American United Mut. Life Ins. Co. v. Avon Park, 311 U.S. 138 (1940)
U.S. Supreme CourtAmerican United Mut. Life Ins. Co. v. Avon Park, 311 U.S. 138 (1940)
American United Mutual Life Insurance Co. v.
City of Avon Park, Florida
Argued November 12, 1940
Decided November 25, 1940
311 U.S. 138
1. A plan for the composition of the debts of a municipality under Chapter IX of the Bankruptcy Act comprised a refunding plan whereby the municipality's fiscal agent (a private corporation) would defray the expenses incident to the refunding and would be reimbursed therefor and compensated for its services by an assessment of participating bondholders. A stated charge was to be made for each $1000 bond, but the charge would be less if the bondholder should sell to the fiscal agent accrued interest coupons at a third of their face value. The fiscal agent solicited acceptances of the plan, and acceptances representing more than two-thirds of all claims affected were obtained. Exclusive of claims held by the fiscal agent as creditor and voted in favor of the plan, however, the two-thirds required for confirmation would have been lacking. The claims held by the fiscal agent were acquired by it at about fifty cents on the dollar, some before and others after it entered into the agency contract with the municipality. It did not appear from the record in the bankruptcy court whether the fiscal agent disclosed to creditors from whom it solicited acceptances: that it was a creditor as well as fiscal agent of the municipality; the extent, or the circumstances of the acquisition, of the claims held by it; or its intent to vote those claims in favor of the plan. No such disclosure was made in the plan. Held that an order of the bankruptcy court confirming the plan of composition must be set aside. Pp. 311 U. S. 141, 311 U. S. 143.
2. Whether the fiscal agent's compensation for services rendered would exceed the "reasonable compensation" authorized by § 3(b) of the Act requires evaluation of the aggregate of all benefits which might accrue to it under the plan, including its speculative interests. P. 311 U. S. 144.
3. That the fiscal agent's position in the plan is speculative does not dispense with the necessity for the definitive finding demanded by the Act as to the reasonableness of compensation for service rendered. P. 311 U. S. 144.
4. To the extent that the benefits accruing to the fiscal agent under the plan might exceed "reasonable compensation" for services rendered, the allowance was not authorized by § 83(b). P. 311 U. S. 144.
5. Also, if excess benefits should accrue to the fiscal agent, the plan would not then comply with § 83(e)(1), for it would discriminate unfairly in favor of the fiscal agent as creditor. P. 311 U. S. 144.
6. Since the fiscal agent in soliciting creditors' acceptances of the plan is not shown to have made full disclosure with respect to its dual capacity as fiscal agent and creditor, it cannot be said that the assents were fairly obtained, nor that its acceptance of the plan was in "good faith" within the meaning of § 83(e)(5). P. 311 U. S. 144.
7. The control which the bankruptcy court has over the whole process of formulation and approval of plans of composition or reorganization, and the obtaining of assents thereto, is to be exercised in accordance with principles of equity, so far as consistent with the Act. P. 311 U. S. 145.
8. The duty of the court in cases such as this requires scrutiny of the circumstances surrounding the acceptances, the special or ulterior motives which may have induced them, the time of acquiring the claims so voting, the amount paid therefor, etc. Only after such investigation can the court exercise the "informed, independent judgment" essential to confirmation of a plan. P. 311 U. S. 145.
9. It is the responsibility of the court, before entering an order of confirmation, to be satisfied that the plan, in its practical incidence, embodies a fair and equitable bargain openly arrived at and devoid of overreaching, however subtle. P. 311 U. S. 146.
10. The bankruptcy court, in permitting claims held by the fiscal agent as creditor to be included in computing the statutory percentage of assents, without protecting other creditors by requiring full disclosure and other appropriate safeguards, and in allowing compensation to the fiscal agent without scrutinizing the latter's speculative interests, did not in this case discharge its responsibilities under the Act. P. 311 U. S. 146.
11. The provision of § 83(b) for allowance of "reasonable compensation" for "services rendered" necessarily implies "loyal and disinterested service in the interest of the persons" for whom the claimant purported to act. P. 311 U. S. 147.
12. Approval representing the required percentage of claims affected is not the exclusive test of whether a plan of composition satisfies the statutory standard; it is independent of, not a substitute for, the statutory standard. P. 311 U. S. 148.
13. Claims are "controlled" by the municipality and required by § 83(d) to be excluded in computing the statutory two-thirds required for confirmation of the plan not only when the holder of the claims is an agent of the municipality within the doctrine of respondeat superior, but also when there is such close identity of interests between the claimant and the municipality that the claimant's assent to the plan may fairly be said to be more the product of the municipality's influence and to reflect more the municipality's desires than an expression of an investor's independent business judgment. P. 311 U. S. 148.
14. Should there be presented in this case another plan of composition involving a fiscal agency contract, the question of the legality of such contract under the state law would be a relevant inquiry for the District Court, a bearing on whether the municipality "is authorized by law to take all action necessary to be taken by it to carry out the plan," within the meaning of § 83(e)(6). P. 311 U. S. 149.
108 F.2d 1010 reversed.
Certiorari, 309 U.S. 651, to review the affirmance of an order confirming a plan for the composition of the debts of a municipality under Chapter IX of the Bankruptcy Act.