July 10, 1952
IN RE THIRD AVE. TRANSIT CORP. ET AL. MELNIKER ET AL.
LEHMAN ET AL.
Before AUGUSTUS N. HAND, CLARK and FRANK, Circuit Judges.
FRANK, Circuit Judge.
The bankruptcy court had the power, in appropriate circumstances, under Section 116, sub. 2 of the Bankruptcy Act, to authorize the borrowing of money, from voluntary lenders, on trustees' certificates, having a lien on mortgage assets superior to previously existing mortgage liens.*fn3 To substitute for the use of that power - which itself must be most cautiously employed*fn4 - the court's far more drastic power under Section 257,*fn5 requires proof of the most extraordinary circumstances - see R.F.C. v. Kaplan, 1 Cir., 185 F.2d 791, 795*fn6 not present here.*fn7 We think that power is not limited to mortgaged or pledged assets coming into the hands of the mortgagee or pledgee*fn8 after default. But we believe that that power should never be exercised absent findings, based on the clearest evidence, not only that it is imperative to obtain the funds and that they cannot be obtained, on reasonable terms, first, by bank loans or second, by the disposal of certificates under Section 116, sub. 2, through ordinary market channels to voluntary lenders,*fn9 but also that there is a high degree of likelihood (a) that the debtor can be reorganized in accordance with the Act,*fn10 within a reasonable time, and (b) that the secured creditors whose security is being compulsorily loaned will not be injured.*fn11 The reorganization trustees here had the burden of proving all these matters. They did not discharge that burden.*fn12
The first mortgage bondholders should not have had their security put at risk in order to increase the "elusive equity"*fn13 of junior creditors or stockholders, for those junior interests possess no right to a "run for other people's money".*fn14 To direct enforced lending of the sort ordered here may yield these undesirable results: (a) The zeal of the reorganization trustees to make only the most prudent expenditures may be blunted. (b) There may well be undue delay of what may be inevitable liquidation. (c) The judge loses the opportunity to learn, in a significant way, the detached attitude of the commercial world towards the value of the assets.*fn15
As the debtor is a public utility, the judge properly took into account the factor of the public interest in the debtor's continued operations. That, however, is but one factor; it must not be allowed to outweight all others. There are strict limits to the extent to which, in reorganization proceedings, the interests of creditors (or of a particular class of creditors) may be sacrificed to the public interest; to exceed those limits is (to say the least) to come dangerously close to the edge of unconstitutional taking of property, a line from which courts should keep away if possible. The reorganization judge should not compel a marked sacrifice of that kind, without first deciding, on substantial evidence, whether the interest of the creditors who would be affected by the sacrifice does not demand that prompt steps be taken to bring about abandonment of the utility's operations, including steps to procure the consent of those public authorities (if any) whose consent to abandonment is required.*fn16
As the record here is barren of essential findings (and of evidence to support them) of the kind of facts found in the Kaplan case,*fn17 we think the judge "abused" his discretion.