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May 5, 1947


The opinion of the court was delivered by: GORLEY

This matter comes before the Court on petition of the Universal Stockholders' Protective Committee for a rule to show cause why the Order of this court made on March 7, 1945, by the Honorable Judge Schoonmaker, now deceased, in the matter of the reorganization of Universal Lubricating Systems, Inc., should not be amended and a Master appointed for the purpose of determining the present value of the holdings of the preferred stockholders of Universal Lubricating Systems, Inc., as it is now constituted, who are the same persons in most instances as the former creditors of Universal Lubricating Systems, Inc., prior to bankruptcy and reorganization of said company. 59 F.Supp. 171.

The petition for rule to show cause was presented to the Court on March 4, 1947. The Court directed the same to be filed, and two members of the Court have heard the oral arguments and considered the briefs filed by counsel for the respective parties to this proceeding. This was done for the reason that Judge Gibson, after the death of Judge Schoonmaker, confirmed the final plan of reorganization of said company, and entered the Order for the consummation of the reorganized plan. Judge Gourley heard and was informed in detail as to all the facts and circumstances having to do with the proceeding in which Universal Lubricating Systems, Inc., was a counter-claimant in a proceeding against the Stewart-Warner Corporation, in which violations of the Sherman Anti-Trust Act, 15 U.S.C.A. §§ 1-7, 15 note, and unfair competition were claimed. After the Court was engaged in the trial of said proceeding for approximately five months, a settlement was effected in the amount of $ 225,000, which was approved by the trial judge.

 To make possible this information and knowledge being merged and thoroughly considered in disposing of said petition, two members of this Court agreed to hear and decide the request for the equitable relief desired by the Protective Stockholders' Committee.

 In order for the problem to be intelligently approached and thoroughly understood, it is necessary that brief comment be made as to the circumstances existing from the time of the filing of the bankruptcy proceedings to the present date. A summarization will, therefore, be briefly made.

 On May 12, 1941, bankruptcy proceedings were instituted for the purpose of protecting creditors of the Universal Lubricating Systems, Inc., and on August 5, 1941, the proceedings were transferred to one of reorganization, in accordance with the provisions of Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. Austin L. Staley, petitioner therein, was Trustee in the bankruptcy proceedings and was substituted, therefore, as Trustee for the Debtor in the reorganization proceedings.

 The case was referred to a Master, who, among other things, found that there was insolvency under the Bankruptcy Act and a reorganization plan was submitted to him. The first plan was rejected by the Master for the reason that it included the participation to some extent of the stockholders of the Debtor Company.

 On September 18, 1944, the Trustee filed an amended plan, the main provisions of which were as follows:

 '(1) That creditors of debtor shall be given one share of preferred stock, and one share of common stock in the reorganized corporation for each $ 100 of claims duly proven by them; (2) the present common stockholders shall be given one share of new common stock, upon paying $ 10 for each unit of ten shares of the old common stock; (3) the present preferred stockholders shall receive one share of common stock upon paying $ 10 for each share of old preferred stock; (4) that each share of preferred stock in the new corporation is to have ten votes, while each share of the new common stock shall have one vote; (5) that the Steward-Warner litigation shall not be passed to the reorganized corporation, but shall be retained and litigated by the Trustee, and that the net proceeds of the litigation shall be ear-marked for retirement of the new preferred stock.'

 The Special Master held hearings on this plan. On October 13, 1944, he filed a supplemental report, holding that this amended plan complies with the Act; that it is fair, equitable and feasible.

 This plan was approved by the Master and in turn approved by His Honor, the late Judge Schoonmaker. The Protective Stockholders' Committee, representing the stockholders of the Debtor Company, took exception to this plan, and contended first, that there was no need for the reorganization plan for the reason that the Debtor Company did not commit an act of bankruptcy, that the Debtor Company was solvent at the time that the bankruptcy proceedings were instituted, and they took particular exception to the Master's findings on the question of valuation of the assets and business. They contended that the Referee erred,

 1. In establishing the proper value,

 2. In not setting the value upon the litigation which was pending in the case of Steward-Warner Corporation v. Staley, Trustee, D.C., 4 F.R.D. 333.

 3. That one Brynoldt had made various remarks thereby committing slander of title, and this would be considered an asset, and

 4. That the Trustee was operating and earning a substantial profit and that this should be evaluated as an asset.

 Thereafter, said plan was confirmed with modification:

 'We are of the opinion that in his two reports the Special Master has fully and fairly dealt with all these matters, except that in his treatment of the Stewart-Warner litigation, paragraph IX (c) should be stricken out, and the following substituted therefor:

 '(c) After deducting from the recovery of said litigation, all counsel fees, costs, expenses or other items incidental to the litigation, and also any taxes or other charges of similar or dissimilar nature, which equitably should be deducted therefrom, and remaining proceeds shall be ear-marked and paid by the Trustee in the following manner:

 '1. First, he shall pay to the reorganized company the amount needed for the following purpose * * * for the retirement of the issued preferred shares to its capital stock, said amount to be earmarked and available only for that purpose.

