RL Witters Associates v. Ebsary Gypsum Co.

• Decision Date: 05 January 1938
• Docket Number: No. 8596.,8596.
• Parties: R. L. WITTERS ASSOCIATES, Inc., v. EBSARY GYPSUM CO., Inc., et al.
• Court: U.S. Court of Appeals — Fifth Circuit

93 F.2d 746 (1938)

R. L. WITTERS ASSOCIATES, Inc., v. EBSARY GYPSUM CO., Inc., et al.

No. 8596.

Circuit Court of Appeals, Fifth Circuit.

January 5, 1938.

Leland Hyzer, of Miami, Fla., for appellant.

Herbert U. Feibelman and W. G. Ward, both of Miami, Fla., for appellees.

Before FOSTER, SIBLEY, and HUTCHESON, Circuit Judges.

HUTCHESON, Circuit Judge.

Appellant, a petitioner for corporate reorganization under section 77B (a)¹ of the National Bankruptcy Act, filed its petition in the form, and with the allegations, required by the section. The District Judge approved the petition, continued the debtor temporarily in possession, and directed that a hearing be had as to whether a trustee should be appointed. Appellees are creditors who, before the filing of the reorganization petition, had instituted involuntary proceedings in bankruptcy against petitioner. They appeared in the proceeding to controvert the facts alleged in the petition, particularly that the petition was filed in good faith.

The principal points of attack upon the good faith of the petitioner are that it made a conveyance some six months before, which has operated to hinder, delay, and defraud its creditors; that it is not a going concern and cannot be made one; and that the reorganization petition was filed not in good faith to obtain the benefits of the act, but in bad faith, for the purpose of coercing creditors to accept an unconscionable settlement. There was a hearing, at the end of which the District Judge found that the petition had not been filed in good faith. He filed findings of fact and conclusions of law of which these are the gist:

"The court, therefore, finds from all of these facts, that this corporation is no longer an active, going concern. If it possessed any good will, which should be protected by this court through reorganization proceedings, certainly such good will has been lost, for the volume of its business compared to its former operations is insignificant. Certainly the prospects of an expedient and economical reorganization are not apparent. There appears to be no certainty whatever that this corporation can be reorganized. In truth and in fact, it has gone a long way towards liquidation without apparent benefit to the creditors themselves. There is no reasonable expectation of continued useful existence, or successful rehabilitation. * * *

"The good-faith clause of section 77B of the National Bankruptcy Act, as amended (11 U.S.C.A. § 207), has been employed as a basis for refusing approval to all petitions except those in which the prospects of economically expedient reorganization appear fairly certain at the time of filing. * * *

"By reference to `good faith' the meaning is not merely sincerity of intention. The expression embraces a reasonable expectation of continued useful existence. There must be reasonable prospect for successful rehabilitation of the debtor. * * *

"Undoubtedly section 77B is aimed at the `continuance of a business as a going concern,' and does not contemplate an inactive corporation, bereft of its chief means of livelihood. * * *

"Where a case presented is one for liquidation or for composition, proceedings under 77B should not be approved and the rights of creditors must be guarded and recognized throughout the proceedings as paramount to those of stockholders. * * *

"The evidence discloses a decreased activity by the debtor to the extent that its situation as a going corporation seeking to secure the benefits of section 77B of the Bankruptcy Act have been materially changed. The court in determining the legal good faith of a debtor seeking the benefits of the said section of the Bankruptcy Act should consider whether the debtor presents itself as applicant as a going corporation, continuing, and proposing to continue, its general activities without a radical change in its structural organization."

Based upon these views, he concluded that there was absent from the filing the "legal good faith the statute requires."

Appellant insists that the District Judge gave too narrow a construction to the statutory words "good faith"; that he gave them a meaning not intended by the lawmakers, and neither expressed nor implicit in the words. It insists that this ruling would exclude from the operation of the statute all corporations except those which are to be reorganized as going concerns; that specifically it would exclude corporations seeking an orderly and conserving liquidation as against the disrupting and dismembering processes of common-law actions and seizures.

We agree with appellant. The statute as to the corporations eligible to file the petition is broad and comprehensive. Under it, "Any corporation which could become a bankrupt * * * may file an original petition." Nowhere in the statute is there any definition of "good faith." What is meant by the term must be drawn from the meaning of the words themselves, as interpreted by the context in which they are used, the purpose back of the statute, the mischiefs it was enacted to prevent, the results it was enacted to accomplish.

The provisions of section 77B (a) pertinent to this appeal are:

"Upon the filing of such a petition or answer the judge shall enter an order either approving it as properly filed under this section if satisfied that such petition or answer complies with this section and has been filed in good faith, or dismissing it. * * * If three or more creditors who have provable claims which amount in the aggregate in excess of the value of securities held by them, if any, to $1,000 or over, * * * shall, prior to the hearing provided for in subdivision (c) clause (1) of this section appear and controvert the facts alleged in the petition or answer, the...