The opinion of the court was delivered by: MACK
A creditors' petition under section 77B of the Bankruptcy Act (11 USCA § 207) against the Associated Gas & Electric Company, hereinafter referred to as Associated, has been held by me to have been filed in good faith. Pending hearings on the issues of the Associated's insolvency as defined by the Bankruptcy Act and the commission of an act of bankruptcy, the determination of which against the Associated is a prerequisite to the court's approval of the petition, petitioners seek an order enjoining the Associated, its subsidiaries, and controlled affiliates, and their officers, directors, attorneys, and employees from transferring any part of the assets of the Associated system other than in the regular course of business, save after due and reasonable notice to the court and to petitioners, such notice to contain complete information as to the reasons for making the proposed transfer and the proposed disposition of the proceeds to arise therefrom.
Counsel for the Associated contend that section 77B, properly construed, gives the court no jurisdiction over a debtor's property prior to the date of the approval of the petition and that therefore no such injunction may issue at this time; further, that even if there be jurisdiction, the injunction should be denied on the merits.
It is urged against the jurisdiction of the court, that the Bankruptcy Act defines the extent thereof and that while section 2, subdivisions (3)
, 11 USCA § 11 (3, 15), expressly gives power to grant injunctions in the ordinary bankruptcy proceedings, section 77B, regulating corporate reorganizations, has no such provision, either expressly or under a proper construction of its subdivision (k)
, 11 USCA § 207 (k). Associated contends that subdivision (k) must be construed to refer to procedural and administrative, but not to jurisdictional provisions of the act because of section 77A (11 USCA § 206), which provides that "in addition to the jurisdiction exercised in voluntary and involuntary proceedings to adjudge persons bankrupt, courts of bankruptcy shall exercise original jurisdiction in proceedings for the relief of debtors, as provided in Section 77B of this Act [section 207 of this chapter]." The argument for this construction is that section 77A established an entirely distinct bankruptcy jurisdiction, defined and limited by the provisions of section 77B.
But, Associated urges, even if subdivision (k) is not to be so construed, the power conferred by section 2, to issue injunctions immediately on the filing of an involuntary petition in bankruptcy, is inconsistent with the spirit and intent of section 77B and must therefore be deemed as not within subdivision (k). The inconsistency is sought to be shown by analysis both of the general purpose and of various specific provisions of the section. The purpose of section 77B, it is said, is to facilitate corporate reorganizations "for the relief of debtors," in the accomplishment of which the entry of an order approving the petition is the first real step; this, in contradistinction to the ordinary involuntary bankruptcy proceeding aiming at liquidation, in which adjudication is in a sense the final step except for the actual liquidation. Because of this difference in the nature of the proceedings, approval of the petition by the court, it is contended, is a prerequisite to the acquisition of jurisdiction over debtor's property.
This general conclusion of inconsistency is sought to be buttressed by the language of several specific provisions of section 77B. Subdivision (a), 11 USCA § 207 (a),
it is urged, makes approval an express condition precedent to such jurisdiction. This in turn, it is said, is supported by subdivision (o), 11 USCA § 207 (o),
which, by negative implication, it is urged, must be construed as a denial of jurisdiction over a debtor's property prior to approval. In contrast, Associated points to similar provisions of section 74 (m), as amended (11 USCA § 202 (m),
dealing with compositions, and of section 77 (n),
11 USCA § 205 (n), dealing with railroad reorganizations, both emphasizing the date of filing the petition.
Although subdivisions (a) and (o) of section 77B are the Associated's chief reliance, various other provisions thereof are likewise pointed out as tending to show inconsistency between this section and section 2. It is urged as to subdivision (c) (1), 11 USCA § 207 (c) (1),
that the court is without power to appoint a trustee of the debtor's property before approval of the petition and that therefore the date of approval must be considered the crucial date with respect to the court's acquisition of jurisdiction over the debtor's property. Subdivision (m), 11 USCA § 207 (m) that "no judge, debtor, or trustee acting under this section" shall enter into a so-called "yellow dog contract," is contrasted with an analogous provision in section 77 (q), 11 USCA § 205 (q), that "no judge, trustee, or receiver acting under this Act [title] shall," etc. From the absence of any mention of a receiver in subdivision (m), the inference is drawn that no receiver may at any time be appointed for the debtor's property; this, in turn, is said to show that the court has no jurisdiction over such property prior to the date of approval. Similarly, subdivision (c) (10), 11 USCA § 207 (c) (10),
is asserted to mean that no injunction against the commencement or prosecution of suits against the debtor may issue until after approval, in contrast to the ordinary bankruptcy case in which, by the express provision of section 11, such injunction may issue before a decree of adjudication is entered. Thus again, it is urged, is shown the intent of Congress to make approval the earliest date for the court's exercise of power over a debtor's property.
Finally, subdivision (i), 11 USCA § 207 (i), is relied upon. This provides that if a receiver has theretofore been appointed for the property of a corporation, a petition or answer may be filed under section 77B, at any time thereafter, by the corporation or creditors, "and if such petition or answer is approved, the trustee or trustees appointed under this section * * * shall be entitled forthwith to possession of and vested with title to such property. * * *" This, it is urged, establishes, first, that no receiver of a debtor's property may be appointed under section 77B, and that after the petition is approved, the property must either be turned over to a trustee, if one be appointed, or continue with the debtor; and, second, that prior to approval of the petition, any receiver or trustee of the debtor's property, appointed in any other proceeding, is to remain in possession of the property, thus indicating again that, under section 77B, the court acquires no jurisdiction over such property until approval.
