Securities and Exchange Commission v. American Trailer Rentals Company

PETITIONER:Securities and Exchange Commission
RESPONDENT:American Trailer Rentals Company
LOCATION:United States Post Office and Courthouse

DOCKET NO.: 35
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 379 US 594 (1965)
ARGUED: Nov 10, 1964
DECIDED: Jan 18, 1965

Facts of the case

Question

Audio Transcription for Oral Argument – November 10, 1964 in Securities and Exchange Commission v. American Trailer Rentals Company

Earl Warren:

Number 35, Securities and Exchange Commission, Petitioner, versus American Trailer Rentals Company.

Mr. Friedman.

Daniel M. Friedman:

Mr. Chief Justice, May it please the Court.

This case which is here on a writ of certiorari to the Court of Appeals for the Tenth Circuit involves the standards to be applied in determining whether the reorganization of a financially distressed corporation should be conducted under Chapter X of the Bankruptcy Act or under Chapter XI.

I’ll discuss in some detail, the differences between these two chapters that suffice at this point to say, that Chapter X is the provision providing generally for what are known commonly as ‘big large scale corporate reorganizations’.

And Chapter XI provides a summary procedure, by which the unsecured debts of a debtor maybe readjusted.

And there is a provision of the Bankruptcy Act, Section 328, which authorizes the Securities and Exchange Commission or any party in interest.

When a proceeding has been filed for an arrangement under Chapter XI to move the District Court to dismiss the proceeding on the ground that the proceeding should have been brought under Chapter X and this Court held many years ago in the United States Realty case, which is the landmark decision in this field that these two provisions of the Bankruptcy Act are mutually exclusive.

And this case arises out of the District Court’s denial of such a motion by the Securities and Exchange Commission.

The specific question which is presented in this case, which has not been before the Court before, is whether when you have a proceeding which involves the adjustments of the rights of public investor creditors, I want to make that explicit.

These are people who have loaned money to the corporation, members of the public who have a creditor claim.

The question is when you have a proceeding under which the rights of those public investor creditors are to be cut down whether such a proceeding maybe had under Chapter XI or whether as the Commission contends only under Chapter X.

Byron R. White:

So, you’re embedding that category of the public — the investor creditor or is that pretty well grounded in the cases?

Daniel M. Friedman:

Well, I don’t — Mr. Justice, I don’t think we’re embedding it, it’s a phrase and perhaps it has not appeared before —

Byron R. White:

Yes.

Daniel M. Friedman:

But this —

Byron R. White:

But this is embedded, you are distinguishing between one creditor and another there?

Daniel M. Friedman:

Well, yes.

We’re distinguishing between the ordinary commercial trade creditors, who do business with the company, who are informed sophisticated businessmen and the so-called investor creditors, who put money into a business in the hope of getting a —

Byron R. White:

Chapter XI should never be used to conflict an arrangement with the investor creditor?

Daniel M. Friedman:

That is our position.

We think the basic purpose of this chapter is to accomplish only arrangements with trade creditors.

That when investor creditors are involved, we think that the whole statutory scheme is actually developed caused for the invocation of the protective procedures in Chapter X for the benefit of public investors.

William J. Brennan, Jr.:

But, this may be the point, investor creditor, is this a widespread phenomenon, is this a unique kind of suit or?

Daniel M. Friedman:

Well, the arrangement in this case is very unique, but investor creditors are quite frequent, public debentures, public bond holders, these are the categories that we mean as investor creditors.

I know of no case that involves the facts of this —

William J. Brennan, Jr.:

So, is this is an ordinary unsecured — this debenture does not, holds no security and this is the kind of thing that would reach.

Daniel M. Friedman:

That’s correct.

William J. Brennan, Jr.:

Your rule would reach.

Daniel M. Friedman:

That’s right.

Daniel M. Friedman:

We think those —

Byron R. White:

Or anytime where they combine -– they sell packages with stock plus a loan when you buy —

Daniel M. Friedman:

As long as members of the investing public put their money into a business in a credited position, we think Chapter XI cannot be used.

I’d like now —

Byron R. White:

That’s not the only reason I suppose for saying that Chapter XI shouldn’t be used here?

Daniel M. Friedman:

Well, we have a double position.

First, we think on the facts of this case, as I shall develop.

We think that plainly this is what — pardon me —

William J. Brennan, Jr.:

For other reasons.

Daniel M. Friedman:

For other reasons and in addition to which, we think there is this broader principle, which we are urging.

The facts in the case are somewhat complicated, I’m afraid that somewhat lengthy statement will be necessary.

The respondent of the American Trailer Rentals Company, which I shall refer to as the debtor was organized in 1958 to engage in the automobile-trailer rental business.

This is the business of these little carts that are attached to the rear bumpers of automobiles.

There are four or five feet long and two or three feet wide.

And you see them driving on the highway, the most frequently seen one is manufactured by a firm called U-Haul It, and they are used either to carry stuff from one city to another or within a locality.

The business is actually operated through a series of service stations.

What the people engaged in this business do is they put trailers at various gasoline service stations.

And if you want to say, have a trailer to go from here to Chicago — request you to get your trailer from a station here and he will make arrangements, rent it to you. And also, you will be told where in Chicago, you will deliver the trailer.

So, you have this system of trailers moving back and forth between the different service stations.

The debtor itself is one of a group of interrelated companies.

There were eight or nine companies at one point in the operations of this business and all of these companies in 1961 were merged into the debtor.

The business was basically financed by selling trailers, individual trailers, to members of the public and simultaneously leasing back to the company or one of its affiliates, the use of the trailers.

So in other words, what amounts to here was a trailer was sold to the public and he was promised a certain rate of return for the lease of the trailers.

Earl Warren:

We’ll have our recess.

Mr. Friedman?

Daniel M. Friedman:

Mr. Chief Justice, May it please the Court.

When the Court arose, I referred to the system by which the debtor had raised money from the public, the selling of a trailer and the leasing back of the trailer to one of the defendants affiliated companies.

They leased the trailers, the financial basis of the leases were three-fold.

The principal number of leases were written on a basis that they would pay the owner of the trailer 2% of the cost of the trailer a month for ten years.

In other words, 24% a year for ten years.

Daniel M. Friedman:

Another group of leases were written for a five-year period and they promised them 36% a year.

The third group of leases which were the minority, promised them 35% of the net profits allocable to the particular trailers. In the first two types of leases, the 2% and the 3% leases, the promised rental payments were not in any way tied to the income either of the company or from the particular trailers.

On this basis, the company sold a total of about 5,800 trailers over a 3-year period to several hundred investors primarily in the Western States and the total amount, which these people paid for these trailers was roughly $3.5 million.

The trailers when they were sold to the people were not in existence.

The investors they paid $1,000 for a trailer.

The money however, was then used by the debtor to manufacture the trailer.

Earl Warren:

Was that in accordance with the agreement?

Daniel M. Friedman:

This was the understanding, yes.

Earl Warren:

It was the understanding.

Daniel M. Friedman:

It was the understanding.

Earl Warren:

Yes.

Daniel M. Friedman:

But a very substantial amount was taken out of the purchase price by way of sales commissions, it ranked roughly from 30% to 37%.

So, of every $1,000 that an investor put in only between $700 and $630 was actually used to purchase a trailer, 90% of these trailers were manufactured by a firm called DeMar, which was an affiliated company of the debtor, it had various interlocking relationships.

And in 1960, the debtor gave DeMar the exclusive right to manufacture trailers for it for a substantial period.

A year later DeMar went bankrupt and at the time DeMar went bankrupt, the debtor had paid to it $200,000 for trailers, which had never been manufactured and another $140,000 for trailers, which DeMar had manufactured but had not turned over to the debtor and those trailers were subsequently lost, because DeMar had mortgaged them.

Now, after this company —

Earl Warren:

Mortgaged because of what?

Daniel M. Friedman:

Because DeMar, the company that had gone bankrupt had not transferred the trailers to the debtor, it had mortgaged them and a third person had taken possession of the trailers.

After this company had sold, as I say, about $3.5 million worth of these interests, the Securities and Exchange Commission advised them that they were selling investment contracts and these were securities, which required registration.

The company made an attempt to register the securities and filed a registration statement, but the commission issued a proceeding to so-called ‘stop order proceeding’ alleging that the registration statement contained false and misleading statements and the registration statement was subsequently in effect withdrawn, because the debtor consented to the issuance of an order stopping the sale of these securities.

After this, a Board have attempted to register the securities, a man named Peters who in 1960 had become the Executive Vice President and the Principal Officer of the debtor together with some trailer owners organized a firm called ‘Capital Leasing Company’, which will figure prominently in the discussion of the recapitalization plan.

And Capital, acting under a regulation of the commission, which exempts from registration.

The public sale of securities of not more than $300,000 proposed to exchange trailers for its capital stock on the basis of issuing one share of its capital stock for every $2 that the investor had put into his trailer.

And pursuant to this arrangement, Capital acquired about 300 trailers, at which point, the Securities and Exchange Commission brought another proceeding against Capital, this time alleging that the circular by which it was offering this exchange was itself false and misleading and it suspended the exemption from registration under which these people had acted.

Now, a couple of other little things, as I mentioned Mr. Peters took over the management of this — the Head of Operating of this company in 1960 and sometime before that, approximately $140,000 had been misappropriated from the company.

Peters blamed this on a former member of the management, who has since deceased and who allegedly died penniless.

What had happened was, the Executive Sales Company another one of the companies in this complex, which was in charge of the actual selling of the trailers to the public had received moneys from the public for the purchase of trailers, but these moneys have not been turned over to DeMar.

In other words, this man had misappropriated these funds, which were under his control and of course, at the same time however, Executive Sales was indebted to the company, which had undertaken to manufacture these trailers and then when Executive Sales was merged in the debt.

The debtor undertook this obligation.

Now, in view of these very heavy fixed obligations, which this company had undertaken from the outset of its business paying 24% and 36% a monthly return on the investment without regard to the earnings, in view of the very substantial commissions that have been taken out of this money that was supposed to go into the purchase of trailers, it’s not surprising that the company was in financial difficulties for its entire life, the company has never operated a profit.

Daniel M. Friedman:

The first three years of its operations ending in 1961 is slightly less than that for three years.

They had an aggregate gross income from the rental of trailers to the public.

That is someone who rented a trailer to take from here to Chicago, $400,000.

In that same period, the payments to the trailer owners themselves for use of these trailers was 50% more than that $600,000.

And then they had very substantial additional expenses in addition to this.

Now in order to make these payments, the debtor found it necessary to borrow very heavily from its offices, from its directors, from its employees.

And in addition, it borrowed from this affiliated company Executive Sales company, which was in charge of the selling various amounts including amounts, which Executive Sales had taken as a commission on the sale of new trailers.

So, it amounted to an effect that at least a portion of the $600,000 that it had paid to the trailer owners with previously bought trailers came out of the new trailers that were being sold.

