Appeal from the District Court of the United States for the Southern District of New York.
Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.
LEARNED HAND, Circuit Judge.
This is an appeal from three orders in bankruptcy, approving and confirming a joint plan of reorganization of the Postal Telegraph & Cable Company and the "Associated Companies," "debtors" under § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. The appellant, Commercial Cable STaffs' Association, which for brevity we shall speak of as the Association, is an association of employees of the Commercial Cable Company, which is not in reorganization, though it is a subsidiary of the "Associated Companies"; the Association asserts the right to oppose the confirmation of the plan because the money and other peopwery which the Commercial Cable Company is to transfer in its execution will either make that company insolvent, or at least imperil its employees' claims against it. These claims arise from the establishment of two pension funds in favor of the employees who are alleged for this reason to be creditors of the company. The bankruptcy court allowed the Association to intervene, and it thereupon objected to the plan, not only for the reason just given, but because it was unfair to all parties concerned except one. It will be necessary to state in a little detail the relations of the various corporations concerned.
The Postal Telegraph and Cable Company is hardly more than a holding company; its tangible assets consist of only about $260,000, and the rest of its assets, stated in round figures, are as follows: all the common, and all but 6,000 of the preferred, shares of the "Associated Companies"; $22,700,000 in notes and interest of the Commercial Cable Company; $29,000,000 in open indebtedness against the "Associated Companies"; and all the shares of a small company, the Postal Telegraph Sales Corporation. The "Associated Companies" is a Massachusetts trust; it is purely a holding company, and its assets consist of claims of $26,000,000 on open account against thirty-five of its own subsidiaries, grouped together as the "Land Lines"; $4,000,000 against the Commercial Cable Company, either on open account or "accrued guaranty revenue"; $1,000,000 against an English company called the Commercial Cable Company Ltd.; $7,000,000 against two other subsidiaries, not necessary to describe; all the common shares of the "Land Lines", of the Commercial Cable Company, of the Commercial Cable Company, Ltd., of the Mackay Radio & Telegraph Company of California, and of the Radio Communication Company; and 10,000 common shares (25% of those outstanding) of the Commercial Pacific Cable Company. Thus, the only financial relations of the Commercial Cable Company with either of the two "debtors" in reorganization are that the "Associated Companies" owns all its common shares, that it owes $23,000,000 to the Postal Telegraph and Cable Company, and that it owns 61,266 of the preferred shares of the "Associated Companies". The Association has no interest in the Commercial Cable Company except as a creditor through the pension claims, which in wuch the larger part depend upon the existence of profits and are limited by their amount.
The plan among other things provides that the Commercial Cable Company shall transfer all its assets (with some exceptions to be noted) to a new company which shall assume its obligations (again with certain exceptions). Presumably this is to be done by the vote of the "Associated Companies", as its sole shareholder. To this part of the plan the Association does not apparently object; but it does object to the disposition of the assets which are to be excepted from the transfer. These consist of (1.), some $3,000,000 in cash, (2.), a further sum of cash not ascertainable, but apparently not important, (3.), 37,500 preferred shares in a building company, (4.), $38,000,000 of accounts, owed either by the "Land Lines", by the Radio Communications Company, Inc., or by Mackay Radio & Telegraph Company of Delaware; and, (5.), the 61,266 preferred shares of the "Associated Companies", already mentioned. The plan proposes that these assets shall be transferred in various ways, not important here, in consideration of (1.), the cancellation by the Postal Telegraph and Cable Company of its $20,000,000 of notes; (2.), of any debts of the Commercial Cable Company to the "Land Lines", (so far as we can find, there are none of these); (3.) of its obligations to the Postal Telegraph and Cable Company and the "Associated Companies", ($4,000,000 to "Associated Companies", and apparently none to the Postal Telegraph and Cable Company); and, (4.), all unpaid interest on the foregoing, which cannot be stated exactly, but which includes $2,700,000 on the notes of the Postal Telegraph and Cable Company. The Association protests that by this transfer the Commercial Cable Company will be stripped of all its liquid assets, and left only with its cables and other "wasting" property; also that there has been no adequate appraisal of the $38,000,000 of claims against the "Land Lines". Further, it asserts that the plan is in general unfair to the creditors and "security holders" of the Postal Telegraph and Cable and the "Associated Companies", and to all their subsidiaries, because at the expense of all the rest it favors the International Telegraph and Telephone Company, the shareholder of all the common, and some of the preferred, shares of Postal Telegraph & Cable Company. Finally it complains of an order of the court, extending §§ 196 and 198 of the Chandler Act, 11 U.S.C.A. §§ 596, 598, to the pending proceeding, and to the way in which consents to the plan were in consequence computed. The judge considered these objections on their merits, and after deciding that the transfer of the excepted assets was in the Association's interest, confirmed the plan.
