distribution of one-third of the assets of the debtor to the creditors. The Commission, joined by certain creditors, objected on the ground that a liquidation of such a substantial portion of an estate undergoing a reorganization could be accomplished only pursuant to a plan of reorganization, but the judge overruled these objections. The Commission joined a creditor on a motion for a stay to the United States Court of Appeals for the Tenth Circuit. The appellant's request that no supersedeas bond be required was supported by the Commission on the ground that to require a bond in a matter such as this would in effect defeat the right of creditors and stockholders to take appeals under chapter X.8 On January 30, 1959, the Court of Appeals stayed the distribution, but the matter became moot with the confirmation of a plan of reorganization in July 1959.

9

In the Swan Finch Oil Corporation case, the court had enjoined Doeskin Products, Inc., a former subsidiary of the debtor, from transferring any of the stock or assets of Keta Gas & Oil Company, which had been a wholly-owned subsidiary of the debtor. There had been a purported transfer of 1,140,390 shares of Keta to Doeskin in exchange for 800,000 shares of Doeskin stock. The trustees secured an order requiring Doeskin to show cause why it should not be required summarily to turn over the Keta stock and its assets to the trustees. Doeskin and Keta moved the court to vacate this order on the grounds (1) that the court lacked jurisdiction over Keta; and (2) that since Doeskin had a substantial adverse claim to the Keta stock and assets, summary jurisdiction did not lie. Evidence at the hearings indicated the Keta stock and assets were turned over to Doeskin in an unauthorized manner and that consequently Doeskin had no valid claim to the stock and assets. The Commission contended that Doeskin knew or should have known of the unauthorized nature of the transaction, and that under these circumstances, the reorganization court had summary jurisdiction to determine the question of title. The court denied the trustees' motion for a summary order and an appeal was taken. The Commission filed a brief expressing the view that the trustees' position was correct.10

In the Ludman Corporation case," certain creditors petitioned the court to adjudicate the debtor a bankrupt. As a result of the Commission's representation that there was a good possibility the company could be successfully reorganized, the reorganization proceeding was

8 See also In the Matter of Equitable Plan Company (S.D. Cal., Cen. Div. No. 86096–BH), where the trustee petitioned the court for authority to pay a dividend of 20% on unsecured pre-chapter X debts of $9,725,083 which would have amounted to 83% of the debtor's cash and 33% of its current assets, The Commission took the position that this proposed dividend would be a payment out of funds provided by liquidation of loans and not from the earnings of the company and was in effect a liquidation without a plan. A dividend of 10% was approved by the court.

In the Matter of Swan-Finch Oil Corp., (S.D.N.Y. No. 93046).

10 On Aug. 24, 1959, the Court of Appeals reversed the District Court. Pettit and Crawford, Trustees v. Doeskin Products Inc. et al.-F. 2d—(C.A. 2).

11 In the Matter of Ludman Corp. (S.D. Fla., Miami Div. No. 4018-M-BK).

continued. A plan was subsequently filed with the court and referred to the Commission for an advisory report, which was under consideration at the end of the year.

TRUSTEE'S INVESTIGATIONS

A complete accounting for the stewardship of corporate affairs by the old management is a requisite under the Bankruptcy Act and chapter X. One of the primary duties of the trustee is to make a thorough study of the debtor to assure the discovery and collection of all assets of the estate, including claims against directors, officers, or controlling persons who may have mismanaged the company's affairs, diverted its funds to their own use or benefit, or been guilty of other misconduct. The staff of the Commission participates in the trustee's investigation so that it may be fully informed as to all details of the financial history and business practice of the debtor. The Commission views its duty under chapter X as requiring it to call the attention of the trusteee, or the court if necessary, to any matters which should be acted upon.

