Callaway v. Benton/Opinion of the Court

The Central of Georgia Railway Company, whose Trustee is the petitioner here, and its predecessor have leased and operated the property of the South Western Railroad Company since 1869. The Central went into receivership in 1932, and in 1940 entered reorganization under § 77 of the Bankruptcy Act, 49 Stat. 911, 11 U.S.C. § 205, 11 U.S.C.A. § 205. South Western's lease was adopted successively by Central's Receiver and Trustees. It has, in consequence, remained solvent, and no petition for reorganization has ever been filed in its behalf.

Under the plan of reorganization of the Central promulgated by the Interstate Commerce Commission and approved by the district court, South Western is given the alternative of selling its property to the reorganized company in return for a fixed amount of bonds of the latter, or of having the lease disaffirmed by the debtor and its property returned. South Western appeared specially in the reorganization proceedings and asked that its lease be adopted by the reorganized company, but on the basis of studies and estimates not now open to challenge, the Commission rejected the proposal and found that the amount offered for its properties appears 'fair and equitable and to equal the value of the transportation property, and (is) approved.'

Following Commission and court approval of the plan, South Western's officers, reversing their previous stand, urged acceptance of the offer by its stockholders and signified their intention of conveying the company's property to the Central if a majority of the stockholders voted to accept. Thereupon the respondents, who are individual stockholders of South Western, brought an action in the Superior Court of Bibb County, Georgia, where South Western's principal office is located, asking for an injunction against South Western, its officers and directors, restraining them from certifying the company's acceptance of the offer to the Interstate Commerce Commission or from selling the railroad's property to the reorganized debtor if, upon a vote of the stockholders, a 'mere majority' of the stock was voted in favor of the plan. The basis of the petition for injunction was the contention that under the laws of Georgia, where South Western was incorporated, the entire assets of the company cannot be sold except upon unanimous approval of the stockholders.

Before a decision was reached in the state court action, a meeting of South Western's stockholders was held at which the offer of purchase incorporated in the Central's plan of reorganization was considered. 30,137 shares were voted in favor of acceptance against 9,057 shares favoring rejection. Petitioner, acting as Trustee of the Central which was not a party to the state court suit, then filed a petition in the bankruptcy court asking that respondents and other stockholders of South Western be enjoined from further prosecution of the state court action, and a temporary restraining order was entered as prayed. Thereupon the state court, of its own motion, entered an interlocutory injunction restraining the officers and directors of South Western from selling its property, on the ground that such a sale under Georgia law requires unanimous consent of the stockholders. Petitioner then amended his petition in the bankruptcy court by bringing to its attention the injunctive order of the state court, and, after holding hearings, the federal district court granted a permanent injunction restraining further prosecution of the state action and declared the state court's temporary injunction null and void as in excess of its jurisdiction. Upon appeal, the Court of Appeals for the Fifth Circuit, one judge dissenting, reversed the order of the district court, 165 F.2d 877. We granted the petition for a writ of certiorari because of the conflict between state and federal authority and the importance of the question in the administration of the Bankruptcy Act.

First. The district court's injunction was based primarily on the premise that the plan of reorganization requires the inclusion of South Western's lines within the system of the reorganized company. The state action is said to be an attempt on the part of respondents 'to prevent the consummation of the plan as respects South Western.' Again, the court held that 'the question of the consolidation, merger and sale, and under what conditions South Western may convey its property to the reorganized company, in consummation of the plan, is not a question of State law; it is a question of Bankruptcy law-a question which arises under the Bankruptcy Act and the Interstate Commerce Act.' The court's conclusion was, therefore, that although the question whether a Georgia railroad corporation can convey all of its properties without unanimous consent of its stockholders would ordinarily be one of state law congizable in the state's courts, under these circumstances the decision was one for the bankruptcy court applying federal law.