The statute under which the proceeding is conducted - § 77B of the Bankruptcy Act - like its successor, Chapter X, 11 U.S.C.A. § 501 et seq., is concerned with the reorganization of corporations as such, and with them alone. That does not mean that it stands upon the fictional legal person of the corporation; a reorganization may be worked out in disregard of the "corporate entity", treating the shareholders, for all but procedural purposes, as a group formed to conduct a common venture. But it does mean that the reorganization is to be confined to the readjustment of the relations between the shareholders collectively and their creditors (including relations between sub-groups of shareholders inter se and between them and creditors); and that the bankruptcy court shall not bring into a concourse the relations between the shareholders, i.e., the corporation, and third persons other than creditors. The section preserves the moder of all bankruptcy by confirming itself to adjustments between the bankrupt and his creditors, leaving all his legal transactions with the world at large to those tribunals that have cognizance of them generally. In harmony with this premise the statute does not therefore attempt to adjust the relations of the shareholders of a parent with the creditors of a subsidiary, even though the subsidiary be wholly owned and though its creditors are for that reason creditors of the same group of shareholders. That is entirely possible and proper, because, although the shareholders of the parent and the subsidiary are the same, the creditors are divided into two groups, their rights being against different assets. An examination of the text of the section leaves no doubt that this is its scheme. It does indeed allow a subsidiary to join in the reorganization of its parent (sub. a), but only upon filing its own petition and getting a separate approval. This would be wholly unnecessary if the subsidiary's creditors were already within the jurisdiction of the court. "Creditors" are those holding "claims", and "claims" are "debts, securities, other than stock, liens, or other interests of whatever character" in the corporate assets (sub. b); the creditor of a subsidiary has no interest in the assets of the parent except in exceptional transactions in which the subsidiary has acted as an agent or dummy. Again, notice is to be given only to creditors and shareholders; and while their interests must be solicitously guarded in the plan, no one else's need be (sub. e).
Since the Association is neither a creditor nor a shareholder of either of the "debtor", it had no standing to object to the plan, unless it may speak for the Commercial CAble Company, as preferred shareholder of the "Associated Companies". If is impossible to find any basis for allowing it so to speak. Merely as creditor it clearly had no standing; a man's creditors cannot control the conduct of his affairs while he remains solvent. Perhaps for that reason the Association asserts that Commercial Cable Company is insolvent. The record does not show it. The value of the plant of the company as a live business is about $5,500,000 (at least that is the mean of the appraisals); neither its claims against the "Land Lines" and other subsidiaries of $38,500,000, nor its investments in the two "debtors" and in their subsidiaries of $7,500,000, have ever been appraised; its current assets are $4,000,000. Its liabilities in accounts and notes payable are $26,600,000; in current liabilities $350,000; and in pension claims (if we accept the Association's own figures) $4,700,000, making $31,700,000 in all. Therefore, after the appraised value of the plant and the current assets have been subtracted, there remain $22,000,000 of debts to be covered by claims against, and investments in, subsidiaries of a book value of $46,000,000. The company is solvent, unless these are in fact worth less than half their book value. Perhaps they are, but we know nothing whatever about it, and the Association had the burden upon the issue. Thus, even if insolvency were enough to give it a standing without judgment and execution nulla bona - as ordinarily it is not - it had none. Apparently this is not its ground for demanding a hearing; on the contrary, if we understand it right, it complains that the proposed transfer will leave the Commercial Cable Company insolvent, even if it is not so today. Thus, it claims to speak as a creditor who seeks to prevent a fraudulent transfer. In the first place the record does not bear out this position on the facts. A balance sheet prepared by the Association does indeed show a deficit of about $660,000, but a very slight analysis demonstrates its fallacy. One item alone is enough. Among the assets the plant is given a value of $3,150,000 by subtracting from an appraised salvage value of $4,042,000, $890,000 for the property of an English subsidiary. The second figure was not, however, a salvage value at all, but a live one; the difference between two such disparate items is meaningless. The fair mean for the live value of the whole plant is $5,500,000, as we have said; but it is not necessary to put it higher than $4,700,000, for at that figure the deficit disappears. The lowest appraisal of live value was $4,500,000. The Association has therefore failed to establish any footing as a simple creditor seeking to prevent a fraudulent transfer. (We do not wish to be understood as deciding in this case whether the commercial Cable Company will be made insolvent by the transfer: we are holding that the Association is not a proper party to the reorganization anyway, and our discussion is merely incidental to that. Moreover, the record is entirely unsuited to the determination of the issue, having been made without it in mind.)
