General Stores Corporation v. Shlensky

• Decision Date: 26 March 1956
• Docket Number: No. 170,170
• Citation: 100 L.Ed. 550,76 S.Ct. 516,350 U.S. 462
• Parties: GENERAL STORES CORPORATION, Petitioner, v. Max SHLENSKY, Securities and Exchange Commission, Creditors' Committee and WageClaimants
• Court: U.S. Supreme Court

350 U.S. 462

76 S.Ct. 516

100 L.Ed. 550

GENERAL STORES CORPORATION, Petitioner,

v Max SHLENSKY, Securities and Exchange Commission, Creditors' Committee and WageClaimants.

No. 170.

Argued Jan. 18, 1956.

Decided March 26, 1956.

Messrs. Aaron Rosen, Frederic P. Houston, New York City, for petitioner.

Mr. Max Goldweber, Jamaica, N.Y., for respondent Wage Claimants.

Mr. Leon Singer, New York City, for respondent Creditors Committee.

Mr. A. Alan Reich, New York City, for respondent Max Shlensky.

Mr. William H. Timbers, Washington, D.C., for respondent Securities Exchange Comm.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Petitioner instituted proceedings under c. XI of the Bankruptcy Act, 52 Stat. 905, as amended, 11 U.S.C. § 701 et seq., 11 U.S.C.A. § 701 et seq., alleging it was unable to pay its debts as they matured. It proposed an arrangement of its general unsecured trade and commercial debts, none of which is evidence by any publicly held security. Petitioner has indeed no debts of any nature by way of bonds, mortgage certificates, notes, debentures, or obligations of like character, publicly held. It does, however, have over 2,000,000 shares of $1 par value common stock listed on the American Stock Exchange and held by over 7,000 shareholders. One of these—an owner of 3,000 shares—and the Securities and Exchange Commission moved that the proceedings be dismissed unless, within a time fixed by the court, the petition by amended to comply with the requirements of c. X of the Bankruptcy Act, 52 Stat. 883, as amended, 11 U.S.C. § 501 et seq., 11 U.S.C.A. § 501 et seq., for a corporate reorganization. The District Court granted the motions. 129 F.Supp. 801. The Court of Appeals affirmed by a divided vote. 222 F.2d 234. The case is here on certiorari. 350 U.S. 809, 76 S.Ct. 65.

Petitioner, formerly known as D. A. Schulte, Inc., has operated for some years a chain of stores for the sale of tobacco and accessory products. Petitioner has also had a chain of difficulties. Its financial problems go back at least to 1936 when it filed a petition for reorganization under former § 77B of the Bankruptcy Act. After its reorganization was completed in 1940, it had a few years of prosperity followed by a postwar decline in volume of business, a rise in costs, and substantial losses. During these years $600,000 cash was raised by the sale of stock and a new management installed with a view to converting some existing stores into candy, food, and drink establishments. That idea was abandoned and the proceeds of the stock sale were used for general corporate purposes. It was then decided to liquidate the existing specialty stores and to have petitioner acquire the stock of two existing retail drugstore chains—Stineway Drug Company and Ford Hopkins Company. The Stineway stock was acquired for $1,220,320, petitioner borrowing $870,000 from Stineway for the purpose. Later petitioner borrowed an additional $440,000 from Stineway to help make the down payment on the Ford Hopkins stock, making a total indebtedness to Stineway of $1,310,000, represented by two non-interest-bearing notes. The Ford Hopkins stock was acquired for $2,800,000, the down payment being $735,000, the balance being payable in a yearly amount of $200,000 with 4 per cent interest and secured by the Stineway and Ford Hopkins stock.

While the two drug chains were being acquired, petitioner started the liquidation of its own stores, a process that was completed under c. XI of the Bankruptcy Act. The disposition of those stores involved the rejection of numerous leases and the creation of claims of landlords against petitioner.

The arrangement proposed by petitioner under c. XI would extend its unsecured obligations and provide for a 20 per cent payment on confirmation of the plan and 20 per cent annually for 4 years thereafter. The claims listed were the $1,310,000 debt to Stineway and $525,000 unsecured claims, exclusive of claims by landlords. We were advised on oral argument that during the course of the c. XI proceedings it was decided that this offer was not feasible and that the unsecured creditors are now offered the equivalent of 40 per cent of their claims in full satisfaction.

