In re Inland Gas Corp.

• Decision Date: 19 March 1951
• Docket Number: No. 11090-11094.,11090-11094.
• Citation: 187 F.2d 813
• Parties: In re INLAND GAS CORP. et al. (five cases).
• Court: U.S. Court of Appeals — Sixth Circuit

187 F.2d 813 (1951)

In re INLAND GAS CORP. et al. (five cases).

Nos. 11090-11094.

United States Court of Appeals Sixth Circuit.

March 19, 1951.

John L. Davis, Lexington, Ky., for Clinton M. Harbison.

Oscar S. Rosner, New York City (Jay Raymond Levinson, Rudolph Grunfeld, New York City, on the brief; Baker, Obermeier & Rosner, New York City, of counsel), for Green Committee.

LeWright Browning, Ashland, Ky. (George W. Jaques, New York City, on the brief), for Vanston Committee.

Edward S. Pinney, New York City (William B. Marshall, New York City, on the brief; Cravath, Swaine & Moore, New York City, Andrew J. Conroy, Jr., Peck, Shaffer & Williams, Cincinnati, Ohio, of counsel), for Columbia Gas System, Inc.

Anthony H. Whitaker, Philadelphia, Pa. (J. Victor Bradley, Jr., Norman T. Hayes, Jr., Philadelphia, Pa., on the brief; Bradley & Bradley, Georgetown, Ky., Morgan, Lewis & Bockius, Philadelphia, Pa., of counsel), for Edward J. Caughlin Committee.

Charles I. Dawson, Louisville, Ky. (Thos. S. Dawson, Malcolm Y. Marshall, Louisville, Ky., on the brief; Bullitt, Dawson & Tarrant, Louisville, Ky., of counsel), for Alvin C. Radford and others.

Roger S. Foster, Washington, D. C., John R. Young, Cleveland, Ohio (David Ferber, W. Victor Rodin, Charles J. Odenweller, Jr., Washington, D. C., Warren E. Blair, Cleveland, Ohio, on the brief), for Securities and Exchange Commission.

Before HICKS, Chief Judge, and SIMONS and MARTIN, Circuit Judges.

SIMONS, Circuit Judge.

There are here involved five appeals from an order of the district court approving a plan of reorganization for the debtors in proceedings under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The appeals overlap. Both appellants and appellees variously challenge and defend findings of fact, conclusions of law and the provisions of the order in multiple aspects. The most important contentions which lie at the root of the whole controversy, however, are in respect to the status that is to be accorded the claims of the Columbia Gas System, Inc., successor to Columbia Gas & Electric Corp., in the distribution of the assets of the debtors, and this leads to a consideration of our previous opinions in In re American Fuel & Power Co., 6 Cir., 122 F.2d 223, and Columbia Gas & Electric Co. v. U. S., 6 Cir., 151 F.2d 461, and particularly of our mandate in the second of these cases.

The Columbia Claims

When the controversy first claimed our attention in 1941 it was upon an appeal by creditors of the American Fuel & Power Company, seeking to set aside an order approving a settlement between the trustees of the debtors and the Columbia System. In an exhaustive opinion we held that Columbia had acquired its securities and stock in pursuance of an illegal and inequitable scheme to destroy competition with it by the American Fuel & Power Company and its affiliates, that under the facts of record no principle of equity, morals or law required the court to lend its aid to further a scheme abhorrent to all recognized rules of right and justice. The orders of the court were reversed and the causes remanded with direction that all claims or stock interests of Columbia against the debtors be rejected.

Columbia, not having been a party to the proceedings in that case and so not bound by it, the district court conducted extended hearings upon the Columbia claims, and applying the law as we found it to be, entered orders upon detailed findings of fact and conclusions of law rejecting them all. Again there were appeals mainly by Columbia, challenging the judgment. After careful consideration of the findings and conclusions of the court, and an extended six volume record, we accepted the findings of the district judge but limited the remedy to the subordination of Columbia claims to the "claims of all other creditors in every class." Petitions for amendment and clarification of our mandate were later denied. 6 Cir., 153 F.2d 101.

