Opinion
No. 49864.
November 8, 1939.
Squire, Sanders Dempsey and William H. Hill, all of Cleveland, Ohio, for debtor.
O'Neill Laughlin, H.R. Teschner, and Hugh Wells, all of Cleveland, Ohio, for objectors.
Paul Clarke, of Cleveland, Ohio, for King Fauver, receiver.
Proceeding in the matter of the Romec Pump Company, debtor. On petition for review of referee's order confirming the plan of arrangement.
Referee's order confirming plan of arrangement under the Bankruptcy Act modified and, as modified, affirmed.
Certificate of the Referee
To the Honorable Judges of the District Court of the United States for the Northern District of Ohio, Eastern Division, Sitting in Bankruptcy:
I, Wm. B. Woods, in charge of the above proceedings, do hereby certify:
That in the course of such proceedings on September 15, 1939, an order was made and entered confirming the plan of arrangement proposed by debtor under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., and that on September 23, 1939, a petition for the review of said order was filed on behalf of B.K. Elliott Company, the Brost Pattern and Casting Company, Elyria Hardware Company, Fort Pitt Lithographing Company, Glove Tool Company, Hull, Brock West, O'Neil Laughlin, and the Severance Tool Manufacturing Company, creditors of Romec Pump Company affected by said plan of arrangement.
That the referee's statement of questions raised by objecting creditors to the confirmation of debtor's plan of arrangement and the findings of the referee, pursuant to Section 39 of the Bankruptcy Act, 11 U.S.C.A. § 67, are filed herewith in a separate document. In connection therewith the referee submits the following memorandum on the questions presented.
The proceedings for an arrangement are provided for in Chapter XI of the Bankruptcy Act as amended by the Chandler Act which went into effect in September, 1938. This chapter deals with compositions and extensions of unsecured debts under a new and comprehensive title, "Arrangements". It has taken over the worthwhile features of the old section as to compositions and with parts of Section 77B, 11 U.S.C.A. § 207, fashioned a new form of debtor relief in respect to unsecured debts.
The Chandler Act dropped old sections 12 and 74, 11 U.S.C.A. §§ 30, 202, and substituted for them Chapter XI, the provisions of which are more comprehensive, effective and workable. Under this chapter a settlement may be made upon any terms and for any consideration, provided only that it is fair, equitable and feasible and in the interest of creditors. Corporations may come under this chapter, and thus the abuse which resulted from forcing corporate debtors under 77B, because of their exclusion from section 74, has been eliminated.
In section 366 of Chapter XI, 11 U.S.C.A. § 766, provision is made for the confirmation of a proposal accepted by less than all creditors. The court shall confirm an arrangement if satisfied that (1) the provisions of this chapter have been complied with; (2) it is for the best interest of the creditors; (3) it is fair and equitable, and feasible; (4) 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; and (5) the proposal and its acceptance are in good faith and have not been made or procured by any means, promise or acts forbidden by the Act.
This procedure is new, patterned after section 221 of Chapter X, 11 U.S.C.A. § 621, in the reorganization of corporations, which in turn has been derived from Section 77B and is merely a clarifying and conforming requirement.
Section 366 providing that the court shall confirm an arrangement if it is satisfied that the provisions of Chapter XI have been complied with and the other enumerated conditions met, the burden is upon the objectors to show that the plan is not in conformity with the statute or that the situation does not comply with the statute. In the new chapter on arrangements in the revised edition of Remington on Bankruptcy, Section 3089, on Burden of Proof on Opposition to Confirmation, this authority states "the burden of proof is on the creditor opposing confirmation of a composition."
This Chapter XI of the Bankruptcy Act as to arrangements, being a new thing in the Bankruptcy law and a combination of old section 12 as to compositions, and the old provisions of 77B as to reorganization, it becomes necessary to examine the rules which have heretofore been applied by the courts in such cases. So far as the reported cases have appeared at this time, there are no reported decisions of the courts which have considered the questions here presented as to Chapter XI providing for arrangements.
