Petitioners Brief — Hamburger v. Dyer, Trustee, et al.

10

BRIEF IN SUPPORT OF PETITION FOR

WRIT OF CERTIORARI

OPINIONS OF THE COURTS BELOW

The District Court rendered no opinion. The opinion

of the Cireuit Court of Appeals for the Sixth Circuit is

printed in the first record at pages 212-217 and in the

second record at pages 44-49 but is not yet officially re-

ported.

JURISDICTION OF THIS COURT TO GRANT THE

WRITS

a. The judgments of the Cireuit Court of Appeals for

the Sixth Cireuit, review of which is hereby sought, were

entered on January 17, 1941.

b. The jurisdiction of this Court is invoked under

Section 240 (a) of the Judicial Code as amended by the

Act of February 13, 1925 (28 U. S. C. A. Section 347

(a) ).

e. Review is hereby sought of bankruptey cases in

the United States Cireuit Court of Appeals for the Sixth

Cireuit in which final judgments have been rendered.

STATEMENT OF THE CASE

The statement of the case is set forth in the Petition

at pp. 2-6, and is here incorporated by reference. The

following excerpt from the opinion of the Cireuit Court

(F. R. 212, S. R. 44) is helpful:

The Cireuit Court held that while it was error to submit

1]

‘*Appeal No. 8718 involves two orders of the

District Court, one entered February 7, 1940, and

the other February 19, 1940. In the first order the

court found that $1,157,000 in principal amount of

the debts listed was represented by unsubordinated

bonds; that the appraised value of the hotel did

not exceed $550,000; that all creditors havi ing claims

inferior to the unsubordinated bonds would not be

materially and adversely affected by any arrange-

ment because their claims were without value, and

ordered that such creditors should not participate in

or vote upon any proposed arrangement. The court

also decided that the debtors had no equity in the

property, and hence had no right to participate in

any proposed arrangement.

‘In the order of February 19, 1940, the court

ordered that an arrangement prepared by the bond-

holders’ committee, and another proposal submitted

by the representative of the second mortgagee,

should be submitted to the creditors along with the

arrangement proposed by the debtors. In this order

the court classified the individual and unrelated

debts of each appellant under the same classifica-

tion.’’

‘Appeal No. 8822 is from an order entered July

22, 1940, confirming an arrangement as modified,

proposed by the bondholders’ committee. The ar-

rangement gave the benefit of the entire property to

the unsubordinated bondholders. The District Court

then discharged the debtors from all of their debts

and liabilities except as specifically provided in the

arrangement or in the order excluding such debts

as are not dischargeable under the provisions of

Section 17 of the Bankruptey Act as amended.”’

to creditors offers other than debtors and to classify

together unrelated debts of the two debtors such error

12

was harmless because the value of the hotel being ex-

eceded by the amount of the lien thereon, neither debtors

nor unsecured creditors could participate in any way. The

court thereupon affirmed the orders in No. 8718.

The Cireuit Court further held that the consent of the

debtors was not required for a confirmation of an offer

proposed by the creditors and therefore affirmed the

order in No. 8822, except that it limited the debtors to

the discharge only of those debts provided for by that

arrangement (i.e., the bonds) and left the claims of other

creditors undisposed of and undischarged.

POINTS RELIED ON FOR REVERSAL

1. A proceeding under Chapter XIT of the Chandler

Act is in the nature of a composition, and where a secured

debt is greater than the value of its security, the court

cannot, ipso facto, hold that debtor has no claim or equity

of value and can not participate in any arrangement

which may be proposed.

2. In sueh a proceeding, where. a secured debt is great-

er than the value of its security, the court cannot, ipso

facto, hold that other creditors have no interest of value

and no right to participate in or vote upon any arrange-

ment which also makes provisions for their separate bene-

fit that do not affect the seeured debt.

3. Ina proceeding under Chapter XII of the Chandler

Act unsecured creditors are entitled to participate in an

arrangement and to settle their claims with the debtor.

13

4. In a proceeding under Chapter XII of the Chandler

Act a secured creditors’ arrangements which makes no

provision for unsecured ereditors cannot be confirmed.

5. Ina proceeding under Chapter XII of the Chandler

Act no arrangement can be confirmed without the consent

or acceptance of the debtor.

6. In a proceeding under Chapter XII, a bondholders’

committee cannot propose an arrangement before a finding

that it is a proper ereditor and before leave obtained

from its controlling Commission.

