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
that an order of the bankruptcy court
confirming the plan of composition must be set aside. Pp.
311 U. S. 141
311 U. S.
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.
Page 311 U. S. 139
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.
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.
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.
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.
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.
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.
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.
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.
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.
Page 311 U. S. 140
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.
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
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.
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.
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.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
The District Court confirmed a plan for the composition of the
debts of respondent under Ch. IX of the Bankruptcy Act, 50 Stat.
653, 52 Stat. 939, 940. [Footnote
Page 311 U. S. 141
Circuit Court of Appeals affirmed that order. 108 F.2d 1010.
Petitioner, a creditor of the city, having objected to the
confirmation in the courts below, brought the case here on a
petition for certiorari, which we granted in view of the importance
of the problems in the administration of the composition and
reorganization provisions of the Act.
The city's composition was a refunding plan worked out by it and
its fiscal agent, [Footnote 2
R. E. Crummer & Co. Pursuant to the fiscal agency contract,
both parties were to use their best efforts to induce the creditors
to participate in the plan. The city was not to pay any of the
costs of the refunding, as Crummer was to defray all expenses
incident to assembling the bonds, printing the refunding bonds,
representing the city in proceedings to validate the new bonds,
obtaining a legal opinion approving the bonds, etc. The fiscal
agency contract provided that Crummer was to be compensated for its
services and reimbursed for its expenses by assessing charges
against the participating bondholders. This charge was $40 for each
$1,000 bond, or, in case the bondholders elected to sell Crummer
the interest coupons, accrued to July 1, 1937, at one-third of
their face amount, [Footnote 3
the charge was to be $20 per $1,000 bond.
Page 311 U. S. 142
Crummer solicited assents to the plan. Approximately 69% of the
bondholders accepted. But for the claims held by the Crummer
interests, [Footnote 4
voted in favor of the plan, the requisite two-thirds statutory
vote, however, would not have been obtained. Some of these claims
had been purchased prior to the fiscal agency contract, some later.
The average price was apparently about 53� on the dollar. The
inference seems clear that some of them were acquired in order to
facilitate consummation of the composition by placing them in
friendly hands. But the record does not show whether or not Crummer
disclosed to the bondholders when their assents were solicited that
it was a creditor as well as the city's fiscal agent, the extent of
the claims held by it and its affiliate, the circumstances
surrounding their acquisition,
Page 311 U. S. 143
and its intent to vote those claims in favor of the plan. No
such disclosure was made in the plan.
The District Court, however, found that the two-thirds of the
aggregate amount of claims affected by the plan, required by §
83(d), 11 U.S.C. § 403(d), for confirmation, had assented. It also
found that Crummer's compensation was fair and reasonable, that the
plan and its acceptance were in good faith, and that the plan was
fair, equitable, and for the best interests of the creditors, and
did not discriminate unfairly in favor of any creditor.
We disagree. The order of confirmation must be set aside. It
cannot be said that the plan does not discriminate unfairly in
favor of any creditor, that the acceptances were in good faith,
that the requisite two-thirds vote of approval had been
Crummer had at least [Footnote
] three financial stakes in this composition: (1) the fee to
be collected from the bondholders; (2) its speculative position in
such of the interest accruals as it might acquire from the
bondholders at a third of their face amount; (3) the profit which
might accrue to it or its affiliate, as a result of the refunding,
on bonds acquired at default prices.
The court found that the first of these items was reasonable.
But it apparently deemed the others irrelevant to the inquiry.
Page 311 U. S. 144
Clearly, however, no finding could be made under § 83(b), 11
U.S.C. § 403(b), that the compensation to be received by the fiscal
agent was reasonable without passing on the worth of the aggregate
of all the emoluments accruing to the Crummer interests as a result
of consummation of the plan. Since that inquiry would necessitate
an appraisal of the fiscal agent's speculative position in the
plan, perhaps the definitive finding demanded by the Act could not
be made. Yet that is a chance which the fiscal agent, not the
bondholders, must take, for it is the agent who is seeking the aid
of the court in obtaining one of the benefits of the Act. Moreover,
to the extent that the aggregate benefits flowing to the Crummer
interests exceeded reasonable compensation for services rendered,
their reward would exceed what the court could authorize under §
83(b), 11 U.S.C. § 403(b). Furthermore, if any such excess benefits
would accrue to them, then the plan would run afoul of § 83(e)(1),
11 U.S.C. § 403(e)(1). For, in that event, the plan would
discriminate unfairly in favor of the Crummer interests as
Hence, the lack of that essential finding would be fatal in any
case. It is especially serious here in view of the fact that,
without the vote of the fiscal agent, the requisite two-thirds
acceptance would not have been obtained. Where it does not
affirmatively appear that full and complete disclosure of the
fiscal agent's interests was made to the bondholders when their
assents were solicited, it cannot be said that those assents were
fairly obtained. Cf. Rogers v. Guaranty Trust Co.,
288 U. S. 123
288 U. S. 143
And where, without such disclosure, the fiscal agent's vote was
cast for acceptance of the plan, it cannot be said that such
acceptance was in "good faith" within the meaning of § 83(e)(5), 11
U.S.C. § 403(e)(5). Here, the fiscal agent was acting in a dual
Page 311 U. S. 145
it was representing the city, it likewise purported to represent
the interests of bondholders. The very minimum requirement for fair
dealing was the elementary obligation of full disclosure of all its
interests, and the burden was on it to show at least that such
disclosure was made. Equity and good conscience obviously will not
permit a finding that an acceptance of of a plan by a person acting
in a representative capacity is in "good faith" where that person
is obtaining an undisclosed benefit from the plan.
