Opinion
No. 18519.
February 4, 1937.
Reorganization proceedings under section 77B of the Bankruptcy Act, as amended, 11 U.S.C.A. § 207, in the matter of the Baldwin Locomotive Works, debtor. On exceptions to the master's report.
Exceptions dismissed, report confirmed, and plan of reorganization approved.
The report of the Special Master follows:
On Acceptances to Plan of Reorganization.1. Your honorable court, on March 3, 1936, entered an order authorizing the debtor (upon certain terms as to expenses incurred), to procure the assents of the persons affected by the debtor's proposed plan of reorganization, and directing that said assents be filed with the special master, with instructions to the special master to find and determine whether the required assents had been given as required by the provisions of section 77B, as amended, 11 U.S.C.A. § 207.
Pursuant thereto, the debtor duly filed with the special master the assents obtained, and thereupon the special master, after notice duly given to all parties or their counsel affected by the plan, and heretofore classified by the special master as entitled to vote on the plan of reorganization (a copy of which said notice is hereto attached marked Exhibit A), began his inquiry into the sufficiency of said assents, holding for that purpose his first meeting, at his offices, rooms 456-457, Burd Building, southwest corner Ninth and Chestnut streets, at 11 o'clock in the forenoon, on October 16, 1936. Subsequently, by adjournments, four additional hearings were held, on October 28, 30, 31, and November 6, 1936. In attendance before the special master were the following attorneys and other parties:
Morgan, Lewis Bockius, by William Clarke Mason, and A. Allen Woodruff, all of Philadelphia, Pa., for the debtor.
Drinker, Biddle Reath, by Carl W. Funk, all of Philadelphia, Pa., for the consolidated mortgage bondholders committee.
Pepper, Bodine, Stokes Schoch, by Thomas Stokes, all of Philadelphia, Pa., for the Fidelity-Philadelphia Trust Company, trustee under the consolidated mortgage.
Schnader Lewis, by Francis A. Lewis, all of Philadelphia, Pa., for the common stockholders' protective committee.
Hays, St. John, Abramson Schulman, by Arthur Garfield Hays, and Allen S. Hays, all of New York City, for the consolidated mortgage bondholders' independent protective committee.
Loria Martinson, of New York City, with them Nathaniel S. Shaham, of Philadelphia, Pa., for William A. Brady and Brady Enterprises, Inc., of New York City, dissenting common stockholders.
Stebbins, McKinley Price, of Chicago, Ill., by Richard K. Stevens, of Philadelphia, Pa., for preferred stockholders.
J. Wesley McWilliams, of Philadelphia, Pa., for George H. Stephenson, bondholder, preferred stockholder, and common stockholder.
George H. Stephenson, in pro. per.
Charles D. MacGillivray, debtor's secretary.
James F. Atterbury, of J. P. Morgan Co., debtor's New York depositary of assents.
Samuel J. Mills, of Drexel Co., debtor's Philadelphia depositary of assents.
The 800 pages of testimony, exhibits, and tabulations taken at the foregoing five hearings, are separately returned herewith to the court.
2. Preliminarily, the special master reports that four classes of parties were affected by the plan of reorganization, and entitled to vote thereon. These were: (1) First mortgage bondholders, holding $2,676,000 bonds; (2) consolidated mortgage bondholders, holding $10,435,600 bonds; (3) preferred stockholders holding 200,000 shares; and (4) common stockholders holding 1,105,860 shares.
3. The procedure adopted by the debtor for procuring assents to the plan, was as follows: The debtor sent to all the holders of the foregoing four classes of securities whose addresses were known (a) a printed copy of the plan of reorganization; (b) a printed Summary of the provisions of the plan; (c) a printed form of letter of acceptance of the plan, to be used in signifying assent to the plan; and (d) a printed letter of transmittal, directing that the letter of acceptance, when signed, be forwarded, at the debtor's charge, to either of the debtor's depositaries, Drexel Co., Philadelphia, or J. P. Morgan Co., New York City; that the acceptance should have attached to it the security holder's bond or certificate of stock, in order that said security might be stamped as having accepted the plan of reorganization, and advising that thereupon the security, so stamped, would be promptly returned by the depositary to the holder. In addition, the debtor sent out letters from time to time to, and also in some cases caused personal visits to be made upon, its bondholders and stockholders, in an effort to facilitate and expedite the consummation of the plan, in the matter of obtaining the requisite number of assents to the plan. The following paragraph formed part of the letter of acceptance:
"The undersigned hereby accepts said Plan, and agrees to the terms thereof and the provisions of Section 77B of the Bankruptcy Act, and authorizes you (the Depositary) to evidence such acceptance in the manner provided in the Plan, or otherwise as may be approved by the Court.
"This acceptance and agreement shall terminate if the Plan shall be abandoned, or if at the time of final decree in these proceedings the Plan shall not have been confirmed by the Court."
Stockholders were requested to accompany their letters of acceptance with an irrevocable power of attorney to the reorganization managers named in the plan of reorganization, authorizing the latter to vote the acceptor's stock at all meetings of the debtor, and with power to vote such stock in favor of any action required to be taken to effectuate the provisions of the plan.
