debtor was insolvent and that stockholders were not entitled to participate under the plan. The Commission supported an appeal by the preferred stockholders' committee. After the close of the fiscal year, the Court of Appeals for the Sixth Circuit affirmed, holding that the district court's determination of insolvency "was supported by substantial evidence and is not clearly erroneous." 29

31

In Rocky Mountain Chemical Corp.,30 the court approved a plan of reorganization which provided for the sale of the assets to a new company formed by a stockholders' committee, which raised funds from the sale of stock pursuant to a Regulation A offering. The debtor had been found insolvent and the amount paid by the stockholders' committee was sufficient only to pay the expenses of administration. In Edward N. Siegler & Co., a registered broker-dealer which was a member of the Midwest Stock Exchange filed a petition for reorganization in Cleveland, Ohio on May 23, 1966. With the assistance of the Commission, an agreement was worked out which provided for the satisfaction of the claims of all customers in full by the transfer of the customers' accounts to Hartzmark & Co., Inc., a Cleveland brokerdealer. Hartzmark has undertaken to honor all of the customers' paid security positions and free credit balances. This agreement was approved by the court on August 1, 1966. The assets held by the debtor for customers were approximately $160,000 short of the amount required to satisfy these liabilities. The Midwest Stock Exchange contributed $135,000 towards the deficiency and Hartzmark provided the balance.

In Twentieth Century Foods Corp.,32 the Commission objected to the petition of the trustee to sell the assets of a wholly-owned subsidiary of the debtor, which constituted the major asset of the estate, unless a sale were made pursuant to a plan of reorganization. The trustee thereupon agreed to incorporate the offer to purchase the assets into a proposed plan.

In TMT Trailer Ferry Inc.,33 as reported previously," the Stockholders' Protective Committee appealed from the order of the district court confirming an internal plan of reorganization. While the district court denied the objections of the Commission to consummation of the plan pending ultimate determination of the issues on appeal, the court accepted the suggestion of the Commission that the new com

31st Annual Report, p. 100. For previous reports on the plan of reorganization, see also 30th Annual Report, p. 105; 29th Annual Report, pp. 91–92.

mon stock to be issued to creditors bear a legend disclosing the pendency of the appeal. After the close of the fiscal year, the court of appeals rendered its decision affirming the order of the district court.35

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 197 applications for compensation totaling about $6.9 million were reviewed.

In Automatic Washer Company,36 the court disagreed with the view of the Commission that no compensation or reimbursement of expenses should be allowed a fee applicant in connection with the preparation of his application for an allowance or attendance at the hearing on his application. The court said that the preparation of a fee application and attendance at a hearing thereon in a Chapter X proceeding may require a substantial amount of time, which would be considered in making an allowance for fees.37

In General Economics Syndicate, Inc., application for final allowances totaled $276,000, the Commission recommended $136,000, and the district court allowed $160,500. On appeal, the court reduced the allowances to the trustees and their counsel to the amount recommended by the Commission and agreed with the Commission that the allowance to counsel for certain stockholders was so low as to constitute an abuse of discretion. Counsel for the stockholders had requested $25,000, the Commission recommended $15,000, and the district court awarded $3,500. The court of appeals allowed $10,000.39 The court of appeals stressed the necessity for attorneys who expect to obtain an allowance to keep accurate time records.

In Swan-Finch Oil Corporation,10 20 applicants requested a total of about $1,204,000 in final allowances. The Commission recommended a total of about $760,000. The Commission's recommendations were

35 Protective Committee, etc. v. Anderson, 364 F. 2d 936 (C.A. 5, 1966). "S.D. Iowa, No. 5-426 Bankruptcy.

27

Contra: In re Solar Mfg. Corp., 215 F. 2d 555, 561 (C.A. 3, 1954); In re Celotex Corp., 13 F. Supp. 1011, 1013 (D. Del., 1936).

89 In re General Economics Corp., et al., 360 F. 2d 762 (C.A. 2, 1966).

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

adopted by the court, except for allowance to the trustee. The latter had requested $650,000, the Commission had recommended $450,000, and the district court allowed $490,000.

In Tucker Corporation," a proceeding in which the Commission was not participating, the Commission informed the attorney for the trustee that final allowances to four law firms had been approved by the court on the basis of applications which had understated the amounts previously received by these firms as interim allowances. All four firms admitted having received interim payments which they did not report to the court at the time they applied for final allowances, but sought court approval to correct the record to show the amounts actually received as interim allowances.

