First Nat Bank of Cincinnati v. Flershem Arzt v. Same Clapier v. Same

Decision Date08 January 1934
Docket NumberNo. 64,65,63,No. 65,64,Nos. 62,s. 62
Citation54 S.Ct. 298,78 L.Ed. 465,290 U.S. 504
PartiesFIRST NAT. BANK OF CINCINNATI et al. v. FLERSHEM et al. (two cases). ARZT et al. v. SAME. CLAPIER v. SAME
CourtU.S. Supreme Court

[Syllabus from pages 504-506 intentionally omitted] Messrs. Ralph Royall and Manfred W. Ehrich, both of New York City, and Horace F. Baker and Sidney J. Watts, both of Pittsburgh, Pa., for petitioner First Nat. Bank of Cincinnati.

Mr. James F. Hubbell, of Utica, N.Y., for petitioner International Heater Co.

Mr. David M. Palley, of New York City (Messrs. Charles H. Sachs and Louis Caplan, both of Pittsburgh, Pa., of counsel), for petitioners Artz, Clapier et al.

Messrs. Lawrence Bennett, of New York City, Maynard Teall, of Pittsburgh, Pa., and G. Franklin Ludington, of New York City, for respondent Reorganization Committee.

Messrs. Grandin Tracy Vought, of New York City, and J. Garfield Houston, of Pittsburgh, Pa. (Mr. Carlos L. Israels, of New York City, on the brief), for respondent Bankers Trust Co.

Mr. Justice BRANDEIS delivered the opinion of the Court.

These cases, which are here on certiorari to the Circuit Court of Appeals for the Third Circuit (289 U.S. 722, 53 S.Ct. 795, 77 L.Ed. 1473), were argued together. They arise out of the plan of reorganization of the National Radiator Corporation of Delaware dated February 11, 1931. The reorganization committee sought to effectuate its plan through securing, in a suit filed in the Western district of Pennsylvania, the appointment of receivers and a judicial sale of the property. In that suit the federal jurisdiction was invoked on the ground of diversity of citizenship; the original plaintiffs being citizens of states other than Delaware and one of them a citizen of the district in which the suit was brought. The corporation, a citizen of Delaware, was the sole defendant. The District Court appointed receivers, and entered decrees ordering the sale, confirming it, approving the plan, and directing the receivers to convey and deliver to the purchaser the entire property. The Circuit Court of Appeals affirmed the decrees. 64 F.(2d) 847. The petitioners in No. 64 urge that the final decrees should be reversed as to them on the ground that the court lacked equity jurisdiction or that the bill lacked equity. The petitioners in Nos. 62 and 63 urge that the decrees should be reversed as to them mainly because the property was sold at a grossly inadequate price. The petitioner in No. 65 is the plaintiff in a bill of review, brought in the same court, praying that the order appointing receivers be vacated. Its dismissal, which was affirmed on appeal, is alleged to have been erroneous.

In August, 1927, National Radiator Corporation was organized to effect a merger of six independent manufacturers of radiators and boilers for heating purposes. The net assets of the consolidated corporation, which included ten manufacturing plants located in five states and warehouses in four others, were valued at $26,192,261.72. The capital was represented by 270,000 shares of no par common stock; 60,000 shares of $7 cumulative convertible no par preferred stock; and $12,000,000 twenty-year 6 1/2 per cent. sinking fund gold debentures. These had been underwritten, and were marketed, by J. & W. Seligman & Co. and Bankers' Trust Company of New York. The terms governing the issue of the debentures and the rights and remedies of the holders thereof were fixed by an indenture between the corporation and the Bankers' Trust Company, as trustee.

In January, 1931, the management of the corporation concluded, after months of consideration and conference with the bankers, that a revision of its capital structure was desirable in order to effect a drastic reduction of the debenture liability and the elimination of all fixed charges, and that, to this end, default should be made in the payment of the February 1, 1931, interest on the debentures. Before the merger, the constituent concerns had operated successfully for many years. After the merger, the business ceased to prosper. By the end of 1931, all but three of the ten manufacturing plants had been closed; the outlook for the immediate future was obscure; and there was no definite promise of an early recovery in earning power.1

