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U.S. Supreme Court

SEC v. American Trailer Rentals Co., 379 U.S. 594 (1965)

Securities and Exchange Commission v.

American Trailer Rentals Co.

No. 35

Argued November 10, 1964

Decided January 18, 1965

379 U.S. 594


Respondent company, which was in the trailer rental business, was financed by arranging for the sale of trailers to investors on a lease-back agreement. The trailers were placed by respondent at hundreds of gasoline stations which acted as rental agents. The Securities and Exchange Commission (SEC) blocked the further offering of the sale and lease-back agreements without a registration statement, which never became effective. Respondent's vice president then formed a new corporation which sought to exchange its stock for the investor creditors' trailers, but the SEC suspended the exemption from registration for small offerings because there was reasonable cause to believe there were false statements in the material used in making the offer. Respondent then filed a petition and proposed plan of arrangement under Chapter XI of the Bankruptcy Act. The petition showed that respondent never operated at a profit, that it owed large sums to trailer investors, that it made payments to investors whose trailers had not been obtained, that it purchased all trailers from an affiliate which had gone bankrupt owing it money, that 100 trailers were lost, and that substantial funds had been misappropriated. The SEC filed a motion under § 328 of the Bankruptcy Act to transfer the proceeding to Chapter X. A referee in bankruptcy, acting as special master, recommended denial of the motion on the ground that the SEC had not made a sufficient showing. The District Court, although expressing disapproval of the proposed stock arrangement and the preferential treatment of unsecured bank loans, accepted the referee's findings and denied the motion. The Court of Appeals affirmed, holding that the District Court did not abuse its discretion in this borderline case and the SEC did not show that adequate relief was not available under Chapter XI.


1. In Chapters X and XI, Congress enacted two distinct methods of corporate rehabilitation which are mutually exclusive. Pp. 379 U. S. 604-607. chanrobles.com-red

Page 379 U. S. 595

(a) Chapter X affords greater protection to creditors and stockholders by providing judicial control over the entire proceedings and impartial and expert assistance in corporate reorganizations through disinterested trustees and the active participation of the SEC. Pp. 379 U. S. 604-605.

(b) Chapter XI is a summary procedure, usually under the control of the debtor, limited to an adjustment of unsecured debts, with only a bare minimum of control or supervision. Pp. 379 U. S. 605-607.

(c) These are not alternate routes, with the choice in the debtor's hands. P. 379 U. S. 607.

(d) A Chapter X petition may not be filed unless "adequate relief" is not obtainable under Chapter XI. P. 379 U. S. 607.

(e) A Chapter XI petition is to be dismissed, or in effect transferred, if the proceedings should have been brought under Chapter X. P. 379 U. S. 607.

2. While there is no absolute rule that Chapter X be used in every case in which the debtor is publicly owned, or where publicly held debt is adjusted, as a general rule, Chapter X is the appropriate proceeding for adjusting publicly held debt. SEC v. United States Realty & Improvement Co., 310 U. S. 434, followed. Pp. 379 U. S. 613-614.

(a) Public investors are generally widely scattered, and are far less likely than trade creditors to be aware of the financial condition and cause of the collapse of the debtor; they are less commonly organized in groups or committees capable of protecting their interests; they do not have the same interest as do trade creditors in continuing the business relations with the debtor; and, where debt is publicly held, the SEC is likely to have become familiar with the debtor's finances, indicating the desirability of its performing its full Chapter X functions. Pp. 379 U. S. 613-614.

(b) In enacting Chapter X, Congress had the protection of public investors, and not trade creditors, primarily in mind. P. 379 U. S. 614.

3. There are only narrow limits within which there are exceptions to this general rule that the rights of public investor creditors are to he adjusted only under Chapter X. "Simple" compositions are still to be effected under Chapter XI; such situations may exist even where public debt is directly affected, for example, where the public investors are few in number and familiar with the operations of the debtor, or where, although the public investors are greater in number, the adjustment of their debt is relatively minor. P. 379 U. S. 614. chanrobles.com-red

Page 379 U. S. 596

4. Even where there is no public debt problem, Chapter X is appropriate where there are widespread public stockholders needing the protection offered thereby, such as accounting for mismanagement or obtaining a change in management, or where the financial condition requires more than a simple composition of unsecured debts. General Stores Corp. v. Shlensky, 350 U. S. 462, followed. Pp. 614-615.

5. Here, where public debts are being adjusted, the investors are many, widespread, and not intimately connected with the debtor, and the adjustment is major, it is obvious on the above-stated principles that Chapter X is the appropriate proceeding for the debtor's attempted rehabilitation. P. 379 U. S. 615.

6. The contention that Chapter X is not here appropriate, as the time and expense involved in such a proceeding would be too great, is just another way of stating the natural preference of a debtor's management for the "speed and economy" of Chapter XI to the "thoroughness and disinterestedness" of Chapter X, which preference has been rejected by the determination of Congress that the disinterested protection of the public investor outweighs the self-interest "needs" of corporate management for so-called "speed and economy." Pp. 379 U. S. 617-618.

(a) Experience in this area has confirmed the view of Congress that the thoroughness and disinterestedness assured by Chapter X not only results in greater protection for the investing public, but often in greater ultimate savings for all interests, public and private, than does the so-called "speed and economy" of Chapter XI. Pp. 379 U. S. 617-618.

(b) The requirements of Chapter X are themselves sufficiently flexible so that the District Court can act to keep expenses within proper bounds and insure expedition in the proceedings. P. 379 U. S. 618.

(c) Chapters X and XI were not designed to prolong -- without good reason and at the expense of the investing public -- the corporate life of every debtor suffering from terminal financial ills. P. 379 U. S. 618.

7. District courts do not have open-ended discretion to decide in each case whether it is better for a debtor to be in Chapter X or Chapter XI, but must decide the issue pursuant to the principles here reaffirmed. Pp. 379 U. S. 619-620.

325 F.2d 47, reversed and remanded. chanrobles.com-red

Page 379 U. S. 597


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