American United Mut Life Ins Co v. City of Avon Park, Fla

• Decision Date: 25 November 1940
• Docket Number: No. 31,31
• Citation: 61 S.Ct. 157,85 L.Ed. 91,136 A.L.R. 860,311 U.S. 138
• Parties: AMERICAN UNITED MUT. LIFE INS. CO. v. CITY OF AVON PARK, FLA
• Court: U.S. Supreme Court

311 U.S. 138

61 S.Ct. 157

85 L.Ed. 91

AMERICAN UNITED MUT. LIFE INS. CO.

v CITY OF AVON PARK, FLA.

No. 31.

Argued Nov. 12, 1940.

Decided Nov. 25, 1940.

Rehearing Denied Dec. 23, 1940.

See 311 U.S. 730, 61 S.Ct. 395, 85 L.Ed.—.

[Syllabus from pages 138-140 intentionally omitted] Mr. Giles J. Patterson, of Jacksonville, Fla., for petitioner.

Mr. Robert J. Pleus, of Orlando, Fla., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

The District Court confirmed a plan for the composition of the debts of respondent under Ch. IX of the Bankruptcy Act, 50 Stat. 653, 52 Stat. 939, 940, 11 U.S.C.A. § 401 et seq.¹ The Circuit Court of Appeals affirmed that order. 5 Cir., 108 F.2d 1010. Petitioner, a creditor of the city, having objected to the confirmation in the courts below, brought the case here on a petition for certiorari, which we granted in view of the importance of the problems in the administration of the composition and reorganization provisions of the Act.

The city's composition was a refunding plan worked out by it and its fiscal agent,² R. E. Crummer & Co. Pursuant to the fiscal agency contract both parties were to use their best efforts to induce the creditors to participate in the plan. The city was not to pay any of the costs of the refunding as Crummer was to defray all expenses incident to assembling the bonds, printing the refunding bonds, representing the city in proceedings to validate the new bonds, obtaining a legal opinion approving the bonds, etc. The fiscal agency contract provided that Crummer was to be compensated for its services and reimbursed for its expenses by assessing charges against the participating bondholders. This charge was $40 for each $1,000 bond; or in case the bondholders elected to sell Crummer the interest coupons, accrued to July 1, 1937, at one-third of their face amount,³ the charge was to be $20 per $1,000 bond.

Crummer solicited assents to the plan. Approximately 69% of the bondholders accepted. But for the claims held by the Crummer interests,⁴ and voted in favor of the plan, the requisite two-thirds statutory vote, however, would not have been obtained. Some of these claims had been purchased prior to the fiscal agency contract, some later. The average price was apparently about 53 on the dollar. The inference seems clear that some of them were acquired in order to facilitate consummation of the composition by placing them in friendly hands. But the record does not show whether or not Crummer disclosed to the bondholders when their assents were solicited that it was a creditor as well as the city's fiscal agent, the extent of the claims held by it and its affiliate, the circumstances surrounding their acquisi- tion, and its intent to vote those claims in favor of the plan. No such disclosure was made in the plan.

The District Court, however, found that the two-thirds of the aggregate amount of claims affected by the plan, required by § 83, sub. d, 11 U.S.C. § 403(d), 11 U.S.C.A. § 403, sub. d, for confirmation, had assented. It also found that Crummer's compensation was fair and reasonable, that the plan and its acceptance were in good faith, and that the plan was fair, equitable and for the best interests of the creditors, and did not discriminate unfairly in favor of any creditor.

We disagree. The order of confirmation must be set aside. It cannot be said that the plan does not discriminate unfairly in favor of any creditor, that the acceptances were in good faith, that the requisite two-thirds vote of approval had been obtained.

Crummer had at least⁵ three financial stakes in this composition: (1) the fee to be collected from the bondholders; (2) its speculative position in such of the interest accruals as it might acquire from the bondholders at a third of their face amount; (3) the profit which might accrue to it or its affiliate, as a result of the refunding, on bonds acquired at default prices.

The court found that the first of these items was reasonable. But it apparently deemed the others irrelevant to the inquiry.

Clearly, however, no finding could be made under § 83, sub. b, 11 U.S.C. § 403(b), 11 U.S.C.A § 403, sub. b, that the compensation to be received by the fiscal agent was reasonable without passing on the worth of the aggregate of all the emoluments accruing to the Crummer interests as a result of consummation of the plan. Since that inquiry would necessitate an appraisal of the fiscal agent's speculative position in the plan, perhaps the definitive finding demanded by the Act could not be made. Yet that is a chance which the fiscal agent, not the bondholders, must take; for it is the agent who is seeking the aid of the court in obtaining one of the benefits of the Act. Moreover, to the extent that the aggregate benefits flowing to the Crummer interests, exceeded reasonable compensation for services rendered, their reward would exceed what the court could authorize under § 83(b), 11 U.S.C. § 403(b), 11 U.S.C.A. § 403, sub. b. Furthermore, if any such excess benefits would accrue to them, then the plan would run afoul of § 83, sub. e(1), 11 U.S.C. § 403(e)(1), 11 U.S.C.A. § 403, sub. e(1). For in that event the plan would discriminate unfairly in favor of the Crummer interests as creditors.

