In re Peoples Loan & Investment Company of Fort Smith

• Decision Date: 23 April 1969
• Docket Number: No. 19567.,19567.
• Citation: 410 F.2d 851
• Parties: In the Matter of PEOPLES LOAN & INVESTMENT COMPANY OF FORT SMITH, Debtor. SECURITIES AND EXCHANGE COMMISSION, Appellant, v. PEOPLES LOAN & INVESTMENT COMPANY OF FORT SMITH, Debtor, Creditors' Committee of Peoples Loan and Investment Company, Intervenor.
• Court: U.S. Court of Appeals — Eighth Circuit

410 F.2d 851 (1969)

In the Matter of PEOPLES LOAN & INVESTMENT COMPANY OF FORT SMITH, Debtor SECURITIES AND EXCHANGE COMMISSION, Appellant, v. PEOPLES LOAN & INVESTMENT COMPANY OF FORT SMITH, Debtor Creditors' Committee of Peoples Loan and Investment Company, Intervenor.

No. 19567.

United States Court of Appeals Eighth Circuit.

April 23, 1969.

Paul Gonson, Asst. Gen. Counsel, S. E. C., Washington, D. C., for appellant; Philip A. Loomis, Jr., Gen. Counsel, David Ferber, Solicitor, J. Kirk Windle, Special Counsel, and Joseph L. Grant, Atty., S. E. C., Chicago, Ill., with him on the briefs.

James W. Gallman, of Ball & Gallman, Fayetteville, Ark., for appellee; E. J. Ball, Fayetteville, Ark., and Franklin Wilder, Fort Smith, Ark., with him on the brief.

Bradley D. Jesson, Fort Smith, Ark., for intervenor, Creditors' Committee for Peoples Loan & Investment Co.

Before GIBSON, LAY and HEANEY, Circuit Judges.

FLOYD R. GIBSON, Circuit Judge.

The Securities and Exchange Commission, pursuant to § 328 of the Bankruptcy Act, 11 U.S.C. § 728 intervened in this Chapter XI Bankruptcy proceeding and moved the District Court for an order dismissing the Chapter XI proceeding unless the petition be amended by the debtor to comply with the requirements of a Chapter X proceeding. The basis of the motion was that only a Chapter X proceeding would provide the proper method for protecting the public debt holders (depositors) of the debtor. The District Court denied the motion on the basis that a proposed arrangement for scaling down amounts owed depositors with a payout over a five-year period was in the best interest of the unsecured creditors holding the public debt.¹ The Securities and Exchange Commission duly appealed and requested a temporary injunction from this Court restraining further proceedings including the adoption of a proposed plan of arrangement for the unsecured debt. The injunction was granted by us and is in force pending a hearing on the merits of this appeal.

A bankruptcy court is a court of equity and is guided by equitable doctrines and principles. 11 U.S.C. § 11; Securities and Exchange Commission v. United States Realty & Improvement Company, 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940). We reverse and remand because we think the proper application of equitable principles enunciated by the Supreme Court in controlling cases commands the employment of a Chapter X proceeding in the factual situation of the debtor. The Congressional scheme for the relief of financially pressed debtors and the protection of creditors enacted as Chapter X and Chapter XI of the Bankruptcy Act sets forth mutually exclusive proceedings and places the burden on the Court and not the debtor to select the proper proceeding.

In our opinion the factual situation disclosed by the record shows that a Chapter XI proceeding is too limited to provide adequate relief to the public debt holders and calls for the application of the more extensive and adequate safeguards of a Chapter X proceeding.

To evaluate the proper application of the bankruptcy statutes and its equitable doctrines and principles to the debtor's overall financial position and the rights of all interested parties, including in particular those of the unsecured public debt creditors, it is necessary to relate in some detail the composition, background and operation of the debtor.

The debtor, Peoples Loan and Investment Company,² was organized in 1923 as an ordinary business corporation with certain lending powers. It became subject to state regulation about 1940 under the Arkansas Loan Institution Act, Ark. Stat.Ann. tit. 67, ch. 10 (1947). Its operating funds were obtained almost wholly from the public in so-called deposits or certificates paying 6 to 6½ per cent interest. It made loans on uncompleted residences called "shell" homes and also invested in other property and business operations. Its deposits exceeded $8,400,000 when a run started against Peoples on March 14, 1968, caused by a suit brought by the Securities and Exchange Commission against a similar though unrelated loan and thrift institution located in the same area. This unrelated suit sought to place the Arkansas Loan and Thrift Corporation in receivership because of alleged insolvency and violations of the Securities Act of 1933. Peoples had no connection with the other institution but was similarly structured and operated under the same state statute, which authorized the acceptance of thrift accounts but did not provide for any guarantee or insurance of deposits as is found in federally insured banks and savings and loan institutions.

