In re Los Angeles Lumber Products Co., 31352-RJ.

Citation24 F. Supp. 501
Decision Date18 July 1938
Docket NumberNo. 31352-RJ.,31352-RJ.
CourtU.S. District Court — Southern District of California
PartiesIn re LOS ANGELES LUMBER PRODUCTS CO., Limited.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Faries & McDowell, David R. Faries, J. Clifford Argue, Gibson, Dunn & Crutcher, J. C. Macfarland, and Stuart Lapp, all of Los Angeles, Cal., for debtor.

Thomas K. Case, in pro. per.

George R. Larwill and Frank S. Balthis, Jr., both of Los Angeles, Cal., for bondholders Ogden et al.

William Schoenau, Jr., in pro. per.

Clarke & Bowker and Earl E. Moss, all of Los Angeles, Cal., for bondholder Adele M. Cowan.

Overton, Lyman & Plumb and C. L. McGaughey, all of Los Angeles, Cal., for bondholders Coulter and Priest.

JENNEY, District Judge (after stating the facts as above).

There are a number of interesting legal problems which have been presented orally and by briefs to the court.

The first issue to be considered is the constitutionality of Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, which has been questioned by counsel for the objectors, but which has never been passed upon directly by the Supreme Court of the United States. That court has however held constitutional Section 77, 11 U. S.C.A. § 205, relating to railroad reorganizations, which are in many respects similar to the corporate reorganizations intended to be covered by Section 77B. Continental Ill. National Bank & Trust Co. v. Chicago, R. I. & P. Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110, 27 A.B.R.,N.S., 715.

While the Circuit Court of Appeals for this Ninth Circuit has not passed on the matter, the Circuit Courts of Appeal of the Second, Fourth, Seventh and Eighth Circuits have all held Section 77B to be constitutional. In re New Rochelle Coal & Lumber Co., 2 Cir., 77 F.2d 881, 29 A.B.R., N.S., 177; Campbell v. Alleghany Corp., 4 Cir., 75 F.2d 947, 27 A.B.R.,N.S., 504; In re Georgian Hotel Corp., 7 Cir., 82 F.2d 917, 31 A.B.R.,N.S., 234; Grand Boulevard Investment Co. v. Strauss, 8 Cir., 78 F.2d 180, 29 A.B.R.,N.S., 188.

No Circuit Court of Appeals, District Court, or state court, so far as any reported decision reveals, has held the section as a whole unconstitutional.

The decision in Tennessee Publishing Co. v. American National Bank, 6 Cir., 81 F.2d 463, 30 A.B.R.,N.S., 521, has been heavily relied upon by counsel for the objectors. It seems to this court to be distinguishable in principle. An analysis of that case shows that the lower court found the proceeding instituted in good faith, but declared subsection (b) (5) of Section 77B, 11 U.S.C.A. § 207 (b) (5), in so far as it purports to permit adjustment of liens without the consent of the lien holders, invalid under the Fifth Amendment to the Constitution, U.S.C.A.Const. Amend. 5. That case was appealed, and the Circuit Court of Appeals found that the Plan of Reorganization which had been presented to the District Court, and which, of course, was a part of the record on appeal, was hopelessly unworkable. The appellate court said that it was apparent from the record that the company had had operating losses for such a length of time that it seemed impossible, under the plan presented, to turn those deficits into profits; that there was no reasonable prospect for the rehabilitation of the debtor. The appellate court, therefore, held that the plan was not filed in good faith, and was not a feasible one. The court admitted that because of its finding of lack of good faith, the question of the constitutionality of subsection (b) (5) was perhaps not necessary to be decided. It then went on to say that because other plans of reorganization might be presented to the court below after remand, it would nevertheless determine the constitutional question, rather than leave this subject open. It then sustained the decision of the lower court and held the provisions of subsection (b) (5) unconstitutional. It stated that under the Fifth Amendment to the Constitution, the lien holders had rights under their contract, to retain their lien, to public sale, and to have the mortgaged property devoted to the satisfaction of the debt, etc.

The decision of the Circuit Court of Appeals was affirmed by the Supreme Court in 299 U.S. 18, 57 S.Ct. 85, 81 L. Ed. 13, 32 A.B.R.,N.S., 180, on the ground that the plan was not feasible and not presented in good faith, but the court declined to pass upon the constitutional question.

In the opinion of this court, Section 77B of the Bankruptcy Act is constitutional. The question is whether or not the law authorizes the court to adjust the debts and obligations of an embarrassed corporate debtor, unable to pay its debts as they mature, without making a formal adjudication of bankruptcy or taking possession of its property for distribution among creditors, and whether that power may be sustained under the power over bankruptcies vested in Congress. U.S.C.A. Const. art. 1, § 8, cl. 4. The grant of power to Congress to establish uniform laws on the subject of bankruptcies does not seem to be limited to the forms in which that power has heretofore been exercised by Congress, or by the laws relating to bankruptcies which have been passed in this country or in England or even in the several American Colonies prior to the adoption of the Constitution.1

All phases of the relationship between a financially embarrassed debtor and his creditors are brought under the control of Congress by the constitutional grant of power. The fact that a particular mode has heretofore been employed in dealing with this relationship should not, it seems to this court, be taken as a measure of the power of Congress to enact legislation in that regard. See Hanover National Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L.Ed. 1113; Sturges v. Crowninshield, 4 Wheat, 122, 4 L.Ed. 529; In re Landquist, 7 Cir., 70 F.2d 929; Nelson v. Carland, 1 How. 265, 11 L.Ed. 126; In re Reiman, 20 Fed.Cas. p. 490, No. 11,673, 7 Ben. 455.

