HERLANDS, District Judge.
On October 29, 1962, BarChris Construction Corporation, the debtor, filed a petition for an arrangement under Section 322 of Chapter XI of the Bankruptcy Act, 11 U.S.C. § 722.
Subsequently, eight of its subsidiaries or subsidiaries of subsidiaries filed Chapter XI petitions with this Court. All of [230] the debtors were adjudicated bankrupt on March 19, 1963. On May 16, 1963, a receiver (Marvin Rosen, Esq.) was appointed for the debtors after the adjudication was vacated by consent of the parties. The proceedings of BarChris and its subsidiaries were consolidated on July 30, 1963.
On August 16, 1963, two debenture holders of the debtor (holding $366,000 in 5%% convertible subordinated debentures) moved (pursuant to Section 328 of the Bankruptcy Act, 11 U.S.C. § 728) to dismiss the Chapter XI petition unless, within a period to be fixed by this Court, the debtor’s petition shall have been amended to comply with the requirements of Chapter X for the filing of a debtor’s petition.
The motion is supported by the Securities and Exchange Commission; it is opposed by the debtor and official creditors committee.
In resolving the issues presented herein, the Court exercises its “sound discretion” and “business” judgment. General Stores Corp. v. Shlensky, 350 U.S. 462, 467, 468, 76 S.Ct. 516, 100 L.Ed. 550 (1956); Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 456, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940); In re Lea Fabrics, Inc., 272 F.2d 769, 772 (3d Cir. 1959), judgment vacated, Securities and Exchange Commission v. Lea Fabrics, 363 U.S. 417, 80 S.Ct. 1258, 4 L.Ed.2d 1515 (1960); Securities and Exchange Commission v. Liberty Baking Corp., 240 F.2d 511 (2d Cir.), cert, denied, 353 U.S. 930, 77 S.Ct. 719,1 L.Ed.2d 723 (1957).
The discretion so to be exercised “must be a legal discretion, rather than one merely at will” or one expressing the court’s “own notions of equitable principles.” Securities and Exchange Commission v. United States Realty & Improvement Co., supra, at 457 of 310 U.S., at 1054 of 60 S.Ct., 84 L.Ed. 1293
“Discretion that is premised on the wrong criteria or that disregards well-settled principles is said to transcend ‘the allowable bounds’ and is reversible.”
In re Herold Radio & Electronics Corp., 191 F.Supp. 780 (S.D.N.Y.1961), citing General Stores Corp. v. Shlensky, supra, at 468 of 350 U.S., at 520 of 76 S.Ct., 100 L.Ed. 550; Securities and Exchange Commission v. Liberty Baking Corp., supra, at 516 n. 10 of 240 F.2d.
The crucial consideration in choosing between Chapter X and Chapter XI is “the needs to be served.” General Stores Corp. v. Shlensky, supra, at 466 of 350 U.S., at 519 of 76 S.Ct., 100 L.Ed. 550. The resolution of that issue necessarily hinges “on the facts of the case whether the formulation of a plan under the control of the debtor, as provided by c. XI, or the formulation of a plan under the auspices of disinterested trustees, as assured by c. X and the other protective provisions of that chapter, would better serve ‘the public and private interests concerned including those of the debtor.’ [Securities and Exchange Commission v. United States Realty Co., 310 U.S. 434], at 455 [60 S.Ct. 1044, 84 L.Ed. 1293, 1940].” General Stores Corp. v. Shlensky, supra, at 465 of 350 U.S., at 518 of 76 S.Ct., 100 L.Ed. 550.
We turn now to a consideration of the material facts.
The debtor was incorporated in the State of New York in 1955 to renovate and construct bowling centers and to manufacture and supply related equipment. From 1955 to 1962, it constructed approximately 70 centers. Payment for the centers generally took the form of cash and a series of secured notes which in turn were negotiated to various lending institutions in order to provide debt- or with working capital.
Debtor’s financial difficulties stem from a recession in the bowling business commencing in 1961. As the bowling business declined, many of the operators of bowling centers defaulted on their secured notes, thereby forcing the debtor to repossess and run the centers. In addition, the debtor was forced to complete [231] for its own account seven centers when prospective purchasers failed to honor their commitments.
The debtor’s principal business was bowling center construction, not operation. It is now not engaged in any construction and has lost all of its employees engaged in such work.
On July 9, 1963 a proposed amended plan of arrangement was mailed to creditors. The arrangement provides, in relevant part, that the debtor is to consolidate or merge with either a corporation called Leisureland, U.S.A., Inc. (hereinafter “Leisureland”) or one of its subsidiaries. The consolidation is to be effected by the issuance of stock and subordinated debentures of the debtor.
The proposal also calls for payment to unsecured creditors (including debenture holders) of a total of 15% of their claims over a period of 4 years and 3 months from confirmation, each debt to be evidenced by a non-negotiable 4% note. This is subject to a provision for adjustment in the event that the total amount of claims exceeds $5,250,000. The total payment to unsecured creditors is not to exceed $800,000.
The plan further provides that Leisure-land will pay the fees of the creditors’ and bondholders’ committee and its attorneys as well as the trustee in bankruptcy and his attorney. The debtor is to pay other legal fees and assume performance of all agreements with secured creditors not disaffirmed.
