In re Standard Gas & Electric Co.
| Decision Date | 29 March 1945 |
| Docket Number | Civ. No. 489. |
| Parties | In re STANDARD GAS & ELECTRIC CO. |
| Court | U.S. District Court — District of Delaware |
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COPYRIGHT MATERIAL OMITTED
David K. Kadane, of Philadelphia, Pa., for Securities and Exchange Commission.
C. A. Southerland (of Southerland, Berl & Potter), of Wilmington, Del., Robert H. Richards, Sr. (of Richards, Layton & Finger), of Wilmington, Del., A. Louis Flynn, of Chicago, Ill., and B. A. Javits, of New York City, for Standard Gas & Electric Co.
Thomas O'G. FitzGibbon (of Davis, Polk, Wardwell, Sunderland & Kiendl) and Paul P. Eagleton, both of New York City, for Guaranty Trust Co.
Murray Taylor (of Seibert & Riggs), of New York City, for Standard Power & Light Corporation.
Sidney K. Schiff (of Pam, Hurd & Reichmann), of Chicago, Ill., for A. O. Stewart and others.
Albert J. Fleischmann, of Baltimore, Md., pro se.
Claude Pearce, of Toronto, Canada, pro se.
James R. Morford (of Marvel & Morford), of Wilmington, Del., and Spencer Pinkham (of Holthusen & Pinkham), of New York City, for Frank Bailey, Marie Louise Bailey, Union College and Equitable Holding Corporation.
W. Kent Cochran, of Boston, Mass., pro se.
This is an application of the Securities and Exchange Commission pursuant to Sections 11(e) and 18(f) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. §§ 79k(e), 79r(f), "to enforce and carry out the terms and provisions of" a compliance plan of Standard Gas and Electric Company1 (a Delaware corporation) filed for the purpose of enabling Standard to submit to the provisions of Section 11(b) of the Act, 15 U.S.C.A. § 79k(b). A discussion of the details of the amended plan of this solvent2 public utility holding company may be found elsewhere and need not be discussed here.3
The substance of the plan is apparent by the various objections to it; (1) one $6 Prior Preference stockholder contends that, as against the $7 Prior Preference stock, some substantial recognition should be given to the liquidation preferences of the $6 Prior Preference stock, and lesser recognition to its claim on earnings, despite inconvenient fractions resulting therefrom; (2) then there are objections to the treatment accorded $4 preferred stockholders and common stockholders because the plan allocates approximately 5% of the new common stock to the $4 (junior) preferred stockholders, and totally excludes the old common stock; and (3) certain holders of notes and debentures of Standard object to the provisions of the plan which, it is argued, force them to accept and receive, in lieu of their notes or the face value thereof in cash, common stocks (hereinafter collectively referred to as the "Stocks") of other utility and underlying corporations. The notes and debentures of Standard aggregate $59,000,000, are in six series having variable dates of maturity from May 1, 1948 to December 1, 1966, are treated on a parity in the plan as originally filed and are so treated in the plan as amended. Their provisions vary, however, as to the payment of interest without deduction for federal taxes, refunds to the holders of state taxes paid by the holders, convertibility into other securities, and restrictions against the issuance of additional funded debt. They are issued under seven trust agreements or supplemental trust agreements.4 The plan provides that, instead of cash, the Noteholders will receive part cash and part Stocks. Each of the Stocks has been appraised by experts. Delivery and exchange are to be on the basis of such appraised values. In addition, the plan provides for the payment or deduction of a so-called differential, not to exceed 3 per cent, in the event that the market in public utility securities should increase or decline between August 15, 1944 and the date when the plan should be approved by the Commission. The differential has now been fixed by the Commission at $5.05. Accordingly, the plan, as it is presently presented here for enforcement, provides for the cancellation of the Notes and the payment of each $1,000 principal amount thereof as follows:
Cash payment .............. $ 304.95
Cash differential ......... 5.05
Assigned Aggregate
No. of Value per Assigned
Stocks Shares Share Value
Pacific Gas and Electric Co. 3 $32 $ 96
Oklahoma Gas and Electric Co. 12 21 252
The California Oregon Power
Co. 5 24 120
Mountain States Power Co. 2 21 42
Wisconsin Public Service Corp. 18 10 180
690.00
________
Total ....................... $1,000.00
A proposal to alter rights of creditors, by requiring them to accept in payment of their debt securities instead of cash, raises two questions: (a) does the Act authorize such alteration or modification, and if yes (b) is the proposed action fair and equitable?
