Securities & Exchange Commission v. United States Realty & Improvement Co.

108 F.2d 794, 1940 U.S. App. LEXIS 4133

• Court: Court of Appeals for the Second Circuit
• Decided: January 15, 1940
• Docket: 178
• Status: Published

Opinions

SWAN, Circuit Judge.

This is a proceeding for an arrangement under chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. It was commenced by petition filed by United States Realty and Improvement Company, hereafter called the debtor. The debtor is a New Jersey corporation having its principal place of business within the city of New York; its business consists in the management and ownership of investments in real estate. It has substantial assets and liabilities and its capital stock and certain other securities are outstanding in the hands of the public. By this proceeding it seeks to obtain an extension and modification of one class of its unsecured obligations, namely, its guaranty of the publicly held mortgage certificates, in the amount of some $3,700,000, of its subsidiary, Trinity Buildings Corporation of New York (for brevity hereafter called Trinity) ; all other unsecured obligations the debtor proposes to pay as they fall due. The mortgage against which the guaranteed certificates were issued was to mature June 1, 1939, and the debtor’s plan contemplates that the mortgagor, Trinity, will institute a proceeding under the Burchill Act, sections 121-123, N. Y. Real Property Law, Consol.Laws N.Y. c. 50, in a state court to obtain a modification of the mortgage to conform it to the debtor’s guaranty as modified under the arrangement.

By order entered on May 31, 1939, the date of the filing of the debtor’s petition, the district court found, among other things, that the petition was properly filed under section 322 of the Act, 11 U.S.C.A. § 722, and directed that the debtor be continued in possession of its assets and th.at a meeting of its creditors be convened before the court on June 28, 1939. Early in July counsel for the Securities and Exchange Commission obtained permission from the district judge to present as amicus curiae the contention that the order of May 31st should be vacated and the proceeding dismissed for lack of jurisdiction. As amicus curiae, counsel for the Commission pressed the argument at several hearings that the debtor could not properly file a petition for an arrangement under chapter XI but must resort to a reorganization under chapter X, 11 U.S.C.A. § 501 et seq., because it had securities outstanding in the hands of the public. After the judge had indicated that this contention would not be sustained, the Commission moved for leave to intervene in the proceeding for the purpose of moving to vacate the order of May 31st, to deny confirmation of the debtor’s proposed arrangement and to dismiss the proceeding. After further argument the court, on July 28, 1939, entered three orders. The first granted the Commission leave to intervene for the purpose of contesting jurisdiction of the court over this proceeding under chapter XI, “and for the purpose of enabling the said Commission to appeal from any order made in this proceeding with respect thereto”; the second denied the motions of the Commission to vacate the order finding the debtor’s petition to have been properly filed under section 322 and to dismiss the proceeding for lack of jurisdiction; and the third referred the proceeding to one of the referees in bankruptcy for such action as is required and permitted by the Bankruptcy Act. From the two latter orders the Commission appealed; subsequently the debtor appealed from the order allowing intervention. Thereafter the debtor moved in this court to dismiss the Commission’s appeals. This motion was reserved until argument of the appeals.

