Continental Vending Mach. Corp., In re

• Decision Date: 05 June 1975
• Docket Number: D,No. 542,542
• Citation: 517 F.2d 997
• Parties: In the Matter of CONTINENTAL VENDING MACHINE CORP. and Continental Apco, Inc., Debtors. JAMES TALCOTT, INC., Appellant, v. Irving L. WHARTON, Trustee, Appellee. ocket 74-2233.
• Court: U.S. Court of Appeals — Second Circuit

Page 997

517 F.2d 997

In the Matter of CONTINENTAL VENDING MACHINE CORP. and

Continental Apco, Inc., Debtors.

JAMES TALCOTT, INC., Appellant, v. Irving L. WHARTON, Trustee, Appellee.

No. 542, Docket 74-2233.

United States Court of Appeals, Second Circuit.

Argued April 1, 1975.

Decided June 5, 1975.

J. Jacob Hahn, Hahn, Hessen, Margolis & Ryan, New York City (Julius J. Abeson, New York City, of counsel), for appellant.

Charles Seligson, Weil, Gotshal & Manges, New York City (Joseph J. Marcheso, Gen. Counsel for Continental Vending Machine Corp., New York City, of counsel), for appellee.

Amicus brief filed by the SEC, David Ferber, Sol., SEC (Marvin E. Jacob, Associate Regional Administrator, New York Regional Office, SEC).

Before ANDERSON, MANSFIELD and OAKES, Circuit Judges.

OAKES, Circuit Judge:

This appeal is by a secured creditor, James Talcott, Inc. (Talcott), in a Chapter X bankruptcy proceeding, 11 U.S.C. § 501 et seq., involving a parent corporation, Continental Vending Machine Corp. (Continental), and its subsidiary, Continental Apco, Inc. (Apco). Talcott objects to an approved amended plan of reorganization for the two corporations because, while the plan calls for consolidation of the proceedings and treats the properties of the two debtors on the basis of a merger or consolidation of the two corporate entities, it provides that no secured creditor's claim shall be elevated or improved as a result of the consolidation. We are in short asked to determine whether it is "fair and equitable" under § 221 of the Bankruptcy Act (Act), 11 U.S.C. § 621, to disregard corporate lines and to consolidate or pool assets and liabilities for purposes of dealing with unsecured claims but not to do so for purposes of dealing with secured claims. We agree with the United States District Court for the Eastern District of New York, Jacob Mishler, Chief Judge, that the amended plan is "fair and equitable" since the absolute priority of Talcott to the specific assets pledged to it in connection with loans made to both the parent and subsidiary corporations has been preserved and that the Act does not require consolidation to be complete for all purposes. Accordingly, we affirm Judge Mishler's order approving the trustee's amended plan. ¹

Continental is a publicly owned Indiana corporation which at one time had a number of subsidiaries but for present purposes had only one of note, Apco, which it wholly owned. Apco was principally the sales arm for and Continental was the manufacturer of vending machines. Talcott financed each corporation, receiving mortgages of machines and other security devices from Continental covering its indebtedness, and assignments of accounts receivable and assorted other liens from Apco covering its indebtedness. The security agreements with each contained no cross-collateralization agreement, i. e., no provision allowing Talcott to set off the obligations of one corporation against the collateral which it held to secure the debts of the related corporation, nor was there any guaranty by either Apco or Continental of the other's indebtedness. While the exact amounts are not yet ascertained, it appears that the liquidation of Talcott's security in Apco will leave at least a $380,000 surplus while the sale of the Continental security will result in a $820,000 deficit. Talcott, needless to say, would like to see its Apco lien apply to secure the Continental deficit. We point out that there is no evidence in the record that there were any intercompany transfers to the detriment of secured creditors, of which Talcott is now the only one remaining.

Appellant makes essentially two major points and a minor one. The first major one is that since improvement of some creditors' position is inherent in a consolidation it would be unfair and inequitable to permit the unsecured creditors to improve their position but to deny the secured creditor such improvement. The second major point is that the broad language of each of the security agreements giving Talcott a lien for "any and all obligations no matter how or when arising and whether under this or any agreement or otherwise . . ." applied to permit the Apco lien to cover the Continental deficit. The minor point, which was raised "with reservations," was that the plan was accepted by creditors holding 71.8 per cent of the total amount of claims filed and allowed. Appellant maintains that the amount required under § 179 of the Act, 11 U.S.C § 579, is 75 per cent; that section, however, requires acceptance by creditors "holding two-thirds in amount" of the claims filed and allowed as to each class, so that we fail to see any merit whatsoever to this argument. We take up the major points in reverse order.