Hence the lack of that essential finding would be fatal in any case. It is especially serious here in view of the fact that without the vote of the fiscal agent the requisite two-thirds acceptance would not have been obtained. Where it does not affirmatively appear that full and complete disclosure of the fiscal agent's interests was made to the bondholders when their assents were solicited, it cannot be said that those assents were fairly obtained. Cf. Rogers v. Guaranty Trust Co., 288 U.S. 123, 143, 53 S.Ct. 295, 302, 77 L.Ed. 652, 89 A.L.R. 720. And where without such disclosure the fiscal agent's vote was cast for acceptance of the plan, it cannot be said that such acceptance was in 'good faith' within the meaning of § 83, sub. e (5), 11 U.S.C. § 403(e)(5), 11 U.S.C.A. § 403, sub. e(5). Here the fiscal agent was acting in a dual capacity. While it was representing the city, it likewise purported to represent the interests of bondholders. The very minimum requirement for fair dealing was the elementary obligation of full disclosure of all its interests, and the burden was on it to show at least that such disclosure was made. Equity and good conscience obviously will not permit a finding that an acceptance of of a plan by a person acting in a representative capacity is in 'good faith' where that person is obtaining an undisclosed benefit from the plan.

We have emphasized that full disclosure is the minimum requirement in order not to imply that it is the limit of the power and duty of the bankruptcy court in these situations. As this court stated in Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 455, 60 S.Ct. 1044, 1053, 84 L.Ed. 1293: 'A bankruptcy court is a court of equity, § 2, 11 U.S.C. § 11, 11 U.S.C.A. § 11, and is guided by equitable doctrines and principles except in so far as they are inconsistent with the Act. * * * A court of equity may in its discretion in the exercise of the jurisdiction committed to it grant or deny relief upon performance of a condition which will safeguard the public interest.' And see Papper v. Litton, 308 U.S. 295, 304 et seq., 60 S.Ct. 238, 244, 84 L.Ed. 281. These principles are a part of the control which the court has over the whole process of formulation and approval of plans of composition or reorganization, and the obtaining of assents thereto. As we said in Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 114, 60 S.Ct. 1, 6, 84 L.Ed. 110, 'The court is not merely a ministerial register of the vote of the several classes of security holders.' The responsibility of the court entails scrutiny of the circumstances surrounding the acceptances, the special or ulterior motives which may have induced them, the time of acquiring the claims so voting, the amount paid therefor, and the like. See Continental Insurance Co. v Louisiana Oil Refining Corp., 5 Cir., 89 F.2d 333. Only after such investigation can the court exercise the 'informed, independent judgment' (National Surety Co. v. Coriell, 289 U.S. 426, 436, 53 S.Ct. 678, 682, 77 L.Ed. 1300, 88 A.L.R. 1231; Case v. Los Angeles Lumber Products Co., supra, 308 U.S. page 115, 60 S.Ct. 7, 84 L.Ed. 110) which is an essential prerequisite for confirmation of a plan. And that is true whether the assents to the plan have been obtained prior to the filing of the petition or subsequent thereto.

Where such investigation discloses the existence of unfair dealing, a breach of fiduciary obligations, profiting from a trust, special benefits for the reorganizers, or the need for protection of investors against an inside few or of one class of investors from the encroachments of another, the court has ample power to adjust the remedy to meet the need. The requirement of full, unequivocal disclosure; the limitation of the vote to the amount paid for the securities (In re McEwen's Laundry, Inc., 6 Cir., 90 F.2d 872); the separate classification of claimants (see First National Bank v. Poland Union, 2 Cir., 109 F.2d 54, 55); the complete subordination of some claims (Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669; Pepper v. Litton, supra), indicate the range and type of the power which a court of bankruptcy may exercise in these proceedings. That power is ample for the exigencies of varying situations. It is not dependent on express statutory provisions. It inheres in the jurisdiction of a court of bankruptcy. The necessity for its exercise (Pepper v. Litton, supra, 308 U.S. page 308, 60 S.Ct. 246, 84 L.Ed. 281) is based on the responsibility of the court before entering an order of confirmation to be satisfied that the plan in its practical incidence embodies a fair...