Before AUGUSTUS N. HAND, CHASE, and CLARK, Circuit Judges.
This appeal brings before us as its main feature a district court order approving as fair, equitable, and feasible the trustee's plan for the reorganization of Silesian-American Corporation, a Delaware holding company, which was the conduit whereby American investors in the golden twenties put money into a Polish corporation owning and mining extensive zinc and coal deposits in Upper Silesia. In the light of existing world conditions the mines, now in the possession of the present Polish Government, are obviously beyond reach of any American bankruptcy court. The trustee's plan therefore is in substance a distribution of the salvage from the wreck, consisting in the main, beyond some few assets on hand, of an amount offered by a syndicate of Swiss banks which had received deposits from the original mine owners to retire the debtor's bonds. Objectors to the plan direct their sharpest attack upon the asserted inadequacy of the Swiss offer. Hence the major issue on this appeal is whether the court below was justified in accepting and adopting the trustee's view that the offer constituted an appropriate adjustment of conflicting claims and in any event was all that could be reasonably realized from that source. Other issues involve the possibility of a claim against the present Government of Poland and the desirability of suit by the trustee against the original promoters of the debtor, together with various details of the plan which are attacked by some or more of the objectors. On all these points the district court, in approving the plan, found with the trustee in concluding that nothing more of substance for the bondholders could be reasonably expected. Objectors to the plan, in addition to the debtor and its principal stockholder, Silesian Holding Company, are Edward W. Smith et al., as Protective Committee for the Holders of the 7% Collateral Trust Bonds here particularly involved, and J. Howard McGrath, Attorney General of the United States, as successor to the Alien Property Custodian representing a German interest seized by that office. The Securities and Exchange Commission filed below a very extensive report which went into the history of the debtor in all aspects and the merits of the plan and both vigorously opposed its acceptance and strongly urged the pressing of legal action against the Swiss banks and others. This position it reaffirms here in brief and oral argument urging reversal of the district court order.
The proposal of the Swiss banks calls for a definite and final adjustment whereby, upon its acceptance, those banks will be freed from any liability in the future and will indeed share in substantial amount in the securities and obligations of the corporation, as reorganized for the future collection of contingent claims. It thus presents a somewhat different situation from the other potential claims in favor of the debtor which in theory at least may be still subject to some realization even after execution of the plan. Because of this fact and because the offer does assure the estate of certain definite funds at once, we must consider it in detail. Since decision here is so highly a matter of judgment, indeed of shrewd appraisal of what may be the possibilities of lengthy litigation as against an immediate smaller payment in hand, we obviously cannot find any sure or pat answer. The trustee naturally urges that we must give strong weight to the decision below, suggesting that it must be sustained as a finding of fact based on the preponderance of credible evidence, and therefore not "clearly erroneous" under Fed.Rules Civ.Proc. rule 52(a), 28 U.S.C.A. But we are not justified in thus oversimplifying this difficult problem, so much more one of forecasting the future than of restating the past. Naturally careful consideration is due the conclusion of the able district judge who has had this lengthy reorganization so long under his control. At the same time we cannot overlook the fact that the governmental agency charged with substantial responsibility in the premises, the Securities and Exchange Commission, has made an extensive investigation resulting in a detailed and helpful report with a reasoned conclusion which the trial judge has rather summarily rejected. If the considered findings of this agency, with so much better facilities for investigation than those possessed by either this or the trial court, are to have any force beyond their initial impact below, then we think that they will largely offset the usual presumption accorded a decision of first instance. Otherwise much of the statutory purpose in creating an expert body for the consideration of technical problems will be set at naught. Compare 6 Collier on Bankruptcy P7.30, 14th Ed.1947. We have elsewhere stressed the importance of due regard for Commission findings, Finn v. Childs Co., 2 Cir., 181 F.2d 431, 438; and we are clear that here, too, we must give weight to the detailed evaluation of the facts made by this reliable and experienced public agency and the conclusion reached, even though this was not accepted by the trial judge.
The facts, so far as they appear of record, come in the main from the various written documents before the court, together with the Commission's report. The supplementing oral testimony from the trustee and associates and from certain representatives of German interests left many gaps which the noncooperative attitude of the Swiss banks - who avoided any disclosures except under pressure - did not fill. But the broad outlines of the story at least are clear. They present a fascinating case study of American investing in continental Europe between the world wars and what happened to it once the nations became again involved in world conflict. To this story we must now turn.
