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January 10, 1968

In the Matter of MANUFACTURERS' CREDIT CORPORATION et al., Debtors

The opinion of the court was delivered by: WORTENDYKE

 This case came before me upon return of an Order to Show Cause allowed to the Securities and Exchange Commission (S.E.C.), directing the parties to the captioned Chapter XI proceeding to show cause why leave should not be granted to the S.E.C. to intervene therein, and why the proceeding should not be dismissed unless the petitions of the debtors under Chapter XI be amended, or a creditors' petition be filed to conform the proceedings to the provisions of Chapter X (11 U.S.C. § 728).

 Briefs were filed in behalf of various parties in interest, and oral argument was heard upon the return of the Order to Show Cause on November 3, 1967. The motion for leave to intervene was granted at the conclusion of the oral argument, but decision was reserved upon the application to dismiss the Chapter XI proceeding pending the filing and consideration by the Court of an anticipated report from Puder and Puder, Certified Public Accountants, which had been ordered by the Receiver appointed by the Referee in the Chapter XI proceeding, respecting the affairs of the debtors. That accountant's report has not yet been filed, but S.E.C. urges that the Court decide the still pending aspect of its motion without further delay. The Court accedes to the request and concludes, upon the record before it, that the relief sought by S.E.C. should be granted in full.

 The Order to Show Cause was allowed upon facts disclosed in the affidavit of Marvin E. Jacob, an attorney for S.E.C. from which affidavit it appears that on August 1, 1967 two petitions were filed under the Bankruptcy Act relating to Manufacturers' Credit Corporation (M.C.C.). The first of these petitions was involuntary, under Chapter X, by three unsecured creditors of M.C.C. That petition was dismissed on August 17, 1967. The second petition filed on August 1 was voluntary, by M.C.C. and nineteen of its subsidiary and affiliated corporations, under Section 322 of Chapter XI of the Act (11 U.S.C. § 722). The matter was referred generally to Referee William Lipkin, who appointed Joseph Thieberg receiver of the twenty petitioning debtors. By further orders of the Referee the proceedings and receiverships were extended to include six additional affiliated or subsidiary corporations of M.C.C. On or about October 31, 1967 a plan of arrangement was filed in behalf of the twenty-six debtors. S.E.C. contends, and this Court agrees, that the Chapter XI proceeding should be dismissed and transferred to Chapter X on the grounds that it should have been brought under Chapter X of the Act (11 U.S.C. § 728) and that adequate relief is not obtainable under Chapter XI (11 U.S.C. § 546(2)) as evidenced, in part, by the proposed arrangement which is not in compliance with Section 366(2) of the Act (11 U.S.C. § 766(2)). That Section provides that the Court shall confirm an arrangement if satisfied that "* * * (2) it is for the best interests of the creditors and is feasible; * * *." The proposed arrangement, in my opinion, meets neither of these requirements.

 Since the appointment of the Receiver, the debtors have continued to operate their businesses under his supervision. Schedules and statements of affairs were filed by the 26 debtors on August 28, 1967, and several examinations have been conducted by the Receiver under Section 21(a) of the Bankruptcy Act (11 U.S.C. § 44(a)). The outstanding capital common stock of each of the debtors is owned directly or indirectly by Theodore J. Richmond, who is president of each of the corporations, and by his wife and two daughters. He owns 55% of the stock and they the balance. We are informed that Referee Lipkin has appointed a Receiver for Richmond in the separate proceedings for arrangement under Chapter XI of the Bankruptcy Act.

 M.C.C. was incorporated in 1932 in New Jersey and commenced business as a finance company. It discontinued that business some time prior to 1948, when it became a holding company and began to sell unsecured promissory notes to members of the public for the purported purpose of financing the development and operation of other corporations subsidiary to and affiliated with M.C.C. The principal office of each of the debtors, excepting Orange & Black Bus Lines, Inc. (hereinafter Orange & Black), Fairview Motor Repairs (hereinafter Fairview) and Fairtrans Realty Corp. (hereinafter Fairtrans) is at 730 Madison Avenue, Paterson, New Jersey. The principal office of Orange & Black, Fairview and Fairtrans is at 419 Anderson Avenue, Fairview, New Jersey, but the affairs of all of the 26 debtors herein have been continuously controlled by Richmond, as President of each of them, until the date of the filing of the original petitions under Chapter XI.

 Most of the debtors are engaged directly or indirectly in operating interstate and intrastate bus lines. Seven of the debtors are in interstate and intrastate bus operations. Four own real estate used in connection with those bus operations. Four own buses and other equipment used in connection with those operations. Nine debtor corporations, including M.C.C. are or were engaged in financing. One debtor is a transportation broker, and another owns real estate in New Jersey not used in connection with the bus operations.