In view of the statements contained in the opinion of the Supreme Court of the United States in the case of Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593, 97 A.L.R. 1106, 28 A.B.R.,N.S., 397, respecting the power of the majority of a class to bind a minority in composition matters, it seems likely that the Supreme Court would hold Section 77B constitutional, if the question were squarely presented to it. In the absence of any such definite decision on the part of that court, it becomes the obligation of this court to do the best it can under the circumstances. That court would, we believe, hold that a lien, otherwise valid under Section 77B of the Act, could be impaired where the lien holder is a member of a class and the requisite two-thirds in amount of that class consent, and the plan of impairment is found by the court to be fair, equitable, feasible and not discriminatory. In that connection see: In re Central Funding Corp., 2 Cir., 75 F.2d 256, 27 A.B.R.,N.S., 764; Downtown Inv. Ass'n v. Boston Met. Bldgs., 1 Cir., 81 F.2d 314, 30 A.B.R.,N.S., 483, which, although not quite so directly in point, is a later case; Canada Southern Ry. Co. v. Gebhard, 109 U.S. 527, 3 S.Ct. 363, 27 L.Ed. 1020.

In Campbell v. Alleghany Corporation, supra, Judge Parker of the Fourth Circuit said in substance that it is no ground of constitutional objection to the Corporate Reorganization Amendment that the Act relates only to corporate debtors, as the uniformity required by the Constitution is geographical and not personal. He indicated that Section 77B, authorizing a court to readjust the debts and obligations of an embarrassed corporate debtor, without, making formal adjudication of bankruptcy or taking possession of its property for distribution among creditors, is within the power over bankruptcies vested in Congress by the Constitution.

A statute requiring secured creditors of a corporation to scale down their debts in accordance with the plan which two-thirds of them are willing to accept and which has been approved by the court as reasonable and fair, and accept in lieu of payment in money such securities as are specified in the plan, is not, he said, such an arbitrary and unreasonable exercise of the bankruptcy power as to amount to a denial of due process.

The fact that secured debts are affected by the Corporate Reorganization Amendment does not impair its constitutionality. Likewise, there is nothing relating to stockholders in that Amendment which affects its constitutionality, for like other constitutional grants of power, that giving Congress power over bankruptcies is to be interpreted, not in the light of the conditions with which the framers of the Constitution were familiar, but of what is required under modern conditions to deal adequately with the relationship existing between embarrassed debtors and their creditors.

The acceptance of a proposed plan by a large percentage of the parties interested is strong evidence that it is fair and feasible, and that it is made in good faith. While a court of equity will not allow minority bondholders to be disregarded or treated unfairly in a reorganization plan, yet, on the other hand, it will not lend its aid to any scheme of minority bondholders opposing a fair reorganization plan solely as a means for obtaining greater value or more favorable terms for their bonds than are to be given by the plan to the great majority of the bondholders. Palmer v. Bankers' Trust Co., 8 Cir., 12 F.2d 747, 754; Downtown Inv. Ass'n v. Boston Met. Bldgs., supra.

In the latter case Judge Morris summed up the situation this way (81 F.2d page 323):

"Some of the tests applied by the Supreme Court in dealing with the question of whether a plan of reorganization is fair and equitable in equity receivership proceedings are that the plan must not exclude any creditor from participation under the penalty of the plan being declared a fraudulent...

To continue reading

Request your trial
9 cases
  • In re Southern Land Title Corporation, 67-135.
    • United States
    • U.S. District Court — Eastern District of Louisiana
    • November 25, 1968
    ...strictly construed if, in fact, they are not void as contrary to public policy. The objecting bondholders in In Re Los Angeles Lumber Products Co., 24 F.Supp. 501 (S.D.Cal.1938) aff'd, 100 F.2d 963 (9th Cir. 1939), rev'd on other grds. 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939), argued t......
  • Case v. Los Angeles Lumber Products Co
    • United States
    • United States Supreme Court
    • November 6, 1939
    ...equitable to bondholders. The District Court found that the debtor was insolvent both in the equity sense and in the bankruptcy sense. 24 F.Supp. 501. The latter finding was based upon 'appraisal and audit reports.' In this connection the court found that the total value of all assets of Lo......
  • Los Angeles Shipbuilding & Drydock Corp. v. United States
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • March 22, 1961
    ...was organized to act as transferee and successor of the assets and business of Lumber and its subsidiaries. See In re Los Angeles Lumber Products Co., 24 F.Supp. 501, affirmed 9 Cir., 100 F.2d 963. Certain interested parties objected to the plan. Upon petition for certiorari to the Supreme ......
  • THE NAVEMAR
    • United States
    • U.S. District Court — Eastern District of New York
    • July 26, 1938
    ... ... Tampico, supra, 16 F. 491, 493, 494; cf. Berizzi Bros. Co. v. S. S. Pesaro, supra 271 U.S. 562, 46 S.Ct. 611, 70 ... ...
  • Request a trial to view additional results
1 books & journal articles
  • The Alteration of Ex Ante Agreements by the Bankruptcy Code.
    • United States
    • American Bankruptcy Law Journal Vol. 95 No. 4, December 2021
    • December 22, 2021
    ...reorganized debtor). (235) Case v. Los Angeles Lumber Prod. Co., 308 U.S. 106, 111-112 (1939). (236) In re Los Angeles Lumber Prod. Co., 24 F. Supp. 501, 507 (S.D. Cal. (237) in re L.A. Lumber Prods. Co., 100 F.2d 963, 965 (9th Cir. 1939). (238) Case, 308 U.S. at 116-117. (239) Id. at 115. ......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT