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In re Argyle-Lake Shore Corp.

June 21, 1938


Appeals from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Treanor

Before EVANS, SPARKS, and TREANOR, Circuit Judges.

TREANOR, Circuit Judge.

The same questions are presented in each of the two appeals which have been consolidated for briefing and for decision by this court.

The controversy in the instant case is an outgrowth of reorganization under Section 77B, 11 U.S.C.A. ยง 207, in which proceeding a plan of reorganization was submitted, and was approved by the District Court on February 13, 1936. The plan provided for the deposit and cancellation of the first mortgage bonds, the formation of a new corporation and the issuance of the stock of the new corporation to voting trustees. Also, as a part of the plan, participating trust certificates were issued to the bondholders on the basis of one certificate for each "one hundred dollars in face amount of unsubordinated first mortgage bonds."

A voting trust agreement was approved by order of the District Court and a final decree was entered by the court on August 29, 1936, terminating and closing the reorganization proceedings; the decree reciting that the final plan had been consummated. The decree of the court also recited " * * * that except as hereinabove in paragraph 4 and 6 hereof provided, the proceedings in this cause entitled 'In the Matter of Argyle-Lake Shore Building Corporation, a Corporation, Debtor, Case No. 57393,' be and the same hereby are terminated and finally closed."

The voting trust agreement requires the voting trustees to call a meeting of all holders of participating certificates, or to conduct a referendum of the holders on the question of continuance or termination of the trust, such meeting or referendum to be held within sixty days before July 1, 1938. And it further provided that in the event a majority in amount of the holders of participating certificates voting shall vote in favor of the termination of the trust, the trust shall be dissolved as of July 1, 1938. There is a similar provision for an expression of opinion by the holders of the certificates at the end of each two year period during the continuation of the trust. The voting trust agreement expressly authorizes any certificate holder to take "any action and/or give or make any direction, consent, or dissent hereunder by agent, and attorney thereunto duly authorized in writing."

The respondents, who are the owners and holders of over 22% of the participating certificates, favor the dissolution of the voting trust and for the purpose of bringing about such result have communicated with other participating certificate holders and have solicated proxies to vote for the termination of the trust.

The voting trustees presented their verified petition to the District Court in the original bankruptcy case, in which petition they alleged that the respondents were misleading other certificate holders; and for relief the petitioners prayed that the District Court enjoin the respondents from soliciting or voting proxies. And after a hearing the District court enjoined the respondents from voting any powers of attorney or proxies which had been obtained, or which might thereafter be obtained, as a result of the communications which had been sent out by the respondents; and the respondents were enjoined from sending out further communications "without submitting the form of the proposed communication to the court for its approval." From this order the respondents have prosecuted this appeal.

The argument of appellants-respondents resolves itself into three propositions:

1. The District Court, acting as a bankruptcy court in the original cause, does not possess the injunctive power which was exercised in this case.

2. No such power was reserved in the final decree of August 29, 1936.

3. Granting that the District Court possessed the power, either as a bankruptcy court or under its reservation of power, the petition and supporting evidence did not warrant the issuance of the injunction.

The District Court having terminated and finally closed the proceedings under Section 77B,*fn1 except as provided in paragraphs 4 and 6 of the final decree, we are of the opinion that the exercise of injunctive power in the instant case cannot rest upon the general equity powers of a bankruptcy court; and that such exercise was invalid unless it ...

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