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request of the district judge, supported the petition, urging that the stockholders who had acquired stock in this manner be treated as creditors for the purpose of determining insolvency since they had been induced to convert their debentures into common stock by the fraudulent assertions of management. Prior to the filing of the Chapter X petition, the Commission had obtained an order against the debtor, its officers, directors, and others enjoining violations of the registration and anti-fraud provisions of the securities laws in the sale of securities of the debtor. The special master's report adopted the Commission's views and the district judge approved the petition.

As reported previously, in Joe Newcomer Finance Company 8 a debentureholders committee was enjoined, on motion of the Commission, from further soliciting contributions from public investors, and the funds already collected were ordered held in escrow pending a ruling on their disposition. The court subsequently required the return of the funds to the contributors and refused to allow committee members reimbursement of expenses from these funds.

In Trans-United Industries, Inc.,' the Chapter X court in Connecticut held that it had jurisdiction to determine the validity of tax assessments levied against the debtor's property in Philadelphia by the City of Philadelphia, and disallowed the claim.

TRUSTEE'S INVESTIGATION A complete accounting for the stewardship of corporate affairs by the old management is a requisite under 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 officers, directors, or controlling persons who may have mismanaged the debtor's affairs. The staff of the Commission often aids the trustee in his investigation.

In Automatic Washer Co.,10 reported previously, 11 the court of appeals affirmed 12 the order of the district court which held that the stock interests of Bankers Life & Casualty Company and of Bellanca Corporation (now Olson Brothers, Inc.) should be subordinated to the publicly held stock of the debtor to the extent of $1.50 per share. As the Commission urged, the court held that subordination was not precluded because of a money judgment for fraud obtained by the trustee against Bankers, nor because the plan of reorganization was one of liquidation. The subordination nearly doubled the distribution to the

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*30th Annual Report, p. 100.
8 D. Colo., No. 34452.
• D. Conn., No. H-3832.

S.D. Iowa, No. 5-4-26.
11 30th Annual Report, p. 103.

Bankers Life & Casualty Co. v. Kirtley, 338 F.2d 1006 (C.A. 8, 1964).

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public stockholders, and, since the per share distribution to them was substantially less than $1.50, was tantamount to a disallowance of the stock interests of Bankers and Bellanca.

In Swan-Finch Oil Corporation,13 the trustee settled an action against the American Stock Exchange and Josephthal & Co. for $150,000 and $300,000, respectively. The action had been based upon alleged violations of the securities laws in the sale, through dummy accounts at Josephthal & Co., of 578,000 shares of unregistered SwanFinch common stock in a rigged market and by use of the facilities of the Exchange. The trustee had also alleged that the Exchange did not carry out its responsibilities under the Securities Exchange Act of 1934. The proceeds of the settlement will enhance the distribution to creditors and stockholders under the proposed plan of liquidation. Substantially all of the facts alleged in the trustee's complaint were derived from an investigation conducted by the Commission's staff.14

The court, in The Sire Plan, Inc.,15 authorized the trustees to accept $20,000 in settlement of an action against two attorneys. The trustees had alleged, inter alia, that, within 1 year prior to the filing of the reorganization petition, at a time when the debtor corporations were insolvent, they transferred funds to the attorneys without fair consideration.

In Dilbert's Quality Supermarkets, Inc.,16 the court authorized the trustee to settle for $60,000 a suit against a supplier and its directors for monies allegedly paid as a commercial bribe to a former officer of the debtor. In Equitable Plan Co.,17 the court authorized the trustee to settle a suit against Doeskin Products, Inc., based upon allegedly fraudulent acts committed by Lowell M. Birrell when he controlled Doeskin. Under the settlement, Doeskin recognized as validly issued 150,000 shares of the 194,000 shares of its stock held by the trustee. The 150,000 shares had a market value of about $450,000 at the time of settlement.18

REPORTS ON PLANS OF REORGANIZATION Generally, the Commission files a formal advisory report only in a case involving a substantial public investor interest and presenting significant problems. When no such formal report is filed, the Commission may state its views briefly by letter, and authorize its counsel

13 S.D.N.Y., No. 93046.

1* For other settlements in this proceeding, see 30th Annual Report, p. 103 ; 29th Annual Report, p. 91.