It had needless to add over the period a very substantial net loss and in addition, its problems were further compounded by operating difficulties, trailers were unsatisfactory, 100 trailers were mysteriously lost and couldn’t be located.

So, in December of 1962, the company filed a petition under Chapter XI of the Bankruptcy Act for an arrangement of its unsecured debts.

And what the plan proposed was to terminate the leases by which the public investors had given the trailers to the company and to offer the trailer owners stock in this newly formed firm Capital Leasing.

The basis on which the stock was being offered was that all the amounts which the trailer owners previously had received by way of rentals, that is the 2% or 3% a month was now to be treated as though it were a return of capital.

Then they were to give these people $2 per share, one share of its capital leasing stock for every $2 that the trailer owner had invested in the trailer.

But again, what he had invested in the trailer was calculated on the assumption, if he bought a trailer for $1,000 and had received $250 by way of back rent.

This was on the assumption that they had only $750 in the trailer and he would therefore get 375 shares of capital stock.

There was — at this time, slightly more than $700,000 which the debtor then owed to these public investors.

That was just eliminated, completely wiped out.

In addition, the plan provides for payments to —

Earl Warren:

Before you get to that. What happened to the trailer owners who didn’t avail themselves in this opportunity to take the stock at $2?

Daniel M. Friedman:

— under the plan is silent as to that but presumably, if someone does not avail himself of this opportunity he has a trailer.

That the plan is also silent for example, as to whether after the plan, the trailer owner who does not avail himself of the plan and who has a claim for $250 back rent against the debtor whether he can go against Capital Leasing for that amount.

And of course, in terms of one of the points we make is that, in terms of the small investor who had invested $500 or $1,000 in a trailer, which maybe located at a gasoline station hundreds of thousands of miles from his home. It’s a very difficult thing what he can do.

Theoretically, he can get his trailer back, but the plan isn’t clear and as I say, it would be virtually impossible for many of these people to do.

And this is one of our claims that I will come to, that this puts an impossible choice to these people without giving them adequate explanations.

The plan also provides for giving stock to other creditors of the company on a slightly more favorable, less favorable basis one share for each 350 of their claim.

And also, members of the management who had loaned money are to be paid on an even less favorable basis.

Now, in addition, the plan provides that the debtor will transfer its so-called “system”.

The system is the interrelationship of operating agreements with the various gasoline stations.

It will transfer its system to this new company Capital Leasing company in exchange for which Capital Leasing company will issue to the old stock holders of the debtor, not the public investors, the old stockholders of the debtor roughly 100,000 shares of stock.

The basis on which this is proposed is a statement in the plan that the debtor’s system was built by it at a cost of $500,000.

Daniel M. Friedman:

It’s interesting, however, that the registration statement, which the debtor had filed a year and a half earlier, in its accounting schedules, listed as an asset item the cost of establishing these trailer rental systems at a figure $33,750.

Now on the basis of various of these facts and other matters, which the Securities and Exchange Commission set forth in a supporting memorandum, it moved to dismiss the Chapter XI proceedings.

The District Court denied the motion.

The commission appealed and the Court of Appeals affirmed in the basic rationale of the Court of Appeals, I think, as the Court of Appeals said this is a closed case, but even though it’s a closed case, they thought the commission had not shown enough to warrant saying that the District Court had abused its discretion in declining to transfer of the case.

Now, in discussing the legal issues in the case, my argument will basically be composed I think of three parts.

The first part will discuss the differences between Chapter X of the Bankruptcy Act and Chapter XI of the Bankruptcy Act and will show why we think the various protections, which Congress provided for the public investors under Chapter X make necessary, a transfer of this type of case.

A second argument we will make is that —

Earl Warren:

Is that mandatory?

Daniel M. Friedman:

Mandatory.

Earl Warren:

Mandatory.

Daniel M. Friedman:

Mandatory.

A second argument we shall make is that transfer is also required, because only under the provisions of Chapter X will the creditors be guaranteed to receive their so-called “fair and equitable treatment”, a rule which I will again discuss summary here.

It is the basic principle of the reorganization law that a creditor cannot be given less than his full contract preference, if the stock holders are permitted to participate in the business.

And then, I shall indicate briefly, why we think when we’re dealing with this area of the law, it is important that there be a general principle and if this kind of a case, this particular type, that is with public investor creditors should not be generally left to the discretion of the District Court.

William J. Brennan, Jr.:

(Inaudible)

Daniel M. Friedman:

Will not —

William J. Brennan, Jr.:

Should not —

Daniel M. Friedman:

It should not be left to the discretion of the case.

William J. Brennan, Jr.:

What are these references (Inaudible)?

Daniel M. Friedman:

The least is the second, we think both are correct but if the Court would disagree with this on the first, we think at least where there is a denial of fair and equitable treatment.

William J. Brennan, Jr.:

That was the trial in (Inaudible)

Daniel M. Friedman:

Fair and equitable?

William J. Brennan, Jr.:

Yes.

Daniel M. Friedman:

Well —

William J. Brennan, Jr.:

(Inaudible)

Daniel M. Friedman:

Well, put it this way if I may Mr. Justice.

The District Court would have to be looked at least — if on the surface of the plan, as we think is clear here, the proposal which is made, the proposed treatment of the public creditors does not give them fair and equitable treatment, then we think the plan Chapter XI proceeding would have to be dismissed.

William J. Brennan, Jr.:

(Inaudible)

Daniel M. Friedman:

Yes.

William J. Brennan, Jr.:

(Inaudible)

Daniel M. Friedman:

I wouldn’t — I can’t accept that Mr. Justice, because I think inevitably when you have a Section Chapter XI proceeding, they are going to cut down in practically every case.

They are going to cut down the interest of the public investors, that’s the reason they’re having an arrangement, it’s because they want to reduce them.

Potter Stewart:

The important thing to remember in this connection is that the phrase fair and equitable in this context has a fixed absolute meaning, meaning absolute priority.

Daniel M. Friedman:

That’s correct.

They are words of honor.

Potter Stewart:

It doesn’t mean what those words mean in other context?

Daniel M. Friedman:

Not in the colloquial sense —

Potter Stewart:

Right.

Daniel M. Friedman:

This is a very technical rule.

Now in the Realty case, this Court had explained that the reorganization provisions of the Bankruptcy Act were designed to remedy a number of reorganization abuses that a grown up under the old equity receiverships which antedated these provisions.

And the Court pointed out that among the ables, which had existed under the old practice were and I’ll just quote briefly, “The inadequate protection of widely scatted security holders.

The frequent adoption of plans, which favored management at the expense of other interests and which afforded the corporation only temporary respite from financial collapse.

And the various provisions, which the Congress adopted in Chapter X, of course, were designed to meet this situation.”

Perhaps the key reform of Chapter X was the introduction of the concept of an independent trustee.

Except in cases where the indulgence of the debtor was less than $250,000, the statute makes mandatory the appointment of a disinterested trustee, who is to have charge in the reorganization.

The statute is quite explicit in making clear what is meant by disinterested.

In effect, he can have no previous connection ordinarily with the company.

The trustee as the Court again pointed out in Realty is required to make a thorough examination and study of the debtor’s financial problems and management, and submit a report on that to the stockholders and the creditors.

In addition, the trustees specifically charge with investigating possible causes of action against the management.

And finally, it is the trustee and not the debtor who formulates the plan of reorganization.

He asks for the advice of the security holders.

They make suggestions, but he formulates the plan.

In Chapter XI, in contrast, everything about the reorganization is under the control of the debtor.

It’s the debtor who formulates the plan, it’s the debtor who has complete control of the reorganization, and of course, as Mr. Justice Douglas pointed out when he was testifying as the Chairman of the Securities and Exchange Commission on these things, the debtor who is in possession can hardly be expected to investigate itself.

Now, we think that this case, the record in this case, shows the need for a thorough independent investigation of this company.

Its whole history has been one of financial disaster.

It’s never operated at profit. One-third approximately of the moneys the public investors contributed were taken-off to high commissions, but that would have been a substantial mismanagement by the prior — I’m sorry, substantial misappropriation by the prior management.

All the relations between this company and the affiliated company that was manufacturing the trailer require looking into.

There is indeed moreover, indication of at least dubious practice in using moneys paid by some trailer owners for buying their trailers to pay the rental charges promised to early purchases.

Byron R. White:

Mr. Friedman, is there discretion in the Chapter XI Court to appoint a trustee?

Daniel M. Friedman:

No.

There is — the Court may — the Court and the statute says, the Court may, if necessary, appoint a receiver.

There’s no discretion to appoint a trustee. Of course, it was one exception, if the company had previously been in bankruptcy, which is not this company and a trustee had been appointed.

Byron R. White:

I thought the power of the judge was to — when a petition is filed under — a voluntary petition is filed that the power of the judge is the same as though there had been a petition of bankruptcy and the company had been adjudicated.

Daniel M. Friedman:

Well, it —

Byron R. White:

Which means he can appoint either a receiver or a trustee?

Daniel M. Friedman:

I don’t —

Byron R. White:

And Chapter XI specifically says, either a receiver or a trustee can operate the business?

Daniel M. Friedman:

Well then, I think that has reference to the fact Mr. Justice, if they had previously — if the company previously had been adjudicated bankrupt and a trustee had been appointed.

But I don’t believe that if there has been no proceeding bankruptcy, the Court may appoint a trustee.

I think that all the Court may do if necessary is to appoint a receiver.

Of course in this case, there was neither a trustee —

Byron R. White:

On what purpose?

Daniel M. Friedman:

It’s unclear.

Statute said if necessary, there’s a — one case we know of in which Mr. Jenckes who represent —

Byron R. White:

All I want to know, if it’s unclear then you can’t say that the Court has no discretion not to appoint somebody else to operate the business.

Daniel M. Friedman:

Well, it’s possible that if the Court deems it appropriate, he may appoint a receiver.

But the point is it’s more than just operating the business Mr. Justice.

It’s operating the business.

It’s investigating the business.

It’s formulating the plan.

It’s doing all of these.

Byron R. White:

I understand that, that’s another point.

That’s right.

Daniel M. Friedman:

Doing all of these things.

Now, we think that when you have a company in this shape.

You’ve got to have a very thorough investigation.

You’ve got two questions you want to know.

One, what got the company into this condition?

And two, what if anything can be done about it to put it back on its feet?

Daniel M. Friedman:

There’s been no such study made here and indeed, Chapter XI doesn’t even contemplate such a study, only Chapter X does.

In addition, we think there’s enough here to at least raise the suggestion that there may well be possible causes of action against the old management and we don’t know, but certainly again warrants further investigation.

Now, there’s another serious problem permitting the company like this to continue to be reorganized under Chapter XI.

Under Chapter XI, it’s the old management, the management that got the company in these troubles that runs the business.

