IN RE DCA DEVELOPMENT CORPORATION, 73-1262.

• Decision Date: 27 December 1973
• Docket Number: No. 73-1262.,73-1262.
• Parties: In the Matter of DCA DEVELOPMENT CORPORATION et al., Debtors. Petition of FRANCHI CONSTRUCTION CO., INC., Petitioner, Appellant.
• Court: U.S. Court of Appeals — First Circuit

489 F.2d 43 (1973)

In the Matter of DCA DEVELOPMENT CORPORATION et al., Debtors Petition of FRANCHI CONSTRUCTION CO., INC., Petitioner, Appellant.

No. 73-1262.

United States Court of Appeals, First Circuit.

Argued November 6, 1973.

Decided December 27, 1973.

Robert Robinson, Boston, Mass., with whom Widett & Widett, Boston, Mass., was on brief, for appellant.

Donald Forte, Jr., Boston, Mass., with whom Joseph W. Bartlett, and Ely, Bartlett, Brown & Proctor, Boston, Mass., were on brief, for Boston Financial Technology Group, Inc., appellee.

Hertz N. Henkoff, Boston, Mass., with whom Barron & Stadfeld, Boston, Mass., was on brief, for James N. Langan, etc., appellee.

Before COFFIN, Chief Judge, ALRICH and McENTEE, Circuit Judges.

McENTEE, Circuit Judge.

This appeal arises out of proceedings for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. (1970). Appellant, an unsecured creditor¹ of debtor DCA Development Corporation (DCA), challenges a transfer of DCA assets that was approved by both the referee and district court. Appellant contends (1) that it was denied its right as a creditor to a fair hearing because of insufficient notice; (2) that the transfer, as approved, provided inadequate consideration to DCA and was not in the best interests of creditors; and (3) that the findings of fact in the referee's order were statutorily insufficient. We reject these contentions and affirm the validity of the transfer.

The factual background is as follows.² DCA filed a Chapter XI petition on February 5, 1973. At that time it had four categories of assets: (1) two tile manufacturing plants, inoperative since November 1972; (2) two wholly-owned subsidiaries, Development Corporation of America (Development) and DCA Builders, Inc. (Builders), both of which also petitioned for Chapter XI arrangements; (3) general partner interests in five limited partnerships engaged in housing projects; and (4) miscellaneous holdings of tile inventory, real estate and accounts receivables, much of which were depleted in value or subject to extensive liens and pledges.

This appeal concerns the general partner interests. With respect to each interest, DCA had executed development arrangements with the limited partnerships and then assigned the receivables (i. e., the limited partners' contributions) due under the agreements to its subsidiary, Development. The subsidiary in turn granted Newton-Waltham Bank & Trust Company (the Bank) a security interest in the receivables to the extent of $1,447,000 owed by DCA to the Bank.

On April 12, 1973, DCA sought authority to engage in the following transaction: transfer four of its general partner interests, plus an option in the fifth, to Boston Financial Technology Group, Inc. (Boston Financial). According to DCA figures submitted to the referee, the four interests at that time were burdened by $1,330,200 in liabilities,³ of which $694,200 was owed to Boston Financial.⁴ The deal also called for Development to tranfer to Boston Financial the related receivables, valued at $2,393,200 but subject to the Bank's $1,447,000 security interest.⁵ In addition, the Bank would release DCA from all claims and Boston Financial would pay Development $100,000, spread over six months.⁶ At DCA's request the referee agreed to hold a hearing the next morning on the proposed transfer. Appellant and other creditors received notice at about 3 p. m. on April 12 of the hearing to be held at 11 a. m. April 13.

The witnesses at the April 13 hearing represented DCA, Boston Financial and the limited partners. All of them testified in favor of the transfer. The witnesses stated that DCA's cash reserves were so depleted that it could no longer take the steps necessary for government certification of the housing projects, all of which had been halted close to completion.⁷ Without certification the limited partners would not be obligated to pay their contributions, which were the only meaningful assets left to DCA and its subsidiaries. Therefore, speedy transfer of the general partner interests to a more stable entity was deemed essential if the projects were to be completed and any value was to be left with DCA for the benefit of its creditors. This testimony was subject to vigorous cross-examination by counsel for the creditors.

Appellant's counsel attended the hearing and participated in the cross-examination. He also filed an answer (1) stating that appellant had insufficient time to prepare an adequate response or defense, (2) denying generally the allegations in the petition to transfer, (3) asserting inadequacy of consideration for the assets, and (4) alleging that Boston Financial and the Bank would receive preferential treatment and that the transfer was not in the best interests of the creditors. The referee adjourned the April 13 hearing without taking any action or setting a date for another hearing.

