Dudley v. Mealey

• Citation: 147 F.2d 268
• Decision Date: 05 January 1945
• Docket Number: No. 140.,140.
• Parties: DUDLEY et al. v. MEALEY et al.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

147 F.2d 268 (1945)

DUDLEY et al. v. MEALEY et al.

No. 140.

Circuit Court of Appeals, Second Circuit.

January 5, 1945.

Laurence Sovik, of Syracuse, N. Y., for appellants Frank A. Dudley and others.

George I. Sleicher, all of Albany, N. Y., for appellant Paul J. Hinkey.

George J. Hatt, 2nd, of Albany, N. Y., for appellee Carroll E. Mealey, trustee.

B. Jermain Savage, of Albany, N. Y., for appellee First Trust Co. of Albany.

Harold P. Seligson, of New York City, for appellees General Mortgage Bondholders Committee.

C. Emory Lochner and Avrom M. Jacobs, both of Albany, N. Y., for appellee First Mortgage Bondholders Committee and National Commercial Bank & Trust Co.

Before L. HAND, AUGUSTUS N. HAND and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

This case comes before us upon two appeals from an order in bankruptcy, approving a plan of reorganization of the Albany Hotel Corporation, a debtor in a reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The appeals involve different questions: one is by a committee of shareholders, who assert that the debtor was not insolvent, and that they should not have been excluded from the plan of reorganization as they were. The other is by a single bondholder of an issue known as "General Mortgage 6% Bonds," who complains that certain unsecured creditors were preferred, and that the First Trust Company of Albany, trustee of the bondholders of whom he is one, obtained security through an abuse of its fiduciary position. We shall take up the appeals separately, as our disposition is different for each. The facts are as follows. The debtor which was organized in 1897, owns a large plot of ground in the City of Albany, on which there has been a hotel since 1898. This action was precipitated by an action of foreclosure, commenced on March 17, 1943, by the trustee of another issue, known as the "First and Refunding Mortgage 5% Bonds," in which a receiver was appointed. The debtor on March 20th followed with this action under Chapter X, begun by voluntary petition. On December 31, 1943, the property was subject to four liens, which in the order of their priority were as follows: $16,000 of "First Mortgage 5% Bonds" of date May 1, 1909, overdue, on which interest of $934.06 was unpaid; $784,000 of "First and Refunding 5% Bonds," of date January 1, 1916, not due, on which $58,800 of interest was unpaid; $210,000, "General Mortgage 6% Bonds," of date January 1, 1916, overdue, on which $20,760 of interest was unpaid; $110,000 "Gold 7% Bonds," of date March 29, 1922, overdue, on which $13,475 of interest was unpaid. To these must be added current liabilities, real estate taxes and accounts payable, $182,424.76, making a total indebtedness of $1,396,393.82 on December 31, 1943. Against this there was on that day cash of $70,866.39; accounts receivable of $16,971.12, and inventories of $34,198.71, making a total for current assets of $122,036.22; to which must be added $1,804.08 deposits with public service corporations; bank deposits of $75,677.36, and prepaid expenses of $7,562.16: a total of $207,079.82, which, when subtracted from the total indebtedness just mentioned, leaves $1,189,314, which the fixed assets had to supply, if the debtor was to be solvent. The difference between the financial situation on December 31, 1943 and March 20, 1943, when the petition had been filed, was less than $5000 and may be disregarded.

