Chenery Corp. v. SECURITIES AND EXCHANGE COM'N

• Decision Date: 04 February 1946
• Docket Number: No. 8977,8978.,8977
• Citation: 154 F.2d 6
• Parties: CHENERY CORPORATION et al. v. SECURITIES AND EXCHANGE COMMISSION. FEDERAL WATER & GAS CORPORATION v. SAME.
• Court: U.S. Court of Appeals — District of Columbia Circuit

154 F.2d 6 (1946)

CHENERY CORPORATION et al. v. SECURITIES AND EXCHANGE COMMISSION.

FEDERAL WATER & GAS CORPORATION v. SAME.

Nos. 8977, 8978.

United States Court of Appeals District of Columbia.

Argued November 20, 1945.

Decided February 4, 1946.

Writ of Certiorari Granted May 13, 1946.

Mr. Spencer Gordon, of Washington, D. C., with whom Mrs. Virginia Collins Duncombe, of Washington, D. C., was on the brief, for petitioners Chenery Corp. and others.

Mr. Allen S. Hubbard, of New York City, for petitioner Federal Water & Gas Corp.

Mr. Roger S. Foster, Solicitor, Securities and Exchange Commission, of Philadelphia, Pa., for respondent.

Before GRONER, Chief Justice, and CLARK and WILBUR K. MILLER, Associate Justices.

Writ of Certiorari Granted May 13, 1946. See 66 S.Ct. 1025.

GRONER, C. J.

This is a petition for the review of an order of the Securities and Exchange Commission, issued February 7, 1945, under the Public Utility Holding Company Act, 15 U.S.C.A. § 79 et seq. The same case was here in 1942.

A brief statement of proceedings on the first appeal may be helpful in understanding the question now presented for decision.

In 1937 Federal Water Service Corporation, hereafter called "Federal," a Delaware holding company, owning securities of subsidiaries operating water, gas, electric and other properties, filed a plan of voluntary reorganization with the Commission under §§ 7 and 11 of the Holding Company Act of 1935.¹ The plan contemplated simplification of the corporate structure and the elimination of existing capital deficits by a reduction of capital which would permit Federal to resume payment of dividends. Subsequently, two additional plans were filed, but were ultimately withdrawn largely on objection by the Commission's staff.

In March, 1940, Federal, as the result of a then recent Delaware Supreme Court decision, filed a new plan of merger, which, with modifications, was approved by the Commission. The new plan, as modified, contained no provision for participation by Class B stock of Federal — which the Commission had found to be without value. Instead, that stock was to be surrendered for cancellation and only Class A common and all issues of preferred were to be converted into common stock of the new corporation.

Petitioners, who were officers and directors of Federal, held a one-third interest in Utility Operators Company, and that company in turn had virtual control of Federal through the ownership of Federal Class B common stock, representing forty-three per cent of voting power. During the period the various plans of reorganization were before the Commission, petitioners purchased Federal's preferred stock to the total amount of 12,467 shares. The purchases were made in the open market, at current prices, from time to time over the three and a half year period during which the negotiations with the Commission's staff were in progress. All of the purchases were made individually, and, except as to Chenery and van den Berg, averaged around 130 shares per individual. Chenery, for the account of a family corporation controlled by him, acquired approximately 8,000 shares, 2,700 shares of which he obtained for $100,000 of Federal's gold bonds in an exchange arrangement with a banking syndicate; and van den Berg, who at the time of final action by the Commission had ceased to be a director of the corporation, purchased in the open market approximately 1,700 shares. If the stock so acquired had been converted into common stock of the new corporation, under the plan as finally approved by the Commission, petitioners stood to receive 79,077 shares of new common, having a par and probable market value (as determined by the Commission) of $5 per share, or an aggregate value of $395,385, in return for the preferred stock which cost petitioners $328,347, a difference of little more than the amount of interest lost in holding the preferred shares pending completion of the plan. The common stock which petitioners (including Chenery Corporation and van den Berg) would thus have received, if their preferred stock had participated in the new corporation, would have represented 7.4% of the total voting power in the new corporation. In addition, petitioners, individually, had acquired 6,500 preferred shares of Federal prior to the filing of any plan of reorganization which when converted would have represented 2.7% of the total voting power. Added together, petitioners stood to hold 10.1% of the voting power of the reorganized corporation.