We do not agree. The language of the plan and the factors which the Commission took into consideration in arriving at the amount offered South Western for its properties indicate clearly that, so far as the reorganization plan contemplates acquisition of the lessor railroad, the ordinary rules of offer and acceptance were intended to apply. That has invariably been the practice. As a consequence, we have held that the amount which may be offered a lessor is a question of 'business judgment'; that 'if the Commission deems it desirable to keep the leased lines in the system, it must necessarily have rather broad discretion in providing modifications of the lease where, as here, the lessor is not being reorganized along with the debtor. For under that assumption the modification must be sufficiently attractive to insure acceptance by the lessor or its creditors.' Group of Institutional Investors v. Chicago, M., St. P. & P.R. Co., 1943, 318 U.S. 523, 550, 63 S.Ct. 727, 742, 87 L.Ed. 959. The plan itself recites that the leased lines are to be acquired only 'if they can be acquired on the terms hereinafter set forth.' Otherwise, the lease is to be disaffirmed and the property returned to the lessor. In addition, the record is replete with statements by the Commission, the court, and the parties that South Western's stockholders are to have the choice open to any offerce: an unfettered right to accept or reject.

Under these circumstances, we can see no reason why the ordinary incidents of a sale of the assets of a corporation should not be applicable. One of the most important of these is, of course, the question of the proportion of a corporation's stock which must be voted in favor of accepting the offer of purchase in order to make its acceptance effective. Since, as the district court held, this would ordinarily be a question of Georgia law, we believe that substitution of any other rule of law is erroneous.

Not the least of the difficulties with a contrary result is the fact that the Bankruptcy Act gives no clue to what proportion of the lessor's stockholders must vote to accept the offer if state law is not controlling. Section 77, sub. e provides that confirmation of a plan requires acceptance by creditors holding two-thirds in amount of the total allowed claims of each class voting on the plan, but that the judge may confirm the plan in any event 'if he is satisfied and finds, after hearing, that it makes adequate provision for fair and equitable treatment for the interests or claims of those rejecting it'. But neither the two-thirds vote provision nor the so-called 'cram-down' provision applies to a lessor not in reorganization or its stockholders. They apply to 'creditors of each class whose claims have been filed and allowed in accordance with the requirements of subsection c of this section,' which obviously does not include a lessor-offeree. And, although South Western is a 'creditor' under the specific terms of § 77, sub. b, its stockholders, individually, are not.

The district court sought to find a federal rule permitting acceptance by a simple majority vote of the shareholders in the provisions of § 5(11) of the Interstate Commerce Act. But that section relates to voluntary mergers, not to the purchase of a leased line as part of a plan of reorganization. The Commission can undoubtedly carry on § 5 proceedings simultaneously with § 77 reorganization proceedings, see United States v. Lowden, 1939, 308 U.S. 225, 60 S.Ct. 248, 84 L.Ed. 208, but that procedure was not followed in this case. The Commission preferred, instead, to carry out the consolidation under the authority of § 77, sub. b(5) of the Bankruptcy Act, which provides that the plan of reorganization may include 'the merger or consolidation of the debtor with another corporation or corporations'. That power flows from a different source than the power over consolidations under the Interstate Commerce Act. While some of the findings required of the Commission under the two Acts are similar, and § 77, sub. f provides that consolidation and merger of the debtor's property shall not be inconsistent with the provisions and purposes of chapter 1 of the Interstate Commerce Act, their procedural and jurisdictional requirements do not overlap. It may be noted, in addition, that § 5(11) contains a proviso that the majority vote provision shall not apply if 'a different vote is required under applicable State law, in which case the number so required shall assent'. Whether that proviso is operative when a state's law requires unanimous consent of the shareholders is a question we need not decide.

