Continental Mortg. Investors, In re

• Citation: 578 F.2d 872
• Decision Date: 25 May 1978
• Docket Number: Nos. 77-1216,77-1217,s. 77-1216
• Parties: In re CONTINENTAL MORTGAGE INVESTORS, a Massachusetts Trust with Transferable Shares, Debtor-Appellant. Appeal of SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — First Circuit

Page 872

578 F.2d 872

In re CONTINENTAL MORTGAGE INVESTORS, a Massachusetts Trust

with Transferable Shares, Debtor-Appellant.

Appeal of SECURITIES AND EXCHANGE COMMISSION.

Nos. 77-1216, 77-1217.

United States Court of Appeals, First Circuit.

Argued Sept. 12, 1977.

Decided May 25, 1978.

Alan L. Lefkowitz, Boston, Mass., with whom Edward T. Robinson and Gaston Snow & Ely Bartlett, Boston, Mass., were on brief, for Continental Mortgage Investors, debtor-appellant.

Irving H. Picard, Asst. Gen. Counsel, Washington, D. C., with whom David Ferber, Sol. to the Commission, Washington, D. C., Marvin E. Jacob, Associate Administrator, Lawrence J. Toscano, Sp. Counsel, and Philip M. Mandel, Sp. Counsel, New York City, were on brief, for Securities and Exchange Commission, appellant.

Charles W. Morse, Jr., Boston, Mass., with whom Victor Bass and Sullivan & Worcester, Boston, Mass., were on brief, for John Hancock Mutual Life Ins. Co., et al., appellees.

Robert M. Gargill, Boston, Mass., with whom Choate, Hall & Stewart, Boston, Mass., Henry L. Goodman and Zalkin, Rodin & Goodman, New York City, were on brief, for Creditors' Committee and Certain Senior Creditors, appellees.

Before CAMPBELL and TUTTLE ^*, Circuit Judges, WOLLENBERG ^**, District Judge.

WOLLENBERG, District Judge.

These two appeals involve one of the largest business reorganizations in United States history, initiated on March 8, 1976, by the petition of Continental Mortgage Investors ("CMI" or the "debtor") in the District Court for the District of Massachusetts to effect a plan of arrangement under Chapter XI of the Bankruptcy Act. ¹ The proceedings were referred to a bankruptcy judge who entered the order on October 20, 1976, which is the subject of these appeals, adjudicating CMI a bankrupt. On October 21, 1976, CMI filed a Chapter X ² petition, which was referred back to the same bankruptcy judge. Hearings to determine whether the petition was brought in good faith, that is, whether a corporate reorganization is feasible within the meaning of Chapter X, commenced on November 18, 1976, and are ongoing at the time of this appeal.

The primary concern of these appeals is with the propriety of an order of adjudication of a corporate debtor in Chapter XI proceedings pursuant to Section 376 of the Bankruptcy Act ³ and Rule 11-42(b) ⁴ because it effectively denied without a hearing pending motions to transfer the proceedings to Chapter X made pursuant to Section 328 of the Bankruptcy Act ⁵ and Rule 11-15. ⁶

The order of adjudication by the bankruptcy judge in the case at bar was appealed to the district court by CMI, by the Securities and Exchange Commission ("SEC") and by the Indenture Trustee for CMI's publicly-held Convertible Subordinate Debentures ("Citibank"). The consolidated appeals eventuated in an affirmance by the district court judge on April 21, 1977, from which CMI and the SEC appeal. Appellees are a group of holders of approximately $36 million of the senior note obligations of CMI ("Institutional Investors") and the Chapter XI official creditors' committee ("Creditor Committee").

FACTS

CMI, the debtor in these bankruptcy proceedings, had been one of the largest Real Estate Investment Trusts in the United States. Its shares were actively traded on the New York Stock Exchange. Its investments were principally in construction and development loans secured by first mortgages on real property located throughout the United States and its territories. As a result of unfavorable economic conditions in 1972-1976, including a depression in the real estate market, an increase in interest rates, and the higher cost of building materials and construction labor, CMI experienced financial difficulties which culminated in its filing a voluntary Chapter XI petition in bankruptcy. At that time CMI reported assets of approximately $611 million and liabilities of about $593 million, of which about $46 million was junior debt consisting of publicly held debentures with the remaining debt owed to senior creditor banks and institutional investors. There was no secured debt in CMI. CMI's shares of beneficial interest were held by approximately 28,000 public shareholders. In its subsequently prepared Annual Report ⁷ for the fiscal year ending March 31, 1976, it was indicated that CMI's business had changed to that of managing its assets, consisting of loans and real estate, with a view toward completion and marketing of certain projects and operating other income-producing projects. The reported deficit net worth was over $90 million.

