REA Holding Corporation v. Sowerwine Opinion

    fflARCP Legal Defense Fund
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AUG 5 ^ ITED STATES COURT OF APPEALS

F ob th e  S econd C iboxjit

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No. 789—September Term, 1976.

(Argued April 14, 1977 Decided July 27, 1977.)
Docket No. 76-5039

In the Matter of

REA H olding C orporation, T h e  E xpress C o m pan y , REA 
E xpress, I n c ., f/k /a  Railway Express Agency, Inc., 
R exco S u p pl y  C orporation,

Bankrupts.

M atth e w  E. M a n n in g , A n t h o n y  S atriano , D an iel  S. G il - 
h u l y , V in ce n t  P ontillo , W illiam  R. W egl, E dm und  
F. N ovitski, E dward J. C ox, A n t h o n y  J. J a n u z z i, 
C harles F. M cG overn and J am es  J. K ilco yn e ,

C r editor s-Appellants,

B rotherhood oe R ailw a y , A ir lin e  and S team ship  Clerks , 
F reight  H andlers, E xpress and  S tation  E m ployees,

Intervenor,
v.

C. O rvis S o w erw in e , Trustee in Bankruptcy,

Appellee.

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Cl ark , Associate Justice,* and 
M oore and  M u lligan , Circuit Judges.

Appeal from order of the United States District Court 
for the Southern District of New York, Lloyd F. Mac- 
Mahon, Judge, dismissing the petition of a group of cred­
itors for reorganization of a debtor corporation under 
Chapter X  of the Bankruptcy Act, 11 U.S.C, §501 et seq.

Affirmed.

A r t h u r  M. W iseh art , Esq., New York, N.Y. 
(Wisehart, Friou & Koch, of counsel), for 
Creditors-Appellants.

W illiam  M. K a h n , Esq., and J oshua J. A ngel , 
Esq., New York, N.Y. (Whitman & Eanson, 
Marcus & Angel, co-counsel, Donald L. Wal­
lace, Jeffrey A. Oppenheim, of counsel), for 
Appellee.

J o h n  O’B. Clarke , J r ., Esq., Washington, D. C. 
(Reilly, Fleming, & Reilly and Highsaw, 
Mahoney & Friedman, on the brief; David 
J. Fleming, James L. Highsaw, William J. 
Donlon, General Counsel for Brotherhood 
of Railway and Airline Clerks, Rosemont, 
Illinois, of counsel), for Intervenor.

Honorable Tom 0. Clark, Associate Justice, United States Supreme 
Court, Retired, sitting by designation.

Mr. Justice Clark died on June 13, 1977, before this case could be 
decided. Pursuant to $0.14 of the Rules of this Court, this petition is 
being determined by Judges Moore and Mulligan, who are in agreement. 
Prior to his untimely death, Mr. Justice Clark had voted to affirm the 
petition.

4994



M o o re , Circuit Judge:

Four companies, REA Holding Corporation, The Ex­
press Company, Inc., REA Express, Inc., f/k /a  Railway 
Express Agency, Inc. and Rexco Supply Corporation (col­
lectively referred to as “REA” ), have been adjudicated as 
bankrupts. Out of the welter of charges and countercharges 
a few salient facts emerge. For many years prior to 1975 
REA had been engaged in the express shipping business 
in the United States by land and by air, and to some ex­
tent internationally. Its Railway Express Agency trucks 
were a common sight to the American public. It operated 
under both Interstate Commerce Commission (ICC) and 
Civil Aeronautics Board (CAB) authority.

Unlike the Biblical seven fat years alternating with seven 
lean years,1 for some 30 years REA’s were all lean with a 
modest exception in 1974. The natural consequence of such 
financial debility was the filing of a petition for an arrange­
ment under Chapter XI of the Bankruptcy Act, 11 U.S.C. 
§701 et seq., which occurred on February 18, 1975. Honor­
able John J. Gralgay, the Bankruptcy Judge in charge of 
these proceedings, by order permitted the Bankrupts to 
continue to operate their business as Debtors-In-Possession. 
A Creditors Committee (confirmed April, 1975), in co­
operation with the Bankrupts, endeavored by operating 
economies to restore REA to a profitable operation. One 
of the economy measures was a motion to reject a contract 
with the Brotherhood of Railway and Airline Clerks 
(BRAC), a union of which most employees were members. 
From the time of the motion until ultimate rejection of the 
contract, the BRAC employees were paid only 90% of their 
then going wage and no vacation or holiday pay. These 
deficits constitute the bulk of the large claims which the

1 Genesis, Chap. 41.

4995



BEAC employees assert and are the source of the claims 
of the ten petitioning creditors in this proceeding.

