From a decree confirming a plan of reorganization under Chapter
X of the Bankruptcy Act, an appeal was taken by P and B, holders of
preferred stock. The appeal was based largely upon objections to
allowances made to junior claimants, and, had it been successful,
the preferred stockholders as a class would have benefited. For a
consideration paid to them, P and B transferred their stock to
junior claimants and agreed to abandon the appeal. Petitioner, also
a holder of preferred stock, sought to intervene and prosecute the
appeal. The Circuit Court of Appeals denied leave and dismissed the
appeal. Petitioner thereupon filed in the bankruptcy court a
petition, on behalf of himself and all other preferred
stockholders, seeking an accounting by P and B to the debtor or to
the preferred stockholders, for the excess of the amount which they
had received over the fair value of their stock.
Held:
Page 324 U. S. 205
1. The Circuit Court of Appeals' dismissal of the appeal over
petitioner's attempt to intervene did not bar petitioner's
subsequent petition for an accounting. P.
324 U. S.
208.
2. The fruit of the appeal by P and B belongs to all of the
preferred stockholders. P.
324 U. S. 213.
3. The bankruptcy court has jurisdiction to award the relief
prayed. P. 214.
4. The alleged improper motive of the petitioner does not
warrant denial of the prayer for relief, which was made on behalf
of all the stockholders. P.
324
U.S. 214.
142 F.2d 1004, reversed.
Certiorari, 323 U.S. 689, to review a judgment which affirmed
the bankruptcy court's dismissal of an application for relief.
MR. JUSTICE BLACK delivered the opinion of the Court.
This case presents the question of the accountability of
stockholders who objected to the confirmation of a plan of
reorganization under the Bankruptcy Act, [
Footnote 1] and abandoned their appeal for a
consideration to themselves, where the basis of the appeal was
that, if successful, it would benefit the entire class.
The Higbee Company, a department store with assets of more than
six million dollars, filed a voluntary petition
Page 324 U. S. 206
for reorganization. It had three types of stocks -- common and
first and second preferred. Two of its directors, Bradley and
Murphy, claimed that they had acquired by purchase a junior debt
against the company of $1,952,000.00. A plan for reorganization was
presented under which the owners of this junior debt were to be
awarded $600,000.00 in new notes and a large block of common stock.
Potts and Boag, respondents here, and owners of some shares of
first preferred, objected to confirmation of the plan. They
contended, on several grounds, that unless the junior debt was
subordinated to the preferred stock claims, the plan allotted that
indebtedness too great a share in the distribution of the
bankrupt's assets. [
Footnote 2]
When the stockholders' committee of which they were members
approved the plan, Potts and Boag resigned and announced the
formation of a new committee to press their objections to the
junior debt allowance. Notwithstanding these objections, the
Securities & Exchange Commission recommended the plan's
acceptance, 8 S.E.C. 777, and the District Court confirmed it. 50
F. Supp. 114. Potts and Boag appealed from the District Court's
decree confirming the plan. Although appealing as individuals,
their appeal was based almost entirely on objections to allowances
for the junior indebtedness which left less for distribution among
all the preferred stockholders. Their appeal sought no separate
individual relief for themselves;
Page 324 U. S. 207
they appealed only to have the confirmation set aside. Had their
appeal succeeded, the District Court would have been required to
reduce the value of junior claims asserted by Bradley and Murphy,
thereby increasing the value of the claims of the preferred
stockholders as a class.
