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IN RE IMPERIAL "400" NATL.

January 31, 1966

In the Matter of IMPERIAL "400" NATIONAL, INC., a Delaware corporation, Bristol Financial Corporation, a New Jersey corporation, Imperial "400" Corporation, a Nevada corporation, Imperial "400" Land Corporation, a Delaware corporation, Motor Hotel Properties, Inc., a New Jersey corporation, Trans-National Development Corporation, a New Jersey corporation, Four Hundred Construction Corporation, a Delaware corporation, National Motel Construction Company, a California corporation, and Trans-World Motel Supply Corporation, a California corporation, Debtors


The opinion of the court was delivered by: SHAW

 On June 3, 1965 petitioners filed a joint petition under Chapter XI of the Bankruptcy Act alleging, among other things, that they "cannot meet their obligations." A receiver was appointed on June 4, 1965. The initial petition was subsequently amended on petition of the debtors and by order of the Referee in Bankruptcy dated July 27, 1965. The substance of the amendment is an allegation that the debtors cannot meet their obligations "as they mature." A consolidated balance sheet as of January 31, 1965 annexed to the petition shows assets of $37,113,269 and total liabilities of $31,065,297. Several plans of arrangement were considered, and finally an amended plan of arrangement was submitted on December 15, 1965.

 The Securities and Exchange Commission now moves to intervene in the pending Chapter XI proceedings and to dismiss the Chapter XI petition unless within a period of time fixed by the Court the Chapter XI petition is amended to comply with the requirements of Chapter X or a creditors petition under Chapter X is filed.

 Petition, Imperial "400" National, Inc. (Imperial), is the parent corporation and the other petitioners are subsidiaries or affiliates. Bristol Financial Corporation, Imperial "400" Corporation, Imperial "400" Land Corporation, and Motor Hotel Properties, Inc. are wholly owned subsidiaries of Imperial. Trans-National Development Corporation is an affiliate of Imperial by reason of Imperial's ownership of 15,800 shares of convertible preferred stock which, if converted, would amount to ownership of 80% of all of the common stock. Trans-World Motel Supply Corporation and National Motel Construction Corporation are wholly owned subsidiaries of Trans-National Development Corporation. Four Hundred Construction Company is a wholly owned subsidiary of National Motel Construction Corporation. It would serve no useful purpose to comment in detail upon the interlocking association of these corporations and the various functions of each, particularly in view of the necessity for an expeditious decision and the fact that Imperial is the dominant corporation. Moreover, factual detail as to this as well as with respect to the business and financial structure of the debtors is set forth succinctly in the affidavit of Sidney Lapidus annexed to the moving papers of the Commission. The basic facts set forth therein are not disputed. Indeed, the only area in which issue is taken is that of the nature and extent of the financial plight of the debtors and the conclusory statements to the effect that the proposed plan of arrangement under Chapter XI is the best solution for all parties affected by such financial plight *fn1" Hence, the Court does not feel it is necessary to do more in recitation of fact than to touch upon what it conceives to be the most significant factors in resolving the issue of whether the Chapter XI proceeding should be dismissed.

 The business in which Imperial is engaged was commenced in January of 1959 by a predecessor corporation, Imperial "400" Motels, Inc. Imperial was incorporated in Delaware on August 16, 1961 and during March of 1963 acquired all of the assets of Imperial "400" Motels, Inc. which had been organized by Bernard Whitney, Robert B. Boyd and Leslie N. Aikman. At the time of the filing of the Chapter XI petition herein Whitney was chairman of the board of directors of Imperial, Aikman was the president and a director and Boyd was executive vice-president and a director. It seems as far as the record discloses, that since its inception business policy was formulated and management controlled by these individuals. The petition initiating the proceeding under Chapter XI of the Bankruptcy Act was signed by Bernard Whitney and Robert B. Boyd and also by the president of Four Hundred Construction Corporation and National Motel Construction Company and by the president of Trans-World Motel Supply Corporation. It is also appropriate to note here that there was no formal authorization by the board of directors of any of the debtor corporations to file the petition. From this it may be inferred that the four individuals mentioned who signed the petition assumed or had controlling authority to make major decisions of this nature for the debtors.