1. The case at bar presents the first instance in which the Commission has approved satisfaction of indebtedness of a solvent public utility holding company by payment in other securities rather than in cash.
The Noteholders insist a creditor cannot be made to accept securities in a reorganized company without his consent and every plan must provide for payment in cash to non-assenting creditors. They contend the provisions of the Railroad Reorganization Act,5 of Sec. 77B, 77, subs. b, d-f, of the Bankruptcy Act and its successor, Chap. X of the Chandler Act6 which permit conversion of debt into securities upon the assent of a requisite number of creditors, were regarded as a radical innovation, and the absence in Sec. 11 of the Public Utility Holding Company Act of language comparable to that appearing in Sec. 77B, for example, demonstrates the general rule of law requiring payment in cash to creditors should prevail. In support of their position they point out that no language7 appears in either Sec. 11(b) (1) of the Act, requiring disposition of non-retainable interests in other companies, or in Sec. 11(b) (2) requiring simplification of corporate structure, which authorizes or commands conversion of debt into securities to achieve the purposes of those two sections.
Absent statutory authorization, a creditor has the right to demand cash for payment of his debt in reorganization. Geddes v. Anaconda Mining Co., 254 U.S. 590, 41 S.Ct. 209, 65 L.Ed. 425; Coriell v. Morris White, Inc., 2 Cir., 54 F.2d 255; In re Northampton Portland Cement Co., D.C., 185 F. 542; In re Sale of Assets of First Nat. Bank of Florence, D.C., 6 F.2d 905; In re J. B. & J. M. Cornell Co., D.C., 186 F. 859, 201 F. 381; In re Prudential Outfitting Co., D.C., 250 F. 504. See Gerdes on Corporate Reorganizations, Sec. 1038. Under Section 77 of the Railroad Reorganization Act, specific provision is made calling for the approval of the reorganization plan by each class of security holders affected, unless the Interstate Commerce Commission and the enforcement court find that any particular securities are without value. Likewise under Sec. 77B of the Bankruptcy Act and Chapter X, 11 U.S.C.A. § 501 et seq., provision is made for participation of creditors in the acceptance of a plan which changes their debt status to that of a stockholder or other type of security holder. Such statutory authorization is found in state statutes. See Sec. 5(9) of the Delaware Corporation Law, Rev.Code of 1935, c. 65, p. 462, § 2037(9). But, under the Public Utility Holding Company Act there are no such provisions. We are not convinced from an examination of legislative history that Congress intended the Commission to have power to require creditors of solvent companies to accept portfolio equity securities in payment of debt. In enacting analogous legislation Congress has obviously and with particularity expressed its intention that administrative bodies and courts may modify creditors' rights if certain statutory procedures are followed. A holding that the creditor here is entitled to cash if his debt is to be paid is not in conflict with the doctrine announced in Otis & Co. v. Securities and Exchange Commission, 65 S.Ct. 483, for the relation of a creditor to a solvent company is quite different from the relation that exists between the stockholders inter sese.
In a case of preferred stock vs. common stock, such as was involved in Otis & Co. v. Securities and Exchange Commission, preferred does not necessarily receive its contractual liquidating rights because where simplification by nominal (but not actual) liquidation is compelled under the Act, charter provisions do not apply. That being so, claims of preferred are not matured and are consequently not a debt.8 In the case of bondholders, it is elementary, a debtor-creditor relationship exists from the time the bond is issued. The claim of a bondholder may not always be matured in the sense that he can demand payment, but his is always a matured obligation in the sense that a debt exists eo instanti and from the time of its contractual conception.
2. In Otis & Co. v. Securities and Exchange Commission, 65 S.Ct. 483, the Supreme Court held the Holding Company Act, in providing that plans for simplification be "fair and equitable", incorporates the principle of full priority in the treatment to be accorded various classes of security interests, a view long recognized in bankruptcy and reorganization statutes. Northern Pacific R. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931. Under this view contracts are subject to equitable adjustment in corporate reorganizations so long as they receive "full compensatory treatment" or so long...
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