Under Chapter X, however, there’s ordinarily a new management and this Court recognized in the General Stores case which is the second case before this Court dealing with this problem will be used in Chapter X against Chapter XI in which, in that case, the Court upheld the action of the lower courts in dismissing the Chapter XI proceeding.

This Court recognized that the provision of new management may well be essential to the continued and prospects of the enterprise.

As the Court stated, readjustment of the debts may be a minor problem compared with the need for new management.

Without a new management today, today’s readjustment maybe a temporary moratorium before major collapse.

Now in this very case indeed, the District Court recognized the possible need for a new management.

In page 145 of the record, the District Court in its oral opinion stated near the bottom of the page.

“Now, there may be in this situation need for a new management and there’s certainly some question in my mind as to whether or not the management that is presently representing it would, I mean operating it, would continue to do so for the best interest of the investors.”

And the Court went on to say, “However, that has not been clearly established yet.”

And then he suggested that if the Securities and Exchange Commission found any evidence of criminal activity on the part of the people, who are running this business, they should report it to the Justice Department.

Well, of course, the reason we think you have to transfer this case to Chapter X is be to investigate and see whether there’s the need for new management.

To say that there may be need for new management, but it hasn’t been conclusively established as yet.

It seems to me, the very facts that the District Court recognized this, is itself the strongest argument and shows the need for the full inquiry possible under Chapter X.

(Inaudible)

Daniel M. Friedman:

Well, first of all, we don’t know.

We don’t know what’s likely to happen.

We don’t think there’s any basis for the claim of the judge was speaking about.

He referred to two or three reorganizations in which he had experience.

Congress, we think has made the determination that in this kind of a case what the public interest calls for is having an independent trustee.

Now —

(Inaudible)

Daniel M. Friedman:

Well, of course — I mean, there are expenses incurred in Chapter X, that you wouldn’t have in Chapter XI.

And there were expenses I think for the very reason that the proceedings are more comprehensive.

There is money coming into this company.

The rentals have fallen off naturally as the number of trailers have been reduced, but there is money coming in.

But, again, I suggest Mr. Justice, that what the court seems to be saying here basically, is that it’s got to be expensive.

He thinks, he fears it’s going to be expensive.

Daniel M. Friedman:

There may be difficulty in getting money and therefore, it’s appropriate in effect to disregard all of these things.

And this is an area where it seems to us that basically, the determination has been made that when you have all of these of kinds of factors is that the public policy is that an independent trustee should have a look at it.

(Inaudible)

Daniel M. Friedman:

Yes, that’s right.

(Inaudible)

Daniel M. Friedman:

There may — we don’t know.

We don’t know whether they’ll get — let me suggest this Mr. Justice.

Under this plan, those who participate give up their trailer and they get stock in this new company.

Who knows what’s going to happen to this new company?

At the moment they have something, it may be difficult to realize on, but at least they have a trailer.

Once this plan goes through, they don’t have a trailer, they’ve got them stock in a company which at least on the basis of the history of this enterprise raises serious questions, they are —

Byron R. White:

They have control, overwhelming control of the investor creditors?

Daniel M. Friedman:

They have control, but the old management presumably will continue to stay, at least starts in this saddle and again —

Byron R. White:

All stockholders have plenty of opportunity.

I mean, they can oust the old management as they have, what do they have, 90% of the stock?

Daniel M. Friedman:

Roughly.

Roughly, no, I’m sorry.

They have about 80%.

Byron R. White:

80%.

They don’t have to anything at 80% to do, which is quite a bit.

Daniel M. Friedman:

Well, but at one — by the time this happens, I mean in other words, first of all, the old management of course does have control and will have control of the proxy machinery. Secondly, assuming that the — well, let me back up a minute.

We’re dealing here basically with uninformed investors in most instances.

I mean, the fellow who buys a trailer for $1000, because he’s been promised 24% or 36% on his money is presumably a rather unsophisticated fellow.

And it seems rather unrealistic to suggest there’s an adequate protection to these people to say that they have voting control of the company.

Now, they have voting control of the company, theoretically they have it, but as a practical matter, it seems most likely unless there’s some real organization of these people around the country that the old management will continue to operate.

And indeed, this company is going to have to raise some money, somehow, I suppose the company two weeks after the plan goes through, mortgages all of these trailers to who receives the money.

Now, there’s one other important and a very important thing as to why we think Chapter X is required here.

This is to make sure that when the security holders are called upon to accept or reject this plan that they received full and adequate information, that is what is guaranteed by Chapter X.

Chapter X provides for intervention by the Securities and Exchange Commission.

And if the Securities and Exchange Commission intervenes, then it plays a very important role both in helping the trustee and in developing information for submission to the investors.

Daniel M. Friedman:

Under Chapter X, the investors cannot be solicited ordinarily, to consent to the plan unless and until the judge has approved it, unless and until, if it’s been sent to the Securities and Exchange Commission for an advisory opinion, that opinion has been received and unless and until the stockholders receive from the proponents of the plan, a full package of information.

They’ve got to get the plan, they have to get the judge’s opinion, the judge’s comments on the plan, the report of the Securities and Exchange Commission.

Byron R. White:

It seems to me these permits apply to trade creditors as well as the stockholders as to investor creditors.

I mean, these last few —

Daniel M. Friedman:

Well, I —

Byron R. White:

This is true of Chapter XI, generally, when you’re dealing with a large unorganized group of trade creditors.

There might be hundreds of them.

Daniel M. Friedman:

Well, two answers to that Mr. Justice.

Ordinarily, the trade creditors tend to be more sophisticated I think than the public investors.

Secondly, the trade creditors frequently do organize in a committee with some organized representation.

And finally, in this situation, the trade creditor’s interest is very frequently quite different from that of the investors.

The trade creditors primarily are concerned with the short-term condition of their company.

They want to get their money and the trade credit frequently will be willing to accept a good deal less than his claim in the hope of continuing to do business with the company.

The public investors, while they’re interested in getting their — whatever percentage it is.

They are also equally if not more so interested in making sure of the security of their principle.

And therefore, it seems to us that if trade creditors are willing to accept these things, they don’t need the same measure of protection that the public investors.

That’s basically, basically what the whole reorganization reform program was about protecting the public interest of the people who put their money into these businesses as an investment.

Arthur J. Goldberg:

(Inaudible)

Daniel M. Friedman:

That’s correct.

Arthur J. Goldberg:

(Inaudible)

Daniel M. Friedman:

That’s right.

That’s —

Arthur J. Goldberg:

(Inaudible)

Daniel M. Friedman:

That’s certainly is, yes.

Byron R. White:

Mr. Friedman, it seems that the Chapter XI says that — it says that the — you can adjust the claims of any creditor.

All creditors generally or any class of it gives the Court power to classify creditors and treat them differently.

And it says, the claims of all unsecured creditors shall be discharged except as provided for in the plan.

Now, it seems to me, but it is clear that you don’t deal with secured creditors in Chapter XI.

Now, Congress left out the secured creditors in Chapter XI, but it didn’t leave out these investor creditors that you’re talking about.

Now, how — it seems to me that you would be a lot, get a lot closer to your mark.

Byron R. White:

You argued these people were secured creditors.

Daniel M. Friedman:

Well we do make that suggestion.

Byron R. White:

Not just investor creditors generally.

Daniel M. Friedman:

We make the suggestion that they are —

Byron R. White:

There’s a whole series of leases which in effect perhaps these people have made a sale of the company with a million on the trailers?

Daniel M. Friedman:

We do make that argument in our brief that these people are in economic effect of secured creditors.

And therefore, that this is not in fact —

Byron R. White:

But you just wouldn’t have perfected your lien, would you?

Daniel M. Friedman:

They would not be a perfect — they would not be —

Byron R. White:

You couldn’t speak under the secured creditor — in a secured creditor category, because you wouldn’t have satisfied the State laws on recording and things like that, I suppose?

Daniel M. Friedman:

Well, I don’t know whether they might — they might not be — their liens might not be valid as against other creditors, but in terms of whether they’re secured creditors —

Byron R. White:

Against a trustee or against the — in a bankruptcy Court.

I mean in a Chapter X case, these fellows would not be treated as secured creditors, if for no other reason that they were — were not — the — their liens weren’t valid against the trustee, because they haven’t filed them.

Daniel M. Friedman:

That might be, I just —

Byron R. White:

So, you have to go this investor creditor route?

Daniel M. Friedman:

Well, I don’t know.

We might — on the other hand, it’s arguable at least that what you have is — if this is such a strange beast, that this is really not just an adjustment of unsecured debt.

It seems to be — it’s really basically a reorganization of the company, basically here.

Now, in contrast to these procedures of Chapter XI with a detailed provision of information to the creditors and to the investors, Chapter XI and Chapter X — in Chapter X — in Chapter XI it is just the opposite.

There’s no objective study of the plan, there’s no requirements of any information.

The Securities and Exchange Commission is not a party.

The debtor who formulates the plan gives just about as much information as he wants to and indeed, consents for the plan may be solicited from creditors even before the plan has been filed.

Even before the petition for arrangement is filed, the debtor can go out and get the consents.

And of course, as the Court pointed in Realty, when the plan for the first time comes before the judge for confirmation, he’s faced with the fact that the majority of the creditors have already approved it, because if the majority of the creditors haven’t approved it, it wouldn’t be presented to him for confirmation.

Now in this case as I’ve indicated, the plan seriously deficient in the information it gives to the investor creditors, but previously mentioned, he doesn’t know — if he doesn’t go into the plan, what happens to him?

All that there is in the proposed plan as a general statement, if the company thinks it’s a good thing for the investor creditors and it’s coupled with a warning that if the plan is not accepted, the trailer owners quote the record at Page 7 to 8, “May find themselves unable to realize any value for their trailers or any income from their operation.”

And we think when unsophisticated investor gets this kind of thing, he may not be very happy with it.

He doesn’t know enough about it, but it looks as though it’s something better than what he has.

He hopes to be getting 24% or 36% a year, he has had nothing for a year.

The pressure is overwhelming on him to accept it.

Daniel M. Friedman:

Whereas, if he weren’t told all effects that they have been objectively explored, he might conclude he’s better off at this point and at least he can get out with his trailer for whatever that is worth and to go ahead with this new venture.

Now, I’d like to turn to the other facet of our argument, which is the argument that Chapter X here is also required, because this plan fails to give the public creditors the fair and equitable equivalent of what they have.

Chapter X permits the confirmation and approval of a plan only if it is found to be fair and equitable.

There’s no such requirement in Chapter XI.

There had been such requirement in 1900 and up to 1952 when it was deleted and I’ll come in a moment to explain why we don’t think that deletion changes the results.

And as Mr. Justice Stewart had pointed out, in the reorganization field the words “fair and equitable” words of art, which have a definite and fixed meaning, they connote the notion that you have to payoff the senior creditors in full, giving them their full contract claim before you can allow anything to the junior interests.

The —

This branch of your argument wherein I was saying that the two lower courts have used their discretion in refusing new transfer, doesn’t it?

