City Nat. Bank & Trust Co. v. SECURITIES AND EXCH. COM'N

• Decision Date: 05 March 1943
• Docket Number: No. 8106.,8106.
• Citation: 134 F.2d 65
• Parties: CITY NAT. BANK & TRUST CO. OF CHICAGO v. SECURITIES AND EXCHANGE COMMISSION et al.
• Court: U.S. Court of Appeals — Seventh Circuit

134 F.2d 65 (1943)

CITY NAT. BANK & TRUST CO. OF CHICAGO v. SECURITIES AND EXCHANGE COMMISSION et al.

No. 8106.

Circuit Court of Appeals, Seventh Circuit.

March 5, 1943.

Wm. G. Burns, and Daniel C. Smith, both of Chicago, Ill., for petitioner.

M. F. Cosgrove, Balfour S. Jeffrey, and Clayton E. Kline, all of Topeka, Kan., Benjamin Schenker, of New York City, John F. Davis, Homer Kripke, Roger S. Foster, Counsel, Public Utilities Division, and David K. Kadane, all of Philadelphia, Pa., Theodore L. Thau, of Washington, D. C., and Aaron Levy, of New York City, for respondents.

Before MAJOR, KERNER, and MINTON, Circuit Judges.

MAJOR, Circuit Judge.

This is a petition to review an order of the Securities and Exchange Commission, entered July 10, 1942, under the Public Utility Holding Company Act of 1935 (hereinafter called "the Act"), 49 Stat. 803, 15 U.S.C.A. § 79a et seq. The order approved an application (called Application No. 2) filed by the respondent, North American Light and Power Company (called Light and Power), for authority to retire its outstanding publicly held debentures, for which petitioner was a successor trustee.

Light and Power, incorporated in 1924 under the laws of Delaware, is a subsidiary of the North American Company (called North American), both of which are holding companies registered under the Act. North American owns 85% of Light and Power's common stock, 43% of its preferred stock and 62.4% of its debentures.

The proceeding was instituted by the Commission on December 2, 1941 to determine among other things, whether under Sec. 11(b) (2) of the Act an order should be entered requiring the liquidation and dissolution of Light and Power, and the distribution of its assets to its security holders in accordance with a fair and equitable plan. On December 30, 1941, the Commission, in conformity with its findings and opinion that the continued existence of Light and Power was in violation of the Act and that liquidation and dissolution were necessary to comply therewith, entered its order that Light and Power be liquidated and its existence terminated. Light and Power was directed to proceed with due diligence to submit to the Commission a plan or plans for its prompt liquidation and the termination of its existence in a manner consistent with the provisions of the Act. (The period within which this order could be reviewed has expired. Sec. 24(a) of the Act.)

Among the applications filed by Light and Power for approval of steps necessary to carry out the required liquidation was Application No. 2, upon which the order under review was predicated. Of the outstanding debentures, the principal amount of $3,376,500 was held by the public and $5,623,500 held by North American (the parent of Light and Power). The application proposed the retirement of the former by payment of the principal amount of such debentures with interest accrued to July 1, 1942, but without payment of any premium.¹ It was not proposed to pay off the debentures held by North American at the same time for the stated reason that questions had been raised as to the right of North American to be paid on the same basis as the public holders. The Commission, in its order approving the application, found that immediate retirement of the publicly held debentures was practical and necessary to effect the provisions of Sec. 11(b) (2) and to enable Light and Power to liquidate and dissolve in accordance with the order of December 30, 1941, and was fair and equitable to the persons affected thereby. Interest was allowed upon the debentures until August 21, 1942 and thereafter the debentureholders were paid amounts equal to the principal plus interest accrued to that date.