ARGUMENT

I.

Under Chapter XII a Debtor Cannot Automatically Be Barred

from Participation in Every Possible Arrangement Solely

because a Secured Claim Exceeds the Value of its Security.

Petitioner Hamburger and Singer on July 5, 1939 filed

their respective petitions with the lower court for a real

property arrangement under Chapter XII of the Chandler

Act (F. R. 13, 37). The schedules of each disclosed as

assets their interest in the Belerest Hotel which they

owned jointly (F. R. 20, 51), and certain personal

property. Each debtor also set forth as liabilities the

claims of bondholders under the first trust mortgage

on the Belerest and the liability to Lulu BE. Powers, as

trustee (F. R. 17, 47). In addition thereto Hamburger

scheduled certain unsecured creditors (F. R. 18) and

Singer scheduled certain unsecured creditors (F. R. 48,

49), but these were in no way related to each other. Their

proposed arrangement was attached to their petitions

(F. R. 26-30, 56).

14

The district court on July 7, 1939 entered orders duly

approving and accepting the petitions praying that the

debtors ‘‘be afforded an opportunity to effect a real

property arrangement under Chapter XII of the Chandler

Act’’ as properly filed under said chapter (F. R. 57, 59).

Subsequently, however, the district court on the petition

of the trustee entered an order on February 7, 1940

finding that the value of the Belerest property was

exceeded by the amount due on the first mortgage,

therefore barred both the debtors and the ereditors other

than first mortgage bondholders from participating in

any arrangement which may be proposed in the pro-

ceeding (IF. R. 67-71). It is the contention of petitioner

that the district court had no authority thus to bar him

and other creditors from participating by virtue solely of

this finding.

An Arrangement Under Chapter XII is a Composition

Chapters XI and XII of the Chandler Act are out-

growths of and successors to the old bankruptey composi-

tions and extensions of Sections 12 and 13 and 73 and 74.

(Collier-Bender Pamphlet Edition, 1988 Bankruptcy Act,

page 6; Moore’s Bankruptcy Manual, pages 631, 704).

The preamble of the Act so states. (See 7 Remington on

Bankruptcy (5th ed.) 156). These new chapters must

therefore be construed and considered in the light of

their history and the principles of compositions are direct-

lv applicable (Remington (op. cit.) page 156).

Arrangements of the type here involved have long been

in use in England and can be found in the Bankrupt Law

Consolidation Act of 1849 (12 and 13 Vict. ¢. 105). Sim-

ilar provisions now exist under the Deeds of Arrange-

ment Act of 1914. There also existed in Sngland certain

15

provisions in the bankruptcy act itself dealing expressly

with compositions and schemes of arrangement. Origin-

ally in the act of 1883 they now appear in the Bankruptey

Act of 1914. These arrangements have been construed

by the English courts to mean agreements and composi-

tions between a debtor and his creditors. (See Tetley v.

Taylor (1853) 1 El. and BI. 921, 540, 542, 118 Eng. Rep.

530). Similar provisions dealing with compositions and

arrangements are to be found in the Canadian Bank-

ruptey Act of 1919, section 13, and Canadian Bankruptey

Act of 1919 as Amended (R. S. C., 1927, Ch. 11), section

11, et seq. These have also been construed as meaning

a contract between the parties. (Duncan, Law and Prac-

tice of Bankruptcy in Canada (1922), page 214).

This court has also held that a ‘‘composition’’ par-

takes of a nature of a contract. (Meyers v. International

Trust Company (1926) 273 U.S. 380, 383, 47 S. Ct. 372,

71 L. Ed. 692.)

In Canada Southern Ry. Co. v. Gebhard, 109 U.S. 527,

this court held arrangements tantamount to composition

agreements.

‘The confirmation and legalization of ‘a scheme

of arrangement’ under such circumstances is no

more than is done in bankruptey when a ‘composi-

tion’ agreement with the bankrupt debtor, if as-

sented to by the required majority of creditors,

is made binding on the non-assenting minority’?

(636).

Finally the Chandler Act itself assimilates an arrange-

ment to a composition. Section 14(5) of the Act provides

for denial of a discharge if within six years past bank-

rupt has been ‘‘granted a discharge, or had a composi-

tion or an arrangement by way of composition . . . con-

firmed under this Act’’.

