In re Dutch Woodcraft Shops, 6251.

• Court: U.S. District Court — Western District of Michigan
• Writing for the Court: Butterfield, Keeney & Amberg, of Grand Rapids, Mich., for excepting creditor, Fine Arts Corporation
• Citation: In re Dutch Woodcraft Shops, 14 F.Supp. 467 (W.D. Mich. 1935)
• Decision Date: 19 November 1935
• Docket Number: No. 6251.,6251.
• Parties: IN RE DUTCH WOODCRAFT SHOPS.

14 F. Supp. 467

IN RE DUTCH WOODCRAFT SHOPS.

No. 6251.

District Court, W. D. Michigan, S. D.

November 19, 1935.

Jarrett N. Clark, of Zeeland, Mich., for debtor.

Butterfield, Keeney & Amberg, of Grand Rapids, Mich., for excepting creditor, Fine Arts Corporation.

RAYMOND, District Judge.

A number of exceptions have been filed by Fine Arts Corporation, a creditor, to the report of the special master which recommends confirmation of debtor's amended plan of reorganization submitted in proceedings under section 77B, Bankr.Act (11 U.S.C.A. § 207). The objecting creditor has a claim of $7,000 out of a total of approximately $520,000 of claims allowed against debtor.

Among other exceptions, objection is made to the finding that debtor's amended plan of reorganization is fair and equitable and does not discriminate unfairly in favor of any class of creditors or stockholders, and is feasible, the complaint being that the plan provides for the equivalent of a private sale of debtor's assets to stockholders for an amount which is wholly inadequate. Careful examination of the record is convincing that this exception must be sustained. Because of the view taken by the court upon this exception, comment upon the remaining exceptions is unnecessary.

Without doubt, in a case like the present, where the proposed plan of reorganization of a grossly insolvent corporation contemplates reinvestment of the title to the assets in the former stockholders, by purchase or otherwise, those who seek approval of the plan over objection of a dissenting creditor are constrained by a very substantial burden to establish strict observance of the equities necessarily precedent to such result.

A misconception of the fundamental purposes of the section here invoked appears in the record of proceedings before the special master. Early in these proceedings, counsel for the debtor announced the view that the essential purpose of section 77B is to allow the debtor corporation to work out a plan so that creditors will receive approximately what they would obtain in bankruptcy proceedings and still allow the company to continue to function. This view cannot be sustained. With outstanding capital stock of $15,000 and assets appraised at about $53,000, the indebtedness of the company is substantially in excess of a half million dollars. Obviously, the essential purpose of section 77B is to preserve and continue a going business, but in cases where going concern values have been wholly or practically eliminated, the case is one for liquidation rather than reorganization. The preservation of business enterprises must not be at the expense of creditors, and the provisions of section 77B should not be taken advantage of to effect what, in fact, amounts to a composition under section 12 (11 U.S.C.A. § 30). The words "in good faith" as used in the act imply an honesty of purpose to save the company and its creditors, particularly its creditors, and to avoid the evils of liquidation which is often effected with the result that creditors receive practically nothing. The good faith which must be made to appear at the inception of proceedings under 77B must continue throughout, and, in the case of insolvent corporations, the rights of creditors are to be guarded and must be recognized as paramount to those of stockholders.

Confirmation of the plan to revest the stockholders with title to the property of debtor would be justified only upon clear proof of fairness to creditors. Here the appraisal evidently was made on the basis of values which would be realized at a forced sale. Creditors may not be thus dealt with. In determination of the value of their claims, they are entitled to have recognized not only present liquidation values but also the prospective values of debtor's assets as a going concern. It is not fair that stockholders, the value of whose rights has been completely obliterated, shall appropriate to themselves the going concern value of a debtor corporation seeking reorganization under section 77B, at the same time disregarding the rights of creditors to share in the prospective values.

Prior to the enactment of section 77B, similar plans of reorganization were held to be fraudulent conveyances as against dissenting minority interests. The case of Northern Pac. R. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931, held that even in the absence of fraud, any device, whether by private contract or judicial sale, whereby stockholders are preferred to creditors is invalid. In that case it was said, 228 U.S. 482, at pages 504, 508, 33 S. Ct. 554, 560, 57 L.Ed. 931:

"For, if purposely or unintentionally a single creditor...