In re Slumberland Bedding Co.

• Decision Date: 29 September 1953
• Docket Number: No. 10368.,10368.
• Citation: 115 F. Supp. 39
• Parties: In re SLUMBERLAND BEDDING CO., Inc.
• Court: U.S. District Court — District of Maryland

115 F. Supp. 39

In re SLUMBERLAND BEDDING CO., Inc.

No. 10368.

United States District Court D. Maryland.

September 29, 1953.

Edward Azrael, Baltimore, Md., for debtor.

Louis J. Sagner, Baltimore, Md. for objecting creditors.

CHESNUT, District Judge.

The present case presents the question whether the order of the referee confirming an "arrangement" under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., should be affirmed. The order of the referee affirmatively found that the debtor proposing the arrangement had met the statutory requirements for confirmation prescribed in section 366 of the Bankruptcy Act, 11 U.S.C.A. § 766. Three unsecured creditors having claims aggregating about $2,500 have filed a petition for review. Counsel have been heard orally on the petition and their briefs have been carefully considered. My conclusion is that the order of the referee should be affirmed.

The debtor is the Slumberland Bedding Co., Inc., a Maryland corporation. It was formed June 19, 1952 and started business with evidently insufficient capital of only about $13,000. In less than a year of activity and at the time of filing the petition for an "arrangement" on April 28, 1953 it was clearly heavily insolvent having assets, by its amended schedules, of only $42,250.79 with liabilities of $85,551.22. The appraisal of the assets valued them at at least several thousand dollars less than $42,250.

The liabilities of $85,551 consisted of wage claims in the amount of $3,369; taxes due the United States $4,184, and taxes due the State of Maryland $967.47. There were secured claims in the amount of $23,854 and unsecured claims in the amount of $53,134.

The plan of arrangement was in short substance that one Nathan Rosenbloom, a brother of Harry Rosenbloom, the president and principal stockholder of the debtor, agreed to purchase at par a sufficient amount of common stock of the debtor to pay a dividend of 20% to all unsecured creditors as "complete and final satisfaction of all unsecured claims", and that the present management remain the same with the debtor continuing in business under court supervision until such payment is made. The sum necessary to pay such 20% dividend has been deposited subject to the order of counsel for the debtor and is available for immediate distribution to creditors in the event of an affirmance of the referee's order. Likewise the sum of $9,200 has been deposited subject to the order of the referee for the payment of all taxes, wage claims and costs of administration.

It is at once evident from the figures stated that the corporation is hopelessly insolvent and that upon liquidation, as would be the case in ordinary bankruptcy, there is no reasonable probability that the unsecured creditors will receive a dividend even approximating 20%. This is not disputed by counsel for the three unsecured creditors seeking a reversal of the referee's order. Their stated position is that, despite the fact that if the plan is not confirmed, they will receive probably less than 20%, nevertheless they oppose the confirmation of the plan on the ground that the business of the debtor has been so loosely, if not fraudulently, managed that they prefer as a matter of principle to object to the confirmation of the plan with the hope that in ordinary bankruptcy other proceedings might follow which would demonstrate that, as they put it, such a badly conducted business should not be permitted to continue. This objection seems to be based on the legal contention that the term "feasible", one of necessary characteristics of the plan to be found in the event of confirmation, means more than merely that the plan itself is assured of being carried out successfully. I will discuss this somewhat more fully.

At the outset I think it is appropriate to note that Chapter XI of the Bankruptcy Act was intended to provide a method by which an insolvent debtor would be permitted to continue in business provided the plan or arrangement therefor made adequate provision for the interests of unsecured creditors. In this respect at least it would appear that Chapter XI was intended to be in the nature of a substitute for the provision for a "composition" which was a feature of the ordinary bankruptcy act.

