The opinion of the court was delivered by: WEINFELD
This is an application to modify a provision of an antitrust consent decree entered on July 7, 1978 enjoining the Culbro Corporation ("Culbro") from acquiring more than a twenty-five percent equity interest in the Havatampa (now Eli Witt) Holding Company (the "Holding Company"). The restraint expires in July 1983. Culbro seeks authorization now, however, to purchase a 100% equity interest in the Holding Company and its subsidiary, Eli Witt Company ("Eli Witt"), formerly Havatampa Company ("Havatampa"). The basis of the application is a substantial change in the affairs of Eli Witt, which on June 29, 1979, less than a year after entry of the consent decree, filed a Chapter XI petition under the Bankruptcy Act. Eli Witt was permitted to continue in business as a debtor-in-possession. It is contended that events immediately preceding and during the operation of Eli Witt as a debtor-in-possession that were not reasonably contemplated by the parties or the Court at the time the consent decree was entered justify its modification to avoid converting it into an "instrument of wrong."
In sum, it is urged that removal of the equity ceiling will not result in substantial anticompetitive consequences, but even more important, that the likely result of its continuance will be the forced liquidation of the debtor causing the loss of some 1,400 jobs, impairing the prospect of unsecured creditors recovering any substantial portion of the $ 26,000,000 owed them and imperiling the pension rights of Eli Witt's employees.
I. Events Preceding Entry of the Consent Decree.
Familiarity with prior proceedings leading to entry of the decree is assumed.
For purposes of this application, however, certain facts are noted. In 1976, Culbro and Havatampa were both manufacturers and wholesale distributors of cigars and other tobacco products in various states of the United States. Culbro was the second largest manufacturer and the third largest wholesale distributor of cigars in the United States. Havatampa was the sixth largest manufacturer and the largest wholesale distributor of cigars in the United States. Havatampa operated fifty-two distribution outlets located principally in the southeastern United States; it was the largest distributor in Florida and a major distributor in other areas of the southeast. Its distribution also extended to cigarettes, candy and sundry products. Through its General Cigar & Tobacco Co. ("General Cigar"), Culbro was and is a supplier to Havatampa and Eli Witt.
In late 1976, Oppenheimer & Company ("Oppenheimer"), an investment banking firm, negotiated an agreement to purchase the assets of Havatampa through the Holding Company, which had been expressly organized for that purpose. The purchase price was approximately $ 32,000,000. As part of the financing, Culbro purchased $ 2,750,000 of subordinated debentures of the Holding Company and acquired an option to purchase a twenty-five percent stock interest in it. Culbro still holds but has not exercised this option. Oppenheimer purchased all the Holding Company stock for $ 1,000,000 and also acquired $ 750,000 of its subordinated debentures, the balance of the issue. The Holding Company borrowed the balance of the purchase price from the Manufacturers Hanover Trust Company ("Manufacturers Hanover"), repayment of which was collaterally secured by liens against the plant, property and equipment acquired from Havatampa. Before the agreement could be consummated, the Government commenced this action to enjoin the Holding Company from acquiring Havatampa upon a claim that the acquisition violated section 7 of the Clayton Act.
In essence the complaint alleged that Culbro's acquisition of an interest in Havatampa would result in lessening competition among cigar manufacturers who might be foreclosed from selling through the distribution houses owned by Havatampa and that other adverse horizontal and vertical effects would result. This Court entered a temporary restraining order requested by the Government.
Following a hearing before Judge Robert J. Ward of this Court,
the Government's motion for a preliminary injunction was denied on the ground that the Government had failed to establish a reasonable probability of interim harm to the public. However, the Court entered a hold separate order, restricting Culbro's involvement in Havatampa's business pending a trial on the merits.
As modified by the hold separate order, the transaction was consummated on July 30, 1977. Thereafter and during the course of pretrial discovery proceedings, the parties negotiated and agreed upon the terms of the consent decree now sought to be modified.
Pursuant to a provision of the decree, Havatampa in December 1978 divested itself of its cigar manufacturing operations and assets to an independent company, which retained the Havatampa name, and continued in business solely as a distributor of cigars, cigarettes, candies and related products under the name of Eli Witt. This divestiture eliminated the horizontal effects alleged in the Government's complaint. Since the divestiture there has been no competition between Eli Witt and Culbro at the manufacturing level.
Section IX of the decree restricted the sale of Culbro cigars to Eli Witt distribution outlets for a period of twenty years to 12.9% of the dollar amount of Eli Witt's total cigar purchases from all sources in the preceding year, or $ 2,790,327, whichever is greater.
The stated purpose of this restriction is "to prevent the defendants from exploiting Havatampa's market power as a wholesaler in order to increase the sales of Culbro cigars through Havatampa at the expense of other manufacturers' cigars."
Section XI of the decree also prohibited Culbro for five years from the date of entry from increasing its equity interest in the Holding Company above the twenty-five percent level. This prohibition was considered by the Government "to be additional protection against the misuse of Havatampa's purchasing power to disadvantage competing manufacturers."
Section XI is the subject of the instant motion.
