Securities and Exchange Commission v. United States Realty Improvement Co

• Decision Date: 27 May 1940
• Docket Number: No. 796,796
• Citation: 310 U.S. 434,84 L.Ed. 1293,60 S.Ct. 1044
• Parties: SECURITIES AND EXCHANGE COMMISSION v. UNITED STATES REALTY & IMPROVEMENT CO
• Court: U.S. Supreme Court

310 U.S. 434

60 S.Ct. 1044

84 L.Ed. 1293

SECURITIES AND EXCHANGE COMMISSION

v UNITED STATES REALTY & IMPROVEMENT CO.

No. 796.

Argued April 29, 30, 1940.

Decided May 27, 1940.

[Syllabus from pages 434-436 intentionally omitted] Robert H. Jackson, Atty. Gen., and Francis Biddle, Sol. Gen., for petitioner.

[Argument of Counsel from pages 436-438 intentionally omitted] Messrs. Joseph M. Hartfield and Henry M. Marx, both of New York City, for respondent.

[Argument of Counsel from Pages 439-440 intentionally omitted] Mr. Justice STONE delivered the opinion of the Court.

The questions are whether respondent's petition for an arrangement of its unsecured debts under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., should be dismissed because the relief obtainable under that chapter is inadequate, and whether the Securities and Exchange Commission is entitled to raise and litigate that question by intervention and appeal.

Respondent, a New Jersey corporation doing business in New York as owner of and manager of real estate invest- ments, has outstanding 900,000 shares of capital stock without par value, which are listed on the New York Stock Exchange and are stated by respondent to be held by some seven thousand stockholders. It has liabilities of $5,051,416, of which only $74,916 is current. This indebtedness includes two series of publicly held debentures aggregating $2,339,000, maturing January 1, 1944, which are secured by a pledge of corporate stock of little value and a $3,000,000 note, due August 12, 1939, which is secured by a first mortgage owned by respondent. In addition respondent is also liable as a guarantor of payment, principal and interest, and sinking fund of mortgage certificates in the sum of $3,710,500, issued by its wholly owned subsidiary Trinity Building Corporation of New York and now in the hands of some nine hundred holders. These certificates have been in default for failure to pay interest, principal and sinking fund since January 1, 1939. They are secured by mortgage of real estate and buildings which are Trinity's only substantial assets. Each year since 1936 respondent has suffered a net loss in the conduct of its business and is now unable to pay its debts as they mature.¹

Before maturity of the first mortgage certificates, respondent and the Trinity Company joined in proposing to certificate holders a plan for the modification of the obligation of the certificates, leaving unaffected the other indebtedness and stock of respondent. By this plan the maturity of the certificates was to be extended, the rate of interest reduced, and the terms of the provisions for payment of the sinking fund modified. Respondent's guarantee, as to the extension and interest was to be modified accordingly, and its guarantee of sinking fund payments was to be eliminated. The plan was to be consummated by resort to two proceedings, one to be instituted by respondent under Chapter XI of the Bankruptcy Act, 11 U.S.C.Supp. V, § 701 et seq., 52 Stat. 840, 905, 11 U.S.C.A. § 701 et seq., for an 'arrangement' modifying its guarantee of the certificates in the manner already indicated. The other was to be instituted on behalf of Trinity in the New York state courts under the Burchill Act, New York Real Property Law, Consol. Laws, c. 50, §§ 121—123, to secure the appropriate modification of Trinity's primary obligation on the certificates. The plan provided that modification of respondent's guarantee by the Chapter XI proceeding should stand, even though the state court should refuse to confirm the proposed modification of Trinity's obligation on the certificates. When the assent to the plan of holders of certificates amounting to approximately 55 per cent. in number and amount, had been obtained, the present proceeding was gegun May 31, 1939, by the filing in the district court for Southern New York of a petition praying that the proposed 'arrangement' affecting the unsecured indebtedness of respondent be approved.

The district court found that the petition was properly filed² under § 322 of Chapter XI of the Bankruptcy Act and directed that respondent debtor continue in possession of the property. On July 18, 1939, the district court entered an order permitting the Securities and Exchange Commission to intervene. The motions of the Commission to vacate the order approving the debtor's petition, to dismiss the proceeding under Chapter XI, and to deny confirmation of the proposed arrangement, were denied by the district court and the cause was referred to a referee for further proceedings. On appeal by the Commission from these several orders and on appeal of the respondent from the order of the district court permitting the Commission to intervene, the appeals being consolidated and heard together, the Court of Appeals for the Second Circuit reversed the order permitting the Commission to intervene and dismissed the appeal of the Commission. 108 F.2d 794. We granted certiorari April 1, 1940, the questions raised bring of public importance in the administration of the Bankruptcy Act. 309 U.S. 649, 60 S.Ct. 724, 84 L.Ed. —-.