4. Pursuant to the procedure thus outlined for procuring the acceptances, the debtor caused to be delivered to the special master's office all acceptances which had been procured down to October 15, 1936. These acceptances (letters of acceptance) when delivered, were encased in a heavy metallic filing cabinet, securely locked, and the letters of acceptance therein contained were said to number some 10,000 or more.
5. The procedure followed by the special master for auditing the letters of acceptance was as follows: At the said first meeting of the special master on October 16, 1936 (and thereafter at the various adjournments thereof), the special master unlocked the filing cabinet, and continuously, during the course of the hearings, caused its contents to be open to the inspection of any party in interest present at the hearings. It transpired that not a single acceptor of the plan came forward to impeach the validity of his letter of acceptance thus contained as assenting to the plan of reorganization. Likewise, no challenges were entered of record to the integrity of the some 10,000 letters of acceptance, in whole or in part, except by counsel for William A. Brady and the Brady Enterprises, Inc., of New York City, common stockholders, to whom reference will hereinafter be made, and by certain preferred stockholders represented by Stebbins, McKinley Price, Esqs., of Chicago (with them Richard K. Stevens, Esq., of Philadelphia), who entered only a formal objection of record to all the acceptances. In the circumstances, and for the purpose of expediting the audit, the debtor called to the stand accredited representatives of the financial houses of Drexel Co., Philadelphia, and J. P. Morgan Co., New York City, the depositaries under the plan of reorganization designated to receive and transmit the voluminous letters of acceptance to the special master for audit. These accredited representatives (Samuel J. Mills of Drexel Co., and James F. Atterbury of J. P. Morgan Co.), by the filing of sworn certificates and by their sworn oral testimony, attested, to the satisfaction of the special master, the authenticity and integrity of all the letters of acceptance thus exposed to view at the hearings. Specifically, Messrs. Mills and Atterbury satisfactorily verified that all the letters of acceptance in evidence had been duly received, by mail or over the counter, by the respective depositaries; that to said letters of acceptance had been duly attached the securities of the acceptors; that thereupon the said Messrs. Mills and Atterbury had personally directed and supervised the stamping upon said securities of the legend or notation evidencing that the securities had been deposited as assenting to the plan of reorganization; that the securities, so stamped as assenting securities, had thereafter been promptly returned to the acceptors; and that the letters of acceptance (being themselves retained by the depositaries) were the identical letters of acceptance now on view before the special master.
6. The special master finds, from the documentary and oral evidence produced by the debtor, that the letters of acceptance procured by the debtor down to October 15, 1936, taken in connection with those procured since October 15, 1936, and filed with the special master at his open hearing on November 6, 1936, disclose that the debtor's plan of reorganization had been accepted, in writing, by or on behalf of creditors holding two-thirds in amount of the claims of each class whose claims have been allowed and would be affected by the plan, and by or on behalf of stockholders of the debtor holding a majority of the stock of each class, as required by subdivision (e)(1) of section 77B of the Bankruptcy Act, as amended by Act Aug. 29, 1935, 11 U.S.C.A. § 207(e)(1), evidenced by the following tabulation of the amount and percentages of the bonds and stock assenting to the plan:
First Mortgage Bonds ..... $1,911,000 (being 71.4% of the total of $2,676,000 outstanding) Consolidated Mortgage (being 82.2% of the Bonds ................... $8,578,200 total of $10,435,600 outstanding) Preferred Stock .......... 124,960 shares (being 62.48% of the total of 200,000 shares outstanding) Common Stock ............. 566,157 shares (reduced by 247 shares to 565,910 shares) (being 51.7% of the total of 1,105,860 shares outstanding)
7. The special master has hereinbefore noted the challenge to the sufficiency of the letters of acceptance, made of record by or on behalf of William A. Brady and the Brady Enterprises, Inc., of New York City, holders of some 2,300 shares of common stock. Mr. Brady, it should be said, was not among those who accepted the plan of reorganization; neither did he appear in person at any of the special master's five hearings. Mr. Brady was represented at the hearings by the New York City law firm of Loria Martinson (with them Nathaniel S. Shaham, Esq., of Philadelphia). The contention of Mr. Martinson, of counsel for Mr. Brady, was that the debtor "cannot bind us to any Plan of Reorganization, unless they have a "majority of the Common Stockholders." Testimony, p. 668.
Pursuant to this contention, there was laid before Messrs. Loria Martinson (with them Nathaniel S. Shaham, Esq., of Philadelphia) the voluminous collection of letters of acceptance (aggregating some 7,000 acceptances) received from common stockholders assenting to the plan, and thereupon a scrupulous scrutiny, and an exact count, of each particular letter of acceptance was begun by counsel for Mr. Brady. Adding machines were brought into the special master's office by the debtor to facilitate the poll. Counsel for Mr. Brady acted as tellers. At the conclusion of the tally, Mr. Brady's counsel announced a shortage in the count of 247 shares out of a total of some 560,000 odd shares. The ruling of the special master is that even if the shortage alleged were conceded (which the debtor disputes), a majority of the stock of each class of the common stockholders would still be found to have assented to the plan of reorganization. Vide the tabulation of the special master shown in paragraph 6, of this report.