In this situation, Potts and Boag sold their stock and their
appeal [
Footnote 3] to Bradley
and Murphy, claimants under the junior debt; the consideration paid
was $115,000.00. The par value of this stock was $26,000.00. Its
admitted market value at the time, as the court below found, was
$17,000.00. Pursuant to this contract for sale of the appeal, a
stipulation for dismissal was filed in the Circuit Court of
Appeals. Petitioner Young, a preferred stockholder of the same
class, sought to intervene and prosecute the appeal. His petition
was denied, and the case was dismissed without opinion. Young then,
on behalf of himself and all other preferred stockholders, filed a
petition in the District Court setting up these facts and praying
that
Page 324 U. S. 208
he be authorized to employ counsel to compel Potts and Boag to
account to the debtor for the difference between what they received
and the fair value of their stock, or praying in the alternative
that Potts and Boag be required to pay over that amount to the
preferred stockholders. [
Footnote
4] After a hearing, a special master found as a fact that Potts
and Boag had appealed in behalf of themselves only, and had not
acted as representatives of a class. The District Court approved
this finding, thought it determinative of the case, and dismissed
Young's petition. The Circuit Court of Appeals affirmed. 142 F.2d
1004, 1005. Because considerations of substantial importance to the
effective administration of corporate reorganizations are involved,
we granted certiorari, 323 U.S. 689. [
Footnote 5]
First. It is argued that, since the Circuit Court of
Appeals dismissed the appeal of Potts and Boag over Young's attempt
to intervene, Young is estopped from prosecuting the present
petition. This contention has no merit, for the reason, among
others, that the determinative issues
Page 324 U. S. 209
in the two proceedings were not the same. The first petition did
not pray for an accounting by Potts and Boag. The court only
decided then that Young could not intervene and continue that
appeal, and that the appeal should be dismissed. Now, accepting the
court's dismissal of the appeal as final, Young seeks an accounting
for the consideration paid Potts and Boag for agreeing to
dismiss.
Second: It is argued that, since Potts and Boag did not
expressly specify that they appealed in the interest of the whole
class of preferred stockholders, but appealed only in their own
names, they owed no duty to any stockholders but themselves. The
appeal here, however, was not from a denial of any individual claim
of Potts and Boag. Its basis was that every other preferred
stockholder, as well as themselves, would be injured by
confirmation. So far as the issues raised by the appeal are
concerned, the rights of Potts and Boag and the other preferred
stockholders were inseparable. Thus, even though their objection to
confirmation contained no formal class suit allegations, the
success or failure of the appeal was bound to have a substantial
effect on the interests of all other preferred stockholders. The
liability of one who assumes a determining position over the rights
of others must turn on something more substantial than mere formal
allegations in a complaint. [
Footnote 6] Equity looks to the substance, and not merely
to the form.
Furthermore, the right of appeal granted by a statute should not
be interpreted in such way as to defeat rights clearly granted in
other parts of the same Act.
Peck v.
Jenness, 7 How. 612,
48 U. S. 623.
Potts and Boag appealed under
Page 324 U. S. 210
Sec. 206 of the Chandler Act, which, contrary to the general
bankruptcy procedure, grants any stockholder or creditor the right
to be heard on all matters relating to corporate reorganizations.
Courts have liberally construed this language as authorizing
appeals. [
Footnote 7] We are
now asked to say that the privilege of appeal granted to Potts and
Boag by the Act vested them with an indefeasible right to sell the
privilege to the disadvantage of all other stockholders in their
class. But, historically one of the prime purposes of the
bankruptcy law has been to bring about a ratable distribution among
creditors of a bankrupt's assets; to protect the creditors from one
another. [
Footnote 8] And the
corporate reorganization statutes look to a ratable distribution of
assets among classes of stockholders, as well as creditors. There
would be no ratable distribution of this bankrupt estate if Potts
and Boag could utilize their statutory right of appeal to get for
their preferred stock.$7.00 for every $1.00 paid to other preferred
stockholders. We are asked to say that Congress intended such a
consequence, and to construe the right of a stockholder to be heard
on a plan of reorganization as carrying with it the right to "sell"
the very appeal which the Act grants him.