An early case in this circuit on the composition statute are the two In re Kinnane Company cases reported in D.C., 221 F. 762; 34 A.B.R. 119, and 6 Cir., 242 F. 769, 39 A.B.R. 593, from the Southern District of Ohio. In the first case the lower court decision was rendered by Judge Sater, who said at page 766 of 221 F., at page 124 of 34 A.B.R.: "A composition must appear to be for the best interest of all creditors, and not merely for the best interest of certain ones or of a certain class. Black, Bankr. § 654, p. 1351. The provisions of the statute relating to compositions are in derogation of the common law in that they compel dissenting creditors to accept the percentage agreed upon by the majority in number and amount and deprive the minority creditors of their remedies on the balance of their respective claims. * * *"
When the same case came into the Court of Appeals, Circuit Judge Knappen said, 242 F. page 775, 39 A.B.R. page 601: "The bankrupt has an absolute right to make an offer. The question whether it shall be accepted is largely one of policy (perhaps partly of sentiment), as to which different creditors may well entertain different views, depending in part at least upon their relations to the alleged bankrupt and its business, past or prospective, as well as their individual and immediate needs. Necessarily, there is, in the usual case, more or less uncertainty as to the ultimate financial benefit connected with the acceptance or rejection of any composition offer. Primarily the statute is intended to give to a majority of creditors in number and amount power to decide whether the composition shall be accepted. The provision requiring approval by the court seems designed for the protection, first, of the dissenting minority as against the favoring majority, and, second, of the controlling majority as against an imposition leading to their approval; but essentially and ultimately the acceptance is, so far as concerns creditors, one of policy. * * *"
While in the Kinnane cases the composition was not approved for other reasons apparent on examining the text of the opinion, the view of the courts on the questions of feasibility and the right of creditors to control is important in connection with the proceeding.
The rule in considering whether a confirmation was properly before the court, In re Graham Sons, 252 F. 93, 42 A.B.R. 52, in the Seventh Circuit, Judge Alschuler said, at page 99 of 252 F., at page 61 of 42 A.B.R., as to the place and duty of the judge in such proceeding: "The facts and circumstances which bear upon the advisability of confirming the offer are no part of the offer itself, but are properly presentable at the hearing of the offer and of the objections thereto, for which the law makes provision; and it is for the judge then to determine under all the facts and circumstances then appearing, including the nature of the offer itself, whether he is satisfied that the composition `is for the best interests of the creditors.' * *"
Passing now to the consideration of the question in the reorganization cases under Section 77B of the Bankruptcy Act before the enactment of Chapter XI for Arrangements, there are many cases which have considered the question as to the policy and course which the courts should follow. In Downtown Investment Ass'n. v. Boston Metropolitan Bldgs., Inc., 81 F.2d 314, 30 A.B.R., N.S., 483, is a proceeding where the Court of Appeals in the First Circuit considered many details of a plan of reorganization. The plan had been confirmed in the District Court and the Court of Appeals modified the decree in particulars and Judge Morris says, at page 323 of 81 F.2d at page 502 of 30 A.B.R., N.S.:
"Reorganization plans under 77B may differ from offers in composition in form and complexity, but the difference is little more than one of degree. A plan of reorganization when accepted is nothing more than an agreement between the debtor and its creditors and stockholders, or if the debtor has been declared insolvent, then between the several classes of creditors. When such contract or agreement has been accepted by the requisite majority of creditors and stockholders, the principle long recognized in composition cases steps in and under the supervision of the court imposes upon objecting minorities the will of the majority. This could not be accomplished under the acid tests applied to equity receiverships before the passage of 77B.
"We therefore hold that section 77B does not require that every plan approved as fair and equitable shall be of such a character that it would withstand attack by nonassenting creditors asserting their strict legal rights unaffected by any principles of the Bankruptcy Act."
An interesting case where the Court of Appeals of the Eighth Circuit discussed acceptance of a plan and refused to confirm the reorganization order of the District Court, for the reason that proper notice had not been given to all classes of creditors, is found in Price v. Spokane Silver Lead Co., 97 F.2d 237, 37 A.B.R., N.S., 1.
The last case reported is In re Gibson Hotels, Inc., 24 F. Supp. 859, 860, 37 A.B.R., N.S., 708, where the District Court of West Virginia approved a reorganization plan with modifications and Judge Watkins said, at page 866 of 24 F. Supp., at page 724 of 37 A.B.R., N.S.: "In passing upon feasibility of a reorganization plan a court should not lightly set aside express preference of a large percentage of all claims or interested security holders, especially if well considered and apparently intelligently reached. In re A.C. Hotel Co., 7 Cir., 93 F.2d 841."
Thus the fact that creditors sufficient in amount and number, as authorized by the law, have accepted the plan of arrangement which the court finds to be feasible, fair and equitable, furnishes a sufficient ground for the court to confirm the plan, notwithstanding the objections of a minority.
Finally the referee reports some twenty labor employees of the debtor whose claims are being paid in full, have petitioned the court for the confirmation of the plan. The place of business of the debtor is at Elyria, Lorain County, Ohio, and these laborers presented a petition which was read into the record at page 3 asking that the court confirm the plan of arrangement and protested a sale of the business in bankruptcy, which might mean its removal from Elyria to Cleveland, Cuyahoga County.
The referee has entered an order confirming the debtor's plan of arrangement, to which certain creditors have objected and have filed a petition for review. Some 15 charges of error in the findings and rulings of the referee are asserted. Together with his certificate on review, the referee has filed a statement dealing with the objections and setting forth his findings and conclusions with respect to each of the objections.