The language of the statute, however, is at least equally susceptible of a contrary construction. In these circumstances, considerations both of policy and of legislative background must be invoked to resolve any ambiguity; these, in my judgment, are conclusive against the Associated's contentions.
I shall assume, purely arguendo, that the court is not authorized to grant the injunction by virtue of any general equity power (but cf. Continental Illinois Bank & Trust Co. v. Chicago, R.I. & P. Ry. Co., 55 S. Ct. 595, 79 L. Ed. 1110, April 1, 1935) or of any express power conferred by section 77B; further, that any such power must be derived from section 2, subds. (3) and (15), 11 USCA § 11 (3, 15), incorporated into section 77B by subdivision (k) thereof, 11 USCA § 207 (k).
The argument that subdivision (k) refers to administrative and procedural rather than jurisdictional provisions is based upon the fallacious assumption that section 77B, in relation to the other provisions of the Bankruptcy Act, is separate and distinct rather than an integral part of one complete act. The provision for liquidation (subdivision [c] , 11 USCA § 207 (c) (8), should an attempted reorganization fail, is a strong indication that section 77B is designed as an additional remedy within the ordinary bankruptcy jurisdiction rather than as an entirely new proceeding. Subdivision (c) (10), 11 USCA § 207 (c) (10), tends to the same conclusion. The language there used, "in addition to the provisions of Section 11 of this Act [section 29 of this title] for the staying of pending suits against the debtor," implies that all the provisions for injunctions are to be read together as part of one entire act. The House Report on the bill is also of some significance (H.R. 194, 73d Cong. 1st Sess. 1934). "It is the purpose of this bill to bring the exercise of the bankruptcy powers more in line, from a practical and helpful standpoint, with the necessities of both distressed debtor corporations and their creditors, and to reduce the expense and delay of administration." The indication here, too, is that section 77B is but an added step in bankruptcy rather than an organically new legal proceeding. The language of section 77A does not compel the conclusion asserted by Associated and in the light of these other considerations, that conclusion must be rejected. Cf. Continental Illinois National Bank & Trust Co. v. The Chicago, Rock Island & Pacific Ry. Co., supra.
The question is whether or not subdivisions (3) and (15) of section 2 in so far as they provide for the issuance of injunctions before adjudication are inconsistent with the provisions of section 77B. I cannot concur in the contention that the difference in the nature of ordinary bankruptcy proceedings and of reorganization proceedings under section 77B demonstrates such an inconsistency. An injunction in ordinary bankruptcy cases issued immediately on the filing of the petition aims to prevent dissipation of the assets of the alleged insolvent, in anticipation of a possible or probable adjudication. In re Mitchell, 278 F. 707 (C.C.A. 2d, 1922). It is, of course, none the less valid even though eventually the adjudication fails and the petition in bankruptcy is dismissed. Creditors of a corporation against which an involuntary petition under section 77B is filed may be in no less need of such protection against dissipation of assets. Whether the section 77B proceedings will end in reorganization or, as in ordinary bankruptcy, in liquidation, the creditors have a present direct interest in the maintenance of the debtor's property. That the section is labeled "for the relief of debtors" is immaterial. This tag was attached to what was apparently the earliest draft bill (that of March 1, 1932), embodying in rough form the recent amendments to the Bankruptcy Act; in it, no provision was made, either in the railroad or corporate reorganization sections, for creditors' petitions. But under section 77B as finally enacted, the scope of the proceeding was broadened by the provision for involuntary petitions; the interests of creditors as well as of the debtor are therefore to be considered in construing the language of the act. The term "approval" may well have been substituted for "adjudication" merely to remove the odium commonly attached to the latter term in ordinary bankruptcy cases; no inference can fairly be drawn from this difference in language, especially as in several provisions of section 77B, an order of approval is expressly assimilated to an order of adjudication.
Associated urges that subdivision (a) of section 77B, 11 USCA § 207 (a), not only confers jurisdiction, but fixes as well the time of its acquisition and that, as of the date of approval; therefore, it is said to be inconsistent with the provisions of section 2 (11 USCA § 11), under which jurisdiction is expressly exercisable prior to adjudication. But the provision that "an order of adjudication in bankruptcy shall not be entered" may well have been deemed to require the language immediately following it in order to make clear that, even though there is to be no "adjudication," the jurisdiction of the court is at the least no weaker than in a proceeding in which adjudication is had; therefore this provision indicates no limitation on the court's power. Furthermore, the purpose of the provision clearly is to emphasize that the court's jurisdiction extends to the debtor's property "wherever located" despite the fact that no adjudication is entered; it is in this respect unlike the restricted territorial jurisdiction either in equity or prior to adjudication, in the ordinary bankruptcy proceeding. For this reason, no negative implication limiting the court's power prior to approval is to be inferred.
In this case and at this time, I need decide as to section 77B, subd. (a), 11 USCA § 207 (a), only that it does not fix the time of acquisition of jurisdiction.The same provision, in precisely the same words, is found in section 77, subd. (a), 11 USCA § 205 (a); but subdivision (n) of that section (11 USCA § 205 (n) expressly provides that jurisdiction is acquired on the filing of the petition. Subdivision (a) of section 77 does not, therefore, afford any negative implication that the court has no jurisdiction in respect to the debtor's property prior to approval. Section 77B, subd. (a), likewise must be held to give rise to no ...