Wayne United Gas Co. v. Owens-Illinois Glass Co., 4080.
| Decision Date | 06 August 1937 |
| Docket Number | No. 4080.,4080. |
| Citation | 91 F.2d 827 |
| Parties | WAYNE UNITED GAS CO. v. OWENS-ILLINOIS GLASS CO. et al. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Fred O. Blue and Robert S. Spilman, both of Charleston, W. Va., for appellant.
Arthur G. Stone, of Charleston, W. Va. (Donald O. Blagg and Rummel, Blagg & Stone, all of Charleston, W. Va., on the brief), for appellees.
Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.
This is an appeal from a decree dismissing a petition for corporate reorganization filed under section 77B of the Bankruptcy Act, as amended, 11 U.S.C.A. § 207. Upon motion of appellees, we dismissed the appeal at the June term, 1936, 84 F.(2d) 965; but this action was reversed by the Supreme Court. Wayne United Gas Co. v. Owens-Illinois Glass Co., 300 U.S. 131, 57 S.Ct. 382, 81 L.Ed. 557. The appeal is accordingly before us for hearing on the merits, and the subject of review is the decree which dismissed the petition for reorganization on the ground that it was not filed in good faith and did not present a feasible plan or method of reorganizing the debtor corporation within the meaning of the act.
As basis for the holding that the petition was not filed in good faith and that the proposed plan was not feasible, the court below found with respect to the first mortgage indebtedness of the corporation that it amounted to $1,900,000; that the total value of all of the property was not sufficient to discharge this indebtedness; that the indebtedness was due and that decree had been entered foreclosing the mortgage securing same; that there was no immediate prospect of enhancement in value of the mortgaged property; and that the prospect of earnings from other sources was too remote to afford protection to the first mortgage bondholders. With respect to junior securities and common stock, the court found that these represented no equity in the mortgaged property, and that the effect of the plan of reorganization would be to permit a diversion of the corpus of that property for the benefit of the holders of junior obligations. He found, further, that the petition was not filed in good faith for the payment of the first mortgage indebtedness according to the adjudicated rights of bondholders; that the necessary result of the approval of the petition would be to hinder, delay, and prevent the payment of that indebtedness and to continue the control and management of the corporation in the hands of those whose securities represented no property value; and that it did not appear that any plan of reorganization could be proposed by the debtor which would adequately provide for the protection of the first mortgage bondholders or which would be acceptable to them. With respect to the plan proposed and prior plans, which it amended, he found that they "(a) Do not comply with the provisions of section 77B of the Bankruptcy Act, and do not present a feasible plan or method of reorganizing the Debtor corporation within the meaning of said Act; (b) Do not provide adequate protection for the realization by the first mortgage bondholders of the Debtor of the value of their interest, claim and lien, as required by said Act; (c) Would materially and adversely affect the rights, claims and interest of said first mortgage bondholders, within the meaning of the provisions of said Act, and that the holders of more than 92 per cent of the said first mortgage bonds have refused to approve or accept the same."
In making these findings the judge below had before him, not only the petition of the debtor corporation, the objections thereto filed by the first mortgage bondholders, and the answer of the trustees under the deed of trust securing the first mortgage bonds, but also the record in a receivership and mortgage foreclosure suit instituted in the circuit court of Kanawha county, W. Va., and carried by appeal to the Supreme Court of Appeals of that state, the decision of which is reported in Bell v. Wayne United Gas Co., 116 W. Va. 280, 181 S.E. 609. From these records the following facts appear:
The debtor corporation was organized in 1929 with 250,000 shares of common capital stock, valued on its books at $600,000. It issued first mortgage 6½ per cent. bonds in the sum of $1,500,000, secured by a deed of trust on all of its properties, and 7 per cent. notes in the sum of $500,000, secured under a trust agreement by an equal amount of second mortgage bonds; $1,361,916.60 was received by debtor from the sale of the first mortgage bonds. Of this amount $615,666.60 was used in payment for properties which were transferred to debtor by a predecessor company and for which the promoters of that company, who were the promoters also of debtor, had paid a total of $552,000. Of the remainder of the amount received from the first mortgage bonds, $600,000 was held as a development fund, $66,250 was deposited to pay interest on the bonds as it matured, and $80,000 was paid for expenses of organization and financing. The capital stock and the 7 per cent. notes secured by second mortgage bonds were issued to the promoters and their financial agents, and the debtor received nothing of value for them.