In the Texas Portland Cement Company case,12 the Commission participated in an extensive investigation under section 167 by the trustees into the tangled financing of the debtor and related questions. The debtor had initially sold 500,000 shares of unregistered stock to residents of Texas. It issued approximately 400,000 additional shares in bonuses, commissions for assistance in procuring loans, and special transactions with promoters and creditors. At the suggestion of counsel for the Commission the trustees secured injunctions against the transfer of most of the additional shares by the holders thereof, pending determination of the validity of their issuance and other questions involved.13

The trustee's investigations in the reorganization proceedings involving Selected Investments Corporation and Selected Investments Trust Fund, disclosed that the debtor had been subjected to fraudulent mismanagement by its officers and directors. The trustee obtained a judgment against these corporate insiders for approximately $12 million in damages, on which some recovery has been had, and suits are pending against the bonding companies for the balance."

ACTIVITIES REGARDING PROTECTIVE COMMITTEES

The Commission has constantly been alert to insist upon the honesty of fiduciaries in their relationship to the estate and to investors, and

1 In the Matter of Texas Portland Cement Co., (E.D. Texas, Beaumont Div., No. 1606). 13 Approximately 35 witnesses were examined. Two of the witnesses, a former director and his business associate, were indicted in the Southern District of Texas for perjury allegedly committed in the course of their respective examinations under section 167. 14 See fn. 5, supra.

15 On Oct. 22, 1958, an indictment was returned (U.S.D.C. W.D. Oklahoma) charging certain of the debtors, officers and directors and others with violations of the antifraud provisions of the Securities Act of 1933 and the mail fraud statute. On March 27, 1959, each of the defendants was found guilty on some or all of the counts of the indictment. 529523-59-13

has always sought to disqualify security holder committees subject to a conflict of interest from acting in chapter X proceedings.

In the above mentioned Selected Investments Trust Fund and Selected Investments Corporation case, a committee formed to represent certificate holders of the trust fund, had solicited from public investors $1 for each $1,000 of thrift certificates. Commission counsel objected to this solicitation and the court required the committee to return all funds received.16 After the committee qualified as a duly constituted committee, representing approximately 3,000 certificate holders whose claims exceed $16 million, it applied to the court for permission to solicit contributions from certificate holders to finance its activities. The Commission contended that the committee should be denied the right to make mass solicitations, recommending that the committee make appropriate arrangements for the financing of its activities by contributions from its members or individual security holders. The Commission's contention was upheld.

In the Texas Portland Cement Company case,17 a common stockholders' committee, composed of a New York attorney and four of his relatives, attempted to solicit powers of attorney from stockholders generally. The Committee members had acquired their stock in one of the transactions being investigated by the trustees, in settlement of a relatively small cash advance to the debtor, and the committee chairman was asserting a large unliquidated claim against the debtor for services and expenses allegedly rendered in procuring a mortgage commitment which the debtor had rejected. The Commission joined with the trustees in opposition to recognition of this committee, on the ground of the conflict between the interests of its members and those of common stockholders generally. The District Court ruled that the committee was disqualified to act as a representative of stockholders. There has since appeared in the proceedings another common stockholders' committee, composed of local stockholders who acquired their shares in the original public offering.

Some of the members of a creditors' committee in this proceeding owned stock of the debtor either directly or indirectly. The Commission joined the trustees in opposition to the recognition of this committee because of the conflict of interests involved in the dual status of committee members. This committee also was disqualified.

ACTIVITIES WITH REGARD TO ALLOWANCES

Every reorganization case ultimately presents the difficult problem of determining the allowance of compensation to be paid out of the debtor's estate to the various parties for services rendered and ex

16 24th Annual Report of the Securities and Exchange Commission, page 138.

17 See fn. 12 supra.

penses incurred in the proceeding. The Commission, which under section 242 of the Bankruptcy Act may not receive any allowance from the estate for the services it renders, has sought to assist the courts in protecting debtors' estates from excessive charges and at the same time equitably allocating compensation on the basis of a claimant's contribution to the administration of an estate and the formulation of a plan.