We have emphasized that full disclosure is the minimum
requirement in order not to imply that it is the limit of the power
and duty of the bankruptcy court in these situations. As this court
stated in Securities and Exchange Commission v. United States
Realty & Improvement Co., 310 U.
, 310 U. S.
"A bankruptcy court is a court of equity, § 2, 11 U.S.C. § 11,
and is guided by equitable doctrines and principles except insofar
as they are inconsistent with the Act. . . . A court of equity may,
in its discretion in the exercise of the jurisdiction committed to
it, grant or deny relief upon performance of a condition which will
safeguard the public interest."
And see Pepper v. Litton, 308 U.
, 308 U. S. 304
These principles are a part of the control which
the court has over the whole process of formulation and approval of
plans of composition or reorganization, and the obtaining of
assents thereto. As we said in Case v. Los Angeles Lumber
Products Co., 308 U. S. 106
308 U. S. 114
"[t]he court is not merely a ministerial register of the vote of
the several classes of security holders." The responsibility of the
court entails 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, and the like. See Continental Insurance Co.
Page 311 U. S. 146
Louisiana Oil Refining Corp.,
89 F.2d 333. Only after
such investigation can the court exercise the "informed,
independent judgment" (National Surety Co. v. Coriell,
289 U. S. 426
289 U. S. 436
Case v. Los Angeles Lumber Products Co., supra,
308 U. S. 115
which is an essential prerequisite for confirmation of a plan. And
that is true whether the assents to the plan have been obtained
prior to the filing of the petition or subsequent thereto.
Where such investigation discloses the existence of unfair
dealing, a breach of fiduciary obligations, profiting from a trust,
special benefits for the reorganizers, or the need for protection
of investors against an inside few or of one class of investors
from the encroachments of another, the court has ample power to
adjust the remedy to meet the need. The requirement of full,
unequivocal disclosure; the limitation of the vote to the amount
paid for the securities (In re McEwen's Laundry, Inc.,
F.2d 872); the separate classification of claimants (see First
National Bank v. Poland Union,
109 F.2d 54, 55); the complete
subordination of some claims (Taylor v. Standard Gas &
Electric Co., 306 U. S. 307
Pepper v. Litton, supra
) indicate the range and type of
the power which a court of bankruptcy may exercise in these
proceedings. That power is ample for the exigencies of varying
situations. It is not dependent on express statutory provisions. It
inheres in the jurisdiction of a court of bankruptcy. The necessity
for its exercise (Pepper v. Litton, supra,
p. 308 U. S. 308
is based on 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. Neglect of
that duty is apparent here by inclusion of the vote of the claims
held by the Crummer interests in computing the requisite statutory
assents, without protection of the public investors through the
Page 311 U. S. 147
requirement of full disclosure and of other appropriate
safeguards. By the same token, allowance of compensation to Crummer
without scrutiny of Crummer's speculation in the securities does
not comport with the standards for surveillance required of courts
of bankruptcy before confirming plans of composition or
reorganization or before making such allowances.
The scope of the power of the court embraces denial of
compensation to those who have purchased or sold securities during
or in contemplation of the proceedings. As in case of
reorganizations under former § 77B, the provision in § 83(b), 11
U.S.C. § 403(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. In re Paramount-Publix
Corp., 12 F. Supp.
Beyond that is the question of unfair discrimination to which we
have adverted. Compositions under Ch. IX, like compositions under
the old § 12, envisage equality of treatment of creditors. Under
that section and its antecedents, a composition would not be
confirmed where one creditor was obtaining some special favor or
inducement not accorded the others, whether that consideration
moved from the debtor or from another. In re Sawyer,
Fed.Cas. No. 12,395; In re Weintrob,
240 F. 532; In re
M. & H. Gordon,
245 F. 905. As stated by Judge Lowell in
In Re Sawyer, supra,
"if a vote is influenced by the
expectation of advantage, though without any positive promise, it
cannot be considered an honest and unbiased vote." That rule of
compositions is but part of the general rule of "equality between
creditors" (Clarke v. Rogers, 228 U.
, 228 U. S. 548
applicable in all bankruptcy proceedings. That principle has been
imbedded by Congress in Ch. IX by the express provision against
unfair discrimination. That principle, as applied
Page 311 U. S. 148
to this case, necessitates a reversal. In absence of a finding
that the aggregate emoluments receivable by the Crummer interests
were reasonable, measured by the services rendered, it cannot be
said that the consideration accruing to them under or as a
consequence of the adoption of the plan likewise accrued to all
other creditors of the same class. Accordingly, the imprimatur of
the federal court should not have been placed on this plan. The
fact that the vast majority of security holders may have approved a
plan is not the test of whether that plan satisfies the statutory
standard. The former is not a substitute for the latter. They are
independent. See Case v. Los Angeles Lumber Products Co.,
pp. 308 U. S.
