal interest in assuring that such investors are not

deprived of the safeguards contained in Chapter X

through iinproper exercise of jurisdiction under

Chapter XI. Second, it, has an equally great in-

terest in protecting its own functions under Chap-

ter X from impairment through improper resort

to Chapter XI BV corporations which should file

under Chapter X, The applicable decisions of this

Court clearly establish that this interest is sufti--

cient to support the District Court’s order aed

ting the Commission to intervene,

‘If the Distriet Court properly exercised its dis-

eretion in permitting the Commission to intervene,

the Commission had the right.to appeal from the.

orders denying its motion. An interest sufficient

to warrant intervention is plainly sufficient to war-

rant appeal, after intervention, from a decision oF

adverse to that interest.

_ ARGUMENT

Cuapter X Is THE ExcLustve MeTHOop BY WHICH

CORPORATIONS WITH SECURITIES OUTSTANDING IN

THE HANDS OF THE PuBLIC- MAY REORGANIZE

UNDER THE Bankruprey Act |

The court below. 0 holding that the yeipondent

had properly filed its petition under Chapter XI,

“

: | ~ .%

read the statute with literal exactness but without .

regard to the Congressional intention. Section 322

provides that ‘a “‘debtor’’ may file a petition under

Chapter XI, and Section 306 (3) provides that

‘debtor’? mean# a person who could become a

bhankrnpt under Section 4. . Since the respondent

could become a bankrupt under Section 4, the two

sections, construed liter ally and without regard to

the purposes sought to be achieved’ by ‘the statute,

permitted the procedure adopted. — - ,

This literal construction of the Act is, however,

contrary We its plain meaning; as we point out

below, the structure of the statute as a whole, as

well as its legislative history, points unmistakably.

to the conclusion that Congress intended Chapter

X proceedings to be the exclusive method. by which

corporations with securities outstanding in fhe”,

hands of the publie can reorganize in bankruptcy.

Under this interpretation of the Act, the District

Court hid no jurisdiction over the proceedings

instituted by the Debtor wider Chapter XL.‘ >

- Admittedly, in the-usual case, it is presumed that

the language of a-statute expresses. the intention of

Congress in enactiug it. But where, as here, there

«im be no reasonable doubt that adherenee to the

strict letter of the law would nullify rather than

effec ‘tuate the intent of Congr C85, the presumption

ispovercome and. the élear purpose of Congress

—

“.4In Jn re Reo Motor Car Co., 30 ¥. Supp. 785 (FE. D.

Mich.), the court lield that a cor rpor: ation which has securi-

a ib

_ must be given effect. Church of the Holy Trinity

v. United States, 143 U.S. 457; American Security

-, Co. v. District of Columbia, 224 U. S. 49% See

;

also Keifer & it er V. Reconstruction 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 ¥. Jin Fuey Moy, 241 U.S. 394; Lau

Ow Bew v. United States, 144 U.S. 47. “It isa

familiar rule,’’ this Court said in the Church of the

Holy Trinit y case, “that a thing may be within the

letter of the statute and yet not within the statute,

because not within its spirit, nor within the inten-

‘tion of its makers”’ (143 U.S. at 459).

The principle that the real purpose and intent of

_the legislative. body must prevail over the literal

~ import of the “words, employed is particularly ~p-

plicable in a of a statute as complex as the

~ Bankruptey Adt. This Court, in Helvering v.

Morgan’s, Inc., 293 U. S. ie, 126. pointedly.

—e_|)

ties outstanding in ‘the han: ds of the silo may not file a

petition under Chapter XI. This holding was made in

connection with a motion to dismiss a Chapter X proceed-

ing which was based on the asserted availability of Chapter

XI. Th same result was reached, without opinion, by the -

District Court. for the Southern District. of New York in

Ia re McKesson & Robbins, No. 72697, decided December

27, 1938, a reorganiza ition proceeding under Chapter X,

although certain other/factors were there present. _In re

Credit Service, Ine, 30 F. Supp. 878 (D. Md.), is, however.

in accord with the decision below. -

| observed, with. reference to ‘the income tax law,

that:

* wet

/* * * the true meaning of a single sec-

tion of a statute in a setting as complex as

that of the révenue acts, however precise its

language, caiinot be ascertained if it be con-

«+ sidered apart from related sections, or if the

mind be isolated frém the history of the in-

come tax legislation of which it is an inte-

gral part. i eee ) |

It is, of course, true that in any particular ease it

is a matter of judgment whether the provisions of

the Act and their legislative background do ¢learly

reveal a Congressional purpose at- variance with

the strict letter of the law. See, e. @., Palmer v.

Massachusetts, 308 U. S. 79, 83; United States v.

Missouri Pacific R. R. Co., 278 U. S. 269, 277-278;

Wallace’v. Cutten, 298 U.S. 229° Here,-however;

‘such a variance is established by the vary fabric of

the Act and by: every extrinsic guide to its inter-

pretation ; u unter the authorities above cited, there- |

fore, the will of Congress, even though imperfectly

* See also Duparquet Huot d& Moneuse Co... Evdns, 297 —

U.S. 216, 218, wheré the Court said of the Bankruptey Act

itself : To fix the meaning of these provisions there is need

to keep in view the background oftheir history. .There is

~ need to keep in view aiso the structure of the statute, and

the relation, physical and logical, between its several parts.”

There is a clear distinction between a case Hike that at .

bar, where the question is which chapter of -a remedial

‘stafute Congress intended a‘particular type of company to _

resort. to, and a case like Jeelin v. United States, 270 U.S.

“45, 251, where the question was whether a tax statute

1 |

expressed, must be. recognized and obeyed. See

Keifer & Keifer v. Reconstruction Finance Cor-

poration, 306 U. 8. 381, 391, quoting from Mr. Jus-

tice Holmes i in Johnson v. United States, 163 Fed.

"30, 82 (C. C. A. Ist). |

fs) ‘ ;

A. THE EVIDENCE OF CONGRESSIONAL INTENT WITHIN THE |

PROVISIONS OF THE STATUTE :

1. Chapters X and XI were enacted in 1938 as .

part of a general revision of the Bankruptcy Act.

In this revision, specialized types of proceedings’

were segregated in separate chapters.’ Chapter X -

provides a special procedure for the reorganization

of corporations; Chapter XI provides for ‘‘ar-

rangements’’ of the unsecured debts of any person

could be enlarged by construction “so that what was omitted,

prestanably by inadvertence, *may be included within its

scope.” See also Wallace. v. Cutten, 293 4. S. 229, 237;

Osaka Nhose vw Line.v. United States, 300 U.S. 9s, 101.

In the present case, the construction for which we contend

does notjnvolyve an extension of the scope of the statute but

merely an exclusion from the remedial provisions of Chapter.

XI of publicly held corporations to which C ongress did not

‘intend ‘the provisions of Chapter XT to apply.

‘Chapters I-VIL were retained for ordinary bankruptey

proceedings and several types of spec ialized proceedings

were provided for in Chapters VIIT- XIV. -C hapter VIII

contains provisions apphe: wble to farm debtors and to rail-

roads: Chapter EX contains provisions» applicable to mu-

yicipal corporations: . Chapter X ‘relates to corpor: ate.

reorganizations; Chapter XI relates to arrangements of

unsecured debts; Chapter XIT relates to real property ar-

rangements by persons other than corporations: Chapter

NIIT relates to wage earners’ plans; and Chapter. XIV

relates to Maritime Commissign liens. |

who could becotrhe a bankrupt. The intended

scope of each Chapter is indicated by its ancestry.

Chapter X replaced Section 77B, which in turn

supplanted the equity receivership mechanism, as

the normal reorganization procedure for corpora-

tions with widely distributed securities. Chapter

XI, on the other hand, replaced the ‘‘composition”’

provisions of Sections 12 and 74° as the normal

procedure for adjusting the trade obligations of

small individual and corporate businesses.”

. Reflecting the difference in their genesis, the two

Chapters embody strikingly different schemes of .

*H. Rep. No. 1409, 75th Cong., Ist Sess.. p. 50; S.. Rep.

No. 1916, 75th Cong., 3rd Sess.. p. 18.

' *The composition cases concluded under Section 12 for

bankrupts and the composition and extension cases con-

cluded under Section 74 for individuals during the period

from 1932 through 1938 involved average liabilities of sub-

stantially less than $50,000. Annual Reports of the Attor-

ney General of the United States, 1932 to 1938, Exhibit 3 in

each report. While no comprehensive figures are available

.to permit an accurate comparison of these figures with. the

{,size of equity receivership and Section 77B proceedings, a

Study made by a Senate committee of receiverships filed in

the federai courts in California during the period from 1930

to 1933 showed average liabilities of approximately $1,000,-

00. S. Rep. No. 365, 73rd Cong. 2d Sess., jip..1-3. There

are, of course, sporadic instances of the use of the composj-

tion procedure for large corporations. See, e. g.. /n re Realty

Associates Securities Corporation, 69 F. (2d) 41 (C. C. A.

