Coriell v. Morris White, Inc.

• Decision Date: 16 November 1931
• Docket Number: No. 170,171.,170
• Citation: 54 F.2d 255
• Parties: CORIELL v. MORRIS WHITE, Inc., et al.
• Court: U.S. Court of Appeals — Second Circuit

54 F.2d 255 (1931)

CORIELL v. MORRIS WHITE, Inc., et al.

Nos. 170, 171.

Circuit Court of Appeals, Second Circuit.

November 16, 1931.

Saul S. Myers, Baldwin, Hutchins & Todd, and O'Connell & Butler, all of New York City (Charles H. Tuttle, Saul S. Myers, and Raymond O'Connell, all of New York City, of counsel), for appellants.

Nathan D. Stern, of New York City (Norman M. Behr, of New York City, on the brief), for Morris White, Inc.

Milton C. Weisman, of New York City (John S. Sheppard, Joseph R. Margulies, and Milton C. Weisman, all of New York City, of counsel), for appellees Michael Hollander and others.

Olcott, Holmes, Glass, Paul & Havens, of New York City (Joseph Glass and Jerome Weinstein, both of New York City, of counsel), for appellee Irving Trust Co., receiver, and for complainant-appellee.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

On April 6, 1931, a creditor, as assignee of a banking institution, filed a bill in equity against Morris White, Inc., a New York corporation, engaged in the manufacture of hand bags, pocketbooks, and leather goods, seeking a receivership. The bill alleged that the corporation was solvent but unable to meet its current debts, and that there was danger of destruction of its property by a forced sale, and prayed for the appointment of a receiver. The corporation filed an answer admitting the allegations of the complaint and consented to the appointment of a receiver.

The appointment was made April 6, 1931, and powers conferred upon the receiver to continue the business of manufacturing and selling its products. Thereafter, on June 3, 1931, an order was entered making permanent the receivership. Immediately a plan was prepared for reorganization of the corporation, and proceedings were had before the court for approval of the plan. The creditors, appellants here, objected to the plan proposed, but on June 15, 1931, the court entered an order approving an offer for the purchase of all the assets of Morris White, Inc., which, pursuant to the plan of reorganization, were to be, and later were, turned over to a new corporation organized for the purpose of continuing the business. Morris White was the principal stockholder of Morris White, Inc. His wife, Lily White, made the offer for the assets of the corporation as part of the plan of reorganization. It provided that the offerer would organize a new corporation under the name of Morris White Handbags, Inc., with an authorized capital of 10,000 shares, of which 1,000 was to be common stock, without par value, to be issued for such consideration as the board of directors might deem advisable. The remaining 9,000 shares were to be preferred stock, of the par value of $100 per share, to be issued by the new corporation in extinguishment of 80 per cent. of the proved and allowed claims of the creditors and 20 per cent. was to be paid by notes, to the creditors who proved their claims, the first series due on January 2, 1932, the second series due July 2, 1932, the third series due January 2, 1933, and the fourth series due July 2, 1933. These notes were noninterest-bearing and given without security.

At the time the bill was filed, Morris White, Inc., had about 245 creditors who were owed about $1,072,000.30. Among its creditors were the United States government for taxes, $80,000; New York state for taxes, $57,000; banks partly secured, $440,000; and merchandise creditors, $400,000. The assets which were appraised by a creditors' committee, on a going concern basis, were as follows: Merchandise inventories listed at $1,241,208.09; $5,000 in cash; $300,000 in accounts receivable; and $4,000 in listed securities. Of the $300,000 accounts receivable, approximately $250,000 was pledged as collateral for bank loans. The creditors' committee's appraisal of the merchandise inventoried was $717,000, on the basis of a going concern value, and $357,000 on a forced sale in liquidation. The leathers listed in the accountant's statement at $316,000 were appraised by the committee's appraisers at a value of $255,000 on a going concern basis, and $75,000 at a forced sale. Frames for hand bags, stated by the accountants to be $161,000, with a net worth of $80,000 on the basis of a going concern value, were appraised at $25,000 on a forced sale basis. Machinery and equipment, if sold at auction, would bring $10,000, whereas, if retained to carry on the business, would be worth $200,000. There was also an item of loans amounting to $1,700,000 to the Morris White Holding Company, a real estate corporation, owning three large hotels in the city of New York, upon each of which there were first mortgages. It was established in the court below that Morris White, Inc., consistently made profits averaging about $500,000 per year, which demonstrated a good will not valued.