The Commission moved for leave to file its appearance in the Chapter X proceeding and urged that the court order the return by the four firms of the full amount of the excess payments received by them, plus interest. The Commission also suggested that there should be an inquiry as to the circumstances surrounding the overpayments. The court denied the Commission's motion to enter the proceeding and granted the motion of the four law firms to correct the record, finding that the inaccuracies in the petitions for fees "were the result of inadvertent and honest mistakes." As a result, two of the firms actually received payments in excess of the total originally requested.

INTERVENTION IN CHAPTER XI PROCEEDINGS

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.

42

In Imperial "400" National, Inc., a company engaged in the business of developing and operating motels on a co-ownership basis proposed an arrangement under Chapter XI whereby the interests of the 850 common stockholders were to be eliminated and the estimated several hundred holders of the $994,000 of convertible debentures were to receive 50 percent of the stock of the reorganized company. The Commission's motion under Section 328 was based on the major adjustment of the rights of the debenture holders and the fact that the debtor

was attempting a comprehensive reorganization under Chapter XI rather than a simple composition of its unsecured debts. The court agreed with the Commission's position and granted the motion stating, among other things, that there was a need for the appointment of a disinterested trustee with broad powers of investigation and for the assistance of the Commission. The debtor subsequently amended its petition to comply with Chapter X.

43

In American Guaranty Corporation, reported previously," the district court affirmed its previous denial, in 1963,45 of the Commission's Section 328 motion, which was again before the district court on remand from the Court of Appeals for the First Circuit.46 The Commission advised the court of appeals, which had retained jurisdiction over the matter, that it did not desire to press its appeal further and the court of appeals dismissed the appeal.

47

In First Mortgage Corp. of Stuart, the debtor, on the complaint of the Florida Securities Commission, had been placed in a State court receivership together with several other corporations alleged to be related to or affiliated with the debtor, including Tower Credit Corporation. A few days thereafter the debtor filed a petition under Chapter XI. This Commission's motion under Section 328, joined in by the Florida Securities Commission and many attorneys representing public investors, was denied without prejudice. Shortly thereafter the court adjudicated the debtor bankrupt. Several months later an involuntary petition under Chapter X was filed by three purported creditors against Tower,48 which the court dismissed on the ground that the petitioning creditors did not have valid claims. After the close of the fiscal year, three different creditors filed another involuntary Chapter X petition against Tower.19

43 D. R.I., No. 63-B-17.

44

49

31st Annual Report, pp. 104-105; 29th Annual Report, pp. 95–96. 45 221 F. Supp. 961 (D. R.I., 1963).

46 S.E.C. v. Burton, 342 F. 2d 782 (C.A. 1, 1965).

47 S.D. Fla., No. 65-312-Bk-CF.

48 M.D. Fla., No. 66-81-BK-T. "M.D. Fla., No. 66-171-BK-T.

238-643-67-8

ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939

The Trust Indenture Act of 1939 requires that bonds, notes, debentures and similar securities publicly offered for sale, except as specifically exempted by the Act, be issued under an indenture which meets the requirements of the Act and has been duly qualified with the Commission. The Act requires that indentures to be qualified include specified provisions which provide means by which the rights of holders of securities issued under such indentures may be protected and enforced. These provisions relate to designated standards of eligibility and qualification of the corporate trustee to provide reasonable financial responsibility and to minimize conflicting interests. The Act outlaws exculpatory provisions formerly used to eliminate all liability of the indenture trustee and imposes on the trustee, after default, the duty to use the same degree of care and skill in the exercise of the rights and powers vested in it by the indenture as a prudent man would use in the conduct of his own affairs.

The provisions of the Trust Indenture Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the Securities Act of securities to be issued under a trust indenture subject to the Trust Indenture Act is not permitted to become effective unless the indenture conforms to the requirements of the latter Act, and necessary information as to the trustee and the indenture must be contained in the registration statement. In the case of securities issued in exchange for other securities of the same issuer and securities issued under a plan approved by a court or other proper authority which, although exempted from the registration requirements of the Securities Act, are not exempted from the requirements of the Trust Indenture Act, the obligor must file an application for the qualification of the indenture, including a statement of the required information concerning the eligibility and qualification of the trustee.

Number of indentures filed under the Trust Indenture Act of 1939