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September 11, 1942


The opinion of the court was delivered by: KIRKPATRICK

Section 203 of Chapter X of the Bankruptcy Law, 11 U.S.C.A. § 603, provides: "If the acceptance or failure to accept a plan by the holder of any claim or stock is not in good faith, in the light of or irrespective of the time of acquisition thereof, the judge may, after hearing upon notice, direct that such claim or stock be disqualified for the purpose of determining the requisite majority for the acceptance of a plan."

The question presented by the Trustee's petition, the answer and the testimony taken at the hearing is whether securities acquired for the purpose of defeating the plan should be disqualified in determining the requisite majority for acceptance. The court must interpret and apply the term "good faith" in the statute.

 This reorganization proceeding was instituted in May, 1939. The Debtor was a coal mining company. There were three classes of creditors' claims: (a) A first mortgage in the amount of $1,105,000 securing a rather widely distributed bond issue; (b) a second mortgage in the amount of $1,300,000, all the bonds under which, having been originally owned by Locust Mountain Coal Co., were then held by a court-appointed receiver; (c) various land owners, parties to leases, with the Debtor extending generally to 1945.

 Weston, Dodson & Co. (which will be referred to as Dodson) is another coal mining company, operating in the same field as the Debtor. In May, 1942, it owned $112,000 of the Debtor's first mortgage bonds and, indirectly, through its stock ownership in Locust Mountain Coal Co., had about a 20 per cent interest in the second mortgage bonds. It also owned over 51 per cent of the preferred and common stock of the Debtor. The stock has no value and has never been a factor in the reorganization. Prior to these proceedings Dodson had been operating the Debtor under a management contract and also had a general sales agency contract. The Dodson interest represents an actual cash investment of about $250,000, and Dodson is the largest creditor.

 In July, 1939, the Trustee proposed a plan of reorganization generally similar in structure to the present plan, but providing for a loan from Reconstruction Finance Corporation of at least $578,000 together with some $200,000 from other sources, as opposed to a total of $140,000 to be advanced by private interests under the present plan. The plan granted no participation to the stockholders, but proposed the continuance of Dodson as manager and sales agent and provided for an underwriting by Dodson of $125,000. This plan received the support of Dodson. However, because of inability to obtain the consent of certain landlord creditors, the plan failed of consummation.

 Thereafter, in December 1941, the Trustee proposed the plan now before the Court. Under it, Philadelphia & Reading Coal & Iron Co., a third coal mining company in the same field, is to advance the money for the development of certain mining property to be leased by it to the Detor. The proposed arrangement is believed by the Trustee to be advantageous to the Debtor from an operating standpoint because of certain physical features of the mines of the two companies, which need not be detailed here. In January, 1942, the Trustee awarded a new sales contract, conditioned upon the adoption of the plan, to Philadelphia & Reading Coal & Iron Co., as the lowest of four bidders, among them Dodson, and subsequently terminated the Dodson management.

 After hearings before the Special Master and the Judge, the Trustee's second plan was approved as fair, equitable and feasible. The plan was then submitted to the security holders for acceptance or rejection and May 1, 1942, was fixed as the time within which proofs of claims and ballots were to be filed. By that date, more than 70 percent of the first mortgage bondholders and more than the requisite majority of landlord creditors had filed acceptance to the plan. Dodson voted its first mortgage bonds against the plan.

 Without unnecessary discussion, it may be said that the Court, can, and would if necessary, extend the time for voting the second mortgage bonds to a future date, so that, in dealing with the question now raised, it may be taken that the voting of that class of claims is still open.

 On July 9, 1941, Dodson, without disclosing its identity, purchased the entire second mortgage issue from the Locust Mountain receiver for $15,500. These bonds had not assented to the reorganization but, prior to the purchase the receiver had indicated that he had decided to vote them in the affirmative. Although there was no general agreement upon the point, it appears that, before he purchased them, Mr. Dodson was under the impression that the proposed plan had lapsed, by reason of the fact that they had not been voted favorably on May 1, 1942. He testified that the purchase was made to influence any subsequent plan which could have been submitted. However, there is no dispute that Dodson now proposed to vote the bonds against the plan if and when the Court fixes a date for voting them.

 Although it cannot be made the subject of a fact finding, it seems more than likely that if the present plan is not accepted there will be no alternative except to liquidate the Debtor company.

 Is Dodson's announced determination not to accept the plan in good faith, in view of the circumstances under which it acquired the second mortgage bonds?

 No decision has been broght to my attention, nor have I found any, dealing with "good faith" in Section 203 of Chapter X. The predecessor provisions of Sec. 77B, 11 U.S.C.A. § 207, were construed by the Court in Texas Hotel Securities Corporation v. Waco Development Co., 5 Cir., 87 F.2d 395, 400.However, in that case the Court pointed out that the provisions of 77B did not apply to dissenters and particularly that they did not require "that the non-acceptors are to be investigated at all."

 The new provision was intended to empower the Court to disregard dissenters, as well as assenters, not voting in good faith. It prescribes a standard of conduct defined by the elusive term "good faith", which must be met under pain of disqualification. The test is plainly to be sought in the motives of the holder of the claims. The Securities and Exchange Commission suggests in its brief that if assent is withheld to serve some ulterior selfish purpose good faith is wanting. If the emphasis be placed on "ulterior" rather than "selfish" this seems to be as practical a test as could be found. What is selfishness from the standpoint of those who derive no benefit from conduct under scrutiny often becomes enlightened self-interest if viewed from the standpoint of those who gain by it. If a selfish motive were sufficient to condemn reorganization policies of interested parties, very few, if any, would pass muster. On the other ...

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