The hotel had been unsuccessful for many years. Without any allowance for depreciation, it had met its fixed charges only twice between 1937 and 1942, and if the depreciation charges carried on its books were deducted, it had not done so since 1930, the last year when it declared a dividend. Its average earnings over its fixed charges from 1931 to 1942, inclusive, had been about $16,000, not allowing for depreciation. Two witnesses — Toth for the trustee, and Udd for the shareholders — experts in such matters, testified at the hearing (the judge had personally selected Toth at an earlier stage in the action, presumably as a disinterested person, to appraise the hotel). Toth estimated that the earnings without allowance for depreciation — from 1937 to 1943, inclusive — had been from $43,000 to $49,000, which he capitalized at four per cent — $1,250,000. That made the debtor solvent. He did not however say that he considered four per cent a proper rate at which to capitalize; he was calculating upon the value of land only, and since first mortgages on land pay from four to four and a half per cent and the rate is lowest on the land, he took the four per cent, because the value of the hotel was "all in land." He had never heard of any one buying a hotel on the basis of twenty-five times its earning capacity before depreciation, but always at considerably less. Two witnesses for the shareholders appraised the land, one at $1,000,000 (and the building at $700,000); the other the land alone at $900,000. If Toth was right in regarding the value of the land as the only value of the hotel, he was far in advance of these witnesses. A witness for the shareholders valued the furniture, furnishings, china, silver and linen at $208,000. Udd computed a number of hypothetical annual earnings of the hotel, which varied from $218,000 to $155,000. These presupposed economies which had never been practiced, and were only remotely based upon any earnings that the hotel had ever made in the past. To these figures Udd applied a factor of ten per cent for capitalization, and thus arrived at values for the hotel of between $1,500,000 and $2,000,000.

The judge found that the value of the assets on March 20, 1943, was less than $1,300,000, which, after deducting quick assets of about $120,000, meant that the hotel and its furniture and gear were worth less than $1,180,000; the limit of our review is to say whether that figure was "clearly erroneous." The Supreme Court has several times said that the best test of the value of a going commercial enterprise is its earning capacity. Galveston H. & S. R. Co. v. Texas, 210 U.S. 217, 226, 28 S.Ct. 638, 52 L.Ed. 1031; Consolidated Rock Products Co. v. Dubois, 312 U.S. 510, 525, 526, 61 S. Ct. 675, 85 L.Ed. 982; Group of Institutional Investors v. Chicago, M. St. P. & P. R. Co., 318 U.S. 523, 540, 63 S.Ct. 727, 87 L.Ed. 959. In the case at bar, that is a particularly apt test; and obviously, the judge was not bound to accept the testimony of Udd, based as it was, not upon what the earnings had been in the past, but on what he assumed they might become in the future. It is of course impossible to divine what economies will be made, and what, under other management, the hotel may earn; but it is already forty-five years old, and since 1928 it has suffered the competition of a more modern, better equipped, rival in a city, where until then it had had a substantial monopoly. Udd's appraisal was the merest guess; even if it has some support while the war lasts, there is no assurance that its prosperity, if it comes, will continue. For the ten years — 1933-42, inclusive — its average earnings without depreciation were about $65,000, which left less than $5000 after the fixed charges were paid, obviously far too little allowance for depreciation. If Udd's capitalization factor of ten per cent was right the value was only $650,000; and upon the necessary value of $1,180,000, $65,000 is almost exactly five and one-half per cent. If, on the other hand, we take the five years, 1938-1942, the average earnings were less than $51,000; making a capitalization at ten per cent only half a million, and allowing less than four and one-half per cent upon a capitalization of $1,180,000. Conceding that appraisals of such property must be tentative at best, it is apparent that a valuation of less than $1,180,000 for the fixed assets of the debtor was not "clearly erroneous." So far as we can see, the debtor was plainly insolvent, and the judge's finding was almost certainly right.

Upon Hinkey's appeal the first question is of our jurisdiction. Although notice was sent to him under § 171 of the hearing required by § 170 for any approval of the Plan, he did not appear and the order under § 174 was entered in his default. Were he concluded by it, it might be argued that he should not be allowed to appeal, since he had not availed himself of the opportunity which the law gave him. However, § 180 expressly provides that approval of a plan "shall not affect the right of * * * a creditor, indenture trustee, or stockholder to object to the confirmation of the plan." It seems therefore an idle formality to require a creditor who failed to appear on the first hearing, but who must be given notice of the second, to wait until the plan comes up for confirmation in order to raise any objections, which are apparent on the face of the plan. All creditors have an absolute right to be heard on all matters (§ 206), and it is desirable that they should be heard as soon as convenient. We can see nothing to be gained by postponing Hinkey's right to be heard until the later stage of the action; and much time, labor and expense may perhaps be saved. Moreover, the matter in which the Plan at bar is...