Reconstruction Finance Corp. v. Kaplan

• Decision Date: 08 January 1951
• Docket Number: No. 4523.,4523.
• Citation: 185 F.2d 791
• Parties: RECONSTRUCTION FINANCE CORP. v. KAPLAN et al. In re WALTHAM WATCH CO.
• Court: U.S. Court of Appeals — First Circuit

185 F.2d 791 (1950)

RECONSTRUCTION FINANCE CORP. v. KAPLAN et al. In re WALTHAM WATCH CO.

No. 4523.

United States Court of Appeals First Circuit.

December 21, 1950.

Rehearing Denied January 8, 1951.

Charles C. Cabot and Harry Bergson, Boston, Mass. (Herrick, Smith, Donald, Farley & Ketchum, Boston, Mass., on brief), for appellant.

Jacob J. Kaplan, Boston, Mass. (Daniel J. Lyne and C. Keefe Hurley, Boston, Mass., on brief), for trustees, appearing pro se, appellees.

Before MAGRUDER, Chief Judge, and WOODBURY and FAHY, Circuit Judges.

MAGRUDER, Chief Judge.

There is pending in the court below a debtor's petition for reorganization under Chapter X of the Bankruptcy Act, as amended, 52 Stat. 883, 11 U.S.C.A. § 501 et seq. The present appeal is by Reconstruction Finance Corporation, a secured creditor, from an order of the district court on a petition for authorization to the reorganization trustees to conduct the business of the debtor.

Waltham Watch Company, the debtor, is a Massachusetts corporation engaged in the business of manufacturing and selling jeweled watches, parts, and other timing instruments. It is an old and established concern, of considerable local importance. The company was in an earlier reorganization pursuant to a debtor's petition under Chapter X filed in the court below on December 28, 1948. A plan of reorganization thereunder was confirmed by the court on June 10, 1949, and consummated on September 23, 1949. As part of the plan, the debtor received from RFC a loan in the sum of $4,000,000, subject to security provisions which gave to this creditor pretty much of a strangle-hold on the life of the company. Thus, the debtor executed (1) a real estate mortgage covering all the real estate and plant of the company, (2) a chattel mortgage covering all of its machinery and equipment, (3) a factor's lien agreement covering all its merchandise inventory and its accounts receivable arising from the sale of said inventory, such agreement conforming to the provisions of C. 255, Mass.G.L.(Ter.Ed.), as amended by C. 273, Laws of Mass. 1947, and (4) an assignment of all notes and accounts receivable and trade acceptances owned by the debtor on September 21, 1949, or thereafter acquired.

By the terms of the factor's lien agreement the debtor was permitted until default to sell its merchandise in the usual course of business. The RFC under the powers conferred collected the accounts receivable and placed the same in a so-called cash collateral account, from which it doled out or "reloaned" to the debtor from time to time certain sums as working cash.

In October, 1949, the debtor applied to RFC for an additional loan of $3,000,000, stating in its application that operating losses for 1950 were anticipated to be in excess of $1,000,000, and that without this further loan the company could not continue in business. The loan was not forthcoming, though notification of RFC's refusal was not made until February 3, 1950, on which day the debtor shut down.

Meanwhile, on January 23, 1950, Waltham Watch Company failed to pay an installment of interest in the sum of $13,333.33 on the note to RFC, and also failed to make a monthly tax deposit of $2,700 pursuant to the loan agreement. At this date RFC held in the cash collateral account the sum of $347,103.69. However, on February 3, 1950, it declared the loan in default and the entire indebtedness immediately due and payable, and took possession of all the debtor's plant, machinery, fixtures, equipment, inventory, materials and supplies. As above stated, RFC was already in possession of the cash proceeds arising from the collection of the debtor's accounts and notes receivable.

Later on the same day, February 3, 1950, Waltham Watch Company filed in the court below the petition now pending for reorganization under Chapter X. On February 28, 1950, the district court entered an order approving the petition as properly filed, permitting RFC to continue in possession of the debtor's property for the time being, and appointing three disinterested trustees of the debtor.

A plan of reorganization was filed by the trustees on May 15, 1950, and an amendment thereto on June 12, 1950. The plan came on for hearing on June 20, 1950, and on June 30 the district court filed a memorandum stating: "I find the Trustee's plan to be fair, equitable, and feasible, and give it the Court's approval." It does not appear that this approval has yet been embodied in a formal order, nor does it appear what further steps have been taken toward confirmation and consummation of the plan. The detailed provisions of the plan need not be examined in the present appeal.

