Burco, Inc. v. Whitworth

• Decision Date: 22 February 1936
• Docket Number: 3991.,No. 3983,3983
• Citation: 81 F.2d 721
• Parties: BURCO, Inc., v. WHITWORTH et al. (LAUTENBACH et al., Interveners) (two cases).
• Court: U.S. Court of Appeals — Fourth Circuit

81 F.2d 721 (1936)

BURCO, Inc., v. WHITWORTH et al. (LAUTENBACH et al., Interveners) (two cases).^*

Nos. 3983, 3991.

Circuit Court of Appeals, Fourth Circuit.

February 22, 1936.

COPYRIGHT MATERIAL OMITTED

D. Heyward Hamilton, Jr., of Baltimore, Md., and Ralph P. Buell, of New York City, for appellant.

James Piper, of Baltimore, Md. (Francis J. Carey and Huntington Cairns, both of Baltimore, Md., Edwin F. Blair and J. Paschall Davis, both of New York City, and George S. Newcomer, of Baltimore, Md., on the brief), for appellees trustees of Estate of American States Public Service Co., debtor.

John W. Davis, of New York City, for appellee Ferd Lautenbach, intervener.

Carlyle Barton and H. Warren Buckler, Jr., both of Baltimore, Md., for appellees Francis E. Frothingham, Martin C. Remer, and Samuel Wagner, Jr., Reorganization Managers and, as such managers, interveners.

Thomas G. Corcoran, Sp. Asst. to Atty. Gen., and John J. Burns, Gen. Counsel, Securities and Exchange Commission, of Washington, D. C. (Stanley Reed, Sol. Gen., of Washington, D. C., Benjamin V. Cohen, Sp. Asst. to Atty. Gen., and Roger S. Foster, Allen E. Throop, Henry A. Herman, Nathaniel L. Nathanson, Joseph A. Fanelli, and Joseph L. Rauh, all of Washington, D. C., on the brief), amici curiæ for United States of America and Securities and Exchange Commission.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

In this proceeding for corporate reorganization under section 77B of the National Bankruptcy Act (11 U.S.C.A. § 207) instituted in 1934, the question arose upon the passage of the Public Utility Holding Company Act of 1935 (15 U.S.C.A. § 79 et seq.) whether the trustees of the debtor corporation should comply with the act as a valid exercise of Congressional power. Being advised that the act was unconstitutional, the trustees sought the instruction of the District Court, and two petitions were filed by intervening creditors who disagreed as to the validity of the act, one opposing and one favoring a compliance with its provisions. The District Court set the petitions down for hearing and caused notice to be sent to the Securities and Exchange Commission and the United States Attorney for the District of Maryland. The commission and the United States came in as amici curiæ, and suggested that the court should not decide the issue, but should dismiss the petitions. The court retained the petitions, heard argument on the merits of the controversy, in which the United States and the commission participated by written brief, and decided that the act was unconstitutional and should not be observed by the trustees. These appeals followed, and the United States and the commission came into this court also as amici curiæ and by both oral and written argument urged that the appeals be dismissed. Their attorneys were requested by this court to assist it by participating also in the argument on the constitutional question, but they refused to do so.

American States Public Service Company, the debtor, is a holding company incorporated in Delaware, having its principal place of business at Baltimore. Its outstanding securities in the hands of the public are $7,575,400 of first lien 5½ per cent. gold bonds, $3,328,700 of ten-year 6 per cent. gold debentures, 16,622 shares of $6 cumulative preferred stock, 100,578 of class A stock without par value, and 99,729 shares of class B stock without par value. Substantially all of the first lien bonds and debentures were distributed or made the subject of public offerings after January 1, 1925, and a substantial part of them on October 1, 1935, was owned or held by persons residing in various states. The reproduction costs less depreciation as of June 1, 1935, of the physical property of the subsidiary companies was appraised at $7,669,663 by engineers appointed by the District Court. The total debts are $11,628,824.

