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.
Our starting point for analysis must be American Trailer Rentals, wherein Justice Goldberg, speaking for a unanimous Court, explained in great detail the relationship between Chapters X and XI and the factors determining the choice between those chapters in a particular case. Though the decision to transfer is committed to the district court's discretion, Schreibman v. Mason, 377 F.2d 99, 102 (1st Cir. 1967); see 11 U.S.C. § 728 (note 1, supra), that discretion must be exercised in reliance on the principles stated in American Trailer Rentals, 379 U.S. at 619, 85 S.Ct. 513, which reaffirms and explains the decisions in General Stores Corp. v. Shlensky, 350 U.S. 462, 76 S.Ct. 516, 100 L.Ed. 550 (1956), and SEC v. United States Realty Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940). The Supreme Court's examination of the legislative history of the Bankruptcy Act revealed that Chapter XI was created "to provide a quick and economical means of facilitating simple compositions among general creditors who have been deemed by Congress to need only the minimal disinterested protection provided by that Chapter."
The principal of the General Debentures is to be accelerated on any default or, at the option of the Official Creditors' Committee, if the debtor has suffered specified losses or if the trustee under the indenture covering the Subordinated Convertible Debentures has accelerated their principal. The SEC's motion was supported by an affidavit of one of its attorneys. After setting forth the recent history of the debtor, it alleged, as reasons for the relief requested, the "Financial Inadequacy of Chapter XI," to wit, that successful reorganization would require the raising of new capital; "The Need for Investigation" of the transactions outlined above and other matters, particularly "the competency of management"; the desirability of bringing the debtor's many subsidiaries into the reorganization, as could readily be done under Chapter X, § 129; and the various procedural and substantive safeguards provided by Chapter X but not by Chapter XI. See SEC v. United States Realty Improvement Co., 310 U.S. 434, 448-455, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940). In opposition there were submitted an affidavit of Stanley Roth accompanied by numerous exhibits relating to the debtor's recent history and future prospects, affidavits of counsel for the Creditors' Committee and of a co-chairman and a member of that body, and an affidavit of David Dubinsky, President of the International Ladies' Garment Workers' Union. One of the exhibits attached to Roth's affidavit was a Cash Flow Projection for the year ended January 26, 1964, reviewed by S.D. Leidesdorf Co., which purported to show the adequacy of Grayson's cash for this period.
A measure of "sound discretion" and "business" judgment resides in the Court in deciding these motions. Securities and Exchange Commission v. United States Realty Improvement Co., 1940, 310 U.S. 434, 456, 60 S.Ct. 1044, 84 L.Ed. 1293; General Stores Corp. v. Shlensky, 1956, 350 U.S. 462, 467, 468, 76 S.Ct. 516, 100 L.Ed. 550; Securities and Exchange Commission v. Liberty Baking Corporation, 2 Cir., 1957, 240 F.2d 511, 516, certiorari denied 1957, 353 U.S. 930, 77 S.Ct. 719, 1 L.Ed.2d 723; In Re Lea Fabrics, Inc., 3 Cir., 1959, 272 F.2d 769, 772, judgment vacated, Securities and Exchange Commission v. Lea Fabrics, 1960, 363 U.S. 417, 80 S.Ct. 1258, 4 L.Ed.2d 1515. This discretion has been described as "within the purview of the district court's discretionary exercise of its equity powers."
The Bankruptcy Court also enjoys inherent power to dismiss a Chapter XI petition. SEC v. United States Realty Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940); Ira Haupt Co. v. Klebanow, 348 F.2d 907 (2d Cir. 1965). Under its inherent power, the Bankruptcy Court may act sua sponte without notice.
The Memorandum Opinion of the Honorable Paul X. Williams, United States District Judge for the Western District of Arkansas, is reported at 292 F. Supp. 594 (W.D.Ark. 1968). A bankruptcy court is a court of equity and is guided by equitable doctrines and principles. 11 U.S.C. § 11; Securities and Exchange Commission v. United States Realty Improvement Company, 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940). We reverse and remand because we think the proper application of equitable principles enunciated by the Supreme Court in controlling cases commands the employment of a Chapter X proceeding in the factual situation of the debtor.
