In re Standard Gas & Electric Co.

• Decision Date: 14 September 1945
• Docket Number: No. 8934.,No. 8885,8906,8885,8934.
• Citation: 151 F.2d 326
• Parties: In re STANDARD GAS & ELECTRIC CO. (three cases).
• Court: U.S. Court of Appeals — Third Circuit

151 F.2d 326 (1945)

In re STANDARD GAS & ELECTRIC CO. (three cases).

Nos. 8885, 8906, No. 8934.

Circuit Court of Appeals, Third Circuit.

Argued June 19, 1945.

Decided September 14, 1945.

David K. Kadane, of Philadelphia, Pa., for S. E. C.

A. Louis Flynn, of Chicago, Ill., for Standard Gas & Electric.

Thomas O'G. FitzGibbon, of New York City, for Guaranty Trust Co.

Spencer Pinkham, of New York City, for Union College et al.

Albert J. Fleischmann, of Baltimore, Md., pro se.

Before MILLER,^* GOODRICH, and McLAUGHLIN, Circuit Judges.

GOODRICH, Circuit Judge.

In the reorganization of Standard Gas Corporation under the Public Utility Holding Company Act¹ a plan which was the resultant of suggestions by the Company's management and further suggestions by the Securities and Exchange Commission was approved, as finally amended, on November 15, 1944. The Commission then brought proceedings pursuant to Section 11 (e)² of the Act in the District Court for the District of Delaware to secure approval of the plan.³ The plan was a reorganization measure, designed as part of an effort to simplify the general corporate structure of Standard Gas. To the extent that it concerns us, it provided for cancellation of the notes and debentures in the ratio of $304.95 in cash plus $690 worth of stocks⁴ to be distributed from the Company portfolio plus a market fluctuation differential now fixed at $5.05 (3% maximum) totaling $1,000 for each $1,000 of debt retired. This appeal from the District Court decision⁵ by the Company and by the Commission has been met by cross-appeals filed by some of the debenture holders.

The questions in order of difficulty and importance are as follows:

(1) The power of the Commission to order distribution in kind to note and debenture holders instead of ordering a sale of corporation assets and paying them in cash.

(2) If the Commission has such power was it properly exercised in this case? Is this a matter on which a District Court and an Appellate Court should exercise an independent judgment or is its function to be limited to determining whether the Commission's action was reasonable under the circumstances.

(3) Exercisability of the call premium on the debentures to be cancelled.

(4) Problem of valuation of the shares proposed to be distributed.

Power to Order Distribution in Kind

The primary question is concerned with the power of the Commission to order distribution in kind rather than cash. Both the Commission and the opposing security holders start with the premise that absent statutory authorization the creditor of a solvent corporation must be paid off in cash. The Commission contends that statutory authority for payment in kind exists. The security holders, of course, disagree, and the District Court is of the same view.

It is clear from the legislative history of the Act that power of reorganization was one of the intended and well recognized means for effectuating the Congressional purpose. On February 6, 1935, a bill was first introduced by Senator Wheeler as S. 1725 in the Senate and by Congressman Rayburn as H. R. 5423, a companion measure in the House. Section 11 of S. 1725 expressly gave the Commission power to order reorganizations, but contained no provision for permitting voluntary plans. A substitute bill, S. 2796, was introduced on May 9, 1935, by the same sponsor. Section 11(e) first appeared in this bill and to meet the standards of Section 11(b) expressly permitted a voluntary plan, "for the divestment of control, securities, or other assets or for the reorganization or dissolution of such company, or any subsidiary company." In the Act as it finally passed this was changed to, "for the divestment of control, securities, or other assets, or for other action by such company or any subsidiary company."