2d), certiorari denied, 292 U. S. 628; Jn re O'Gara Coal

(o., 260 Fed. 742 (C.C. A. 7th). But thefarity of such

cases, and the inapposite nature of the composition sections,

is indicated by the fact that when. the need for more efficient °

reorganization procedure wag first recognized by Congress

reorganization. Chapter X establishes compre-

hensive administrative. machinery and protective

provisions for the benefit “of public investors, rest-»

ing on the assumption that such investors, dis-

sociated from control or active participation in

the management, need impartial an@ expert~ad-

ministrative assistance in the ascertainment. of —

facts, in the detection of fraud, and in the under-

standing of complex financial problems.” In con-

trast, Chapter XI establishes a rudimentary sys-_

tem of creditor control, resting on the assumption

that the problem of rehabilitating. debtors filing

petitions under Chapter XI can 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 (Secs, 156-158). The trus-

tee is. required to make a thorough é¢xamination

in’ 1934, it based that procedure on the equity receivership

rather than upon the composition practice. Report of

Counsel to the Special Committee’ to ahi <9 Receiver-

ship and Bankruptcy Bon eedings, S. Doc. No>d.268, 74th

Cong., 2d Sess., p. 8; S. Doc. No. 65, 72nd Cong ‘Ist Sess.,.

p. 90; H. Rep. No. 194, 73rd Cong., Ist Sess., passim.

rities legislation administered by the Commission; of which

Chapter X is an rer part. Securities Act of 1933, c. 38,

48 Stat. 74, 15 U.S. C., Secs. 77a-77aa; Securities Exchange

Act of 1934, ¢. 404, 48 Stat. 881,15 U.S. C., Sees. 78; Public

paige Holding Company Act of 1935, ¢. 687, 49 Stat. 838,

15 U.S. C. Supp. V, Sec. 79; Trust Indenture Act of 1939,

‘¢. 411, 53 Stat. 1149, 15 U. S.C. —_ V, Secs. 77aaa-77bbbb.

and study of ‘the debtor's financial problems and

management. (See. 167 (3) (5)). He prepares

a report thereon, which is sent to security holders

with a notice to submit to him proposals for a

plan of reorganization (See. 167 (5) and (6)). The

trustee then formulates a plan, or reports the rea--

sons why a plan cannot be effected (Sec. 169). .To

preserve for the court freedom to consider the plan

on its merits; unhampered by the appearance of an

accomplished fact, Section 176 voids consent toa

plan obtained prior to its initial approval by the

judge. | ; |

In recognition of the fact that public investors

‘in the debtor are likely to be widely scattered,

Chapter X provides “or their mobilization through

specific provisions pe rmitting them to act through

agents or coimittees (Sec. 209) and making lists

of security holders available (Sees. 163, 165). It

provides for compensation of committees and other

representatives (Sees. 24)-243). It also provides

safeguards against ubusive prac tices by such com-

mittees. Section 211, for. example, requires com-

mittees to file statements showing . the . circum-

stances surrounding their formation, and Section

212 authorizes the court to slisreg gard provisions in

| authorization? obfained by committees which are.

unfeir or contrary to public policy. The interests

of public investors are further safeguarded by the

provisions of Section 206 giving indenture trustees

the right to be heard on all matters involved.

*-*e

Chapter X also provides for participation in the

proceedings hy 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 for a report, and must do s0

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 means investors are provided with an ex-

pert: impartial analysis of the plan and of the

debtor’s financial condition, in the ight of which

the plan may be intelligently appraised. In addi-.

tion, the Commission is authorized to participate -

generally’ in the proceedings as a, party with the

permission of the court, and with the duty to do

so upon the request of the court (Sec. 208)\.

These provisions indicate a clear recognition by

Congress of the necessity for improved reorgani-.

zation machinery in the interests-of public nivest-

‘ors and for impartial and expert assistancesto the

district courts fin order that they may more read-

ily exercise the “informed, independent judgment”’

which this Court ‘has recognized to be essential in

_ veorganization eases. Case y. Los A ngeles Lum-

ber Co., 308 U.S. 106, 115; National Surety Co. v.

z. ‘oriell, 289 U.S. 426, 436. The Congressional: re-

ports show plainly that Chapter X was the medi-

nm designed to supply these safeguards (H. Rep:

No. 1409, 75th Cong., Ist Sess., pp. 43, 44, 47-48;

_§. Rep. No. 1916, 75th fend: 3d Sess., Pp. 21, 30,

$1)." .-

' No comparable safeguar ds are, » found i in Chapter

“XI. It provides only a skeleton procedure for the

modification of unsecured debts and contains no -

provision for the modification of secured. debts

or stock. The debtor files a petition which is ac-

companied by its proposed arrangement (Sees.

306 (1), 323, 357). Thereafter a meeting of the

cr redjtors is called (See. 334) at which creditors

may elect a creditors’ committee (Sec. 338). After

aceeptance by. a majority in number and amount

of the unsecured creditors , the proposal becomes

effective upon a finding. that it complies with the |

requirements of. the statute (Sees. 362-367). 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 security holders, or for assuring security

holders ade quate information before Yhey vote

z upon a plan. No mention whatever is made of in-

_-denture trustees or of security-holder comnnttees,

other than the creditors’ committee, and The court

“is given no power of control ever such committees.

Aid finally, there is no provision for rai proposal

See, e. g.. House Report at 47-48; * * the court

Will have the benefits of expert and disinterested advice to

aid it in the solution of the complicated financial and legal

‘problems involved in the typical large reorganization, This

should fill a long felt. need and be welcomed hy both courts

and inyestors.”

plans by anyone except the debtor, or for the

‘ticipation in. the proceedings of an independent

trustee or an atlvisory agency. a: Calete a _

" he contrast between the procedures prescr ibed

a by these two chapters makes it plain. that they were

intended to be mutually exclusive. Indeed, this’

conclusion seems necessarily to follow from. the

2 provision, of Section 146 (2) that a petition under

Chia ter X shall not be deemed to be filed’ in good |

- faith if adequate rélief would be obtainable uraler

Chapter XI. . Judge Clark pointed. this ¢ out in his

dissenting opition (R. 426)! I

aie Meera 146 (2) of Chapter ; petition

tiled under that Chapter may not be ap:

proved if the judge believes that adequate |

relief. would be: obtainahle under Chapter.

XI. Had this debtor filed a Chapter X.

petition, the court would have been com-

pelled to make an affirmative finding that

~ adequate relief could not be obtained under

XI. If the initiation of a X proceeding by

: | this debter would necessarily have led to

such a finding, the same finding should ‘be.

made when, as here, the debtor has filed -.

under XI. ‘Phe ‘adequacy of relief junder

. XLise clearly the same issue whether it/ariseés

in the setting of a Chapter X petigion or in

en .° the setting of Chapter. XI. ; /’ '

. ‘ oO 7 ‘

o . *A detailed comparison between the prov isions of Chap- ,

ter X and Chapter XI, in tabular form, is contained in

the Appendix, PP 53-55, infra.

]

Since the two chapters are » mutually exclusive,

the problem | is. to determine’ the precise: sphere

- ~, within which each chapter, wag intended by Con-

gress to operate. - Under the dgcision of the court

~ below, determination of the ap@@opriate chapter

depends solely on- whether the debtor proposes to |

modify any of its obligations other than unsecur ed

debts; if it seeks to modify only unseéured obliga-

_. tions, it may resort to Chapter XI, despige the fact

_ that its unsecured obligations are widely held by the

public and despite’ the fact that the proceeding

necessarily discriminates against the holders of the

unsecured obligations in favor of the debtor’s other

security _ holders. The decision thus imputes to

Congress the irrational intention of prov iding

safeguards for mortgage bondholders but not for

unsecured debenture holders, or for ‘unsecur ed de-_

_ benture-holders when secured debts are also ta 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 hold- _

_ ers should have the protection afforded by Chapter

. X and that Chapter XI should be confiyed to cor-

~porations with only trade and commercial

creditors.

Congress had good reasen for preser ibing differ-.

ent procedures. for corporations with a public in-

- vestor. interest and for corporations without such

- an investor interest.. Trade and commeréial cred-*

-itors are usually. relatively few in nunier’a ‘and are

¢ sn: : J.

