IN RE AMERICAN GUARANTY CORPORATION

• Decision Date: 09 September 1965
• Docket Number: No. 63-17.,63-17.
• Parties: In the Matter of AMERICAN GUARANTY CORPORATION, Debtor.
• Court: U.S. District Court — District of Rhode Island

246 F. Supp. 322

In the Matter of AMERICAN GUARANTY CORPORATION, Debtor.

No. 63-17.

United States District Court D. Rhode Island.

September 9, 1965.

Richard L. Veron, New York City, for Securities and Exchange Commission.

Alfred B. Stapleton, Providence, R. I., for debtor corporation.

Frederick G. Fisher, Jr., John Cancian, of Hale & Dorr, Bingham, Dana & Gould, Marcien Jenckes, Walter N. Kernan, of Hill & Barlow, Boston, Mass., S. Everett Wilkins, Providence, R. I., for creditors.

Andrew P. Quinn, Aram A. Arabian, Providence, R. I., for certain stockholders.

DAY, District Judge.

This matter is again before me upon the motion of the Securities and Exchange Commission (hereinafter called SEC) to dismiss the petition of American Guaranty Corporation (hereinafter called the debtor) for an arrangement under Chapter XI of the Bankruptcy Act, or, in the alternative, to dismiss unless said petition is amended in such a way as to transfer to proceedings under Chapter X of said Act. 11 U.S.C.A. § 728. Said motion was denied by me on September 11, 1963. In the Matter of American Guaranty Corporation, Debtor, 1963, D.C.R.I., 221 F.Supp. 961.

SEC appealed from the denial of its motion. Arguments on the appeal were heard by the Court of Appeals for the First Circuit at its December session 1963, but before its opinion had been prepared, the Supreme Court of the United States, on March 23, 1964, granted certiorari, 376 U.S. 948, 84 S.Ct. 971, 11 L.Ed.2d 969 in Securities and Exchange Commission v. American Trailer Rentals Co., 1963, 10 Cir., 325 F.2d 47, and the Court of Appeals withheld its opinion awaiting the decision of the Supreme Court. On January 18, 1965, the Supreme Court decided the American Trailer Rentals Co. case, 379 U.S. 594, 85 S.Ct. 513, 13 L.Ed.2d 510, and on February 16, 1965, SEC moved for a remand to this Court for reconsideration on the ground that subsequent to September 1, 1963, "there have been `significant' factual developments `bearing on the question presented on appeal'."

Thereafter, on March 23, 1965, the Court of Appeals issued its opinion, Securities and Exchange Commission v. Burton, Receiver et al, 1 Cir., 342 F.2d 783, granting the motion to remand to this Court for reconsideration and directing me to review "the factual situation as it is now in the light of the criteria for the exercise of discretion as developed by the Supreme Court in SEC v. American Trailer Rentals Co., supra."

In its opinion the Court of Appeals said at page 785:

"In the light of American Trailer Rentals we think the court below may have misconstrued the criteria for exercising its discretionary power under the cases upon which it relied, SEC v. United States Realty & Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940), and General Stores Corp. v. Shlensky, 350 U.S. 462, 76 S.Ct. 516, 100 L.Ed. 550 (1956), principally by considering the orderliness of the plan of arrangement and the economy of Chapter XI proceedings, and in not giving sufficient weight to the need for new management, the need for investigation by a disinterested trustee of alleged past management inefficiency, lack of skill and even wrongdoing, and the need for application of the `absolute priority' rule of Chapter X but not of Chapter XI. Moreover in view of past payments and assertions of economical and successful administration of the debtor's affairs by the Receiver appointed under Chapter XI, it may be that only a `minor adjustment of capital' is all that now needs to be accomplished to put the debtor back on its feet."