Also on June 20, 1950, the district court held a hearing on a petition, by the debtor and the voting trustee of all the common stock of the debtor, seeking interim authority in the trustees to take possession of the debtor's property and to operate the business, "with special reference to the completion of the unfinished movements now on hand, the dialing and preparation for sale of the finished movements and the inspection, testing and further preparation for sale of the completed watches now in the possession of the Debtor". On July 10, 1950, the court made its findings of fact and order granting this petition. The evidence produced at the hearing has not been included in the appellate record, and the findings of fact of the district court must be accepted by us. The court's findings are as follows:

"The Debtor is solvent. While the amount by which the value of its assets fairly exceeds its liabilities cannot be determined with precision, it is abundantly clear that:

"(a) The value of these assets exceeds by a substantial amount the Debtor's secured indebtedness to the Reconstruction Finance Corporation (hereinafter called RFC) and the unsecured indebtedness of the Debtor.

"(b) The greater part of the assets consists of watches and watch movements. These assets are of a wasting and seasonal character in that,

"(1) continued retention of the watches and watch movements at the factory without the application of labor to oiling, testing and conditioning will probably result in deterioration of this inventory in quality and value, and would require the expenditure of a greater amount of labor in necessary conditioning of this inventory before sale at a future date than would otherwise be necessary.

"(2) The debtor's inventory contains approximately 76,000 watch movements for which an equal number of watch cases are owned by the debtor. These as watch movements are worth in the neighborhood of $8.00 each. The watch cases as such have little value. By the expenditure of approximately $3.50 per movement, the movement can be conditioned, placed in a case, necessary attachments affixed, and the completed watch boxed. In such completed state the watch will have a value of from $18.00 to $23.00 according to the manner of selling the watches. Thus by the expenditure of about $260,000 in the aggregate, the value of the inventory of watch movements and related cases will be increased by about $760,000.00 or a net increase of $500,000.

"(3) The sale of watches is highly seasonal. About two-thirds of the total sales of a watch factory are made in the fall and winter months for sale to the ultimate consumer during the Christmas season. In order that sales may be made for this Christmas season it is essential that the Debtor's inventory be promptly conditioned, cased and marketed almost immediately. Otherwise the 1950 Christmas market will be missed, and there will be no substantial sales until early in 1951 when sales begin for the lesser Easter season which normally accounts for about one-third of a watch manufacturer's volume. If the Debtor's plant remains idle pending consummation of the plan of reorganization which has been approved, heavy overhead charges will be incurred, for which there will be no compensation, and net equity of the unsecured creditors and stockholders will be sharply diminished.

"(c) The order entered herewith can be carried out without impairing the position or security of RFC. On the contrary that position and security will be substantially improved."

Following is the order of July 10, 1950, from which the present appeal was taken:

"1. The Trustees are authorized from time to time to take possession of and operate all the property, assets and plant of the Debtor including that mortgaged to RFC and upon which it has a lien or liens, including without restricting the preceding generality, inventory, supplies, cash, securities, accounts receivable, plant, machinery and equipment; to conduct the business of the Debtor and to sell from time to time portions of the inventory at such prices and upon such terms as the Trustees deem prudent; and for such purpose to purchase for cash or on credit and use necessary materials, supplies and other assets and to employ operatives and other necessary assistance.

"2. The net proceeds of sales of the Debtor's inventory by the Trustees shall be kept in a separate account, and shall be applied solely to the expense of operating the Debtor's business as hereinbefore specified. Subject to the further orders of the Court, which may hereafter prove necessary to carry out the intent hereof, the RFC's lien shall be transferred to the said net proceeds.

"3. The Trustees are authorized to employ Teviah Sachs to direct the operations of the Debtor's business at the discretion and subject to the control of the Trustees, and to pay him compensation for such services at the rate of $25,000 per year.

"4. If the Trustees hereafter from time to time deem it necessary that they borrow funds and issue Trustees certificates herefor for the purpose of conducting the Debtor's business, they may apply to the Court for leave to do so upon five days prior notice in writing to RFC; and the Court reserves the right to authorize borrowing upon such certificates upon such terms and with...