# Brief for the Petitioner — Securities & Exchange Commission v. United States Realty & Improvement Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386401_0289%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for the Petitioner - **Published:** January 1, 1940 - **Citation:** 310 U.S. 434 ## Text . 7 co Sy YOM Srercive oni ug \ i “APR to ed ; ... + 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 = e 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 - 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 Fs 14 _ 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. - 15 | 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 i . 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. | 17 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 18 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 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. © This basic assumption underlies ail of the federal secu- 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. 3 19 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 20 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; ae 21 _§. 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. 3 bi ] | 23 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. Pr 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. . Vv 25 ‘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" 26 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- i —— 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). 30 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’ o 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. . ee se 31 e 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) 7 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.” 33 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 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 G ‘ 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 41 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- © 5. Rept. No. 1916, wth Cong.. 3d Sess., p. 33. : ” 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). 43 - 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 ©The majority opinion below attempts to distin- ' 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. 9 “ 44 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. “> & 45 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.). 46 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. 47 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 48 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 : r Ot ’ 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. ¢ 2 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- te ‘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 02 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. a8 = _——— . 9. Assistance of APPENDIX setae cine of provisions of Chapter X and sical Xi) —_—--— 1. Initiation of pro- “eseding. 2. Appointment of trustee. e 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. j 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. : .c a 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) 4 No comparable provwion . Acceptances re- . Dissenting classes ‘ Participation quired for con- firmation. of creditors or stockholders. j | . Classes of security | ‘ holders plan may affect. | in proceeding by - security holders. ; Control ever repre- | sentatives of ! curity holders. | ! { 7, Indenture trustees. | r which | formative materials have been trans- - mitted (Sec. 17g). © 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- io 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 ae o --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386401_0289%3A3. Public record. Not legal advice.