8. Counsel for Mr. Brady, in support of their challenge to the sufficiency of the acceptances, next demanded of the debtor the production of notices of withdrawal of acceptances alleged by counsel to have been received by the debtor from previously assenting common stockholders, together with any correspondence which the debtor may have had with common stockholders relating to the subject of withdrawals of acceptance. The debtor denied of record that any withdrawals of acceptances had been received, and denied the right of counsel to the correspondence demanded, in the absence of any proof offered by counsel that they held powers of attorney to represent the common stockholders referred to, and particularly in the absence of any such common stockholder to appear before the special master and testify that he had been improperly induced by the debtor to execute his acceptance. The special master sustained the debtor, and held that assenting stockholders could withdraw their acceptances only upon proof of fraud or misrepresentation practiced upon them by the debtor. Per Buffington, D. J., in Re Levy (D.C.) 110 F. 744, followed by Manton, C. J., in Re Jablow (C.C.A.2) 15 F.2d 132, and see Myers v. Trust Co., 273 U.S. 380, 47 S.Ct. 372, 71 L.Ed. 692. The Brady counsel excepted. The exception is dismissed.
9. Counsel for Mr. Brady next called to the stand one R. T. Freels, a nonaccepting common stockholder, who, under objection by the debtor, was asked concerning letters sent him, and personal calls made upon him, by representatives of the debtor, soliciting his acceptance of the plan of reorganization; the purpose in offering Mr. Freels' testimony and the various letters received by him from the debtor being to show the typical methods employed by the debtor in solicitating acceptances to the plan, and from which the methods used in obtaining assents from other stockholders might be gauged. The various letters offered for identification as having been received by Mr. Freels were duly marked as Exhibits G, H, I, J, K, L, and M. The exhibits, or some of them, were subsequently sought to be formally offered in evidence. Objection was made by the debtor, on the ground that Mr. Freels, being a nonaccepting common stockholder, statements made to him, by letter or personal call, by the debtor, were immaterial, irrelevant, and incompetent to the issue before the special master. The special master sustained the objection. Counsel for Mr. Brady excepted. The exception is dismissed.
10. Counsel for Mr. Brady, in further support of their challenge to the sufficiency and validity of the acceptances by common stockholders, propounded certain additional objections, all predicated upon the proposition that the burden was on the debtor to establish the due execution of the acceptances, and that the debtor had failed to assume this burden, and had relied on the bare production of the executed acceptances, without more. Among the objections thus made, was the failure to prove the genuineness of the signature of the acceptor; the failure of certain acceptances to have an attesting witness to the signature; the fact that in certain acceptances the signature of the acceptor was not exactly on the "dotted line" designated; the fact that none of the acceptances, in the case of partnerships or corporations, were executed or duly acknowledged in compliance with the requirements of General Order 21, as amended 11 U.S.C.A. following section 53; the fact that the authority of trustees or other agents, signing, was not set forth; the fact that certain fiduciaries accepted the plan, in violation of subdivision (e)(1) of section 77B; and the fact that stock registered in the names of brokerage houses was voted in favor of the plan without proof being furnished that such brokerage houses had been authorized by their customers to vote such stock.
11. The special master is satisfied that the additional objections enumerated in paragraph 10 above are without merit. William A. Brady and the Brady Enterprises, Inc., on whose behalf the objections are raised, is admittedly a nonaccepting common stockholder, holding no authorization from the accepting common stockholders to impeach the validity of their acceptances on any of the grounds urged, nor is there anything before the special master indicative of the slightest intention on the part of the accepting common stockholders themselves to urge the grounds thus gratuitously urged for them by William A. Brady and the Brady Enterprises, Inc. Specifically, it does not lie with William A. Brady or the Brady Enterprises, Inc., to challenge the acceptances given in this case by brokerage houses who are registered holders of the stock of their customers. Thus, in Re Pressed Steel Car Co. (D.C.W.D.Pa.) 16 F. Supp. 329, 336, it is said: "It is clear that the record holder of stock has the right, as between himself and the corporation, to vote the stock, and that objection to such vote can be registered only by the person beneficially interested. This rule * * * has been consistently applied in corporate elections, and no reason appears why a similar rule should not be applied under section 77B [11 U.S.C.A. § 207]. An equitable owner of shares who permits them to stand in his broker's name impliedly authorizes the broker to vote them; any other rule would lead to hopeless confusion. * * * The fact that brokers may be obliged, under the rules of the New York Stock Exchange or under any other requirement of law or regulation, to obtain the consent of their customers before voting the stock does not alter the rule of law in this respect; the presumption being that in the absence of proof to the contrary, of which there was none in this case, consent had been obtained."