Much of the argument has been devoted to the meaning of Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293. In that case we held that relief was not properly sought under c. XI but that c. X offered the appropriate relief. That was a case of a debtor with publicly owned debentures, publicly owned mortgage certificates, and publicly owned stock. An arrangement was proposed that would leave the debentures and stock unaffected and extend the certificates and reduce the interest. It was argued in that case, as it has been in the instant one, that c. X affords the relief for corporations whose securities are publicly owned, while c. XI is available to debtors whose stock is closely held; that c. X is designed for the large corporations, c. XI for the smaller ones; that it is the character of the debtor that determines whether c. X or c. XI affords the appropriate remedy. We did not adopt that distinction in the United States Realty case. Rather we emphasized the need to determine on the facts of the case whether the formulation of a plan under the control of the debtor, as provided by c. XI, or the formulation of a plan under the auspices of disinterested trustees, as assured by c. X and the other protective provisions of that chapter, would better serve 'the public and private interests concerned including those of the debtor.' 310 U.S. at page 455, 60 S.Ct. at page 1053. The United States Realty case presented a rather simple problem. There one class of creditors was being asked to make sacrifices, while the position of the stockholders remained unimpaired, id., 310 U.S. 453—454, 456, 60 S.Ct. 1052, 1053, contrary to the teachings of Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. Moreover, the history of the company raised a serious question 'whether any fair and equitable arrangement in the best interest of creditors' could be effected 'without some rearrangement of its capital structure.' Id., 310 U.S. 456, 60 S.Ct. 1053. For those reasons c. X was held to offer the appropriate relief.

The character of the debtor is not the controlling consideration in a choice between c. X and c. XI. Nor is the nature of the capital structure. It may well be that in most cases where the debtor's securities are publicly held c. X will afford the more appropriate remedy. But that is not necessarily so. A large company with publicly held securities may have as much need for a simple composition of unsecured debts as a smaller company. And there is no reason we can see why c. XI may not serve that end. The essential difference is not between the small company and the large company but between the needs to be served.

Readjustment of all or a part of the debts of an insolvent company without sacrifice by the stockholders may violate the fundamental principle of a fair and equitable plan, see Case v. Los Angeles Lumber Products Co., supra, as the United States Realty Co. case emphasizes.

Readjustment of the debt structure of a company, without more, may be inadequate unless there is also an accounting by the management for misdeeds which caused the debacle.

Readjustment of the debts may be a minor problem compared with the need for new management. Without a new management today's readjustment may be a temporary moratorium before a major collapse.

These are typical instances where c. X affords a more adequate remedy than c. XI. The appointment of a disinterested trustee, § 156, his broad powers of investigation, § 167, the role of the trustee in preparing a plan, § 169, the duty of the Securities and Exchange Commission to render an advisory report on the plan, § 172, the requirement that the plan be 'fair and equitable, and feasible', §§ 174, 221, the power to include the subsidiaries, Stineway and Ford Hopkins, in the reorganization of petitioner, § 129—these are controls which c. X gives to the entire community of interest in the company being reorganized and which are lacking under c. XI. These controls are essential both where a complicated debt structure must be readjusted and where a sound discretion indicates either that there must be an accounting from the management or that a new management is necessary. Those conditions only illustrate the need for c. X. There may be others equally compelling.

The history of this debtor indicates not fraud but either an improvident overextension or a business that has been out of step with modern trends. One corporate reorganization has already been suffered. Heavy short-term loans hang ominously over the company; and it has been converted from an operating company to a holding company with the shares of the subsidiaries pledged to creditors. It is argued that only a short moratorium is needed. There are, however, fears that a short moratorium may be merely a prelude to new disasters, that what the company needs is a fundamental reorganization of its capital structure, so that its limited cash resources will not be dissipated in an effort to meet the demands for debt reduction. A question as to what is 'fair and equitable' between creditors and stockholders may eventually be reached in the reorganization. But the paramount issue at present concerns what is 'feasible.' A 'feasible' plan within the meaning of c. X, §§ 174, 221, might mean, first a merger of the subsidiaries with the holding company, and, second, a funding of the unsecured debt and a realignment of debt and stock so as to give a balanced capital structure. The old business has been liquidated and the new one launched with heavy borrowings on a short-term basis. If the new one is to succeed, it may well need a more thorough going capital readjustment than is...