16

Both the district court and the Circuit Court felt that

the absolute priority rule of corporate reorganization

‘ases must control. But in view of their history and the

assimilation of arrangements to compositions, the district

court’s order of February 7, 1940 barring debtor and

unsecured creditors from further participation solely be-

‘ause a secured claim exceeded the value of its security,

must be held erroneous. The principle which must govern

in Chapter XII proceedings as well as in compositions is:

Does debtor’s arrangement offer creditors as much as or

more than his estate will pay in a bankruptey distribution.

1 Collier on Bankruptcy (13th ed.) page 450;

In re Kinnane (D. C. Ohio, 1914) 217 Fed. 488;

In re Waynesboro Drug Co. (D. C. Ga., 1907)

157 Fed. 101.

Under the Canadian Bankruptey Act above referred

to the rule as to compositions and schemes of arrange-

ments is the same:

‘‘In order to be reasonable the scheme must give

the creditors a greater advantage than they would

have in proceedings in bankruptey ...”’

Duncan, op. cit., page 220.

Likewise under the English statutes. In Re Ashmead-

Bartlett, 18 T.L. R. 68, affd. (1901) 1 K. B. 457, C. A.

the court’s approval of a scheme is reported thus:

‘That subsection (of the bankruptey act) had

been held to mean that the scheme must provide

something more than the ereditors would receive

in bankruptey.”’

We have been unable to find any reported cases under

Chapter XII dealing with the present problem. However,

under the analogous Section 74 of the Act prior to its

17

amendment, it was held that an offer of a debtor to pay

his creditors more than the fair market value of his estate

was made in good faith. (In re Reaney (D.C. Pa, 1938)

37 A. B. R. (N. S.) 252). In Re Goldstein (D. C. La.,

1938) 22 F. Supp. 270, a proposal under Section 74 was

approved by the court with the following statement (271):

“Tt is true that he might have offered to share a

larger proportion of his salary with his creditors,

but the court is not aware of any law by which this

can be compelled; the other alternative being adju-

dication.”’

Although the Cireuit Court of Appeals relied upon

the corporate reorganization cases, this Court has, in

?

Case v. Los Angeles Lumber Company, 308 U. 8. 109,

carefully distinguished them. It there said:

“The statutory scheme of See. 77B (in those

respects which are material here) is in sharp

contrast to that which was provided for composi-

tions under former See, 12 . . . But See. 77B

contemplates a procedure and results not permiss-

ible under See. 19, Reorganizations are nowhere

referred to in the statute as compositions’... The

general view was well expressed In Re Dutch Wood-

craft Shops, 14 F. Supp. 467, 469, ‘the preservation

of business enterprises must not be at the expense

of creditors, and the provision of See. 77B should

not be taken advantage of to effect what, in fact,

amounts to a composition under section 12’.’’ (208

U.S. 109, 119, footnote 14).

The foregoing clearly shows that while an insolvent

debtor might be eliminated under 77B, ipso facto, such

result is not permissible in a composition proceeding,

and conversely, an insolvent may participate in a com-

position, but not under 77B.

18

District Court Could Not Bar Debtors.

The authorities above cited conclusively establish that

the court had no power under the statute arbitrarily to

bar debtors from participating in any arrangement which

might be proposed. That the property securing the first

mortgage indebtedness is of less value than the outstand-

ing bonds thereon (and this is the sole basis of the lower

court’s decision) affords no justification for the elimina-

tion of debtor from participation in any arrangement

which may be proposed in the proceeding. Despite the

fact that he is to participate, his offer may nevertheless

give creditors more than any reasonably expected dividend

on liquidation of his estate, and will therefore be ‘‘fair

and equitable’’. This must be determined subsequently

by the court on confirmation in deciding whether or not

it was ‘‘for the best interests of creditors’? under Section

472 (2). In view of the fact that these proceedings

may be instituted only on the debtor’s petition (Sections

422, 423) and that such petition must contain an arrange-

ment proposed by him (Section 423) and in view of the

further faet that the court on July 7, 1939 approved the

petition as properly filed (F. R. 57), thereby approving

the proposed arrangement as proper for submission and

consideration, the order arbitrarily barring debtor is a

misconstruction of the statute. Even if it could be said

that debtor’s proposal was not one that could be legally

confirmed, even if accepted, the district court would still

not be justified in barring him absolutely because he could

still propose, with funds obtained from outside sources,

an amendment such as would make the offer fair and

equitable. But of course, by the positive terms of the

order of February 7, 1940, debtors were prohibited from

submitting their amended offer.

