American United Mutual Life Insurance v. City of Avon Park

Clearly, however,- no finding could be. made under § 83 (b), 11 U. S. C. § 403 (b), that the compensation to be received by the fiscal agent was reasonablé without passing on the worth of the aggregate of all the emoluments accruing to the Crummer interests as a result of consummation of the plan. Since that inquiry. would necessitate an appraisal of the fiscal agent’s speculative position in the plan, perhaps the definitive finding demanded by the Act could not be made. Yet that is a chance which the fiscal agent, not the bondholders, must take; for it is the,agent who is seeking the. aid of the court in obtaining one of the benefits of the Act. Moreover, to the extent that the aggregate benefits, flowing to the Crummer interests exceeded reasonable compensa^ tion for services rendered, their reward would exceed what the court could authorize under § 83 (b), 11 U. S. C.. § 403 (b). Furthermore, if any such excess benefits' would accrue to them, then the plan would run afoul of § 83 (e) (1), 11 TJ. S. C. § 403 (e) (1). For in that event the plan would discriminate unfairly , in favor of the drummer interests as creditors.

Hence the lack of that essential finding would be fatal in any case. It is especially serious here in view of the fact that without the vote of the fiscal agent the requisite two-thirds acceptance would not have been obtained. Where it ■ does not affirmatively appear that full and complete disclosure of the fiscal agent’s interests was made to the bondholders when their assents were solicited, it cannot be said that those assents were fairly obtain'ed. Cf. Rogers v. Guaranty Trust Co., 288 U. S. 123 , 143. And where without such disclosure the fiscal agent’s vote was cast for acceptance of the plan, it cannot be said that such acceptance was in “good faith” within the meaning of §83 (e) (5), 11 U. S. C. § 403 (e) (5). Here the fiscal agent was acting in a dual capacity. While

it was representing the city, it likewise purported to represent the interests of bondholders. The very minimum requirement for fair dealing was the elementary obligation of full disclosure of all its interests. And the burden was on it to show at least that such disclosure was made. Equity and good conscience obviously will not permit a finding that an acceptance of a plan by a person acting in a representative capacity is in “good faith” where that person is obtaining an undisclosed benefit from the plan.

We have emphasized that full disclosure is the minimum requirement in order not to imply that it is the limit of the power and duty of the bankruptcy court in these situations.' As this Court stated in Securities and Exchange Commission v. United States Realty & Imp rovement Co., 310 U. S. 434 , 455: “A bankruptcy court is a court of equity,. § 2, 11 U. S. C. § 11 , and is guided by equitable doctrines and principles except in so far as they are /inconsistent with the Act. ... A court of equity may in its discretion in the exercise of the jurisdiction committed to it grant or deny relief upon pern formance of a condition which will safeguard the public interest.” And see Pepper v. Litton, 308 U. S. 295 , 304, et seq. These principles are a part of the control which the court has over the whole process of formulation and approval of plans of composition or reorganization, and the obtaining of assents thereto: As we said in Case v. Los Angeles Lumber Products Co., 308 U. S. 106 , 114, “The court is not merely a ministerial register of the vote of the several classes of security holders.” The..responsibility of the court entails scrutiny of the .circumstances surrounding the acceptances, the special or ulterior motives which may have induced them, the time of acquiring the claims so voting, the amount paid therefor, and the like. See Continental Insurance Co. v.

Louisiana Oil Refining Corp., 89 F. 2d 333 . Only after such investigation can the court exercise the “informed, independent judgment” (National Surety Co. v. Coriell, 289 U. S. 426 , 436; Case v. Los Angeles Lumber Products Co., supra, p. 115) which is an essential prerequisite for confirmation of a plan. And that is true whether the assents to the plan have been obtained prior to the filing of the petition or subsequently thereto. Where such investigation discloses the existence of unfair dealing, a breach of fiduciary obligations, profiting from a trust, special benefits for the reorganizers, or the need for protection of investors against an inside few, or of one class of investors from the encroachments of another, the court has ample power to adjust the remedy to meet the ne^d. The requirement of full, unequivocal disclosure; tifie limitation of. the vote to the amount paid for the securities (In re McEwen’s Laundry, Inc., 90 F. 2d 872 ); the separate classification of claimants (see First National Bank v. Poland Union, 109 F. 2d 54 , 55); the complete subordination of some claims (Taylor v. Standard Gas & Electric Co., 306 U. S. 307 ; Pepper v. Litton, supra), indicate the range and type of the power which a court of bankruptcy may exercise in these proceedings. That power is ample for the exigencies of varying situations. It is not dependent on express statutory provisions. It inheres in the jurisdiction of a court of bankruptcy. The necessity for its exercise (Pepper v. Litton, supra, p. 308 ) is based on the .responsibility of the court before entering an order of confirmation to be satisfied that, the plan in its.practical incidence embodies a fair and equitable bargain openly arrived at and devoid of overreaching, however subtle. Neglect of that duty is apparent here by inclusion of the vote of the claims held by the Crummer interests in computing the requisite statutory assents, without protection of the public investors through the