After the debtor's petition was filed it was referred by order of court in due course to the referee for hearing. Pursuant to the procedure required by title 11 the referee gave notice to interested parties and held extensive hearings at which much testimony was submitted. He found without contradiction here that, as required by 11 U.S.C.A. § 762, the plan had been accepted in writing by a majority in number of all creditors affected by the arrangement, whose claims had been proved and allowed before the conclusion of the meeting, and that the number so accepting represented a majority in amount of such claims. The referee was not requested to divide the unsecured creditors into classes at the time and there was apparently no sufficient reason presented to him for doing so.

The additional requisites for confirmation of the arrangement provided for by 11 U.S.C.A. § 766, as amended July 7, 1952, ch. 579, § 35, 66 Stat. 433, are —

"The court shall confirm an arrangement if satisfied that —

"(1) the provisions of this chapter have been complied with;

"(2) it is for the best interests of the creditors and is feasible;

"(3) the debtor has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to the discharge of a bankrupt; and

"(4) the proposal and its acceptance are in good faith and have not been made or procured by means, promises, or acts forbidden by this title.

"Confirmation of an arrangement shall not be refused solely because the interest of a debtor, or if the debtor is a corporation, the interests of its stockholders or members will be preserved under the arrangement."

It appears from the referee's certificate that he was satisfied that the debtor's plan met all these requirements. While the plan had been affirmatively approved or accepted by only a small majority in number of unsecured creditors there were apparently no affirmative refusals to accept the plan although counsel for the three creditors now petitioning for review participated in the taking of evidence and impliedly was objecting to the confirmation of the plan.

It will be noted that the referee also affirmatively found that the plan was fair and equitable. Such an additional finding was required under section 766 until the amendment of 1952, which was apparently not brought to the attention of the referee by counsel during the proceedings before him. It will be noted that the requirement that the debtor must satisfy the court that the plan is also fair and equitable has been eliminated by the 1952 amendment to section 766. And it is said that the amendment was made by Congress subsequent to and possibly in view of the decision in Case v. Los Angeles Lumber Products Co., Ltd., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. That seems now to be immaterial here. See Collier on Bankruptcy, Vol. 8, 1952 Supp. 14th Ed. p. 64.

The principal point of law raised by counsel at the hearing related to the proper construction or meaning of the word "feasible" as contained in section 766. The referee found that the plan was feasible. He did not discuss the meaning of the word but apparently understood that it meant only that what was proposed could be or would be definitely accomplished in that the funds necessary for a 20% payment to all unsecured creditors would be, and in fact it is stated has been, made available for immediate distribution. Counsel for the objecting creditors, however, contends that the word "feasible" has a broader implication than that. He contends that it means not only that the money is available for the distribution to unsecured creditors but that the plan is feasible only if by what is now done for the benefit of unsecured creditors there is a probable prospect of the future successful financial rehabilitation of the debtor and its continued success in business operations. If the latter is required I would have difficulty in determining that the plan is feasible in view of the past history and probable future prospects of the company. But if the statutory requirement as to feasibility does not require a finding of probable future success, the confirmation of the plan should not be construed as a finding by the court that the business in the future will be successful. Creditors who may subsequently deal with the debtor must determine that for themselves.

It should be noted that the requirement as to feasibility of a plan was contained in the original section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, and was also retained in Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., now relating to the reorganization of corporations. In many cases in this court under section 77B and later under Chapter X it is my recollection that the feasibility of the plan of reorganization did involve the broader characteristic now contended for with respect to the same requirement under Chapter XI. For illustration see Wayne United Gas Co. v. Owens Illinois Glass Co., 4 Cir., 91 F.2d 827; Price v. Spokane Silver & Lead Co., 8 Cir., 97 F.2d 237; Collier on Bankruptcy, 14th ed. Vol. 8, p. 1171. However I think the term "feasible" has a more limited meaning in Chapter XI, 11 U.S.C.A. § 766, by reason of the different subject matter that is involved. As heretofore noted, Chapter XI relates only to the interests of unsecured creditors and seems to have been in the nature of a substitute for a "composition" in the original Bankruptcy Act. And this seems to be the proper view in this case. As we have noted, the amendment of 1952 eliminated the requirement that the plan must be fair and equitable, although that point is not now involved here because the petition was not filed until after the effective date of ...