When our decision was rendered on November 26, 1945 in Columbia Gas & Electric Corp. v. United States, supra, the Supreme Court had but recently decided the case of Hartford-Empire Co. v. United States (Jan. 8, 1945), 323 U.S. 386, 65 S.Ct. 373, 89 L.Ed. 322, wherein the court denied relief for infringement of patents illegally used against those infringing during such illegal use, but declined to hold the patents invalid. We thought that under the facts of that case there might well remain to the appellants property rights which, when their owners had abandoned their illegal practices and been purged of inequity, could still be enforced against subsequent infringers, and that it was for that reason the court would not permit them to be forfeited. We perceived an analogy between the patent rights there preserved and the claims of Columbia here involved, and so while we approved the findings of the district court that the conduct of Columbia in acquiring its securities was inequitable and illegal, we concluded that subordination of its claims to those of other creditors was a more appropriate remedy than their complete rejection. We were probably led to this also by the view of the SEC that upon the facts of the case then developed, the distinction between subordination and rejection was purely academic. Mature consideration leads to the conclusion that the analogy between Columbia securities here and the patents involved in the Hartford-Empire case, supra, is not as close as it then appeared to us to be. The Supreme Court found no evidence that the patents there involved had been illegally or fraudulently obtained. It was their inequitable use that led to the adjudication and there still remained the possibility that when such inequitable use was discontinued and their owners purged of inequity a legitimate property right against subsequent infringers might thereafter be maintained. Here the securities of Columbia were tainted with inequity from the very beginning, and no reasonable expectation may be indulged that in the present status of the debtors there may come a time when Columbia may assert any right in such securities as against creditors who have not been injured by its illegal and inequitable conduct. This is not to say that subordination is not a more appropriate remedy than rejection, in view of the principle applied in the Hartford-Empire case, if by it a just result may be reached. Nor are we precluded by our previous mandate, even if susceptible to the interpretation put upon it by the district court, from considering whether the plan of reorganization, now for the first time presented, is, in the light of all circumstances brought forth, fair and equitable, since the allowance of claims in bankruptcy remains interlocutory until the estate has been closed, New York N. H. & H. R. Co. v. Reconstruction Finance Corp., 2 Cir., 180 F.2d 241, 243, and no application of the principle of "the law of the case" need deter us from so doing, in an exceptional case, which this is, Reynolds Spring Co. v. L. A. Young Industries, 6 Cir., 101 F.2d 257, 259 however such principle may circumscribe the action of a district court.

When the plan of reorganization was submitted to the court below various parties in interest, and particularly those acting for certain secured creditors of American Fuel and Kentucky Fuel, namely, the Green Committee and the Vanston Committee, urged the court to subordinate the claims of Columbia to such securities as were in the hands of the public. This leads to the interpretation put upon our amended mandate by the court, and requires consideration of the origin and status of the securities, the priority of which is here so strongly asserted.

The Inland Gas Corporation was organized in 1927 for the purpose of producing and selling natural gas to industrial consumers. In 1928 Kentucky Fuel Gas Corporation was promoted by the same persons, financed by the same group of bankers and each issued securities to the public. The promoters also in July, 1928, organized American Fuel & Power Company for the purpose of taking over and holding stock of both Inland and Kentucky Fuel and other operating companies in order to integrate and expand their operations through unified control and management. The stockholders of Inland and Kentucky Fuel exchanged their stock share for share for stock in the holding company, and in July, 1929, American Fuel issued and sold to the public convertible gold notes, the proceeds of which were used to provide financial aid to the operating companies and to acquire additional gas acreage and transmission lines. These securities, were guaranteed by the pledge of Inland stock held by American and Kentucky Fuel. It is the status of the securities so safe-guarded that is now put in issue by the conflicting interpretations of our mandate in Columbia Gas & Electric Corp. v. United States, supra. The district judge, relying upon the definition of the words "claims," "creditors" and "debts" in Article II, Chapter X of the Bankruptcy Act, construed our mandate to provide for subordination of Columbia claims only to the claims of creditors of each corporation and so could not be subordinated to the stock of Inland pledged by Kentucky Fuel and American Fuel. He therefore rejected the contentions of the Green and Vanston Committees. He felt that he was precluded from ignoring the separate identities of the three allied corporations, and interpreted our mandate which read "The decree will be limited in remedy to the subordination of the Columbia claims to the claims of all other creditors of every class," as though it read that "Columbia's claims be subordinated as to each corporation to all other claims against such corporation."

It now seems clear that there was ambiguity in our direction to the district court. Columbia interpreted it when it applied to the Supreme Court for certiorari, 329 U.S. 737, 67 S.Ct. 48, 91 L.Ed. 636, as the protective committees now interpret it, but it here takes...