336 U.S. 132 (1949), 21, Callaway v. Benton

Docket Nº:No. 21
Citation:336 U.S. 132, 69 S.Ct. 435, 93 L.Ed. 553
Party Name:Callaway v. Benton
Case Date:February 07, 1949
Court:United States Supreme Court

Page 132

336 U.S. 132 (1949)

69 S.Ct. 435, 93 L.Ed. 553




No. 21

United States Supreme Court

Feb. 7, 1949

        Argued October 19, 1948




        A railroad in reorganization under § 77 of the Bankruptcy Act had for many years leased and operated the property of another railroad, which was solvent and not in reorganization. Under the plan of reorganization approved by the Interstate Commerce Commission and the bankruptcy court, the lessor was given the alternative of selling all of its property to the reorganized company on specified terms or having its lease disaffirmed and its property returned. A majority of the lessor's stockholders voted to accept the offer, but a substantial minority voted to reject it. In a suit brought by minority stockholders, a state court issued a temporary injunction restraining the officers and directors from selling the property or certifying the company's acceptance of the offer to the Commission, on the ground that state law required unanimous consent of the stockholders to such a sale. The bankruptcy court enjoined further prosecution of the state action and declared the state court's temporary injunction null and void as in excess of its jurisdiction.

        Held: under the narrow facts presented here, the bankruptcy court erred in enjoining the state court suit leading to a determination of the requirements of state law with respect to the sale of the entire assets of the lessor. Pp. 134-151.

        1. Since the lessor was not being reorganized along with the lessee, and the plan of reorganization gave the lessor the unfettered right to accept or reject the offer to purchase all its property, the question whether the offer could be accepted by less than a unanimous vote of the lessor's shareholders was a question of state, not federal, law. Pp. 136-141.

        (a) The Bankruptcy Act gives no clue as to what proportion of the lessor's stockholders must vote to accept the offer if state law is not controlling. P. 139.

        (b) The majority vote provision of § 5(11) of the Interstate Commerce Act is not applicable in this case, since this is not a proceeding under that Act. Pp. 139-140.

        (c) The Bankruptcy Act does not give the Commission or the court the right to require acceptance by a lessor not in reorganization

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of an offer for the purchase of its property, and no such power was asserted by the Commission in this case. P. 141.

        2. The bankruptcy court did not have exclusive jurisdiction to decide this question of state law. Pp. 141-149.

        (a) While § 77(a) of the Bankruptcy Act gives the bankruptcy court exclusive jurisdiction of the debtor and its property, it does not give the bankruptcy court exclusive jurisdiction over all controversies that in some way affect the debtor's estate. P. 142.

        (b) The interest here involved was not a part of the property of the debtor, but the lessor's reversion in fee, and the issue concerned the rights of the lessor's stockholders inter sese to sell their reversionary interest in the property. Pp. 142-143.

        (c) The lessor not being in reorganization, its internal management was not subject to the control of the bankruptcy court. Pp. 144-146.

        (d) The purchase of formerly leased properties does not involve rights asserted by the lessor against the debtor; it is a creditor in the proceedings only by virtue of its claims against the debtor under the lease and for breach of the lease. Pp. 146-147.

        (e) The jurisdiction asserted by the district court over a solvent lessor not in reorganization was not justified by any provision of § 77. Pp. 146-148.

        3. In the circumstances of this case, Continental Illinois Bank v. Chicago, R.I. & P. R. Co., 294 U.S. 648, and other cases dealing with the power of an equity court to prevent the defeat or impairment of its jurisdiction do not support the bankruptcy court's injunction against the state court action and its determination of the issue there involved. Pp. 149-151.

        165 F.2d 877, affirmed.

        A federal district court having jurisdiction of a proceeding to reorganize a railroad under § 77 of the Bankruptcy Act enjoined further proceedings in a state court to determine the rights inter sese under state law of stockholders of another railroad not in reorganization to sell to the railroad being reorganized certain property leased to and operated by the latter. The Court of Appeals reversed. 165 F.2d 877. This Court granted certiorari. 333 U.S. 853. Affirmed, p. 151.