24...

in a position to obtain adequate information and to

. appear effectively i in their own interests.” Since,

in the normal ease, such creditors are well equipped

to evaluate plans in terms of self-interest and. busi-

ness knowledge, they may safely be left to appraise

‘. the infirmities of a proposed arrangement.“ But.

public investors, such as the holders of the Trinity

mortgage certificates, who are uninformed, unor-

ganized, and widely scattered, are obviously not |

qualified to make a like: appraisal or similarly to

protect themselves against impairment of their in-

terests. Yet, under the ‘decision below, the ques-

‘tion of whether publie ‘investors shall. have the

protection of the safeguards: provided for them by

Congréss depends solely on the decision of the

debtor whether to propose its plan under Ghapter

XI or under Chapter X. 7 ite:

2. The. irrationality of attributing to Congress

the intention of allowing publicly held corporations

> Chapter XT provides for the election of a. creditors’

committee at the first meeting of thie creditors (Sees. 334,

338). This-is “peculiarly a,trade creditors’ method of han-

dling the problems of financially embarrassed debtors. Only

. this committee may be compensated out of the estate. /n

re Mar Fishman, Inc., 27 F. Supp. 33 (S. D. N. Y.).

* The fact that Section 393a. (2).of Chapter XI provides |

_ for an exemption from the registration provisions of tlie

Securities Act of 1933 (15 U. S. C., Sec. 77e): of an offer-

ing of securities pursuagt to an arrangement does not in-

dicate that _Congress intanded Chaptet XI to be appli-

cable to corporations ip - a public investor interest, since

an offering to a large fumber.of trade and commercial

‘creditors may constitute a public offering which, apart from

the exemption, would have to be registered. .

‘to resort to Chapter XT is effectively illustrated by

the present reeord. The Debtor is in an unhappy

financial conditien. The book value.of its assets;

as shown ‘by its consolidated balance sheet; shrank

from: $123,000,000 i in 1930 to $26,561,696 on Decem-

ber 31, 1938; n

_ were shown as $28,478,974 (R. 55). This book

| value, inoreover, was) greatly in excess of actual

‘value;.the Debtor itself revised’ its. balance sheet

as of June 1, 1939, to reflect present market and —

estimated values and as a result of. this revision

claimed a total value for all of its assets of $7,076,-

515 (R. 375, 226, 229). The recent history of the

Debtor has been one of successpve losses." -Trinity, |

too, has operated ata loss, and, even if the proposed -

modification of its certificates were to be consum-

mated, its earnings would, at least until the end of

1941, be insufficient by about’ $50, 000 a year to meet

the fixed interest réquirements (R. 177-178, 373).

It is admitted that ‘No improvement ‘in existing

** The Debtor's net losses ( after interest charges, but not .

including any interest charges under the guaranty) for

1936, 1937, and 1938 were, respéctively, $190,886; $121,771,

and $24,526 before depreciation (R. 59). After allow-

~ gn¢ée for depreciation these losses were $205, 700, $131,610,

and $25,215, respectively (R, 59). Trinity's operations’ re-

: ‘sulted in het josses, after mortgage interest but before de-

preciation, of $54,757, $20,782, and $51,546 for 1936, 1937, -

and 1938, respectively (R. 53). After allowances for de-

preciation these losses \ were $239,847, $205, 748, and $236,055,

respectively (R. 58).

unconsolidated basis its assets"

conditions or in earnings is expected ‘in the imme-

diate future’’ (R. 32). :

Because: the Debtor’s petition Ses been filed

under Chapter XI, there has been no thorough or -

impartial examination of “this financial picture.

The extent to whieh improvident management may

have combined in the. past with unforeseeable eco-

‘nomie conditions to ‘produce the Debtor’s present.

condition lias not been determined’ and there is

no basis upon which an intelligent independent

judgment ean be formed as to the company’s -fu-

ture prospects. Obviously Congress intended ‘no

such result; to the contrary, its plain purpose was

‘ that neither the court nor security holders should

be required to pass upon or accept a plan of read-

justment, such as that here involved, ‘except upon

the basis of a business-like investigation. The

Trinity mortgage certificate holders should have -

been specifically informed ‘that the modifications .

16 By, sheer chance ‘the District Court discovered that

Trinity had: berrowed funds from ‘a ,bank to, meet the in-

terest, on its ‘mortgage certificates due December 1, 1938,

repaying the loan out of the income of the sueceeding semi-

annual period (R. 342-352). As a result, the Debtur was

relieved of liability on the guaranty for the period ended

December 1, 1938, while Trinity failed to earn the interest

, due on June 1, 1939; and defaulted thereon. Such transac-

tions, testified the vice president of the Debtor, were “not

with me an unugual procedure” (R. 350). In addition,

“transactions whereby Trinity became indebted to the Debtor —

for more than $14%000,000 (R. 170) and. the payment. by

Trinity to the Debtor of $9,489,986 as interest on a note for _

$8,781,192 (R. 171-172, 231-233) clearly call for independ-

ent examination.

C | | :

ao See

proposed in the plan would still leave overburden- ,

‘some fixed charges; that the conditions: ghich

caused the Debtor and Trinity to show net losses

over a period of year? v would not be corrected by

the plan; that the estimated earnings of Trinity

for the next three years were less annually than the

proposed annual fixed charges by almost, $50,000;

and that continued payment of interest. by the

Debtor was highly doubtful in view of its net losses

and its future prospects. Instead, the Debtor so-

— licited acceptances to its proposed arrangement in ‘

advance of the institution of tlie judicial proceed-

ings and upon the basis of its unconsolidated bal-.

ance sheet as of December 31, 1938, reflecting book

_ values grossly in excess of the actual values of its

assets’(R. 30, 55, ef. 375). Such advance solicita-

tion would have been ineffective under Chapter X, - :

and the availability to the court of the assistance of ,

an independent trustee and of the Commission

would have made impossible the solicitation of

security holders on ‘the basis of a disclosure so .

inadequate. | -

Moreover, by ees to’ Chapter XI the Debéior a”

proposes to effect what is actually one plan of re-

organization ‘by the piece-meal use of courts of

two different jurisdictionss , Neither the federal

court in the Chapter XI proceedings instituted by

- the Debtor nor the state court in the Burchill Act

7 proceedings to be instituted for Trinity will have

jurisdiction over. the plan as a whole. In contrast,

‘ 22225140 —3 ' |

28.

ee Chapter X, which provides for the filing of

a petition for a subsidiary corporation in the same

court which approved the petition of the parent -s

corporation (Sec. 129), the federal court would -

- have complete jurisdiction: over both the Debtor

and its subsidiary. a

Thus, concrete application of the provisions of.

Chapters X and XI to the Debtor confirms the.

conclusion flowing from analysis of the Act itself, —

i. e., that Congress could not have intended to per-

mit the procedyre approved by the court below.

“Chapter XI does mot contain the machinery’neces- -

sary to deal adequately with a corporation in which

there is a public investor interest for the obvious »

. Teason that it was not designed to apply to such a

corporation.

.B. THE EVIDENCE OF CONGRESSIONAL INTENT CONTAINED-

IN THE LEGISLATIVE HISTORY OF THE STATUTE.

The legislative history of Chapters X and, XI

also demonstrates that the decision below does not

properly. reflect the intention of Congress. In 1932

the Solicitor General, in a report on bankruptey ‘

administration transmitted to Congress by the —

President, recommended that a stafutory se ‘heme

for the rgor ganization of corporations be adopted

‘(S. Doe. No, 65, 72d Cong., 1st Sess.). The Solici-.

tor General explained that stich a’statute was nec-

_ essary and desirable to save'a failing business con-

ducted ‘“‘by a corporation having securities out-

——

eee 29

standing in the hands of the public representing

various interests in its property”’ (1d. p. 90). Pur-

suant to‘this recommendation, Congress in 1934

enacted Section 77B of .the Bankruptcy Act (ec.

424, 48 Stat. 911, 912).” ,

_ Experience thereafter .showed. the need for

amendment -of Section 77B. A Special Senate

Committee to Investigate Receivership and Bank-

_ruptey Proceedings filed with Congress the report

of its counsel, showing that Section 77B.had been

improperly resorted to by small corporations. The

report drew a distinetion 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 ee the

composition procedure in bankruptcy and th

tion.77B or its equivalent be reserved for the ae

(S. Doc. No. 268, 74th a 2d Sess., pp. 9-10).