The debtor has outstanding the following three issues of securities:
5% % convertible subordinated debentures : $3,440,000
$.50 par common stock: 1,247,976 shares
Common stock warrants exercisable @ $3.00 until October 31, 1964: 19,500 shares
These securities are all held by members of the investing public except that persons (Christie Yitolo, president, and Lebario Pugliese, vice-president) associated in the management of the debtor hold approximately 42% of the common stock and about $70,000 in debentures. The stock is pledged to secure their guarantees of certain of the debtor’s obligations.
There are approximately 2,773 holders of the common stock, which is listed on the American Stock Exchange. Trading was suspended by the Exchange when the debtor was adjudicated.
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HERLANDS, District Judge.
On October 29, 1962, BarChris Construction Corporation, the debtor, filed a petition for an arrangement under Section 322 of Chapter XI of the Bankruptcy Act, 11 U.S.C. § 722.
Subsequently, eight of its subsidiaries or subsidiaries of subsidiaries filed Chapter XI petitions with this Court. All of [230] the debtors were adjudicated bankrupt on March 19, 1963. On May 16, 1963, a receiver (Marvin Rosen, Esq.) was appointed for the debtors after the adjudication was vacated by consent of the parties. The proceedings of BarChris and its subsidiaries were consolidated on July 30, 1963.
On August 16, 1963, two debenture holders of the debtor (holding $366,000 in 5%% convertible subordinated debentures) moved (pursuant to Section 328 of the Bankruptcy Act, 11 U.S.C. § 728) to dismiss the Chapter XI petition unless, within a period to be fixed by this Court, the debtor’s petition shall have been amended to comply with the requirements of Chapter X for the filing of a debtor’s petition.
The motion is supported by the Securities and Exchange Commission; it is opposed by the debtor and official creditors committee.
In resolving the issues presented herein, the Court exercises its “sound discretion” and “business” judgment. General Stores Corp. v. Shlensky, 350 U.S. 462, 467, 468, 76 S.Ct. 516, 100 L.Ed. 550 (1956); Securities and Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 456, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940); In re Lea Fabrics, Inc., 272 F.2d 769, 772 (3d Cir. 1959), judgment vacated, Securities and Exchange Commission v. Lea Fabrics, 363 U.S. 417, 80 S.Ct. 1258, 4 L.Ed.2d 1515 (1960); Securities and Exchange Commission v. Liberty Baking Corp., 240 F.2d 511 (2d Cir.), cert, denied, 353 U.S. 930, 77 S.Ct. 719,1 L.Ed.2d 723 (1957).
The discretion so to be exercised “must be a legal discretion, rather than one merely at will” or one expressing the court’s “own notions of equitable principles.” Securities and Exchange Commission v. United States Realty & Improvement Co., supra, at 457 of 310 U.S., at 1054 of 60 S.Ct., 84 L.Ed. 1293
“Discretion that is premised on the wrong criteria or that disregards well-settled principles is said to transcend ‘the allowable bounds’ and is reversible.”
In re Herold Radio & Electronics Corp., 191 F.Supp. 780 (S.D.N.Y.1961), citing General Stores Corp. v. Shlensky, supra, at 468 of 350 U.S., at 520 of 76 S.Ct., 100 L.Ed. 550; Securities and Exchange Commission v. Liberty Baking Corp., supra, at 516 n. 10 of 240 F.2d.
The crucial consideration in choosing between Chapter X and Chapter XI is “the needs to be served.” General Stores Corp. v. Shlensky, supra, at 466 of 350 U.S., at 519 of 76 S.Ct., 100 L.Ed. 550. The resolution of that issue necessarily hinges “on the facts of the case whether the formulation of a plan under the control of the debtor, as provided by c. XI, or the formulation of a plan under the auspices of disinterested trustees, as assured by c. X and the other protective provisions of that chapter, would better serve ‘the public and private interests concerned including those of the debtor.’ [Securities and Exchange Commission v. United States Realty Co., 310 U.S. 434], at 455 [60 S.Ct. 1044, 84 L.Ed. 1293, 1940].” General Stores Corp. v. Shlensky, supra, at 465 of 350 U.S., at 518 of 76 S.Ct., 100 L.Ed. 550.
We turn now to a consideration of the material facts.
The debtor was incorporated in the State of New York in 1955 to renovate and construct bowling centers and to manufacture and supply related equipment. From 1955 to 1962, it constructed approximately 70 centers. Payment for the centers generally took the form of cash and a series of secured notes which in turn were negotiated to various lending institutions in order to provide debt- or with working capital.
Debtor’s financial difficulties stem from a recession in the bowling business commencing in 1961. As the bowling business declined, many of the operators of bowling centers defaulted on their secured notes, thereby forcing the debtor to repossess and run the centers. In addition, the debtor was forced to complete [231] for its own account seven centers when prospective purchasers failed to honor their commitments.
The debtor’s principal business was bowling center construction, not operation. It is now not engaged in any construction and has lost all of its employees engaged in such work.
