In re Third Ave. Transit Corp.

• Decision Date: 10 July 1952
• Docket Number: No. 101,Docket No. 22099.,101
• Citation: 198 F.2d 703
• Parties: In re THIRD AVE. TRANSIT CORP. et al. MELNIKER et al. v. LEHMAN et al.
• Court: U.S. Court of Appeals — Second Circuit

198 F.2d 703 (1952)

In re THIRD AVE. TRANSIT CORP. et al. MELNIKER et al. v. LEHMAN et al.

No. 101, Docket No. 22099.

United States Court of Appeals Second Circuit.

July 10, 1952.

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Hays, St. John, Abramson & Schulman, Robert Irving Lenox, New York City (Edward M. Garlock and Osmond K. Fraenkel, New York City, of counsel), for appellants.

Saxe, Bacon, O'Shea & Bryan, New York City (William J. O'Shea, Edward D. Burns, James J. Geraghty and John A. Kiser, New York City, of counsel), for appellees.

Roger S. Foster, David Ferber, Lawrence M. Greene and Robert L. Randall, Washington, D. C., for Securities and Exchange Commission.

Harold P. Seligson, New York City, for First Mortgage Bondholders.

Before AUGUSTUS N. HAND, CLARK and FRANK, Circuit Judges.

FRANK, Circuit Judge.

The bankruptcy court had the power, in appropriate circumstances, under Section 116, sub. 2 of the Bankruptcy Act, to authorize the borrowing of money, from voluntary lenders, on trustees' certificates, having a lien on mortgage assets superior to previously existing mortgage liens.³ To substitute for the use of that power — which itself must be most cautiously employed⁴ — the court's far more drastic power under Section 257,⁵ requires proof of the most extraordinary circumstances — see R. F. C. v. Kaplan, 1 Cir., 185 F.2d 791, 795⁶ not present here.⁷ We think that power is not limited to mortgaged or pledged assets coming into the hands of the mortgagee or pledgee⁸ after default. But we believe that that power should never be exercised absent findings, based on the clearest evidence, not only that it is imperative to obtain the funds and that they cannot be obtained, on reasonable terms, first, by bank loans or second, by the disposal of certificates under Section 116, sub. 2, through ordinary market channels to voluntary lenders,⁹ but also that there is a high degree of likelihood (a) that the debtor can be reorganized in accordance with the Act,¹⁰ within a reasonable time, and (b) that the secured creditors whose security is being compulsorily loaned will not be injured.¹¹ The reorganization trustees here had the burden of proving all these matters. They did not discharge that burden.¹²

The first mortgage bondholders should not have had their security put at risk in order to increase the "elusive equity"¹³ of junior creditors or stockholders, for those junior interests possess no right to a "run for other people's money".¹⁴ To direct enforced lending of the sort ordered here may yield these undesirable results: (a) The zeal of the reorganization trustees to make only the most prudent expenditures may be blunted. (b) There may well be undue delay of what may be inevitable liquidation. (c) The judge loses the opportunity to learn, in a significant way, the detached attitude of the commercial world towards the value of the assets.¹⁵

As the debtor is a public utility, the judge properly took into account the factor of the public interest in the debtor's continued operations. That, however, is but one factor; it must not be allowed to outweigh all others. There are strict limits to the extent to which, in reorganization proceedings, the interests of creditors (or of a particular class of creditors) may be sacrificed to the public interest; to exceed those limits is (to say the least) to come dangerously close to the edge of unconstitutional taking of property, a line from which courts should keep away if possible. The reorganization judge should not compel a marked sacrifice of that kind, without first deciding, on substantial evidence, whether the interest of the creditors who would be affected by the sacrifice does not demand that prompt steps be taken to bring about abandonment of the utility's operations, including steps to procure the consent of those public authorities (if any) whose consent to abandonment is required.¹⁶

As the record here is barren of essential findings (and of evidence to support them) of the kind of facts found in the Kaplan case,¹⁷ we think the judge "abused" his discretion.

Reversed.

3 This section, 11 U.S.C.A. § 516, sub. 2, provides that the court may "authorize a receiver, trustee, or debtor in possession, upon such notice as the judge may prescribe and upon cause shown, to issue certificates of indebtedness for cash, property, or other consideration approved by the judge, upon such terms and conditions and with such security and priority in payment over existing obligations, secured or unsecured, as in the particular case may be equitable."

4 In re Prima Co., 7 Cir., 88 F.2d 785, 790, 116 A.L.R. 766; 6 Collier, Bankruptcy (14th ed.) § 3.26.

5 This section, 11 U.S.C.A. § 657, provides that the bankruptcy trustee shall "have the right to immediate possession of all property of the debtor in the possession of a * * * mortgagee under a mortgage."

Cf. Section 111, 11 U.S.C.A. § 511, which gives the court "exclusive jurisdiction of the debtor and its property, wherever located."

6 There the Court concluded: "Bearing in mind the objective of Chapter X proceedings, there is no a priori reason for supposing that Congress, in defining the powers of the reorganization court, would give a preferred status to secured creditors having possession of pledged collateral or other personal property, as against secured creditors who have taken possession under a defaulted real estate or chattel mortgage. See 6 Collier, Bankruptcy (14th ed.) § 14.03(2). The authorities, though we have found none precisely on all fours, seem to indicate that no such distinction is taken. * * *"

Among the cases cited by the court are Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110; In re Prudence Bonds Corp., 2 Cir., 77 F.2d 328; In re Moulding-Brownell Corporation, 7 Cir., 101 F.2d 664; In re Philadelphia & Reading Coal & Iron Co., 3 Cir., 117 F.2d 976.

See 6 Collier (14th ed.) § 14.03(2); "In an earlier discussion, we saw that the reorganization court's summary jurisdiction extends to property in the hands of a pledgee as well as of a mortgagee; that viewed in the context of Chapter X the secured creditor cannot claim adversely as against the reorganization court merely on the basis of possession; and that any other result would defeat the very purposes of the proceeding, which contemplates the possible alteration or modification of secured debts as well as unsecured. In this aspect pledged property cannot be distinguished from mortgaged property. Accordingly, it is well settled that pledgees in possession may be enjoined summarily, if necessary, from disposing of the security or the income therefore by virtue of a sale. If this is so, then there is no apparent reason why the reorganization court may not summarily recapture possession where the needs of reorganization warrant."

7 In the Kaplan case, ...