United Properties Inc. v. Emporium Department Stores, Inc.

• Decision Date: 05 July 1967
• Docket Number: No. 18610.,18610.
• Citation: 379 F.2d 55
• Parties: UNITED PROPERTIES INCORPORATED, and Hans Bodsgard, Appellants, v. EMPORIUM DEPARTMENT STORES, INC., Debtor, and Its Creditors Committee, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

379 F.2d 55 (1967)

UNITED PROPERTIES INCORPORATED, and Hans Bodsgard, Appellants, v. EMPORIUM DEPARTMENT STORES, INC., Debtor, and Its Creditors Committee, Appellees.

No. 18610.

United States Court of Appeals Eighth Circuit.

June 1, 1967.

Rehearing Denied July 5, 1967.

Jerome B. Simon, of Maun, Hazel, Green, Hayes, Simon & Aretz, St. Paul, Minn., for appellant and filed brief with Joseph A. Maun, St. Paul, Minn.

Marcy Finke, of Finke, Jacobs & Hirsch, New York City, for appellee Emporium Dept. Stores, and Douglass, Bell & Donlin, St. Paul, Minn., were with him on the brief.

Leonard Schwartz, of Siegel, Sommers & Schwartz, Brooklyn, N. Y., for appellee, Official Creditors Committee and filed brief.

Before VOGEL, Chief Judge, and GIBSON and HEANEY, Circuit Judges.

HEANEY, Circuit Judge.

The Emporium of St. Paul, Inc., a subsidiary of United Properties, Inc. (hereinafter referred to as United), the owner and operator of a large downtown department store and two leased branch stores in St. Paul, Minnesota, sold substantially all of its operating assets to the Debtor on September 18, 1963.¹ Concurrently, the Emporium of St. Paul, Inc., changed its name to St. Paul Dry Goods, Inc., and, thereafter, St. Paul Dry Goods, Inc., was liquidated and all of its assets were transferred to United.

On the day of the sale, the Debtor entered into a twenty-five year lease agreement for the downtown store with United acting as the lessor. The Debtor agreed to make annual payments of about $450,000 per year.² The Debtor also accepted an assignment of the leases of the branch stores.

The Debtor, in consideration of a $400,000 reduction in the purchase price, agreed to continue to pay pensions to a number of retired employees of United (the Emporium of St. Paul, Inc.) as long as they lived. The pensions ranging from $18.00 to $150.00 per month were computed on a formula previously adopted by United. The estimated cost to the Debtor of making the pension payments was set by the accountant for the Creditors Committee at $296,000. The Debtor deposited securities having a reasonable value of $75,000 with United as partial security for its performance of the agreement.

Under an indemnity and pledge agreement entered into between the Debtor and United, the Debtor agreed to defend, hold harmless and indemnify United if it defaulted and United was forced to make pension payments to the retired employees. If a claim was made against United by a pensioner, the Debtor was to be given notice thereof and a reasonable opportunity to dispute, defend or settle said claim. If United made any payments or incurred any expenses in connection therewith and Emporium did not reimburse United within fifteen days, United was authorized to liquidate a sufficient amount of the collateral of $75,000 to reimburse United for the amount of any such payment.³

The Debtor further agreed to pay (deferred) compensation of $15,000 per year for ten years to Russell Hunsinger, the president and general manager of the seller, who assumed similar duties with the Debtor, upon termination of his employment. In the event of Hunsinger's death, payments were to be made to his estate. He terminated his employment on February 1, 1966, and thus became eligible to receive $15,000 per year beginning in January of 1967. United guaranteed the Debtor's obligation to Hunsinger, and the Debtor pledged securities having a value of about $75,000 to United as partial security for guaranteeing the payment.⁴

Some time after taking possession, the Debtor loaned $1,499,435 to its parent company, Kerr's Inc.⁵ This transaction depleted the Debtor's working capital and led directly to its financial difficulties.⁶

The loan apparently was inadequate, however, to the solution of the financial problems of the parent, and on February 14, 1966, Kerr's Inc. and its subsidiaries, including the Debtor, filed a petition in the United States District Court of the Southern District of New York seeking a Chapter XI reorganization. Each corporation alleged it was unable to pay its debts as they matured. Upon application of three unsecured creditors of the Debtor and United, the New York District Court for the Southern District ordered that the proceedings with respect to the Debtor (Emporium) be transferred to Minnesota. In re Kerr's Inc., 253 F.Supp. 742 (S.D.N.Y.1966), aff'd 360 F.2d 163 (2d Cir. 1966).