requirement of full disclosure, and of other appropriate safeguards. By the same token allowance of compensation to Qrummer without scrutiny of Crammer’s speculation in the securities does not comport with the standards for surveillance required of courts of bankruptcy before confirming plans'of composition or reorganization or before making such allowances. The scope of the power of the court embraces denial of compensation to those who have purchased or sold securities during or in contemplation of the proceedings. As in case of reorganizations under former § 77B, the provision in § 83 (b), 11 U. S.1 C. § 403 (b), for allowance of “reasonable compensation” for “services. rendered” necessarily implies .“loyal and disinterested service .in the interest of the persons” for whom the claimant purported, to act. In re Paramount-Publix Corp., 12 F. Supp. 823 , 828.

Beyond that is the qufestion of unfair discrimination to which we have adverted. Compositions' under 'Ch. IX, like compositions under the old § 12, enviságe equality of treatment of creditors. Under , that section and its antecedents, a composition would not be confirmed where onfe creditor was- obtaining some special favor or inducement not accorded the others, whether that consideration moved from the debtor or from another. In re Sawyer, Fed. Cas. No. 12,395; In re Weintrob, 240 F. 532 ; In re M. & H. Gordon, 245 F. 905 . As stated by Judge. Lowell in In r.e Sawyer, supra, “if á vote is influr encfed by the expectation of advantage, though without any.positive promise, it cannot be considered an honest and unbiased vote.” That rale of- compositions is but part of the general rule of “equality between creditors” (Clarke v. Rogers, 228 U. S. 534 , 548) applicable in all bankruptcy , proceedings. That. principle has been imbedded by Congress in'Ch.'IX by the express provision against unfair discrimination. That principle &s applied

to tnis case necessitates a reversal. In absence of a finding that the aggregate emoluments receivable by the Crummer interests were reasonable, measured by the services rendered, it cannot be said that the consideration accruing to them, under or as a consequence of the adoption of the plan, likewise accrued to all other creditors of the same class. Accordingly, the imprimatur of the federal court should not have "been placed on this plan. The fact that the vast majority of security holders may have approved a plan is not the test of whether that plan satisfies the statutory standard. The former is not a substitute for the latter. They are independent. See Case v. Los Angeles Lumber Products Co., supra, pp. 114-115.

Since the cause must be remanaed, there are two other matters which should be mentioned. Section 83 (d), 11 U. S. C. § 403 (d), provides that in computing the statutory two-thirds vote necessary for confirmation of a plan all claims “owned, held, or controlled” by the city shall be excluded. So far as appears, the claims held by the Crummer interests were not owned by or held for the city. Yet it is by no means clear that they were not “controlled” by the city within the meaning of the Act. Claims held by a city’s fiscal agent presumptively would ¡Seem to fall in that prohibited category. The abuse at which the Act is aimed is not. confined to those cases where the holder of the claims is an agent of the city within the strict rules of respondeat superior. Rather, the test is whether or not there is such close identity of interests between the claimant and the city that the claimant’s assent to the plan may fairly be said to be more the product of the city’s influence and to reflect more the city’s desires than an expression of an investor’s independent, business judgment. Here there was such a, close identity of interests between Crummer and the city

vis-á-vis the refunding as to raise grave doubts as to the propriety of allowing those claims to vote in any event. That, however, is a question for appropriate findings by the court should, another plan be presented.

Petitioner also urges that the fiscal agency contract between Crummer and the city was illegal under the decisions of the Supreme Court of Florida in Taylor v. Williams, 142 Fla. 402 , 562, 756; 195 So. 175 , 181, 184; 196 So. 214 , and W. J. Howey Co. v. Williams, 142 Fla. 415 , 562, 756; 195 So. 181 , 184; 196 So. 214 . Under § 83 (e) (6), 11 U. S. C. § 403 (e) (6), the court must be satisfied that the city “is authorized by law to take all action necessary-to be taken by it to carry out the plan” before it may enter a decree of confirmation. Plainly that finding could not be made if it was clear, for example, that a,taxpayer could enjoin the issuance of the new bonds or the levy of assessments therefor. The courts below did not pass on the applicability of these recent Florida decisiofis to this fiscal agency contract, since they were decided after the Circuit Court of Appeals affirmed the order of confirmation. Nor do we.undertake to decide the question, in view of our disposition of the case. It is, however, a relevant inquiry to be made by the District Court as, if and when another plan of composition is presented, which directly or indirectly involves any such fiscal agency contract.

For the reasons stated we reverse the judgment below and remand the cause to the District Court for proceedings in conformity with this opinion.

Reversed.