 In March 1963 Imperial succeeded Imperial "400" Motels in the business of establishing motels throughout the United States. By June 3, 1965, 115 motels were in operation and 14 more were in various stages of construction in approximately 38 states. The sites for motel construction would be obtained by long term leases on undeveloped property. Money for construction of motels would be raised by construction loans. Upon completion of construction in most instances, a 50% interest in the motel would be sold to a third party who became a co-owner with Imperial and who resided at and operated the motel. A few of the motels are wholly owned by Imperial but the majority are operated on a co-partnership basis, the direct management thereof conducted by the resident owner.

 There are 1,087,722 shares of common stock, par value $.50, issued and outstanding. As of April 12, 1965 the officers and directors of Imperial owned 696,585 shares of this stock. The remainder was owned by approximately 850 public investors. There are 1,900 shares of 6.6% cumulative preferred stock issued and outstanding, the majority of which is held by public investors. In January 1964 Imperial sold one million 6 1/2% convertible subordinate debentures. It appears that 994,000 of these debentures are outstanding. Since they were issued to "Bearer", the number of debenture holders cannot be determined. They were sold to the public and were issued under an indenture dated January 22, 1964 with The Marine-Midland Trust Company of New York as indenture trustee. It was required in connection with these debentures that Imperial pay interest semi-annually on January 1 and July 1 of each year and that it make substantial payments into a sinking fund. In accordance with the terms of the debenture, Imperial was required to deposit approximately $66,000 into the sinking fund by June 1, 1965. Interest as of July 1, 1965 amounted to approximately $32,305. Neither the required payment into the sinking fund nor the interest was paid.

 Three of the largest creditors are Union Bank of Los Angeles, California (Union), Franklin National Bank of New York City (Franklin), and General Tire Pension Fund, also referred to as General Investment Funds, (General). Pursuant to the proposed plan of arrangement, all of the assets of the debtors are to be conveyed to a corporation to be formed or designated by Union, Franklin and General. This new corporation will pay $300,000 to the receiver to be used by him together with other money on hand or due on accounts receivable as of the date of confirmation of the plan to pay debts incurred by the receiver, administration expenses and allowances and priority claims.

 A trustee is to be designated by the official creditors' committee with 50% of the stock of the new corporation to be issued to the trustee. The trustee would also be entitled to money, if any, which the receiver had left after payment of the items above mentioned. Such money paid over to the trustee would be for the benefit of general unsecured creditors. The trustee would hold the stock issued to him by the corporation "in trust for the benefit of all creditors including, without limitation, all general unsecured creditors, all debenture holders, and all claimants under contracts with the debtors who have filed claims * * * as are finally approved and allowed in these proceedings under Chapter XI of the Bankruptcy Act."

 Theodore L. Cross, vice-president of legal affairs and treasurer of the Sheraton Hotel chain (Sheraton) testified [Tr. 66] that Sheraton had been approached by the creditors' committee, and had become interested in the proposed plan of arrangement, and was willing to invest $300,000. *fn2" According to the proposed plan of arrangement, the total of capital to be paid into the new corporation would be $300,000 represented by 3,000,000 shares of common stock with a par value of $.10 each.

 When Mr. Cross was questioned by the Court as to the underlying factors which would account for the financial plight of the debtors, he stated:

 
"It is attributable to several factors. First of all, a lack of management. The company is being managed as well as it can be under the circumstances, but it has no active hotel direction and management, but it is due in large part to the fact that the individual hotel units were financed with very short maturities. In other words, chattel mortgages would arrange financing for construction that carried very heavy payments of amortization, and in some cases interest up to 10 or 12 per cent, so that even ignoring the parent company debt of upwards to 10 or 12 million dollars, there is a negative cash flow in this picture of upwards to 15 to 30 thousand dollars a month, as I say.
 
"So that you don't need to be an appraisor in this situation to see that as an economic entity we see no inherent value in this situation, even assuming - I say inherent value. I mean as an organization ...

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