Nothing that we have said derogates in any way from decisions of this Court upholding the power of the Interstate Commerce Commission, in the exercise of its statutory obligations, to override state laws interposing obstacles in the path of otherwise lawful plans of reorganization. We have recently reaffirmed that power in cases arising under the Interstate Commerce Act. Nor is the ambit of federal power less broad in cases arising under the bankruptcy laws of the United States. Section 77, sub. f of the Bankruptcy Act specifically provides that the plan of reorganization shall be put into effect, 'the laws of any State or the decision or order of any State authority to the contrary notwithstanding.' The statute does not, however, give the Commission or court the right to require acceptance by a lessor not in reorganization of an offer for the purchase of its property, and no such power has been asserted by the Commission in this case. The plan of reorganization in effect hands South Western a contract of sale. Whether or not South Western signs the contract must depend not only upon its business judgment, but also upon the charter of the company and the laws of the state of its incorporation. There is therefore no occasion to override state law. The plan implicitly accepts it as controlling. The fact that the law may make acceptance of the offer less likely than would be the case if the offeree were incorporated elsewhere does not change the picture. We do not believe that Congress intended to leave to individual judges the question of whether state laws should be accepted or disregarded, Palmer v. Massachusetts, 1939, 308 U.S. 79, 60 S.Ct. 34, 84 L.Ed. 93, or to make the criterion to be applied the effect of the law upon the prospects of acceptance by the offeree.

Second. The district court further held that even if Georgia law governs the question of the authority of South Western's officers to sell its properties, the bankruptcy court has exclusive jurisdiction to decide the state law question. We have held that a court of bankruptcy has exclusive and nondelegable control over the administration of an estate in its possession. Thompson v. Magnolia Petroleum Co., 1940, 309 U.S. 478, 60 S.Ct. 628, 84 L.Ed. 876; Isaacs v. Hobbs Tie & Timber Co., 1931, 282 U.S. 734, 51 S.Ct. 270, 75 L.Ed. 645. There can be no question, however, that Congress did not give the bankruptcy court exclusive jurisdiction over all controversies that in some way affect the debtor's estate. One exception is found in the express language of the statute. What it did give is exclusive jurisdiction of the debtor and its property wherever located. § 77, sub. a. The interest held by the debtor in South Western's lines was a leasehold estate. Such an estate is the debtor's 'property' within the meaning of the Act. Any controversy involving that estate would have been within the exclusive jurisdiction of the bankruptcy court.

Here, however, the question involves not the debtor's leasehold, but the reversion in fee held by South Western as lessor. South Western was not in reorganization jointly with its lessee, nor could it have been reorganized in the Central's proceedings. The controversy which respondents initiated in the state court, and which the district court decided after having enjoined the state proceedings, requires a determination of the rights of the stockholders of South Western inter se to sell their reversionary interest in the property. We think that the interest here involved is not part of the property of the debtor, and that the district court's assertion of exclusive jurisdiction was error.

In Ex parte Baldwin, 1934, 291 U.S. 610, at page 615, 54 S.Ct. 551, at page 553, 78 L.Ed. 1020, we said: 'All property in the possession of a bankrupt of which he claims the ownership passes, upon the filing of a petition in bankruptcy, into the custody of the court of bankruptcy. To protect its jurisdiction from interference, that court may issue an injunction.' In the Baldwin case this Court upheld the bankruptcy court's exclusive jurisdiction under § 77 to adjudicate the question of forfeiture by the debtor of an easement of right of way-clearly a part of the property of the debtor of which it claimed ownership. See Thompson v. Magnolia Petroleum Co., supra. In Warren v. Palmer, 1940, 310 U.S. 132, 60 S.Ct. 865, 84 L.Ed. 1118, where the debtor under § 77, the New Haven Railroad was lessee of property but had rejected the lease and was operating the property for the account of the lessor under § 77, sub. c(6), we held that the bankruptcy court had exclusive jurisdiction to fix the amount of the deficit resulting from such operation and to declare it a lien upon the property of the lessor. Since the physical property covered by the rejected lease was within the custody of the bankruptcy court, the fact that legal title remained in the lessor was thought to be immaterial. Clearly, control of the physical property must remain in the court which has the ultimate responsibility for operating it. And in order to protect the estate of the debtor from dissipation through losses suffered in the operation of the lessor's property, responsibility for the determination of the amount of the losses and provision for their recoupment from the lessor was properly lodged in the court supervising the reorganization of the debtor.