Potts and Boag, by appealing from a judgment which affected a
whole class of stockholders, owed an obligation to them the full
extent of which we need not now delineate. Certainly, at the very
least, they owed them an obligation to act in good faith. If Potts
and Boag had declined to accept this plan in bad faith, the court,
under
Page 324 U. S. 211
Section 203 [
Footnote 9]
could have denied them the right to vote on the plan at all. The
history of this provision makes clear that it was intended to apply
to those stockholders whose selfish purpose was to obstruct a fair
and feasible reorganization in the hope that someone would pay them
more than the ratable equivalent of their proportionate part of the
bankrupt assets. [
Footnote
10] If Potts' and Boag's opposition to confirmation sprang from
such a purpose (and Potts and Boag did obstruct confirmation until
they were able to "sell"
Page 324 U. S. 212
their appeal), they were acting in bad faith within the
statutory meaning of that term. And accepting money as the end
result of such a statutory violation cannot vest them with a right
to keep it. Payment to them of this money simply meant that the
distribution of bankrupt assets to the junior debt claimants who
paid Potts and Boag would represent a smaller net value. The
statute contemplates, and the appeal was taken on the assumption,
that the less the junior claimants were awarded, the more all the
preferred stockholders would receive. Therefore, the consideration
of the sale which Potts and Boag made was not merely their own
interest in the bankrupt estate, but the interest of all the
preferred stockholders. The situation which enabled them to traffic
in the interests of others was created by a statute passed to
protect the interests of all of them. [
Footnote 11] The statute neither compels them to
appeal nor to prosecute an appeal already taken contrary to their
own interests; it does impose upon them the duty of good faith to
all other stockholders whose interests they temporarily control
because they are necessarily involved in the appeal. This control
of the common rights of all the preferred stockholders imposed on
Potts and Boag a duty fairly to represent those common rights.
[
Footnote 12] This
representative responsibility is emphasized
Page 324 U. S. 213
by the fact that they might have been awarded compensation for
their services had they succeeded in reducing the claim of the
junior indebtedness to the advantage of all the preferred
stockholders. Sec. 243;
cf. Sec. 249.
In re Keystone
Realty Holding Co., 117 F.2d 1003, 1006. They cannot avail
themselves of the statutory privilege of litigating for the
interest of a class and then shake off their self-assumed
responsibilities to others by a simple announcement that henceforth
they will trade in the rights of others for their own
aggrandizement. To hold that the Chandler Act permits this would be
to say that Congress, which sought more effectively to accomplish
fair and equitable treatment of investors, had, by granting a right
of appeal to stockholders, defeated its purpose, and had
substantially modified the whole body of law imposing the most
rigorous responsibilities for fair dealing upon those who represent
the rights of others. [
Footnote
13]
The money Potts and Boag received in excess of their own
interest as stockholders was not paid for anything they owned. It
came to them in settlement of litigation which, if carried to a
successful conclusion, would have added to the value of other
preferred stockholders of the common debtor. That the suit was
settled and dismissed does not alter the rights of parties as to
distribution of the fruits of the settlement. A distinction as to
rights arising from litigation, which rests upon the difference
between a judgment and a settlement of a lawsuit, under these
circumstances, as in others, is "too formal to be sound."
Lyeth
v. Hoey, 305 U. S. 188,
305 U. S.
195-196;
Helvering v.
Safe
Page 324 U. S. 214
Deposit & T. Co., 316 U. S. 56,
316 U. S. 63-67.
The appeal of Potts and Boag was alleged to be for the benefit of
all preferred stockholders. In the contemplation of the statute
which authorized the appeal, its fruit properly belongs to all the
preferred stockholders. One creditor therefore cannot make that
fruit his own by a simple appropriation of it.
Cf. Terry v.
Little, 101 U. S. 216,
101 U. S.
218.
Third: It is argued that, even though the money paid in
excess of the stock value does, in equity and good conscience,
belong to the stockholders, the bankruptcy court is without power
to award the relief prayed. Courts of bankruptcy are courts of
equity, and exercise all equitable powers unless prohibited by the
Bankruptcy Act.
Securities and Exchange Commission v. United
States Realty & Improvement Co., 310 U.
S. 434,
310 U. S. 455.
The District Court still has jurisdiction to exercise its powers
under the Act both because of its express reservation and because
of the provisions of Section 222. [
Footnote 14] That power is ample to authorize the court
to order an accounting for the funds in dispute here.
Pepper v.
Litton, 308 U. S. 295,
308 U. S.
303-310;
American United Mut. Life Insurance Co. v.