Origin of the debtor. Prior to World War I, certain zinc and coal mines in Upper Silesia, owned and operated by the Giesche family since 1704, were then held by the German firm Bergwerkgesellschaft Georg von Giesche's Erben. (We shall follow the parties in referring to this firm by the perhaps not fully adequate term "Erben.") Unfortunately the Erben mining properties were divided by the German-Polish boundary line set by the Treaty of Versailles in 1922, so that about 80% was allocated to Poland, and the remainder to Germany. For practical reasons the Polish properties were therefore transferred to one of Erben's subsidiaries, a firm incorporated in Prussia about 1907. This firm then became the Polish Corporation Giesche Spolka Akcyjna, referred to as Spolka.
The post-World War I operations of Erben and Spolka appear to have been financially unsuccessful. This was partly due to the fact that Poland had laid a heavy tax on the Spolka properties unpaid in the approximate amount of $10,000,000. Because unsettled conditions made it difficult to borrow German funds to pay these taxes, Erben sought a loan elsewhere.
About this time W. A. Harriman & Co., Inc., investment bankers of New York, opened an office in Berlin and in cooperation with the Guaranty Trust Company of New York made available about $5,000,000 for short-term loans to German enterprises. Through a German banking institution about $2,000,000 was lent to Erben on the strength of a fraudulent balance sheet which overstated the value of Erben's zinc inventory by several million dollars. Then Mr. Irving Rossi, Harriman's Berlin representative, to use his own words,*fn1 "discovered that the balance sheet was false and I notified my company's New York office of that, and in order to find a way to obtain the return of our money I developed a plan under which Harriman, together with the Anaconda Copper Company, would acquire these properties."
The plan contemplated the creation of a new American corporation to make an advance to Spolka with money to be acquired through the sale of securities on the American market. This would permit Spolka to pay off part of its debt to Erben and enable the latter, in turn, to pay Harriman. This is in brief substantially what occurred.
Sometime in 1925 Harriman therefore suggested to the Anaconda Copper Mining Company that it investigate the possibility of organizing an American corporation which would finance the purchase of the Spolka properties from Erben. And on July 30, 1925, Harriman entered into an agreement with Erben which - although not reproduced in the record - appears to have contemplated (1) that the proposed American company would purchase from Erben either all of Spolka's assets or all of its capital stock, and (2) that Erben would receive for the Spolka properties $10,000,000 in cash, $10,000,000 in preferred stock of the new company, and 49% of the latter's common stock. On the same day Harriman granted Anaconda an option to take over the deal for the latter's account "provided, however, that if you take over the same you agree to allot to us a fair participation in the said business upon the same terms that you undertake the same, the amount and proportion of our said participation to be fixed by agreement between the presidents of our respective companies." This instrument also incorporated by reference the Harriman-Erben agreement made the same day.
Anaconda then agreed to survey and inspect the mining properties, and so sent to Upper Silesia Mr. Laist and Mr. Sales, two of its engineers. In a notably clear and detailed report dated September 25, 1925, the engineers stated that a proposal based on the figures given above was feasible only if "the German part of the Bleischarley mine be included. Otherwise there does not appear to be enough margin to justify the risks and difficulties." The arrangements contemplated by the July 30, 1925, contracts were therefore cancelled because they had in view acquisition of the Spolka properties only. A new agreement of October 23, 1925, did contemplate the acquisition also of important zinc, coal, and lead properties in Germany; and two of Anaconda's responsible officials, Kelley and Sowerwine - then president and his assistant, now chairman of the board and vice president respectively - sailed for Europe to make the necessary arrangements with Erben to acquire the properties. But these plans and a later modification proposing to limit American participation in the German properties to a contract to refine the Bleischarley ore also fell through. This was attributed to a disinclination of the Prussian Government to countenance the sale of German resources to foreign interests.
