In re Community Gas & Power Co.

• Decision Date: 10 April 1947
• Docket Number: Civ. No. 860.
• Citation: 71 F. Supp. 171
• Parties: In re COMMUNITY GAS & POWER CO. et al.
• Court: U.S. District Court — District of Delaware

71 F. Supp. 171

In re COMMUNITY GAS & POWER CO. et al.

Civ. No. 860.

District Court, D. Delaware.

April 10, 1947.

Harry G. Slater, Chief Counsel, Myron S. Isaacs, and Jerome S. Katzin, of Philadelphia, Pa., for Securities & Exchange Commission.

Albridge C. Smith and Prescott R. Andrews (of Humes, Buck, Smith & Stowell), of New York City, and Clarence A. Southerland (of Southerland, Berl & Potter), of Wilmington, Del., for Community Gas & Power Co. and American Gas & Power Co.

Melber Chambers and Edward H. Spencer (of Sage, Gray, Todd & Sims), of New York City, for New York Trust Co. as Debenture Trustee.

George C. Munson (of Townsend, Elliott & Munson), of Philadelphia, Pa., for the Committee for Secured Debentures of American Gas & Power Co.

Solomon E. Star (of McManus & Ernst), of New York City, for certain Debenture Holders of American Gas & Power Co.

Walter J. Fried (of Riegelman, Strasser, Schwarz & Spiegelberg), of New York City, for a Stockholder of American Gas & Power Co.

Seymour Heilbron (of Hays, St. John, Abramson & Schulman), of New York City, for an objecting Common Stockholder of American Gas & Power Co.

Percival E. Jackson, of New York City, for certain Debenture Holders of American Gas & Power Co.

John C. Benson and Chester L. Nichols, of Minneapolis, Minn., for Minneapolis Gas Light Co.

LEAHY, District Judge.

Community Gas and Power Company's and American Gas and Power Company's long attempt to comply with § 11 of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k, may be examined by a reference to 13 S.E.C. 532, Holding Company Act Releases Nos. 4395, 4665, 5081, 6436, 6522 and 7131. Only the master facts will be recited here. Both Community and American are registered holding companies. The Securities and Exchange Commission on July 2, 1943 ordered Community to liquidate and American to eliminate its debt securities. A plan was filed which was later modified.

The plan, here as modified, calls for dissolution of Community and the merger of American with Minneapolis Gas Light Company, its remaining operating subsidiary and all of whose common stock is owned by American. American will contribute $3,330,000 cash to Minneapolis for reduction of the latter's debt and for working capital. Minneapolis will transfer its assets to American. American will assume Minneapolis' debt; issue new preferred stock to Minneapolis' present preferred shareholders; and issue 1,090,382 shares of new common stock. 80.16% of this stock will go to American's secured debenture holders — the balance to its common shareholders and holders of warrants. The surviving corporation will be named Minneapolis Gas Company.

There are objections to the plan. The Trustee for the secured debenture holders, as well as two groups representing certain other secured debenture holders, contend the court lacks power to approve any plan under which secured debenture holders are to receive anything but cash; but if such power exists the provisions of the plan whereby debenture holders are to receive the stock of Minneapolis Gas Company are unfair and not appropriate to effect compliance with § 11; and the particular allocation of the stock to the secured debenture holders is not fair and equitable. Certain of the common shareholders of American object to the distribution of stock to the secured debenture holders as not appropriate. Another stockholder of American joins with the company and seeks court approval of the plan. To the features of the plan which provide for the treatment of the senior security holders of Minneapolis, to the relative treatment accorded the 5% and 6% debentures, and to the relative treatment between the warrant holders and the common shareholders, there is no objection.

The questions for decision are, do the Securities and Exchange Commission and the enforcement court have the power to approve a plan of a solvent holding company where creditors, secured by a pledge of underlying securities, are given such securities instead of cash for the dischargement of the debt; assuming the debenture holders must take stocks, is the distribution here fair and equitable; and, is the plan appropriate in providing for the merger of American with its principal operating subsidiary, Minneapolis Gas Light Company?

1. It cannot be seriously argued that the Commission is here asserting a power to destroy a pledge of collateral of American's secured debentures. In fact, the security behind the debentures is simply American's holdings of common stock in Minneapolis Gas Light Company and cash received from the sale of former subsidiaries and, under the trust indenture, American may use that cash to buy additional common stock of Minneapolis. At best, then, the secured debenture holders may look to their participation in the common stock of Minneapolis.

Both the Act¹ and legislative history² disclose that Congress envisaged that proceedings for enforcement might arise whereby it would be necessary to have alteration of a pledge³ or a satisfaction of first mortgage bonds, for example, in new common stock.⁴ A study of the legislative history does not suggest that Congress intended to exclude any particular type of security from the impact of § 11; certainly at no place in the Act itself may there be spelled out the exception that "secured debentures" are without the scope of the Act. More than that, I do not think Congress could have intended that the validity of a plan should depend upon the fortuitous circumstance of whether, in any given case, the bonds were first mortgage bonds or income or other type bonds or debentures.

With the power to deal with debentures in any case where there is an attempt to effect compliance with the Act, the Commission may approve a plan for distribution in kind to holders of debentures and it has been so decided in this Circuit. In re Standard Gas & Electric Co., 3 Cir., 151 F.2d 326, 329, 330, certiorari denied 327 U.S. 796, 66 S.Ct. 820. It must follow that a first mortgage bond likewise is subject to the impact of the Act; hence I see no reason why such security holders may not also be forced to accept distribution in kind, whether they be called true bondholders or "secured debenture holders." Distribution in kind, then, in the matter at bar, is an appropriate and fair method for effecting compliance with the Act. The main asset of American is the common stock of Minneapolis; the latter as an operating company needs cash for reduction of debt, construction of properties and working capital. It is not unfair to utilize the pledged cash to increase the stability of Minneapolis and thus strengthen its common stock. The argument is made that the pledged cash and a sale of the new common stock should be had to pay the secured debentures in cash. But here the companies, all the security holders and the Commission itself face an impediment. The City of Minneapolis strongly objects to any sale of stock of the operating company; and it will not permit the transfer of the franchise if such course should be followed. The conclusion is clear that any alternative other than distribution in kind to the secured debenture holders would result in non-compliance for many years.

One secured debenture holder argues that the proposed plan results in an...