Specifically, too, the genuineness of the signature to a letter, which comes in answer from the person to whom a prior communication had been duly addressed and mailed, is assumed, without express proof of its genuineness, in the absence of contrary evidence. National Acc. Soc. v. Spiro (C.C.A.) 78 F. 774, Scofield v. Parlin (C.C.A.7) 61 F. 804. Specifically, also, where a power to vote is signed by a partnership name, it is unnecessary that it appear that every single member of the partnership signed, or, if signed by only one member, that his copartners authorized him to act. Gow v. Consolidated, etc., Corporation, 19 Del. Ch. 172, 165 A. 136. Likewise, where a power to vote is signed by a corporation name which corresponds to the name of the registered owner, it is unnecessary that the signature be attested with all the formalities required for the execution of solemn corporate acts. Gow v. Consolidated, etc. Corporation, supra. In our own District, Dickinson, J., has held that where a reply letter is signed by a corporation, no proof of the signature is required (D.C.) Ringrose v. Sloane, 262 F. 545. Finally, we note that the provisions of General Order 21, relied on by the Brady counsel, are, by the express terms of that order, as amended (11 U.S.C.A. following section 53), made inapplicable to reorganization proceedings under section 77B. We hold, too, that subdivision (e)(1) of section 77B, relied on by counsel, does permit (properly read) acceptances to a plan of reorganization to be made "by or on behalf of" the creditors and stockholders of the debtor, and that this accords also with the express language of Judge Dickinson in his order of February 18, 1935, authorizing the debtor in the present proceeding to solicit acceptances "by or behalf of" the creditors and stockholders.
12. Accordingly, all the exceptions to the sufficiency or validity of the acceptances to the plan of reorganization are dismissed, and, as before stated, the special master finds, and reports, that the plan of reorganization has been accepted by the number, in amount, of the debtor's creditors and stockholders required by section 77B.
13. Notice of the completion by the special master of this report on his audit of the acceptances to the plan of reorganization was sent to all the parties or their counsel who appeared before the special master. Such notice set forth the findings of the special master, and directed that the said report would be open to inspection, in his office, rooms 456-457, Burd Building, Southwest corner Ninth and Chestnut Streets, Philadelphia, Pa., for a period of 10 days from November 24, 1936, and that unless written exceptions to said report were filed with the special master within the said period of 10 days, said report would then be filed with the clerk of the United States District Court, at Philadelphia, Pa., where it would remain for 20 days, to allow any exceptions thereto to be filed with the clerk of said court, after which the said report would be presented in open court for the court's action thereon.
A copy of the notice thus sent, together with affidavit of the due mailing thereof, will be found, marked Exhibit B, hereto annexed.
On Petition for Order Directing Issuance of Common Stock Under Debtor's Outstanding Warrants.1. The petition was in part argued in open court on December 7, 1936, and was, on the same day, in the presence of the parties then in attendance, referred by your honorable court to the undersigned special master, who, on December 9, 1936, by agreement of and in the presence of parties in attendance in court, proceeded to hear argument on the petition.
2. The gravamen of the petition is that the petitioners, being the owners and holders of warrants dated March 1, 1933, entitling them to purchase 600 shares of old common stock of the Baldwin Locomotive Works at $5 a share at any time until February 28, 1938, elected to exercise the warrants, and in pursuance thereof did, on December 2, 1936, make formal demand for the stock, accompanied by the purchase price of $3,000, and formally made tender of surrender of their warrants, but nevertheless were on the said date refused the stock, unless and until they first obtained an appropriate order of court. The prayer of the petition is for an order of court directing the issuance of the stock, upon compliance by the petitioners with the terms of the warrants, a specimen copy of which is attached to the petition.
3. The question involved is the advisability or expediency of granting the prayer of the petition, in view of the intervention of the reorganization proceedings instituted by the Baldwin Locomotive Works on February 25, 1935, and particularly in view of the apparent acceptance by the requisite number of creditors and stockholders of the debtor's plan of reorganization filed August 8, 1935. It is conceded that the prayer of the petition is addressed wholly to the sound discretion of the court, in view of the provisions of section 77B of the Bankruptcy Act, which invest the court with exclusive jurisdiction of the debtor and its property, and empower it to stay the commencement of suits against the debtor until after final decree.
4. But for the intervention of the debtor's proceedings under section 77B, the right of the petitioners to proceed against the Baldwin Locomotive Works on the warrants in their hands would not, in the opinion of the special master, be open to serious challenge. The warrants are clearly agreements by the Baldwin Locomotive Works to sell and deliver the designated amount of stock to the petitioners for the designated price accompanied by the surrender of the warrants, at any time until February 28, 1938. It is not denied that, on December 2, 1936, the petitioners exercised their right to purchase the stock, in the mode and in accordance with the terms of the warrants, and that the Baldwin Locomotive Works refused to sell and deliver the stock. Ordinarily, therefore, the petitioners would be in position to treat the refusal as a breach of contract, and recover accordingly. Roehm v. Horst, 178 U.S. 1, 20 S.Ct. 780, 44 L.Ed. 953.
5. The special master, after attentive consideration, is of the opinion, and so reports, that it would be inadvisable and inexpedient to grant the prayer of the petitioners at this time.
6. As already stated, the debtor's reorganization proceedings have advanced to the stage where its plan of reorganization (the product of long and arduous negotiation) has apparently been accepted by more than two-thirds of its creditors (i. e., its bondholders), and by something over a majority of its preferred and common stockholders. It must be assumed that the acceptances were given in reliance upon the structural set-up of the plan as it existed at the time the plan was presented for acceptance, and in the confidence that that set-up would not be disturbed, without hearing afforded the acceptors. If it appear to the court that to grant the prayer of the petition at the present time would be to work disturbances in the plan, the court will, in the opinion of the special master, suspend the assertion of remedies against the debtor by the petitioners, until a more appropriate season; namely, until the debtor's plan of reorganization comes before the court for hearing on confirmation and final decree. As was said by Dickinson, District Judge, in Re Penn Victor Dairies, Inc. (D.C. 1935) 12 F. Supp. 126, 127: "The property and affairs of the debtor having been committed to the care of the court, it cannot permit any interference with the performance of its duties. Under section 77B [11 U.S.C.A. § 207] a part of the duty is to supervise and pass upon a plan of reorganization of the debtor so as to enable it to continue its business under its own management. All rights to the assertion of remedies against the debtor are necessarily suspended."
7. The special master is of the opinion that to grant the prayer of the petition at the present time would be to disturb the plan in at least the two following illustrative particulars:
(1) The warrant holders would become common stockholders. There are 167,340 unissued shares of common stock held for issuance under all the outstanding warrants. To admit the warrant holders to stock ownership would be to increase the number of common stockholders beyond the number who were classified by the special master as entitled to vote on the plan, and beyond the number implicit in the plan at the time the plan was presented to the parties affected by the plan, for voting purposes.
(2) The consolidated mortgage bondholders would be injuriously affected. All the outstanding warrants were attached to their bonds, but were detachable. The potential amount realizable from the sale of the warrants is $836,700. This $836,700 is, by the terms of the consolidated mortgage, to be applied exclusively to the retirement of the consolidated mortgage bonds, each of which, though of the denomination of $1,000, has a present bond value of about $1,450. Each $1,000 bond is to be retired by each $1,000 derived from the warrants, and hence each bondholder, who (by lot) is required by the mortgage indenture to accept $1,000 in retirement of his bond, would, if the prayer of the petition be granted, suffer the loss of the $450 which has inured to each bond since his acceptance of the plan, in addition to the loss he has already suffered in consenting, by his acceptance of the plan, to the supersession of his bond by another bond subordinate in lien and rank to the bond now held by him. It is entirely allowable to conceive that had the very large group of existing consolidated mortgage bondholders been made aware, at the time of their acceptance of the plan, that the court, in advance of confirmation of the plan and the entry of the final decree, would disturb the setup of the plan by allowing a potential sale of the entire issue of warrants whereby their financial status would be thus materially jeopardized, they might have refrained from accepting the plan.
8. The special master is of the opinion that, if the foregoing modifications and alterations of the plan were permitted by the court at the present time, a grave question would arise whether it would not become indispensably necessary that such modifications and alterations be incorporated in the plan, and that the plan, as so amended, be resubmitted to the stockholders and bondholders for acceptance or rejection, as being in derogation of the substantial rights of the parties previously accepting. Compare Downtown Investment Association v. Boston, etc. (C.C.A.1) 81 F.2d 314, 320.
9. The considerations urged by the petitioners for the immediate and summary recognition of their rights do not, in the opinion of the special master, countervail the views already expressed. It is true that the petitioners, if placed to-day in position to buy the common stock at $5 a share at a time when the market price of the stock is said to be around $10 a share, would derive a profit peradventure not otherwise to be had. The same is true of the world at large holding a large number of the like warrants, and who may be assumed to be vitally interested in and awaiting the court's action on the present petition.
The special master conceives, however, that the court will take no account of fluctuating market quotations. Its larger concern will be to discover, if it can. justifiable cause for interrupting the orderly processes of the reorganization proceedings and affording the immediate relief demanded by the petitioners.
The special master finds no such justifiable cause. The petitioners are not affected by the plan. Aside from the possibility of making present profits in the stock market, the rights of the petitioners will be as secure at the hearing for confirmation of the plan as they are at the present time. The debtor, instead of availing itself to seek a rejection of the warrants as executory contracts (these warrants, by their terms, have no voting power), has elected fully to protect the warrants and insure their ultimate relative enforcement (see article II clause (e) and article III clause (E) of the plan).
Likewise, the special master is of the opinion that the further contention of the petitioners, that the potential $836,700 proceeds derivable from the sale of the warrants, if paid into the debtor's treasury, would augment the equity of the stockholders, and otherwise be in financial aid of the stockholders and the rehabilitation of the debtor, is not a cogent one. It has already been shown that all the proceeds from warrants are exclusively applicable to the retirement of the consolidated mortgage bonds, and cannot, except upon hearing on confirmation or by final decree of the court after hearing, be applied otherwise. Moreover, the well-settled rule is, that in all corporate reorganization proceedings, the interests of bondholders come first, and they are to be given the greater benefits over stockholders. Compare Northern Pacific Ry. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931; Western Union Tel. Co. v. U.S. Mexican Trust Co. (C. C.A.8) 221 F. 545, 549. Especially would this appear to be so where, as here, the bondholders have, in the interest of the stockholders, agreed, by their acceptance of the plan, to surrender their present place as lienors, and to accept bonds subordinate and junior in rank to the bonds now held by them, and likewise have surrendered their right to payment in full. Moreover, there are now pending and undertermined in this court objections that the equity of the common stockholders has already been taken care of in the plan adversely and to the prejudice of the higher rights and interest of other parties affected by the plan.
10. The recommendation of the special master is, that the prayer of the petition be denied, and the petition dismissed.
11. Notice of the completion by the special master of this report has been sent to all the parties of record or their counsel who appeared before him, with instructions that the report would be open to inspection, and to any exceptions which might be filed thereto with the special master, for 10 days from the date of said report, after which, failing any exceptions, the report would be filed with the clerk of the United States District Court, at Philadelphia, there to remain for 20 days, for like inspection and the filing of any exceptions with the clerk of the court. A copy of the notice thus sent, together with affidavit of the due mailing thereof, is annexed hereto marked Exhibit A.
A. Allen Woodruff and William Clarke Mason, both of Philadelphia, Pa., for debtor.
Henry S. Drinker, Jr., of Philadelphia, Pa., for mortgage bondholders.
Edward A. G. Porter and Maurice B. Saul, both of Philadelphia, Pa., for preferred shareholders and for trustee for first mortgage bondholders.
L. A. Stebbins, of Chicago, Ill., and Richard K. Stevens, of Philadelphia, Pa., for objecting preferred stockholders.
Francis A. Lewis, of Philadelphia, Pa., for common stockholders' committee.
Loria Martinson, of New York City, and Nathaniel S. Shaham, of Philadelphia, Pa., for Wm. A. Brady.
Arthur Garfield Hays, of New York City, for consolidated bondholders.
This cause is now ripe for a ruling after leave given to submit briefs.
The questions presented arise out of what is known as a 77B proceeding. The genesis of the amendment to the Bankruptcy Act incorporated into the act as section 77B, as amended (11 U.S.C.A. § 207), has often been given but will bear repetition to afford light on the questions raised. The poor we have always with us, and at all times there have been those who were financially in embarrassed circumstances requiring readjustment of their debts. The first device was resort to a composition agreement. It was made binding upon all creditors by being made with the debtor and "with each other." Any relief afforded the debtor was wholly a matter of agreement. Corporations performing a public service had found a city of refuge in an equity receivership. Such bills were upheld by the courts in order that the public service might not be interrupted. Such receiverships were expanded to include corporations in need of a moratorium pending reorganization or liquidation. The courts had no equitable jurisdiction in such cases, but the practice was so convenient and useful that the question of jurisdiction was at first not raised. When it was, the courts held that the jurisdiction lacking was of a kind which could be waived and upheld receiverships if there was a confessing answer by the corporation and submission by it to the decrees of the court. By this time equity receiverships had become matters of course. Where the ultimate objective was not liquidation but reorganization, one obstacle was encountered. There was no way of enforcing a reorganization plan over the objections of minority creditors. This could, however, be done by a court in bankruptcy through the acceptance of a composition offer. The advocates of the section 77B plan evidently anticipated objections on constitutional grounds if the power was given to a court of equity to override the obligation of contracts. Courts of bankruptcy were acknowledged to have this power. The plan was in consequence made in form an amendment to the bankruptcy statutes. We thus have the approval of a plan of reorganization like in principle to the acceptance of an offer of composition in bankruptcy. It would be easy to point out differences, but these would go to constitutional objections to the legislation. No question of the constitutionality of the act is raised, and so is passed by without discussion. Any plan of reorganization however, just as a composition offer, must have the sanction of the approval of the required number of those affected thereby, and also the approval of the court. Either of two possible evils may present itself. The motive of objecting creditors may be wholly selfish and the objections an attempt to induce the majority creditors to grant to the objectors preferential treatment. The majority may likewise from selfish motives abuse the power they have to impose unfair terms upon the minority. The purpose of the act is to avoid both these evils. It seeks to do this by requiring the plan of reorganization to have the approval of the court. In giving or withholding this approval the court is not bound by the ordinary judicial limitations.
We think the court is not restricted to what is in evidence in the cause, but may seek help in that vague domain which is known as the things of which a court may take judicial notice.
