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In re National Public Service Corp.

February 15, 1937

IN RE NATIONAL PUBLIC SERVICE CORPORATION


Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The debtor, National Public Service Corporation, is a public utility holding company. It issued $20,000,000 principal of debentures in 1928 and secured them under a trust indenture of which the New York Trust Company was trustee by stocks of various subsidiary corporations.

On July 8, 1932, National Public Service Corporation was adjudicated a bankrupt and the Irving Trust Company became trustee in bankruptcy. The unpledged assets were liquidated in the bankruptcy proceeding and the cash proceeds aggregating about $111,000 are in the hands of the trustee in bankruptcy.

The collateral for the debentures constituted all the remaining assets and consists of 712,411 shares of the common stock of Jersey Central Power & Light Company, a public utility operating company, which is slightly over 67 per cent. of all the stock of that company, and certain common stocks of two other holding companies which were sold by the New York Trust Company as trustee under the indenture for a small sum on August 27, 1936. The disposition of the 67 per cent. interest in the common stock of Jersey Central Power & Light Company is the subject of contention in the present litigation.

On December 19, 1935, after a valuation pursuant to section 57 (h) of the Bankruptcy Act (11 U.S.C.A. § 93(h), an order was entered by the referee in bankruptcy fixing the value of the collateral at $6,767,904.50, providing that the claims on the debentures upon which dividends are to be paid "be credited with the payment of, and reduced by," that amount "which credit and reduction shall be pro rated upon and with respect to all" secured claims in accordance with the amounts thereof and that "all claims and interest of the Bankrupt and its Trustee in and with respect to said collateral * * * be terminated by the Bankrupt and its Trustee." This order was made upon the petition of one Murray Kanner, a debenture holder acting on behalf of himself and other owners of debentures which asked for an appraisal of the collateral and prayed, among other things, for an adjudication of the rights of the trustee in bankruptcy therein, for an order directing the trustee to abandon any interest in the collateral in the event that the securities should be found to be of less value than the amount of the lien of the bondholders thereon and the claims filed on the bonds in the bankruptcy proceeding, and for other and further relief. No attempt was made by any person to review the order of December 19, 1935, which was made after a creditors' meeting held on December 5, 1935.

On or about July 30, 1936, the New York Trust Company, at the request of a "Protective Committee" for the debenture holders, formed in 1932, began to advertise the collateral for sale on September 10, 1936, having an offer therefor of $5,000,000, which was thereafter advanced to $8,000,000, from the Public Service Corporation of New Jersey, a holder of a large number of the debentures. On August 20, 1936, the three petitioners herein, two of which were subsidiaries of Associated Gas & Electric Company, holding $6,437,000 of the debentures, filed a petition under section 77B of the Bankruptcy Act (as amended, 11 U.S.C.A. § 207), and proposed a plan of reorganization. This plan involved the formation of a new corporation, and provided that all the unpledged stock of the Jersey Central Power & Light Company, now owned by interests of the Associated Gas & Electric Company, should be transferred to the new company, and that the pledged stock should be contributed thereto by the debenture holders in return for debentures of the new company to the extent of 60 per cent. of the par value of the holdings of the owners of the old debentures, and that the new debentures should be secured by the stock of the Jersey Central Power & Light Company now held as collateral by the New York Trust Company as trustee under the trust indenture.

The creditors who filed the petition in which the reorganization under section 77B was proposed applied for an order approving the petition. After a reference to and report by the referee as special master, Judge Mandelbaum filed an opinion in which he held that, as a result of the referee's order of December 19, 1935, "every legal right of this debtor in the Jersey Central stock was terminated, and the sole property right in that stock, free of all claims of the debtor, was vested in the debenture-holders through their trustee and the claim of these debenture-holders against the estate of the debtor was reduced by the value placed on the Jersey Central stock and was irrevocably fixed at the reduced amount." The judge added that: "the order of December 19th, 1935, has so completely divested the debtor-corporation of any proprietary interest in the collateral that there is nothing which can properly be the subject of reorganization," and made an order, on November 24, 1936, dismissing the petition for reorganization accordingly. From this order the present appeal is taken.

It is to be noticed that the cash realized by the trustee in bankruptcy is still in its hands for distribution in the original bankruptcy proceeding and that the proposed reorganization deals wholly with the collateral of which the debtor once had the legal title, subject to its pledge to the New York Trust Company as trustee for the debenture holders. If the result of the order of the referee of December 19, 1935, was to extinguish this title so far as the debtor is concerned, there remained no subject-matter for the reorganization which was proposed.

The question here is what effect to give to the order of December 19, 1935, "that all claim and interest of the Bankrupt and its Trustee in and with respect to said collateral hereinbefore mentioned be terminated and abandoned by the Bankrupt and its Trustee."

Counsel for the appellants do not seem to question that this appeal is concerned only with the interpretation of the foregoing order, for they say in their reply brief (page 10) that they do not contend that the order could not be effective to extinguish the bankrupt's equity of redemption because the bankrupt did not participate in the 57 (h) proceeding but only "that in view of the circumstances, the order should not be deemed self-executing as a transfer of the debtor's title or interest in the collateral to the debenture holders or their trustee."

As we have already said, the order was made upon a petition praying that the court fix the value of the securities held by the New York Trust Company, as trustee under the trust indenture, in accordance with section 57 (h) of the Bankruptcy Act (11 U.S.C.A. § 93 (h), deduct such value when determined from the secured claims "and/or adjudicate the rights, if any, of * * * Irving Trust Company, as Trustee in Bankruptcy of National Public Service Corporation therein, and/or direct the Irving Trust Company as Trustee to abandon any claim to or interest in the said securities and the administration thereof, in the event that such securities shall be found to be of lesser value than the amount of the lien of the bondholders on the said securities and of the claims filed on said bonds herein; and make such other orders, decrees and provisions in reference thereto as shall be just and equitable to all parties concerned, and that your petitioner have such other, further and different relief as to this court may seem just and equitable in the premises."

We cannot see how a finding by the referee that the "interest of the Bankrupt and its Trustee * * * is terminated and that all claim and title in or with respect thereto by the Bankrupt or its Trustee should be abandoned," and the succeeding order directing that "all claim and interest of the Bankrupt and its Trustee in and with respect to said collateral * * * be terminated and abandoned by the Bankrupt and its Trustee," could have had any other purpose than the vesting of all rights, which the trustee in bankruptcy represented ...


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