A meeting of the board of directors was called for the purpose of taking formal action in respect to the payment of the February 1, 1931, interest. Although the corporation had suffered (including depreciation and sinking fund charges) large losses in each of the years 1928, 1929, and 1930, its financial condition was still excellent. On December 31, 1930, the ratio of current assets to all current liabilities was more than 10 to 1; the current assets, including raw material and stock in process and manufactured, being $5,054,007.30. The ratio of cash on hand to all current liabilities was then 3 1/2 to 1. It had $1,701,899.94 cash, and $1,132,563.17 in good accounts receivable; whereas its debts presently payable were only $46,787.60 (besides $293,339.58 for semiannual interest accrued on the debentures but not payable until February 1, 1931, $151,768.54 of accrued taxes and like items, and $60,000 in notes payable in one, two, and three years). The twenty-year debentures outstanding had been reduced from $12,000,000 to $10,716,000.2

After presenting to the board the December 31, 1930, financial statement, the chairman said:

'That although the working capital of the Company as shown by the balance sheet was reasonably ample, it was evident that, if the Company were to do an increasing volume of business, it would require the use of all or a substantial part of this cash to carry larger inventories and receivables, and that it would also be necessary to make large expenditures for the design of new products and for equipment necessary in their manufacture. Otherwise, the Chairman pointed out it might well prove to be impossible to maintain the Company's competitive business as against other enterprises in the industry. The Chairman then referred to the fact that the management had considered the advisability of a reorganization and had requested Messrs. Rudolph B. Flershem (the Chairman of its Executive Committee), Charles O. Cornell (a member of a firm specializing in reorganizations) and John H. Waters (the corporation's President) to act as a Committee to consider the matter and to formulate a Plan of Reorganization which might be submitted to the security holders of the Company. The Chairman reported that this Committee was now considering the matter of reorganization and had formed the opinion that a reorganization was advisable.'

The recommendations of the management were adopted by the board of directors. It was voted to default in the payment of the February 1 interest; the holders of the debentures were notified that the default was deemed advisable in order to conserve the corporation's cash resources; and, under date of February 11, 1931, an elaborate 'Plan and Agreement of Reorganization' was submitted to the security holders for acceptance.

The plan did not provide for raising additional capital. It was directed solely to reducing the liability on the debentures and eliminating all fixed charges. It provided that a new corporation be organized which would take over all the assets of the existing one, continue the business, and pay in cash all the current debts for merchandise and services; that the debenture indebtedness be scaled by giving for each $1,000 of the 6 1/2 per cent. twenty-year sinking fund debentures, $500 of the new corporation's 5 per cent. fifteen-year income debentures (without sinking fund provision),3 5 shares of its $7 preferred stock (entitled to $100 a share on involuntary liquidation and $115 a share on voluntary liquidation), and 20 shares of its common stock. Holders of the preferred stock in the existing company were to receive therefor, share for share, common stock in the new; and holders of the common stock of the existing company might (upon payment of $1), receive for every three shares a stock warrant, entitling the holder to purchase on or before July 1, 1941, one share of common stock in the new company upon payment of $20 per share. The plan made no provision for dissenting debenture holders.

The reorganization committee proceeded to solicit deposits of securities under the plan. Before September 15, 1931, it had secured the deposit of about 81 per cent. of the debentures and a large part of the preferred and common stocks. On that day it declared the plan operative. On the same day it made a settlement with an opposing bondholders' protective committee,4 whereby it secured additional deposits of about 9 per cent. of the debentures. Later, other deposits were received; so that ultimately more than 95 per cent. of all outstanding debentures were deposited under the plan.

Some holders of nonassenting debentures demanded payment of their overdue coupons, including those for the August 1, 1931, interest. When payment was refused, the holders of $24,000 of the debentures brought an action therefor; and counsel gave notice of intention to bring a further action on coupons attached to others. In order to frustrate these attempts to collect the interest, and in order to compel the minority debenture holders to acquiesce in the plan of reorganization, the committee commenced, on October 5, 1931, this suit praying for the appointment of receivers with power to continue the business; for a sale of the properties as an entirety; and that meanwhile all creditors be enjoined from enforcing their claims. The bill set forth the existing capital structure, the defaults in the payment of interest, and the plan of reorganization. It did not allege that the corporation was unable to pay the interest; or that it was insolvent; or that its assets, while ample, were not then available for payment of its debts. The bill alleged merely...

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