The Creditor Committee, duly elected and confirmed by the bankruptcy court on July 18, 1976, moved that the court order CMI to propose, file, and transmit to the Creditor Committee a Chapter XI plan of arrangement. CMI filed its proposed plan ⁸ on August 13, 1976, but failed to get the approval of the Creditor Committee, which refused to support the plan unless CMI delivered an advance consent to adjudication to be held in escrow and to be used in the event that the arrangement was not confirmed by the court.

It was at this juncture that the posture of the parties in regard to transfer to Chapter X proceedings shifted. Two motions to transfer CMI's case to Chapter X from Chapter XI had been filed early in the case. The first was made by a group of senior creditors on April 13, 1976, and was subsequently supported by the affidavits of additional senior creditors on June 21. The second was made by the SEC on May 6, 1976. ⁹ June 18 was set as the date for filing answers to the transfer motions and, at CMI's request, the hearing was postponed until September 30, 1976. Following the frustration of the plan of arrangement under Chapter XI, caused by CMI's failure to obtain the requisite acceptances of a majority of the creditors, Citibank filed its motion to transfer to Chapter X just three days before the hearing on the two pending motions. On the date of the hearing, CMI made its own transfer motion and offered to consent to such transfer. It was also on this occasion that the senior creditors withdrew their transfer motion. ¹⁰ The Creditor Committee filed an answer in opposition to the SEC motion. Although prepared to argue the merits of its motion, the SEC urged that CMI's motion for consolidation of the three motions for a later hearing be granted. The bankruptcy judge denied these requests and subsequently failed to set a date for filing of answers and for a hearing on the CMI and Citibank motions for transfer to Chapter X. He proceeded to hear the SEC motion in isolation from those of the other movants, reserving his decision as to whether to set a later hearing for those motions.

On October 6, 1976, CMI, the SEC, and Citibank filed a motion in the district court to withdraw from the bankruptcy judge the three pending transfer motions for hearing and determination by the district court. In its order of October 12, 1976, denying this motion, the court noted the following:

It is clear that the movants' primary basis for seeking withdrawal of the reference is their apparent conviction that they have not received and will not receive a fair hearing on their respective motions (to transfer the proceedings to Chapter X) from the Bankruptcy Judge. . . . He has yet to rule on these matters, and I have no grounds for concluding that he will deny these parties their hearing.

On this same day, in a hearing scheduled for another purpose, the bankruptcy judge was advised that negotiations between CMI and the Creditor Committee had broken down. The judge then requested all parties to argue two days later, on October 14, 1976, dismissal under Rule 11-42(b)(1) versus adjudication under Chapter XI, on the assumption that the necessary acceptances of the plan of arrangement were not forthcoming.

At the October 14 hearing, the bankruptcy judge persisted in hearing the issue of dismissal or adjudication, over the objections of CMI, the SEC, and Citibank that the pending motions to transfer the action to Chapter X first be decided. He denied the Citibank motion to transfer from the bench without having heard the argument and without stating the reasons for his decision. It appears from the record that, being convinced of CMI's insolvency and lack of ability or intent to procure the requisite creditor acceptances of a plan of arrangement, the bankruptcy judge felt compelled by Rule 11-42(b) to adjudicate CMI a bankrupt "for want of prosecution." Asserting that since a Chapter X petition could be filed in the district court either before or after bankruptcy is adjudicated under Chapter XI, relief under Chapter X would not be foreclosed by an adjudication under Chapter XI. Therefore, the judge declined to grant the request of CMI and Citibank to hold in abeyance any decision with respect to adjudication until the motions for transfer to Chapter X had been heard. ¹¹ Noting the bleak economic situation of CMI, as reflected in its financial statements, and the mandatory language of Rule 11-42, the order of October 20, 1976, gave the following reasons for choosing adjudication: 1) that the plan of arrangement "has not been accepted by a majority in number and amount of all classes of creditors . . ."; 2) that "the Debtor and Debtor-in-Possession filed a Consent to transfer this case to a Chapter X proceeding and a Motion for an Order directing that this case proceed under Chapter X of the Act, which consent and Motion, in the judgment of this Court, constitutes an abandonment of these proceedings under Chapter XI of the Bankruptcy Act, as amended, and that as a result thereof, the Debtor and Debtor-In-Possession has unquestionably acknowledged its non-intention to further prosecute this case as a Chapter XI proceeding"; and 3) that "the Court had determined that it would not be in the best interest of this estate to dismiss the case but that it would be in the best interest of the estate and its creditors to adjudicate the Debtor a bankrupt ....