The instant plan, for illustration, practically affects bondholders and stockholders, preferred and common. The bonds and stock are dealt in by any who may wish to take "a flier." The plan in question has been given wide publicity. The corporation in question is well known, and its securities dealt in on the Exchange and Curb markets. The market for its bonds and stock may be said to be world-wide. The reaction to the plan on the part of bondholders and stockholders and that of investors, speculators, and even gamblers in stocks and bond have thus a value. In applying this test we find several curious anomalies. The plan is in ease of the corporation by reducing the burden of its debts which is to be accomplished by cutting down its bonded indebtedness. From this general statement it would be expected that the bondholders might object, but the stockholders would surely approve. Instead of this, we find the reaction to be the reverse of this. The bondholders enthusiastically approve, and the opposition is limited to stockholders only. The stockholders are moreover divided in opinion presenting another, on its face, curious result. The preferred stockholders object to the plan as unduly favorable to the common stockholders, and the latter object because it gives the preferred stockholders an undue advantage. Even more interesting is the market reaction to the plan. As we have often had occasion to remark, the market price of anything is inscrutable. A weather vane is stability itself in comparison with the vagaries of the so-called market. No one can forecast what will influence its decisions. This is because, as before several times said, there is nothing which has happened, is happening, or seems likely to happen, anywhere in the world but may influence prices. The few who happen to make a good guess may think they know, but the many who have guessed wrong bear testimony that nobody knew or could know. If the holder of a bond, as here, was asked to scale down the debt, it would be expected that this would reduce the selling price of his bond. It was proposed here that the interest on the bonded indebtedness of the corporation be withheld and that the sum payable be reduced. The bonds were then selling at about $80. What would be the expected effect on the market price? An answer might be made that the price of the bonds would be reduced corresponding to the abatement in payment made. Instead of this the reaction was that the bonds jumped from about $80 to about $160 for every $100. If the possessor of the famous Aladdin's lamp had known of this he would have hidden his diminished head and traded his old lamp for a new one. Why a short term bond for $100 should sell for more than twice its redemption sum suggests a puzzle. If the bonds were given the privilege of exchange for stock which was worth more than the nominal sum of the bonds, the effect might be to enhance the value of the bonds. This increase might be said to be in a sense at the expense of the stock.
As the learned counsel for the minority preferred stockholders maintained in his impressive argument, it is the relative effect upon all the interests affected to which we must look. While the market reaction to the plan was to raise the price of the bonds 2 to 1, the corresponding effect upon the price of stock, preferred and common, was to raise it 3 to 1. If this reaction of the market was due to the plan, no one could say that its effect was an injustice to the stockholders, preferred or common.
It may be true that there is not much left of the old doctrine of the obligation of contracts, but it is recognized as still the law that creditors have a legal right to payment of their claims in full before stockholders get anything. It is true that bondholders have the legal right only to that for which their contract calls, usually debt with interest, but if the obligor cannot pay on the due date bondholders have the legal right to enforce payment. It may be that the management of this debtor was unduly alarmed by the approach of the due date of its bonds, and that resort to any readjustment of indebtedness plan was unnecessary, as the indebtedness might have been paid in full. On the other hand, failure to resort to the plan might result in consequences which would have been disastrous. The plain truth is that if a debtor cannot meet his obligation he is at the mercy of the creditor if he offers something other than money in payment.
What concerns this court is not the need of a plan, but whether the plan submitted is fair to all the interests affected thereby. The point sought to be made is that the question of the economic wisdom of a plan is best left to the judgment of those concerned. The attention of the court should be directed to the other question of whether it affects any interest unfairly.
The plan has been so fully analyzed and discussed by the learned master that we see no need to outline it. The master's analysis and discussion has met with commendation from all sides. In view of this, we may go directly to the exceptions.
Exceptions of Preferred Stockholders.
These are supported by an exceptionally strong presentation of the views of counsel. With many of the propositions advanced we are in hearty accord. Regard should be had for rights of property. There should, however, be no distinction made between different kinds of property. Yet property rights are invaded, and there are distinctions made. A debt claim is property, and the changes have long been rung on the obligations of contracts. When, however, the obligation becomes inconveniently burdensome, a change in terminology or phraseology is all that is necessary to get rid of it. Usually to say of any law that it is the exercise of the police power is sufficient to accomplish the purpose. The right of contract is a sacred right, but if we wish to regulate it we say it is "affected with a public interest." So with the word bankruptcy. A court of equity or of law cannot absolve one from the obligation of debt. Call the court a court of bankruptcy and it can. Originally, courts of bankruptcy were instituted to assure the equable distribution of the assets of a bankrupt among his creditors. Inasmuch as the debtor had given up all his property and assets to his creditors, it was thought right that he should be discharged of the obligation of his debts. At all events, he was so discharged. A stockholder is not a creditor of his corporation. Notwithstanding this, the provisions of section 77B extend not only to a restatement of the debt obligations of the debtor, but to "altering the rights of stockholders." Subdivision (b), 11 U.S.C.A. § 207(b). Unless the constitutionality of the act is attacked (which the exceptant here has not done), this provision of the act must be given effect. The plan when put into effect may thus encroach upon the rights of stockholders as fully as upon those of creditors. We see no limit to either, except as provided in the act. What was doubtless thought to be a sufficient check against abuse of the power was that it could not be exercised without the previous consent of the required majority of creditors or stockholders affected, but as an additional guard against the "tyranny of majorities," and for the protection of the minority, the plan is required to have the approval of the court. Here we recognize a distinction. A plan as a business proposition may be a wise plan or a foolish one. Without questioning the power of the court, it should in the exercise of the power defer to the business judgment of those whose financial interests are at stake. The fairness and justness of the plan, as affecting the minority, should be given careful and discriminating consideration. Whatever our own views, if we had any, respecting the business judgment displayed in this plan, we would yield our judgment to the judgment of those financially concerned.