Equally clear, however, is the fact that the internal management of the lessor is not properly subject to the court's control. The anomaly of petitioner's position is demonstrated by the facts of the case just discussed. The New Haven reorganization was proceeding in a Connecticut federal district court, while the lessor railroad, the Boston & Providence, was in reorganization under § 77 in a Massachusetts district court. The plan of reorganization of the New Haven, like the Central's plan in this case, contemplated the purchase of the lessor's property. Since the Boston & Providence reorganization court had exclusive jurisdiction of its property, it can hardly be contended that the New Haven reorganization court could assume exclusive jurisdiction to decide questions arising, for example, between different classes of creditors of the Boston & Providence as to whether the New Haven's offer should be accepted. Such a result would be incompatible with the Massachusetts district court's exclusive jurisdiction over the property of the Boston & Providence under § 77, sub. a. Insofar as the power of the court reorganizing the lessee rests on its jurisdiction over the property of the debtor, the fact that the lessor here is not in reorganization in another court is immaterial.

Further support for this position is found in our decision in Group of Institutional Investors v. Chicago, M. St. P. & P.R. Co., supra. The Milwaukee reorganization, in one of its aspects, presented a situation analogous to the one now before us: the lessee was in reorganization under § 77, but no proceedings had been instituted for the reorganization of the lessor of some of its lines, the Chicago, Terre Haute & Southeastern Railway Company. The reorganization plan provided for a new lease to be offered the Terre Haute, which required that the latter scale down its bonded indebtedness so that the interest thereon, which was the rental under the lease, would be substantially reduced. The plan did not, however, differentiate between the four classes of bonds of the lessor with respect to the earning power and character of the security of each, as is required in the reorganization of properties of the debtor. Certain bondholders accordingly attacked the plan as unfair, because it did not attempt to preserve the respective priorities of these bond issues. But we said, 318 U.S. at page 546, 63 S.Ct. at page 741, 87 L.Ed. 959: 'Th short answer to that objection is that the Terre Haute properties have not been treated by the Commission or the District Court as a part of the properties of the debtor for reorganization purposes. Nor has any question been raised or argued here as to the power of the Commission or the District Court so to treat them. The Commission and District Court considered the problem solely as one of rejection or affirmance of a lease.' It is abundantly clear that in the case before us, the interest of South Western was similarly considered.

Other provisions of § 77 lend no support to petitioner's contentions. Section 77, sub. b, which makes South Western a creditor in the proceedings, does not, as we have pointed out, give the bankruptcy court any control over its internal organization. It is not a creditor which can be bound by the plan without its assent, except to the extent of its claim for damages for breach of the lease and for amounts due it from the lessee. Section 77, sub. b(1) provides that the plan may alter the rights of creditors, while § 77, sub. b(5) requires that the plan provide adequate means for its execution, which may include merger or consolidation of the debtor with another corporation. This subsection also permits rejection of executory contracts and unexpired leases.

The bankruptcy power unquestionably gives the Commission and court, working within the framework of the Act, full and complete power not only over the debtor and its property, but also, as a corollary, over any rights that may be asserted against it. These rights may be altered in any way thought necessary to achieve sound financial and operating conditions for the reorganized company, subject to the requirements of the Act. The purchase of formerly leased properties does not involve rights asserted against the debtor, however. This Court has said that 'The exclusive jurisdiction granted the reorganization court by § 77, sub. a is that which bankruptcy courts have customarily possessed.' Meyer v. Fleming, 1946, 327 U.S. 161, 164, 66 S.Ct. 382, 384, 90 L.Ed. 595. We conceive the jurisdiction asserted by the district court over a solvent lessor not in reorganization to be an extension of these traditional powers not justified by any provisions of the Bankruptcy Act.