City of Avon Park, 311 U. S. 138,
311 U. S.
145-14, ;
Consolidated Rock Co. v. DuBois,
312 U. S. 510,
312 U. S.
521-523.
Nor can we sustain the contention that relief should be denied
on the allegations that Young's motive in bringing the proceeding
is an unworthy one. His petition sought relief for the benefit of
all the stockholders. The rights of these stockholders are not to
be ignored because of some motive attributable to Young.
Reversed.
THE CHIEF JUSTICE and MR. JUSTICE JACKSON concur in the result.
MR. JUSTICE ROBERTS dissents.
[
Footnote 1]
The proceedings were begun in 1935 under Section 77B, 11 U.S.C.
207. June 22, 1938, Congress passed the Chandler Act, and the
provisions of Chapter 10 of the Act were thereafter applicable to
these proceedings. 52 Stat. 883-905, 11 U.S.C. ยงยง 501-676.
[
Footnote 2]
This $1,952,000.00 junior indebtedness consisted of subordinated
notes of The Higbee Company which had been bought by Midamerica
Corporation for $100,000.00 at an auction sale in 1935. Potts and
Boag consistently maintained that the junior debt's participation
in Higbee's assets should be limited to $100,000.00. They charged
that Bradley was a director of Higbee and of Midamerica, and thus
occupied two conflicting fiduciary positions. They insisted that
the court should find this junior debt to be "invalid and
unenforceable in whole or in part" and "subordinated to the First
and Second Preferred Stock."
[
Footnote 3]
Potts' testimony as to the sale was:
"Q. So that, in a sense, you were selling something more than
your stock, I take it?"
"A. It think so."
"Q. You were selling the appeal which you had taken in behalf of
yourself and Mr. Boag; that is a fair statement, isn't it?"
"A. I think so."
The written contract between Potts and Boag and Bradley and
Murphy specifically provided for sale of the appeal as well as the
stock. It reads in part:
"I hereby sell, assign, transfer and set over unto Charles L.
Bradley and John P. Murphy, and their assigns, 260 shares of First
Preferred stock of The Higbee Company, of Cleveland, Ohio, . . .
together with all rights, title and interest, benefits or
privileges we, or either of us, have or may have in and to or by
virtue of or arising from the matter of The Higbee Company, Debtor,
J. Fred Potts and William W. Boag, Appellants, vs. The Higbee
Company, Appellee, and a certain appeal taken by J. Fred Potts and
William W. Boag in said proceedings, which said appeal is now
pending in the United States Circuit Court of Appeals for the Sixth
Circuit. . . ."
[
Footnote 4]
In both courts below, Young sought an order against Bradley and
Murphy as well as Potts and Boag, but Bradley and Murphy have not
been made respondents in this Court.
[
Footnote 5]
The petitioner has made the following statement to this Court
with reference to the respondent Boag:
"During the course of the appeal in the Circuit Court of
Appeals, it first came to Petitioner's attention that Respondent
Boag had entered the Armed Services. No one representing Boag has
appeared to request a stay of proceedings pending his return.
However, Petitioner has no desire to cause judgment to be entered
against Boag under these circumstances. It would be entirely
satisfactory to have the proceedings stayed as to Boag pending his
return, although no rights against him are waived."
Under these circumstances, no judgment against Boag will be
entered in this case and the proceedings in the Circuit Court of
Appeals will be stayed as to him. Soldiers' & Sailors' Civil
Relief Act of 1940, 54 Stat. 1178.
[
Footnote 6]
Sprague v. Ticonic Nat. Bank, 307 U.
S. 161.
See Atlas Bank v. Nahant Bank, 23
Pick., Mass. 480;
Whitten v. Dabney, 171 Cal. 621, 154 P.
312;
Honesdale Shoe Co. v. Montgomery, 56 W.Va. 397, 49
S.E. 434;
Rawnsley v. Trenton Mutual Life Ins. Co., 9
N.J.Eq. 95;
Wood v. Dummer, 30 Fed.Cas. 435, No.
17,944.
