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U.S. Supreme Court

First National Bank of Cincinnati v. Flershem, 290 U.S. 504 (1934)

First National Bank of Cincinnati v. Flershem

Nos. 62 and 63

Argued November 9, 10, 1933*

Decided January 8, 1934

290 U.S. 504


A corporation, having suffered great losses but still highly solvent, determined to scale down its debenture indebtedness. By its directors, it defaulted on the debenture interest, though fully able to pay, and arranged the formation of a committee which solicited and secured the deposit of 95% of the debentures, to be exchanged, pursuant to a proposed Plan of Reorganization, for debentures greatly reduced in amount and security in a transferee corporation to be formed. Minority debenture holders having brought suit to collect their interest and threatened to levy on corporate assets, the Committee brought this creditors' bill for the appointment of a receiver, to the allegations and prayer of which the defendant corporation assented. An order of sale of the assets was made, fixing an upset price based on so-called "scrap" value. The purchasers at the sale transferred the corporate assets to the newly formed corporation, and, on the joint petition of the purchasers and the new corporation, the Plan of Reorganization was found fair, and the sale confirmed.


1. That, assuming that there was equity jurisdiction, there was no equity in the bill to support the appointment of a receiver or the interference with and discharge of creditors' rights. P. 290 U. S. 515.

Page 290 U. S. 505

2. That, where a corporation is solvent, the fact that there have been and may continue to be heavy losses which may result in financial embarrassment in the future affords no basis for a receivership. P. 290 U. S. 516.

3. The judicial sale effecting the transfer of all the corporate property to the new corporation and relieving both the old and the new corporation from the payment of the former's debts, all for the purpose of consummating the Plan of Reorganization, was, as to nonassenting creditors, a fraudulent conveyance. P. 290 U. S. 518.

4. The fact that the trustee for the debenture holders, after the filing of the bill, and at the behest of the plaintiffs, declared the entire principal due and secured judgment therefor, thus creating a condition of insolvency, did not cure the lack of equity in the bill when filed. Pusey Jones Co. v. Hanessen, 261 U. S. 491. P. 290 U. S. 519.

5. Non-assenting debenture holders, who were prevented by the order appointing receivers from asserting their rights at law, are entitled to prove their claims in the equity suit and to be paid in full, either out of the funds in the receivers' hands or by levy on the corporate property, it appearing that the assets fraudulently conveyed far exceeded the claims of all nonassenting creditors. P. 290 U. S. 520.

6. If the right of these debenture holders to sue at law was impaired by the action of the trustee in declaring the principal due and securing judgment therefor, equity will grant relief because that action, as to them, was fraudulent in law. P. 290 U. S. 520.

7. The debenture holders who, by assenting to the Plan, cooperated with the corporation and the committee are in no position to complain that those who did not assent will fare better than they. P. 290 U. S. 521.

8. A bill of review will not lie to review the interlocutory order appointing receivers. P. 290 U. S. 522.

9. A nonassenting debenture holder who, by bill in the nature of a bill of review, attacked the receivership for want of jurisdiction and prayed that it be vacated was entitled to have that bill dismissed without prejudice and to prosecute the claim by intervention. P. 290 U. S. 522.

10. Debenture holders and other creditors who intervened in subordination to the main proceeding but without assent to the Plan of Reorganization, and objected to confirmation of the sale,

Page 290 U. S. 506

are entitled to that sum in cash which they would have received if the property had been sold at a proper price. Pp. 290 U. S. 523, 290 U. S. 526.

11. In receivership proceedings, as was held in National Surety Co. v. Coriell, 289 U. S. 426, 289 U. S. 436, every important determination by the court calls for an informed, independent judgment, and special reasons exist for requiring adequate, trustworthy information where the jurisdiction rests wholly upon the consent of the defendant who joins in the prayers for relief. P. 290 U. S. 525.

12. Failure of dissenting creditors to produce evidence of the value of the property did not justify its sale as an entirety. P. 290 U. S. 525.

13. The upset price for the corporate property as an entirety and the sale price which was paid on behalf of the Committee was based on its so-called "scrap" value, the assumption being that the dissenting debenture holders for whose protection the price was supposed to be fixed were, by opposing the reorganization, insisting that all the properties, consisting of separate and widely scattered manufacturing plants, be dismantled. The inadequacy of the price was due to the mistaken belief that it was the duty of the court to aid in effectuating the Plan of Reorganization since a very large majority of the debenture holders had consented to it. Pp. 290 U. S. 523-525.

14. A manufacturing company composed of separate plants capable of independent operation need not, as may be necessary with a railroad, be sold as an entirety, and, in determining the proper price, the court should acquire information not only as to the value of each parcel, but as to the possibility of reconstituting one or more of the separate plants as independent operating units and finding markets for them; in making the determination, it is proper to take into account the willingness of the Reorganization Committee to purchase the properties as a going concern. P. 290 U. S. 526 et seq.

15. The Plan of Reorganization, in providing that debts for merchandise and services shall be paid in full by the new corporation, does not include debts owing by the old company on a purchase of shares in another corporation, and it cannot be amended by the court, in this proceeding, to include them. P. 290 U. S. 529.

64 F.2d 847 reversed as to Nos. 62, 63 and 64 and affirmed, with modification, as to No. 65.

Certiorari, 289 U.S. 722, to review the affirmance of decrees in a receivership case.

Page 290 U. S. 507

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