The opinion of the court was delivered by: HIGGINBOTHAM
Re: Confirmation of Trustees' Plan
HIGGINBOTHAM, District Judge.
After three and one-half years, the corporate reorganization of the Spectrum has finally reached the stage where I have been presented at a confirmation hearing a most viable plan for ultimate payment of all Creditors -- secured and unsecured. I approve the Trustees' Plan as submitted.
On May 1, 1968, the Spectrum Arena, Inc., (hereinafter referred to as the "Debtor" or "Spectrum") was involuntarily placed in reorganization under Chapter X of the Bankruptcy Act of July 1, 1898, (11 U.S.C. §§ 501, et seq.). The only plan for reorganization currently before me
is the plan proposed originally by Earl M. Foreman and Edward N. Snider and currently endorsed and submitted by the able Trustees, Harvey N. Schmidt and William David Webb. (This plan is hereinafter referred to as "Plan ", "Trustees' Plan" or "Foreman-Snider Plan".)
The Trustees' Plan has been before me since it was first filed on April 15, 1971. On August 31, 1971, I entered an Opinion and Order pursuant to § 172 of the Bankruptcy Act (11 U.S.C. § 572) finding that the Trustees' Plan was "worthy of consideration" for submission to the Securities and Exchange Commission (hereinafter referred to as "SEC"). Having received a letter from the SEC on September 16, 1971, that they would not file a report, on October 28, 1971, I filed a major Opinion and Order which, inter alia, approved the Trustees' Plan as complying with § 216 of the Bankruptcy Act (11 U.S.C. § 616), ordered the Trustees' Plan submitted to the creditors for acception or rejection, ( Opinion of October 28, 1971, 340 F. Supp. pp. 781-783), set November 24, 1971 as the final date for voting, and ordered the Trustees to file with this Court by December 1, 1971, an affidavit certifying the results of the voting. On December 1, 1971, the Trustees, as ordered, submitted the requisite affidavit (Docket No. 254) certifying that seventy-eight percent (78%) of the creditors in dollar amount had accepted the Trustees' Plan and no Creditor voted against the Plan. The Order of this Court filed October 28, 1971, set December 8, 1971 as the time for a hearing on the confirmation of the Trustees' Plan. At the confirmation hearing, Mr. Chait, attorney for the Trustees, filed with this Court an affidavit certifying that notice of the confirmation hearing, pursuant to § 179 of the Bankruptcy Act (11 U.S.C. § 579) was mailed to creditors on November 23, 1971.
For the reasons appearing hereinafter, I find that the Trustees' Plan of Reorganization of the Spectrum meets all the requirements of § 221 of the Bankruptcy Act (11 U.S.C. § 621) and accordingly is hereby confirmed.
Should The Trustees' Plan Be Confirmed?
The hearing on confirmation was held, as noted above, on December 8, 1971. Thus, the only major issue remaining for my decision is whether the Trustees' -- Foreman-Snider Plan -- meets the requirements of § 221 of the Bankruptcy Act (11 U.S.C. § 621) and therefore should be confirmed. The requirements for confirmation under § 221 of the Bankruptcy Act (11 U.S.C. § 621) are that the judge must be "satisfied" that the following five requirements are met: (1) the Plan must meet the requirements of §§ 199 and 216 of the Bankruptcy Act (11 U.S.C. §§ 599, 616); (2) the plan must be fair and equitable, and feasible; (3) the proposal and acceptances must have been in good faith; (4) all payments to be made under the Plan must be disclosed to the Court or if fixed after confirmation, subject to the approval of the Court; and (5) the identity, qualifications and affiliations of the persons who are to be directors or officers upon consummation have been disclosed and that their appointment "is equitable, compatible with the interests of the creditors and stockholders and consistent with public policy."
A. Insolvency of the Debtor Corporation
No provision is made in the Trustees' Plan for compensating the shareholders, and if the Debtor is insolvent, no compensation to stockholders is required pursuant to § 216(8) of the Bankruptcy Act, 11 U.S.C. § 616(8).
Conversely, if the Debtor Corporation is solvent, the Trustees' Plan must be rejected.