Daniel M. Friedman:

Well, if — if I may Mr. Justice, I would say that the two lower courts, was a matter or is a matter of law in our transfer, I mean —

Well, I don’t quite understand that, a matter of law independently of the use of discretion?

Daniel M. Friedman:

Yes.

Mr. Justice, we think that whenever a plan under Chapter XI on its face indicates that the public creditors are not being given fair and equitable treatment.

The District Court must dismiss the Chapter XI freely.

But there’s no such requirement under Chapter XI?

Daniel M. Friedman:

There is no such requirement.

Well then, how do you –are you – there was once I think.

Daniel M. Friedman:

There was once.

Now, we think that the basic thing is this, that what happened was in the Realty case, where the Court had said, directed that a transfer was required in a case — this is prior to the amendments.

The Court had said in the Reality case that the two lower courts had urged in refusing new transfer.

And in the course of his opinion, Justice Stone recognized that there might be situations where there are no public interests that Chapter XI might be used even though there would technically be of violation of the fair and equitable stand.

Now in any case, where you have only a composition with trade creditors, where you have the businessmen and they’re going to give them $0.40 on $1 or $0.60 on $1.

Whenever you have a corporation on its face there’s a technical violation of the fair and equitable standard, because in that situation, the old common stock is continuing to participate even though the creditors are being given less than their full priority of claim and —

Hugo L. Black:

(Inaudible)

Daniel M. Friedman:

Well, I think and Mr. Justice, I think it may depend where you begin the circle, if you want to call that.

I think we begin with the fact that this Court has consistently held that creditors cannot be denied their so-called “full priority” in a reorganization, and indeed, we think that the legislative history of Chapter — the original Chapter XI, before the 1952 Amendments indicated that the basic purpose of Chapter XI was to permit compositions with trade creditors.

Hugo L. Black:

Chapter XI was then changed?

Daniel M. Friedman:

Chapter XI was changed —

Hugo L. Black:

(Inaudible)

Daniel M. Friedman:

If it is — yes.

If it is properly brought, we think the deletion of chapter — of the fair and equitable standards from Chapter XI was intended to make it clear that a plan should not be denied confirmation, when it was involving trade creditors.

Daniel M. Friedman:

That was the purpose of it.

But we think that it was not intended by deleting from Chapter XI, the reference to fair and equitable to make this a completely irrelevant consideration in deciding whether Chapter XI had been properly invoked in the first place.

This is our basic point that the reason — the reason this was put in.

The reason that fair and equitable standard was deleted from the statute was because insofar as trade creditors were concerned, there was no need for that.

I think this is confirmed by a couple of other things.

First, these very amendments themselves were referred to by the House Committee reporters non-controversial.

And secondly, at the same time that Congress deleted the fair and equitable in Chapter XI, it also had deleted it from two other chapters, Chapter XII and Chapter XIII.

And those are both provisions, which had no applicability to corporations.

One dealt with real estate arrangement, the other dealt with individual wager and the plans.

So that with Congress it seems to us was really doing was saying, there’s no need to have the fair and equitable standard in Chapter XI because in deciding whether a plan is to be confirmed, once it’s properly in Chapter XI, since what is involved here is affecting the rights of sophisticated business creditors, this is alright.

But we think that it does not follow from that, that because Chapter XI no longer requires fair and equitable that therefore when the question is whether it was properly invoked in the first place.

You cannot look to see what the effect of the implication — what the effect of the plan is on creditors.

Arthur J. Goldberg:

Now, what your first point that you just left would be that even though fair and equitable treatment were shown here, Chapter XI would not apply, because it doesn’t apply at all to public creditors.

Daniel M. Friedman:

That’s correct.

Arthur J. Goldberg:

And now you’re arguing that if you’re wrong in the broad front at least it doesn’t apply where fair and equitable treatment is not shown.

Daniel M. Friedman:

That’s right.

Arthur J. Goldberg:

Is that it?

Daniel M. Friedman:

The two in a sense perhaps interrelate, so –.

Arthur J. Goldberg:

Yeah.

Daniel M. Friedman:

Now, here we think it’s clear that —

Arthur J. Goldberg:

You approach it from different ends.

Daniel M. Friedman:

We hope they both come out in the same place.

Here, it seems to apply that there is not fair and equitable treatment, because what you have here, this company has admittedly insolvent.

And if a company is insolvent it seems to us that company belongs to the creditors and yet on —

Byron R. White:

(Inaudible) 766 says the Court shall confirm an arrangement if it is for the best interests of the creditors and is feasible.

Daniel M. Friedman:

Yes.

Byron R. White:

Now you’re saying that, that provision should be read as saying that — what, that no arrangement shall deal with public investors within investor creditors other than a fair and equitable manner?

Daniel M. Friedman:

No, I would — if I may —

Byron R. White:

You’re saying if they attempt to — because I would assume that your argument isn’t necessarily that it should be transferred.

Daniel M. Friedman:

It should be dismissed.

Byron R. White:

No.

But that as — but that arrangement just won’t be confirmed unless the —

Daniel M. Friedman:

No.

Byron R. White:

— unless, the investor creditors are treated fairly and equitably by the arrangement.

Daniel M. Friedman:

May I — may I restate —

Byron R. White:

I could understand why you’re — on your first argument, why you’d say transfer, but here, if you are – this assumes — this argument assumes that you can deal with investor creditors in some manner.

Daniel M. Friedman:

No, Mr. Justice, we’re saying that because whenever the plan proposes to give them less than fair and equitable statement, you can’t deal with them at all.

We recognize, we have to at this statute then —

Byron R. White:

Well, what if you’re wrong on that?

Daniel M. Friedman:

Well, if we’re wrong on — if we’re wrong on that when we come back —

Byron R. White:

What if you’re wrong on the proposition, you can’t deal with the investor creditors at all?

What if you’re wrong on that?

Then what?

Daniel M. Friedman:

You mean under either of these arguments?

Byron R. White:

No, on your first argument, if you’re wrong on your first argument, I assume that —

Daniel M. Friedman:

Well, if — well, if we can’t deal with investor creditors at all.

We then say at the second proposition, you can’t deal with investor creditors if you don’t give them fair and equitable treatment.

Byron R. White:

Right.

But that doesn’t mean transferring in the sense —

Daniel M. Friedman:

No, that would mean dismissing.

That would mean dismissing.

Byron R. White:

No.

Would this mean saying that you’re going to have a plan to deal with these fellows, they should receive fair and equitable treatment under the arrangement.

Daniel M. Friedman:

Because that’s not — that’s not — I have to concede that’s not what the statute says.

The statute does not —

Byron R. White:

I just thought it sounds like you are — it says, it is for the best interest of creditors.

Daniel M. Friedman:

Yes.

Byron R. White:

If it is, then you should confirm it.

And I would think you’re saying those words you’ve interpreted in the case of investor creditors is meaning fair and equitable?

Daniel M. Friedman:

Well, the difficulty I have with that Mr. Justice is that the — once the motion to dismiss under Section 328 is denied as far as the commission’s interest is concerned, it’s out of the case.

Daniel M. Friedman:

This is a matter between the party — and I’d like to come back if I may, you quoted from the provision dealing with conformation.

That of course assumes the case is properly in Chapter XI —

Byron R. White:

Go through it.

Daniel M. Friedman:

I’d like to refer to Section 328 —

Byron R. White:

Yes.

Daniel M. Friedman:

Which is the provision of page 3.

Byron R. White:

Yes.

Daniel M. Friedman:

–of our brief which is the critical provision here, which says that the judge may dismiss it if it finds the proceedings, should have been brought under Chapter X.

Byron R. White:

I understand, but what if you’re wrong on your first argument?

Daniel M. Friedman:

Well, if we — if we’re wrong on our first argument.

We fall back to the fair and equitable and finally, we fall back on the proposition that even though transfer may not be mandatory in all cases.

Certainly, in the facts of this case that we had here transfer was necessary.

Arthur J. Goldberg:

(Inaudible)

Daniel M. Friedman:

Well, this —

Arthur J. Goldberg:

Which you said in previous cases unless I’m wrong, the question of transfer apart from your legal arguments as a matter where — a matter for the discretion.

Daniel M. Friedman:

Well, in the General Stores case, Mr. Justice, the Court where both lower courts had dismissed, had transferred in effect, this Court in affirmance said, it could only disturb that ruling, if there was an abuse of discretion.

Now, here we think, there was an abuse of discretion.

We think that this is a case in which there was no — not the same kind of balancing that was involved in the General Stores case.

The General Stores case, the plan did not affect the interests of the public of the creditors, public creditors.

The creditors involved in the case were not members of the public.

The theory on which the District Court had dismissed the Chapter XI proceedings, so that they were publicly held securities, stockholders, and it — in order to protect the interests of these people.

The procedures of Chapter X were required and we think that in this situation where all the material you have here is — shows what is shown here that — in any event, the District Court should have transferred in the Realty case.

In the Realty case, the two lower courts in effect had upheld the denial of the transfer and this Court, it concluded that in all the circumstances, a more comprehensive reorganization with the protections of Chapter X was required.

It had no reluctance to correct the error and direct that there shouldn’t have been a transfer.

(Inaudible)

Daniel M. Friedman:

If he would’ve — let me assume a hypothetical case that there was no question that the public creditors are being paid off $0.100 on $1.

And — in that type of the case, it seems to be you’d go to the first point as to whether nevertheless there was any need to protect —

(Inaudible)

Daniel M. Friedman:

That it seems to me, however, is that most unusual case.

This is the not the usual situation where they propose in the Court.

Daniel M. Friedman:

If they had enough cash to pay them off $0.100 on $1 as frequent as they did, there would be no need to resort to these provisions at all.

They would just go ahead and pay them.

If I may to come back one moment to this fair and equitable point, I would like to refer again to the General Stores opinion.

(Inaudible)

Daniel M. Friedman:

No.

(Inaudible)

Daniel M. Friedman:

It could be pay over period of time.

It does not have to be paid in cash.

If that is true (Inaudible)

Daniel M. Friedman:

Well, not necessarily, because whether the particular plan gives them fair and equitable treatment, it is often a very complicated question.

(Inaudible)

Daniel M. Friedman:

Well, I have some difficulty Mr. Justice in accepting that, because frequently, resort need be had to the provisions of Chapter X in order to determine that very question.

For example, suppose there’s a certain interest rate and they propose to give them new securities with a different interest rate.

This may require evaluation of the business to see what the risk elements are.

And therefore, I can’t accept the hypothesis that despite all the complexities, you could tell just by looking at it, that this plan would meet fair and equitable standards.

If the case were – as I say that they were just paying them in cash, that would be one thing.

But where, you have a complicated question, we think that the provisions for Chapter X are necessary.

Indeed, in the Realty case, which was decided when you had the fair and equitable standard in both X and XI, the argument was made that you didn’t have to go to X, because you could determine under XI whether it was fair and equitable.