Respecting the fairness of the plan, there is this to be said: The bondholders are conceded to have prior claims upon the assets of the debtor to those of stockholders. The main feature of the plan is that the bondholders give up their preferential rights to accept a common lot with stockholders. No one can say that this was unjust to stockholders. It might of course be that the share given the bondholders in the assets exceeded their fair share. This, however, is not asserted, and because of this we have not gone into it. The sole assertion of unfairness is that the plan gives an advantage to the common stockholders over the preferred. This turns not upon any legal principle, but a fact. The fact turns upon business judgment. Almost two-thirds of the preferred stockholders differ with the exceptants. The common stockholders unanimously proclaim their disagreement. More than one-half have certified to their judgment that the plan is fair to all, and the stockholders represented by the excepting common stockholders proclaim that the plan is unfair only and because only it is unduly favorable to the preferred shareholders. In view of this no court would be justified in condemning the plan as discriminating against preferred stockholders.
With the complaint that the debtor had used the preliminary report of the master to aid it in securing approval of the plan, we are in qualified sympathy. We do not agree with the proposition that there should be no reference to a special master until after the plan has been accepted by the required majority of creditors and stockholders concerned.
A very important aid to the court is to have the master conduct what is the equivalent of an election to determine the fact of acceptance or rejection of the plan. Whether a court, during the trial of a case or the conduct of any proceeding, should express any opinion which may have been formed is controlled by the sound discretion of the court. Masters have the like discretion.
We have no hesitation in stating our view that in a proceeding such as this the court should not express any opinion of a plan until after it had received the acceptance and approval of the interested parties and was regularly submitted to it for its required approval or disapproval. The learned master evidently thought it would contribute to an understanding of the plan by the parties interested if he made a preliminary report upon it. He accordingly submitted such preliminary report. In accordance with the view we have taken, this report has remained on file without action thereon by the court, and without it being even called to the attention of the court, beyond the fact of its having been filed. As, however, it was filed and thus became a matter of record, we do not see that any one interested could be denied the right to make such use of it as he properly might.
Exceptions of Common Stockholders.
We cheerfully accord to any stockholder, however small his holdings, all his legal rights. These include the right to object to a plan which has secured the approval of the majority. Equality and fairness are not determined by the brute force of numbers. Too often the rights of the small investor are disregarded and ignored because he is small, and, because small, of little or no importance. The mere fact that the exceptions are presented by the holder of a relatively small number of shares of common stock should not prejudice the objections urged to the plan. Expressed in percentage, the objecting shares are .002 per cent. of the total issue. The shares, although relatively few, have all the rights to a hearing which the many have. None the less, when out of a total issue of 1,105,560 shares only one stockholder, representing 2,300 shares, appears in opposition to a plan, the query naturally arises why the arguments which are advanced to persuade us have made no appeal to those most concerned.
The brunt of the argument is borne by the fact that the business prospects of the debtor have much improved over the situation existing when the petition was filed. Elaborate and very cleverly constructed charts have been prepared to forcibly impress this truth upon us. The main insistence of the objecting stockholder is that the plan should be referred again to the master to receive testimony in support of the fact of improvement in general business conditions. We see no need of this. The fact is one of which the court can take judicial notice. We accept the charts submitted as illustrative of this improved condition. It may well be that if the business conditions prevailing to day had been present when the petition was filed, it would not have been filed. A creditor is a queer animal. Impress him with the thought that his debtor is amply solvent and easily able to pay the debt and he will urge the debtor to withhold payment. Let him suspect that the debtor is unable to pay, and he instantly and insistently demands payment, with consequences not only disastrous to his debtor, but often to himself. The situation which made it the part of wisdom to put the debt obligation of the debtor in manageable shape when the petition was filed may recur. If the debtor can be put on financial Easy Street it is well to do it and to do it when the "going is good."
As before remarked, the only objections which are urged to the plan are made by some of the preferred stockholders solely on the ground that it unduly favors the common stock and by one common stockholder that it favors the preferred stockholders to the prejudice of the common stock. They are largely outvoted by those whose interests are the same as their own, and the arguments of each may be left to be answered by the arguments of the other.
The plan has received the close and thorough study of the master, who has analyzed and discussed it so as to elicit praise from all interests. We have had pointed out to us no reasons for withholding our approval. The common stockholder exceptant failed to comply with our rules by not filing his exceptions with the master. The reasons for the requirement are obvious. The exceptions were, however, filed in compliance with the Equity Rules. We admit them to the record as filed in time.
The like right is extended to what we treat as the exceptions of Ross C. Patton, with this comment: We have already granted him leave to bring his action against the company.
A formal decree dismissing the exceptions to the master's report, confirming the same, and approving the plan of reorganization, may be submitted.