It stated in part (pp. 13-15) :

‘There is. ° * * a clear distinction to -

be observed between a corporation, the stock -

of which is privately owned by a small num-.

ber of persons, and which .is indebted to

trade creditors, and a corporation the se-

curities of which are in the hands of the

public. The problems of the former are not

, Ny | 3 ag

_ ‘This report was-also considered by Congress in 1938°

in connection with the revision of Section 77B which, as

revised, became Chapter X (H. Rept. No. 1409, 75th Cong.,

Ist Sess., p. 2).

shared by the latter; the problems of the

latter have no concern with the former,

* + # 7 . an

* * * * when the stock of a corpofa-— -

tion_is in the hands of the “public, when .

~Jatge numbers of persons in widely scat-

tered areas have purchased it through stock

and bond salesmen and dealers, ‘when the

stock of such corporation is listed upon ex-.

changes, and traded and otherwise dealt in ©

-in large. volume, or when a_ corporation,

either with its stock in tlie hands of the pub-

lie or the stock privately held, borrows

money by the issuance of bonds or other .

evidence-of indebtedness and such bonds are

sold to the investing public, situations are

presented that require different treatment.

_ ‘The large number of stockholders of suc

corporation and equally large number of

bondholders scattered over the entire

United States, can neither be represented ,

hy private counsel nor be expected to be

present at meetings. The number.is too un-

wieldy for any simple or private arrange-

ment. ‘It is-no small task to get their. ac-

quiescence to a plan, however fair; obvi-

ously it cannot. be prepared by conferencé’

or arrahgement with them.

x = & i a ri a. #* .

For the bankrupt insolvent corporation,

not publicly owned orjindebted, let us offer

composition under seftion 12 of the Bank- ..

ruptey Act; for the qthers, let us have sec-

tion 77B. .

Relying in part on this report and in part ona .

@tudy by the Securities and Exchange Cc ‘ommission

of the degree of protection “afforded to- -publi¢ in-

vestors: in reorganizations," Congress in 1938

enacted Chapters X and XI. The hearings” and

reports ” on the bill so enacted demonstrate what

would in any event be obvious, that Congress did

not intend these chapters to provide alternative

reorganization procedures for the choice of the

debtor. They show that in enacting Chapter X

the purpose of Congress was to supply an impar-

tial administrative machinery to assist the courts |

and publi¢ inv estors in the solution ‘of the complex

problems. which arise in the reorganization of ‘cor-

porations having sec “urities outstanding in the :

hands of the public; throughout the repoxts, there

is repe ated emphasis on ‘investors,’ ** “investor in-

terests,”’ “publicly owed . corporations” and like —

phrases as related to the objectives of Chapter X.

'® Securities and Exchange Commission Report on the

Study and Inv estigation. of the Wor k, Activities, Personnel,

and. Functions’ of Protective and Reorganization Com-

mittees. This study and investigation of ‘corporate reor-

2 “ ee . =e ° .

‘ganizations was made by the Commission at the direction of

Congress. Securities Exchange Act of 1934, Sec. 211 eg

U.S. C., Sec. £8jj.) ;

'® Hearings before the House Committee on the Judiciary

_ on H. R. 8046, 75th Cong., Ist Sess., pp. 36-39, 45-47, 167-

199; Hearings before a Subcommittee of the Senate Com-

mittee on the Judiciary on H. R. 8046, T5th Cong., 2d Sess.,

pp. $-15, 93-101.

*o. Rept. No. 1409, 75th Comg., Et Sess., pp. 5 51; Ss.

Rept. No. 1916, T5th Cong., 3d Sess., pp. 19-31. c

we)

House Report; pp. 37-48, adopted in the Senate

Report, pp. 2,18. The same hearings and reports”

show that in enacting. Chapter XI Congress had

the entirely different purpose of. affording small

. ehterprises, in which there is no- public investor

interest, a simple system of debt adjustment, under

the fraditional bankruptey method of direct

creditor control.” ee

It would, we submit, be a nullification of the will

of Congress, as greve ‘aled in this legislative history

and as embodied in the provisions of Chapters X

-# The express statement of the House Judiciary Committee

with respect to Chapter XI indicates this quite plainly (H.

Rept. No. 1409, Toth Cong., Ist Sess., pp. 50-51): “Section

2 has been recast: such. features of section 74 are incor-

‘porated as are deemed of. value and the combined sections ©

are made Chapter-X1 of the Act under the title “Arrange-

ment’, * * *. The inclusion of corporations will permit

a large number of the smaller companies ‘sneh as are now: —

seeking relief under Section 77B but do not require the

complex mac hinery of that. section, to- resort to the simpler

Jind less expelis ‘ive though fully adequate relief afforded by

Section 1." .

A representative of the National Bankraptey y Conference,

which was responsible. for the basic draftsmanship of the-

Act, explained the purpose of Chapter XI as follows, at

the hearing before the HFlonse Committee on the. Judiciary

(Hearings on H.R. 8046, 75th ‘Cong., Ist Sess.. pp. 45,

4647): “Subsection 1 [Chapter XI} is no different from

‘the present section 12 which has been with us for years,

except that it allows wider. rights. - A man goes in, who has

6a little business as a druggist. wnd wants to make a com-

position with his-«reditors. * *.* Now, the man that

wants to avail himself of the present subsection 12, which

is the composition section * * * is interested in ‘making

a composition with tris merchandise creditors.”

and XJ, if literal sniiseittion of the definition pro- -

‘visions were permitted to prevail over what Con-

- -gress meant in fact to say. In the pungent words

of Mr. Justice Holmes, “it is not an adequate dis-—

charge of duty for courts to say: We see what you"

are driving at, but you jave not said it; and there- __

fore we shall go on as before. * Johnson v. U. nited,

States, 163 Fed. 30, 32 C. C. A. Ist), quoted with

approval in Keifer & Keifer.v. Reconstruction:

Finance Corporation, 306 U. S. 381, 391.

II |

THE Disrricr _— SHOULD Have Dismissep THE

-Pemition Because No “Fair anp EQUITABLE”

PLAN FoR THE Destor Can. Be ConstuMMATED

UnpER CHAPTER XI AND No'ARRANGEMENT CAN

BE PROPOSED IN Goon-+'aITH nf

* The District Court lacked jurisdiction over » the

Debtor under Chapter XI, not only because the

Debtor had securities outstanding in the hands of

the public but also because, as the’ record disclosés, -

no “fair and. equitable”’ plan can be consummated

: in the. proceeding and no ar rangement: can be pro-

posed in good faith. Ue <iee

Section 366 (3) of the Act, which ee that

an arangement. may not be confirmed: unless it is

‘fair and equitable,” makes applicable to Chapter .

XI pPoceedings the rules of law enunciated in

Northern Pacific Ry. Co. vy. Boyd, 228 U.S. 482.

» See Case v. Los Angles Lumber Products: Co.,

ap o

. Lid’, 308 U. 8. 106.” - wi plan for this Debtor un-.

der Chapter XI can be fair and equitable, as re-

, quired by Section, 366 (3), because under that .

chapter only ‘unsecured obligations may be modi-

fied. Consequently. any modification of the Debtor’s

guaranty on the Trinity certificates under Chapter .

XI must be accomplished without altering the Deb-

tor’s large stock issue and probably also without

altering its debenturés, which are technically se-

cured debts. Yet the Trinity certificate holders

have a claim against the Debtor which must be-satis-

fied before. the stockholders receive anything and

which. ranks on-a par with that of the debenture

holders, sinee the security behind the debentures is

~~ valueless. Under the doctrine of:the Boyd and Los —

Angeles Lumber Co. cases, ho plan for the Debtor

~ would be fair and equitable which modified’ the.

debtor’ s obligation on the guaranty but. left the -

stockholders and perhaps also the debenture hold-

ers anaffected—yet such a plan is the only one

which can be consummated under es XI.

*? The respondent's suggestion in its brief in opposition

‘(p. 4, note 2) that>the Los Angeles Lumber. Co. case is |

applicable only to corporations insolvent in the bankruptcy

sense disregards the fact that all plans for all debtors under

Chapters X and XI_are required to be *fair and equitable.”

It also disregards’ the basis of the decision. which is that

the debtor's property must first be applied to payment of

the claims of creditors in full before stockholders are allowed.

to participate. . There is no ground for any contention that -

this rule applies only in the case of debtors insolvent in the:

_bankruptey. sense and ‘that the rights of creditors of. other «

debtors are to be less carefully protec ted.

ae 35 gee 9

' The Debtor seeks to escape the force of the doe-

trine of the Boyd and Los Angeles Lumber Co.

