Equity Corporation v. Brickley

• Citation: 237 F.2d 839
• Decision Date: 26 October 1956
• Docket Number: 5128.,No. 5127,5127
• Parties: The EQUITY CORPORATION, Appellant, v. Bartholomew A. BRICKLEY, Trustee, et al., Appellees. CENTRAL-ILLINOIS SECURITIES CORPORATION, et al., Appellants, v. Bartholomew A. BRICKLEY, Trustee, et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

237 F.2d 839 (1956)

The EQUITY CORPORATION, Appellant, v. Bartholomew A. BRICKLEY, Trustee, et al., Appellees.

CENTRAL-ILLINOIS SECURITIES CORPORATION, et al., Appellants, v. Bartholomew A. BRICKLEY, Trustee, et al., Appellees.

Nos. 5127, 5128.

United States Court of Appeals First Circuit.

Heard October 4, 1956.

Decided October 26, 1956.

As Amended November 23, 1956.

David Schenker, New York City, with whom Schenker & Schenker, New York City, was on brief, for The Equity Corp., appellant.

Morris L. Forer, Philadelphia, Pa., with whom Daniel C. Cohen, and Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., were on brief, for Central-Illinois Securities Corp. and C. A. Johnson, appellants.

Aaron Levy, Atty., Washington, D. C., with whom Thomas G. Meeker, Gen. Counsel, Frederick Zazove, Chief Counsel, Division of Corporate Regulations, and Robert S. Keebler, Atty., Washington, D. C., were on brief, for Securities and Exchange Commission, appellee.

Ganson Purcell, Washington, D. C., with whom C. Roger Nelson, Washington, D. C., was on brief, for Interim Board of Directors of Internat. Hydro-Electric System, appellee.

Henry J. Friendly, New York City, with whom Leonard S. Sheriff, New York City, was on brief, for Lucinda Bunnen et al., appellees.

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

MAGRUDER, Chief Judge.

Appellants in these cases, Central-Illinois Securities Corporation, a registered investment company, and C. A. Johnson, its president and principal stockholder, and The Equity Corporation, another registered investment company, are all stockholders of International Hydro-Electric System (hereinafter abbreviated to IHES), a registered holding company under the Public Utility Holding Company Act of 1935, 49 Stat. 803, 15 U.S.C.A. § 79 et seq. The appeals are from an order of the United States District Court for the District of Massachusetts entered April 23, 1956, issued under § 11(d) of the Act, approving and enforcing a plan of reorganization of IHES deemed to be a fair and equitable means of compliance with the corporate simplification requirements of § 11(b) of the Act, in accordance with an order of the Securities and Exchange Commission, as modified.

IHES was organized as a Massachusetts business trust, under an original declaration of trust dated March 25, 1929, and since amended from time to time. The trustees, and by delegation the board of directors, were given the broadest discretionary powers to engage in almost any sort of business activity — this without the requirement of a favoring vote by the shareholders, and without any obligation on the part of the trust to buy out a dissenting shareholder. Thus, though IHES started out as a holding company in the public utility field, the trustees and/or the board of directors, if they deemed it advisable, were fully empowered to dispose of the utility subsidiaries of the trust and to transmute IHES into an investment company.

On June 17, 1940, the Securities and Exchange Commission instituted a proceeding under § 11(b) of the Public Utility Holding Company Act to determine what action was necessary to be taken by IHES to comply with the simplification standards of § 11(b) (2). Eventually, on July 21, 1942, after elaborate hearings, the Commission issued its Findings, Opinion and Order requiring that IHES be liquidated and dissolved, such liquidation and dissolution to be "carried out with care and in a manner which subserves the public interest in every particular." International Hydro-Electric System, 11 SEC 888, 908. On a petition by a shareholder of IHES for review of this Commission order, under § 24(a) of the Act, the Court of Appeals for the Sixth Circuit upheld the Commission and directed that the shareholder's petition for review be dismissed. Todd v. S. E. C., 1943, 137 F.2d 475.

In view of the inability of the IHES management to come forward with a satisfactory plan for the orderly liquidation of the holding company, the Commission filed in the United States District Court for the District of Massachusetts an application under § 11(d) of the Act asking for a court decree enforcing compliance with the Commission's dissolution order of July 21, 1942. The district court took jurisdiction of IHES and its assets and enjoined the debenture holders from filing suits for enforcement of their claims pending the orderly liquidation of the estate. In November, 1944, the district court appointed Bartholomew A. Brickley as trustee of the estate of IHES, and since then Mr. Brickley has continued actively in that capacity.

