1. Constitutional questions should not be decided, by
anticipation, upon records not necessarily presenting them. P.
299 U. S.
2. Under § 77B of the Bankruptcy Act, if the plan of
reorganization is neither fair nor feasible, the District Judge,
upon so finding, can proceed no further with the plan, and is
authorized to dismiss the petition. Id.
81 F.2d 463 affirmed.
Page 299 U. S. 19
Certiorari, 298 U.S. 651, to review the affirmance of a decree
of the District Court which dismissed the Publishing Company's
petition for reorganization, filed under § 77B of the Bankruptcy
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
The Circuit Court of Appeals affirmed a decree of the District
Court dismissing the petition of the debtor, Tennessee Publishing
Company, and its plans of reorganization, in a proceeding under §
77B of the Bankruptcy Act. The court held (1) that the debtor's
proposal was not a workable one, and hence had not been presented
in good faith as that phrase was used in the statute, and (2) that
subsection (b)(5) of § 77B, as applied to the adjustment of claims
of nonassenting lienholders, was invalid under the due process
clause of the Fifth Amendment. * In re
Tennessee Pub. Co.,
81 F.2d 463, 465. We granted
Page 299 U. S. 20
At the beginning of the proceeding, the District Judge approved
the petition for reorganization as having been filed in good faith,
but, by an order to show cause, reserved to all persons in interest
the opportunity to present their objections. Answers and motions to
dismiss were filed by bondholders. Three successive plans of
reorganization were submitted and opposed. Several hearings were
had. It appears that, for more than two years prior to this
proceeding, the affairs of the debtor had been in charge of a
receiver appointed by the District Court upon a creditors' bill. An
appraisal of the debtor's property showed assets worth about
$295,000. Outstanding bonds, secured by mortgage, were in default,
and amounted, with interest, to approximately $900,000. There were
unsecured claims of about $300,000.
We shall not attempt to state the many details of the various
plans. It may be said in a general way that the first plan, and the
second presented "as a supplement to, or alternate of," the first
contemplated an appraisal of the property, the determination of the
value of the bonds, and the issue of new bonds and the distribution
of the proceeds of their sale, after payment of costs, expenses,
and preferred claims among the secured and unsecured creditors and
stockholders. By an amendment, the debtor offered to pay in cash
the amount of the appraised value of the property as it might be
judicially determined, or to pay the "actual cash value of all
valid interests, claims or liens" as fixed by the court. The third
plan looked to
Page 299 U. S. 21
the retention of the property by the debtor subject to the lien
of the bonds scaled to 80 percent of their face value, or, in the
absence of assent, to an amount found by the court to be due.
Provision was also made for the issue of preferred stock.
In his final opinion, upon the third plan, the District Judge
said that it would "manifestly be unjust to the bondholders" to
undo what had been done in the equity case; that "the validity and
amount of the bonds outstanding" had been established in that case
upon the report of the standing master, to which the debtor had not
excepted, and that it was admitted that the debtor was "notoriously
The District Judge was unable to see how the bondholders could
realize the value of their bonds, or how that value could be
ascertained "except by a public sale" of the mortgaged property. He
thought that the effect of the last plan was to disregard what had
been done in the equity suit and to delay a final administration of
the debtor's estate indefinitely. He found that none of the
bondholders was willing to adopt the plan, and that more than
two-thirds of the bondholders and more than 50 percent of the
unsecured creditors had affirmatively declined to accept it. He
expressed the view that, in such circumstances, the adoption of the
plan would deprive the secured creditors of their constitutional
rights. While again ruling that the petition for reorganization was
filed in "good faith," he saw no alternative "except to dismiss the
petition and let the property be sold in the equity case."
The Circuit Court of Appeals considered that the District Judge,
in passing upon the issue of good faith, was guided mainly by a
consideration of the debtor's honesty of purpose. The court
believed that more was required; that the statute had in view the
submission of a practicable plan with a reasonable prospect for the
Page 299 U. S. 22
of the debtor, and that hence, in the finding of good faith by
the District Judge, there was an erroneous application of the law.
Despite that, the court recognized that the decree of the District
Court should still be affirmed if right, however erroneous might be
any given conclusion of law.
Although reaching the conclusion that the plan of reorganization
was not a workable one and failed to meet the statutory test, the
Court of Appeals proceeded to consider the constitutionality of
subsection (b)(5), and held it invalid. This ruling was premature.