SANE ESTING PORE DS AE TE CRN MON RES

19

The decision of the Cireuit Court in applying the rigid

rule of priorities of the corporate reorganization cases

must result in a perversion of the language and purpose

of Chapter XII. It ignores entirely the statutory pro-

vision set forth in Section 423 that a person who is in-

solvent may on that ground avail himself of the Act.

To say that such person may voluntarily (and all pro-

ceedings must be voluntary) file a petition and pray for

relief at the hands of the court, and automatically be

precluded from participating in any arrangement because

of that same insolveney is inconceivable. Certainly no

insolvent person will file such petition if he knows that

his property will immediately and summarily be taken

from him, particularly where, as in the instant case, he

thereby surrenders his rights and period of redemption

from a mortgage foreclosure yet to be completed,

In addition to the bondholders, debtors had other ered-

itors (F. R. 18, 48-49). Provisions were made in their

proposals for the compromise and settlement of these

claims, but under the order of the district court of

February 7, 1940, preventing the debtors and these ecred-

itors from participating in any arrangement proposed

in the proceeding, such settlement by them even with

these creditors was prohibited. Debtors were thereby pre-

cluded from settling with these classes of creditors even

though the proceeds for such offer came from a source

other than the property securing the claims of bondhold-

ers. This, we believe, was in direct violation of Section

461 defining an arrangement as an offer making provision

for the modification or alteration of the rights of creditors

of each and every class. Petitioner also objected in the

district court, and the Cireuit Court of Appeals in its

decision has agreed (S. R. 47), that he will be in the

peculiar position of having obtained a discharge as to

20

only one class of his creditors, i.e., those provided for

in the bondholders’ committee’s offer, and will not be

discharged from any of his other debts. Nor will he be

able for the next six years to file another petition in

bankruptey and obtain a discharge as to those other

creditors because of the provisions of Section 14a (5).

As to debtor Singer the decisions of the lower courts are

even more astounding. Since he did not assume the

mortgage on the Belcrest and it will be the only claim

discharged, he has undergone a_bankruptey proceeding

which discharges him from no liabilities whatsoever, and

at the same time precludes him from filing another peti-

tion for the next six years.

The district court order of February 7, 1940 barring

the debtors and unsecured creditors from participating

was in express violation of Section 435 which requires

the court to send out to creditors for their consideration

copies of debtors’ proposed arrangement. The natural

and reasonable effect upon debtors’ proposal, accompanied

by such a bar order, would be to render it ineffective and

stigmitize it as already rejected by the court. Acceptances

of their offer under such circumstances could hardly be

expected. Thus debtors’ absolute right to have the offer

unqualifiedly submitted to all classes of his creditors for

their consideration, particularly since it contained pro-

vision for settlement not only of the bondholders’ claims

but of all other claims, was effectively destroyed.

The questions hereinabove discussed insofar as we have

been able to determine have not been passed upon by

any other courts. They should be determined by this

court in order that individual debtors shall know the

purposes and consequences of proceedings under Chapter

XII of the Chandler Act and the meaning of the words

‘fair and equitable’’ as there used.

II.

Under Chapter XII Unsecured Creditors Cannot Automatic-

ally be Barred From Participation in Every Possible Ar-

rangement Solely Because a Secured Claim Exceeds the

Value of its Security.

The district court in its order of February 7, 1940

not only barred the debtors from participation in any

arrangement but similarly barred unsecured ereditors.*

The Cireuit Court affirmed this, again basing its decision

on the absolute priority rule of corporate reorganization.

As a corollary to the proposition advanced in the argu-

ment under Point I it follows that the court was without

authority to preclude such creditors from participating

in any arrangement which may be proposed. While it

might be true that the value of the Belcrest property

did not exceed the indebtedness due under the mortgage

thereon this should not have prevented the participation

by unsecured creditors.

The arrangement provided for in Chapter XII is in the

nature of a composition. A debtor comes voluntarily into

court and proposes a settlement of his debts with each

and every class of his creditors, generally with funds

borrowed from friends and relatives. In the present in-

stance debtors proposed settlements or modifications not

only of the claims of the bondholders, but also of the

claims of other creditors (F. R. 30) by offering a certain

percentage in cash. This consideration could effect the

hotel property and bondholders neither one way or the

other,

*Unsecured creditors as used in this discussion are unsecured

creditors and secured creditors whose claims are subordinate to the

Belcrest bonds.

