In re St. Charles Hotel Co.
| Decision Date | 13 June 1945 |
| Docket Number | No. 5908a.,5908a. |
| Parties | In re ST. CHARLES HOTEL CO. |
| Court | U.S. District Court — District of New Jersey |
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Louis L. Goldman, of Camden, N. J., and J. Hector McNeal, of Philadelphia, Pa., for debtor.
Thomas H. Munyan, of Atlantic City, N. J., and Charles Gottlieb, of New York City, for creditors, Howard K. Hurwith and Frank K. Vidler.
George Zolotar and Richard V. Bandler, both of New York City, for Securities and Exchange Commission.
Order Affirmed June 13, 1945. See 149 F.2d 645.
On December 8, 1944, the St. Charles Hotel Company, a corporation engaged in the business of owning a hotel in Atlantic City, New Jersey, filed a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The petition set forth the debtor's financial condition as of October 31, 1944, and alleged, among other essential allegations, that the petitioner is in need of relief under the provisions of Chapter X, is unable to meet its debts as they mature and is desirous of effecting a plan of reorganization. This Court entered an order upon the same day approving the debtor's petition, appointing a trustee under bond and setting a date for a hearing to be held at which objections might be made to the retention of the trustee. At the request of the Court the Securities and Exchange Commission was asked to intervene, which it did on December 26, 1944.
An order to show cause entered upon the petition of Howard K. Hurwith, a creditor of the debtor corporation, why the order of the Court entered December 8, 1944 should not be vacated and why the petition of debtor of the same date should not be dismissed, was set down for January 12, 1945, the date of the hearing at which objections to the retention of the trustee might be made.
Howard K. Hurwith and Frank K. Vidler, each a creditor of the debtor corporation and each a holder of First Mortgage bonds, filed separate answers to the debtor's petition of December 8, 1944 on the 11th day of January, 1945, which deny that the petitioner is in need of relief under Chapter X, and which affirmatively allege (1) that the aforesaid petition was not filed in good faith because the interests of the creditors and stockholders would best be subserved in prior proceedings pending in the Court of Chancery of New Jersey, which proceedings were commenced by the filing on November 29, 1944 of a bill in equity by the holders and owners of First Mortgage bonds by reason of the debtor corporation's insolvency, and (2) that it was unreasonable to expect that a plan of reorganization can be effected which would adequately protect the interests of the bondholders.
Upon the return date of the order to show cause the Securities and Exchange Commission appeared and entered its opposition. The debtor corporation by its counsel adopted the argument of the Securities and Exchange Commission made at this hearing. The hearing of objections to the retention of the trustee was adjourned until such time as the questions raised in the order to show cause could be determined. The debtor corporation and the Securities and Exchange Commission were given additional time to support their argument in opposition to the application for the vacation of the order of the Court, dated December 8, 1944, and the dismissal of the debtor corporation's petition of the same date, by means of affidavit proof to be submitted at a final hearing to be held on January 26, 1945.
At the final hearing, the debtor corporation filed an affidavit, by its attorney, J. Hector McNeal, to the effect that the corporation had contemplated reorganization for the past few years and that a petition to be filed under Chapter X was prepared in early October 1944.
In support of its argument, the Securities and Exchange Commission filed an affidavit by its attorney in which the following points were made:
1. That the officers of the debtor corporation had considered instituting voluntary proceedings for reorganization under Chapter X for a number of years and had actually decided to file such a petition in October of 1944;
2. That the debtor corporation has unmortgaged assets amounting to $115,235.70 which will require a consideration of the rights and interests of classes of creditors other than the holders of the First Mortgage bonds;
3. That no proceedings for the foreclosure of the First Mortgage are pending and none has been threatened;
4. That the interests of security holders would best be subserved in these proceedings rather than in the prior proceedings in the Court of Chancery of New Jersey for the reasons:
(a) That the state court proceedings contemplate an equity receivership which Section 77B, 11 U.S.C.A. § 207, and Chapter X of the Bankruptcy Act were designed to improve and supplant;
(b) That judicial supervision is lacking in the state court proceedings and that it does not safeguard the rights, or protect the interests, of public security holders as adequately as the proceedings under Chapter X;
(c) That the state court proceedings do not offer facilities for reorganization contained in proceedings under Chapter X, as, for example, in the case of the approval of a plan of reorganization, it would be necessary in the former proceedings to raise cash to pay dissenting security holders;
(d) That the assets of this debtor corporation would revert to its custody if this court relinquished its jurisdiction because the state court proceedings have not advanced beyond the stage of the filing and service of the bill in equity and no receiver has been appointed;
(e) that there is no assurance that a receiver will be appointed in the state court proceedings in view of certain contested issues, such as assertions of mismanagement by the debtor's officers and directors, and improper and fraudulent leases.
The debtor corporation, appearing by J. Hector McNeal, stated that it intended to stand or fall on its original petition filed December 8, 1944 and that it did not intend to amend its petition in any way, even though such amendment might be necessary to sustain it and would be allowed by the court.
Section 146 of the Bankruptcy Act, 11 U.S.C.A. § 546, aids in the definition of the term "good faith" as used in the Act. It provides as follows:
We shall concern ourselves with a discussion of subsections (3) and (4), for the objecting creditors contend that the facts of this case show that the petition failed to meet the requirements set forth in those subsections.
The most recent complete expression of the Supreme Court on this subject is contained in the case of Marine Harbor Properties v. Manufacturer's Trust Co., 1942, 317 U.S. 78, 63 S.Ct. 93, 87 L.Ed. 64. The property of the debtor in that case consisted of an apartment building in New York City subject to a first mortgage of $370,000, junior mortgages and other claims. The property was admittedly worth less than the first mortgage indebtedness. The court held that the debtor petitioning under Chapter X had not sustained the burden which was upon it to show that the interests of creditors and stockholders would be best subserved in the Chapter X proceedings where there was a prior state foreclosure proceeding pending. The court unequivocally places the burden of showing good faith on the petitioner. In the language of the court:
Italics supplied. Marine Harbor Properties v. Manufacturer's Trust Co., supra, 317 U.S. at page 84, 63 S.Ct. at page 97, 87 L.Ed. 64.
The petition filed by the debtor corporation in the instant case contains an allegation of "need for relief" under Chapter X. On its face this allegation may be sufficient, provided it is not attacked, for in such instance, all interested parties in effect submit to the jurisdiction of the federal court and do not question the good faith of the filing of the petition. However, when attacked, as is this petition, it becomes the burden of such petitioner to demonstrate that its petition is filed in good faith. This petitioner has failed to sustain that burden, for it failed when given the opportunity by the Court to support its petition to show that it is reasonable to expect that a plan of reorganization could be effected and that, although a prior proceeding is pending in the state court, it appears that the interests of creditors and stockholders would not be best subserved in such prior proceedings, which were the points upon which it was attacked by the objecting creditors.
In this case the Securities and Exchange Commission attempted to support the debtor corporation's petition by shouldering the burden of showing good faith.
The court in which a petition is filed has...
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