And Mr. Justice Stone in his opinion for the Court said, no, you can’t do that.

You need the very procedures of Chapter X in order to determine it.

And I would just do like —

Potter Stewart:

But what if you have just a simple case.

You said that fair and equitable, the fair and equitable concept requires that creditors be paid $0.100 on $1.

And of course, that’s not quite accurate, because often there just isn’t $0.100 for $1 of debt, but it does require that senior creditors be paid everything before junior creditors or stockholders get anything.

Daniel M. Friedman:

Yes.

Potter Stewart:

It does require that much as at least as I understand it.

But would it be possible under a Chapter XI proceeding, let’s assume just one class of creditor and one class of stockholders to just turn the whole company over to the creditors.

Now, that would certainly be fair and equitable, isn’t it?

Daniel M. Friedman:

I would assume so.

Potter Stewart:

And wouldn’t that be possible to do in a Chapter XI proceeding or not?

Daniel M. Friedman:

It would be possible.

It seems to me most unlikely that the management which represents the common stock interest would do that.

And of course, in this case, they didn’t do that.

Potter Stewart:

A Court could require that they do it, could not approve anything short of that?

Daniel M. Friedman:

Well, it could disapprove it.

The Court could conceivably just say that it’s not going to approve any plan, which still is, but the management doesn’t have to amend the plan.

The management can go into bankruptcy and again, you may have also referred — again, in this situation that there are all sorts of problems as possible protection of the interest of the stockholders in addition to that.

If the plan proposed, imagine I find it frankly very difficult to conceive of a management coming in under a Chapter XI plan to arrange its secured debts —

Potter Stewart:

Without some hope of retaining something.

Daniel M. Friedman:

That’s right.

And I would just like to save a minute or two for rebuttal.

I would just like to refer to what the Court said in General Stores on this point, which was decided four years after the amendments and it listed as a typical instance with Chapter X four for the more adequate remedies in Chapter XI and that is the standard for deciding which Chapter to be used.

The Court said, “Readjustment of all or a part of the debts of an insolvent company without sacrifice by the stockholders may violate the fundamental principle of a fair and equitable plan, as the United States Realty case emphasizes.”

Earl Warren:

Mr. Burke.

Arthur W. Burke, Jr.:

Mr. Chief Justice, Your Honors.

The counsel has indicated that this involves a rather complicated fact situation and that’s not basically true.

In December of 1960, the following facts were existing, this company had approximately 5,600 trailers leased from various trailer owners around the Rocky Mountain States that was unable to meet the obligations due on these trailers, because they were under a firm contract amount payable at the rate of — in most cases, 2% a month.

It had certain general creditors of rather insignificant amount and it had creditors who are also members of management.

Being unable to meet the obligations created by the leases on these trailers, it had no alternative but to seek relief under some Section of the Bankruptcy Act or some type of proceedings such as that, selected Chapter XI.

Now as indicated previously, there are two methods by which financially distressed corporations may obtain relief from their untenable debts.

These two methods are generally known and referred to here as Chapter X and Chapter XI.

Chapter X may also, of course, deal with secured debt creditors.

Now, the two provisions although quite different in the words used come to the same import, when you analyze what you may or may not do under a Chapter X or XI or in either case.

Chapter XI provides that “An arrangement shall mean any plan of a debtor for the settlement, satisfaction or extension of the time for payment of his unsecured debts upon any terms.”

Chapter X on the other hand, provides that a plan of reorganization under this Chapter, shall include in respect to creditors generally or some class of them, secured or unsecured, and may include in respect to stockholders generally, or some class for them, provisions altering or modifying their rights to the issuance of new securities of any character or otherwise.

Now, here we are primarily concerned with Chapter XI.

Chapter XI has had a rather interesting history.

Prior to 1942, the only parties to a Chapter XI were those who had some interest in the Chapter XI; that would be the creditors.

They and the company itself would necessarily be the only parties in interest.

At that time, in the Securities and Exchange Commission versus United States Realty, an improvement case, a determination was made that this was an equitable proceeding and that the Securities and Exchange Commission could intervene in such a Chapter XI proceeding.

Arthur W. Burke, Jr.:

Thereafter, Chapter XI was amended to permit the intervention by the Securities and Exchange Commission under Section 328 to allege that the matter should have been brought as a Chapter X proceeding.

Now, prior to 1952 as previously indicated, the Chapter XI contained a provision that it must be fair and equitable, and of course, that means a strict priority to senior creditors, junior creditors, and then to the stockholders.

In 1952, however, Congress amended this Section and removed the fair and equitable provision and to show that congressional knowledge of the meaning of its amendment that Congress had knowledge of the meaning of its amendment, added a paragraph to the end of this Section stating that, “confirmation of an arrangement shall not be refused solely because the interest of a debtor or if the debtor is a corporation, the interests of its stockholders or members will be preserved under the arrangement.”

So, that is not grounds for the reservation of the interest of stockholders, is not grounds for a refusal of confirmation.

Now, the Securities and Exchange Commission has indicated that this is a non-controversial amendment, merely clarifying previous law, but that is not what is indicated by the history of the amendment because in Senate Report 1395 in the 82 Congress at which this amendment was passed, the second session in 1952.

So Sections 35, 43, and 50 of the bill make similar changes in Section 366 of the Act.

The language fair and equitable was derived from 221 (2) of Chapter X in which for the purposes of corporate reorganization, the requirement is sound and necessary.

However, the fair and equitable rule cannot be applied in a Chapter XI, XII or XIII proceeding if construed as interpreted in Northern Pacific Railway Company versus Boyd.

Now, that was a case in which it was determined that strict priority shall be accorded to senior creditors.

Potter Stewart:

You wouldn’t argue then that the — for the best interest of the creditors in Section 366, Chapter XI, includes the fair and equitable.

Arthur W. Burke, Jr.:

That is —

Potter Stewart:

That is used in Chapter X in which you —

Arthur W. Burke, Jr.:

No.

I do not believe that it contains a fair and equitable provision.

I do believe that for the best interest of creditors, it can be interpreted to mean generally fair.

Potter Stewart:

Yes.

Chapter XI is a great concession to the existing management to stay and preserve its equity.

Arthur W. Burke, Jr.:

Yes, preserve its equity.

I think in our case, provision has been made for management to get out.

I can’t conceive that —

Potter Stewart:

That’s the end product.

That’s not the —

Arthur W. Burke, Jr.:

That’s not — and until the plan is complete.

Potter Stewart:

Yes.

Arthur W. Burke, Jr.:

Yes, that’s correct.

Then they go on to paraphrase where I said previously, — you cannot apply the fair and equitable provision to Chapter XI, XII or XIII, if construed as interpreted in Northern Pacific and other cases without impairing if not entirely making value as the relief provided by these chapters.

If so applied, no individual debtor or corporate debtor or stockmanship is substantially identical with management under Chapter XI and no individual debtor under Chapter XII or XIII can effectuate an arrangement or a plan by scaling of debts.

The Fair and Equitable Rule was never applied in a composition proceeding under the former Section XII of the Bankruptcy Act, which has been replaced by Chapter XI, nor is it practical or realistic to apply at any proceeding under Chapter XI, XII or XIII.

The amendment removes the fair and equitable provision and by paragraph added to each of the amended Sections, it is made clear that it shall not be applied there under.

So that Congress knew precisely what they were doing when they removed the fair and equitable provision and made it quite clear that their intention — they made their intention quite clear.

Arthur W. Burke, Jr.:

Now, it’s interesting to note in Chapter XI and Chapter X that there is a reference back and forth, one chapter to the other.

Chapter X provides that you must make as a jurisdictional allegation that Chapter XI cannot provide the relief needed.

Now, this would seem to indicate a degree not absolute, but a degree of preference for Chapter XI.

If Chapter XI can provide the relief needed, then obviously, Chapter XI is to be used, because you must allege in a Chapter X, that Chapter XI cannot in order to cannot meet the needs, in order to stay under a Chapter X.

Chapter XI now provides that it may be dismissed — Chapter XI may be dismissed if the Securities and Exchange Commission or any party in interest shows the matter should have been brought as a Chapter X.

And I think this Court has previously interpreted what is meant by the language should have been brought as a Chapter X.

I will get to that a little later.

But at any rate, the reference back and forth between these two sections creates a situation in which the proponents of a Chapter X must show that Chapter XI cannot provide relief and creates precedence as I said.

And the provision in Chapter XI which provides for a permissive dismissal, if the matter should have been brought under a Chapter X imposes a burden on the parties moving to dismiss.

In this case, it imposed a burden upon the Securities and Exchange Commission to prove that there is a reason why Chapter XI is not available and to prove — and this is probably more important, to prove that Chapter X is available; because certainly, if Chapter X is not available, no one could justifiably say that it should have been brought as a Chapter X.

And then it has an additional burden and this burden is imposed by, I believe this Court is imposed in a realty case, and that burden is that they must also prove that Chapter X better meets the needs to be served than a Chapter XI does.

In other words, there are those two affirmative burdens.

Now, in this case, as it’s obvious from statement to counsel, as it’s obvious from the brief, the Securities and Exchange Commission have gone to great limits to pick apart this record to pick a part of this company to attack the plan as proposed under the Chapter XI, but has offered no evidence to indicate that a Chapter X better meets the needs to be served or that Chapter X meets the needs to be served at all.

(Inaudible)

Arthur W. Burke, Jr.:

Well, of course.

First of all, the simple answer and that is if there are — if you intend to adjust the rights of secured creditors, Chapter X is available.

I think and I intend to cover this and I’ll go through it right now.

(Inaudible)

Arthur W. Burke, Jr.:

Yes, I believe —

I think you’re under XI?

Arthur W. Burke, Jr.:

The only Chapter X provides that you may adjust the rights of secured creditors.

In fact, I believe that Chapter XI specifically refers only the unsecured creditors.

Now, that it may necessitate in an answer your question, certain factual presumptions.

One, we have a situation in this particular case, in which there is insufficient money to pay for a Chapter XI proceeding — Chapter X proceeding.

There is no money to pay a receiver or a trustee.

Second, the only asset of this company, the primary asset of this company except for some insignificant furniture and office script — the primary asset of this company is its contractual relations with a series of station operators numbering at the time of the filing of this arrangement, some 500 stations across the United States and unclear across Maine to California and Seattle to Miami Beach.

These contractual arrangements are with for the most part, filling station operators without being intending to degrade filling station operators, they are not the most astute businessmen and I think that clearly, when you — company with whom they are dealing gets in a little bit of trouble and starts talking about a bankruptcy proceeding even though it may be a rearrangement proceeding that nevertheless, they begin to worry and they begin to think how to protect themselves.

Now, I could give examples of that.

They are not in the record and in the record before the court, but the company has had some difficulty with station operators as a result of being in a Chapter XI even though you can handle it much faster.

So that, there is a necessity for speed in order to keep these contractual arrangements as intact as may be done.

