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March 26, 1956



Warren, Black, Reed, Frankfurter, Douglas, Burton, Clark, Minton; Harlan took no part in the consideration or decision of this case.

Author: Douglas

[ 350 U.S. Page 463]

 MR. JUSTICE DOUGLAS delivered the opinion of the Court.

Petitioner instituted proceedings under c. XI of the Bankruptcy Act (52 Stat. 905, as amended, 11 U.S.C. § 701 et seq.) alleging it was unable to pay its debts as they matured. It proposed an arrangement of its general unsecured trade and commercial debts, none of which is evidenced by any publicly held security. Petitioner has indeed no debts of any nature by way of bonds, mortgage certificates, notes, debentures, or obligations of like character, publicly held. It does, however, have over 2,000,000 shares of $1 par value common stock listed on the American Stock Exchange and held by over 7,000 shareholders. One of these -- an owner of 3,000 shares -- and the Securities and Exchange Commission moved that the proceedings be dismissed unless, within a time fixed by the court, the petition be amended to comply with the requirements of c. X of the Bankruptcy Act (52 Stat. 883, as amended, 11 U.S.C. § 501 et seq.) for a corporate reorganization. The District Court granted the motions. 129 F. Supp. 801. The Court of Appeals affirmed by a

[ 350 U.S. Page 464]

     divided vote. 222 F.2d 234. The case is here on certiorari. 350 U.S. 809.

Petitioner, formerly known as D.A. Schulte, Inc., has operated for some years a chain of stores for the sale of tobacco and accessory products. Petitioner has also had a chain of difficulties. Its financial problems go back at least to 1936 when it filed a petition for reorganization under former § 77B of the Bankruptcy Act. After its reorganization was completed in 1940, it had a few years of prosperity followed by a postwar decline in volume of business, a rise in costs, and substantial losses. During these years $600,000 cash was raised by the sale of stock and a new management installed with a view to converting some existing stores into candy, food, and drink establishments. That idea was abandoned and the proceeds of the stock sale were used for general corporate purposes. It was then decided to liquidate the existing specialty stores and to have petitioner acquire the stock of two existing retail drugstore chains -- Stineway Drug Company and Ford Hopkins Company. The Stineway stock was acquired for $1,220,320, petitioner borrowing $870,000 from Stineway for the purpose. Later petitioner borrowed an additional $440,000 from Stineway to help make the down payment on the Ford Hopkins stock, making a total indebtedness to Stineway of $1,310,000, represented by two non-interest-bearing notes. The Ford Hopkins stock was acquired for $2,800,000, the down payment being $735,000, the balance being payable in a yearly amount of $200,000 with 4 per cent interest and secured by the Stineway and Ford Hopkins stock.

While the two drug chains were being acquired, petitioner started the liquidation of its own stores, a process that was completed under c. XI of the Bankruptcy Act. The disposition of those stores involved the rejection of numerous leases and the creation of claims of landlords against petitioner.

[ 350 U.S. Page 465]

     The arrangement proposed by petitioner under c. XI would extend its unsecured obligations and provide for a 20 per cent payment on confirmation of the plan and 20 per cent annually for 4 years thereafter. The claims listed were the $1,310,000 debt to Stineway and $525,000 unsecured claims, exclusive of claims by landlords. We were advised on oral argument that during the course of the c. XI proceedings it was decided that this offer was not feasible and that the unsecured creditors are now offered the equivalent of 40 per cent of their claims in full satisfaction.

Much of the argument has been devoted to the meaning of Securities and Exchange Commission v. United States Realty Co., 310 U.S. 434. In that case we held that relief was not properly sought under c. XI but that c. X offered the appropriate relief. That was a case of a debtor with publicly owned debentures, publicly owned mortgage certificates, and publicly owned stock. An arrangement was proposed that would leave the debentures and stock unaffected and extend the certificates and reduce the interest. It was argued in that case, as it has been in the instant one, that c. X affords the relief for corporations whose securities are publicly owned, while c. XI is available to debtors whose stock is closely held; that c. X is designed for the large corporations, c. XI for the smaller ones; that it is the character of the debtor that determines whether c. X or c. XI affords the appropriate remedy. We did not adopt that distinction in the United States Realty case. Rather we emphasized the need to determine on the facts of the case whether the formulation of a plan under the control of the debtor, as provided by c. XI, or the formulation of a plan under the auspices of disinterested trustees, as assured by c. X and the other protective provisions of that chapter, would better serve "the public and private interests concerned including those of the debtor." 310 U.S., at 455. The United

[ 350 U.S. Page 466]

     These are typical instances where c. X affords a more adequate remedy than c. XI. The appointment of a disinterested trustee ( § 156), his broad powers of investigation ( § 167), the role of the trustee in preparing a plan ( § 169), the duty of the Securities and Exchange Commission to render an advisory report on the plan ( § 172), the requirement that the plan be "fair and equitable, and feasible" ( §§ 174, 221), the power to include the subsidiaries, Stineway and Ford Hopkins, in the reorganization of petitioner ( § 129) -- these are controls which c. X gives to the entire community of interests in the company being reorganized and which are lacking under c. XI. These controls are essential both where a complicated debt structure must be readjusted and where a sound ...

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