The Court of Appeals held that the proceeding to secure approval of the arrangement, embodied in the plan proposed by respondent, was properly brought under Chapter XI of theBankruptcy Act; that the intervention by theCommission was not authorized by any provision of the Bankruptcy Act and that it had no interest affected by the proceeding under that chapter entitling it to intervene under the applicable rules controlling intervention in the federal courts, and that consequently it was not aggrieved by the order appealed from and so was not entitled to maintain its appeal.

The Commission argues that Chapter X of the Bankruptcy Act prescribes the exclusive procedure for reorganization of a large corporation having its securities outstanding in the hands of the public such as respondent,³ and that consequently the district court was without jurisdiction to entertain respondent's petition under Chapter XI; that in any case the district court should have dismissed the petition because in the circumstances no fair and equitable arrangement affecting respondent's unsecured creditors alone such as is prescribed by Chapter XI, can be consummated in a proceeding under that chapter. Such being the status of the cause under Chapter XI, the Commission insists that it was properly allowed to intervene in order to protect the interest of the public specially committed to its guardianship by the provisions of Chapter X, and to forestall the impairment of its own functions under that chapter by an unauthorized or improper resort by respondent to Chapter XI, and that for the same reason the Commission was entitled to appeal from the order of the district court refusing to dismiss the Chapter XI proceedings.

To this it is answered, as the Court of Appeals held, that respondent, although a large corporation with its securities widely distributed in the hands of the public, is nevertheless within the literal terms of Chapter XI, which unqualifiedly authorizes a debtor to petition under that chapter for an arrangement with respect of its unsecured indebtedness, and that the district court was accordingly bond to entertain the petition, however desirable it might be that the reorganization should proceed under Chapter X, whose procedure is better adapted in cases like the present to protect the public interest and to secure a fair and equitable reorganization, than are the provisions of Chapter XI.

Chapter XI provides a summary procedure by which a debtor may secure judicial confirmation of an 'arrangement' of his unsecured debts. The debtor who is defined as a 'person who could become a bankrupt under section 4(22) of the Act (title)', § 306(3), may, according to sections 4 and 1(23), 11 U.S.C.A. §§ 22 and 1(23), be any person (which includes corporations), except a municipal, railroad, insurance or banking corporation or a building and loan association. The debtor files his original voluntary petition for an arrangement in such a court as would have jurisdiction of a petition in ordinary bankruptcy⁴ and must file with the petition the proposed arrangement. §§ 322, 323. An arrangement is defined as 'any plan of a debtor for the settlement, satisfaction, or extension of the time of payment of his unsecured debts, upon any terms.' § 306(1). The unsecured debtors may be treated generally or in classes. §§ 356, 357.

It is evident that the language of the sections to which we have referred in terms confers on the court jurisdiction of a petition for an arrangement, which the present petition is, filed by a debtor, which the respondent is, in the technical sense that it confers on the court power to make orders in the cause which are not open to collateral attack. See Pennsylvania v. Williams, 294 U.S. 176, 180 et seq., 55 S.Ct. 380, 382, 79 L.Ed. 841, 96 A.L.R. 1166. But the Commission points out that a proceeding begun under Chapter X may be begun and continued under that chapter only if the petition is filed in good faith, §§ 130(7), 143, 146(2), 221, and that under § 146(2) 'a petition shall be deemed not to be filed in good faith if * * * (2) adequate relief would be obtainable by a debtor's peti- tion under the provisions of chapter XI (11)'; that Chapter X, devised as a substitute for the equity receivership, is specially adapted to the reorganization of large corporations whose securities are held by the public, and sets up a special procedure for the protection of widely scattered security holders and the public through the intervention of the Commission, while Chapter XI which is peculiarly adapted to the speedy composition of debts of small individual and corporate businesses, omits the machinery for reorganization set up by Chapter X, and contains no provision for participation by the Commission in a proceeding under Chapter XI. From this it argues that the district court was...