Despite high hopes and substantial economies, REA con­
tinued to suffer losses which during the Chapter XI pro­
ceeding—February 18, 1975 through September 28, 1975—- 
amounted to some $15,790,000, with a discouraging prog­
nostication of additional losses of some $5,681,000 for the 
next three months (October through December).

Unable to meet their payrolls, the bankrupts on Novem­
ber 6, 1975 requested that they be adjudicated bankrupt. 
Then ensued rapid developments. On November 6,1975 the 
bankruptcy order was signed and entered. The next day, 
C. Orvis Sowerwine, Esq. was appointed and qualified as 
Trustee. The Trustee straightaway proceeded to collect 
claims and to liquidate the bankrupts’ assets—including 
terminals and rolling stock—so that REA had no operat­
ing facilities. There remains, however, REA’s “operating- 
authorities”—rights obtained through the ICC and CAB 
to operate various routes.

In the liquidation process, these operating authorities 
were put up for sale. Six hearings were held before the 
Bankruptcy Judge during the period from June 23, 1976 
to July 9, 1976. Judge Calgay, in an opinion and order- 
dated July 16, 1976, held that of the four2 proposals sub­
mitted for the acquisition of REA’s operating authorities, 
customer lists and trade names and marks, the Alltrans 
Express—U.S.A. proposal was the “best offer” : that it 
represented “a fair and reasonable value for the Prop­
erty” ; that “acceptance of the Alltrans offer is in the best 
interests of the bankrupt estate” ; and that it “provides

2 Alltrans Express-—U.S.A. ("Alltrans” ), BEAEMCO, Ine., All Truck 
Express, Inc. ("A ll Truck” ) and ABC Freight Forwarding Corpora­
tion ("ABC” ).

4996



the probability of the greatest realization to the bankrupt 
estate from the sale of the property” .

The Bankruptcy Judge had eliminated All Truck and 
ABC as submitting either partial or contingent offers, so 
that the choice was between Alltrans and BEAEMCO. In 
the July 16, 1976 order, the Judge found in favor of All­
trans and directed the Trustee to accept the Alltrans offer 
and to prepare a contract for submission to, and approval 
by, the Judge. An appeal from this order is pending 
before Judge Werker.

Although not particularly material to the narrow issue 
before us, a word about Alltrans and BEAEMCO may not 
be amiss.

Alltrans is represented to be a subsidiary of Thomas 
Nationwide Transport, Ltd., with consolidated assets of 
$190,000,000. Pursuant to its proposal, Alltrans was to 
pay the bankrupts $2,500,000 in cash upon ICC approval 
of a temporary transfer to it of the operating authorities. 
Additionally, pending decision on a permanent transfer, 
Alltrans would make interim payments of certain percent­
ages of gross revenues over a ten year period. If such 
approval of a permanent transfer were obtained, Alltrans 
and Thomas together guaranteed payments of at least 
some $9,500,000.

BEAEMCO was organized in the interest of BEA’s em­
ployees who desired to continue to operate BEA. It was 
without funds and without operating facilities. Its chief 
asset was “hope” and a hypothetical plan portrayed in 
minute detail during 3% days of testimony by an acknowl­
edged expert in the transportation field, Mr. F. Balph 
Nogg. It was Mr. Nogg’s opinion that $3,000,000 would 
be needed at the outset; that equipment could be rented 
or purchased by the employees; that employees could con­
tribute 10% of their salaries; and that large anticipated

4997



profits might enable substantial payments to be made to 
creditors. However, no part of the REAEMCO plan called 
for the production and presentation of new money because 
there was none.

