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U.S. Supreme Court

SEC v. United States Realty & Improvement Co., 310 U.S. 434 (1940)

Securities and Exchange Commission v.

United States Realty & Improvement Co.

No. 796

Argued April 29, 30, 1940

Decided My 27, 1940

310 U.S. 434


1. A bankruptcy court has jurisdiction to make orders not subject to collateral attack in a proceeding for an "arrangement" with unsecured creditors brought by a debtor corporation under Chapter XI of the Chandler Act, although the financial and corporate setup of the debtor are such that adequate protection and relief cannot be obtained under the limitations of that chapter, but require a reorganization under Chapter X with the special procedure and safeguards which that chapter affords. P. 310 U. S. 446.

Chapter X, devised as a substitute for the equity receivership, is specially adapted to the reorganization of large corporations whose securities are held by the public, and sets up a special procedure for the protection of widely scattered security holders and the public through the intervention of the Securities and Exchange Commission, while Chapter XI, which is peculiarly adapted to the speedy composition of debits of small individual and corporate businesses, omits the machinery for reorganization set up by Chapter X, and contains no provision for participation by the Commission in a proceeding under Chapter XI.

2. Chapters X and XI of the Chandler Act, in providing that a plan or arrangement, to warrant its confirmation, shall be "fair and equitable," use those words with the meaning attached to them, as words of art, in cases of reorganization through equity receiverships or under former § 77B, viz., that, in any plan of corporate reorganization, creditors are entitled to priority over stockholders to the full extent of their debts, and that any scaling down of

Page 310 U. S. 435

creditors' claims, without some fair compensating advantage to them which is prior to the rights of stockholders, is inadmissible. Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482. P. 310 U. S. 452.

3. Since Chapter XI admits of an "arrangement" only with respect to unsecured creditors, without alteration of the relations of any other class of security holders, and since it contemplates (as required by § 366) that the arrangement shall be fair and equitable within the meaning of the Boyd case, it is evident that it gives no appropriate scope for an arrangement of an unsecured indebtedness held by hundreds of creditors of a corporation having thousands of stockholders. P. 310 U. S. 452.

The hope of securing an arrangement which is fair and equitable and in the best interests of unsecured creditors, without some readjustment of the rights of stockholders such as may be had under Chapter X, but is precluded by Chapter XI, is, at best, but negligible, and, if accomplished at all, must be without the aids to the protection of creditors and the public interest, including participation by the Securities and Exchange Commission, which are provided by Chapter X, and which would seem to be indispensable to a just determination whether the plan is fair and equitable.

4. Whether confirmation of an arrangement proposed in this case would be "for the best interest of the creditors," as § 366(2) requires, depends upon whether the stockholders should be eliminated or the creditors receive some substitute compensation, and whether that compensation would be fair and equitable. It is for the best interest of the creditors that these questions be answered in a Chapter X proceeding. P. 310 U. S. 453.

5. Chapter XI has special scope in the case of small businesses, where there are no public or private interests involved requiring protection by the procedure and remedies of Chapter X. P. 310 U. S. 454.

6. Under § 146(2), a petition may not be filed under Chapter X unless the judge is satisfied that "adequate relief" would not be obtainable under Chapter XI. The adequacy of the relief under Chapter XI must be appraised in comparison with that to be had under Chapter X, and in the light of its effect on all the public and private interests concerned including those of the debtor. P. 310 U. S. 454.

7. If the case is such that adequate relief cannot be obtained under Chapter XI, the court, exercising its equity power, should dismiss the proceeding under that chapter, leaving the petitioner free to proceed under Chapter X, which affords every remedy obtainable under Chapter XI, and more. Pp. 310 U. S. 455-456.

Page 310 U. S. 436

8. A bankruptcy court is a court of equity, § 2, 11 U.S.C. § 11, and is guided by equitable doctrines and principles except insofar as they are inconsistent with the Act, and an Act dealing with bankruptcy should be read in harmony with the existing system of equity jurisprudence, of which it is a part. Pp. 310 U. S. 455, 310 U. S. 457.

9. A court of equity may, in the exercise of its discretionary jurisdiction, condition relief on fulfillment of a requirement which will safeguard the public interest. It may withhold relief altogether, in the public interest, when private right will not suffer. P. 310 U. S. 455.

10. What the court can decide under the express terms of § 146 of Chapter X as to the adequacy of the relief afforded by Chapter XI it can decide in the exercise of its equity powers under Chapter XI for the purpose of safeguarding the public and private interests involved and protecting its own jurisdiction from misuse. P. 310 U. S. 456.

11. It was the duty of the District Court in this case, in the exercise of a sound discretion, to dismiss the petition under Chapter XI, leaving the debtor to proceed under Chapter X. P. 310 U. S. 456.

12. The Securities and Exchange Commission, in view of the duties and functions laid upon it in the public interest by Chapter X of the Chandler Act, may be permitted, under Rule 24 of the Rules of Civil Procedure and paragraph 37 of the General Orders in Bankruptcy, to intervene in a Chapter XI proceeding and move its dismissal upon the ground that resort to that chapter, rather than Chapter X, interferes with performance of the Commission's duties and violates the policy of the Act. P. 310 U. S. 458.

13. Upon a denial of such motion to dismiss, the Commission is entitled to appeal, under §§ 24 and 25 of the Bankruptcy Act. P. 310 U. S. 460.

108 F.2d 94 reversed.

Certiorari, 309 U.S. 649, to review a judgment which reversed an order of the District Court permitting the above-named Commission to intervene in a proceeding under Chapter XI of the Bankruptcy Act, and which dismissed the Commission's appeal from the denial of its motions that an approval of the debtor's petition be vacated and that the petition be dismissed, etc.

Page 310 U. S. 441

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