Pursuant to said remand, oral arguments were heard by me on June 28 and 29, 1965, at which affidavits in support of and in opposition to said motion were submitted. Decision was reserved pending the filing of memoranda by counsel for interested parties which have now been considered by me. At the original hearing on said motion in June, 1963, all creditors and stockholders who appeared at said hearing opposed said motion; now said motion is supported by certain large senior institutional creditors, particularly the Prudential Insurance Company and the First National Bank of Boston, which by virtue of two distributions from accumulated cash collected by the Receiver of the debtor's estate since his appointment on January 25, 1963 have been paid substantially all of the principal of their loans to the debtor. These senior creditors, on September 16, 1963, voted overwhelmingly to accept the modified plan of arrangement filed by the debtor, the terms of which are summarized in my opinion in In the Matter of American Guaranty Corporation, supra. Said plan contains a provision that no interest on the unsecured debts of the debtor shall be paid for the period beginning January 18, 1963 and ending eighteen months subsequent to the confirmation of said plan, or January 18, 1965, whichever date first occurs. This plan has never been confirmed because upon the motion of the SEC I enjoined confirmation pending the outcome of its appeal from my decision of September 11, 1963. The senior creditors, so-called, by virtue of certain subordination agreements are entitled to priority of payment and a conservative appraisal of the present financial condition of the debtor establishes that sufficient cash will be available not later than September 30, 1965 to satisfy the balance of the principal due on their claims. Their change of position since June and September 1963 is clearly motivated by their desire to avoid said waiver of interest to which they had previously agreed. They make no claim that they were induced to accept said modified plan of arrangement as the result of any concealment or misrepresentation of facts by the debtor, its past management or its counsel.

From the affidavits at said hearings in June, 1965, it is clear that there has been a substantial improvement in the cash position of the debtor since the appointment of said Receiver. Immediately upon his appointment he took possession of all its books and records. At his invitation, Domenic J. Perri, its former president and founder, who had been directing its operations, left its premises and has not in any way directly or indirectly interfered with or had any participation in the operations of the debtor since January 25, 1963. The Receiver has also effected a practically complete change in the management personnel of the debtor. With the exception of one individual who is employed in a minor capacity, the entire management personnel has been changed.

Although a limited amount of new business has been written by the debtor since the appointment of said Receiver, he and present management personnel of the debtor have devoted their efforts primarily to the collection of its accounts receivable and the sale of other assets where such action was deemed to be required. As a result of their combined efforts, more than $18,000,000 have been collected by them.

In July, 1964 and January, 1965 two distributions from cash so accumulated were made by the Receiver among senior creditors on account of the principal of their respective claims pursuant to orders entered by the Referee in Bankruptcy. His order, dated July 17, 1964, authorized the Receiver to pay the amount of each such creditor's claim in full up to $2,500, or 35% of such amount, whichever was the greater, and his order of January 18, 1965, authorized the payment of the balance of each such creditor's claim, if any, up to $2,500, or 22.5% of such balance, whichever was greater. To permit of these distributions said modified plan of arrangement was further modified with the unanimous consent of the creditors and stockholders. These distributions amounted to $14,100,000.

As a result thereof the amount of principal due on investment certificates was reduced from $3,307,324 to $341,997, and the number of investment certificate holders was reduced from 2558 to 96. The amount of principal owed to banking institutions has been reduced by 72.5%, the outstanding balance now being $1,454,037, which is owed to 50 banks. Similarly, the amount owed as principal on notes owed to others than banks has been reduced by 72.5%, the present balance now being $1,144,377 owed to four holders of such notes. It further appears that at the present time there are approximately 1400 public holders of the subordinated debt, preferred and common stock of the debtor.

Despite these distributions, the Receiver has now accumulated cash in the amount of approximately $4,000,000, of which $650,000 has been set aside under the control of the Referee to provide for the payment of legal and other expenses which have been incurred in the Chapter XI proceedings. He estimates that by September 30, 1965 there will be enough cash available to pay in full the principal owed to senior creditors and by September 30, 1966, enough cash to pay in full the...