In 1947 the trustee and interested security holders filed various plans for a division of the assets and for dissolution of IHES. After extensive hearings, serious disagreements among the various classes of security holders became apparent. In April, 1949, the trustee proposed a Second Plan, in four parts, for the liquidation of IHES. Parts I and II provided for the retirement of the IHES debentures and for a two-year bank loan. Part III provided for the issuance of trustee certificates to IHES preferred shareholders and Class A stockholders, and Part IV provided for distribution of the residue of the assets and dissolution of the enterprise. After Parts I and II had been duly approved by the Commission and the district court, a compromise agreement was executed on March 26, 1953, the terms of which were embodied in Part III (as amended) and Part IV (as amended) of the trustee's Second Plan. Part III (as amended) provided (a) for the retirement of the IHES preferred stock, and (b) for the election of an interim board of directors of IHES to consist of nine members, with the function of representing the stockholders in formulating a plan for implementing Part IV (as amended), which called for a request to the Commission to modify its flat dissolution order of July 21, 1942, so as to permit the continuance of IHES as a closed-end nondiversified investment company to be registered as such under the Investment Company Act of 1940, 54 Stat. 789, 15 U.S.C.A. § 80a-1 et seq. Be it noted that at the date of this compromise agreement of March 26, 1953, all the parties in interest were in apparent accord upon the desirability of modifying the Commission's dissolution order to permit survival of IHES as an investment company, and all assumed that the Commission had power to make such modification.

Meanwhile, in June, 1949, Paul H. Todd, a large stockholder in IHES, had proposed a plan to the Commission under which IHES would be permitted to continue in existence as an exempt holding company under § 3(a) (5) of the Act, this on the argument that most of the abuses and violations of the Act pointed out in the Commission's opinion supporting its 1942 dissolution order had already been eliminated. The Todd plan was supported by the IHES Class A stockholders but was opposed by the trustee, by the Commission's staff, and by the IHES preferred stockholders. An order was entered by the Commission disapproving the Todd plan. Upon a petition for review under § 24(a) filed by the Class A Stockholders Protective Committee, the Court of Appeals for the Second Circuit sustained this order of denial by the Commission. Protective Committee, etc. v. S. E. C., 1950, 184 F.2d 646.

After that, Todd and the Class A Stockholders Protective Committee took a new tack and filed other plans for the continuance of IHES, now to be divested of other public utility subsidiaries and turned into an investment company, instead of remaining as an exempt holding company as previously proposed and turned down by the Commission. While these plans were pending, the trustee of IHES made arrangements for the disposition of its various domestic subsidiaries, which greatly increased the cash position of IHES. The Class A stockholders of IHES and its preferred stockholders were persuaded to harmonize their previous differences and to execute the compromise agreement of March 26, 1953, above alluded to, upon assurances by the Commission's staff that the staff would support the proposal for continuance of IHES as an investment company, provided the bank debt and the IHES preferred stock were retired, leaving IHES with only one class of outstanding stock, the Class A stock, and with no domestic utility subsidiaries, IHES retaining only the stock of one foreign public utility, Gatineau Power Company of Canada.

A special election was held for the choice of the interim board of directors on April 27-28, 1954. There had been a proxy contest between two rival factions, the so-called Todd-Jacobs group and the Johnson-Romney group. Ninety-five per cent of the outstanding Class A shares voted at the election, and on the face of the returns the Todd-Jacobs group elected five men and the Johnson-Romney group elected four. On December 8, 1954, the district court entered an order provisionally seating as the interim board of directors of IHES the nine persons so chosen, "with only the authority and for the sole purpose of representing the Class A stockholders in all proceedings before the Securities and Exchange Commission and this Court and in particular with reference to the formulation of proposals for the consummation of Part IV (First Amendment) of the Trustee's Second Plan."

The interim board in January, 1955, filed its plan, under which IHES (renamed Abacus Fund) would continue as a closed-end investment company, with minor and noncontroversial amendments to the old declaration of trust in the direction of increasing the protection of the stockholders. Upon registration as an invesment company, it was proposed that the Commission would issue an order exempting the company as a holding company under § 3(a) (5) of the Act.

A different plan was filed by appellants Johnson and Central-Illinois Securities Corporation, supported in the main also by appellant The Equity...