22

Under the provisions of the statute mentioned above,

the debtors’ riglt to come into court and make his offer

to the various classes of creditors was unqualified, par-

ticularly when the offer to the unsecured creditors was

to come from a source other than the Belerest property.

To hold otherwise as the Circuit Court has, would, we

submit, defeat the purpose and intent of the entire chapter

and would as before stated and as the Cireuit Court held,

place the debtors in a position where only certain of his

debts are discharged and the others will remain outstand-

ing against him. Section 461 requires that an arrange-

ment (1) shall inelude provisions modifying or altering

all rights of creditors secured by real property of debtor,

(2) shall provide for the rights of all other ereditors

of debtor who may be affected by the arrangement. Cer-

tainly creditors who are not permitted to participate in

the arrangement although the debtor has offered them a

consideration are creditors affected by such arrangement.

More important, however, is the economically unsound

and unwise position in which the debtor is left with un-

dischargeable claims. The distriet court in such case

should either have dismissed the debtor’s petition or

adjudicated him a bankrupt, whereby he could obtain com-

plete relief.

As the case now stands, petitioner must face the next

six years, at least, with over $80,000 of undischarged debts

outstanding against him. He is as much ‘‘unrehabili-

tated’? now as he ever was. In fact, he is in worse posi-

tion than if he had filed no petition, because he could have

obtained complete relief in ordinary bankruptey. What

then is the use of Chapter XII? None, if the Cireuit

Court is right. The only construction which will give it

any salutary effect is, as petitioner contends, that if a

BAS LE BEY Se AYE PRI PERE

23

debtor is unable to reach an agreement with his creditors,

then his petition shall be dismissed or he shall be adjudi-

cated a bankrupt, in pursuance of section 481 of the Act.

III.

Under Chapter XII of the Chandler Act the Court Cannot

Confirm an Arrangement not consented or Agreed to by the

Debtor.

Cause No, 8822 in the Cireuit Court involved the appeal

from the order of confirmation of July 22, 1940. By that

order the district court confirmed an arrangement pro-

posed by the Belerest bondholders’ committee which made

provision only for their own claims and none whatsoever

for other creditors of either debtor. Needless to say, this

arrangement was not only not consented or agreed to by

debtors, but was vehemently objected to by them. The

Court of Appeals, again basing its decision on the fact

that the value of the Belerest property was exceeded by

the amount of the debt due thereon, affirmed this order

and once again held the rule of absolute priority in cor-

porate reorganization cases applicable. It held (S. R. 45):

“The statute neither expressly nor by implica-

tion provides for consent by the debtor to any

arrangement... ”’

But we submit that the requirement of such consent

is inherent in the theory and purpose of the chapter.

Examination of its provisions discloses:

‘A. The Act can be invoked only by the debtor,

not by his creditors (Section 421, 422).

B. No arrangement can be confirmed if debtor

has done anything which would be a bar to the

—discharge of a bankrupt (Section 472 (4) ).

24

C. If an arrangement is not accepted or con-

summated or confirmation is refused, the court must

either dismiss or proceed with bankruptey (See-

tion 481).

D. If debtor defaults in consummating the con-

firmed arrangement the same result follows (Section

482).

K. The debtor must make the deposit before the

arrangement ean be confirmed (Section 468 (2)).

F. The arrangement may make provision for

continuing the debtor in business (Section 461 (5) ).

G. If debtor has been guilty of fraud, confirma-

tion may be vacated and debtor adjudicated bank-

rupt (Section 511 (1) ).

Only on the theory that a debtor’s consent is required

do these provisions take on significance. With any other

construction, they are superfluous. Of course, the statute

must be so construed that it shall all have harmonious

meaning.

Moreover, being in the nature of an agreement between

the debtor and his creditors and partaking of the same

nature as compositions, debtor’s consent is undoubted.

Whether or not such consent is expressly required by the

statute is immaterial. There was no such express re-

quirement in the provisions of Section 12 of the old Act,

but the court nevertheless required it. In the footnote

to Case v. Los Angeles Lumber Company, supra, it is

said:

‘*Consent by the debtor to the composition was

implicit in former See. 12 (ef. In re Bryer, 281

PF. 812).”