- eases by urging that it is not applicable to the plan

which the Debtor has proposed, since that plan is ~

an “arrangement” rather than a **reorganiza-:”

intended to permit cor ‘porationalike the Debtor.to

\ propose and effectuate in a Chapter XI procéeding

a plan which admittedly would not be ‘‘fair and

‘equitable’? under Chapter X. Plainly, substance

cannot thus be subordinated to procedure; a plan,

either under’ Chapter X or under Chapter XI,

whether it be termed a ‘“‘reorganization’’ plan ot

an “arrangement,’’ cannot be fair and equitable:

if it proposes that stockholders, or one class of

creditors, are to profit at the expense of another —

class of creditors. As this Court, pointed ‘out in

the Los Angeles Lumber Co. case, “fair and equi-

_--table*.are words of art with a-definite content and |

_ meaning y there is, therefore, no room for the von-

tention that they mean something different. when

"used in Chapter XI than when used in arr

me a” =e wee ; ee ;

** Thiis does not lead to the-conclusion that Chapter XI |

has »o legitimate sphere of op@ation, or stated otherwise,

y that the “fair and equitable” requirement makes the provi- ’

- sions of Chapter XI unworkable. As we have pointed out,

Chapter XI was intended to be used by individual and small]

corporate enterprises, in. Which the going-concern ‘value of

the business i is normally .dependent on its proprietors. In

such éases it miy be necessary to provide for the reten-

tion of an interest in the debtor or its stockholders in ordér

jon’’. ‘The argument is, in effect, that Congress” “i

‘ 86

The majority of the court below expressed. the

“view that these matters should be left for decision

until the plan came up for confirmation. T he court

-apparently overlooked the fact that the issue of

confirmation Was before the District Court (R. 2).

But in sany eyent, the Comniission’s objection is

not to the merits of any particular plan proposed,

whether it- be the original arrangement or. any”

amended proposal which the Debtor may make; its

‘objection is rather that no fair and equitable. plan

for this Debtor ean be consummated under Chapter -

XI. In-our view, a showing. that po plan can be | -

consummated in the proceeding goes to the jurisdie- |

- tion and requires dismissal. Cf. Tennessee. Pub-

lishing~o. Vv. ‘American Nat. Bank, 299 U.S. 18;

O'Connor. v. Mills, 90 F. (2d) 665 (C. C. A. 8th;

R.-L. Witters Associates, Ind v.. Ehgary Gypsum .

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

to preserye the going-concern value and make reorganiza-

tion possible. Consequently, if a proposed: arrangement

would realize at least as much for creditors as would. liqui-

dat yon—and snch was generally the test in cases under Sec-

tion 12° (see, e.g. Fleischmann & highend v. Saul Wolfson

Dry Goods Co., 299 Fed. 15 (C. C. A. 5th) )—there might be

‘no unfairness in permitting. the delace or its stackholders to *

retain an interest, for in such ‘cases the full value of the

property would be applied to the claims of creditors to the

largest extent possible. Cf. Rostow and. Cutler, Com peting

ss eg of Reorganization, 48 Yale L. J. 1334.

* The decision:in John Hancock Mutual Life Ins. Co. v.°

artela, No. 33, present Term, decided December 4, 1939,

does not require a contrary conclusion., That case involved

. “Section 75 (s) of the Bankruptcy Act, a form of procedure

unrelated to the statutes in issue, not requiring a “fair and

; - Saad

-37 4

Re.

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.

~ Under these circumstayces, and particularly ih

_ » view of the inappr opriateness of the remedy sought

to be employed by the Debtor, no arrangement pro-

nosed can meet the requirement of ‘‘good, faith’’

contained in Section 366 (5). The concept of

| “good faith’? as used in the reorganization provi-

sions of the Bankr uptey Act has*been. broadly con-

struéd; the issue raised is ‘‘whether or not the re-

lief-seught. by debtor is within the purpose, intent

and spirit of the statute.”’ In _reNortheastern

Water Companies, Inc.,24 F. ‘Supp. 653, 655 (N. D.

N.Y.) Under the compar able “‘good faith” clause

in Section 77B, the courts refused to take. juris-

diction where the interests of ‘creditors would. be

~ better served in another pending proceeding or

where it appeared unreasonable to expect that a

plan of reorganization could be effected. *> In our

view the elements which go ‘to the, basic lack of

_ equitable” plan, and contemplating a three-year moratorium

for farm debtors, with a privilege in the debtor to obtain

“his property at the end of or during the three years by

paying the appraised or sale value thereof.

In re Williamsport Wire Rope Co. 10 F. Supp. 481

(M. DJ. Pag), appeal dismissed, 78°F, (2d): 1023 (C.-C. A.

3d): Provident: Mutual ‘Life Ins. Co. ¥. University Evan-

gelical Lutheran ¢ ‘hurch, 9 F. (2d) 992 (C. C. A. 9th);

Tn re Tennessee Publishing Co..-81 °° ie 463 (C. C. A

6th), affirmed on other grounds, 299 U.S, 18: Wanati seve

‘Co. v. Mock, 75 -F. (2d) 284 (C.C. A. i),

ao yet

- 38

jurisdiction over this Debtor in a Chapter XI pro-

ceeding, and which should iead to dismissal for that

reason, lead also tothe conclusion that thé proceed-

ing should be distiigsed for lack of ‘‘good faith.” “ate

e Furthermore, even apart from the ‘good faith”

provision, the bankruptcy sgurt had ampl¢ power

_ to dismiss the proceeding 5 oh Thy ground that an-

other procedure was more desirable; its failure to

exercise this power was, we submit, an abuse of

discretion. In an analogous situation, this Court

held that a district court abused its discretion in

‘not dismissing an equity receivership proceeding

. for a building and Joan association over which

it had jurisdiction where the public interest made

it preferable that the liquidation procedure pro-.

vided by’ state law be .followed. Pennsylvania v.

Williams, 294 U.S. 176. Compare Thompson v.

Magnolia poten Co., No. 481, present Term, |

‘ decided March 25, 1940; General American Tank

Car Corp. v. El Dorado Terminal Co., No. 129,

present Term, decided January 2, 1940. Similarly,

several district courts undertook to exclude from

Section 77B small corporations which were literally.

within its terms becausé the procedure provided. by

Section 12 was deemed. to be more appropr iate.”

,7%* This Court aan verigisiel the requirement of

fair dealing between those who control corporations, on the.

one hand, and the creditors and stockholders of. the. corpo-

_ ration, on the ther hand, not only with respect to the.con-

dict of business dealings but also with respect to-the use of

legal procedures. Pepper v. Litton, No. 39, saree Term,

decided December 4, 1939. .

27 See, e. g.. Rule 77B-2 (1) of the District Court _ the

Southern District of New York. The principle underlying —

39°

This case presents the precise converse of that situ-

ation and a similar rule should be applied.* The |

rule is peculiarly apposite here where the assunip- ©

tion of jurisdiction by the District Court was in

-derogation of the policy of. Congress and of the

public interest. oo:

: iil : ae oa

- THE Cori recsenos WAS PROPERLY PERMITTED TO INTER-

_ VENE FOR THE PURPOSE OF OBJECTING TO THE JURIS-

DICTION OF THE DistRict CouRT AND COULD APPEAL

FROM AN ADVERSE DECISION

‘1. The holding of the court below that the -Dis-

het Cou Court should not have permitted the Commis- &

is this rule i is now embodied | in. Sections. 130 (7) and 146 (2)

‘Chapter X which require that every petition under

Chapter X shall allege the specific facts showing the need

for relief under that-chapter and why adequate relief can-

not be obtained under Chapter XI, and which require dis-

missal for lack of “good faith” when such a- showing is not

made, ° ©

**Cf. Rostow and Cutler, Competing Mitions of Cor-

- porate. Reorganization, 4% Yale L. J. 1334, 1366 (1939):

_“No petition can be approved as pcoperty. filed under

Chapter X until the court. has determined that the system

of Chapter XI could not provide adequate relief.in the

‘situation of the case. This oblique definition of jurisdiction

under Chapter X can be-evaded at will unless a coniparable

condition. is read into Chapter XI. * * * If. petitions

under Chapter X are: accepted when relief under Chapter

XI would be inadequate, petitions under Chapter XI should

‘ be rejected for the same reason; and the prospective in-

adequacy of relief ‘under Chapter XI should be the same

question when presented as an issue in Chapter XI proceed-

‘ings as when it arises at the hearing on the approval of the

apse in a Chapter X _ +

a ie

iad |

. 40

nent Fas 3

sion to intervene in the proceeding is, we believe, .

_ clearly ‘erroneous. In effect, the decision estab-

_lishes the principle that, in the absence of: express |

statutory provision, a governmental agency may

never intervéne to protect the public from evasion

or emasculation of the statute under which the

agency functions, unless the agency has some prop-

erty or pecuniary right affected by the litigation.