Thereafter, a group of ten former REA employees, as 
creditors (claims aggregating $22,000) filed a petition for 
reorganization under Chapter X  of the Bankruptcy Act, 11 
U.S.C. §501 et seq. That petition, assigned to District 
Judge Lloyd F. MacMahon, was referred to Bankruptcy 
Judge Galgay who since February 18, 1975 had been 
thoroughly familiar with all the facts and proceedings in 
connection with the bankrupt estate. Judge Galgay held a 
hearing on the petition on September 27,1976. It is on that 
occasion that appellants claim that they were deprived of 
a fair hearing. The deprivation, however, is that Mr. 
Nogg was not permitted to repeat his contention that “ the 
reorganization of REA would be feasible” . (Appellants’ 
Brief, p. 13a). But the Bankruptcy Judge considered all 
of the testimony and exhibits from November 5, 1975 to 
September 27, 1976, including all of the Nogg testimony 
in support of feasibility. The only issue before the Judge 
and before us is whether the Chapter X  petition was filed 
in good faith.

The Bankruptcy Act provides:

“Without limiting the generality of the meaning of 
the term ‘good faith’, a petition shall be deemed not 
to be filed in good faith if * * *

(3) It is unreasonable to expect that a plan of re­
organization can be effected . . . .”  11 U.S.C. §546.

Thus the Bankruptcy Judge did not have to look behind 
the petition to discover an improper or unethical purpose. 
He only had to look at the petition against the background

4998



of all the facts known to Mm and decide whether it was 
“ reasonable to expect that a plan of reorganization can be 
effected.” To this end, he not only had opinion testimony 
before him, but the actual experience of a debtor using 
substantial economy measures and accumulating a $15,- 
790,000 deficit in seven and a half months and a further 
estimated deficit of $5,681,000 in three additional months. 
He knew that there were no terminals, no operating equip­
ment and no operating personnel; even the operating au­
thorities were in jeopardy. The period taken for decision 
was short, but he -was entitled to rely on a non-legal con­
cept—“deja vu” .

The Bankruptcy Judge’s Report of September 28, 1976 
was submitted to Judge MacMahon who, on September 30, 
1976, after oral argument from the parties on September 
29, 1976, found the bankruptcy Judge’s findings supported 
by substantial evidence and adopted them in all respects. 
Judge MacMahon was mindful that “more time might im­
prove the fullness of this [his] memorandum” , but wisely 
refrained from adding to the volumes which already over­
tax the space of our law libraries and held that the petition 
was not filed in good faith. This holding is clearly correct 
on the facts and the law, 11 TT.S.C. §546(3), and we there­
fore affirm.

Appellant argues in extenso (it may be said—in exten- 
sissimo) that the bankruptcy proceedings have been tainted 
by a conflict of interest on the part of the Trustee. This is 
no occasion to do more than touch upon the subject which 
seems to be an obsession of the appellants. In the first 
place, it is completely irrelevant to the issue of the likeli­
hood of a feasible reorganization. This decision is solely 
for the Bankruptcy Judge and the court. The recom­
mendation by the Trustees that the Alltrans offer should 
be accepted was quite in accord with the facts—Alltrans

4999



offered realty; EEAEMCO offered unfulfilled, speculative 
hopes. Nor did the Bankruptcy Judge follow the Trustee’s 
recommendation blindly, as his report clearly shows. Con­
flict of interest did not create the u n fortu n ate  financia l 
situation in which EEA found itself. Conflict of interest 
did not create the facts which after full and fair explora­
tion proved the Alltrans. offer to be superior.

The appeal from the July 16, 1976 order (acceptance of 
Alltrans offer) is pending. Proceedings before the ICC 
are unfinished. There are still problems for the Bank­
ruptcy Judge and on the facts, there is no n eed  f o r  a re ­
ceiver. Appellants are still free to raise the issue of con­
flict of interest in appropriate proceedings in which facts, 
if any, may be adduced in support thereof. Conflict of 
interest is a conclusion and conclusions should rest upon 
a solid foundation of fact. The order dismissing the Chap­
ter X  petition and vacating the stay was proper and ac­
cordingly we affirm.

5000
480-7-29-77 . U8CA—4221

M E IIE N  PRESS IN C ., 4 4 5  G R E E N W IC H  ST., N E W  YO R K, N . Y. 1 0 0 1 3 , (2 12 ) 9 6 6 -4 1 7 7