15 S.D.N.Y., No. 63-B-140.
16 E.D.N.Y., No. 62-B-920.
17 S.D. Calif., No. 86,096-T.
18 For other settlements in this proceeding, see 30th Annual Report, p. 103.

to make an oral or written presentation to amplify the Commission's views. During this fiscal year the Commission published two formal advisory reports.19 The Commission conveyed its views to the court on 14 other plans, on some by oral statement of its counsel at the hearing, and on the others by letter and supporting memoranda.20

In TMT Trailer Ferry, Inc., 21 the district court, on remand by the court of appeals,22 held further hearings on the internal plan of reorganization, which gives no recognition to the interests or claims of the debtor's public common stockholders. For reasons previously stated to the court, the Commission's report concluded that the plan was not fair and equitable because the evidence as to insolvency was not adequate and because of the failure to treat as creditors public stockholders who, as urged by the stockholders committee, had claims against the debtor based upon the sale to them of the debtor's stock in alleged violation of the Federal securities laws. The district court confirmed the plan and the stockholders committee appealed.23 After the close of the fiscal year, the court of appeals denied the Commission's motion for a stay pending appeal, and reserved decision on the trustee's motion to dismiss the appeal or to affirm summarily.24

In Yuba Consolidated Industries, Inc.,25 the plan provided for the internal reorganization of Yuba, which will continue in the steel fabrication and industrial engineering business through two divisions and two subsidiaries, with other properties to be liquidated. The plan's principal provisions relate to the treatment of the three classes of unsecured creditors, including the debentureholders whose claims are subordinated to creditor claims which arose after the issuance of the debentures. The plan provided for a distribution to the unsecured creditors of a minimum of $1,050,000 in cash, a maximum of 550,000

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* TMT Trailer Ferry, Inc., Corporate Reorganization Release No. 226 (March 9, 1965); Yuba Consolidated Industries, Inc., Corporate Reorganization Release Nos. 229 (May 3, 1965) and 234 (June 9, 1965).

Atlas Sewing Centers, Inc., S.D. Fla., No. 168–62–M-Bk-EC; Brookwood Country Club, N.D. Ill., No. 59 B 1201 ; Fleetwood Motel Corp., D.N.J., No. B-909-60; GFE Industries, Inc., S.D. Iowa, No. 2-159; Hughes Homes, Inc., D. Mont., No. 3174; Kish Industries, Inc., W.D. Mich., No. 24,525; Leeds Homes, Inc., E.D. Tenn., No. 19,987; Mason Mortgage & Investment Corp., D.D.C., Nos. 98-60 through 101-60; Muskegon Motor Specialties Co., E.D. Mich., No. 47795; Sire Post Office Plan, Inc., S.D.N.Y., No. 63-B-140; LaGuardia Hotel Sire Plan, Inc., S.D.N.Y., No. 63-B-140; Swan-Finch Oil Corp., S.D.N.Y., No. 93046; Taylor International Corp., S.D. Fla., No. 346-62-Bk-DD; Townsend Grouth Fund, Inc., S.D.N.Y., No. 61-B-375. 21 S.D. Fla., No. 3659-M.

Protective Committee, etc. v. Anderson, 334 F.2d 118 (C.A. 5, 1964). 23 For previous reports on the plan of reorganization, see 30th Annual Report, p. 105 ; 29th Annual Report, pp. 91–92.

Protective Committee, etc. v. Anderson, C.A. 5, No. 22652 (August 4, 1965). * N.D. Cal., No. 64103.