At 11 a. m. April 20, appellant was formally notified of a second hearing, this one to be held at 4 p. m. on the same day. In the intervening week, following meetings between the creditors' committee and Boston Financial, the transfer proposal was altered to increase the cash consideration to Development to $285,000.⁸ At this hearing Boston Financial representatives stated that unless the referee approved the transfer that day, they would have to withdraw the offer.⁹ Appellant's counsel continued to object to the transfer and again claimed insufficient notice to prepare an adequate response. This time the referee approved the transfer, as amended, and the district court denied appellant's petition for review. On June 27, 1973, DCA was adjudicated bankrupt after failing to effect a plan of arrangement under Chapter XI.¹⁰

In seeking to unwind the transfer, appellant's principal contention is that it was denied a fair hearing below because of insufficient notice. The Bankruptcy Act generally grants the referee and district court considerable discretion on this matter. Bankruptcy Act § 313(2), 11 U.S.C. § 713(2) (1970), permits the sale of "any property" of a Chapter XI debtor "upon such notice as the court may prescribe." Similarly, Bankruptcy Act § 315, 11 U.S.C. § 715 (1970), provides that when not otherwise specified the court shall designate "the time within which . . . notice shall be given." In short, these provisions merely require such notice and opportunity for a hearing as is reasonable and appropriate in each particular case. See In re Plaza Towers, Inc., 294 F.Supp. 714, 718 (E. D.La.1967) (Chapter X proceeding); cf. In re Wood & Henderson, 210 U.S. 246, 253, 28 S.Ct. 621, 52 L.Ed. 1046 (1908). This is nothing more than traditional Due Process Clause analysis. Gleeson v. Carr, 219 F.2d 64, 67 (9th Cir.), cert. denied, 350 U.S. 827, 76 S.Ct. 56, 100 L. Ed. 738, rehearing denied, 350 U.S. 897, 76 S.Ct. 149, 100 L.Ed. 789 (1955) (Chapter X proceeding). The court in each case must balance the individual's interest in adequate procedure against the overall interest of efficient, final resolution of claims. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 313-314, 70 S.Ct. 652, 94 L.Ed. 865 (1950). The latter interest is particularly important in proceedings under the Bankruptcy Act, where delay can often result in diminution of corporate assets with no corresponding benefit to creditors. See In re Inter-City Trust, 295 F. 495, 497 (1st Cir.), cert. denied, 265 U.S. 589, 44 S.Ct. 635, 68 L.Ed. 1194 (1924).¹¹

Moreover, even where formal notice to affected parties is omitted or is insufficient, informal or constructive notice which provides them with the same opportunity for a fair hearing can satisfy the procedural requirements of the Bankruptcy Act. See, e. g., Ferguson v. Bucks County Farms, Inc., 280 F.2d 739, 743 (3d Cir. 1960); Harris v. Capehart-Farnsworth Corp., 207 F.2d 512, 517 (8th Cir. 1953); Kattelman v. Madden, 88 F.2d 858, 863 (8th Cir. 1937); In re Eatsum Prods. Corp., 286 F. 447, 448-449 (S.D.Fla.1923).

In the instant case, it is clear that appellant received brief formal notice of both the April 13 and April 20 hearings: twenty hours for the first and five hours for the second. But it is also clear that appellant had one full week between the two hearings in which it could have prepared a defense or response to the transfer proposal. See Ferguson v. Bucks County Farms, Inc., supra.¹² Appellant concedes that it did nothing during that week, even though it was fully apprised at the April 13 hearing of the details of the proposal and the arguments being made in support of it. Appellant seeks to justify its inaction by claiming that the referee's failure at the first hearing to fix a date for the second one implied that no further hearings would be held. We do not think this was a reasonable inference. But even if appellant did not expect the referee to call another hearing, it should have begun immediately to seek new evidence against the proposal or a better offer elsewhere so that it could petition the referee on its own motion for another hearing. Instead, it remained idle, and now seeks the opportunity to do for the first time what it should have been doing earlier. In contrast to appellant's inaction, the creditors' committee took the opportunity during the week between hearings to meet with Boston Financial concerning the transfer proposal. These meetings apparently resulted in the increase in consideration from $100,000 to $285,000, after which the committee voiced its approval of the transfer to the referee. Counsel for appellant conceded at oral argument that he was aware of the creditors' committee meetings during the week between hearings but deliberately refrained from participating in them on orders from his client. Thus, appellant's inaction was not solely due to ignorance but involved a good measure of willfulness. On this set of facts, we hold that the notice accorded the appellant with respect to the transfer of assets was...