This drastic restriction upon the power of the Gov-

ernment to protect the public interest finds no sup-

- port in precedent or policy.

In our view, the approach of the court below was

_wrong. It pointed out first that Chapter X eon- -

tains an express provision for Commission inter-

‘vention. while Chapter XI does not, and stated that

this ‘‘raises a strong implication against interven-

tion by the peg oo ’** in Chapter XI proceed-

ings (R. 423). It then addressed itself ‘to the

question of whether the interest of the Commission

in the litigation was so direct and immediate as to

entitle it to intervene as of right and held that, :

— since the Commission did not ‘‘stand to gain o or loge

directly by the decision of the court,” it ot

have ps an interest (R. 424). There 4 no dis-

cussion in the opinion of whether the Cofamission’s ~

interest in the action was such as entitled it to in-

tervene with the permission of the court. Appar-

ently the court below failed to realize that, since the

District Court eranted the Commnission’s motion to

intervene, the question was not only. whether it

could intervene as of right, but also whether the

District Court’s action in allowing it to intervene -

constituted an abuse of discretion.

The reliance of the court below upon the pro-

vision of Chapter X expressly providing for Com-

mission intervention is, we believe, misplaced.

he purpose of this provisign is obviously to allow

the-Commission properly to perform’ the advisory

functians with which it is charged in Chapter X

proceedings. Since the Commission has no simi- «

Ir functions to perform in Chapter XI proceed-

ings, a provision giving it a general -right to par-

ticipate in ChapterXI proceedings would be both ©

inappropriate and superfluous.

The Commission did not intervene here in order

to perferm 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.

Its standing to intervene, therefore, does not de-' .

pend on the provisions of Chapter XI but upon the

broad question whether it had sufficient interest to

entitle the judge in charge of the proceeding to .

allow intervention under the general principles

governing intervention in the federal courts.

The answer to this question cannot be in doubt.

The interest of the Commission in the proceeding —

_ is twofvid. First, as the agency designated by -

. Congress to participate in Chapter X proceedings. .

“in the interest of adequate representation of the

Se enh 42

public interest,”’ * it has a very definite interest in

objecting, if indeed it is not under a duty to object,

on behalf of the investing public against an im-—

proper exercise of jurisdiction under Chapter XI

which deprives investors. of the safeguard. con-

‘tained in Chapter X. Second, it has an equally

great interest in protecting its own functions under

Chapter X. from. impairment through improper

resort to Chapter XI by corporations which should

file under Chapter X.°

This: Court has recognized that public officials .

and administrative commissions, federal and ‘state,

have a legitimate interest in resisting any endeavor

td evade the previsions of the statutes in relation

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

Miller, 307 U. 8. 433, 442, 466; Pennsylvania v.

Williams, 294 U. S. 176° The Williams case is

strikingly similar to the present one: anere 8 a re-

” If the court. below were corvect in stating that. the-C om-

mission-has no interest’ to proteet until a Chapter X_pro-

ceeding is pending (R. 423), it would mean that the Com-

-mission would never have an opportunity to protest in the

interests of tae public investors which it repyesetits against

an improper resort to Chapter XI which deprived those

investors of the protection of Chapter X.

-™ The preservation of governmental functions from im-

pairment through the -improper exercise of jurisdiction has

frequently’ been held by state courts to constitute sufficient

eg for an action for a writ of prohibition. See,.e. g., State

v. Superior,Court for Walla Walla County, 159 Wash. ain

293 P. 986 (1930); -State’ v. Superior Court of Marion

ies sda Ind. 589, 177 N. E. 322 (1931).

- gaivership. proceeding was nnd in the fed- |

eral court. The State of Pennsylvania filed a peti-

tion for leave to intervene and for an order directing

‘the receivers to surrender -the assets of the de-

fendant association to the State Secretary of Bank-

ing for liquidation under the provisions of state

law. The District Court denied the- petition but —

this Court reverged, holding that the District Court

infthe exercise of its discretion 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 implied that

the state had an interest ew to give it stand-

ing to intervene. So

' guish the Williams case on the ground that the

. state “‘claimed a right to full possession and con-

'trol-of thé assets of the insolvents, not merely a

right to advise or protect the public interest’? (R. -

423-494). The distinction is not substantial. The

interest of the state in the receivership proceeding

was not a property or possessory interest but an .

interest in the enforcement of the state liquidation

statutes for the protection of the public. That is

precisely the type of interest which the Commis-

sion has in the present case. That Congress sought

_ to protect the investing public by making the Com- .

mission an advisory, rather ‘than a liquidating, —

agency is immaterial; in each case the administra-

tive body has the same interest in assuring that the.

“

public will receive the protection which the ey

was designed to afford it.” ;

The decision of this Court in The Exchange, 7

- Cranch 116, likewise supports the. Commission’s.

esposition. That case involved a libel fited by Ameri- |

ae ean citizens against a schooner which the libellants

.._. elaimed 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-

tion”’ setting forth the facts and praying that. the

schooner be released.” The District Court. dis-

te _ missed the libel, but on appeal the Cireuit Court

reversed. The District Attorney thereupon ap-

ee a pealed to this Court, which reversed the judgment

of the Cigguit Court and affirmed the judgment of

the District Court dismissing the libel. “The Court,

_ first expressing the opinion that an American citi-

|zen cannot assert, in an Ameriean court, title to’a

" *In State v. Superior Court of Marion Couhty, 202 Ind.

589, 177 N. E. 322 (1931), a state banking commissioner was

_ permitted to inteFvene in an action for a writ of. prohibition

to prevent a state court from exercising jurisdiction to ap-

point a receiv er for a state bank at the instance of a creditor.

The commissioner neithér had nor claimed possession of the

‘assets: his “interest” consisted in the fact that he alone was *

entitled to ask for a receiver.

. ~ §* Although the opinion in Zhe Exchange. does not speak.

; of intervention, the procedure followed was the same as

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

so recognized in Stanley v. Schiwalby, 147 U. S. 508, 513.

“>

public armed vessel in the service of. a foreign sov- _

ereign, 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 sugges-

tion of the attorney for the United States.”’

The course sanctioned by this Court in The Ezr-

change was almost identical with the course pur-

sued by the Commission here. There the United

States appedred in the proceedings in order ‘to

move their dismissal on the ground that the court

had no jurisdiction and that an improper exercise

of jurisdiction would be contrary to the publie in-

terest ; its contentions having been overruled in the

circuit court, an appeal was allowed. As pointed

out in Percy Summer Club v. Astle, 110 Fed. 486,

489 (C. C. D. N. H.), The Exchange case illustrates

that the principle allowing intervention by public

asap where the publi¢ interest is concerned

“is of the broadest character, and” is hai aes wah

out formalities.”

** Other eases in which gover nmenital intervention has been

allowed cannot satisfactorily be distinguished 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 v. Davis, 301 U. S. 619; United States v.

Minnesota, 270 U. S.. 181, 194; Norman v. Consolidated

Edison Co. of New York, 89 F. (2d) 619 (C. C. A. 2d);

Winola Lake & Land Co., Inc. v. Gorham, 17 F. — 75

(M. D. Pa.).

The assumption yinderlying the decision. below |

that in the absence of statutory provision a gov- —

ernmental agency may not apply to the courts to

protect the public interest, as distinguished from

its own pecuniary interest,.is also directly contrary ..

to the principle enunciated in In re Debs, 158 U. 8.”

564. There the’ Court 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 as 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 to

apply to its own courts for any proper assistance in

the exercise of the one and the discharge of the

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

ment ‘‘has no pecuniary interest in the matter’’

(p. 584). See also Hopkins’ Savings Aign. a?

Cleary, 296-U. 8. 315, 339-341." A nonpeethiar vy

°° Cf. Interstate a Commission v. Oregon-Wash-

ington R: Co., 288 U. S. 14, 25, a suit brought to enjoin an

‘order of the Interstate Commerce Commission, in which the)

Court .held that’ state utility congmissions, which had inter- |

vened in the suit, were “aggrieved parties” and therefore .

had a statutory right of appeal “because they officially repre-

sent the interest of their states in obtaining wdequate trans-

portation service.” oP

The public interest of a state in the maintenance of

transportation facilities has been deemed to give it standing

to ask for a writ of prohibition forbidding a circuit judge

who had entered a decree of foreclosure to confirm the sale

of railroad property as junk. State v. Bullock, 78 Fla. 321,

82 So. 866, affirmed, 254 U. S. 513.

interest sufficient to support an independent suit

for the protection of the public must certainly suf-.

fice to support intervention for that purpose in an.

existing suit. Cf. New Pork Vv. New Jersey,” ‘256

U.S. 296, 307-308.

