In re Flora Mir Candy Corporation, 59
| Decision Date | 28 October 1970 |
| Docket Number | Docket 34713.,No. 59,59 |
| Citation | 432 F.2d 1060 |
| Parties | In the Matter of FLORA MIR CANDY CORPORATION et al., Debtors. FLORA MIR CANDY CORPORATION et al., Debtors-Appellants, v. R. S. DICKSON & Co. et al., creditors of Meadors, Inc., Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Michael J. Crames, New York City (Levin & Weintraub and Harris Levin, New York City, of counsel), for debtors-appellants.
David L. Freeman, Greenville, S. C. (Wyche, Burgess, Freeman & Parham, P.A., Greenville, S. C., of counsel), for appellees.
Before DANAHER,* FRIENDLY and HAYS, Circuit Judges.
Meadors, Inc., was organized late in 1961 to manufacture and sell candy in Greenville, S. C. In addition to stock, it issued $330,000 of 7% convertible subordinated debentures. In 1963 the stockholders sold all their shares to United Biscuit Company of America, later Keebler Company. The debenture holders gave up their conversion privilege as part of the transaction. Meadors' sales force was dismantled, and its output was sold under the Keebler label.
In February 1968 Keebler entered into an agreement to sell the stock of Meadors to Atlantic Services, Inc. According to a complaint filed by the Meadors debenture holders in the District Court for South Carolina in November 1968, Atlantic helped itself to $235,000 of Meadors' funds to pay Keebler. Allegedly Keebler was a party to this fraud and worked to conceal it from Meadors' creditors by contracting to buy candy and thus keep Meadors afloat, which it did until August 20, 1968.
In June 1968 Atlantic sold the Meadors stock to Flora Mir Distributing Co., Inc., a dummy subsidiary of Flora Mir Candy Corporation. Allegedly Atlantic went through the form of paying into an account opened for Meadors at the Royal National Bank in New York the $276,800 it had taken from Meadors to finance the purchase from Keebler, but Flora Mir refunded this immediately on the stock being transferred; the balance of the purchase price was paid to Atlantic by Flora Mir upon collection of Meadors' accounts receivable. Flora Mir then arranged to terminate Meadors' small remaining operations and was removing its property from South Carolina to Dunn, N. C., where other Flora Mir subsidiaries operated, until this process was halted by an attachment for unpaid rent by Meadors' landlord in Greenville. All operations of Meadors ended on November 15, 1968. As indicated, the holders of the Meadors debentures brought an action in November 1968 in the District Court for South Carolina for damages and injunctive relief against Keebler, Atlantic Services, the two Flora Mir companies, and Meadors, Inc. Judge Russell entered an order restraining Meadors from removing any of its property from South Carolina during the action's pendency.
On May 12, 1969, Flora Mir, Flora Mir Distributing Company, Meadors, Inc. and ten wholly owned subsidiaries of Flora Mir, which that company had picked up in the course of an acquisition program, filed petitions under Chapter XI of the Bankruptcy Act in the District Court for the Southern District of New York. While it might have been thought that by this time the cup of the unfortunate Meadors debenture holders was full, that proved not to be so. On the very same day the debtors moved for an order consolidating the proceedings of the thirteen debtors, pooling their assets and liabilities, disallowing intercompany claims, and treating claims filed against any of the debtors as having been filed in the consolidated proceeding. A hearing was held before the referee at which an accountant and the secretary of Flora Mir and all its subsidiaries testified with regard to the multitude of intercompany transactions, many without apparent business purpose, and the difficulty of disentangling them. Very little of this evidence bore on Meadors, Inc. The accountant principally relied on the period from December 31, 1968 through May 11, 1969, when Meadors was largely defunct.1 There was also testimony that the trade had considered all the debtors as a group, but this again had little to do with Meadors which had transacted little business after its acquisition by Flora Mir in June 1968 and none since November of that year. The Meadors debenture holders vigorously opposed consolidation. However, the referee signed, without any material change, findings of fact and conclusions of law submitted by the attorneys for the debtors2 and entered an order directing that the proceedings and the assets and liabilities of the debtors should be consolidated and that intercompany claims should be disallowed upon the confirmation of an arrangement.
The first ray of light for the Meadors debenture holders in many years was shed when their petition to review this order came before a district judge possessed of robust common sense. On examining the evidence Judge Murphy found it to be "grossly insufficient to prompt a court of equity" to consolidate Meadors with the other debtors.3 Accordingly he set aside the order insofar as it concerned Meadors, Inc.
The decision was so manifestly correct that we should hardly have written an opinion were it not to make it plain that referees should not order consolidation on so flimsy a basis as was done here. While the term has a disarmingly innocent sound, consolidation in bankruptcy, in the form directed in this case, is no mere instrument of procedural convenience, such as consolidation of actions under F.R.Civ.P. 42(a), but a measure vitally affecting substantive rights. The Supreme Court has told us time and again that "courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity," Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S.Ct. 695, 697, 78 L.Ed. 1230 (1934). The inequity of consolidation could scarcely be clearer than in this case. The debentures had been issued when Meadors was an independent company, more than six years before its acquisition by Flora Mir. Yet we have stated that even when the interrelationship already existed at the time credit was extended, "The power to consolidate should be used sparingly because of the possibility of unfair treatment of creditors of a corporate debtor who have dealt...
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