The Cireuit Court in ascertaining the intention of the

framers of this chapter resorted to the House Report

25

of the 75th Congress (S. R. 46). Further examination

of these same records will disclose the precise intent of

the legislature with respect to the debtor’s consent. It is

there said (H. R. 1409, 75th Cong., 1st Session, 1937,

page 52):

‘*Proceedings under this chapter are voluntary

only. The debtor must file his plan or arrangement

together with his original petition. This clause

permits a large creditor or large group of creditors

to present proposals thereafter. While the debtor

is im no way bound by such proposals uniess he

consents to them, there appears to be no good rea-

son for denying creditors the privilege of sub-

mitting a plan of its own.’’ (Italies supplied.)

The Honorable Walter Chandler, member of the 75th

Congress and introducer in the House of the Act which

now bears his name, has stated the same conclusion in

an article in the American Bar Association Journal (Vol-

ume XXIV, No. 11, pp. 880, 884) :

‘“* * * Chapter XII, therefore represents the

adjustments of debts secured by real property as

well as unsecured debts of those who petition under

the Chapter’’.

“‘The right is limited to the debtor who may file

an original petition or a petition in a pending bank-

ruptey proceeding if adjudication has not taken

place. While the debtor is required to set forth

in the petition the terms of his proposal, his cred-

itors may submit a proposal, which, however, can-

not be confirmed unless it is accepted by the debt-

or’’. (Italies supplied.)

Moreover, since Section 423 makes the chapter avail-

able to debtors on the ground of insolvency, it is ineon-

ceivable that an insolvent will petition for relief if eredit-

26

ors can always force an offer upon him without his con- ut

sent, particularly since those same creditors cannot insti- bi

tute the proceedings themselves. As stated in 87 Uni- ~

versity of Pa. Law Review 837, 839: (3

“It would be illogical to have involuntary peti-

tions under these chapters (XI and XII), for the

debtor may decide to liquidate the business in a

straight bankruptey, whereas an arrangement con-

templates its continuation.”’

Accord that debtor must consent:

S

Collier-Bender Pamphlet Edition, 1938 Bank- 0.N

ruptcy Act, p. 300; of {

Moore’s Bankruptcy Manual, p. 722. wal

to 1

The point in question is novel and has not been de-

cided by any other of our courts, although there have N

been indications in support of our contention. peas

In Kunze v. Prudential Insurance Company (C.C.A. wht

\, 1939) 106 F. (2d) 917, the debtor’s offer was rejected Reg:

at the creditors’ meeting. The court held that it could not

then only dismiss or adjudicate debtor a bankrupt where a

of a

no further offer was made by debtor. To the same effect,

Preas v. Kirkpatrick and Burks (C.C.A., 6, Nov. 9, 1940), and

C.C.H. par. 52801. In re Goldstein, supra, was a proceed- his

ing under Section 74 of the Act prior to its amendment. =

Confirmation of the proposal was there objected to for stan

the reason that it was not for the best interests of 0.

creditors. The court held that it could not compel debtor most

to increase his offer; the only other alternative was woul

adjudication. Chay

prot

Under the Canadian Bankruptey Law above mentioned be g

it has been expressly held that while creditors were en- | Cou"

LOREEN OW RENTS MndeMaeneene OY

27

titled to propose amendments, such amendments were not

binding upon the debtor until accepted by him. In

Martin v. Riman (1930) 66 O.L.R. 394, the court said

(396) :

“There is a provision in subsee. 1 of sec. 13 for

the alteration or modification of the proposal by

the creditors at the meeting. This must necessarily

be with the approval of the debtor, but there is no

provision enabling the court to vary the proposal.

It must either approve or reject the same.’’ (Italies

supplied.)

So too, in Re Richardson (1921) 1 C.B.R. 317, 190

O.W.N. 494, an approval was withheld pending production

of further evidence because ‘‘The proposal of the debtors

was varied by the creditors, and the consent of the debtor

to the variation was not shown to have been given.”’

