About 1.5 million of these shares would be received by the proponents and held as restricted stock. ALLOWANCES Every reorganization case ultimately presents the difficult problem of determining the compensation to be paid to the various parties for services rendered and for expenses incurred in the proceeding. The Commission, which under Section 242 of the Bankruptcy Act may not receive any allowance for the services it renders, has sought to assist the courts in assuring economy of administration and in allocating compensation equitably on the basis of the claimants' contributions to the administration of estates and the formulation of plans. During the fiscal year 275 applications for compensation totaling about $7 million were reviewed. TMT Trailer Ferry, Inc.46 Two appellate matters were pending at the close of the last fiscal year. In one proceeding, the stockholders' committee, supported by the Commission, appealed from orders awarding interim compensation to trustee's counsel. The Commission urged that, because of the lack of progress in the reorganization, trustee's general counsel be allowed no interim compensation for services rendered in 1970 instead of the $89,020 which the district court had allowed him and that in the future he be allowed a maximum of $35,000 interim compensation for services rendered in any one year. The other pending matter related to the district court's award to committee counsel of $10,000 as interim compensation, and $5,000 as reimbursement of expenses for services rendered over the first 11 years of the proceeding. The court of appeals, as recommended by the Commission, increased the award to $60,000 interim compensation and $10,000 reimbursement of expenses. It also granted the committee's request for protection against harassing depositions proposed by trustee's counsel.47 Upon remand, the district court granted the sum directed by the court of appeals, but in addition prescribed how the fees were to be divided, excluding one lawyer entirely and ordered committee counsel to account for their expenses. It also permitted trustee's counsel to bring disqualification proceedings against the committee and its counsel based on essentially the same charges raised in the prior appeal and authorized discovery proceedings in connection therewith. The committee and its counsel sought a writ of mandamus, prohibition, and related relief in the court of appeals to require the district judge to abide by the appellate tribunal's mandate. The Commission supported this position. As to the fee for trustee's counsel, the court of appeals, noting the lack of progress in the proceeding, (1) reduced the interim compensation to trustee's counsel for 1970 from $89,020 to $30,000, and (2) limited any future interim compensation to him to a maximum of $30,000 in any one year.48 The court granted the committee's petition for mandamus, prohibition and related relief. It removed the restriction imposed by the district court on its previous award and put an end to the disqualification and related discovery proceedings. Noting that trustee's counsel had assured the court that the reor. ganization proceeding would be wound up within a year, it withheld ruling on the Commission's suggestion that a special master be appointed.49 Thereafter, the district judge filed a single petition for a writ of certiorari in the Supreme Court, seeking review of the limitation on fees of trustee's counsel and the grant of the extraordinary writ.50 The committee and the Commission opposed the petition on the merits. The Commission also pointed out that the district judge was not a party to the fee appeal and therefore had no stand ing to seek review. After the close of the fiscal year, the petition was denied. Cybern Education, Inc.51 Efforts to reorganize a company engaged in developing specialized educational programs failed within a few months of the commencement of the proceeding. Small sums had been accumulated from sales of miscellaneous assets. Deducting a trustee's certificate, the estate consisted of about $46,000 in cash. The trustee and his counsel applied for interim allowance of $45,000, which the district court granted after a hearing. No notice of hearing, pursuant to Section 247, was given to creditors and stockholders, including the Internal Revenue Service, the holder of the principal claim against the estate and most affected by the allowance. At the hearing the Commission sought to develop a proper record with respect to the nature and value of the services rendered and on the need for interim allowances, but no testimony was offered. The Commission also objected to the lack of notice under Section 247. The United States, as a tax claimant, petitioned for leave to appeal, which the court of appeals granted.52 The Commission filed a brief in support of the United States. The appeal was pending at the close of the fiscal year. Parkwood, Inc.53 The order appointing trustee's accountants in accordance with General Order 45 fixed the maximum to be paid for accounting services at $180,000. The accountant sought this amount plus an addtional $6,750 for certain special tax services performed by an attorney in the accounting firm. The Commission agreed that the accounting firm had earned the $180,000 authorized by the order of appointment but opposed any additional allowance on the ground that the requisite authorization had not been obtained. The court denied the additional compensation on the basis of General The two co-chairmen of the Secured Noteholders' Committee sought compensation of $100,000 for services rendered during the proceeding and during the prior equity receivership. One of the applicants had acquired a note of the debtor while acting for the committee in the receivership. The Commission urged, and the court agreed, that trading in the receivership was covered by the bar of Section 249.54 The other applicant had also traded, but he had done so after substantial consummation of the plan. The trustee urged that such trading nevertheless