A serious practical problem would arise if the consequence of rejection of the offer and return of the properties to South Western would be cessation of railroad service on the formerly leased lines. Congress has foreseen that difficulty, however. Under § 77, sub. c(6), if the lessor is unable to operate the leased lines following rejection of the lease, the duty devolves upon the lessee to continue to operate the leased lines for the account of the lessor, and such operation may continue after completion of the reorganization of the lessee. We need not speculate upon the eventual disposition of South Western's properties. Until some final disposition is made, however, we are assured that service will be maintained on its lines, and that the debtor will not be prejudiced because of the duty thrust upon it. Palmer v. Webster & Atlas National Bank, 1941, 312 U.S. 156, 61 S.Ct. 542, 85 L.Ed. 642.

Third. It is argued that Continental Illinois National Bank & Trust Co. of Chicago v. Chicago, R.I. & P.R. Co., 1935, 294 U.S. 648, 55 S.Ct. 595, 605, 79 L.Ed. 1110, and other cases applying similar principles support the district court's injunction of the state action and its determination of the issue there involved. The question specifically before the Court in the Rock Island case was this: 'Under section 77 does the bankruptcy court have authority to enjoin the sale of the collateral here in question if a sale would so hinder, obstruct and delay the preparation and consummation of a plan of reorganization as probably to prevent it?' The affirmative answer given by the Court rested upon the inherent powers of a court of equity to prevent the defeat or impairment of its jurisdiction, upon § 262 of the old Judicial Code (now 28 U.S.C.A. § 1651), which authorized United States courts 'to issue all writs not specifically provided for by statute, which may be necessary for the exercise of their respective jurisdictions,' and upon § 2(15) of the Bankruptcy Act, 11 U.S.C. § 11(15), 11 U.S.C.A. § 11(15), which gives bankruptcy courts the power to 'make such orders, issue such process, and enter such judgments in addition to those specifically provided for, as may be necessary for the enforcement of the provisions of this act'.

Reliance upon these cases is based, however, upon the fallacy previously adverted to. The action in the Georgia courts in this case does not embarrass or delay the formulation or promulgation of a plan of reorganization. The plan has been formulated and approved. It leaves open t South Western the alternative of selling its properties to the reorganized debtor or of facing disaffirmance of the lease and the risks of separate operation of its lines. No suggestion has been made that a final decision of the state law question will be unreasonably delayed. Under these circumstances, we do not believe that the Rock Island decision provides any support for the district court's action. As we held in Thompson v. Texas Mexican R. Co., 1946, 328 U.S. 134, at page 142, 66 S.Ct. 937, at page 943, 90 L.Ed. 1132: 'Forfeiture of leases by the court in advance of a determination by the Commission of the nature of the plan of reorganization which is necessary or desirable for the debtor may seriously interfere with the performance by the Commissionof the functions entrusted to it.' See also Smith v. Hoboken R.R. Warehouse & S.S.C.onnecting Co., 1946, 328 U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123, 168 A.L.R. 497. The same considerations do not prevail at a later stage of the proceedings, however, when, pursuant to a plan formulated by the Commission, the lease is forfeited and an offer of purchase substituted in lieu thereof. Unless the offer is a sham and the lessor's discretion illusory, the plan may be effectively consummated whether the offeree accepts or not. The district court did not merely postpone action which would have hindered the development of the plan; it took to itself the decision of a question which the plan left open for decision elsewhere.

We conclude that under the narrow facts presented here, the bankruptcy court erred in enjoining the state court suit leading to a determination of the requirements of Georgia law with respect to sale of the entire assets of South Western. This question was already in litigation in the state court when first raised in the federal court. Title 28 U.S.C. § 2283, 28 U.S.C.A. § 2283, forbids this exercise of power, since, as we hold, the controversy does not involve property of the debtor within the jurisdiction of the bankruptcy court, and the assertion of jurisdiction by the state court is not inconsistent with the provisions of the Bankruptcy Act.

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