Appellants argue that the change narrowed the former language. It needs no semanticist to be aware that the words "other action" are broader in meaning than the more connotative and precisely denotative words "reorganization or dissolution". Nor need we determine the matter on such meager grounds. The Senate Report (S.Rep. No. 621, 74th Cong., 1st Sess. on S. 2796, p. 33 (1935)) stated: "Subsection (e) expressly authorizes a holding company subject to the approval of the Commission and the court to work out a plan of reorganization to make unnecessary the issuance of an involuntary order for its reorganization by the Commission, and the Commission and the court are authorized to approve any plan so worked out voluntarily by a holding company as the Commission and the court might order under their compulsory powers. * * *"

And Mr. Rayburn in reporting out the final bill (79 Cong. Rec., Part. 13, pp. 14164, 14165) makes clear the enlargement of the Commission's available remedies, "This differs from the Senate provision in that the Commission is to take such steps as it finds necessary to insure this result, whereas the Senate provision requires reorganization or dissolution." Furthermore, the argument contra is as applicable to dissolutions as it is to reorganizations. What voluntary plan could squeeze through so narrow an interpretation? And what becomes of the many 11(e) plans that have won court approval hitherto either as dissolutions or reorganizations?

It is equally clear that in the grant of power to reorganize was included the incidental power to distribute in kind. Thus the Senate Report (S. Rep. 621, 74th Cong., 1st Sess. pp. 32, 33) referring to S. 2796 stated: "Existing holding companies will be obliged (i) to shed inappropriate affiliates, or (ii) to cease being holding companies or (iii) to distribute their securities and assets equitably among their security holders. Precedents under the Sherman Antitrust Act and under the Hepburn Act demonstrate that the necessary corporate adjustments can be made without forced liquidation or the sacrifice of legitimate investment values. * * *"

And again at pp. 16, 17 of the same report: "As has been explained above, the title does not require the dumping or forced liquidation of securities by the giant holding companies. Such disposition as may be necessary can be accomplished by reorganization which will equitably redistribute securities among existing security holders."

We have still to consider whether the power to distribute in kind applies to note and debenture holders as well as shareholders. The authority of Otis & Co. v. Securities and Exchange Commission, 1945, 323 U.S. 624, 65 S.Ct. 483, is acknowledged by all the parties, as it must be. But they draw a distinction between the technical position of a preferred shareholder and that of a debenture holder in an attempt to show the Otis case inapplicable to the problem here. We think the argument rides that distinction too hard and that as applied to the present problem the distinction is one lacking in essential difference. Persons who put money into a corporate enterprise do not, of course, all stand on the same plane in regard to their rights and duties. The bondholder may have a specific lien on the corporate assets. The note-holders have no specific lien but they are entitled to have their money paid back to them before the shareholders divide what is left. Among shareholders, too, there may be distinctions of which preferred and common stock come most ready to the mind but which distinctions increase in number as other types of shares are created. But we do not see that the classifications of these investors in a corporate enterprise necessitates the drawing of lines so completely separated in categories as the security holders would have us draw here. A noteholder, after all, has only a claim to be paid from corporate assets after security holders with specific liens are paid. The preferred shareholder has to wait until the noteholder is paid for his money, but in the meantime he may have a voice in the management of the corporate enterprise. We do not think that the categories are so absolute that a decision saying what preferred shareholders may be forced to take in a reorganization under the Public Utility Holding Company Act is of no value in another case which concerns debenture holders instead of preferred shareholders.

The short answer to this phase of our problem as applied to this case is that the shareholders and debenture holders both come from the same common stock (that is, the shares of the companies in Standard's portfolio) and cannot rise above their heredity. This identity of origin renders caste distinctions of little significance here.⁶ Consequently a general grant of power to reorganize which has been held applicable to one group of security holders, as here, by the Otis decision, must be held applicable to the other. If Congress had meant otherwise, the distinction between debenture holder and shareholder could all too easily have been made. The fact that Congress neither drew the line of demarcation nor even discussed it in the hearings or reports indicates how little weight a separatist argument can be given now.

Our conclusion upon this phase of the case is that distribution in kind may lawfully be ordered by the Commission. We think that these proceedings under the statute are a type of reorganization and that the well known and established methods of accomplishing reorganization in a manner fair to all parties may be applied. We find close analogy, though admittedly, not direct support for our position in the Otis decision, and think that the sweep of that decision extends to the present fact situation. The public purpose of the statute and certain constitutional questions involved in it were discussed by this court in Commonwealth & Southern Corporation v. Securities and Exchange Commission, 3 Cir., 1943, 134 F.2d 747. What was then said upon these points is reaffirmed here.

Commission Distribution in Kind in This Case

The District Judge gave thoughtful consideration to this question and concluded that even if...