Central States Electric Corp. v. Austrian

• Decision Date: 16 August 1950
• Docket Number: No. 6123.,6123.
• Citation: 183 F.2d 879
• Parties: CENTRAL STATES ELECTRIC CORPORATION et al. v. AUSTRIAN et al.
• Court: U.S. Court of Appeals — Fourth Circuit

183 F.2d 879 (1950)

CENTRAL STATES ELECTRIC CORPORATION et al. v. AUSTRIAN et al.

No. 6123.

United States Court of Appeals Fourth Circuit.

Argued July 6, 1950.

Decided August 16, 1950.

Thomas B. Gay, Richmond, Va., Leo B. Mittelman, T. Roland Berner, pro se, Thomas F. Boyle and Morton G. Rosenberg, all of New York City (Hunton, Williams, Anderson, Gay & Moore, H. Merrill Pasco, all of Richmond, Va., Boyle, Feller, Stone & McGivern, James P. Reeves, all of New York City, Wallerstein, Goode, Drewry & Adamson, Richmond, Va., Stephen D. Finale, Karelsen, Karelsen, Rubin & Rosenberg, all of New York City, John H. Bocock, George E. Allen Sr., Richmond, Va., Norman S. Nemser, New York City, Alfred J. Kirsh, Richmond, Va., Stanley Nemser, New York City, Leonard L. Cowan, Washington, D. C., and B. Gary Blake, Richmond, Va., on brief), for appellants.

Roger S. Foster, General Counsel, Washington, D. C. (Lawrence M. Greene, Special Counsel, Philadelphia, Pa., Manuel F. Cohen, Brooklyn, N. Y., and Aaron Levy, Washington, D. C., on brief), for Securities and Exchange Commission.

Walter H. Brown, Jr., George Rosier, New York City, Thomas C. Egan, Philadelphia, Pa., and Fred G. Pollard, Richmond, Va. (Austrian & Lance, Saul J. Lance, Wilkie, Owen, Farr, Gallagher & Walton, all of New York City, Denny, Valentine, & Davenport, Charles S. Valentine, Williams, Mullen & Hazelgrove, Guy Hazelgrove, all of Richmond, Va., Harry R. Axelroth, Philadelphia, Pa., David J. Mays, Richmond, Va., Francis E. Walter, Easton, Pa., and Tucker, Mays, Cabell & Moore, Richmond, Va., on brief), for appellees.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This is an appeal from an order of the United States District Court for the Eastern District of Virginia approving a plan for the reorganization in bankruptcy under Chapter X of the Central Electric Corporation (hereinafter called Central). Petition for reorganization was filed in 1942 and for more than eight years the affairs of the corporation have been in the hands of the court. At the time the petition was filed, the assets of the corporation had shrunk to $1,400,000. Since then, they have increased to $38,000,000. This does not include contingent claims represented primarily by the lawsuit against Harrison Williams and others pending in the United States District Court for the Southern District of New York. In July, 1948, the trustees filed with the court a plan of reorganization. Criticisms were made by interested parties and an amended plan was submitted in December, 1948, which was referred to the Securities and Exchange Commission and was carefully considered and discussed by it along with plans submitted by the debtors and certain stockholders' committees in a report filed December 19, 1949. Subject to certain minor changes suggested by the Commission, the plan of the trustees was given its unqualified approval, and was approved by the court below in an order dated March 30, 1950. On April 1, 1950, the Commission approved the trustees' plan as thus amended, and on April 24 order of the court below was entered approving it as amended. Appeal was taken from this order by the debtor and certain of the stockholders.

Another appeal, consolidated with that taken from the order approving the plan of reorganization, was that taken from an order of May 24, 1950, directing the trustees to vote the stock of American Cities Power and Light Corporation held by them as trustees in favor of the liquidation and dissolution of American Cities as recommended by them in their report. The lower court refused to stay this order pending appeal, but it was stayed by this court on condition that the appeal be consolidated with the appeal from the order approving the plan of consolidation and that the appeals as consolidated be heard promptly.