Since the cause must be remanded, there are two other matters
which should be mentioned. Section 83(d), 11 U.S.C. § 403(d),
provides that, in computing the statutory two-thirds vote necessary
for confirmation of a plan, all claims "owned, held, or controlled"
by the city shall be excluded. So far as appears, the claims held
by the Crummer interests were not owned by or held for the city.
Yet it is by no means clear that they were not "controlled" by the
city within the meaning of the Act. Claims held by a city's fiscal
agent presumptively would seem to fall in that prohibited category.
The abuse at which the Act is aimed is not confined to those cases
where the holder of the claims is an agent of the city within the
strict rules of respondeat superior.
Rather, the test is
whether or not there is such close identity of interests between
the claimant and the city that the claimant's assent to the plan
may fairly be said to be more the product of the city's influence
and to reflect more the city's desires than an expression of an
investor's independent business judgment. Here there was such a
close identity of interests between Crummer and the city
Page 311 U. S. 149
the refunding as to raise grave doubts as to
the propriety of allowing those claims to vote in any event. That,
however, is a question for appropriate findings by the court should
another plan be presented.
Petitioner also urges that the fiscal agency contract between
Crummer and the city was illegal under the decisions of the Supreme
Court of Florida in Taylor v. Williams,
142 Fla. 402, 195
So. 175; 142 Fla. 562, 195 So. 184; 142 Fla. 756, 196 So. 214, and
W. J. Howey Co. v. Williams,
142 Fla. 415, 195 So. 181.
Under § 83(e)(6), 11 U.S.C. § 403(e)(6), the court must be
satisfied that the city "is authorized by law to take all action
necessary to be taken by it to carry out the plan" before it may
enter a decree of confirmation. Plainly that finding could not be
made if it was clear, for example, that a taxpayer could enjoin the
issuance of the new bonds or the levy of assessments therefor. The
courts below did not pass on the applicability of these recent
Florida decisions to this fiscal agency contract, since they were
decided after the Circuit Court of Appeals affirmed the order of
confirmation. Nor do we undertake to decide the question in view of
our disposition of the case. It is, however, a relevant inquiry to
be made by the District Court as, if, and when another plan of
composition is presented which directly or indirectly involves any
such fiscal agency contract.
For the reasons stated, we reverse the judgment below and remand
the cause to the District Court for proceedings in conformity with
The Act of August 16, 1937, 50 Stat. 653, under which the
petition was filed expired June 30, 1940, except in respect to
proceedings initiated on or prior to that date. That Act, however,
was amended by the Act of June 28, 1940, No. 669, 76th Cong., c.
438, 3d Sess., which, inter alia,
extended for another two
years the time for filing petitions.
Under the original plan, all such accrued interest coupons were
to be acquired by Crummer at 33 1/3% of the face amount, which when
refunded into new bonds, would be held by it subject to purchase by
the City at not exceeding 50% of the face thereof for the first six
months, 60% for the succeeding six months, 70% for the next six
months, and 75% for the following six months. Due to fears of
illegality, the plan was modified. As modified, it provided that
compensation of the fiscal agent was to be 4% of the principal debt
with the right of any creditor to sell to Crummer the interest
accruals at 33 1/3% of their face amount. In the latter event, the
charge against him was reduced to 2%, and Crummer held the
securities so obtained subject to the right of the city to acquire
them at the rates above indicated. The fiscal agent estimated that
it would get substantially the same amount of money out of the plan
whichever option the bondholders elected.
Interest accruals were to be escrowed. Proceeds of the
collection of delinquent taxes were to be remitted to the escrow
agent, who would reduce the amount owed by the city under the
escrow by such amount as would result in the particular proceeds'
constituting a pro tanto
payment and discharge at 50% of
par during the first six months, 60% during the next six months,
70% during the next six months, and 75% during the following six
Thus, in effect, the interest accruals could be offset against
delinquent taxes, the city being able to retire some of its debt at
less than par if it could stimulate tax collections. The proceeds
received by the escrow agent were to be held for the benefit of the
R. E. Crummer & Co. and Brown-Crummer Investment Co. R. E.
Crummer was president of both. A majority of the boards of both
corporations was identical. The Crummer interests had acquired over
a third of the claims.
There were other emoluments for Crummer. It was granted
"exclusive authority" to act for and on behalf of the city for a
period of three years "in all matters connected with, or relating
to, the exchange." And, in case any bonds or coupons were presented
for payment or suit instituted thereon, the city agreed to give
Crummer notice before any terms of settlement were agreed upon.
These provisions, the fact that the Crummer interests hold large
blocks of claims acquired at default prices, the likely interest of
Crummer in the accrued coupons, and its strategic position all
point towards future speculative possibilities which are not
inconsiderable, whatever may be said of their unhealthy impact on
the city and the public investors alike.