required denial of compensation. The Commission advised the court that there was no need to reach this issue since the applicant had failed to show that he had performed compensable services, and the court agreed. Imperial '400' National, Inc.55 The court of appeals had reversed, as excessive, the third interim allowance to the trustee and his counsel.56 On remand, the district court reduced the allowance to the maximums indicated by the court of appeals and ordered refund of the excess payments. The successful appellant urged that payment of interest on the refunds should be required. The district judge ordered that one applicant, who had invested and earned interest on his allowance, pay the earnings to the estate, but did not require the payment of interest on funds not profitably invested. An appeal followed. The Commission had suggested that decision on this relatively small matter be deferred until final allowances were granted and the equities arising from the overpayment be adjusted in that context, and it adhered to that position in the appeal. The court held, however, that the applicants should pay interest on the refund. It fixed the rate at that earned by the estate on its surplus funds during the period they held the money,57 Bermec Corp.58 Attorneys for the terim allowance of $65,000. The application included the time spent on estate matters by lawyers and para-professionals. The latter are not lawyers, but render routine services which junior attorneys of the firm would otherwise have to perform. The Commission urged that their services be treated as profesional services, and recommended $30,000 as adequate interim compensation, since the time spent was weighted so heavily by the work of the para-professionals. The referee as special master recommended $51,265 of which $10,000 was allotted as overhead expense for the para-professionals' service. He stated in his report that he could not allow fees for these services because such "help should be included in overhead just as is secretarial assistance or summer law students." The district judge allowed the amount recommended by the special master, without discussing the status of the para-professionals. The Commission continues to adhere to its reviews on this subject. INTERVENTION IN CHAPTER XI Chapter XI of the Bankruptcy Act provides a procedure by which debtors can effect arrangements with respect to their unsecured debts under court supervision. Where a proceeding is brought under that chapter but the facts indicate that it should have been brought under Chapter X, Section 328 of Chapter XI authorizes the Commission or any other party in interest to make application to the court to dismiss the Chapter XI proceeding unless the debtor's petition is amended to comply with the requirements of Chapter X, or a creditors' petition under Chapter X is filed. Attempts are sometimes made to misuse Chapter XI so as to deprive investors of the protections which the Securities Act of 1933 and the Securities Exchange Act of 1934 are designed to provide.59 In such cases the Commis sion's staff normally attempts to resolve the problem by informal negotiations. If this proves fruitless, the Commission intervenes in the Chapter XI proceeding to develop an adequate record and to direct the court's attention to the applicable provisions of the Federal securities laws and their bearing on the particular case.60 Synergistics, Inc.61 The Commission intervened because of questions regarding the viability of the debtor's business. Its main concern was the proposed issuance of an additional 800,000 shares of common stock, in addition to over 1 million shares previously issued and outstanding. Very little information about the debtor was available to the investing public and there was the possibility that a speculative market in the debtor's shares would develop. The Commission's objections to the arrangement were withdrawn when certain amendments were proposed. These included voluntary registration of the debtor's common stock under Section 12(g) of the Securities Exchange Act, and a commitment that all of the 800,000 shares to be issued to its creditors would be restricted for two years from confirmation, after which the debtor would use its best efforts to register such shares under the Securities Act. The referee confirmed the arrangement. His order of confirmation included the following statement: "The intervention of the Securities and Exchange Commission in Chapter XI proceedings. . . is at one with the duty of a Chapter XI court... to make sure that it does not confirm a Plan that aids creditors in foisting stock of highly doubtful value on an unsuspecting public, the members of which may believe that the order confirming the Plan gives a validity to the issued stock beyond its real worth." Space City, USA, Inc.62 The debtor filed a Chapter X petition and was subsequently adjudicated a bankrupt when it proved impossible to reorganize. After three years in bankruptcy, the debtor filed a Chapter XI petition. Though a mere corporate shell, it filed a plan of arrangement providing for the issuance of about 2.5 million shares. The Commission intervened in order to prevent the issuance of a large quantity of worthless securities, pointing out that the use of Chapter XI for the purpose of reactivating trading interest in a dormant shell was improper. The district court dismissed the Chapter XI proceeding. A-T Industries, Inc.63 This company began as a thrift and securities institution which issued approximately $3.2 million of debentures to the public years ago. In later years it was converted into an operating company, with several small businesses. Although it made a modest operating profit, it had lost a large part of its capital on unsound investments. On default in payment of interest, it filed a Chapter XI petition. The proposed arrangement provided that the debenture holders would receive $1.6 million of new 10-year debentures issued by the debtor's bowling alley subsidiary, $1.6 million of the