In the Third Avenue Transit Corporation case the District Court granted fees and expenses totaling $2,068,505. The Commission had recommended awarding fees and expenses of $1,818,476, and upon appeal to the Court of Appeals for the Second Circuit, that Court set the amount at $1,849,005.18 In so doing, the Court listed the factors which bear on the granting of allowances in reorganization cases: (a) economy of administration, (b) the burden the estate can safely bear, (c) value of the services, (d) duplication of service by counsel representing the same interests, and (e) the reasonableness and fairness of the compensation to each applicant. It noted that the recommendations of the Commission "are entitled to great weight."

The District Court had found that an oral agreement between an attorney and a firm to share equally in the compensation they received from the reorganization contemplated as well as an equal division of work. The Court of Appeals upheld in principle the award by the district judge of separate compensation to each. The Court of Appeals also upheld the Commission's contention that section 249 of the Bankruptcy Act prevented the awarding of a fee where the fee applicant had pledged securities of the debtor after assuming to act in a representative or fiduciary capacity in a reorganization and the securities were subsequently sold.

In this case, further, the wife of an attorney in the reorganization had sold securities of the debtor. The District Court found that the wife's decision to sell was based on the advice of her investment broker and not on any inside information possessed by the husband and held that section 249 did not bar a fee to the attorney although he had knowledge of the sale of the securities by his wife. The Commission took the position that a fee should be denied the attorney since he had knowledge of his wife's transaction and derived an indirect benefit from it. The Court of Appeals sustained the Commissions position and held that the facts warranted the statutory disqualification.1o

In the Stardust, Inc. case,20 the court confirmed a plan of reorganization which provided for a sale to reorganized Stardust, Inc. of a group of five hotel units, in various stages of completion, for $1,500,000

"Surface Transit, Inc. v. Saxe, Bacon & O'Shea, 266 F 2d. 862 (C.A. 2, 1959).

For a discussion of the case in the District Court, see the Commission's 24th Annual Report at pages 138-141.

*In the Matter of Stardust, Inc. (D. Nev., No. 955).

cash and a $2,800,000 note secured by a deed of trust on the properties. Subsequently it appeared that the costs for completion had been underestimated and, as a result, the reorganized Stardust was unable to meet the first payment on the note. A petition for modification was approved by the court under section 222 of chapter X.

Applications for fees and expenses in connection with the modification of the plan aggregated $58,460. The Commission took the position that the creditors, preferred stockholders, and the trustee and his counsel were primarily interested in preserving the terms previously determined and fixed under the plan, and that the modifications, as amended, were essentially a compromise and reflected, in greater or lesser degree, the efforts of all participants. Under a commitment pursuant to order of the Court, the proponent of the modification, who was in control of the reorganized debtor, was obligated to pay the fees and expenses in connection with the modification. The Commission urged that nevertheless chapter X standards should be followed, in accordance with the provisions in section 221(4) which make "all payments . promised by the debtor or by a corporaacquiring property under the plan or by any other person" subject to the governing standards of chapter X. The Commission recommended fees totalling $23,860, and the judge awarded the applicants $29,881.21

tion

.

In the Adolf Gobel, Inc. case,22 applications were filed for fees in the aggregate amount of $374,370. The Commission submitted its recommendations aggregating $170,000 and the court awarded $178,000. The Commission recommended denial of compensation to the debtor's attorneys who also acted as attorneys for the principal stockholder and plan proponent, and to an attorney for an individual creditor whose claim was the subject of litigation, asserting that the activities of these attorneys were principally for the benefit of their clients and only collaterally of benefit to creditors generally, and therefore each should look to his client for his compensation. The court denied these requests for allowances.

ADVISORY REPORTS ON PLANS OF REORGANIZATION

During the fiscal year, the Commission issued two advisory reports and one supplemental advisory report. Such reports represent the principal means by which the Commission records its views publicly. Generally speaking, an advisory report is prepared only in a case involving a substantial public investor interest and in which significant problems exist. On occasion, because of the exigencies of time or for other reasons, no written report is filed but instead Commission

21 The order included a commendation relating to the Commission's participation-"The S.E.C., in a workmanlike document, which is thorough and complete, . . . strikes a responsive chord with the court's thinking."

"In the Matter of Adolf Gobel, Inc., (D. New Jersey, No. B-316-53).