A threshold question for my determination, and in fact the one which appears to be litigated most fiercely by Mr. Kalodner, is the issue of whether the Debtor Corporation as of the dates of the confirmation hearing and this adjudication was insolvent. As prerequisites for submission of the plan as to its worthiness for consideration to the SEC and submission of the plan to the creditors, I have made prior determinations that the Debtor Corporation was then insolvent. (See, Opinions of August 31, 1971, 340 F. Supp. pp. 766-767, and October 28, 1971, 340 F. Supp. pp. 778-779.) However, these prior determinations are not res adjudicata at a confirmation hearing. My prior findings of insolvency could be and in fact were challenged. The parties appear to have no genuine dispute as to the degree of net indebtedness. They appear to concede that the net liabilities as of December 31, 1971 would be approximately $9,488,000.00.
In their briefs the parties used the net liabilities of the Spectrum as $9,464,000.00 (Trustees' brief, p. 3; Kalodner's brief, p. 13). I had a conference in my chambers on December 21, 1971, with counsel and the Business Manager of the Spectrum, to ascertain if we could more precisely estimate the net liabilities as of December 31, 1971. Pursuant to that testimony and the schedules there submitted, I find that the net liabilities of the Spectrum as of December 31, 1971 will be $9,488,000.00.
Professor Max Radin has emphasized:
"The judge should be particularly wary of data furnished by those who will directly or indirectly profit from its [the plan's] acceptance; and while it may be that in an exceptional case no other valuation may be available or obtainable, yet it would seem that the judge could always supply any lack by the appointment of independent appraisers."
Collier On Bankruptcy notes that:
"A systematic, realistic and reasonably exact valuation is called for, based on a competent disinterested and informed appraisal of the property." (Emphasis added.) (6A Colliers, Bankruptcy, para 11.05 at p. 590.)
See also, In re Dutch Woodcraft Shops, 14 F. Supp. 467, 470 (W.D. Mich. 1935), where the Court stated:
"[The] results sought in this case could be sustained only after an appraisal made by appraisers thoroughly competent and wholly disinterested. . . ."
In the instant case, the only witness for the Debtor was Mr. Kalodner himself, a purported owner of more than 92% of the stock, a proponent of the Plan, and his own counsel. Thus at the outset, it becomes relevant to ask whether the testimonial value of Mr. Kalodner has that same probative weight of the "thoroughly competent and wholly disinterested appraiser" referred to by the commentators and in the leading cases. While Mr. Kalodner's distinction as an outstanding lawyer is obvious, legal experience is not in itself the equivalent of the extensive qualifications of Mr. Lukens, a certified appraiser, who has taught this subject at the Philadelphia Board of Realtors, Southern Methodist University, Drexel University, the University of Notre Dame and at several institutes.
Mr. Kalodner's failure to produce an expert witness on this critical issue cannot be attributable to the lack of forewarning. For, at page 779 of my Opinion of October 28, 1971, I noted:
"There was no credible evidence presented which could support, even inferentially, a finding of solvency. It is intriguing that the experienced counsel for the Debtor, Mr. Kalodner, failed to put on any expert to corroborate his allegation of solvency. Rather, he pursued his case by making trivial and peripheral challenges to the report of the experts from the Jackson-Cross Company. Is it asking too much for someone who wants to sell to the public $9,500,000 worth of bonds to present even one expert who will testify as to the value of the leasehold? Adroit cross-examination on peripheral issues is not a substitute for a sound, economic presentation based on market value data by a recognized and scholarly appraiser."
I accept Mr. Lukens' analysis that the fair market value of the leasehold is $8,000,000, as a conclusion which is justified on credible persuasive evidence, and further, as a conclusion which has been neither diluted nor weakened by extensive cross-examination. I accept Mr. Lukens' conclusion that the annual adjusted income to leasehold should be $1,100,000.00. Though the Spectrum has had sufficient earnings under which one could argue for an annual net income to leasehold at $1,200,000.00, this figure would be contingent upon operating the Spectrum without adequate reserves, adequate maintenance, and adequate manpower. I agree with Mr. Lukens' analysis that the Trustees have run the operation on an extremely "lean" basis; in fact for good reason the Trustees have been masters in frugality. The executive staff, particularly Mrs. Rothman and Mr. Freeman, have been underpaid and understaffed. The maintenance has been kept to a bare minimum, yet in a real sense the Trustees had no alternative. For they were not paying any interest on the secured mortgages of over $8,000,000. Thus they had to maintain a mere holding operation while trying to maximize income. This mastery in frugality cannot be expected as a prologue for the indefinite future.
My prior findings of insolvency are here again reaffirmed. My findings are based on a capitalization of future earnings of the Spectrum. As the Supreme Court stated in Consolidated Rock Products v. DuBois, 312 ...