Manufacturers Credit Corp. v. SECURITIES & EXCH. COM'N, 17088
| Decision Date | 16 May 1968 |
| Docket Number | No. 17088,17112.,17088 |
| Citation | 395 F.2d 833 |
| Parties | In the Matter of MANUFACTURERS CREDIT CORPORATION et al., Debtors, Appellants, and Official Unsecured Creditors' Committee, Intervenor, v. SECURITIES AND EXCHANGE COMMISSION, Appellee. In the Matter of MANUFACTURERS CREDIT CORPORATION et al., Debtors. Sidney ENGELHARDT, Emanuel Engelhardt, and Isidor Engelhardt, and Kenron Co., a Partnership (Creditors), Appellants, v. SECURITIES AND EXCHANGE COMMISSION, Appellee. Joseph Thieberg, Receiver, Appellee. |
| Court | U.S. Court of Appeals — Third Circuit |
COPYRIGHT MATERIAL OMITTED No. 17088:
Jay R. Benenson, Furst, Furst, Feldman & Benenson, Newark, N. J., for appellant Debtor Corporation.
Charles Seligson, Seligson & Morris, New York City, for appellants.
Morris Ravin, Ravin & Ravin, Newark, N. J., for appellee-receiver.
Richard V. Bandler, Associate Regional Administrator, Securities and Exchange Commission, New York City, for appellee, Securities and Exchange Commission in both appeals.
Before KALODNER, FORMAN and FREEDMAN, Circuit Judges.
This case involves the consolidation of two appeals from an order of the United States District Court for the District of New Jersey of January 12, 1968. In Appeal No. 17088, twenty-six debtor corporations and an official creditors committee question the propriety of that order which granted the motion of the Securities and Exchange Commission (hereinafter SEC) to dismiss arrangement proceedings under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., unless amended petitions are filed either by the debtors or their creditors complying with the reorganization provisions of Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq. In Appeal No. 17112, appellants, Sidney, Emanuel and Isidor Engelhardt (hereinafter Engelhardt) and Kenron Co., challenge only that part of the District Court's order which relates to four of the corporations in which they claim substantial interests.
In 1932 Theodore J. Richmond formed a New Jersey corporation named Manufacturers Credit Corporation (hereinafter Manufacturers) to conduct a finance business. Sometime prior to 1948 it became a holding company and by 1967 a complex of twenty-six subsidiary or affiliated companies had been incorporated or acquired. Mr. Richmond was president of each company and controlled its affairs. The stock of each was owned directly or indirectly by Mr. Richmond, his wife and two daughters. The companies have been classified as follows:
Company Business
1. Inter-City Transportation
Co., Inc. Franchised Inter-State Bus Line
2. Northeast Coast Lines Franchised Inter-State Bus Line
3. Orange & Black Bus Lines
Inc. Franchised Inter-State Bus Line
4. Warwick-Greenwood Lake &
New York Transit, Inc. Franchised Inter-State Bus Line
5. Homestead Transit Co., Inc. Franchised Inter-State Bus Line
6. Inter-City Lines of New
York, Inc. Franchised Inter-State Bus Line
7. Lake Region Coach Co., Inc. Franchised Inter-State Bus Line
8. Fairview Motor Repairs, Franchised Inter-State Bus Line
Inc. Bus Leasing
9. New Jersey-New York
Transit Co., Inc. Bus Leasing
10. Warwick Coaches, Inc. Bus Leasing
11. Washington Corp. Bus Leasing and Financing
12. Clifton Terminal Corp. Real Estate
13. Donal, Inc. Real Estate
14. Fairtrans Realty Corp. Real Estate
15. Jaytee Securities Corp. Real Estate
16. Monroe Securities Corp. Real Estate and Financing
17. Orblack Securities Corp. Holding Company
18. Waldwick Realty Company
Inc. Holding Company
19. Manufacturers Credit
Corporation Financing and Holding Company
20. Intercity Securities
Corporation Financing
21. Inter-State Securities
Corporation Financing
22. Mondrich Securities Corp. Financing
23. Tee Jay Ar Securities Corp. Financing
24. Te Jay Commercial Corp. Financing
25. Transit Securities
Corporation Financing
26. Inter-City Tours, Inc. Transportation Broker
Nine corporations, including Manufacturers, are engaged in the financing business. Seven are engaged in the operation of bus lines. One company is a transportation broker and another owns real estate in New Jersey not used in connection with the bus operations. Except for Orange & Black Bus Lines, Inc., none of these companies owns the buses used in its service. The buses and other equipment are leased to the operating companies by four of the affiliated companies. Similarly, the operating companies do not own the garages, parking lots or terminals which they use. These facilities are leased from four other affiliated companies which are engaged in the real estate business.
