The opinion of the court was delivered by: HIGGINBOTHAM
On May 1, 1968, the Spectrum Arena, Inc., (hereinafter referred to as the "Debtor" or the "Spectrum") was involuntarily placed in reorganization under the Bankruptcy Act of July 1, 1898, Chapter X (11 U.S.C. § 501 et seq.). After three years of superb management, the Trustees, Harvey N. Schmidt, Esquire, and William David Webb, Esquire, have so revitalized the business that there are now pending two reorganization plans which through reorganization allegedly would pay all secured and unsecured creditors one hundred percent of their claims; and thus, the Arena could potentially become a viable financial entity.
In corporate reorganizations, trustees are often complimented when they are successful in working out plans which would pay only the secured creditors, it is indeed rare when unsecured creditors are able to get any substantial payment for their claims. Under the Trustees' Proposed Plan which would pay one hundred percent to all creditors, secured and unsecured, there has been a miraculous turnaround in the potential of this presently insolvent business.
Two proposals for reorganization have been filed and fiercely litigated through extensive evidentiary hearings, argument and briefs.
One, as amended, is endorsed and preferred by the Trustees and was proposed originally by Earl M. Foreman and Edward N. Snider (this Plan will hereinafter be referred to as the "Foreman-Snider Plan" or the "Trustees' Plan"). The second plan has been filed by Philip P. Kalodner, Esquire, as stockholder, creditor and counsel for the debtor corporation (hereinafter referred to as the "Kalodner Plan" or the "Debtor Plan").
Three months after the Foreman-Snider Plan was filed, Mr. Kalodner filed his first Plan on June 28, 1971, providing for $7,500,000 financing to be raised through bonds which would be sold by a non-profit corporation. (See Docket No. 153.) On July 23, 1971, in the midst of an evidentiary hearing, he moved to amend his plan to obtain financing in the amount of $8,000,000. Mr. Kalodner's Plan is predicated on an anticipated sale of bonds through Bache and Company for the entire financing of the proposed transaction. He has not made any cash outlay for the ninety-two percent of the debtor's stock which he now purportedly owns.
The Kalodner Plan which I today hold not "worthy of consideration" for submission to the Securities and Exchange Commission, (see pp. 772-778, infra) is his third amended plan. The current Kalodner Plan was filed after this Court held the Foreman fourth mortgage valid. (See Opinion of August 31, 1971, 340 F. Supp. pp. 758-759).
The ultimate issues for this Court's present adjudication are two:
(1) Whether the third amended plan by Mr. Kalodner is "worthy of consideration" for submission to the Securities and Exchange Commission (hereinafter referred to as "SEC") for their review pursuant to § 172 of Chapter X, 11 U.S.C. § 572. See generally, 6 Colliers on Bankruptcy, P7.30, pp. 1257-64, and discussion of the Trustees' Plan, pp. 765-767, Opinion of August 31, 1971.
(2) Since, in my August 31, 1971 Opinion, I found that the Trustees' Plan was "worthy of consideration" for submission to the Securities and Exchange Commission, the second issue is whether the Trustees' Plan is also "fair, equitable and feasible" pursuant to § 174 of the Bankruptcy Act, 11 U.S.C. § 574, and therefore proper for submission to Creditors.
On August 20, 1971, I entered an Order denying Mr. Kalodner's petition to strike the Foreman fourth mortgage claim in the amount of $1,481,969.76 as of April 30, 1971.
As a result of my findings that the Foreman fourth mortgage claim was valid, the Kalodner Plan for reorganization was inadequate and not "worthy of consideration" for submission to the Securities and Exchange Commission because it failed to provide for the payment of the $1,481,969.76 mortgage of Foreman, a preferred creditor. Necessarily by the failure to provide for the payment of $1,481,969.76 to a secured creditor, the unsecured creditors would not under the former Kalodner (Second) Plan have any funds available for the payment of any portion of their debt because the "absolute priority rule" requires total payment to creditors in descending order of lien. (See pp. 779-780, infra.).
On August 20, 1971, when the major proponents of the reorganization plans in issue were before me, I thought that after the arduous three years travail we had drawn the final curtain necessary for my preliminary adjudication for the possible submission of a plan or plans to the creditors and the Securities and Exchange Commission. Counsel were expressly asked whether the record was closed.
At the conclusion of the testimony on August 19, 1971, the following colloquy occurred since I was particularly anxious to make certain that the record would be closed finally to make the prerequisite adjudications for the plans then in issue:
"MR. KALODNER: Based upon that stipulation, I would drop my request for any further testimony on this matter, Sir, eliminate it.
"THE COURT: Do you agree to the stipulation, Mr. Oswald?
"MR. OSWALD: That is satisfactory, Your Honor.
"MR. CHAIT: No objection. It is satisfactory.
"THE COURT: So, the record is completely closed now, gentlemen. No further evidence to be presented for my further enlightenment at any time prior to adjudication.
(N.T., August 19, 1971, pp. 91-92.)