Most conclusive that debtor’s consent to & proposal by

creditors is necessary is the provision of Section 472(4),

which provides that the court shall confirm an arrange-

ment if satisfied that, among other things, the debtor has

not been guilty of any of the acts or failed to perform

any of the duties which would be a bar to the discharge

of a bankrupt. If the debtor’s consent were not required

and an arrangement could be imposed upon him against

his will, i.e, a reorganization of his assets as distin-

guished from an arrangement, we are unable to under-

stand the intent and purpose of the provision referred

to. If creditors could force through a plan they deemed

most beneficial to themselves the conduct of the debtor

would be immaterial. The conclusion is inescapable that

Chapter XII was inserted in the act for the benefit and

protection of the debtors and that relief thereunder should

be given to them only if they approve the offer and the

court is satisfied from their conduct that they are desery-

28

ing. This is strengthened by the fact that this clause,

which was formerly a part of Section 12d relating to

compositions, has been construed as a limitation on the

power of the court to confirm a conposition.

See: In Re Godwin (D. C. Penn., 1903) 122 Fed.

111;

In Re Comstock (D. C. R. 1., 1907) 154 Fed. 747.

Had Congress felt that the same rule should govern

both proceedings under Chapter X and Chapter XII it

would certainly have had no occasion for the extensive

and elaborate provisions providing for arrangements. It

would have been simple to have included under Chapter

X voluntary but not involuntary proceedings by individ-

uals. But Congress evidently felt that there was a vital

distinction between a reorganization of a corporation

and an arrangement of an individual’s debts. Such a

distinction is readily understandable, because a corpora-

tion is an artificial being whose existence is, for all prac-

tical purposes, co-extensive with its assets. If those

assets are taken away or reorganized, the new or re-

organized ean begin afresh. As to individuals no such

procedure is possible, because their own personal exist-

ence continues; their obligations still adhere to them.

IV.

A Bondholders’ Committee Cannot Propose an Arrangement

Prior to a Determination that it is a Creditor and Without

Leave of its Controlling Commission.

Petitioner objected to the proposal by the bondholders’

committee because there was not as yet a determination

that the committee was a creditor. He also objected on

29

the ground that the committee had not obtained leave

of the Public Trust Commission of the State of Michigan,

under whose laws it was organized, to propose and sponsor

such a plan,

The district court in its order of February 19, 1940

called the first meeting and provided that “claims of

ereditors shall be filed in the manner herein provided on

or before April 1, 1940’? and objections to such claims

shall be heard on April 15, 1940 (F. R. 85, 86). Obviously

no claims could or would be allowed at least prior to

April 1, 1940 and as a matter of fact no claims were

allowed until July 22, 1940 (S. R. 22). Until that time

there was no adjudication that the bondholders’ commit-

tee or anyone else was a ‘‘ereditor’’. Its attempted offer

of an arrangement on July 31, 1939 (F. R. 135) was

therefor premature inasmuch as Section 466 provides for

the proposals of arrangements approved by creditors.

The construction here contended for is the only one

that can consistently he applied to this chapter as a

whole. As we have repeatedly contended throughout this

proceeding and throughout the proceedings in the lower

court, the only person who could make an offer prior

to the first meeting was the debtor himself: At that

meeting the creditors appear, accept or reject the debtor’s

offer or make an offer of their own. This they can do

because at that meeting the court is empowered by See-

tion 436 ‘‘to receive proofs of claim and allow or dis-

allow them’’ and thereby determine whether or not they

are creditors. Although the Cirenit Court of Appeals

upheld our contention that the committee could not pro-

pose an arrangement prior to such first meeting, it held

somewhat inconsistently that the proposal made by it

prior to that time was nevertheless good.

SALE EP ta Ree Sn ST QT Cae

VRE ESB SIG

30

Additional support for our contention will be found in

the logical and chronological sequence of the various

provisions as set forth in the chapter. Article IV pro-

vides for the petition, which must be voluntary, and

stay. Article V provides for proceedings subsequent to

the filing of the petition such as appointment of trustee,

notice to creditors of debtor’s offer and first meeting,

and procedure at the meeting. Article VI provides in

detail for the rights and duties ete. of the debtor and

officers. Article VII deals with the ereditors and their

claims. Article VIII sets forth the provisions of an

arrangement. Article IX now for the first time mentions

the rights of creditors to propose amendments or modi-

fications. Its very position in the chapter and its rela-

tion to the other parts thereof can lead but to the one

conclusion that these rights of the creditors can be

exercised only at or after the first meeting, and at or

after the allowance of their claims.

The procedure taken by the district court was found

by the Cireuit Court of Appeals to be erroneous, but

not prejudicial. We submit that the procedure taken

effectively destroved the statutory rights of the debtors

to submit their offer to their creditors on an uneompeti-

tive basis, unaccompanied by a canceling order of the

court precluding their participation.