Arthur W. Burke, Jr.:

The third reason and this I think is absolutely determinative in this case and that is this.

These leases with the station — with the trailer owners, Mr. Friedman has stipulated with me, I’ll have to explain just briefly — when the Securities and Exchange Commission ask for a lease to be introduced — so that they could introduce it into evidence.

The manager of the company ran over to the company on his lunch hour and brought it back and he brought back a non-typical lease and said, “Here is a typical lease.”

And at any rate, the lease which is printed in the replied brief of the Securities and Exchange Commission is not the leases of — all of the leases are not of this nature.

That lease does not contain any provision for termination upon entry of a receiving order or bankruptcy proceedings.

Mr. Friedman has stipulated with me that I may state to the court that some of the leases — with his consent, some of the leases do contain a provision for termination of the lease, automatic termination upon entry of a receiving order or a bankruptcy.

(Inaudible)

Arthur W. Burke, Jr.:

Yes.

That — and that provision I believe is paragraph 11 on the same —

Potter Stewart:

X I think.

Arthur W. Burke, Jr.:

X of the — say on the second page.

Potter Stewart:

I think Number X.

Arthur W. Burke, Jr.:

All right, thank you.

Now, I will go further and this without — and Mr. Friedman stipulation on this point and state that many of the leases contained the provision.

This provision was inserted in 1959 in the leases and all of the leases that were executed in the year — in the last three quarters of 1959 and, at least, the first three quarters of 1960, and probably all of 1960 contained this provision terminating the lease upon the entry of the receiving order or a bankruptcy proceeding.

So, we’re faced with the situation in which a receiver or a trustee would have no right to take and use any of this money.

I think it might even be considered a criminal conversion if we had.

He has no right to possession of any of these trailers to continued operation of the trailers.

In other words, a trustee would come down finally to a situation in which he has no trailers to operate and certainly no income from his non-operating trailers.

Potter Stewart:

(Inaudible)

Arthur W. Burke, Jr.:

Your Honor, I can’t disagree completely because of course that clause has never been interpreted.

I would from my own practical point of view in advising the trailer owner client, I would advise him that certainly there is no way he could make an arrangement and until such time as a receiver or a trustees made an offer under a reorganization plan, because prior to that time — prior to the time that he has made a contractual arrangement as we envisioned under the arrangement, then he would have no right to possession of the trailers, I don’t believe.

Hugo L. Black:

(Inaudible)

Arthur W. Burke, Jr.:

All right, I’ve —

Hugo L. Black:

(Inaudible)

Arthur W. Burke, Jr.:

I disagree, but I think that it is subject to interpretation and I certainly can’t say absolutely no.

He could make no such arrangements.

Hugo L. Black:

(Inaudible)

Arthur W. Burke, Jr.:

No.

Hugo L. Black:

(Inaudible)

Arthur W. Burke, Jr.:

No, I don’t disagree with that.

I disagree with his right to possession of the trailers or the receipt of any monies or his ability to make arrangements with some —

Hugo L. Black:

(Inaudible)

Arthur W. Burke, Jr.:

Now the second — the last point on that particular question is this that in the — throughout the proceedings in this arrangement, the company, the directors have provided funds for the continued administration of the company.

And in addition, one of the Directors, Mr. Peters, has offered full-time management and, in fact, has applied full-time management without compensation in order to keep the company going during the time of these proceedings.

Now, the Securities and Exchange Commission, in this particular case to finish off that argument has just grandly without any proof — has just grandly observed that Chapter XI is not available to this company.

This is by virtue of rather a double twist in logic.

I think one of the justices indicated that they were approaching — trying to approach a center point from both ends and — that’s the precise analogy, I had gone earlier that they have said that — because you removed fair and equitable, now the plan can no longer be brought under Chapter XI, it must be brought under Chapter X, where fair and equitable provision applies.

But they have never attempted in this particular case to prove the availability of Chapter X.

Now, we have to look at these things as a practical matter, when we’re dealing with a business arrangement.

And as a practical matter, if Chapter XI is not available to this company, there is only one route that is available and that is the ordinary bankruptcy.

The ordinary bankruptcy in most cases might not be so bad.

Insofar as one of the justices observed frequently, you merely prolonged the life of the company by reorganization or rearrangement.

But in this particular case as indicated previously, we have trailers scattered across the United States, a day-by-day system of accounting to keep track of these trailers.

And in order for any trailer owner to know where his trailers are, he must refer to the records of the company and these records are daily, in case of certain trailers in fast moving areas, weekly sometimes and sometimes monthly and sometimes annually changed, as fast as the trailer has moved from one location to another, these records change.

Now in an ordinary bankruptcy, a trustee would have no inclination and I doubt that he would do it and he would have no inclination to keep these records to date.

He has no interest in the trailers.

The only thing he could do would be to terminate these executory contracts or leases and say, the records of the company are available to you to determine where your trailer is and as soon as you determine it, go get it, which even then might not be too bad.

But by the time a trailer owner makes a determination as to the fact that he is faced with a problem, consults his attorney and comes in to Court and attempts to find out what to do –it’s suggested that that trailer will not move and there will be no further record from that time on as to where the trailer has gone.

William J. Brennan, Jr.:

(Inaudible)

Arthur W. Burke, Jr.:

And once again, not in this portion of the record.

The court below and I’m trying to think now, whether this was a special master or whether it was the District Court, but I believe it was the special master, who was the chief referee in bankruptcy, stated that Chapter X is not available to this company.

This company can not qualify for Chapter X.

William J. Brennan, Jr.:

(Inaudible)

Arthur W. Burke, Jr.:

Well, by reason of the —

William J. Brennan, Jr.:

You state that in your brief, but you don’t indicate any reason?

Arthur W. Burke, Jr.:

Well, for one thing, the termination of the lease is automatically appointed upon the entry of a receiving order.

Secondly because, in the Chapter X you have to show where you’re going — how you are going to carry out your plan.

Where’re you going to get — where the trustee presumes to get the money to operate a Chapter X and it is an expensive proposition. This company had no money with which to do that.

Its income was decreasing day-by-day because many people were taking the trailers out of the system, they were removing.

Arthur W. Burke, Jr.:

And in fact, at one time there were 5,600 and some trailers in the system.

There are now approximately 2,000 trailers in the system.

William J. Brennan, Jr.:

Well, if Chapter X as I understand, protect that status as much of the Chapter XI Rule.

Arthur W. Burke, Jr.:

I’m trying to think back to your original question.

William J. Brennan, Jr.:

But why it didn’t qualify — why you couldn’t qualify it under Chapter X?

Arthur W. Burke, Jr.:

Yes.

Because the receiver would have no money to operate it on there for one thing, because as a practical matter, as a feasible matter under a Chapter X, the time involved would completely destroy all of the contractual or not completely destroyed parties, would destroy a great many of the contractual relationships between the station operators and the company.

Now, this has happened under this Chapter XI because of the protracted time, it was commenced almost two years ago and these relationships are being destroyed.

And in fact, we are finding almost, I’d say once a week, I have to go over and get a restraining order, restrain someone from selling trailers that is a man who had operated the station, rented the trailers and now he wants the storage for the trailers because they are not running as well as they did.

The company has dropped out someone out of a competitive position.

(Inaudible)

Arthur W. Burke, Jr.:

You must plan a receiver if the debts exceeds $250,000, a trustee, I’m sorry not a receiver yet. I’ve interchanged these, I mean the trustees.

In bankruptcy, I believe, the legal significance is the receiver is ordinarily a temporary arrangement and a trustee is a permanent.

(Inaudible)

Arthur W. Burke, Jr.:

That’s right.

(Inaudible)

Arthur W. Burke, Jr.:

I believe that the appointment of a trustee is in effect a receiving order.

(Inaudible)

Arthur W. Burke, Jr.:

No, Your Honor.

I have no — there are no litigate cases that I know of on that particular point as I said before.

Potter Stewart:

Trustee under Chapter X, if the records of $250,000 is present for his appointment where he has been required appointment.

Does he always take possession?

Arthur W. Burke, Jr.:

Yes, I believe he does under chapter X.

Yes, sir.

Potter Stewart:

He normally does.

Arthur W. Burke, Jr.:

Yes, sir.

Potter Stewart:

I just wanted to know if there was a trustee —

Arthur W. Burke, Jr.:

— takes possession.

Potter Stewart:

— and allow the debtor to remand.

Arthur W. Burke, Jr.:

I believe the only time that a debtor could remain in effect in possession is, if the receiver or the trustee were to employ -– in effect employ the management.

Potter Stewart:

As management and to employ experience in — .

Arthur W. Burke, Jr.:

Right, I believe that’s correct.

To some extent, we find sometimes under Chapter X of the managements in jail, I can’t reemploy them, but yes, it is done.

William J. Brennan, Jr.:

(Inaudible)

Arthur W. Burke, Jr.:

Yes.

William J. Brennan, Jr.:

(Inaudible)

Arthur W. Burke, Jr.:

I think in this case — in this particular case, it would have had been done because of the large volume of records which is necessary to keep and the familiarity you had to have with the overall setup of the records.

I think it would have had to be done and I don’t believe there was any money to do either to pay a trustee or to pay the management.

That’s not to say that the director who’s now working for nothing would have worked for nothing under those circumstances, but it’s less likely, because as it’s pointed out, the directors of this company — the management of this company have loaned the company sufficient money to where they would have a 6% ownership of the company for their loans, so — and the stockholders would receive 12% for their stock, that is for their system, and under Chapter X, it’s less likely that that would happen.

So, the management might have been less inclined to make the sacrifices that they have made in additional money some time under Chapter X.

Now, there is one thing that I want to be sure and cover before I run out of time regardless of all else and that is this.

That this plan envisions a completely voluntary type of an arrangement with these trailer owners.

The trailer owners are not in the normal sense or in the sense even outlined by counsel at the beginning of his argument.

They are not public investor creditors in the sense that he outlined, they are not lenders to the company.

They own trailers and the debt of the trailer owners is the unpaid past rental.

The trailer owners may remove a trailer, they may remove half of their trailers, they may remove all of their trailers.

No vote by any group of trailer owners that is to say, if 99% of the trailer owners vote affirmatively in favor of this plan, the 1% may still remove all of their trailers or any part of their trailers and they may vote affirmatively insofar as a portion of their own trailers go, so that there is no involuntary affecting of the rights of creditors as you would have with a bond or an indenture of some type or mortgage certificates that sort of thing.

There is not that, because no one can bind these trailer owners in their individual rights.

They may remove their trailers, they have.

Many of them removed their trailers and they have received their complete cooperation of the company and so doing it.

Byron R. White:

This was started out at the Chapter X case that — and they put the plan and found these trailer owners that two-thirds have been voted to the plan.

They were classified separately as two-thirds have voted to the plan.

That the one-third who voted against it, the nevertheless bound into the —

Arthur W. Burke, Jr.:

If the Court were to take the concept that the trailers or the trailer leases in effect created a secured debt.

