77-B Out?

Since President Roosevelt signed the corporate reorganization amendment to the Bankruptcy Act in 1934, Section 77-B has become a highly popular resort for embarrassed U. S. corporations. So many companies have crowded into court that bankruptcy now has its own trade publication, Corporate Reorganizations.

To businessmen and lawyers, therefore, it was a shock last week to see headlines proclaiming that part of 77-B had been held unconstitutional in Cincinnati by a U. S. Circuit Court of Appeals.

Case concerned Tennessee Publishing Co. (Nashville Tennesseean). Before he went to jail and the company went into receivership, Tennessee Publishing was owned by Nashville's Luke Lea. The present owner of the common stock, E. W. Carmack, submitted several 77-B reorganization plans to Nashville's Federal District Judge John J. Gore, who refused to approve them on the ground that they required coercion of a majority of the creditors. The case turned on the point that 77-B not only provides a means of clubbing a stubborn minority into line if two-thirds of the creditors of each class agree to a reorganization plan, but also that, under certain conditions, it permits a Federal judge to club a stubborn majority if the plan seems to him fair & equitable. This might be the statute, said Judge Gore, but it was not law, for it was plainly contrary to the Fifth Amendment. And he declared 77-B unconstitutional. On appeal the Circuit Court last week sustained Judge Gore's opinion on the point in question but not on 77-B as a whole. Said the Court: "The rights [threatened] are substantive property rights, and any invasion of them under ... the present statute is as clearly violative of the due-process clause of the Fifth Amendment as it was in the Radford case."--* BUT: Section 77-B was still "an operable statute," since only the section involving coercion of majorities, not minorities, was unconstitutional.

*In the Radford case the Supreme Court held the original Frazier-Lemke Farm Bankruptcy Act unconstitutional.

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