Careful consideration of the objections leads me to conclude that those directed to irregularity in the proceedings and a non-compliance with certain of the provisions of the Act are not of such substantial character as to justify reversal on review. The whole matter, as I see it, depends upon the merit of those objections to confirmation which go to the question of whether the arrangement is fair, equitable and feasible, and is for the best interests of the creditors.
That something more than the required majority of the creditors, holding a very substantial amount of the total claims, have accepted the plan of arrangement certainly gives strong evidential weight to favorable consideration, although it must be recognized that it is not the controlling consideration. However, I think that in the absence of a substantial showing in opposition to the arrangement, the Court would be justified in confirming upon the prima facie case made by the debtor's proposal and its acceptance by the requisite number and amount of claims. To give creditors a choice between liquidation and life in respect of their debtor is the underlying purpose of the Act. To resuscitate, if there is reasonable prospect, by the adoption of a workable plan, is the objective.
One of the principal bases of the objections to the proposed extension is the Bishop-Babcock offer to acquire the debtor's assets and to make provision for immediate payment of approximately 25% cash to creditors of the class of those objecting, further payment on such claims to be made out of one-half of the profits earned by the "Rotary Pump Department" of Bishop-Babcock Company. While the offer is not an alternative plan and is not of itself a ground for rejection of the arrangement, yet it does present a comparative measure by which to test the fairness of the plan from the standpoint of probable realization for creditors. Ordinarily, a smaller sum presently payable or obtainable has greater value than a larger sum payable in six years, and carries less of the risks of deferment; but there are inherent weaknesses in the Bishop-Babcock offer as a potential alternative It contemplates liquidation of the debtor's estate and of its independent corporate character. If it or something like it could be worked out, the bankruptcy creditors would transmute their claims to future recovery into conditional obligations of a department of the company in which they would have no voice and no definite commitment to future payment. Present payment of 25% cash is a favorable element, but the provision for future payments conditioned and contingent upon earnings and profits of the pump department, coupled with the surrender of enforcible claims, leaves the offer as a doubtful prospect for greater realization in the end.
Much has been urged pro and con in respect of the burden of proof in such cases. I do not stop to analyze or discourse on the relative theories advanced, in the face of a statute which expressly puts the burden upon the bankruptcy court to determine from the facts before it, both in favor of and in opposition to the plan, whether there is presented a workable and fair arrangement under which the creditors have a reasonable prospect of getting more on their claims than they probably would if the debtor should be liquidated. The ultimate question for the Court, then, is whether there is reasonable prospect of profitable operation and of fulfilling the provisions of the plan respecting payment to creditors. Certainly this is a difficult matter, since no one can foresee consequences with any degree of certainty. But the law definitely commits the determination of this question to the bankruptcy court, regardless of where the burden of proof may lie.
While it is true that the referee does hold that those who object to confirmation of a plan as against the best interests of the creditors have the burden of proving by a preponderance of the evidence the allegations upon which their objections are based, yet I do not find that his findings and conclusions are wholly based upon the failure of the objectors to carry that burden. In his statement of questions presented and findings of fact and conclusions of law, the several objections are analyzed and his reasons stated as to why they are not well taken. This is particularly true in respect of those objections which seem to me to present the greatest merit.
Thirty out of fifty-one creditors of the class affected, holding $92,356.83 of an aggregate amount of $101,903.50 of claims allowed, have accepted and thus have signified their belief that the arrangement offers a better chance for realization of their claims than does liquidation. The referee, after extensive hearings, has ordered confirmation and has certified his findings and conclusions in respect of each of the objections urged against his order. What has transpired and been done up to this point should not be set aside except upon a clear showing of erroneous or illegal action. From a full consideration of the objections, I am unable to say that such showing has been made.
However, there is one matter which should receive further consideration or clarification. If the provision respecting the designation of directors only is to survive until the debtor is released from the jurisdiction of the Court, there really is no purpose in providing for creditor-representation. The referee construes this provision as relating only to the first board of directors. It seems to me that the debenture holders should have representation as long as they hold or retain their debentures, and until they are called for payment. Something more definite and constant in the way of debenture representation is found essential as a protection to creditors. This will permit them to know and see at close range the operation and management of the revived debtor, free from the embarrassment of inquiry, and to learn authentically from time to time how the business fares and what are the prospects of fulfillment.
Such continuing representation, beyond the period of jurisdiction of the Court over the debtor, effectively will give to the present debenture holders the opportunity of insisting promptly upon fulfillment according to the provisions of the arrangement, or of acting with equal dispatch to compel liquidation before their interests are seriously impaired. Six years is a long extension, and creditors whose payment may be postponed for such period ought to have assurance of longer representation than the first year.
Except as thus modified, the order of the referee will be confirmed and the petition to review dismissed, with exceptions to the parties adversely affected.