On May 17, 1966, the Debtor filed its proposed Plan of Arrangement and, on June 22, 1966, the Referee in Bankruptcy determined that the Plan had been accepted by a majority of the creditors.⁷

The Plan of Arrangement provided that the claims of unsecured creditors as of February 12, 1966, were to be liquidated, satisfied and discharged in full according to one of two options:

(1) By the payment of 100% of each claim, payable 50% in cash upon confirmation and the balance of the 50% to be paid in five equal annual installments of 10% each, the first installment payable January 15, 1968, and on the fifteenth day of January in each year thereafter until paid, or

(2) By the payment of 70% of the respective claims in full settlement and discharge of the claims, payable in cash upon confirmation.

No mention was made in the proposed Plan of Arrangement of the Debtor's obligation under the lease, the pension agreement, or the Hunsinger agreement.⁸

A confirmation hearing was set for June 23, 1966, but was subsequently postponed until July 18, 1966. The Creditors Committee, at the opening of the July 18th hearing, moved that the Debtor be adjudicated a bankrupt on the ground that it had failed to make the required deposit. Another creditor joined in the motion upon the ground that the Debtor-in-Possession had sustained operating losses during the month of June amounting to approximately $154,000. The Referee in Bankruptcy denied the motions and postponed the confirmation hearing until August 22, 1966.⁹

Prior to the August 23rd hearing, the appellants filed objections and supplemental objections to the Plan of Arrangement on the grounds that it was neither feasible nor in the best interest of the creditors. The Debtor answered that the appellants were not creditors and were without a provable claim, and, therefore, not interested parties entitled to object to the confirmation of the Plan. The Referee reserved his ruling on the standing issue and permitted testimony to be presented as to whether the Plan was feasible and in the best interest of the creditors.

The Referee, after a two-day hearing, confirmed the Plan. At the conclusion of the hearing, he stated:

"The court has grave doubts as to its ruling that United Properties has status to appear and object to the plan of arrangement on file herein, and which has since been amended.

"The court has allowed the objector to proceed in the interest of all concerned, because further delay in this proceeding would be to the irrepairable (sic) damage of all concerned in this matter."

He went on to hold that (1) the Plan was feasible and in the best interest of the creditors, (2) the leases were affirmed, and (3) the Debtor would be required to make payments to the pensioners and Hunsinger as they came due.

A petition for review of the Referee's order confirming the Plan, as amended, was filed on behalf of United and Hans Bosgard,¹⁰ and a hearing was held before the Honorable Miles W. Lord, Judge of the District Court, on September 19, 1966, at which time the appellants' standing was again questioned by the Debtor and the Creditors Committee. The court deferred ruling on the standing issue and permitted the appellants to present evidence on the questions of whether the Plan of Arrangement was feasible and in the best interest of creditors.

On September 19, 1966, the District Court entered its Findings of Fact and Conclusions of Law and Order affirming the Plan of Arrangement. The court stated:

(1) The Referee's Findings of Fact are supported by the testimony and exhibits offered in evidence at the hearings held July 18, August 22, and August 23, 1966.

(2) Additional evidence concerning the Debtor's position, subsequent to the confirmation of arrangement, did not substantially alter or affect the Referee's Findings of Fact, nor affect or impeach the reasonableness of the conclusions of the Referee drawn therefrom.

(3) While neither the Referee nor the court could guarantee the future commercial success of the Debtor, the evidence gives reasonable indication that there is a present probability of success.

The court concluded that (1) "the findings of fact of the Referee are not clearly erroneous and the conclusions of the Referee therefrom that the Plan of Arrangement is feasible and in the best interests of the creditors is reasonable;" and (2) "the finding of the Referee that the Plan of Arrangement adequately dealt with and provided for the pensioners, including Russell Hunsinger, is reasonable and not clearly erroneous."

On October 4, 1966, United and Hans Bodsgard appealed the order of the District Court to this Court. Thereafter, the appellees filed a motion to dismiss this appeal.

Meanwhile, proceedings leading to finalization of the Plan of Arrangement continued. On September 20, 1966, the Debtor filed a petition with the Referee requesting that the claims of United, as they related to the lease, the pensions and Hunsinger, be expunged and that the same action be taken with respect to the Bodsgard pension claim. On October 20, 1966, the Referee issued an order expunging the pension and the Hunsinger, and Bodsgard claims.¹¹ The appellants filed a petition for review of the Referee's order. The District Court entered its order affirming the Referee's order on November 29, 1966. No further appeal was taken.

Two major questions are presented to this Court on appeal: (1) Is the order confirming the Plan of Arrangement for the Debtor subject to review by this Court? (2) If subject to review, is the order so clearly erroneous that it ought to be...