The general principles of intervention estab-.

“ lished:by the authorities cited are in no way-altered _

or restricted by Rule 24 of the Federal Rules of |

Civil Procedure, which this Court has ordered to

be followed in bankruptcy proceedings ‘‘as nearly —

as may be.”” General Orders in Bankruptey, Par- :

ayraph 37. The Advisory Committee’s Note ‘to

_ Rule 24 specifically states that the rule ‘‘amplifies

and restates the present federal practice at law and

in equity.”” The Commission may intervene either _

under clause (a) (2) of Rule 24, which provides

for intervention as of right ‘‘when the representa-

tion of the applicant’s interest by existing parties

is or may be adequate and the applicant is or

* may be bound by a judgment in the action,’’ or

under clause (b) (2) which provides for permis-

sive intervention. ‘‘when an applicant’s claim or

defense and the main action have a question of

law or fact in common.”’ . ° .

We submit, therefore, that the -Commission

had an absolute right to intervene. Its interest . |

- in the proceeding is not. represented by. any

other party and that interest will be foreclosed

by an adverse judgment, which will effectively.

prevent the Commission from performing its

functions. in relation to the Debtor under Chap- _

ter X ‘and will deprive the investors whom the .

Commission represents of the safeguards provided

for them by Congress in Chapter,X.” Since denial

of intervention in the present case would leave the

Commission without remedy for the impairment

. of its functions, the Commission comes within the

_ class of applicants for intervention who ‘‘can never _

- obtain relief unless it be granted * * * onin- -

_ tervention in the pending cause. In this latter

class the right to intervene is absolute * ae

United States Trust Co. v. Chicago Terminal TR.

Co., 188 Fed. 292, 296 (C. C. A. 7th), and. cases

site: vA og

But whether or not the Commission had: an. ab-

solute right to intérvene, there can be no question

that it was properly permitted to interveng/under

clause ( b) (2) of Rule 24, which merely requires

that the initer venor’s s claim or defense raise a ques-

tion of law or fact in common with the main ac-

tion. Here the petition to intervene clearly raised

Tn United States vy. Lane Life Boat Co., 25 ¥. Supp. %

411 (FE. D..N. Y.), it was held that the term “bound” j

Rule 24 (a) (2) is not to be strictly construed, even as re-

gards private ‘litigants. °. Where public agencies are con:

cerned, Percy Summer Club ¥. Astle, 110 Fed, 486, 48

(C..C. D. N. HL), indicates that. the condition of the rule

that the intervenor be bound ‘by the: judgment means merely

that the practical effect of an adverse judgment must be

“prejudicial.” isnak :

’ 49

a question of law in common with the main action,

since it. was addressed directly:to the jurisdiction

of the court. to maintain the main action. : And -

that a’ motion to dismiss an “action constjtutes a

‘“‘defense”’ to that action within the meaning of the

Rule seems plain; Rule 12 (b) expressly provides

that the ‘‘defense”’ of lack of jurisdiction over the -

subject matter may be presented in a responsive .

pleading or by motion, at the option of the pleader.”

If.it- be urged that ‘‘defense’’ refers only to a

‘pleading interposed by one who is technically. in

the position of the defendant, the short answer is

that, so construed, this provision of Rule 24 (b)

- (2) would: not: strictly be applicable to anyone

secking to intervene to dismiss a voluntary petition

_under-the Bankruptey Act, since in such a pro-

ceeding rio one is ever technically i in the position of

a defendant. If the Rule if to receive this narrow

construction, the result is simply that in a proceed-

‘ing of this sort the provisions of the Rule may not

be applied literally but must rather, as provided by

That the words “claim or defense” were not intended

to be construed technically is shown by the remarks of Dean

(now Circuit Judge) Charles E. Clack at the proceedings

of the American Bar Association Institute at Washington,

D.C. In describing Rule 24, Dean Clark, after first stating

the requirements for intervention of right, stated that per-

missive intervention may be allowed in “any other ‘ease

Where a question of law or fact in common with the main

suit is presented.” See Proceedings of the Institute on

Federal Rules at Washington, D. C. (Am. Bar. Assn.), p. 67.

Paragraph 37 of the General Orders in Bank-

ruptey, ‘be followed ‘‘as nearly as may be.”

‘Plainly, a motion to’ Bie Ries a petition filed under

Chapter XI for lack of jurisdiction, made by a

party. having an interest in the proceeding, is the

counterpart in bankruptcy proceedings of a similar

“motion made in an action at law by one whois

technically in the position of a defendant.”

| 2. ‘If the District Court properly exercised: its |

discretion: in permitting the Commission to inter-

. vene, the Commission had the right to appeal .

from the orders denying ‘its motions. An in-

terest sufficient to warrant intervention is plain-

ly sufficient . to warrant appeal, after interven-

tion, from a decision adverse to that interest.

Pennsylvania. v. Williams, supra; The Exchange,

supra; Teas v. Anderson, Clayton & Co., 92 F.

(2d) 104" (C. C. A. 5th), certiorari denied, 302 U. 8.

747. As) an. intervenor, the. ,Commission was a

party ad the denial ef the. relief which it sought

magé it an aggrieved party.” As: such, it had the

.-/ **The principle that intervention must be in subordiaa-

_ tion to the main action, formerly embodied in Equity Rule

37, has been omittéd from Rule. 24 of the. Rules of Civil

Procedure. The omission’ was deliberate. See remarks of

- Dean Clark, in Proceedings of the Institute on Federal

_ Bales at Cleveland (Ain. Bar Assn.), pp. 265-266. . In the

:tabsence of an.express requirement of subordination, thee

Commission was clearly entitled to the relief sought if it

was properly permitted to intervene and its position is cor-

rect on the merits. Sage v. Central R. R. Co., 93 U. S. 412.

er) |

right, under Sections 24 and 25 of the Bankruptcy

Act, to take an appeal. Cf. Interstate Commerce

Commission v. Oregon-Washington R. Co., 288,

U.S. 14, 24-25; Williams v. Morgan, 111 U. S. 684,

696-698 ; "Savannah v. Jesup, 106 U. 8. 563; Ea

"parte hole: 94 U. S. 248; Sage v. Central R. R.

Co., 93 U. 8. 412, 419." _ #

® Marshall v. Dy _ 231 U.S, 250, cited by the. court below

~(R. 424) is - not “opposed to this conclusion. That case

~ merely holds that those wlto seek review of this-Court of,

the jldgment of a state court must have a personal as tis-

tinguished from an official interest. in the relief sought and

in the federal right alleged to have been. denied by the

‘judgment of the state court. The decision is clearly in-

applicable-to proceedings in the federal courts because the

' basis for the rule enunciated was that the petitioner, “hav-

ing sought the advice .of the courts of his own State in his

official capacity, should be content to abide by their de- '

cision” (231 U. S. at 258). It should also be noted that the

decision was held to be inapplicable to the situation pre-

sented in Coleman v. Miller, 307 U. S. 433, 438. .°.

“Chicago v..Chicago Rapid Transit Co., 284 U. S. 577, re-

_died upon. by respondent, is also inapplicable. That. was .

a suit brought to restrain the Illinois Commerce Commis-

sion and the Attorney General of that state from enforcing

an order of the Commission prescribing rates of fare upon

the plaintiff’s filroads. The City of Chicago »as permitted

' to intervene as a defendant. A three- judge Vistrict Court

granted an injunction and the Commission dnd Attorney

- General decided not to appeal. This Court, in a per curiam

_ Opinion, dismissed an appeal taken by the ‘City of Chicago

on the. ground that it had no separate standing to appeal.

The decision is not authority against the general proposi-

tion that an intervenor is a party entitled to appeal from

* an:adverse order. The authorities cited*in the opinion in-

‘advisory. nature of the Commission’s funetions

terms apply ta the present case, since. this is

- dicate that the basis of the decision was that the regulatory

-comparable since the Securities and Exchange. Commission

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 imp ication, limit the Commission’s

right to appeal in this case. The restriction im-

posed by Secton 208 was designed to emphasize the

under ‘hapter X and the ultimate judicial charac- -

temf the proceedings (see dissenting opinion of

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

a Chapter XT. rather than a Chapter X pro-

ceeding, and. the policy: reflected by the restric-

tion is likewise 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 improper exercise of jurisdiction, |

based on a vital point of statutory construction,

which, in the opinion of the Commission, precludes °

it from performing the functions vested in it' by

Chapter X and thereby defeats the public interest

whieh the Commission is directed to protect.

commission, whose ordet was enjoined and who did not see

fit te appeal, rather than the City, was the proper party

te determine whether the interests of the public called for

review of the decision. “The situation here, of course, is not

was’ the only party in a osition to represent the public

who could appeal from the decision of the District Court.