In my Opinion of August 31, 1971, holding that the Trustees' Plan was "worthy of consideration" for submission to the Securities and Exchange Commission, I emphasized that "all parties have been granted great liberality in amending their proposals, since my primary concern has been the desire to see all creditors including unsecured creditors paid one hundred percent of their fully valid claims. However, even litigation in corporate reorganization should not be an endless tunnel for the continuous depositing of amended plans." (Opinion of August 31, 1971, p. 758.)
After my Opinion of August 31, 1971, Mr. Kalodner filed another material amendment to his Plan wherein he alleged that the bonding issue required for financing his Plan would be increased from $8,000,000 to $9,500,000.
On September 10, 1971, admittedly with some reluctance, I permitted Mr. Kalodner's third material amendment which increased his financing from $8,000,000 to $9,500,000; in granting the request, I recognized that if I had not gone beyond the maximum ambit of my discretion, nevertheless I was at least tottering on the brink which terminates judicial discretion. Having granted Mr. Kalodner another material amendment and another day in court for the presentation of his evidence, nevertheless I find that his Third Plan is again not "worthy of consideration" for submission to the Securities and Exchange Commission. Further, I find that the Trustees' Plan, as amended, is not only "worthy of consideration," but it is also "fair, equitable and feasible" for immediate submission to the creditors pursuant to § 175 of the Bankruptcy Act, 11 U.S.C. § 575.
THE KALODNER PLAN -- IS IT WORTHY OF CONSIDERATION?
In order to pay off the present indebtedness, Mr. Kalodner would need at least an additional $200,000; in addition it is estimated that one would need at least $400,000 of working capital for immediate repairs to the Spectrum and contingency funds. In addition to the shortage of $600,000 there are other uncertainties which might make the Kalodner Plan unworthy of consideration until such time as he has resolved those factors. As an example, his Plan is predicated on:
(1) Receiving a favorable ruling from the United States Internal Revenue Service that the proposed bonds to be issued will be tax exempt; and
(2) The Philadelphia City Council passing
(a) a bill (which is not vetoed by the Mayor) for the creation of the non-profit corporation which would issue the $9,500,000 bonds; and
(b) additional ordinances approving the proposed lease agreements.
These bills have not even yet been submitted to the City Council.
In order to pay the total indebtedness, the Kalodner Plan's survivability is contingent upon his ability to obtain a ruling that ARA must subordinate its present "A" Fund, a $600,000 third mortgage claim, to his proposed $9,500,000 bond issue. I find that as a matter of law, ARA cannot be compelled to subordinate their $600,000 "A" Fund third mortgage claim, and in fact, as secured creditors, it is entitled to have paid at consummation its "A" Fund claim and its "B" Fund claim purportedly in the amount of $850,000.
The multifaceted attacks made by Mr. Kalodner on ARA's claims require the following extensive explanation of the background of the original ARA loans to Mr. Wolman and ARA's relationship to the debtor corporation and the Trustees.
The contract between Jerry Wolman and ARA arises from a Loan Agreement of July 27, 1966. Under that Agreement, ARA was obligated to make a two-part loan to Wolman totalling $2,126,300.00. The first part of the loan, the "A" Fund was advanced immediately and was to be repaid quarterly with interest on the unpaid balance. Under a Concession Agreement, it was provided that ARA could withhold from revenues otherwise due Wolman the sum of $8,333.33 per month in reduction of the principal of the "A" Fund. These withheld funds would be credited against the unpaid balance of the "A" Fund. Thus, the "A" Fund of $1,000,000 would have been repaid at the rate of $100,000 per year for ten years, plus interest.
The second part of the loan by ARA to Wolman was the "B" Fund which ultimately amounted to an indebtedness of $1,126,300.00. Loans were made in varying amounts. ARA advanced to Wolman $394,205 on August 19, 1966, and also on October 7, 1966. In addition, ARA advanced to Wolman $168,945 on November 1, 1966, and also on December 5, 1966. (Docket No. 218, Answer of ARA, p. 3; Docket No. 214, Exhibit A.)
The Loan Agreement specifies several events which would constitute a default, two of the most material of which were:
(1) If the borrowers failed to make any payment of principal or interest required within ten days after notice that the same was due (Loan Agreement, P9. A.); and
Under paragraph 32 of the City-Wolman lease, one of the specified events of default was the placing of the borrower (Spectrum and/or Wolman) in involuntary bankruptcy. On May 1, 1968, ARA, along with other secured creditors, filed a petition placing the Spectrum into corporate reorganization. In addition to other "technical defaults" under the City-Spectrum lease, ARA asserts that when the Spectrum went into corporate reorganization, this act constituted a material default under paragraph 32 of the lease. The acceleration clause in paragraph 10 of the Loan Agreement provides:
"Upon the occurrence of an Event of Default, . . . then forthwith upon written notice by Lender to Borrowers, all balances of principal and interest hereunder then remaining unpaid shall become due and payable . . . "
Accordingly, ARA contends that the petition placing the Spectrum into involuntary bankruptcy filed on May 1, 1968, and its Proof of Claim of December 20, 1968, constituted the requisite ...