In the year 1932, receivers were appointed for debtor by the circuit court of Kanawha county, W. Va., in a suit instituted by a creditor and a stockholder. The trustees under the first mortgage filed answer and cross-bill in that suit, alleging that at the direction of the holders of more than 25 per cent. of the bonds secured by the mortgage they had declared the unpaid bonds in default and immediately due and payable, and prayed for a foreclosure of the mortgage. The glass companies who are appellees here filed answers as holders of bonds secured by the mortgage and joined in the prayer of the trustees for foreclosure. Holders of common stock and notes secured by the second mortgage bonds filed petitions alleging that the glass companies were guilty of violating the terms of a contract which they had entered into with debtor and that the damages arising from this breach should be applied on the bonds held by the glass companies, also that the glass companies had purchased the bonds held by them at less than face value and under such circumstances as to raise a trust for debtor's benefit with respect to the bonds purchased. The circuit court of Kanawha county ruled against petitioners on the issues raised by the petition last mentioned and gave decree against debtor for the full amount of the first mortgage bonds with interest and for foreclosure of the mortgage. This decree was affirmed on appeal except with respect to the issue as to breach of contract, as to which the lower court was directed to determine in advance of sale whether or not there had been a breach of the contract alleged and, if so, the damages resulting therefrom. Bell v. Wayne United Gas Co., 116 W. Va. 280, 181 S.E. 609. It was admitted on the hearing before us that the circuit court had since heard the case as to the issue left open, holding there had been no breach of contract on the part of the glass companies, and that the Supreme Court of Appeals had refused an appeal from this adjudication. It thus appears that there is a final decree of the state court adjudging all of the first mortgage bonds to have been matured by the action of the trustees under the acceleration clause of the mortgage, that the amount due on these bonds has been adjudged to be the face amount thereof with interest, and that the property embraced in the mortgage has been ordered sold for the satisfaction of this indebtedness.
In November, 1935, after the decision of the Supreme Court of Appeals of West Virginia had been rendered, debtor filed in the court below a petition for reorganization, which has been twice amended. At that time, debtor had outstanding the first mortgage bonds, which with unpaid interest amounted to approximately $1,900,000. It also owed $475,000 on the notes secured by the second mortgage bonds and unsecured indebtedness in excess of $200,000. The assets of debtor consisted of cash in the hands of its receivers amounting to $532,170.10, which was subject to the lien of the first mortgage, and other property, all of which also was subject to the first mortgage and was worth not exceeding $750,000. It thus appears that debtor's entire assets were subject to the lien of the first mortgage and that their total value was only about two-thirds of the amount of the bonds and interest secured by that mortgage. It appears, also, that at no time since the organization of debtor has the value of its assets equaled the amount of the first mortgage indebtedness and that there is no prospect of any such enhancement in the value of the assets as would bring it up to the amount of that indebtedness, but that the chief assets of debtor, other than the cash above mentioned, consist of gas leases which will diminish in value with the depletion of the gas supplies resulting from the operation of the properties.
The plan of reorganization, as finally amended, proposes: (1) That the cash in the hands of the receivers be used to pay the past-due interest on the first mortgage bonds and the past-due sinking fund installments required by the first mortgage; (2) that the default in the payment of these bonds be waived and that the original date of maturity be restored so that they will become due in 1944, as originally issued, and that they continue to be secured by the existing mortgage with all of its provisions unimpaired, except that debtor waive the cumulative feature of the allowances for capital expenditures in computing the quota of available earnings to be applied to sinking fund; (3) that debtor obtain upon its unsecured note sufficient funds to take care of any balance of sinking fund requirements, taxes, liens, and expenses of reorganization and to furnish the corporation with adequate working capital, this note to bear 6 per cent. interest,...
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