The argument in support of the plan of reorganization is based upon the theory that the business in the past has been profitable and the best use of the assets could be made by continuing the business, that profits are realizable in the future, and that Mr. White's management would make it possible to rehabilitate the business and pay the creditors. For three years of his management, White was to be paid not more than $60,000 per year as a salary, to be fixed by the board of directors. The common stock is allotted to White. The plan provides for five directors. The preferred stock is placed in the name of two voting trustees for a period of ten years, one of such trustees to be designated by a member of the creditors' committee representing the merchandise creditors, and the other to be designated by the members of the creditors' committee representing the bank creditors. Because of this, voting trust certificates were issued for 80 per cent of the indebtedness. It was provided that the voting trustees elect two directors, one from the banking creditors' committee, and one from the merchandise creditors' committee; otherwise the preferred stock was not to vote. The management of the corporation is left to the control of the common stockholders. The board of directors is given exclusive right to employ executives of the new corporation.

The appellants object to the plan, complaining that the assets of the corporation are given back to Mr. White, the owner and manager of Morris White, Inc., without obligation to pay or repay except in redemption of preferred stock and the notes referred to. It is argued that the company failed because of his management of Morris White, Inc., that there is no new money advanced to carry on the business, nor have the creditors been offered cash in part or whole for the value of their claims. White might receive a salary of $60,000 a year. The banks, as secured creditors, have, in addition to their security, the preferred stock and notes just as unsecured creditors receive. Counsel for the creditors' committee is to receive an unnamed sum to be agreed upon between them and the new corporation. The indebtedness of $158,500 taxes due the federal and state governments is assumed by the new corporation.

The appellants are creditors as follows: National Surety Company, American Credit Indemnity Company, and London Guaranty & Accident Company, Limited, insured accounts owed by Morris White, Inc., and claims have been filed against them, some of which have been paid, in the sum of $92,138.15. At least one has been paid amounting to $19,329.42; Hermann Loewenstein is a creditor for $5,600, and G. Levor & Co., Inc., for $4,500. The plan of reorganization has the approval of the creditors' committee, representing claims amounting to $589,000 out of the total of $1,072,000, as well as the tax creditors, the United States government, and New York state and the bank creditors. The court below, in approving the plan, said: "I agree that the proposed reorganization is more or less of an attempt by Mr. White to lift himself by his bootstraps, in that there is here no capital with which to finance the new concern, save such as he thinks may be received on his business record from others who are favorably disposed toward him. All of us know, unfortunately too well, the present condition of business. Mr. White is hopeful; whether he is over-enthusiastic or not, I do not know; but certain it is, I think, that quite as much is to be anticipated from such effort as he might make to rehabilitate himself, as is to be had from liquidation. * * * If he can `deliver the goods,' to use the vernacular, he should, of course, be well paid for his services; and it would be most gratifying, I am sure to everyone, if, at the end of the summer he could carry out his expressed hope of giving his creditors a check for the 20 per cent. I trust that he may be able to do so." And, in approving the offer, the court modified the plan so as to make dividends on preferred stock cumulative, to make fees allowed subject to the approval of the court, and ordered that Mr. White file a stipulation to the effect that for three years he will render exclusive services and will not, in any way, engage in any competing business.

The transfer of the property for this offer was without public sale, and competitive bids were not sought or submitted. The order in this modified form, and under these circumstances, for the transfer of the property pursuant to the plan of reorganization, was opposed by the appellants.

The question presented to us is whether these minority creditors are obliged to accept the plan, taking stock and notes in place of cash, and be contented to wait the outcome of this new venture in the hope that some day the preferred stock will be redeemed and payment of their notes made. Have the appellants been deprived of their rights as creditors by this order?

Assets of an insolvent commercial corporation have long been recognized as a trust fund for the payment of its creditors. It has likewise long been recognized that contract...