The opinion of the court was delivered by: SUGARMAN
On September 25, 1953 Transvision, Inc., as debtor, filed a petition in proceedings for an arrangement under Chapter XI of the Bankruptcy Act.
It proposed it pay each of its unsecured creditors whose claim exceeded $ 50 100% of its indebtedness at the rate of 2% monthly commencing six months after confirmation of the arrangement and proposed to pay in full upon confirmation of the arrangement each of its unsecured creditors whose claim did not exceed $ 50, the administration expenses and certain deposits made by unsecured creditors for the sale of merchandise by the debtor to them.
The proceedings were referred generally to a Referee who, on October 16, 1953 reported
'Pursuant to provisions of Section 328 of the Bankruptcy Act this proceeding is respectfully referred to the District Court to determine whether the proceeding should remain in Chapter XI or whether because of the public issue of stock, the proceeding belongs in Chapter X (11 U.S.C.A. § 501 et seq.)'
and placed the certificate on the bankruptcy motion calendar.
When it came on for argument there appeared on the same calendar a 'Motion for Leave to Intervene' and a 'Motion to Dismiss', each brought on by the Securities and Exchange Commission. The Referee's certificate and the Commission's motions were consolidated for hearing.
The debtor is a New York corporation engaged in the manufacture of television and electronic products for private industry and for the United States government. It has outstanding (a) 1,773 1/2 shares of 5% cumulative preferred stock, $ 100 par value, all owned by the management and (b) 385,000 shares of common stock, $ 1 par value, of which 65% is owned by the management and 35% is owned by 425 public investors. The debtor's unsecured creditors are trade and commercial creditors.
The Commission urges that its intervention be permitted and that thereupon the debtor's petition for an arrangement under Chapter XI be dismissed solely because 425 public investors own 35% of the debtor's common stock. The Commission offers the Realty case
as the basis for its contentions. That decision does not hold the broad proposition which the Commission ascribes to it, i.e., present public ownership of any part of its stock, a corporation may not undertake an arrangement under Chapter XI and is relegated solely to a reorganization under Chapter X.
The Realty case held that under the facts there presented
Chapter XI was inadequate. The far reaching and oversimplified result which the Commission draws from that decision is unacceptable particularly when the majority opinion says, 310 U.S. at page 454, 60 S. Ct. at page 1052, 84 L. Ed. 1293.
'In a situation like the present it is in the best interests of the creditors that these questions should be answered in a Chapter X proceeding.
'While this means that arrangements of unsecured debts of corporations, like respondent, may not be 'in the best interests of creditors' and 'feasible' under Chapter XI, it does not mean that there is no scope for application of that chapter in many cases where the debtor's financial business and corporate structure differ from respondent's. This is especially the case with small individual or corporate business where there are no public or private interests involved requiring protection by the procedure and remedies afforded by Chapter X.' (Emphasis supplied.)
The quoted language does not mean that Chapter XI is available only to individual and privately owned corporate debtors. It does mean that Chapter XI is not adequate if there are public or private interests which require the investigatory process and protection afforded by Chapter X. The norm is public interest
not public ownership of stock, although both were joined in the certificate holding creditors in the Realty case.
It was concluded in that case that the 'fair and equitable' standard, established by the statute as it then existed
(which standard has since been eliminated from Chapter XI
) could not, under the facts presented, be met, in the light of the 'fixed principle' of reorganization law, enunciated in Northern Pacific Ry. Co. v. Boyd,
that the junior interest of stockholders could not benefit in reorganization at the expense of the senior interest of unsecured creditors. This is indeed remote from construing the case to have meant that any corporation whose stock is partially publicly held is foreclosed of Chapter XI.
The problem was succinctly posed by one commentator who, in reviewing the Realty case, observed
'The question that remains open is: what corporations, in what circumstances, and for what purposes, may use Chapter XI? It is obvious that no useful rule to determine the spheres of the two Chapters is given in the Act. The standard of 'secured' or 'unsecured' debts (Chapter XI being only for compromise of unsecured debts) falls far short of adequacy; indeed, it led to the problem in the principal case. The legal concept of security used in the definition of 'secured creditor' in Section 1(28), contemplating a pledge of definite physical property for a particular debt, is an ...