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September 22, 1952


The opinion of the court was delivered by: KAUFMAN

The Court: I have before me a proposed plan of reorganization for the debtor.

The petition for reorganization of the debtor was approved and the trustee appointed by order of this Court dated April 25, 1952. Approximately one year prior, on April 3, 1951, a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., had been approved and the debtor's affairs were administered under the supervision of a Referee in Bankruptcy from April 3, 1951 until February 25, 1952, when the Chapter XI petition was dismissed with the Referee reserving jurisdiction.

 Upon that dismissal the debtor operated eleven restaurants as its only business. (It now operates nine, having given up two during this proceeding). Principally because of inadequate financing, the restaurants incurred further losses and within a period of less than two months after the dismissal of the Chapter XI petition, a petition, was filed with the Referee seeking to foreclose on certificates of indebtedness which the Chapter XI Receiver had issued. Thereupon, this reorganization proceeding was commenced with the filing of a petition on April 23, 1952.

 The debtor's present plight, and its future prospects, can be readily summarized. It is insolvent, and has been so found by order of this Court on August 20, 1952. See Bankruptcy Act, § 1(19), 11 U.S.C.A. § 1(19); Meyer v. Dolan, 2, Cir., 1944, 145 F.2d 880, certiorari denied 1944, 324 U.S. 867, 65 S. Ct. 916, 89 L. Ed. 1422. Consequently any plan of reorganization will not provide for participation by the debtor's stockholders. See Dudley v. Mealey, 2 Cir., 1945, 147 F.2d 268, 273, certiorari denied 325 U.S. 873, 65 S. Ct. 1415, 89 L. Ed. 1991. Its starvation for working capital has driven the debtor into a Chapter XI proceeding and that continued debilitation is principally responsible for its presence here. New and substantial investment is needed and in fact has been offered. This offer is the result of diligence on the part of the trustee and extensive explorations and negotiations by him, and is the core of the plan before me.

 Time is a vital element here. The new investment must be made within the very near future because the debtor's only vital assets are its operating restaurants, most of the leases for which have clauses providing for their termination, either unconditionally or at the option of the landlord, in the event of bankruptcy. Thus, quite literally, the debtor's day-to-day survival rests on the sufference of its landlords. Much of the trustee's effort in this proceeding has been spent in holding them at bay, or keeping them pacified, with the prospect of an early formulation and consummation of a plan of reorganization as the basis for negotiating new leases. Expedition, therefore, is quite essential.

 Further than this, there are large outstanding claims against the debtor for taxes and Chapter XI Receiver's certificates which, by order of that earlier proceeding, are a first lien upon all the property of the debtor. Any participation by the claimants, to say nothing of general creditors, depends upon substantial investment in the debtor. The sole alternative to such investment is liquidation in bankruptcy which would not realize enough money to pay the Chapter XI Receiver's certificates, and it follows that general creditors would receive nothing in such a liquidation.

 I shall comment briefly upon the salient aspects of the plan and state succinctly the essential reasons for my holding, as I now do, that the plan complies with Sec. 216 of the Bankruptcy Act, 11 U.S.C.A. § 616, and is, in all respects, fair, equitable and feasible, as required by Sec. 174 of the Bankruptcy Act, 11 U.S.C.A. § 574.

 The heart of a plan of reorganization is its classification and treatment of creditors. The classifications in this plan are well founded in law and in equity. The wage claimants in Class 1 would, in a straight bankruptcy proceeding, have priority under Section 64, sub. a(2), 11 U.S.C.A. § 104, sub. a(2). They are properly accorded priority here and their claims will be satisfied in cash.

 Placement of the Federal Government's tax claims in Class 2 pays heed to Section 199 of the Bankruptcy Act, 11 U.S.C.A. § 599, and the priority accorded it through its receipt of subordinated debentures respects the common law right of a sovereign state to priority over unsecured creditors. Marshall v. New York, 1920, 254 U.S. 380, 41 S. Ct. 143, 65 L. Ed. 315.

 The distinct classification of state and local taxing authorities into Class 3 is in accord with In re Sixty-Seven Wall Street Restaurant Corp., D.C.S.D.N.Y.1938, 23 F.Supp. 672, and its priority treatment through receipt of subordinated debentures rests on the same sound theory as that applied in the case of Federal tax claims.

 The payment of Class 4 claims from the specific fund established pursuant to the order dismissing the Chapter XI petition is, to the extent those claims are allowed, a fair treatment of this class in the whole context of the instant reorganization and the events leading to it. The trustee's power to administer the fund is well-founded in Emil v. Hanley, 1943, 318 U.S. 515, 522, 63 S. Ct. 687, 87 L. Ed. 954.

 Holders of Chapter XI administration claims for whom no provision was made in the special fund discussed above are entitled to priority which, in their Class 5, they will be given in view of the recognition of their rights stated clearly in the order dismissing the Chapter XI proceeding, and because these creditors did in fact extend the debtor credit while it was in the straits of the Chapter XI situation.

 Class 6, the holders of Chapter XI receiver's certificates, hold a first lien on the debtor's property and such a prior-proceeding lien must be discharged. Amick v. Hotz, 8 Cir., 1939, 101 F.2d 311, certiorari denied 301 U.S. 637, 59 S. Ct. 1033, 83 L. Ed. 1518; In re Granada Apartments, 7 Cir., 1939, 104 F.2d 528, certiorari denied Woods v. Indemnity Ins. Co., 1939, 308 U.S. 557, 60 S. Ct. 104, 84 L. Ed. 468. Considering the fact that the certificates were issued for cash when the company was in serious difficulty, they are unquestionably entitled to high priority, and the 'absolute priority rule' makes it clear that reorganization is impossible unless they are discharged. Northern Pacific R. Co. v. Boyd, 1913, 228 U.S. 482, 33 S. Ct. 554, 57 L. Ed. 931.

 The transfer of the four stores and 10 per cent of the new stock is a fair and equitable resolution of the claims of this class, and I am convinced that the terms of this solution were intelligently and justly arrived at through the kind of compromise necessary in a reorganization proceeding. Group of Institutional Investors v. Chicago, Milwaukee, St. P. & P. R. Co., 1945, 318 U.S. 523, 563, 63 S. Ct. 727, 87 ...

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