The Commission on March 24, 1941, made formal findings on the basis of which it concluded that the plan could not be approved insofar as it provided participation of the preferred shares purchased by petitioners during the period reorganization plans were before the Commission, even though the purchases were made honestly, after full disclosure and at a fair price at public sale. The Commission based its conclusion on its holding that during the pendency of proceedings before the Commission, officers and directors of the corporation occupied a fiduciary relationship to the corporation and to its shareholders, and consequently were subject to the limitations imposed upon fiduciaries in dealing with trust property. Accordingly, on July 1, 1941, an amendment to the plan was submitted by Federal, over petitioners' protest, whereby the stock so purchased would not be converted into common stock of the new corporation, but would be surrendered to the corporation at cost plus 4% interest.

The plan as amended was approved September 24, 1941.

On petition to us to review, we reversed and remanded for further proceedings in conformity with our opinion. Chenery Corp. v. Securities and Exchange Commission, 75 U.S.App.D.C. 374, 128 F.2d 303. Certiorari was granted, 317 U.S. 609, 63 S.Ct. 52, 87 L.Ed. 494, and on February 1, 1943, the Supreme Court handed down an opinion directing us to remand to the Commission for further action not inconsistent therewith. Securities and Exchange Commission v. Chenery Corp., 318 U.S. 80, 63 S.Ct. 454, 87 L.Ed. 626. On rehearing no new or additional evidence was adduced and in February, 1945, the Commission reaffirmed its former order.

The case is now again before us pursuant to § 24(a) of the Act.

It should be borne in mind that on the previous appeal the Commission conceded that the transactions of which we have spoken were accomplished without ulterior purpose and without intent on petitioners' part to profit personally in the consummation of the plan, likewise held that honesty, full disclosure and purchase at a fair price at public sale characterized the transactions, and concluded that the result was neither unfair nor inequitable to the persons affected by the plan.

Accordingly, we had then, as we have now, a case in which there is not one jot or tittle of evidence tending to contradict petitioners' declared purpose in the purchase of preferred stocks to be the transfer of their interest from one class, declared by the Commission to be worthless, to another with voting rights, in order that to some extent they might make, as they thought, a safe investment and at the same time preserve some interest in a company to which they had devoted a considerable part of their business lives.

The Supreme Court subsequently held, as we had held, that the Commission's order on this record could not be sustained, but presumably, in order that the Commission might reconsider the case, in the light of the standards imposed by the Act, directed us to remand the cause to the Commission for further proceedings not inconsistent with its opinion. This action is in line with the Supreme Court's statement in the Pottsville case,² that an administrative determination open to judicial review does not impliedly foreclose the administrative agency, after its error has been corrected, from enforcing the legislative policy. Considered in this view, obviously, the only question now open is whether the Commission has rightly construed and rightly followed the opinion of the Supreme Court. That the Supreme Court can itself best answer this question goes without saying; but in the meantime it is our duty — which we may not escape by certification — to make, in the light of its content, our own interpretation of the opinion. As preliminary to this, it seems to us clear that the Supreme Court's rejection of the Commission's original order was primarily because it was not sustainable on the grounds on which the Commission based its action, — that is to say, the Commission having affirmatively found that petitioners' purchases of stock were in all respects fair, honest and aboveboard, resulting neither in unjust enrichment to themselves, nor harm to other stockholders or the public, such purchases were not subject to proscription on any ground relied upon by the Commission. And, as sustaining this, the Supreme Court said 318 U.S. 80, 63 S.Ct. 461: "Congress itself did not proscribe the respondents' purchases of preferred stock in Federal. Established judicial doctrines do not condemn these transactions. Nor has the Commission, acting under the rule-making powers delegated to it by § 11(e), promulgated new general standards of conduct."

The Commission, the Supreme Court said, dealt with this as a specific case, and not as the application of a general rule of conduct for reorganization managers, and as explanatory of this added: "Had the Commission, acting upon its experience and peculiar competence, promulgated a general rule of which its order here was a particular application, the problem for our consideration would be very different."

In this aspect, then, the immediate question is whether the Commission's action in again outlawing petitioners' purchases of stocks, considered in the light of the Supreme Court's opinion, is a permissible exercise of administrative discretion entrusted to it by Congress. We are of opinion that its action cannot be sustained on...