 '2. If said remaining proceeds, so earmarked, shall be insufficient for a retirement of all of said preferred shares, they shall be distributed equally among said preferred shares, in the nature of a liquidating dividend.

 '3. The balance, then remaining in the hands of the Trustee, after such earmarking and distribution -- if there be such balance -- shall be distributed and paid by the Trustee, under the direction of the Court, among the present preferred and common shares of debtor, as a liquidating dividend and in accordance with debtor's provisions as to the priority rights of its preferred shares on liquidation.'

 An appeal was perfected in the Circuit Court of Appeals and the questions raised in the appeal were identical with the exceptions taken before the District Court hereinbefore mentioned. The Circuit Court affirmed the decision of the District Court, and certiorari to the Supreme Court of the United States was denied. In re Universal Lubricating Systems, Inc., D.C., 59 F.Supp. 171; Id., 3 Cir., 150 F.2d 832; Stockholders' Committee of Universal Lubricating Systems v. Staley, 326 U.S. 744, 66 S. Ct. 58.

 The requisite acceptances having been obtained from creditors, the plan was then confirmed by Judge Gibson's Order entered November 23, 1945, and recorded in the Office of the Recorder of Deeds of Allegheny County November 28, 1945 in Deed Book Volume 2865, page 360. There was no appeal from that Order of Confirmation. The Order of Consummation of the Plan was entered by Judge Gibson May 3, 1946.

 The amount of indebtedness was approximately $ 331,000 owed to various creditors by the Debtor Company, and the then value of the assets as found by the Master was substantially less than the amount of indebtedness. The best estimates seem to indicate that if the Debtor Company were liquidated on May 12, 1941, or shortly thereafter, the creditors would have realized approximately fifteen cents (15%) on the dollar, and, no doubt, for this reason, they agreed to accept preferred stock of the proposed reorganized company for the reason that preferences were extended to them as to any future liquidation, and in no event could they have been worse off by accepting this proposed compromise. And then, with every share of preferred stock, they were given one share of common stock; as near as we are able to ascertain, the preferred and common stock is held almost exclusively by the former creditors of the Debtor Company.

 However, the former common stockholders of said company were given the right to purchase one share of common stock in the new company upon paying $ 10 for each unit of ten (10) share of the old common stock; and the old preferred stockholders were given the right to purchase one (1) share of common stock in the new company upon paying $ 10 for each share of the preferred stock in the old company. No satisfactory reason has been given as to why more of the old common or preferred stockholders did not elect to purchase stock in the new company. It could have been lack of funds, interest, trust, or belief that the new company could be successfully maintained or operated, and the old stockholders, therefore, did not desire to invest any additional funds in the new company. However, regardless of the reason for the election to not purchase stock in the new company, such is an actuality and a fact, and is material importance in considering the petition which has been filed by the Stockholders' Protective Committee and in passing upon the question as to whether or not the relief requested should be granted.

 Although the company between the period from 1932 and up to 1941 was operating at a loss every year with the exception of one, after the appointment of the Trustee and during his management there was a profit in 1941, a loss occurred in 1942, and large profits in 1943 and 1944. This material change was no doubt, due to the war years since a portion of the business of said company was the manufacture of goods for the war effort.

 Since the consummation, the corporation has functioned with a Board of Directors made up of Mr. Staley and the representatives of the creditor interests, that being the Board of Directors named in the Plan of Reorganization. The necessary money which was needed for the conduct of the business by the Trustee, and then after confirmation for the conduct of the business by the Board of Directors, of the Reorganized Company, was furnished to a large extent by borrowing from the Peoples-Pittsburgh Trust Company, now Peoples First National Bank & Trust Company, of Pittsburgh, Pennsylvania, that credit was obtained on the strength of the Trustee's reputation for success, and on the strength of the standing of the creditor members in the management, and notwithstanding the bankruptcy and unsuccessful history of the stockholder management. The cash balance of the Trustee November 23, 1945, which was the date of the confirmation of the plan, was: Account Amount Withholding Tax Acct. 3,790.15 Regular acct. 63,707.85 Payroll acct. 500.00 Petty Cash 57.17 Potter Title & Trust Co. 5,000.00 $ 73,055.17


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