As a result of the run,³ the debtor was unable to continue payouts to its depositors and on March 27, 1968 the Banking Commissioner of Arkansas filed a petition in the state court for appointment of a receiver and obtained an injunction prohibiting the debtor from accepting future deposits or allowing withdrawals. The debtor consented to the receivership.

On May 16, 1968 Peoples filed a voluntary petition in the United States District Court for Arkansas for a proceeding under Chapter XI of the Bankruptcy Act, pursuant to § 322 of the Bankruptcy Act, 11 U.S.C. § 722, alleging it was solvent but that it could not pay maturing debts, including depositors' demands. An unaudited balance sheet of April 30, 1968 showed assets totaling $8,791,536 and liabilities of $8,441,167. The assets consisted largely of cash, cash items, mortgage loan receivables, corporate stock, real property and claims. Liabilities included $7,254,355 of deposits made by over 3000 public investors.

When the Chapter XI petition was filed the District Court stayed the state court action and also prohibited deposits and withdrawals. The Securities and Exchange Commission filed its § 328 motion on July 22, 1968 and the matter was referred to the Referee in Bankruptcy as a special master for hearing and report. The Referee on August 8, 1968 appointed a receiver to operate debtor's business at the request of the Securities and Exchange Commission and removed the general manager of the debtor. The Referee held an evidentiary hearing and on September 18, 1968 recommended that the motion of the Securities and Exchange Commission be denied. The Court accepted the recommendation of the Referee and denied the motion of the Securities and Exchange Commission on November 7, 1968, thereby leaving the debtor free to proceed with a proposed arrangement. On December 17, 1968 the Referee determined that the submitted plan of arrangement⁴ had been accepted by the requisite number and dollar volume of the unsecured creditors.⁵

The District Court at the time it approved the plan of arrangement also approved a plan of settlement of a large claim that the debtor had against Community National Life Insurance Company of Tulsa, Oklahoma. The settlement allowed Community to purchase a 51 per cent control of the equity or capital stock of the debtor for approximately $59,000. The plan of arrangement does not itself affect any of the debts or securities of the debtor other than the publicly held deposit accounts but the proposed settlement of debtor's claims against Community would affect the equity holding, transferring control to Community for an investment of $59,000. More remains to be said in regard to Community's participation in the affairs of the debtor but further background will be illuminating in showing how Community enters into the picture.

Until 1965 Peoples was controlled by Sam Sexton, Jr. In 1965 Peoples was purchased by Investors Thrift Corporation controlled by Maurice Markham. Each of these men controlled separate corporations which were in the business of building and selling shell homes. Sexton caused the debtor to purchase from American Home Builders, Sexton's corporation, $3,000,000 in notes secured by mortgages received in the sales of these shell homes. There are still notes outstanding in the principal amount of $1,800,000, a large percentage of which may be difficult to collect. In similar transactions after 1965, debtor bought $500,000 worth of notes from Markham Homes, of which $103,000 in principal amount is still outstanding and may offer collection problems. The Arkansas Bank Commissioner informed the debtor that such purchases were illegal. For this and other reasons debtor in 1967 entered into several transactions designed to alter its investment portfolio.

In early 1967 debtor purchased a hotel and office building in Hollywood, California. The purchase price of the hotel was $1,121,000, of which $200,000 was paid in cash. A note was given for the remainder. The debtor purchased the office building for $460,000, of which $50,000 was paid in cash and the balance represented by a note. Debtor spent $200,000 improving these properties. However, the Bank Commissioner informed the debtor that these also were improper investments and were to be disposed of immediately.

The equity interest in the hotel and the office building was sold to Amco Industries in June 1967. Amco paid Peoples with Amco convertible debentures in the amount of $1,000,000 and assumed the mortgage obligation. Shortly thereafter, Amco became financially distressed. As a result, Peoples exchanged its debentures for one-half interest in the office building, previously sold to Amco, and for 150,000 shares of Amco stock which were subject to an investment letter and an option held by Irvru Inc. (which had recently acquired control of Amco) to buy the stock for $5 per share until August 31, 1969, and for $6 per share until June 30, 1970. Markham himself received a personal option on 210,000 shares of Amco stock. The Bank Commissioner informed Peoples that this investment was also improper.

In order to extricate itself from these difficulties, and to divest itself of its improper investments, Peoples in December 1967 negotiated a series of agreements with Community National Life Insurance Company. Community agreed to...