In 1948 Manufacturers began the sale to the public of its unsecured corporate promissory notes bearing interest at rates ranging from 9 percent to 15 percent and maturing generally in three years. By 1954, the principal debt outstanding from these notes approximated $400,000. Since then, the amount borrowed by Manufacturers has increased to more than $48,000,000 owed to about 4,000 public investors. Eight of Manufacturers affiliated or subsidiary corporations engaged in similar borrowing operations and now owe more than 900 lenders almost $10,000,000. It is alleged that no registration statement, required by the Securities Act of 1933, 15 U.S.C. § 77a et seq., was filed during the twenty years of public financing, although it does not appear that any exemption from registration was available. It is further alleged that many persons acted as "finders" on a regular basis and were paid bonuses or commissions for their services in bringing in new investors and that they now hold notes in upwards of $2,000,000.
In reality, Mr. Richmond employed these financing corporations as instrumentalities whereby he borrowed ever increasing huge amounts of money from the public. His scheme was to have the corporations turn over to him the proceeds from the sale of the unsecured promissory notes whereupon he paid the interest charges and other expenses. The corporations were represented as the borrowers to preclude the defense of usury. As interest accrued and principal amounts matured new notes were sold and their proceeds used to meet the earlier obligations. The result of this method of financing was an increasingly complicated debt structure with thousands of notes outstanding issued by various debtors, bearing different interest rates and maturing at different dates.1 The payments required by the terms of these notes in 1966 amounted to approximately $6,000,000 for interest and an equal amount for principal. As against this debt servicing charge of $12,000,000, the 1966 combined profits of all of the companies was approximately $300,000.
The crisis which followed precipitated the filing of a joint petition under Chapter XI of the Bankruptcy Act by Manufacturers and nineteen of its subsidiary or affiliated corporations on August 1, 1967. Pursuant to a petition by Mr. Richmond as president of six additional corporations, an order was entered on August 3, 1967 extending the original Chapter XI proceedings over them. A receiver was appointed who has supervised the operations of all of the debtors.2 An official creditors committee was formed and it has actively participated in the proceedings.
On August 28, 1967 each of the debtors filed schedules and statement of affairs. In the aggregate, assets totalled $136,217,309, including $109,443,183 of inter-company receivables, and liabilities amounted to $120,660,618, including inter-company debts or sums owed to Mr. Richmond of $54,716,433. Actual tangible assets listed in the schedules totalled $10,000,000 not including the value of the franchises, while liabilities, exclusive of debts owed to Mr. Richmond and affiliated companies, amounted to $65,950,361.
On October 27, 1967, after lengthy negotiations with the official creditors committee, the debtors proposed a plan of arrangement. The "essential thrust" of the plan, as asserted by the debtors, is that the stockholders of the debtor corporations would convey all of their stock to the receiver and 1,000,000 new shares of capital stock of Manufacturers would be issued, 90 percent of which is to be designated as Class "A" and 10 percent as Class "B". The Class "A" stock is to be held in trust or distributed on a pro-rata basis for the benefit of the unsecured creditors. Soli Fuhrman, Mr. Richmond's son-in-law, would receive all of the Class "B" stock. A new nine-man board of directors would be chosen, seven selected by the Class "A" stockholders and two by the Class "B" stockholder. Mr. Fuhrman would be employed as general manager, a position he had held for nineteen years. The Class "A" stock would be preferred over the Class "B" stock as to dividends and liquidation. The Debtors state that the main concept of the plan would be to effectively convey complete control, ownership and management of the entire business to the creditors.
The proposed plan also called for the issuance of new promissory notes to general unsecured creditors in full settlement of their claims. The claims of the creditors were to be scaled down according to a formula in which it was recognized that as investors loaned money to Mr. Richmond, he used the funds to pay interest on prior loans. On the assumption that the average rate of interest was 12 percent, under the formula 7 percent was to be considered a return on principal and 5 percent as...
To continue reading
Request your trial
-
In re Richmond
...interests concerned including those of the debtor,'" we affirmed the District Court's order. Manufacturers Credit Corporation v. Securities and Exchange Commission, 395 F.2d 833, 843 (3d Cir. 1968). In addition to the proceedings involving the debtor's corporations, the debtor also filed on......
-
Continental Inv. Corp., In re
...Co. of Fort Smith, 410 F.2d 851 (8th Cir. 1969) (transferring to Chapter X where adjustment not minor); Manufacturers Credit Corp. v. SEC, 395 F.2d 833 (3d Cir. 1968) (transferring to Chapter X where radical readjustment of debt structure); SEC v. Canandaigua Enterprises Corp., 339 F.2d 14,......
-
White v. Abrams
...remanded. * Honorable Fred M. Taylor, United States District Judge, Boise, Idaho, sitting by designation. 1 See Manufacturers Credit Corp. v. SEC, 395 F.2d 833 (3d Cir. 1968), dealing with the bankruptcy proceedings of the Richmond Corporations, for background to the present 2 Since the rel......
-
Kreiger v. U.S.
...Chapter XI of the Bankruptcy Act in August, 1967. One controversy spawned by that petition reached this court in Manufacturers Credit Corp. v. SEC, 395 F.2d 833 (3d Cir. 1968). The opinion in that case, filed in May 1968, describes the history, structure and operations of MCC and its subsid......