In re Federal Water & Gas Corp.

• Citation: 188 F.2d 100
• Decision Date: 02 April 1951
• Docket Number: No. 10160.,10160.
• Parties: In re FEDERAL WATER & GAS CORP. et al. Appeal of CHENERY CORP. et al.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

188 F.2d 100 (1951)

In re FEDERAL WATER & GAS CORP. et al. Appeal of CHENERY CORP. et al.

No. 10160.

United States Court of Appeals, Third Circuit.

Argued December 19, 1950.

Decided April 2, 1951.

Writ of Certiorari Denied June 4, 1951.

Charles A. Horsky, Washington, D. C. (Daniel M. Gribbon, Wilbur R. Lester, Washington, D. C., Covington, Burling, Rublee, O'Brian & Shorb, Washington, D. C., on the brief), for appellants.

Allen S. Hubbard, New York City (Jerome G. Shapiro, New York City, Hughes, Hubbard & Ewing, New York City, on the brief), for respondent, Federal Water & Gas Corp.

Roger S. Foster, Washington, D. C. (Myron S. Isaacs, Special Counsel, Ellwood L. Englander and Richard S. Ries, all of Washington, D. C., on the brief), for Securities and Exchange Commission.

Percival E. Jackson, New York City, for appellees, Common Stockholders Committee of Federal Water & Gas Corp.

Before MARIS, McLAUGHLIN and HASTIE, Circuit Judges.

Writ of Certiorari Denied June 4, 1951. See 71 S.Ct. 1018.

MARIS, Circuit Judge.

This is an appeal from an order of the District Court for the District of Delaware enforcing, on the application of the Securities and Exchange Commission, a plan for the dissolution of the Federal Water and Gas Corporation. The plan had been proposed by Federal Water and Gas Corporation and approved by the Commission under Section 11(e) of the Public Utility Holding Company Act of 1935.¹ The appellants, whom we shall call the Chenery group, were officers, directors and controlling stockholders of a predecessor company, Federal Water Service Corporation. They assert that the district court erred in approving and ordering to be enforced that part of the plan of dissolution which excludes them from participation as stockholders in the distribution of the assets of Federal Water and Gas Corporation with respect to preferred stock of Federal Water Service Corporation acquired by them during the course of the reorganization and which relegates them to the position of creditors of Federal Water and Gas Corporation with respect to that stock. The Commission and the Common Stockholders Committee of Federal Water and Gas Corporation oppose this contention. They assert that in prior proceedings for the reorganization by merger of Federal Water Service Corporation, its parent, Utility Operators Company, and its wholly owned subsidiary, Federal Water and Gas Corporation, from which the present Federal Water and Gas Corporation emerged, it was finally determined that the Chenery group were not entitled to become stockholders in the corporation which resulted from the merger with respect to the preferred stock in question but must be regarded as creditors of that corporation to the extent of the cost of that stock plus interest.

To determine the validity of the respective contentions of the parties we must examine the nature of the prior proceedings to which reference is made. We accordingly briefly review them.

The merger proceeding was initiated by a plan of reorganization and merger proposed by Federal Water Service Corporation in order to comply with the requirements of Section 11 of the Act. The plan was filed on March 30, 1940 under Section 7 of the Act. At hearings thereon it appeared that the members of the Chenery group had purchased shares of preferred stock of Federal Water Service Corporation in the years during which the plan of reorganization was being formulated by them as officers, directors and controlling stockholders. In an opinion filed March 24, 1941,² the Commission concluded that the Chenery group was disqualified, upon equitable principles, from participating in the reorganization with respect to these shares. The Commission accordingly disapproved the proposed plan to the extent that it permitted the Chenery group to participate in the merger with respect to these shares and indicated that the group should be limited in participation to the actual cost of the stock thus purchased. On August 12, 1941, Federal Water Service Corporation amended the plan as suggested by the Commission so as to limit the participation of the Chenery group in the merger to the actual cost of the stock thus purchased by them with interest at the rate of 4% per annum from the dates of purchase to the effective date of the merger. The amendment provided that no shares of common stock of the merged corporation should be issued in lieu of the shares of preferred stock of Federal Water Service Corporation purchased since November 8, 1937 by the Chenery group, but that the merged corporation pay the holders their cost plus interest upon surrender of their shares. The plan as thus amended was approved by the Commission on September 24, 1941.³ Thereupon the Chenery group petitioned the Court of Appeals for the District of Columbia to review the Commission's order approving the merger agreement which as thus amended excluded them from participation as stockholders.

