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In re Diversey Hotel Corporation. Kosdon

January 21, 1948


Author: Evans

Before EVANS, MAJOR, and MINTON, Circuit Judges.

EVANS, Circuit Judge.

The appellants who hold bonds in the above-named corporation seek by this appeal to set aside an order of the District Court in a chapter X Reorganization Proceeding, 11 U.S.C.A. ยง 501 et seq., which declared the petition in said proceedings was filed in good faith, and also seeks relief from an order wherein the court appointed a trustee of said debtor and its property.

Stripped of its verbal foliage, the attack is directed to an assault upon the court's finding that the debtor's petition was filed in good faith - a prerequisite of a valid order taking over a debtor's property for reorganization. Such a finding of good faith was specifically made by the District Court in this case, and our inquiry is as to its correctness, factually and legally.

Briefly, perhaps too skimpily, the petition stated that petitioner was unable to pay its debts as they matured. It was filed a few days before maturity of a large bond issue. It stated ownership of two pieces of realty on Diversey Parkway, in Chicago. The one building was a four story office building; the other was a hotel eight stories high. Petitioner asserted this property and furnishings possessed a value of $1,450,000, which, together with other assets including cash on hand of $45,409, totalled $1,512,902.72. It listed total liabilities of $1,424,578 of which its mortgage, due June 1, 1947, amounted to $1,387,500. There had been a foreclosure of the property, instituted in 1932, but before completion of proceedings there was a reorganization followed by the issuance of new bonds. One hundred shares of common stock, having a par value of $10 were also provided for, and it is concerning this stock that much of the instant controversy centers. Appellants contend that stock should have been distributed to the old bondholders (or under the plan it could have been sold and. the proceeds distributed) but instead was retained in a committee headed by one George Pearson (who filed the instant petition) as president. The appellants contend that he has been in control of the property and by the instant proceeding seeks to retain that control for another indefinite period.

Appellants are three holders of bonds totalling $21,000. They were the only ones to attack the good faith of the petition. They state that Pearson sought to effect a sale of the property for a couple of months immediately prior to the maturity of the mortgage, and received an offer of $1,200,000, which offer was not submitted to the bondholders for their consideration. Appellants state that since the assets of the petitioner have a value less than the first mortgage indebtedness, the corporation is insolvent and the only plan that can be consummated is a liquidation. They state, "There is no reason to expect that a reorganization which is fair can be approved and the proceeding must be dismissed for want of good faith. Only a liquidation will result; therefore, the proceeding was not instituted in good faith and must be dismissed." No effort was made, appellants state, to obtain a voluntary extension of the mortgage.

In reply to the objections, petitioner points out that no stockholder ever asked that the stock be distributed; that had such stock been distributed, appellants would be entitled to but a fraction of one share, which vote would have carried little weight at any stockholders' meeting.

While it may appear to an impartial observer that properties grossing $216,000 rentals (as stated in the advertisement of sale) should have been able to achieve some reduction in the amount of the first mortgage since 1932, and such inability might not make one too sanguine over the outcome of these proceedings, still the instant proceedings might be a crutch to carry the bondholders through and to the end of their long period of convalescence.

We have witnessed the decline and rise of real estate values in Chicago. Those who held on have been rewarded generously. Their hopes are brighter today than ever, as is evidenced by the fact that they are now and have for eight years been receiving a fair return (4%) on their investment and for two years earlier their bonds drew interest. We think the trial judge may take notice of facts which are brought to his attention every day in similar reorganization proceedings. Likewise, we can not ignore the papers filed by other bondholders who ask the court to accept the good faith of the very substantial claims of many creditors and also the petition of the Security and Exchange Commission, whose action must be accepted as undertaken in an effort to help all creditors. After all, if the best offer petitioner secured was $1,200,000 at a voluntary sale, the bondholders stood to lose a substantial amount. If the great majority of the bondholders wish to defer liquidation until a more propitious offer*fn* be made, or should they prefer to attempt a reorganization in these proceedings, their wishes weigh heavily in determining the proper course of action. They are the creditors who are taking the chance. We have no doubt that Judge Campbell was largely influenced by their wishes.

The discussion of the opposing counsel leads us to the conclusion that one, if not the sole basis of difference between them, is traceable to their different conceptions of the meaning of the phrase "good faith". Obviously, this is not a term of precise or restricted meaning in the law. It is a phrase of frequent use and application, and must find its correct connotation in the facts and in the field wherein it is used.

When applied to action of individuals holding a fiduciary position, it is rather easy of application. When its absence is the basis of a criminal charge or the measure of degree of business misjudgment, it involves an appraisal of the facts and legitimate deductions arising from said facts. Here it is used in a narrower sense.

It is not infrequent that a litigant sues to redress a wrong. Often the defendant so sued may feel strongly, and assert that the suit against him is not filed "in good faith." However, the right to sue is not denied. The court awaits the presentation of proof before it acts.

In suits or proceedings like the one at bar, we find a large group of creditors whose investment has turned sour, or perhaps it was of that nature at all times. The desperate creditors desire to save something out of the wreck. They cause a petition to be filed in a court of bankruptcy to secure relief.Being only a fraction of all of the creditors similarly situated, their efforts to improve the situation invite the support or the opposition of other creditors.

Foreclosure of the mortgage, if the creditors' holdings should be bonds, was once the common, and at times the only remedy. Congress, however, provided an additional remedy called Reorganization Proceedings, which was a modification or enlargement of the Bankruptcy Act. The creditors' right to invoke the Federal Court's jurisdiction under this Act, however, necessitated an ...

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