185 F.2d 791 (1st Cir. 1950), 4523, R. F. C. v. Kaplan

Docket Nº:4523.
Citation:185 F.2d 791
Party Name:RECONSTRUCTION FINANCE CORP. v. KAPLAN et al. In re WALTHAM WATCH CO.
Case Date:December 21, 1950
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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Page 791

185 F.2d 791 (1st Cir. 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 Jan. 8, 1951.

Page 792

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 reorganiztion 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 in 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 of 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

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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, 1950k 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 that 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 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...

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