The primary question for decision is whether the order authorizing the retirement by Light and Power of its publicly held debentures, without the payment of premium, is valid and lawful. It is the contention of the Commission that payment of a premium was required only in the event of their voluntary retirement, that such requirement is not applicable to the instant situation because the retirement was involuntary — necessitated by the Commission's order requiring liquidation and dissolution of the corporation. In this connection, it is also contended that the purpose of the debenture agreement was frustrated and rendered impossible of attainment by the supervening mandate of the Act and the Commission's order thereunder. On the other hand, petitioner contends that the debentureholders had a contractual right to the redemption premium, of which they could not be legally deprived. In this connection, it is argued that the retirement of the debentures was the voluntary act of Light and Power, but that even if involuntary, they could not be deprived of the benefit of the redemption provision. To do so, it is urged, is violative of Sec. 26(c)² of the Act, and the Fifth Amendment of the United States Constitution.

In the beginning, we think it may be assumed that an order of the Commission which impaired or destroyed a property right fixed by contract would violate Sec. 26(c) of the Act. Furthermore, such an order would not be "fair and equitable to the persons affected by such plan," as required by Sec. 11(e) of the Act. Case v. Los Angeles Lumber Products Co., 308 U. S. 106, 114, 60 S.Ct. 1, 84 L.Ed. 110; Consolidated Rock Co. v. DuBois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982. Petitioner's contention in this respect, however, carries little, if any, force, because he must, as we view the matter, stand or fall on the issue as to whether Light and Power was obligated by contract to pay a premium on redemption under the circumstances with which it was confronted.

We shall first consider petitioner's contention that the Commission erroneously determined that the dissolution was the result of a "compulsory liquidation by Congressional mandate." In support thereof, certain acts and events which transpired prior to the Commission's liquidation order of December 30, 1941 are relied upon. Briefly, the record discloses that during a hearing in a proceeding instituted by the Commission against North American (parent company), it developed that a continuation of the then existing status of Light and Power was doubtful. On May 9, 1941, the directors of Light and Power adopted a resolution, proposing to the stockholders that the corporation be dissolved. It is admitted that this action was influenced by the prospective application of the Act, but it is urged that other factors were determinative. The president of Light and Power by affidavit stated, in effect, that the directors decided there was no economic justification for the continued existence of the company and that it would have been liquidated, irrespective of the Act.

It was decided to dissolve under the Delaware Corporation Law and to liquidate under the direction of a Chancery Court of that state. The stockholders of Light and Power were so notified. It is disclosed that the Commission opposed the proposed liquidation action in the state court, and on June 3, 1941 entered an order prohibiting North American from voting its stock at the proposed dissolution meeting and prohibiting Light and Power from holding the stockholders' meeting. On the following day, the Commission instituted proceedings in the United States District Court of Delaware, seeking to enjoin Light and Power and North American from violating the provisions of its order. It is claimed that dissolution in the state court, except for interference by the Commission, would have been certain inasmuch as North American, which owned sufficient shares to insure passage of the dissolution resolution, had agreed to vote its shares in favor thereof. Further action was held in abeyance until December 2, 1941, when the Commission ordered that a hearing be held on December 22, 1941 for the purpose of considering whether an order should be entered requiring liquidation by Light and Power. Counsel at this hearing stated that the appearance of Light and Power was without prejudice to the dissolution proceeding pending in the Delaware Court. It was at the termination of this hearing that the Commission on December 30, 1941 entered its liquidation order which resulted in the filing on April 30, 1942 by Light and Power of its Application No. 2, seeking authority from the Commission for its proposed plan of liquidation.

Reference to legal textbooks, digests, etc. is convincing that it is difficult to define with exactitude the word "voluntarily." We think it can be safely said that whether an act is voluntarily performed depends not merely on the act of performance but upon the attending circumstances and conditions. Petitioner suggests as analogous to the asserted voluntary action of Light and Power the action of a person subject to the draft who enlists in the military service. Assuming the pertinency of this analogy, we doubt if it is of any benefit to petitioner. It does illustrate, however, that the character of the act depends upon the circumstances under which it is performed. For instance, a person subject to...