[
Footnote 7]
In re Keystone Realty Holding Co., 117 F.2d 1003;
Dana v. SEC, 125 F.2d 542;
cf. Amick v. Mortgage
Security Corp., 30 F.2d 359.
[
Footnote 8]
Boese v. King, 108 U. S. 379,
108 U. S.
385-386;
Sampsell v. Imperial Paper Corp.,
313 U. S. 215,
313 U. S. 219;
cf. Case v. Los Angeles Lumber Co., 308 U.
S. 106.
See also 66 Pa.L.Rev. 224; Senate
Document No. 65, 72nd Cong., 1st Sess., 6, 10, 49-93.
[
Footnote 9]
"Sec. 203. If the acceptance or failure to accept a plan by the
holder of any claim or stock is not in good faith, in the light of
or irrespective of the time of acquisition thereof, the judge may,
after hearing upon notice, direct that such claim or stock be
disqualified for the purpose of determining the requisite majority
for the acceptance of a plan."
52 Stat. 894.
[
Footnote 10]
A year before the House Committee on the Judiciary held its
extensive hearings on the Chandler Act, a Circuit Court of Appeals
held that a creditor could not be denied the privilege of voting on
a reorganization plan under Sec. 77B, although he bought the votes
for the purpose of preventing confirmation unless certain demands
of him should be met.
Texas Hotel Corp. v. Waco Development
Co., 87 F.2d 395. The hearings make clear the purpose of the
Committee to pass legislation which would bar creditors from a vote
who were prompted by such a purpose. To this end, they adopted the
"good faith" provisions of Sec. 203. Its purpose was to prevent
creditors from participating who,
"by the use of obstructive tactics and hold-up techniques, exact
for themselves undue advantages from the other stockholders who are
cooperating."
Bad faith was to be attributed to claimants who opposed a plan
for a time until they were "bought off;" those who "refused to vote
in favor of a plan unless . . . given some particular preferential
advantage." Hearings on Revision of the Bankruptcy Act before the
Committee on the Judiciary of the House of Representatives, 75th
Cong., 1st Sess. on H.R. 6439, Serial 9, pp. 180-182.
See also, on the same general topic, McLaughlin,
Capacity of Plaintiff-Stockholder to Terminate a Stockholder's
Suit, 46 Yale L.J. 421; Hornstein, Problems of Procedure in
Stockholder's Derivative Suits, 42 Col.L.Rev. 574, Rodgers and
Groom, Reorganization of Railroad Corporations under Section 77 of
the Bankruptcy Act, 33 Col.L.Rev. 571, 588-601.
[
Footnote 11]
See Federal Communications Commission v. Sanders Radio
Station, 309 U. S. 470,
309 U. S.
476-477;
ICC v. Oregon-Washington R. Co.,
288 U. S. 14,
288 U. S.
25-27.
[
Footnote 12]
By virtue of their standing as sole appellants, Potts and Boag,
during the pendency of the appeal, dominated the fate of the
reorganization as completely as though they had been the majority
stockholders of a going corporation.
Cf. Southern Pacific Co.
v. Bogert, 250 U. S. 483,
250 U. S.
492:
"But the doctrine by which the holders of a majority of the
stock of a corporation who dominate its affairs are held to act as
trustees for the minority does not rest upon such technical
distinctions. It is the fact of control of the common property held
and exercised, not the particular means by which or manner in which
the control is exercised, that creates the fiduciary obligation. .
. . T he essential of the liability to account sought to be
enforced in this suit lies not in fraud or mismanagement, but in
the fact that, having become a fiduciary through taking control of
the old Houston Company, the Southern Pacific has secured fruits
which it has not shared with the minority. The wrong lay not in
acquiring the stock, but in refusing to make a
pro rata
distribution on equal terms among the old Houston Company
shareholders."
[
Footnote 13]
Cf. Woods v. City Nat. Bank & Trust Co.,
312 U. S. 262,
312 U. S.
267-269;
Meinhard v. Salmon, 249 N.Y. 458, 164
N.E. 545.
[
Footnote 14]
This Section gives the judge power, under conditions applicable
here, to alter and modify a reorganization plan even after
confirmation.