These appeals raise interesting questions as to the inter-relations of chapters X and XI of the Chandler Act and as to the right of the Securities and Exchange Commission to intervene in an arrangement proceeding under chapter XI. If it be assumed that the Commission is properly here as an appellant, a majority of the court is of opinion that the orders from which it has appealed are right. The Commission attacks the jurisdiction of the court upon the theory that where a corporation seeks to effect .an arrangement with respect to unsecured debts which are held by the investing public, as are the guaranteed certificates representing shares in Trinity’s mortgage, it must proceed under chapter X and the court lacks jurisdiction to entertain a proceeding under chapter XI. However desirable such a limitation of the scope of an “arrangement” proceeding might be thought to be, we can find no warrant for it in the words of the statute or the history of the legislation.¹ Subdivision 1 of section 306, 11 U.S.C.A. § 706 (1), provides that “arrangement” shall mean any plan of a debtor for the settlement, satisfaction, or extension of the time of payment of his unsecured debts, upon any terms; and subdivision 3 defines debtor to mean a person who could become a' bankrupt under section 4 of this Act, 11 U.S.C.A. § 22, and who files a petition under this chapter. The debtor is a person who could become a bankrupt under section 4. Concededly, therefore, the literal words of the statute authorize this proceeding. It may well be that the framers of the legislation contemplated that the arrangement procedure of chapter XI would be more likely to be availed of by small corporations and the reorganization procedure of chapter X by large corporations²; but no such limitation was written into the statute. Nor do we see any compelling reason for saying that a “large” corporation cannot obtain adequate relief under chapter XI because of the existence of outstanding securities in the investing public. Indeed, the statute seems to give preference to an arrangement proceeding, for it is provided in section 130 (7) that a petition under chapter 10 must state “the specific facts showing the need for relief under this chapter and why adequate relief cannot be obtained under Chapter XI [11] of this Act [title].” See, also, §§ 146, 147, 11 U.S.C.A. §§ 546, 547. The latter section provides that a petition for reorganization improperly filed because adequate relief can be obtained by the debtor under chapter XI may be amended to comply with the requirements thereof and thereafter be deemed to have been originally filed thereunder. No corresponding provision is found in chapter XI.. There, section 376(2), 11 U.S.C.A. § 776(2), provides for adjudication of bankruptcy or dismissal of the proceeding if confirmation of the arrangement is refused. Accordingly, we find nothing in the statute to justify acceptance of the contention that the court lacked jurisdiction to entertain this proceeding. To read into chapter XI the limitation that it may be invoked only by small corporations without publicly held securities requires legislation rather than judicial interpretation. Whether the proposed arrangement meets the requirements necessary for confirmation (section 366, 11 U.S.C.A. § 766) is a matter unrelated to jurisdiction and one upon which the district court will later have to pass when the issue of confirmation is presented. We express no opinion concerning it at the present time.

We pass now to the right of the Commission to intervene in a chapter XI proceeding. No section of that chapter confers such right. Section 208, 11 U.S. C.A. § 608, however, expressly authorizes intervention by the Commission in a chapter X proceeding upon request of the judge or upon its own motion if approved by the judge, but forbids it to appeal from any order entered in such a proceeding. The inclusion in chapter X of express permission to intervene and the omission of such a provision in chapter XI raises a strong implication against intervention by the Commission in the latter type of proceeding. In an arrangement proceeding the Commission has no advisory duties to perform such as are provided in section 172, 11 U.S.C.A. § 572. The Commission argues that in order to protect its right to intervene in a chapter X proceeding it must be allowed to intervene in any chapter XI proceeding which it believes ought properly to have been brought under chapter X. But this proceeds upon the false premise that the Commission has á present right to protect. It has no such right. Its only right is to intervene if a chapter X proceeding is pending. Until such a proceeding is instituted, the Commission has no interest whatever to protect. It cannot require a chapter X proceeding to be instituted, if the present chapter XI proceeding be defeated. Dismissal of the present proceeding would not necessarily result in a chapter X proceeding by either the debtor or its creditors; neither it nor they are compelled to initiate any court proceeding, and if one were initiated it might be in straight bankruptcy rather than in reorganization. The case at bar is not like those of Pennsylvania v. Williams, 294 U.S. 176, 55 S. Ct. 380, 79 L.Ed. 841, 96 A.L.R. 1166, and Gordon v. Ominsky, 294 U.S. 186, 55 S.Ct. 391, 79 L.Ed. 848, in each of which the intervening representative of the Commonwealth of Pennsylvania claimed a right to the full possession and control of the assets of the insolvents, not merely a right to advise or to protect the public interest. The Commission has no special interest to protect by intervention in the proceeding at bar.