Furthermore objection was made to the confirmation

of the proposal by the bondholders’ committee because by

the laws of the State of Michigan (Act No. 89 P.A. 1933,

as amended) under which it was organized, it was first

required to obtain leave of the Public Trust Commission

created by that Act, to sponsor or propose the arrange-

tment. Pertinent sections of the statute are set forth in

Appendix B hereof.

plat

con

leay

3l

Section 2(d) defines a protective committee so as to

include the one presently involved. Section 3 requires

that any person actine as a member of such committee

shall first procure a license. Section 10 provides that

‘no protective Committee . . . shall take any action

either by suit or otherwise . . . against either the

property and/or business with respect to which said

security was issued and/or against the person or per-

sons who exeeuted the security unless and until authority

to take such action has been conferred upon the protec-

tive committee by the commission.”

Section 10 then further provides that if any committee

desires to take such action it shall file application with

the commission upon which the commission shall enter

an order fixing the time and place for hearing. Section

19 provides that any person who violates the provisions

of Section 10 shall be punished by a fine of not less

than $500.00 or by imprisonment or both.

The record shows that no application was filed by the

committee with the Public Trust Commission for leave

to propose or sponsor the arrangement. Subsequently,

at or about the time of the confirmation, the committee

did obtain a letter from the Commission disclaiming juris-

diction and at the same time approving the procedure

already taken. Aside from the obvious inconsistency of

such action of the Commission, the belated approval was

without legal effect. If there was no authority in the first

instance to proceed it could not be cured, post facto. -

By virtue of the statute above quoted the state has

placed protective committees under its supervision and

control and has required them to be licensed, and obtain

leave to act. Like corporations they are made creatures

32

of the sovereign power and their authorities and duties

depend upon the laws and statutes of that sovereign.

The property being located in the State of Michigan and

the committee having been organized and licensed under

the laws of that state, those laws must control its powers

and existence. (See Chicago Title & Trust Company v.

4136 Wilcox Building Corporation, 302 U.S. 120, 127; 6

Fletcher Encyclopedia of Corporations (Perm. Ed.) See-

tion 2477, pages 176, 180).

The principle laid down in the Chicago Title & Trust

Company case, supra, is directly applicable to the instant

case. There a corporation which had been dissolved under

the laws of the State of Illinois attempted to file a

voluntary petition for reorganization under 77B. This

Court held that it was without authority to do so saying:

‘“‘The conclusion seems inevitable that if the state

attach qualifications to its sentence of extinction

nothing can be added to or taken from these quali-

fications by federal authorities’? (128).

So in the instant case the state which has created the

protective committee has in specific terms decreed that

before any action can be taken, leave must be obtained

from the Public Trust Commission upon application duly

filed and heard. Without such permission, the committee

has no more power to proceed than had the defunct cor-

poration which attempted to reorganize itself. There was

no power to invoke the jurisdiction of the federal court

in either instance. We submit that the arrangement pro-

posed by the bondholders’ committee was a nullity be-

cause it was premature and without leave of the Public

Trust Commission of the State of Michigan.

\e

eS ee. Se".

vi

CONCLUSION

Considerable comment has been made that to hold that

a debtor’s consent is required before an arrangement is

confirmed, leaves him in control of the proceedings which

he can then use for dilatory purposes. But our theory

of the chapter permits no such results. If debtor’s offer

is promptly sent out to, creditors and a first meeting

‘alled as the statute says, it will either be accepted or

rejected in less than two months. If accepted it will

forthwith be confirmed; if rejected, the petition is dis-

missed or debtor is adjudicated a bankrupt and relieved

of all his debts as required by section 481. Delay in

the instant case was occasioned by the fact the com-

mittee and another intervened and sent out their offers

to creditors with debtors’, which the Cireuit Court held

was error.

Reeapitulating the contentions of petitioner, we sub-

mit: (1) that an arrangement is a composition, and a

debtor, even if insolvent, may still propose a ‘‘fair and

equitable’ offer if it confirms to creditors as much as

they would get upon liquidation; (2) that in any event,

debtor should be allowed to settle his claims with un-

secured creditors; (3) that no offer made by and for

only one class can be confirmed without debtor’s consent,

leaving him with other claims undischarged; and (4) the

committee’s arrangement was void because premature and

made without leave of the Public Trust Commission.