Yes, I believe they could.

Byron R. White:

It’s within — how about just lessors?

Arthur W. Burke, Jr.:

No.

As lessors —

Byron R. White:

As lessors are personal property under Chapter X and Chapter X —

Arthur W. Burke, Jr.:

I don’t believe they could be bound.

Arthur W. Burke, Jr.:

I think that they could remove their equipment the same — their trailers the same under Chapter X as they can under Chapter XI.

Byron R. White:

Now, Mr. Burke, if these trailer leases so-called are in fact a secured debt, then Chapter XI is not available.

Arthur W. Burke, Jr.:

That would be correct.

If we were — if the American Trailer Rentals Company were attempting to effect a secured debt and these were to be classified as a secured debt, which was suggested incidentally, that maybe be so classified at one time and that was rejected.

But if it worked certainly, Chapter XI is not available.

Potter Stewart:

If these amount to a secured debt then you lose your case, then this obviously should have been brought under Chapter X.

Arthur W. Burke, Jr.:

If they are secured debts, then I’m wasting my time even standing here.

Byron R. White:

But in Chapter X, they may have some trouble if that is in itself a secured debt, wouldn’t they?

Even if the referee were receptive to the proposition that this was -– the form where he doesn’t make much difference.

Arthur W. Burke, Jr.:

I doubt that a majority of the trailer owners would desire to be classified as a secured debt.

But even presuming that they did or those that didn’t want to be classified as secured creditors, I think that they would have difficulty.

Byron R. White:

It is protecting him and this protected —

Arthur W. Burke, Jr.:

They’ve never recorded any instruments indicating a lien against anything.

Of course, they have the titles themselves.

The titles are in their name and the trailers are in fact licensed in their name with various state license plates.

I think they are clearly owners.

I think they would have a very difficult time.

If they desired to do so, I think they would have a tough time proving that they are in fact secured creditors.

Now, as one of the justices pointed out earlier, when this fair and equitable provision was removed from Chapter XI, it would have been very simple at that point, if they had intended to exclude from the operation of Chapter XI thereafter.

They intended to exclude from the operation of Chapter XI, the so-called “public investor creditors”.

It would have been very simple to say at some place in the section, some place in Chapter XI, if the rights of public investor creditors are to be effective, the plan must be fair and equitable, or to say that if the rights of public investor creditors are to be affected or that under this Chapter, the rights of public investor creditors may not be affected.

In other words, if Congress had intended to exclude from the operation of Chapter XI, public investor creditors, certainly, they could have so provided very easily and I think we’re bound by the presumption that since they did not exclude, then they did not intend to exclude.

Now —

(Inaudible)

Arthur W. Burke, Jr.:

Of course, Congress codified the holdings in the United States Realty Case, which permitted intervention.

I believe that as a matter of fact that Congress greatly restricted the operations of the Securities and Exchange Commission in these cases by allowing intervention.

Now as to the intention, I have some difficulty myself in understanding why Securities and Exchange Commission should have any interest in this and why Congress should allow them to have any interest in this.

Arthur J. Goldberg:

Are they under public investor?

Arthur W. Burke, Jr.:

No.

Not in public investors in this particular case and I’ll tell you — I’ll show you why.

Arthur W. Burke, Jr.:

Presuming for the moment that my argument is correct that this company would go into ordinary bankruptcy, that the records would quickly become outdated and these trailers would be lost.

Then the people who stand to lose the most are the trailer owners.

Arthur J. Goldberg:

(Inaudible)

Arthur W. Burke, Jr.:

They have that — they have that right anyway outside of these proceedings.

Arthur J. Goldberg:

(Inaudible)

Arthur W. Burke, Jr.:

The —

Arthur J. Goldberg:

(Inaudible)

Arthur W. Burke, Jr.:

If there may —

Arthur J. Goldberg:

(Inaudible)

Arthur W. Burke, Jr.:

I should think it would be.

I should think the Securities and Exchange Commission would have introduced such evidences they have on that particular subject rather than leave it to innuendo and I would also suggest if that evidence exists, Securities and Exchange Commission would have it, because they investigated this company once rather thoroughly.

As it was pointed out, the company filed a registration statement which never became effective.

So that information should be available to the Securities and Exchange Commission and if it is available, I think that it should have been introduced and it was not.

Arthur J. Goldberg:

(Inaudible)

Arthur W. Burke, Jr.:

Yes, he’s not gone beyond the presentation in the District Court.

(Inaudible) probably under that facts of the District Court —

Arthur W. Burke, Jr.:

Yes, it was.

Now, I have two very quick points that I’d like to cover here.

One, I think the General Stores case very clearly sets forth what the rule of law has been to this time on these and in that case, the Court rejected the theory that public-owned debentures, public owned mortgage certificates, public owned stock, the size of a corporation or the character of the debtor dictated the use of one chapter or another.

Now that case clearly established that fact.

It went then into the question of what wasn’t controlling factor and established that the controlling factor was — which chapter better met the needs to be served?

And that if then put in the lap of the District Court as a matter of discretion.

Now, to the matter of discretion, rather quickly, I will indicate that the courts below requested amendments, in effect, requested amendments of this plan.

It was not wholeheartedly satisfied but the plan as originally proposed — it requested amendments to the plan and these amendments were put into effect.

Prior to the amendments — the debts — the management creditors where they received one share of stock for every 350 of debt after they would have received one share of stock for every 550 debt.

And there were other amendments which — to the plan which I haven’t time to cover but, be assured that in every case where the District Courts suggested an amendment, an amendment was made.

I think that District Court exercised sound discretion and I believe that that’s what this Court has previously told the District Court to do.

Thank you.

Earl Warren:

Mr. Jenckes.

Marcien Jenckes:

I’m pleased Your Honor, may it please the Court.

Marcien Jenckes:

I speak as in my certiorari in the case, because I argued last December in our First Circuit in Boston, an identical situation involving the appeals from the District Court Judges’ refusal to transfer a Chapter XI case to Chapter X.

I represented there and here the State Mutual Life Insurance Company and George Patton Fund New Boston, and his management company.

The time, I filed my brief, there were two other cases beside this one and that one, which were pending, the same question, one in the Fifth Circuit and the one in the Second Circuit.

Unfortunately, our case in the First Circuit argued last December has not yet been decided.

The Fifth Circuit case argued in February of this year was decided just a week ago and the action of the District Judge was reversed principally because of the fact that the plan there involved only provided for a 15% dividend to the creditors for as the equity position was increased from a deficit to something over a million.

And I find no difficulty in seeing why the Circuit Court said this is not in the best interest of creditors.

Byron R. White:

What’s that citation?

Marcien Jenckes:

That is the case of the Crumpton Builders case and it has not yet been published in the federal report.

Byron R. White:

What’s the name?

Marcien Jenckes:

Securities and Exchange Commission against Crumpton Builders, Inc.

Hugo L. Black:

I’m sorry, I don’t get that.

Crumpton?

Marcien Jenckes:

Crumpton, CR-U-M-P-T-O-N is cited in the Footnote on page 3 of my brief among the other cases and the decision is dated October 21, 1964.

Potter Stewart:

Was that the case in which the Court of Appeals simply upset the confirmation or did they say that it should be dismissed and brought on the Chapter X?

Marcien Jenckes:

They said it should be transferred to the Chapter X under the provisions of Sections 328.

There are many, many differences between that case and no one at Bar or even more so between that case and the First Circuit Case.

Byron R. White:

What’s the other case?

Marcien Jenckes:

It depends on the First Circuit on the —

Byron R. White:

What do you have besides the Fifth Circuit Case, there’s another case —

Marcien Jenckes:

There’s one in the Second Circuit which is on the current list and another one in the First Circuit where I appeared.

The one in the Second Circuit is in re Canandaigua — in the matter of Canandaigua Enterprises, Western District of New York, Second Circuit Case number 29012.

William J. Brennan, Jr.:

(Inaudible)

Marcien Jenckes:

Neither of them.

My case in the First Circuit is pertinent against the Securities and Exchange Commission, so they’re seeking to review the decision of Mr. Justice Day of the District Court at Rhode Island, which I hope Your Honors will read because it’s such a carefully well-written and thoroughly investigatory opinion on the basis of which he exercises discretion not to transfer.

Some of the opinions in the other cases of to say at least brief, not exhausted.

And in 221 sets up at 961, you will find Judge Day’s opinion, which is perfectly on review since last December.

Hugo L. Black:

229?

Marcien Jenckes:

221, Your Honor.

Hugo L. Black:

221

Potter Stewart:

The citation at the bottom of page 5 of your brief?

Marcien Jenckes:

Yes.

Potter Stewart:

In Re American Guaranteed Corporation?

Marcien Jenckes:

That’s right Your Honor.

Potter Stewart:

Thank you.

Marcien Jenckes:

The Fifth Circuit Case as I say is easily understandable because those among other facts come strictly within the amended deposition of Chapter XI.

That the Chapter XI plan must be in the best interest of creditors, not fair and equitable and obviously a plan with only 15% dividend under those circumstances, it is not.

In the Burton case of the First Circuit, it’s even stronger.

Because in that plan, all of the debt must be paid before the stock has any voter control at all.

The plan is designed and presented for the benefit of creditors up there and it is therefore, I say impossible as a matter of fact and more impossible as a matter of law to say as the commission contends that every time you have a public investigation, it must be transferred to Chapter X.

The word dictates, the word required, the one direct all through their brief and I say this is very expanded reading of the word “may” in the Section 328, which is a very discretionary word and a discretionary word that’s even limited to cases where the judge finds that the action should originally have been started in Chapter X rather than in Chapter XI.

The Second Circuit has twice reached the same conclusion in the Grayson-Robinson Stores where apparently the lower court refused the transfer.

The Solicitor General did not choose to seek review and then the Second Circuit in re transmission that was in 1954, that refusal to transfer, a certiorari petition was filed and was denied by this Court.

I realized fully that the American Trailers case is the only one for decision here.

But those involved in this case, a very important principle which has never been decided before by this Court and that is the principal urge by SEC, counsel for the appellant, that whenever there is a public investor situation involved, it must be in Chapter X.

And secondly, that you can’t in Chapter XI have a plan unless creditors gets this priority that is all of the assets before the equity holders get anything.

The authoritative words of “may”, the rest to that language is read into the SEC from sorts or other.

And I’m calling Your Honor’s attention to the fact that an essential jurisdiction allegation of Chapter X is that you can’t get the proper relief on XI.

Secondly, that there is a provision in Chapter X itself, Section 146 (2), saying that a showing in Chapter X that adequate relief can be obtained in XI will result in the dismissal of the Chapter X proceeding.

That’s always the indications of Congress, indicate a preference to me which puzzles me as to where is the source that says that, every time there’s a public investor, there must be a Chapter X proceeding.

The commission stands that the Chapter XI proceeding is limited only the cases where there are trade creditors.