Thereupon, and notwithstanding the report of the engineers, plans were again made to proceed on the basis of the acquisition of the Spolka properties alone. But it was first necessary to obtain some relief from the burden of the Polish taxes. On July 3, 1926, an agreement was therefore concluded with the Polish Government. Anticipating the formation of an American company which would invest large sums in the Polish properties, it provided for the waiver of the unpaid capital levies referred to above. Also to be waived, for a period of twenty-five years, were certain normal import and export duties. The joint plans thus became financially feasible and the proposed "American company" soon became a reality.
On July 7, 1926, the promoters caused two corporations to be organized in Delaware: one, the present debtor, Silesian-American Corporation, called Saco by the parties herein, and the other, Silesian Holding Company, called Sihoc. Sihoc is the immediate subsidiary of Anaconda and Harriman; its common stock is owned 65% by Anaconda and the remainder originally by Harriman, and still by Harriman or close affiliates and associates. Sihoc, in turn, received 51% of Saco's common stock and $7,000,000 out of a total issue of $12,000,000 of its 7% preferred stock. The remaining preferred and common stock of Saco went to Erben in return for the entire capital stock of Spolka. Saco also purchased $6,000,000 of Erben's first mortgage bonds of 1945, at par value and accrued interest, loaned Erben an additional $2,500,000, and, by an advance to Spolka, enabled Erben to receive $4,750,000 in settlement of a Spolka debt to it exceeding $5,500,000. Saco obtained its funds for the purpose by selling $15,000,000 worth of 7% collateral trust sinking fund bonds maturing August 1, 1941, to a group of underwriters at 88 for a total yield of $13,200,000. The underwriters, consisting of Harriman, Lee, Higginson & Co., the Guaranty Trust Company of New York, and Brown Brothers & Co., then sold the bonds to the public at 94 1/2.
It is thus apparent that Erben received substantial assets from Saco in return for transfer of its interests in Spolka, the direct owner of the Polish mines. But Sihoc and its owners also received substantial assets consisting of $7,000,000 of Saco's preferred stock and 51% of its 200,000 shares of no par value common stock for which they contributed nothing like such an amount if, indeed, they contributed anything. The Spolka stock was carried in Saco's first balance sheet of August 3, 1926, at the sum of $21,552,530.10.*fn2 But a memorandum by Sowerwine, the Anaconda executive who became an officer of Saco and of Sihoc,*fn3 states that "the total investment of the American group was solely the expense and work involved in negotiating the contract [of tax waiver] with the Polish Government. Their cost of the stock of Giesche Spolka Akcyjna was NIL, not $21,552,530.10."
Operations of the debtor. Practically speaking, Anaconda appears to have been in charge of both Saco and Spolka. Several of Anaconda's employees were sent to Poland to manage the Spolka properties; and, as we have seen, Anaconda officials such as Kelley and Sowerwine were officers of the new companies. As the bond circular used to induce purchase of the Saco bonds put it: "The operating management of the properties controlled by Silesian-American Corporation has been selected by Anaconda Copper Mining Company."
As of August 3, 1926, Spolka's indebtedness to Saco appeared to amount to $5,200,000. This figure rose until early 1932, when it was at its highest, $10,715,015, and then declined to its lowest, $6,941,741, at the beginning of 1941. Spolka paid interest on this debt up through 1939, but not since. It paid dividends only in 1927, 1928, 1929, and 1930, in the total amount of $6,181,526.
For its part Erben repaid to Saco its three-year loan of $2,500,000, and also reduced the $6,000,000 bond issue held by Saco to $2,350,000. But when Saco stopped paying dividends on its preferred stock, Erben had difficulties in providing funds to service this debt any further. It borrowed some funds from some Swiss banks, but eventually stopped paying interest on these bonds after meeting the payment required on November 1, 1937.
The Saco bond issued was backed by a sinking fund geared to zinc production. Until June, 1931, 3/4 was to be put into the sinking fund for every pound of zinc extracted, and 1 per pound thereafter. Under these circumstances it was obviously to Saco's advantage to restrict zinc production when the market price was low. And if the market price of the bonds was low at the same time, which was more than likely, it was also advantageous for Saco to buy up its own bonds where the cost of acquisition was seen to be less than that of their normal retirement through the sinking fund device. Consequently it went into the open market and from time to time did purchase its own bonds. By this means Saco retired bonds ...