Section 130(7) demanded that a petition under Chapter X contain "specific facts showing the need for relief under this chapter and why adequate relief cannot be obtained under chapter XI of this Act" and § 146(2) provided that a petition under Chapter X shall not be deemed to be filed in "good faith" if "adequate relief would be obtainable by a debtor's petition under the provisions of chapter XI of this Act." Although Chapter XI as originally enacted had no similar cross-reference with respect to Chapter X, SEC v. United States Realty Improvement Co., 310 U.S. 434, 456, 60 S.Ct. 1044, 1053, 84 L.Ed. 1293 (1940), ruled that "[w]hat the court can decide under § 146 of Chapter X as to the adequacy of the relief afforded by Chapter XI, it can decide in the exercise of its equity powers under Chapter XI" for the purpose of safeguarding that chapter from abuse. Mr. Justice Stone's opinion extensively analyzed the differences between the two chapters and the greater safeguards of Chapter X. But the point most emphasized was the requirement, then contained in both chapters, §§ 221 and 366, that a plan must be "fair and equitable" — "`words of art' having a well understood meaning" of strict priority of creditors over stockholders. 310 U.S. at 452-453, 456-457, 60 S.Ct. at 1052. Noting that the stock of United States Realty was publicly held but that Chapter XI, then as now, did not permit the imposition of sacrifices on the stockholders, the Court found the "hope of securing an arrangement which is fair and equitable" under Chapter XI "at best but negligible" and directed dismissal of the petition.
In resolving the issues presented herein, the Court exercises its "sound discretion" and "business" judgment. General Stores Corp. v. Shlensky, 350 U.S. 462, 467, 468, 76 S.Ct. 516, 100 L.Ed. 550 (1956); Securities and Exchange Commission v. United States Realty Improvement Co., 310 U.S. 434, 456, 60 S.Ct. 1044, 84 L.Ed. 1293 (1940); In re Lea Fabrics, Inc., 272 F.2d 769, 772 (3d Cir. 1959), judgment vacated, Securities and Exchange Commission v. Lea Fabrics, 363 U.S. 417, 80 S.Ct. 1258, 4 L.Ed.2d 1515 (1960); Securities and Exchange Commission v. Liberty Baking Corp., 240 F.2d 511 (2d Cir.), cert. denied, 353 U.S. 930, 77 S.Ct. 719, 1 L.Ed.2d 723 (1957). The discretion so to be exercised "must be a legal discretion, rather than one merely at will" or one expressing the court's "own notions of equitable principles."
The court referred the matter to a referee, who sua sponte issued an order that the debtor and the Securities and Exchange Commission show cause on July 29, 1943, why the petition should not be dismissed. After hearings on that and several subsequent days, at which the Commission appeared informally and appellant as intervening creditor pressed for dismissal, the referee finally dismissed the petition, being of the opinion that fair and equitable relief for the creditors of the debtor could be obtained only by a proceeding for a reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The debtor petitioned for review of this order, and the District Court reversed it and reinstated the petition, writing an opinion in which it questioned the authority of the referee to dismiss sua sponte and held the debtor, in any event, to be a different type of corporation from that considered in Securities and Exchange Commission v. United States Realty Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1093, and therefore not barred from relief under Chapter XI. From this judgment, appellant presses the present appeal, which presents us with the two questions whether the referee had power to dismiss the petition on his own motion, and whether the petition was correctly dismissed on the merits. First, a referee in bankruptcy clearly has the power sua sponte to dismiss a petition for an arrangement under Chapter XI and relegate the debtor to reorganization proceedings under Chapter X. The district judge read Securities and Exchange Commission v. United States Realty Improvement Co., supra, to permit the application of § 146 of the Bankruptcy Act — dealing with want of "good faith" in the filing of a petition for reorganization, to be passed upon by "the judge" under § 141 — to apply to a proceeding under Chapter XI, and thus to support the inference that action must be by the judge.
The determination of whether a debtor should be seeking relief under Chapter XI or Chapter X calls for the exercise by a court of its "sound discretion" and "business judgment." General Stores Corp. v. Shlensky, 1956, 350 U.S. 462, 468, 76 S.Ct. 516, 100 L.Ed. 550; Securities and Exchange Commission v. United States Realty Improvement Co., 1940, 310 U.S. 434, 456, 60 S.Ct. 1044, 84 L.Ed. 1293; Grayson-Robinson Stores, Inc. v. Securities and Exchange Commission, 2 Cir., 320 F.2d 940; In re Lea Fabrics, Inc., 1959, 3 Cir., 272 F.2d 769, 771; In re Transvision, Inc., 1954, 2 Cir., 217 F.2d 243, 246. In making this determination the primary consideration is the "needs to be served."