The constitutional question was not necessarily presented, as with
such a plan no case had been made for the application of subsection
(b)(5). It is a familiar rule that the court will not anticipate
the decision of a constitutional question upon a record which does
not appropriately present it. Liverpool, N.Y. & P. S.S. Co.
v. Commissioners, 113 U. S. 33
113 U. S. 39
Cincinnati v. Vester, 281 U. S. 439
281 U. S.
-449; Arizona v. California, 283 U.
, 283 U. S.
Nor do we need to inquire as to the precise limits of the
concept of "good faith" as required by § 77B. Whatever these limits
may be, the statute clearly contemplates the submission of a plan
of reorganization which admits of being confirmed as "fair and
equitable" and as "feasible." However honest in its efforts the
debtor may be, and however sincere its motives, the District Court
is not bound to clog its docket with visionary or impracticable
schemes for resuscitation. Subsection (f) of § 77B provides for the
confirmation of a plan only if the District Judge is satisfied
"that (1) it is fair and equitable and does not discriminate
unfairly in favor of any class of creditors or stockholders, and is
feasible." These are prime conditions. Unless the District Judge
finds that the plan has these qualities, he need go no further.
Unless he so finds, he has no authority to proceed. There is no
occasion for the District Judge to consider the constitutional
Page 299 U. S. 23
validity of the application of the clauses of subsection (b)(5)
if the debtor's proposal is not found to be "fair" and "feasible."
It was the duty of the District Judge in this instance to consider
the debtor's proposal in that aspect. He did not find that proposal
to be fair and feasible. On the contrary, he deemed it to be unjust
to the bondholders to override what had been accomplished in the
equity case. He found that it was impracticable to determine the
value of their bonds except by a public sale, and, in view of the
financial condition of the debtor, he deemed a sale of its property
to be "inevitable." And, along with these considerations, the
proposal encountered what he described as the almost unanimous
opposition of the secured creditors and the refusal of assent by a
majority of the general creditors. Where the debtor's plan of
reorganization is not confirmed, the District Judge is authorized
to dismiss the proceeding. Subsection (c)(8) § 77B.
The question before the Circuit Court of Appeals was whether,
upon the record, the District Court erred in refusing to confirm
the plans and in dismissing the proceeding. The Court of Appeals
examined the debtor's last proposal as its ultimate effort to repel
attack upon the feasibility of reorganization. The court found that
the plan was not understandable in all of its phases, even after
diligent effort "to separate argument from concrete proposals" and
"to reconcile apparently conflicting clauses." The provisions for a
bond issue and for classes of preferred stock, out of the proceeds
of which unsecured creditors and preferred stockholders were to be
compensated, the court found to be "wholly incomprehensible."
Certainly the District Court was not bound to consider such a plan
as fair and feasible or, in view of the situation which the record
disclosed, to continue the proceeding.
Page 299 U. S. 24
That was an entirely adequate ground for sustaining the decree
of the District Court, without attempting to determine the
constitutional validity of subsection (b)(5). Quite apart from that
question, upon which we express no opinion, the decree of the
Circuit Court of Appeals, affirming that of the District Court,
should in turn be
MR. JUSTICE STONE took no part in the consideration or decision
of this case.
* The provision is as follows:
"(b) A plan of reorganization within the meaning of this section
. . . (5) shall provide in respect of each class of creditors of
which less than two thirds in amount shall accept such plan (unless
the claims of such class of creditors will not be affected by the
plan, or the plan makes provision for the payment of their claims
in cash in full), provide adequate protection for the realization
by them of the value of their interests, claims, or liens, if the
property affected by such interests, claims, or liens is dealt with
by the plan, either as provided in the plan (a) by the transfer or
sale of such property subject to such interests, claims, or liens,
or by the retention of such property by the debtor subject to such
interests, claims, or liens, or (b) by a sale free of such
interests, claims, or liens at not less than a fair upset price and
the transfer of such interests, claims, or liens to the proceeds of
such sale; or (c) by appraisal and payment either in cash of the
value either of such interests, claims, or liens, or at the
objecting creditors' election, of the securities allotted to such
interests, claims, or liens under the plan, if any shall be so
allotted; or (d) by such method as will in the opinion of the
judge, under and consistent with the circumstances of the
particular case, equitably and fairly provide such protection."