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shares of $10 par value preferred stock and a like or greater number of shares of $10 par value common stock, the total of all of which to equal Yuba's reorganization value as determined by the court. The creditors whose claims predated the debenture issue would receive their proportionate amount of the cash and of the preferred and common stocks. The creditors to whom the debentures are subordinated would receive the remaining cash and preferred stock and, depending upon Yuba’s reorganization value, all or part of the remaining common stock, but not exceeding in aggregate par value an amount which, together with the cash and par value of the preferred stock, would equal the dollar amount of their claim. The debentureholders would receive such amount of any remaining common stock as was not required for the purpose of satisfying the claims of the creditors, to whom the debentureholders are subordinated.

The court determined the value of the debtor's assets to be $12,536,000, which included the capitalized value of prospective earnings, excess working capital, and the present value of the tax loss carry forward and of the earnings and sales proceeds of the liquidating properties. In its report the Commission had recommended a value of $13,398,000. The court agreed with the Commission's conclusion that the proposed distribution under the plan provided fair and equitable treatment among the three classes of creditors since it accorded appropriate recognition to their status and priority inter se.26 As was suggested in the Commission's report, the plan was amended to provide for the issuance of no par value common stock and to permit the reorganized company, at its option after a specified date, to redeem the preferred stock at par plus a premium and accrued dividends. In its supplemental advisory report, the Commission concluded that the plan, as amended, was fair and equitable and feasible, 27 and the plan, as amended, has been approved.28

In General Economics Corporation, 29 the court confirmed a plan of reorganization for a subsidiary, General Economics Syndicate, Inc. (“Syndicate"), which provided that the proceeds of $200,000 from the sale by the parent of its majority stockholdings in Syndicate, which were claimed by both the parent and the subsidiary, should be held in escrow pending a ruling on their disposition. The Commission urged that since it had been established that the parent, as a majority stockholder, had breached its fiduciary obligation by defrauding the sub

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Yuba Consolidated Industries, Inc., Corporate Reorganization Release No. 229 (May 3, 1965).

Yuba Consolidated Industries, Inc., Corporate Reorganization Release No. 234 (June 9, 1965).

Since the end of the fiscal year, some stockholders have appealed from the order approving the plan.

S.D. N.Y., 63-B-618.

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sidiary and its public shareholders of over $900,000, the parent should be divested of any interest in the stock or in the proceeds of its sale, and the court awarded the sales proceeds to the subsidiary.

ACTIVITIES WITH REGARD TO ALLOWANCES Every reorganization case ultimately presents the difficult problem of determining the allowance of 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 350 applications for compensation totaling about $9.5 million were reviewed.

In Bevis Shell Homes, Inc., 80 a partner of the attorney representing the debentureholders protective committee sold, at a loss, 500 shares of the debtor's stock during the Chapter X proceeding. It was represented to the court that the selling partner had no knowledge of the proceeding other than that disseminated by the trustee to all of the stockholders, and that the partner representing the committee had no knowledge that his partner owned and then sold this stock until after the firm filed its application for a final allowance. The firm then filed a petition requesting the court to approve the sale and, in its discretion, to award an allowance. The district court, as urged by the Commission, ruled that, although the services performed were meritorious and contributed to the confirmed plan, Section 249 was an absolute bar to the award of any compensation.

In Hudson & Manhattan Railroad Company, 31 the court of appeals, agreeing with the Commission, increased the final allowance to special counsel to the trustee.82 The court said that “the district judge erred in giving weight to the fact that the firm on six occasions did not seek the maximum interim allowance; this only encourages firms to apply for the maximum allowance regardless of the value of the services rendered.” Counsel had requested a total allowance of $107,350, the Commission recommended $75,000, the district court allowed $50,000, and the court of appeals increased the allowance to $65,000. In this connection, the court noted that counsel had not kept accurate time records and emphasized that "any attorney who hopes to obtain an allowance from the court should keep accurate and current records of work done and time spent. ... There is no excuse for an established law firm

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30 D.C. M.D. Fla., No. 4204 Bky-T. 1 S.D. N.Y., No. 90460. * In the Matter of Hudson and Manhattan Railroad Company, 339 F.2d 114 (C.A. 2, 1964),

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