On July 9, 1963 a proposed amended plan of arrangement was mailed to creditors. The arrangement provides, in relevant part, that the debtor is to consolidate or merge with either a corporation called Leisureland, U.S.A., Inc. (hereinafter “Leisureland”) or one of its subsidiaries. The consolidation is to be effected by the issuance of stock and subordinated debentures of the debtor.
The proposal also calls for payment to unsecured creditors (including debenture holders) of a total of 15% of their claims over a period of 4 years and 3 months from confirmation, each debt to be evidenced by a non-negotiable 4% note. This is subject to a provision for adjustment in the event that the total amount of claims exceeds $5,250,000. The total payment to unsecured creditors is not to exceed $800,000.
The plan further provides that Leisure-land will pay the fees of the creditors’ and bondholders’ committee and its attorneys as well as the trustee in bankruptcy and his attorney. The debtor is to pay other legal fees and assume performance of all agreements with secured creditors not disaffirmed.
The debtor has outstanding the following three issues of securities:
5% % convertible subordinated debentures : $3,440,000
$.50 par common stock: 1,247,976 shares
Common stock warrants exercisable @ $3.00 until October 31, 1964: 19,500 shares
These securities are all held by members of the investing public except that persons (Christie Yitolo, president, and Lebario Pugliese, vice-president) associated in the management of the debtor hold approximately 42% of the common stock and about $70,000 in debentures. The stock is pledged to secure their guarantees of certain of the debtor’s obligations.
There are approximately 2,773 holders of the common stock, which is listed on the American Stock Exchange. Trading was suspended by the Exchange when the debtor was adjudicated.
The debentures are in bearer form and were part of an original $3,500,000 sold to the public in May 1961. Drexel & Co. was the principal underwriter. The debentures have been declared in default by the Indenture Trustee. Seventeen thousand five hundred of the warrants are held by Peter Morgan & Co., which received them as part of its compensation as the underwriter in December 1959 of the common stock issue of BarChris.
Balance Sheet
The audited balance sheet of the debtor as of October 29, 1962 is as follows:
Assets
Current Assets
Cash $ 3,072.04
Accounts and Notes Receivable 258,574.01
Notes Receivable — Secured 212,611.24
Inventories (Amount submitted by Management) 448,842.16
Total Current Assets $ 923,099.45
[232] Deferred Charges & Other Assets
Cash value of Insurance on Life of Officers (Contra) ! 73,603.00
Investment in Subsidiaries and Affiliates 550,266.00
Excess of Notes Receivable Pledged over Secured Liabilities to Banks and Factors 2,864,596.06
Accounts Receivable — Shoppers Bowling Lanes Ltd. 78,472.68
Mortgage Receivable — Rose Crete Realty Corp. 15.322.00
Fixed Assets — Less Depreciation 88,519.26
Due from Subsidiaries and Affiliates 1,914,874.36
Investment in Lanes and Equipment (Contra) 1,594,030.11
Pre-paid Insurance 25,487.53
Deposit — Arcade Sunshine Corp. 14,749.98
Deposits — Utilities and Others 19,821.70
Due from A.M.F. Pinspotters Co. 24.600.00
Due from Employees 9,169.13
Total Assets $8,196,611.26
Liabilities and Stockholders’ Equity
Secured Liabilities
Conditional Sales Contracts 1,848.38
Notes Payable — Credit Industrial Corp.— Secured by Chattel Mortgage on Lanes and Equipment (Contra) 225,000.00
Liabilities Having Priority
Taxes Payable 150,794.50
Wages Payable 805.76
Loans Payable — Insurance Companies $ 68,144.88
General Liabilities
Accounts and Notes Payable $1,169,379.74
Due to First National Bank 11,153.29
Due to Executives 324,894.46
Customers’ Deposits Payable 39,000.00
Accounts Receivable — Credit Balance 15,563.32
Due to Employees 10,642.76
Subordinated Debenture Bonds Payable 3,500,000.00
Interest on Bonds Payable 96,250.02
Total Liabilities $5,613,447.11
Stockholders’ Equity
Capital Stock $ 624,488.50
Paid-In Surplus 1,765,659.05
Surplus — Jan. 1, 1962 — Adjusted 994,552.99
Loss — Jan. 1, 1962-Oct. 29, 1962 ( 801,566.39)
Stockholders’ Equity $2,583,134.15
Total Liabilities and Stockholders’ Equity $8,196,611.26
[233] Comments on Some Balance Sheet Items
(a) The balance sheet does not reflect debts secured by notes. These secured debts total $4,298,328.60 and are secured by notes with a face value of $7,162,924.66. The difference between the two figures is shown as an “asset”.
(b) The statement of total assets is not significant since among the assets are the following items:
Investments in subsidiaries and affiliates $ 555,266.00
Due from subsidiaries and affiliates 1,914,874.36
Excess of notes receivable over secured liabilities
[explained in (a) above] 2,864,596.06
Total 5,329,736.42
The accountant’s report shows that many of the subsidiaries of the debtor are in Chapter XI.
Debtor’s Earnings Record
The consolidated earnings history of the debtor and its predecessors since 1957, as reported is:
Year Ended December 31
Net Sales