remedies are offered beyond numbering, but the patient may not survive. Congress, in consequence, by section 77B, has given a remedy which can be invoked only by the debtor or creditors. The P.R.T. is no exception to this general rule. Its affairs are and have been in a most unsatisfactory condition. Some way must be found to extricate the corporation and its subsidiaries, and above all the city and general public from the difficulties which have been created. The petitioners have such a plan. They believe in its merits. To put it in operation there must be a change in management, its policies, and personnel. They have resorted to section 77B as a means of accomplishing their purpose. Our task is to determine whether it is legally available to them. The petition must be by at least three creditors. It is easy for any three persons to acquire the status of creditors so as to meet this requirement. The petitioners have done this but this is not enough. The petition must be "in good faith."
It may be no light matter to sanction a proceeding which is bound to disrupt the relations of the corporation with all with whom it does business. This does not mean to question the purity of the motives of the critics of the management. Nor does it mean that the criticism is baseless. Nor one could be found to say in the instant case that criticism of the way in which the affairs of the P.R.T. have been managed, is unjustified. The fact that a responsible officer in the city government, one whose special duty it is to guard its interests, shares in such criticisms, is of significance and well worthy of due consideration.
The comment we have made is directed to the meaning of section 77B. We think it means that the proceeding provided is to be invoked either by the corporation concerned or by its creditors. This is the meaning of the "good faith" phrase used in the act. It does not, as we have said, refer to the purity of the motives of the petitioners, nor, on the other hand, does it mean that the petitioners have merely technically qualified as creditors. They must be found to be speaking for the corporation or as creditors.
Applying this test in the instant case, we have two questions to answer. Is the pending petition sanctioned by the officials who represent and speak for the corporation? There is no pretense of this. Do the petitioning creditors speak as creditors? The answer to this question must likewise be in the negative. Of course, it may be said that the answer to this second question is made without the light of what may be developed by the evidence which may be introduced. This is true. The duty of so answering it is, however, imposed upon the court. The approval of an adverse petition may, as we have said, do irreparable injury to the corporation and its creditors. The subsequent dismissal of the petition will not repair the damage done. A petition not "in good faith," as we have defined that phrase, must be dismissed, and the proceeding halted before it gets under way. This is not a creditors' petition.
We see in it no more than a well intentioned attempt to create a new management of the P.R.T. corporation and to effect a reorganization which will bring its affairs out of the chaos which now exists. All that we now rule is that, however desirable such an end may be, section 77B confers jurisdiction upon this court only upon the initiative of the corporation or by a petition of its creditors. The amendments to the Bankruptcy Acts are primarily for the benefit of distressed debtors and section 77B (11 USCA § 207) extends to corporations the rights which section 74 (11 USCA § 202) gave to individual debtors. The added right given to creditors to invoke the provisions of the act does not mean that any three persons, merely because they have the technical status of creditors, may force a corporation into reorganization or liquidation."Good faith" means, as we have said, a real creditors' petition, not merely a petition signed by three persons who have the technical status of creditors.
This is an inadequate expression of the thought in mind. It is this. Stockholders of a corporation might think it in need of reorganization. They might file a petition under section 77B. It would be dismissed because it was not a creditors' petition. They could not, by purchasing claims against the corporation, thus becoming creditors, make of their petition a creditors' petition "in good faith." Congress has given to creditors the right to petition. It was necessary to provide for signers.Congress doubtless, by analogy to bankruptcy proceedings, required three. We do not rule that more are required or that they must be acting for or representing others. A double duty is, however, imposed upon the judge. Compliance with certain formalities are required by the act. These the judge must find have been observed. One is that the petition must be signed by three creditors. There has been a compliance with the formalities. The act, however, requires more of the "judge" than a certification to such compliance. He must find "good faith." This is more than a formality. It goes to the very vitals of the petition. If it is not a real creditors' petition, although it may be signed by three persons who have the technical status of creditors, it is not "in good faith" a creditors' petition. No better illustration could be found of the distinction attempted to be expressed than is afforded by this very petition. An official of the city, whose special duty it is to supervise its flscal affairs, finds the city to be in what is really a partnership with a corporation whose activities deeply affect the city and its people. He has made himself as familiar as any one can be with its affairs and its management. He is filled with a deep distrust of that management. This feeling has extended to the directors who, at his instance, were put by the state court in control of its affairs. He is convinced that the corporation is headed for the financial rocks and fears that the city may be drawn into its wake. He believes that both can be saved, but only by a complete change of management and a reorganization. He has conceived a plan of reorganization through which the much desired result may be achieved. He sees in section 77B the needed means. He appreciates, as do his counsel, that the powers of the court given by section 77B can be invoked only by the corporation or by its creditors. The co-operation of the company he knows cannot be secured. Resort must in consequence be had to a creditors' petition. Three real creditors could doubtless have been found to sign such petition. This would, however, not serve his real purpose. That purpose could be served only by his being in absolute control of the proceedings. Hence he and two others chosen by him and upon whose fidelity he could rely bought $7,000 of the bonds of the corporation. There has been as yet no default on these bonds. Their maturity date is far in the future. The mistake made was in assuming that, if he complied with all the formalities required by the act of Congress, he could bring himself within its provisions.He has overlooked the second requirement of substance that the petition must be "in good faith" a creditors' petition.He has further assumed, as his counsel have argued, that the averments of the petition must be taken as verities until the facts have been judicially determined in accordance with the leisurely methods of legal procedure. He again has overlooked the requirement that the "judge" must summarily determine the fact of compliance with the formalities and likewise the fact of "good faith."
The very great efforts and the meticulous care with which the petitioners have sought to comply with the formal requirements of the act make clear that the petition is not a creditors' petition within the meaning of the act. This is manifest. Any one might find the purposes of the petitioners to be of the best and their motives the purest. To find, however, that the purpose and motive was to safeguard their claims as creditors would be impossible. The only claims they have are not presently payable and will not be until 1962. The debts are not due for a generation to come. The fact that two of them have waived the security they hold is proof that they are not concerned over the payment of the debt due them. The real purpose and motive behind the position existed before they became creditors and they became creditors solely as an aid in the accomplishment of this purpose. This was frankly admitted in the argument at bar. They bought their way in as creditors and presumedly can sell their way out.
The petition is not in truth a real creditors' petition and in this sense is not in good faith. Approval should in consequence be denied.
A formal order may be submitted.
KIRKPATRICK, District Judge, concurs.
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