 Excepting Orange & Black, which owns some of the buses which it operates, the interstate and intrastate lines do not own the buses which they operate, but rent their equipment from subsidiary or affiliated corporations engaged in the business of bus leasing. Fairview leases equipment to Orange & Black; Warwick Coaches, Inc. (hereinafter Warwick) leases to Warwick-Greenwood Lake & N.Y. Transit Inc. (hereinafter Warwick-Greenwood); and Washington Corp. (hereinafter Washington), and New Jersey-New York Transit Co., Inc. (hereinafter New Jersey-New York) lease to the remainder of the operating companies.

 The operating bus companies do not own the garages, parking lots or terminals which they use, but they rent such facilities from affiliated companies engaged in the real estate business. Fairtrans Realty Corp. (Fairtrans) owns the garage which houses the Orange & Black buses. Monroe Securities Corp. (Monroe) and Jaytee Securities Corp. (Jaytee) own garages and parking lots used in connection with the remaining bus operations.

 Clifton Terminal Corp. (Clifton) owns a building located on leased land in Rutherford, New Jersey, which was used as a bus terminal. Real estate owned by Donal Inc. is not used in connection with any of the bus operations and presumably is held as an investment by the owner. That real estate is commercial property situated in Paterson, New Jersey, and consists of seven buildings occupied by 26 tenants, yielding a net annual income of $180,000. Orblack Securities Corp. (Orblack) and Waldwick Realty Co., Inc. (Waldwick) are holding companies owning, respectively, all of the stock of Orange & Black and Warwick-Greenwood. Inter-City Tours, Inc. (Inter-City) owns no equipment but holds an I.C.C. license to conduct a package tour business as a broker.

 Each of the corporations involved in the financing business was employed by Richmond as an instrumentality through which to borrow substantial amounts of money from members of the public through the sale of unsecured promissory notes bearing interest rates ranging from 12% to 15% and maturing generally in three years.

 A combined balance sheet of the debtors, compiled from their filed schedules, discloses, as of August 28, 1967, total assets of $136,217,309 and total liabilities of $120,660,618. Actual tangible assets amount to $10,000,000 not including value of franchises. Liabilities, exclusive of amounts owed to Richmond and intercompany debt ($54,716,433) aggregate $65,950,361. In his Section 21(a) testimony, Richmond stated that $48,269,851.43 of the claims of unsecured creditors represents money borrowed by him personally which was paid by the lenders by check to the order of M.C.C., which, in turn, paid over the amounts to him, and out of which he paid all interest charges and other expenses. M.C.C. was represented as the nominal borrower to preclude the availability of the defense of usury. The debtors began borrowing money from the public in 1948. By 1954 their aggregate principal debt outstanding had reached about $400,000. Since then the amounts borrowed, ostensibly by M.C.C., have increased to more than $48,000,000 from approximately 4000 lenders. In addition to M.C.C., 8 of its affiliated subsidiaries (Intercity, Mondrich, Washington, Transit, Monroe, Inter-State, TeJay and TeeJay A.R.) now owe more than 900 lenders in amounts aggregating $9,646,644.

 Orblack was formed to purchase the stock of Orange & Black and Fairview for $860,000. This amount was ostensibly paid by M.C.C., but charged against Richmond's account with M.C.C. Other corporations were not handled in the same manner. Washington operated "on its own" because it was a leasing company with its own assets. M.C.C. had no assets except stock of operating companies. In some instances, however, public loans were made directly to Washington, and guaranteed by M.C.C. or by Richmond. He has a personal claim against M.C.C. (in addition to the $48,269,851.43 which it owes to other unsecured general creditors) for $4,127,000, based upon loans allegedly made by him to M.C.C. without interest.

 No registration statement required by the Securities Act of 1933 was ever filed with S.E.C. by M.C.C. or its affiliates in connection with the sale of any of these securities. They are not exempt from registration under 15 U.S.C. § 77c. The payments required by the terms of these notes in the year immediately preceding the filing of the Chapter XI petitions amounted to approximately $6,000,000 in interest for that year and an equal amount for principal maturities therein. Thus the debt structure of $48,000,000 required $12,000,000 for its servicing. The profits of $300,000 earned by the operating bus companies were insufficient to service such indebtedness. Therefore new notes were sold, the proceeds of which were used to service the old ones. Thus resulted a distribution by different issuers, among 5000 persons of $58,000,000 of notes bearing differing interest rates and differing maturities. For the purpose of procuring investors, bonuses or commissions were paid to persons serving as "finders" who brought investors in. These "finders fees" averaged from 12% to 14% for the 19-year period during which the borrowing practice had been pursued. The proposed arrangement involves a very major alteration of public debt held by very numerous public investors totally unfamiliar ...

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