\ . ee

‘53

The liek of, the ome below shoal be re-

versed and the proceeding remanded to the District

C “ with instructions to dismiss - Debtor’s

petition. .

Respectfully subuiitted.

\ aa FRANcis. BIDDLE,

_ Solicitor Gendval

oe RicHARD H. Demura,

aa : (. Special ans

/ CHESTER T. LANE, _, aot :

. General Counsel; . a.

- Martin RIGER,

\ SAMUEL H. Levy,

‘\ Raovun BERGER,

) Homer Kripke,

GEORGE ZOLOTAR,

Attorneys, |

Securitivs and Exchange Commission. .

. Aprit 1940.

_———

. 9. Assistance of

APPENDIX

setae cine of provisions of Chapter X and sical Xi)

—_—--—

1. Initiation of pro-

“eseding.

2. Appointment of

trustee.

3. Qualifications of

trustee.

4. Examination of

Debtor's financial

problems dnd

causes of failure.

5. Report to judge

upon past con-

duct of J he

Debtor. ,

6 laine to security |

holders.

7. Formulation of plan. | Trustee gives notice to seturity hold- 4

8. Proposal and Bling

oft plan.

ad-

Ministrative

“Agency

“4

10. Submission of

plans for accept-

ances. :

Chapter x

3 Chapter XI

Debtor, three creditors, or indenture

, trustee miay file petition (See. 126).

' Trustee appointed in every case in

which indebtedness is $250,000 or

more (Sec. 156).

Must be | RE ae disinterested

(Sees. 156, 158). :

Trustee investivates property, liabili-

ties, and financial conditien of

debto., the operation of the business,

and the desirability of its continu-

anre@ (Sec. 167 £5}: cf. See. 167 (1)).

Trusteg, reports to. judge facts pertain-

ing fraud, misconduct, mismanp-

agement and irregularities, and any

causes of action availat le to estate

(Sec: 167 (2)).

Trustee submits statement of his in-

vestigation to security holders (Sec.

187 (5)). ;

ers that they may submit to him

suggestions for formulation of plan

(See. 167 (6)).

Trustee preparés and files plan (or re-

port of reasons why plan cannot be

effected) before debtor may propose

plans or amendments (Sec. 166).

In cases in which the scheduled in-

debtedness exceeds $3,000,000, and

in other cases if the judge desires,

plans which the'judge finds worthy

of consideration, after hearing, are

}

Only debtor may file peti-

tion (Sees. 321, 322).

No comparable proriszion.

If trustee in bankruptey

has ®Biready heen’ ap-

pointed, he must be con-

tinued - in pessession.

Otherwise, receiver may

be appointed ‘if neces-

sary” (Sees. 332, 343).

No eumparable provision.

No comparable provision.

No comparabie Pypcizion

No comparahie provision

No comparable protision

Only debtor may propose

arrangement (Sec. 323) of

modifications (Sec. 33)

‘No comparable provisions

“submitted to the Securities and Ex- |.

change Commission for examination

and report (Sees. 172, 173). Com-

mission may, with approval of judge,

participate in proceeding as a-party

(Sec, 208).

After approval by the judge as fair and

equitable arid feasible, plans are

transmitted to security holders to

gether with informative materials,

including the judge’s opinion and

the Commission's report (Sees. ‘174,

175). *

(4)

No comparable provwion

. Acceptances re-

. Dissenting classes

‘ Participation

quired for con-

firmation.

of creditors or

stockholders.

. Classes of security | ‘

holders

plan may affect. |

proceeding by -

security holders. ;

Control ever repre- |

sentatives of !

curity holders.

| !

{

7, Indenture trustees.

which |

formative materials have been trans- -

Two-thirds in amount of each affected

class of. creditors and majority of

holders of stock (if debtor is not in-

solvent) (Sec. 179).

Ifa class of creditors does not accept by

two-thirds in amount, or if a class of

stockholders does not accept by a

majority, the plan may be confirmed

if it provides for such classes ade-

‘quate protettion as prescribed by

the statute (Secs. 216 (7), (8), 179,

221).

Plan may alter and modify the rigBts |

of any class of creditors, secured or |

unsecured, and of any class of stock- |

holders (Sec. 216). : |

Have right to be heard on all matters |

arising in proceeding (Sec. 206); and |

may act in person, by attorney, or by

agent or committee (Sec. 209).

Information furnished to con-

’ cerning employment and interasts of

represeutatives of security hokiers

(such as. committees, indenture

trustees and attorneys), as well as

interests of the persons represented

(Secs. 210, 211). The judge is em-

powered to disregard previsions in

authorizations of such representa-

tives orto restrain the exercise of

powers which are anfair or contrary

to publie policy (Sec. 212). Claims

or stock acquired by the respresenta-

. tives in contemplation of or during

the course of proceeding may be

limited to actual consideration paid

therefor (Sec. 212). :

| Have the right to be heard on all mat-

ters arising in the proceeding (Sec.

208); to file a claim on behalf of all

holders of securities outstanding

under their indenture (Sec. 198);

- and to file a petition initiating the

proceeding under the chapter (Sec.

126).

: 55 ;

Chapter X Chapter XI ~

. % ——

\1, Solicitation of May not normally be solicited until | May be solicited at any

coptances. after judge has approved planandin- | time, even prior to in-

stitution of proceeding,

and must be obtairied be-

* fore court confirms ar-

rangement (Secs. 336 (4),

361, 362). No require-

ment as to data which

must accompany solici:

tation.

Majority in amount and

number of each &flected

class of unsecured credi-

tors (Sec. 362 (1)).

No comparable provisions.

Arrangement may provide’

for settlement, satisfac-

tion, or extension of un-

secured debts only (Secs. .

306 (1), 357).

No comparable provision.

One creditors’ committees

may be elected at first —

, meeting of creditors (Sec.

338).

No comparable provisions.

No comparable provisions

and no mention of in-

denture trustees.

Chapter X

Chapter XI

18, Lists of security

holders.

Trustee is under a duty to prepare and

file lists of security holders (Sec, 164).

Other persons in possession or con-

trol of such lists or information rele-

No comparable provisions.

Debtor files bankruptcy

schedules with petition

(Sec. 324). :

vant thereto may be required to dis- '

close the lists or such information |-

(Sec. 165}. Although in a. proper

case the court may direct impound-

ing of the lists, bona fide security.”

” holders and indenture trustees have

= an unqualified right to use and in-

spect them upoti terms prescribed

by the court (Sec. 166). :

19. Compensation and | In addition to allowances to officers of | The debtor is required to

allowances. the court, the debtor and petitiong, deposit the money nec:

the judge has broad power to make essary .‘‘to pay the costs

reasonable allowances of compensa- and expenses of the pro-

tion and reimbursement for ex- ceedings and the actu:l

penses to the representatives of secu- and necessary erpenses

rity holders, including committees |. incurred. in connectioo

and indenture trustees, and to in- with the proceedings and

dividual creditors and stockholders | the arrangement by the

and their attorneys. (Secs. 241- 242.) | committee of creditors

and the attorneys and |

; agents of such commit

tee, in such amount as,

. ° - the court may allow”

ny "| (See. (2).)

20. Subsidiary corpo- | A petition by or against a subsidiary | No compérable prorision,

rations. corporation may be filed. in the | and no tion of sub-

same court which has approved the | sidiaries.

petition by or against the parent

° corporation. (Secs. 129, 106 (13).) | .

21. Future manage-'! Plan must contain provisions which | No comparable prorision

ment. - are equitable, compatible with the | .

' * interests of security holders, and

‘consistent with public policy, with

respect to the manner of selection of

the reorganized company's directors

“ and officers (Sec. 216 (11)); and iden-

tity, qualifications, and affiliations

of the persons to be directors and

» officers must be disclosed and meet

same test. (Sec. 221 (5).)

Plan must contain provisions requiring | No comparable provision

inclusion in the reorganized com-

pany’s charter of provisions. for the ®

prohibition of the issuance of non-

voting stock, for the equitable dis-

- tribution of voting power among the

new securities possessing such

power, for the election of directors

representing preferred stocleholders

% in the event of default in payment of

preferred diivdends, for the general :

fair and equitable treatment of se-

curities, and for periodic corporate :

reports to security holders Gus. j :

216 (12)).

22. Charter of reorgan-

ized company.

“U.S. GOVERNMENT PRINTING OFFICE: 1946

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