Talcott had no lien on the Apco surplus for the Continental deficiency under any of its security agreements. The language of the Apco agreement, while broad, did not go so far as to cover the debts of Continental. There is nothing to indicate that the debt of Continental was the debt of Apco. It may be true that if the parties agree, the validity of a lien does not depend upon the existence of a contemporaneous debt. In re Cichanowicz, 226 F.Supp. 288 (E.D.N.Y.1964) (secured notes paid down to zero, subsequent advances held covered by original security). But this does not mean that the Apco lien would somehow remain attached to Apco surplus after application of the Apco collateral to satisfy its debt to Talcott. On the contrary, once that Talcott debt was satisfied, no further lien on Apco property could exist, because the obligation of Apco was paid in full. As was stated in United States v. Phillips, 267 F.2d 374, 377 (5th Cir. 1959), "In the absence of an obligation to be secured there can be no lien." ²

We turn then to the question, one really of first impression, whether differentiation of secured from unsecured creditors in a consolidation upon reorganization is proper under the Act. ³ The power to consolidate is one arising out of equity, enabling a bankruptcy court to disregard separate corporate entities, to pierce their corporate veils in the usual metaphor, in order to reach assets for the satisfaction of debts of a related corporation. Soviero v. Franklin National Bank of Long Island, 328 F.2d 446 (2d Cir. 1964); In re Cintra Realty Corp., 413 F.2d 302 (2d Cir. 1969); Stone v. Eacho (In re Tip Top Tailors, Inc.), 127 F.2d 284, 288-89 (4th Cir.), rehearing denied, 128 F.2d 16, cert. denied, 317 U.S. 635, 63 S.Ct. 54, 87 L.Ed. 512 (1942); Hillebrand v. Sav-Co, 353 F.Supp. 19, 21 (E.D.Ill.1972). While it does not require that the creditors knowingly deal with the corporations as a unit, Chemical Bank New York Trust Co. v. Kheel, 369 F.2d 845, 847 (2d Cir. 1966), it should nevertheless be "used sparingly" because of the possibility of unfair treatment of creditors who have dealt solely with the corporation having a surplus as opposed to those who have dealt with the related entities with deficiencies. Id.

Appellant argues that what is sauce for the goose is sauce for the gander; it would, however, swallow the sauce by improving its status from that of a now unsecured creditor of Continental to that of a secured creditor of Apco. It cites Chemical Bank, supra, as requiring this improvement or elevation, since there the consolidation that was ordered benefited the United States as a tax lienor. But Chemical Bank did not deal with consensual liens as here; it dealt with the statutory priority. Nothing in Chemical Bank suggests that the priority of the United States rested on a lien which attached to the consolidated assets; rather, combining the assets of the related companies simply made more money available for the estate, as to which, to be sure, there was a substantial priority claim. In Chemical Bank there was, moreover, every reason to believe that the Government as an unsecured creditor had, along with other unsecured creditors, suffered loss because of the indiscriminate shifting of assets between corporations. Here, as a secured creditor in both parent and subsidiary, Talcott's liens were in no way diminished or lien property transferred by virtue of intercorporate dealings. In the end, Talcott will obtain under the amended plan exactly what it bargained for with each in terms of security.

We have made it very plain that because consolidation in bankruptcy is "a measure vitally affecting substantive rights," the inequities it involves must be heavily outweighed by practical considerations such as the accounting difficulties (and expense) which may occur where the interrelationships of the corporate group are highly complex, or perhaps untraceable. See In re Flora Mir Candy Corp., 432 F.2d 1060, 1062-63 (2d Cir. 1970). Thus, there is nothing to say for the proposition that in the exercise of the bankruptcy court's equity powers, Local Loan Co. v. Hunt,292 U.S. 234, 240, 54 S.Ct. 695, 78 L.Ed. 1230 (1934), it cannot treat unsecured claims as consolidated and secured claims as not. See In re Pittsburgh Railways Co., 155 F.2d 477, 484 (3d Cir.), cert. denied, 329 U.S. 731, 67 S.Ct. 89, 91 L.Ed. 632 (1946). Nor is there anything in the Act itself requiring the symmetry on which appellant insists. As we have pointed out, note 2 supra, as a secured creditor of Apco, Talcott is not "affected" by the amended plan within the meaning of § 107 of the Bankruptcy Act, 11 U.S.C. § 507, because its interests are not materially or adversely affected by the plan. In the allowance or disallowance of claims, the court has the equitable power under § 2(a)(2) of the Act, 11 U.S.C. § 11(a) (2), to make certain that injustice or unfairness does not occur. Pepper v. Litton, 308 U.S. 295, 308, 60 S.Ct. 238, 84 L.Ed. 281 (1939). Again, "The power of the bankruptcy court to subordinate claims or to adjudicate equities arising out of the relationship between the several creditors is complete." Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215,...