The infirmity of the Association's claim to be heard is, however, much deeper than anything we have yet mentioned. It is true that the reorganization plan can deal with the preferred shares of the "Associated companies" held by the Commercial Cable Company; that is, it may, and should, declare what interest in the assets of the "debtors" the preferred shareholders shall have. But the bankruptcy court has no power to take the shares form their owner and transfer them to anyone else, whether for a consideration or not. It cannot force upon the Commercial Cable Company, not a party to the reorganization, a bargain, an accord and satisfaction, or whatever it may be, against its will. And this reasoning applies with even more force to the other assets which are to be transferred, since these could not possibly fall within the scope of the reorganization. It is quite true that the plan may incorporate the transfer as a condition upon its execution, just as it has done; it might make the purchase of any property from a third person such a condition. But in so doing it must accept the chance that the seller will refuse to deliver, and nothing in the order confirming the plan will coerce his will a particle. The "debtors", and the new corporation, will be in no better position as against the Commercial Cable Company because of the confirmation. We do not forget that the "Associated Companies" is the sole shareholder of Commerical Cable Company, and that it is undoubtedly upon its vote that the "debtors" rely to effect the transfer. The bankruptcy court could indeed forbid that vote and stop the transaction, and would do so, if any party to the reorganization objected and its objection were valid upon the merits. But no one has done so; only the Association objects and it is not a party. And this is equally true even though we were totally to disregard the Commercial Cable Company, and treat the "Associated Companies" as the owner of the assets which are to be transferred. The Association would still have no standing vicariously to take up a cause in the interest of those who did not choose to espouse it in their own behalf. Nor is it in the least necessary that the Association should be allowed such a privilege for its own protection, for, as we have already said, the order of confirmation will not conclude it. If the transfer is unlawful as against it, any court of competent jurisdiction will prevent its consummation; not a word said here will gainsay such a court's freedom to decide whatever it thinks best.
In what we have said we do not mean to imply that a bankruptcy judge should allow a palpable fraud to be consummated before his eyes; spoliation might be so patent and so gross that he would be bound to intervene ex mero motu. The facts at bar leave no room for the application of any such doctrine. Unless the transfer is a fraud upon the creditors of the Commercial Cable Company, they have nothing to say about it; the "Associated Companies" as shareholder alone has lawful power to pass upon the bargain. As we have seen, there is as yet no basis for supposing that a fraud will be committed; nobody can tell that without an appraisal of the assets which has not been made. It is just that inquiry which the bankruptcy court is without power to undertake, and which it should not undertake under the guise of preventing its use by the "debtors" as a catspaw. It is true that under Stoll v. Gottlieb, 305 U.S. 165, 59 S. Ct. 134, 83 L. Ed. 104, if we decided the question now, our decision would apparently be res judicata, for we should have deliberately passed upon the point. If thereafter the Association sought to challenge the transfer in a state court, it would fail; though even then the order would not be res judicata against any other creditor of the Commercial Cable Company who might choose to object. But it is scarcely a justification for a court's doing what it believes to be beyond its lasful powers, that after it has done it, the result will be immune from successful challenge. True, there might be an immediate convenience in deciding the question on this imperfect record, for it is not likely that any other creditor of the Commercial Cable Company will complain. But convenience is no excuse for usurping power. Moreover, all questions of propriety and conscience aside, in the end the greater convenience will prove to be in keeping within the lawful bounds of the bankruptcy court's jurisdiction. Reorganizatioins are difficult and complicated enough at best; to interject into them controversies between the "debtor" and third persons not creditors, is likely to produce practical difficulties of administration outweighing anything gained by the enlarged concourse which would ensue.
The appeal must therefore be dismissed because the Association is not a party aggrieved. The order of intervention was erroneous, and should not have been made; but it did not, and could not, create an interest in the reorganization which the Association did not have without it; it enabled the Association to appear, but it gave it no added standing to object to the plan. If the dismissal works delay in the execution of the plan, it is because the Commierical Cable Company did not itself join in the reorganization. That may well have been desirable for other reasons, but it was attended by the possibility that the transfer might be opposed by creditors of the transferrer.
CLARK, Circuit Judge (dissenting).
The appellant was permitted to intervene below; the facts of the controversy it presented were examined by the district judge; a decision on the merits was reached adverse to appellant's contentions. Now my brothers would dismiss this appeal, deny that a right to intervene ever existed, and command that, if ...