Callaway v. Benton/Dissent Douglas

by William O. Douglas

United States Supreme Court

336 U.S. 132

Callaway  v.  Benton

 Argued: Oct. 19, 1948. --- Decided: Feb 7, 1949

Mr. Justice DOUGLAS, with whom Mr. Justice RUTLEDGE concurs, dissenting.

This decision permits control over the plan of reorganization to be taken from the Interstate Commerce Commission and the District Court contrary to the provisions of § 77 and allows a state court to undo what those federal agencies have approved.

The plan approved by the Commission and by the District Court provides for the 'consolidation, merger or purchase' of the properties of South Western in lieu of continued operation under the lease, 'if the leased properties can be acquired on the terms set forth in the Plan.'

The terms of the acquisition are set forth in the plan. If the leased lines are acquired, South Western shall waive any damages on account of breach of the lease and in respect of equipment. Securities allocated to South Western shall not bear interest or dividends for any period prior to the acquisition. The plan also determines the amount of the allotment to South Western which the Commission and the Court approved as 'fair and equitable' and 'equal the value of the transportation property.'

On February 11, 1947, the Commission submitted the plan to all creditors, including South Western, for acceptance or rejection on or before midnight March 28, 1947. On March 13, 1947, the directors of South Western accepted the plan subject to the assent of the holders of a majority of its stock. The stockholders met on March 28, 1947, and accepted the plan by a vote of 30,137 to 9,057. Accordingly South Western mailed its ballot approving the plan to the Commission.

The result of the balloting was certified by the Commission to the court. Thereafter the court had a hearing and confirmed the plan, specifically reserving for later adjudication the question whether it had power to enjoin action in a state court which attempted to annul the acceptance of the plan by South Western. Subsequently it held a hearing, overruled objections of the minority of South Western's stockholders and held that the acceptance by South Western was valid under Georgia law. It accordingly issued the injunction involved in this case.

It seems plain to me that the Commission and the reorganization court had exclusive jurisdiction, subject to judicial review, to determine the question of the validity of the acceptance of the plan tendered by the officers of South Western. The validity of the acceptance is, of course, a question of state law. But it has been entrusted by Congress to these federal agencies.

The plan must first be approved by the Commission and then certified to the court. § 77, subs. d, e. The court, after hearing, passes on the plan; and if the court approves the plan, it certifies that fact to the Commission. § 77, sub. e. The Commission then submits the plan to creditors and stockholders, § 77, sub. e, the lessor and its security holders being included in the definition of creditor. § 77, sub. b. See Group of Institutional Investors v. Chicago, Milwaukee, St. P. & P.R. Co., 318 U.S. 523, 549, 63 S.Ct. 727, 742, 87 L.Ed. 959. The Commission must then determine the result of the balloting and certify to the judge 'the results of such submission.' § 77, sub. e. The court then 'shall confirm' the plan if satisfied (1) that the requisite percentage of each class of creditors and stockholders has been obtained and (2) 'that such acceptances have not been made or procured by any means forbidden by law'. § 77, sub. e. (Italics added.) On confirmation of the plan by the court, the plan and order of confirmation 'shall, subject to the right of judicial review,' be binding upon the debtor and stockholders and 'all creditors secured or unsecured, whether or not adversely affected by the plan, and whether or not their claims shall have been filed, and, if filed, whether or not approved, including creditors who have not, as well as those who have, accepted it.' § 77, sub. f.

Section 77, sub. f also provides that on confirmation of the plan the debtor or any other corporation organized to carry out the plan 'shall have full power and authority to, and shall put into effect and carry out the plan and the orders of the judge relative thereto, under and subject to the supervision and the control of the judge, the laws of any State or the decision or order of any State authority to the contrary notwithstanding.' (Italics added.) And § 77, sub. j, with exceptions not material here, gives the court power to enjoin or stay the commencement of any suit against the debtor until after final decree. ^[1]

The control of the court over the acceptance of the plan and over its confirmation is one of the historic instances of the 'exclusive jurisdiction' vested in the court by § 77, sub. a. The exclusive jurisdiction of the reorganization court is one which heretofore we have zealously guarded against encroachments by state courts. See Thompson v. Texas Mexican R. Co., 328 U.S. 134, 66 S.Ct. 937, 90 L.Ed. 1132. That exclusive jurisdiction is not restricted to protection of the court's possession of the property and operation of the business. Section 77, sub. e gives the reorganization court the sole authority to determine whether the acceptances of the plan have been made or procured 'by any means forbidden by law'. In this case that plainly means that the reorganization court alone had the power to ascertain whether the requisite vote of the directors and stockholders of South Western had been cast in favor of the plan. Once it determined that lawful corporate action had been taken by South Western, then § 77, sub. f bound all of South Western's stockholders, since they are included in the definition of creditors for the purposes of the Act. See Group of Institutional Investors v. Chicago, Milwaukee, St. P. & P.R. Co., supra. And then the reorganization court had the express power under § 77, sub. f to put the plan into effect 'the laws of any State or the decision or order of any State authority to the contrary notwithstanding.'

This is precisely one of those situations where the bankruptcy court, if its exclusive jurisdiction is to be maintained, must have the power to enjoin action in state courts. It has long been recognized to have that authority in order to protect its decree. See Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230, 93 A.L.R. 195. And the policy reflected in old § 265 of the Judicial Code, now 28 U.S.C. § 2283, 28 U.S.C.A. § 2283, which frowned on the stay of state proceedings by federal courts, has for years recognized bankruptcy jurisdiction as an exception. See Toucey v. New York Life Ins. Co., 314 U.S. 118, 132, 62 S.Ct. 139, 143, 86 L.Ed. 100, 137 A.L.R. 967. It was in recognition of the necessity for that power that Congress wrote subdivision j into § 77.

If a state court can hold invalid acceptances whose validity has been approved by the Commission and the District Court, then the federal agencies have lost much of the exclusive jurisdiction which Congress granted them. There are myriad questions of state law underlying the consummation of every plan of reorganization. There is the question whether the new company is validly organized; whether proxies are executed in pursuance of the provisions of the state code; whether the charter of a corporation can contain certain kinds of provisions, authorize certain types of securities, etc., etc. If state courts can intrude with injunctions on such state law questions, the exclusive command of the federal agencies over the reorganization process is lost, its efficiency is undermined, and minorities are given leverages which the scheme of § 77 explicitly

Notes

1. This subsection provides in part: 'In addition to the provisions of section 29 of this title for the staying of pending suits against the debtor, the judge may enjoin or stay the commencement or continuation of suits against the debtor until after final decree * * *.'