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        VINSON, J., lead opinion

        MR. CHIEF JUSTICE VINSON delivered the opinion of the Court.

        The Central of Georgia Railway Company, whose Trustee is the petitioner here, and its predecessor have leased and operated the property of the South Western Railroad Company since 1869. The Central went into receivership in 1932, and in 1940 entered reorganization under § 77 of the Bankruptcy Act, 49 Stat. 911, 11 U.S.C. § 205. South Western's lease was adopted successively by Central's Receiver and Trustees. It has, in consequence, remained solvent, and no petition for reorganization has ever been filed in its behalf.

       [69 S.Ct. 438] Under the plan of reorganization of the Central promulgated by the Interstate Commerce Commission and approved by the district court, South Western is given the alternative of selling its property to the reorganized company in return for a fixed amount of bonds of the latter or of having the lease disaffirmed by the debtor, and its property returned.1 South Western appeared specially

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in the reorganization proceedings and asked that its lease be adopted by the reorganized company, but, on the basis of studies and estimates not now open to challenge, the Commission rejected the proposal and found that the amount offered for its properties appears "fair and equitable, and to equal the value of the transportation property, and [is] approved."2

        Following Commission and court approval of the plan, South Western's officers, reversing their previous stand, urged acceptance of the offer by its stockholders and signified their intention of conveying the company's property to the Central if a majority of the stockholders voted to accept. Thereupon, the respondents, who are individual stockholders of South Western, brought an action in the Superior Court of Bibb County, Georgia, where South Western's principal office is located, asking for an injunction against South Western, its officers and directors, restraining them from certifying the company's acceptance of the offer to the Interstate Commerce Commission or from selling the railroad's property to the reorganized debtor if, upon a vote of the stockholders, a "mere majority" of the stock was voted in favor of the plan. The basis of the petition for injunction was the contention that, under the laws of Georgia, where South Western was incorporated,

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the entire assets of the company cannot be sold except upon unanimous approval of the stockholders.

       Before a decision was reached in the state court action, a meeting of South Western's stockholders was held at which the offer of purchase incorporated in the Central's plan of reorganization was considered. 30,137 shares were voted in favor of acceptance against 9,057 shares favoring rejection. Petitioner, acting as Trustee of the Central, which was not a party to the state court suit, then filed a petition in the bankruptcy court asking that respondents and other stockholders of South Western be enjoined from further prosecution of the state court action, and a temporary restraining order was entered as prayed. Thereupon, the state court, of its own motion, entered an interlocutory injunction restraining the officers and directors of South Western from selling its property, on the ground that such a sale, under Georgia law, requires unanimous consent of the stockholders. Petitioner then amended his petition in the bankruptcy court by bringing to its attention the injunctive order of the state court, and, after holding hearings, the federal district court granted a permanent [69 S.Ct. 439] injunction restraining further prosecution of the state action, and declared the state court's temporary injunction null and void as in excess of its jurisdiction. Upon appeal, the Court of Appeals for the Fifth Circuit, one judge dissenting, reversed the order of the district court, 165 F.2d 877. We granted the petition for a writ of certiorari3 because of the conflict between state and federal authority and the importance of the question in the administration of the Bankruptcy Act.

        First. The district court's injunction was based primarily on the premise that the plan of reorganization requires the inclusion of South Western's lines within the

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system of the reorganized company. The state action is said to be an attempt on the part of respondents "to prevent the consummation of the plan as respects South Western." Again, the court held that

the question of the consolidation, merger, and sale, and under what conditions South Western may convey its property to the reorganized company in consummation of the plan, is not a question of State law; it is a question of Bankruptcy law -- a question which arises under the Bankruptcy Act and the Interstate Commerce Act.

        The court's conclusion was therefore that, although the question whether a Georgia railroad corporation can convey all of its properties without unanimous consent of its stockholders would ordinarily be one of state law cognizable in the state's courts, under these circumstances, the decision was one for the bankruptcy...

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