Central, as of February 28, 1950, had outstanding (in round numbers) against it, the following claims (exclusive of reorganization expenses):

                  Debentures (including interest)        $20,700,000
                  7% First Preferred stock (liquidation
                   preference including
                   dividend arrearages)                   15,800,000
                  6% Junior Preferred Stock (liquidating
                   preference including
                   arrearages)                            31,300,000
                  Common stock (par value $1)
                   shares                                 10,100,100
                

Central, while an "investment company" within the meaning of the Investment Company Act of 1940, 15 U.S.C.A. §§ 80a — 1 to 80a — 52, and registered as such, is, in an economic sense, primarily a holding company with a rather inactive portfolio of securities, of which the most important holdings are in Central's subsidiaries, American Cities and Blue Ridge Corporation. Central owns about 82% of the common stock of American Cities and, directly, 31% of the common stock of Blue Ridge. American Cities, while likewise a statutory investment company, is in turn primarily an intermediate holding company in the pyramid through which Central controls Blue Ridge. American Cities' principal assets consists of 42% of the Blue Ridge common stock. Through control of American Cities, Central's direct and indirect ownership in Blue Ridge amounts to 73% of the common stock of Blue Ridge. Blue Ridge is the only company in the pyramid actively engaged in managing a general investment portfolio.

While both American Cities and Blue Ridge formerly had outstanding senior securities, which accentuated the leverage in the Central holding company pyramid, at the present time their capitalization consists exclusively of common stock with the minor exception of a small bank loan in the case of Blue Ridge. American Cities' Blue Ridge holdings, together with a large block of North American stock, account for about 70% of its net assets of about $26,000,000.

It is clear that the value of the assets of Central (other than contingent assets) is in excess of the amount of the claims of its creditors now outstanding but is less than the amount of these claims plus the interest of all of Central's preferred stockholders, including both the 7% preferred stock and the 6% preferred stock. It is even clearer that the claims of the common stockholders (if the contingent assets of Central be disregarded) are many millions of dollars under water.

It is not necessary to describe at length the plan of reorganization submitted by the trustees and approved by the court below, as it is fully set forth in the report of the Securities and Exchange Commission. Briefly stated, it provides for the liquidation of American Cities, largely by distribution in kind, the merger of Blue Ridge, and the formation of an open-end investment company to take over the assets now held by Central and those to be transferred to it by Blue Ridge. Thus, the present three-company pyramid will be replaced by a single investment company, with a single class of common stock. The reorganized company will be open-ended after an initial time lag.

Stock in this open-end investment company at underlying asset value is to be awarded to debenture holders for the amount of the debentures held by them with interest and 7% preferred stockholders for the face amount of the stock with accrued dividends. As the stock in the reorganized corporation is not to be redeemable for a sixty day period, the debenture holders are given a stock bonus of not exceeding 5% for the risk involved and the 7% preferred stockholders a bonus not exceeding 2½%. If there is any remaining stock of the reorganized corporation, it is to be distributed first to the 6% preferred stock and then to the common stock. Contingent assets, consisting principally of lawsuits against Harrison Williams and others (provision is made for further prosecution of this litigation), will be retained by the trustees and any realization therefrom will be distributed to the stockholders in the priority indicated, that is, first to the 7% preferred if not already paid off, then to the 6% preferred and finally to the common stock.

A number of objections have been made to the plan. Many of these objections have so little merit that nothing need be said with regard to them in addition to what has already been said by the Commission and the court below. Thus the contention of appellant Chase, who owns a small block of common stock recently acquired at a price insignificant in comparison with the magnitude of the interests here involved, that the reorganization should be deferred until the litigation against Harrison Williams shall be terminated, is without merit. As was well said by the Commission: "To request delay when immediate reorganization is practicable is to disregard the rights of creditors, as well as senior stockholders, * * * and to continue to subject them to the risk of loss." Certainly, the creditors and senior stockholders are entitled to a reasonably prompt disposition of their claims.

Equally without merit is the contention that the common stockholders should be allowed to subscribe new capital. It is clear that they have no interest remaining in the corporation, except a very remote one dependant upon the amount recovered in the pending litigation, and this is fully preserved to them under the trustees' plan. There is no point in considering the plans offered by the debtor and the stockholders' committees, all of which involved the perpetuation of the three-tier holding company structure and are otherwise objectionable for reasons which the Commission has very clearly pointed out.

After the Commission has recommended a plan and it has been approved by the District Court, it is not the proper function of this court to consider whether other plans which have been rejected might not have as much or more merit. They are relevant only to the extent that they may throw light upon the reasonableness of the plan which the District Court has approved.

With these matters out of the way, the four main contentions made by appellants...