Nor will its general interest in the welfare of holders of Trinity’s mortgage certificates guaranteed by the debtor serve as a legitimate ground for intervention. A governmental agency has no general right of intervention “in the public interest.” 2 Moore’s Fed.Prac., p. 2327. We find nothing in Rule 24 of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c or in the authorities cited in the briefs that points to a different conclusion. In one group of cases relied upon to support a general right of intervention in the government, the government claimed ownership of the land involved—a direct pecuniary interest—Stanley v. Schwalby, 147 U.S. 508, 13 S.Ct. 418, 37 L.Ed. 259; Percy Summer Club v. Astle, C.C. N.H., 110 F. 486; Winola Lake & Land Co., Inc. v. Gorham, D.C.M.D.Pa., 17 F.Supp. 75; or held title to the land in question as trustee for the Indians. Brewer-Elliott Oil & Gas Co. v. United States, 260 U.S. 77, 43 S.Ct. 60, 67 L.Ed. 140; Territory of Alaska v. Annette Island Packing Co., 9 Cir., 289 F. 671. There was also a direct pecuniary interest in the cases in which the Commissioner of Internal Revenue was allowed to intervene in stockholder suits to enjoin the payment of taxes on the ground of the unconstitutionality of the taxing statute. Helvering v. Davis, 301 U.S. 619, 57 S.Ct. 904, 81 L.Ed. 1307, 109 A.L.R. 1319; Davis v. Boston and M. R. R. Co., 1 Cir., 89 F.2d 368; Norman v. Consolidated Edison Co. of New York, 2 Cir., 89 F.2d 619. In New York v. New Jersey, 256 U.S. 296, 41 S.Ct. 492, 65 L.Ed. 937, the United States intervened to protect its absolute control over navigable waters and its interest in adjacent public property which would be affected by the outcome of 'the suit. See page 308, of 256 U.S., 41 S. Ct. at page 492, 65 L.Ed. 937. Nor does Florida v. Georgia, 17 How. 478, 15 L.Ed. 181, support the Commission’s views. There the only question was whether the fact that the suit was between two states forbade intervention. See page 492 of 17 How., 15 L.Ed. 181. In The Exchange, 7 Cranch 116, 3 L.Ed. 287, the United States never attempted to intervene as a party;' it merely, through the United States attorney, filed a “suggestion,” and was heard. The question of the United States attorney’s right to appeal does not seem to have been raised. On the other hand, cases dealing generally with the right to intervene have demanded an interest in the result of the litigation of a direct and immediate character; the intervenor must stand to gain or lose directly by the decision of the court. See Smith v. Gale, 144 U.S. 509, 12 S.Ct. 674, 36 L.Ed. 521; Lombard Inv. Co. v. Seaboard Mfg. Co., C.C.S.D.Ala., 74 F. 325, 326; Glass v. Woodman, 8 Cir., 223 F. 621, 622; Moore’s Federal Practice, pp. 2307 et seq. A somewhat analogous rule holds that one seeking review in the Supreme Court of a state court judgment must have a personal as distinguished from an official interest in the relief sought, and in the federal right alleged to be denied. Marshall v. Dye, 231 U.S. 250, 257, 34 S.Ct. 92, 58 L.Ed. 206. The order permitting intervention brought up by the debtor’s appeal should be reversed.

In considering at the outset the orders from which the Commission appealed we assumed for purposes of discussion that the Commission was properly an appellant. That assumption is challenged by the debtor’s motion to dismiss. _ Had this proceeding been instituted under chapter X and had the district judge decided that adequate relief could be obtained under a chapter XI proceeding and thereupon permitted an amendment of the petition and allowed the proceeding to continue as though originally filed thereunder, the Commission, though it had properly been allowed to intervene in the chapter X proceeding, could not have appealed from the order which determined that adequate relief could be obtained under a chapter XI proceeding. Section 208. That being so, it would be strange indeed if, after erroneously being allowed to intervene in the proceeding at bar, it could appeal from an order denying its motion to dismiss the proceeding. It would seem that the implication of section 208 not only forbids intervention in a chapter XI proceeding but also forbids appeal if intervention is erroneously permitted therein. But however that may be, we think the appeals should be dismissed because the Commission is not aggrieved by the orders appealed from; it has no interest that is affected by the litigation. In Commercial Cable Staffs’ Association v. Lehman, 2 Cir., 107 F.2d 917, decided November 20, 1939, we held that intervention erroneously granted to an intervenor having no interest in reorganization litigation, gave it no right to appeal from orders approving the plan of reorganization. The motion to dismiss the Commission’s appeals is granted. The order of intervention is reversed.

1 This question has been much discussed in periodical articles. See Competing Systems of Reorganization, 48 Yale L. J. 1334 and articles therein cited; The Need for Amendment of the Chandler Act, Am.Bankruptcy Rev., Vol. A 3, p. 35, Oct. 1939.

2 The report of the Judiciary Committee to the House with respect to H.R. 8046, stated with respect to chapter XI, which combines features of sections 12 and 74: “The inclusion of corporations will permit a large number of the smaller companies such as are now seeking relief under section 77B but do not require the complex machinery of that section, to resort to the simpler and less expensive, though fully adequate, relief afforded by section 12.” House Report, 75th Cong. 1st Sess., pp. 50-51.