debtor's new preferred stock, and 50 percent of the debtor's common stock. The debtor would guarantee payment of the subsidiary debentures at maturity. Available cash would be used to pay management its back bonuses. The debtor could not hope to pay preferred dividends and coverage of the debenture interest was doubtful. The Commission indicated that it would file a motion under Section 328 of Chapter XI to have the proceeding transferred to Chapter X. Thereafter, the staff, at the request of the Referee, conferred with other parties. As a result the proposed arrangement was amended to create approximately $2 million of new notes, secured by a pledge of the principal assets of the debtor and subject to appropriate sinking fund require ments. The preferred stock was eliminated and the debenture holders received 90 percent (instead of 50 percent) of the debtor's common stock. Management received stock rather than cash for their back bonuses. In view of the amendment, the need of the debenture holders for Chapter X seemed less clear, and the Commission determined not to proceed under Section 328. Capital Cities Nursing Centres, Inc.64 The debtor had made an offering of securities, representing that unless all the shares were sold, any funds subscribed would be returned to investors. Although debtor raised only $1.9 million of the $4.5 million sought, it spent the funds received and was unable to return them. The Commission brought a civil action under the securities laws, and the Federal Court in New York appointed a trustee on the Commission's motion.65 Two weeks later, the debtor filed its voluntary Chapter XI proceeding in New Jersey, and asserted that this proceeding ousted the New York trustee. The New Jersey court overruled a motion to dismiss the Chapter XI proceeding as having been filed in bad faith, but appointed its own receiver. Subsequently, an understanding was reached. It allowed the Chapter XI receiver to utilize current cash flow from the debtor for current operations and permitted the trustee in the civil action to seek an accounting from the individual defendants for the funds they had diverted. The Chapter XI receiver or the trustee were to retain any funds each received from the defendants pending a later determination of the proper disposition. Posi-Seal International, Inc.66 The debtor had outstanding about 4.9 million shares held by the public. The arrangement provided, inter alia, that after a one-for-ten reversesplit, new shares would be distributed in specified proportions, including 25 percent to the present stockholders and a like percentage to the holders of the debtor's de bentures, which apparently were not publicly held. The corporate charter was also to be amended to decrease the amount of authorized shares and to eliminated the authority to issue preferred stock. All of these charter amendments required consent of stockholders under state law and the arrangement specified that such consent was a condition precedent to consummation of the plan. The referee confirmed the plan. A stockholder filed a petition for review, in which he objected to the jurisdiction of the court to confirm the arrangement, contending that (1) Chapter XI does not permit a stock recapitalization of the debtor as provided for in the arrangement, and (2) Chapter X, not Chapter XI, is the proper avenue of relief if rights of stockholders are thus adjusted. The district judge affirmed the referee's order and the stockholder appealed. At the request of the court of appeals, the Commission filed a brief amicus curiae, in support of the jurisdiction of the Chapter XI court. The Commission viewed the plan as a composition with unsecured creditors, which could properly be implemented by the recapitalization in accordance with the requirements of state law. The Commission also concluded that the circumstances in this proceeding did not indicate the need for the safeguards of Chapter X. The court of appeals agreed with the Commission and affirmed the order below.67 Rentals Co., 379 U.S. 594, 618 (1965). See also cases cited in 31st Annual Report, p. 104 (1965). 9 D. Mass., No. 71–218. 10 No. 71-1264 (C.A. 1, 1972). 11 M.D. N.C., No. B-198-69. Previously reported in 36th Annual Report, p. 179; 37th Annual Report, p. 181. 12 Weaver v. Hutson, 459 F.2d 741 (C.A. 4, 1972), cert. den. October 24, 1972. 13 C.D. Cal., Nos. 78641-FW, 78950– FW, 79596-FW and 80470-FW. 14 Section 116(3) provides that the court may authorize the trustee "upon cause shown, to lease or sell any property of the debtor . . . upon such terms and conditions as the judge may approve." 15 S.D. N.Y., No. 71-B-523. 17 D. N.J., No. B-656-65. Previously reported in 36th Annual Report, p. 176; 35th Annual Report, pp. 161–162; 33rd Annual Report, pp. 132, 137-138; 32nd Annual Report, pp. 94-95. 18 The resolution reads: "RESOLVED that in all bankruptcy proceedings this Council holds as incompatible the continued representation as attorney for the trustee by any lawyer or his firm who represents a third party who submits a plan for reorganization in the bankruptcy; and that the recusal by the attorney only from commenting on proposed reorganization plans is not an adequate immunization from the appearance of a conflict of interest." 19 In re Imperial '400' National, Inc. (Joseph M. Nolan, Appellant), C.A. 3, No. 72-1399. 20 D. V.I., Division of St. Croix, No. B-4-1971. 21 E.D. Va., Nos. 17-71-A, 256-71-A and 257-71-A. 22 W.D. Okla., Bk. 70-1008, 70 1008A-D, 1008-A-D, 1129, 1129A. 23 The principal reported decision is In re TMT Trailer Ferry, Inc., 334 F. 2d 118 (C.A. 5, 1964), in which it was held that there was no rule of law precluding employment of the trustee. The court noted, however, that proof that the trustee was offered "emoluments and security" rather than a mere nomination, would disqualify him. In a later phase of the TMT proceeding the Supreme Court granted certiorari on this issue among others (387 U.S. 929 (1967)) but in Protective Committee v. Anderson, 390 U.S. 414 (1968) it re |