There is just an imposition on the statute, because nowhere is there any suggestions in the statute or elsewhere that Chapter XI is limited to that situation.

The statutory word that should be pointed out here with respect to what constitutes an arrangement are very broad.

Section 306 (1) of Chapter XI defines the arrangement as any plan for the satisfaction or extension of the time for payment of its unsecured debts upon any terms.

This was all unsecured debts.

And of course, in this case and clearly in my First Circuit Case, unsecured debt is all that is involved.

I might point out here that indicated on page 18 of my brief, Mr. Justice Frankfurter noted in the General Stores Case in 350 that this Court has given no consideration to the significance of the 1952 Amendments.

Hugo L. Black:

Was that a dissenting —

Marcien Jenckes:

Your Honor?

Hugo L. Black:

Was that a dissenting opinion?

Marcien Jenckes:

It was a dissenting opinion Mr. Justice Frankfurter and Judge Bernstein dissented in the General Stores Case.

Marcien Jenckes:

Judge Harlan did not participate, but the point I make is that, I don’t think the opinion contradicts what Justice Frankfurter said in that you have not fully considered the import of the 1952 Amendments.

Particularly, that when which has been mentioned here that provided specifically that the plan shall not be refused confirmation, because the interest of equity holders are maintained.

In other words, it is invidious the fact that you are compromising debts, but stockholders may still retain something.

It is not necessary as indicated by the enactment of that new amendment in Section 366 in 1952 that there be a strict priority under a Chapter XI proceeding.

I think that it is important also to realize here that any question of mismanagement, violation of the Securities Act of 33 or other necessary disciplinary actions or causes of actions against management have really nothing to do with the issue here.

The only question involved on this writ of certiorari is the question of whether or not the lower courts have viewed the District Court, abused his discretion, acted beyond the reasonable bounds in denying the transfer.

And that is why I think it is worthwhile to call your attention to the fact that this issue — issues with reference to this other matters can proceed just as effectively in Chapter XI as they can in Chapter X.

And I might here interrupt my own thought to refer to a question that Mr. Justice Goldberg’s answered and I think Mr. Justice White asked the question along the same line, that is the suggestion made and agreed to by the SEC’s counsel that under Chapter XI if the transfer order it is not made to Chapter X, the SEC’s interests ceases it.

I do not subscribe to that You Honor because it seems to me that ever since the very early case 1940, U. S. Realty case decided before the 1952 amendments.

It’s been perfectly clear that the SEC is entitled to intervene in any of these reorganization proceedings, it has intervened a number of times.

(Inaudible)

Marcien Jenckes:

The positions to intervene had been granted in various places.

It intervened in this case below and it intervened in the transmission case.

(Inaudible)

Marcien Jenckes:

Well, my thought is Your Honor that it was — the intervention was committed without any limitations on its purpose.

The only thing it did affirmatively was to move the 328 motion, but it was there — at the proceedings, it’s all truly the same as I understand this case.

And even in the Transmission case, I know that the SEC was asked to participate, but the SEC declined to give the justices’ advice.

So, I think that’s what happened in this case, because I wasn’t in on the trial, but I’m quite sure that in this case, SEC was asked for its advice and did not.

My point simply is that if there was occasion for the SEC on account of any reason to intervene in the Chapter XI proceeding, it can do so.

I understand that one of the reasons why they don’t do it is because of possible budgetary problem, but that, Your Honor, has no reason for saying that every time a public investor is here, there must be Chapter X.

This is the report that I wanted to get across in an answer to a suggestion made that the SEC should limit its participation only to the 328 motion.

I think it can go farther, if the circumstances want it, even though for some reason or another, it has to date not tried to.

Hugo L. Black:

(Inaudible)

Marcien Jenckes:

Intervention?

The Transmission case was since 52 Your Honor.

The intervention in my Rhode Island case was general.

The intervention in this case, I’m quite sure was a General Intervention not limited to the Section 328, And so, I believe there is considerable inquiry to indicate that intervention if it’s desired by the SEC and we had on any subject where the public may be involved or should be entitled to be heard even under a Chapter XI plan.

Of course, you must realize also that the only other case that involves Section 328 has been before this Court is the General Stores case and it did came up in exactly the opposite way for this case.

In other words, the lower courts had ordered a transfer and Your Honors granted the certiorari and affirmed setting up there in that first opinion under Section 328, this tests — the needs to be served, the thing that gives the judge, District Judge under the statutory word “may” and with that test the needs to be served, the duty and opportunity to investigate situation and see what is for the best interest of creditors.

That’s the test entirely.

Marcien Jenckes:

So I say here that there really isn’t any proper reason for implying into Section 328, but there’s always discretionary language.

A duty on the District Judge to transfer just because there are public investors and this is the trust as I understand it, of the commission’s first point.

The second question raised by them is just a matter of having a strict priority and it has been ordered that arises from the fact that until 1952, the words fair and equitable appear in Chapter XI.

And those words had acquired a word of art meaning.

I don’t know, as a result of two earlier decisions, Northern Pacific against Boyd 1913 case and a case against the Los Angeles Lumber Company in 1939 case.

Boyd case was before any of the federal statutes dealing with reorganizations and it was a very bold effort on the part of a controlling stockholder to cut out a judgment of creditor by foreclosing a mortgage.

And the case in Los Angeles, Lumber Company Case was that an old Section 77 (b) which of course is the predecessor of our present Chapter X.

And in that case Your Honor, the plans provided for and this was emphasized in Your Honor’s opinion.

The plan provided that the holders of the Whistler’s equity got 23% of the vote.

Now, this awful different from the situation here today and I’m not surprised that the case’s case — the way it did, but it’s neither authority – well, this case does not look like — nor for the general proposition that in the Chapter XI cases strict priority that is all for creditors and nothing for equity holders until the creditors are paid is applicable in Chapter XI.

I think in the last paragraph of the commission’s reply brief, they recognize this fact that for buyers with the fair and equitable standard under Chapter X is no longer required in Chapter XI, but they argue it by judicial fiat the same standard should still apply.

Congress, really wanted that standard to apply in Chapter XI, it seems to me would have been so easy for them to say so.

Biased position, the commission relies on the facts, attempts to take the position that if it cannot force to transfer to Chapter X, its interest in the proceedings (Inaudible) relying on the claim as I mentioned in my talk to you Your Honor.

And I repeat again, if I may, that (Inaudible) decision, it’s been clear that the commission could approve.

The protection which is alleged to have been given by Chapter X can be obtained in Chapter XI and you will see an indication of just how this is done and the appendix attached to my brief, because it has been done in the Rhode Island case that I refer to and what I am looking for here as an amicus curiea in some kind of a statement from this Court to the effect that just as a public investor, the appearance of public investors does not dictate Chapter X.

And secondly, that a strict priority on the basis of the Northern Pacific against Boyd is no longer necessary in Chapter XI.

The SEC is an argument Your Honor, run to something like this, as I look at it.

Congress appeals the fair and equitable requirement that 366 of Chapter XI used to have, fair and equitable, a word of that with a special meaning including the strict priority in payment of old age.

Therefore, they say, Chapter XI cannot be used – its priority is not found.

This to me is a very, very obvious case of non sequitur, what that third step should be is that in view of members to the Act, the Rule of Boyd in Los Angeles Lumber no longer applied.

The provision on which they were based has been taken out of Chapter XI and so, I say that in the case of an arrangement which by judicial determination is found to be in the best interest of creditors and in deciding that fact the judges so deciding may very well apply standards of fair and equitable, but he doesn’t have to think about stockholders.

He doesn’t have to think about anything of the best interest of the creditors.

And here on this particular case Your Honor, you will have the referee, the bankruptcy referee who sat as a special master, the District Judge and three appellant judges, all who found that this was accomplished by this plan.

This is to me the subpoena should be dismissed.

Thank you.

Earl Warren:

Mr. Jenckes, it would be helpful to the Court if you would file copies of that Fifth Circuit decision in Crumpton with our clerks.

Marcien Jenckes:

I have one here, I’d like to reproduce it.

Earl Warren:

That — that is appropriate —

Marcien Jenckes:

Yes, I know Your Honor.

Earl Warren:

Mr. Friedman, do you have —

Daniel M. Friedman:

Mr. Chief Justice, I just have three rather brief points I’d like to make on rebuttal but, if the Court would like, the Government will be happy to furnish copies of the opinion in that case, there had been some minor corrections to the slip opinion as it was issued and we’d be happy to furnish the Court with nine copies of the —

Earl Warren:

You do it immediately, it’ll be fine.

Daniel M. Friedman:

Three points Mr. Chief Justice.

First on the question of intervention to which reference has been made, we have on page 7 of our reply brief discussed this problem.

The commission as it understands its authority is limited only to intervening to make the motion.

We do not believe we have any general authority to intervene in this very case.

The only intervention in addition to our motion as we intervened in an attempt to assert that there had been a violation of the Securities Act in the solicitation of the consents to the plan.

We did not intervene generally in opposition to the plan.

Now, it is true as Mr. Burke’s states that this plan is voluntary in the sense that the investor creditors have the choice whether to go in or not.

But of course, the say that the plan is voluntary is only half of it, because the question is what are they told when they are asked to go in and out?

And there is also the suggestion that these people are free at any time that they want to even now to withdraw their trails from the system.

But at page 96 of the record, Mr. Peters testified that whenever a trailer owner wanted to withdraw his trailer from the system, he was required to execute a release of his past claims.

So, what amounts to is, sure you can have the trailer back, but you waive your claims against us for back draft.

And finally, I’d like to just refer to the argument that as a realistic matter, this company has only two choices.

Reorganization or rearrangement of its debts under Chapter XI or bankruptcy, and then the claim is made that, if you don’t permit this company to use Chapter XI, you’re threatening it in effect forcing it bankruptcy.

Again in our reply brief, we have set forth some statistics which indicate that in fact bankruptcy is no more frequent in a case at least statistically where a case has been transferred, where the case has been dismissed under Chapter XI than where it’s retained on the Chapter XI.

This is an argument that’s always made whenever the commission says that Chapter X should be used — the argument is, is always made or you can’t do this, you’re going to force us into bankruptcy.

Well, our answer I think is basically this, if this company is such a sick company that it cannot be reorganized under Chapter X, then it seems to us there is a serious question whether in all the circumstances it should be even rearranged under Chapter XI, because what we’re dealing here with the interest of public investors and when public investors are asked to choose between holding on to their trailer or getting it back if they can or giving it up in exchange in stock in the company.

If a company is so sick that it can’t be reorganized under X — it’s by no means clear that the public investors in this company are better off, under this proposed arrangement than they would be if the company ultimately will liquidate.

And it seems to us that there is another consideration involved here, just the interest of the company — it’s the interest of the public investors, and we think the interest of the public investors in this case would be better served in any circumstances by dismissal of this proceeding rather than by committing to go forward.

Thank you.

Earl Warren:

We’ll recess.