The debtor is a holding company only. As shown by the findings of the District Court, the trustees, by virtue of their office, own, control, or hold with power to vote all the outstanding voting securities of eight corporations. One of these, American States Electric Company, is a holding company which in turn owns, controls, or holds all the voting stock of four companies, and one of these, Hydro Power Company, is also a holding company which in turn owns, controls, or holds all the voting stock of one corporation. Each of these holding companies as well as the debtor conforms to the definition of a holding company under section 2 (a) (7) (A) of the statute, 15 U.S.C.A. § 79b (a) (7) (A), since it owns, controls, or holds with power to vote 10 per cent. and more of the outstanding voting securities of a public utility company as defined in the act. The trustees also constitute a holding company within section 2 (a) (7) (B), 15 U. S.C.A. § 79b (a) (7) (B). The associated utility companies comprise five electric utility companies, four electric and water utility companies, and two water utility companies. The companies which handle electricity are public utility companies within the meaning of section 2 (a) (5) of the statute, 15 U.S.C.A. § 79b (a) (5). The facilities of each of these eleven subsidiary companies are situated entirely within the boundaries of a single state which, in each case, is the state of incorporation. None of them transmits or distributes electric energy other than that generated or purchased by it in such state, and none of them transmits or sells any electric energy outside the boundaries of the state or is engaged in any business in interstate commerce. Likewise none of them obtains or supplies water, or conducts any sewerage business outside the boundaries of the state. None of them is engaged in any business other than the electric business or the electric, water, and sewerage business. Neither the debtor, nor either of the subsidiary holding companies itself generates, purchases, transmits, or distributes any electric power, and neither is engaged in any other business except that of a holding company.

There are seven separate purely intrastate systems, one in Michigan, one in Indiana, one in Montana, one in Oregon, two in Idaho, and one in California. The facilities of these systems are not capable of being physically interconnected or operated as a single interconnected and coordinated system. Hence these systems are not capable of being joined together so as to become an integrated public utility system which is defined in section 2 (a) (29) of the act, 15 U.S.C.A. § 79b (a) (29), as applied to electric utility companies, as a system consisting of one or more units or generating plants, transmission lines, or distributing facilities whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection. The separate utility systems described do not compete with each other, and it is physically impossible for them to do so.

The business of the debtor before June 8, 1934, and of the trustees since that date, has consisted in holding the capital stock and other securities of the subsidiaries, receiving interest and dividends, keeping books of account, visiting and inspecting properties of the subsidiaries, and disbursing net earnings therefrom to the creditors and stockholders. Communication with the subsidiaries is made through use of the various instrumentalities of interstate commerce and of the mails, and resort to these mediums is had in the transaction of their respective businesses. In the management of the estate, the trustees use the mails and travel across state boundaries by rail and air. Neither the debtor nor the trustees have had any service sales or construction contracts of any kind with the subsidiaries or with any one else. There are, however, intercompany open accounts.

On June 8, 1934, the debtor filed a petition for reorganization under section 77B of the National Bankruptcy Act, 11 U.S.C.A. § 207, in the District Court at Baltimore. The petition was approved, trustees were appointed by the District Judge, and a plan of reorganization, later withdrawn, was filed by the debtor. On July 19, 1935, the District Judge approved the selection of reorganization managers for the purpose of supervising the deposit of securities of the debtor, the solicitation of acceptances, and the carrying out of a second plan of reorganization then before the court; and also approved the expenditure of not more than $5,000 for the expenses of the reorganization managers in the performance of their duties, and the payment to dealers, subject to the confirmation of the plan, for expenses and compensation in connection with the solicitation of deposits and acceptances of one-half of 1 per cent. of the amount of securities deposited. Notice was given to the creditors and stockholders of a hearing to be held on September 20, 1935, to consider the confirmation of the plan. On August 15, 1935, a committee representing at least 25 per cent. of the first lien bondholders filed another plan of reorganization known as the "Swart plan" and this also was set down for consideration on the same day.

For our purposes, the differences between the two plans are immaterial, but it is important to note that both contemplate the continued existence of the debtor or a reorganized company as a holding company, which will continue to hold more than 10 per cent. of the outstanding voting securities of the various public utility companies above referred to (and would therefore be a holding company under section 2 (a) (7) of the act), and both plans contemplate the issuance of securities not confined to a single class of common stock and bonds secured by a first lien upon physical property; neither restricts the operations of the holding company system as reorganized to a single integrated public utility system, and neither proposes that the plan shall be approved by the Securities...