II. The Chapter XI Proceeding.
Since entry of the consent judgment in July 1978, Eli Witt has experienced serious operational difficulties and financial reverses compelling it to reduce the number of its branch locations and to curtail its activities in other respects. In early 1979, Eli Witt was severely overextended: its cash flow was increasingly negative, and spiralling interest charges on its substantial outstanding loans further restricted the amount of available cash. By posting bonds with the relevant state agencies, Eli Witt had been able to purchase cigarette stamp taxes on credit. In May 1979, the insurance companies that bonded Eli Witt's payments of cigarette stamp taxes to the various taxing authorities threatened to cancel Eli Witt's bonds aggregating in excess of $ 10,000,000 unless it furnished collateral security against any damages or payments required to be made under the bonds. They demanded acceptable letters of credit issued by responsible financial institutions. In the absence of the bonds, Eli Witt would have been required to purchase cigarette stamps from the various taxing authorities for cash, which would have further substantially reduced the funds available for day-to-day operations. Confronted by this deteriorating financial picture, on June 29, 1979, Eli Witt filed its Chapter XI petition. It has been in Chapter XI since that date. During the pendency of the proceeding, it carried on extensive negotiations for a reorganization plan with its creditors and the Creditors' Committee. The members of the Creditors' Committee represent the bulk of the unsecured creditors, including some of this nation's leading cigar manufacturers: American Brands, Inc., Bayuk Cigars, Inc., Consolidated Cigar Company and John H. Swisher & Company, all competitors of Culbro.
Eli Witt's financial problems worsened during its operation as a debtor-in-possession. Its third largest supplier of cigarettes abruptly cancelled its credit, requiring it to pay cash for its purchases. Other suppliers curtailed its credit by reducing the amount or by shortening the period of payment from the usual thirty days to twenty days or less. It now pays for cigarette tax stamps on a cash-in-advance basis rather than obtaining them on credit as it did prior to Chapter XI. The number of its distribution outlets was reduced from fifty-two in eight states to thirty in five states. Many cigar manufacturers who previously used Eli Witt as their exclusive distributor now sell their cigars either directly to retailers or through other distributors.
Today Culbro, in addition to the $ 2,750,000 of subordinated debentures of the Holding Company it holds, is a creditor of Eli Witt in excess of $ 1,000,000 for merchandise sold and management services rendered. Manufacturers Hanover is a secured creditor of both Eli Witt and the Holding Company in the amount of approximately $ 28,000,000: $ 10,000,000 owed by the Holding Company and $ 13,000,000 by Eli Witt, with an additional $ 5,000,000 due in accrued interest. The total amount due to unsecured trade creditors is approximately $ 26,000,000 and in addition Eli Witt is liable for $ 9,000,000 to its employees' pension fund.
After extensive negotiations with interested parties, Oppenheimer and Culbro have proposed a plan to restructure the debt of Eli Witt to permit it to continue in business on a contracted basis. Its unsecured creditors would receive fifty percent of their $ 26,000,000 in claims, with $ 4,300,000 to be paid upon confirmation of the plan and the remainder over the next ten years. In broad terms, the plan provides for the merger of Eli Witt with its parent, the Holding Company, with the result that Eli Witt would acquire all operating assets. Prior to the merger, under the plan the $ 3,500,000 of subordinated debentures of the Holding Company owned by Culbro and Oppenheimer are to be converted into equity securities so that (1) they are not liabilities or claims against the reorganized entity prior to or on a parity with claims of trade creditors, and (2) the reorganized entity will have a positive net worth to enable it to obtain future credit. Since the debentures currently owned by Culbro and Oppenheimer are those of the Holding Company, which has substantial assets including fixed assets used by Eli Witt in its operations, and are not the subject of any proceedings under the Bankruptcy Act, Culbro and Oppenheimer would give up debenture rights against the assets of the Holding Company and the debentures would be converted into preferred stock in the merged corporation subordinate to all Chapter XI debt. Under the plan, Culbro would not be entitled to receive any dividend on the preferred stock until all debts were paid off. Culbro would also waive payment of approximately $ 700,000 against Eli Witt for management services rendered prior to the commencement of the Chapter XI proceeding.
Culbro is prepared to provide the necessary management to effect what is hoped to be a successfully reorganized entity, despite its continuing heavy long-term debt burden. However, Culbro conditions its participation on its ability to acquire 100% of the capital stock of the reorganized company so that it can recoup its investment and participate in the anticipated profits of the reorganized entity in light of what Culbro conceives to be a long-term prospect of rehabilitation. Oppenheimer, wishing to liquidate its investment in Eli Witt, has proposed to grant Culbro a three-year option to purchase Oppenheimer's equity interest and debentures in the Holding Company for $ 600,000 payable over a two-year period. If Culbro exercises the option, $ 275,000 more is to be paid to Oppenheimer; if not, Culbro would surrender its existing option for twenty-five percent of the Holding Company's shares. The proposed plan has the approval of the Creditors' Committee, Culbro, Manufacturers Hanover and Oppenheimer, and the Committee has recommended its approval to the creditors. Prior ...