At stockholders' meetings held October 28, 1941, the amended agreement of merger was approved by the requisite majorities of stockholders of the three corporations involved. At this election the members of the Chenery group voted against the adoption of the merger agreement. The merger was consummated on October 31, 1941. Review proceedings for the ultimate determination of the rights of the Chenery group, as we have said, were then pending before the Court of Appeals.

The Court of Appeals on April 27, 1942 reversed the order of the Commission approving the merger agreement which excluded the Chenery group from participation as stockholders.⁴ Certiorari was granted upon petition of the Commission. On February 1, 1943 the Supreme Court remanded the case to the Court of Appeals with directions to remand it to the Commission for such further proceedings not inconsistent with the opinion of the Supreme Court as might be appropriate.⁵ While it is not necessary, in the view which we take of the case, for us to analyze the basis of the Court's action, it appears that the Court concluded that established equitable principles did not justify the Commission's action with respect to the Chenery group but that since the standards laid down by the Act might be construed by the Commission to do so, the case should be remanded in order to enable the Commission to give further consideration to the impact of those standards.

After remand of the case to the Commission, Federal Water and Gas Corporation on April 7, 1943 applied to it for approval of an amendment to the plan of reorganization under which the corporation had been formed on October 31, 1941. The amendment proposed that the merger agreement should be altered so as to provide for the issuance of stock of the reorganized corporation to the Chenery group with respect to the preferred stock of Federal Water Service Corporation in question upon the same basis upon which it had already been issued to the public investors in that stock. The Commission thereupon reconsidered the matter and determined upon the basis of standards which it drew from the Act that the proposed amendment to the plan could not be approved. Accordingly, on February 7, 1945 the Commission entered orders denying the application to amend the plan of reorganization and reapproving the plan as constituted on September 24, 1941.⁶ The Chenery group thereupon sought a review of these orders by the Court of Appeals for the District of Columbia and that court on February 4, 1946 set the orders aside.⁷ However, upon certiorari again sought by the Commission, the Supreme Court reversed the judgment of the Court of Appeals, holding that the Commission was within its province in concluding that the proposed amendment permitting participation by the Chenery group as stockholders in the merger was inconsistent with the standards of the Act.⁸ Accordingly, upon remand, the Court of Appeals for the District of Columbia vacated its prior judgment and entered a judgment affirming in all respects the orders of the Commission under review.

This terminated the litigation with respect to the reorganization of Federal Water Service Corporation and its affiliated companies and the creation by merger of Federal Water and Gas Corporation. The merger, therefore, continued in effect as provided for by the merger agreement as originally amended and approved by the Commission. Accordingly the Chenery group never did become stockholders of Federal Water and Gas Corporation with respect to the preferred shares of Federal Water Service Corporation in question but on the contrary in accordance with the terms of the merger agreement became creditors for the amount of the actual cost of those shares, with interest.

Federal Water and Gas Corporation had previously on December 31, 1942 filed with the Commission pursuant to Section 11(e) of the Act a plan under which it would cease to exist by dissolution or otherwise. A number of supplemental plans were filed from time to time thereafter and finally on November 7, 1947 the Corporation filed an amended and supplemental plan for its liquidation and dissolution which the Commission took under consideration. The amended plan purported to treat the rights of the Chenery group as still undecided. The Commission, however concluded that the question had been finally settled in the prior proceedings in which it had been determined that the payment to the Chenery group by Federal Water and Gas Corporation of the cost of the preferred shares of Federal Water Service Corporation in question with interest, totaling $313,190.22, in full discharge of their claims, as provided by the amended merger agreement, would be fair and equitable. The amended plan of liquidation and dissolution was then further amended to conform to the Commission's conclusions and as thus amended was approved on July 27, 1948.⁹

On July 28, 1948...