Business: Reorganizations

In the fiscal year ending June 30, 1933, one billion dollars worth of U. S. partnerships, companies and corporations went to the wall. When the owners and creditors of this vast collection of corporate wreckage took to the courts to salvage their wealth, they found themselves hampered by small recalcitrant groups of creditors and stockholders who blocked reorganization time & again until they were bought off for cash. With co-operation almost impossible, receiverships dragged into endless litigation with fat fees for lawyers on all sides.

Such was the situation in June 1934 when President Roosevelt signed the Corporate Reorganization Act, an amendment to the old Bankruptcy Act. Its prime provision, which became Section 77b of the Bankruptcy Act, authorized Federal judges to approve and make binding on corporate minorities any reorganization plan acceptable to two-thirds of each class of a company’s creditors and a majority of each class of its stockholders. Ink was hardly dry on the new law before corporation lawyers crowded into Federal Courts all over the land to start reviving old bankrupt companies or to stave off the crash of concerns close to trouble. In Manhattan the first to apply for reorganization under Section 77b was Radio-Keith-Orpheum. Last week RKO was still in the courts but Paramount, whose reorganization could never have been completed without Section 77b. was out of the woods. First major company to complete organization under the new law was Glenn L. Martin Co. (bombers) whose plans for recapitalization were approved and adopted in Baltimore Federal Court in one month. Last week Editor Max Isaac of Corporate Reorganizations estimated that no less than 3,500 cases had been filed under the new law since its passage a year ago. Consequently Section 77b and corporate reorganizations are today one of the prime preoccupations of lawyers and businessmen everywhere.

Some reorganizations which made news last week:

McCrory. Operating 203 5¢ to $1 retail units in Pennsylvania, New York, Ohio, the South and Midwest, McCrory Stores Corp. slipped into bankruptcy in 1933, came under the broad roof of Section 77b a year and a half later. Old John G. McCrory, who founded the chain at Scottdale, Pa. in 1882, resigned as board chairman to be free to bid for the bankrupt properties. But in the stormy annals of McCrory’s reorganization it was not John G. McCrory who played the major role but two brothers named George Keenan Morrow and Frederick Morrow.

In a rare interview in 1929. George Morrow remarked: “We are like Tunney. We have never been beaten.” At that time the statement was true. The Brothers Morrow, having migrated to Manhattan from a farm near Toronto, had taken a hand in Gold Dust Corp., been enormously successful in revamping American Cotton Oil Co., had built up an enviable reputation as smart corporate reorganizers. After 1929 the Morrows were once set back on their heels when United Cigar Stores, which they controlled, went bankrupt. But their troubles with United Cigar did not prevent them from acquiring another damaged retail chain last year, McLellan Stores (TIME. Oct. 29).

When the Morrows began angling for McCrory Stores they did not bother with the common stock. Working through their United Stores Corp. they bought up a fistful of McCrory debentures and preferred stock and paid $2,700,000 for $7,000,000 worth of claims from landlords who had leased store space to McCrory. This put the Brothers Morrow in a position to negotiate a reorganization as one of McCrory’s principal creditors. They offered a recapitalization scheme which last week filled the Special Master for McCrory with violent and vociferous rage.

Prime point of the Morrow plan was that United Stores Corp. would receive 444,840 shares, or 37%, of the new common stock at a special price which would give it a profit of $437,000 in return for money spent in acquiring landlord’s claims. That, said the Special Master, was an “unconscionable profit” which Congress never intended when it passed the new bankruptcy amendment. Equally displeased were the common stockholders who had a p!an of their own. They wanted the Morrows to get only what they had spent for landlord claims, plus a small profit and no common stock. Last week the Special Master, declaring that the Morrow scheme “discriminated unfairly” in favor of United Stores Corp., summarily threw it back into the Federal Court for further study.

Baldwin. “I don’t believe,” said President George Houston of Baldwin Locomotive Works last week, “that the railroads can live on less than 40,000 locomotives. … In January 1927 there were 61,995 locomotives on line. In July there were 45,888. Many railroads need locomotives but it is impossible to say when they will buy.”

So few locomotives have U. S. railroads bought since 1929 that Baldwin Locomotive, its working capital down, its cash low, went into reorganization under 77thlast February (TIME, March 4). This was no surprise to the Securities & Exchange Commission which later accused Baldwin of “misleading the investing public,” or to a Baldwin stockholder named George Stephenson who accused the company’s officers of unloading Baldwin stock on the public in 1929—a charge which President Houston hotly denied. What was surprising about the Baldwin reorganization was that a plan to revamp the company was approved almost at once by all the protective committees. It provides for conversion into new securities of all outstanding issues except first mortgage bonds which would remain in the hands of the public. Maximum outlay for fixed charges would be $133,800 a year instead of $1,281,000. Despite this drastic reduction, President Houston announced last week that Baldwin must do a gross business of $30,000,000 a year in order to break even after charges and depreciation under the reorganization plan. Baldwin has not grossed $30,000,000 since 1930.

Coal. A small corporation with an excellent pre-Depression earnings record is New Rochelle Coal & Lumber Co. of New Rochelle, N. Y. It sought permission to reorganize under Section 77b when a creditor, Shanferoke Coal & Supply Corp. of Delaware, sued to collect a bill of $26,051. A reorganization plan was approved by the court and by a majority of security holders and creditors, except Shanferoke Coal. That company tiled a petition in the U. S. Circuit Court of Appeals which resulted in a noteworthy decision.

Shanferoke contended that New Rochelle Coal & Lumber is solvent and therefore had no right to apply for reorganization under Section 77b. If solvent corporations could seek reorganization under the Bankruptcy Law, said the plaintiff, creditors would be deprived of their property (i. e. claims) in violation of the ”due process” clause of the Fifth Amendment. With this argument the Circuit Court did not agree. Ruling that no violation of the Fifth Amendment was involved, it declared, in effect, that a solvent corporation may apply for permission to reorganize under Section 77b. Last week Shanferoke Coal had 14 days left in which to file an appeal with the U. S. Supreme Court. If upheld, the decision may send solvent corporations streaking to court to share with insolvent corporations the power, under Section 770, to make reorganizations binding on stubborn minorities.

Leather. Meanwhile most solvent corporations will continue to thresh out recapitalization plans with security holders and creditors outside the courts. Two notable companies which have completed this process are Wilson & Co. and Armour & Co. One still in the throes of reorganization without recourse to Section 77b last week was American Hide & Leather Co.

Founded in the gaudy 1890’s, American Hide & Leather today has only two tanneries, one in Lowell, Mass., the other in Ballston Spa, N. Y. No dividends have ever been paid on its common stock. Arrears on $10,000,000 of preferred stock now stand at $21,000,000 or $214.25 per share, highest arrearage of any preferred issue on the New York Stock Exchange.

The common stockholders have long realized that they would see no dividends until the preferred arrears are removed. But the arrears cannot be paid without ruining the company. American Hide & Leather was last week proposing to its stockholders to solve the dilemma by replacing the 7% preferred with new 6% preferred, reducing the dividend requirement from $700,000 a year to $300,000. Preferred stockholders were asked to accept four shares of new common in lieu of their rights to the unpaid dividends. Finally, the company proposed to put an end to the extravagant hopes of its founders by writing off $7,169,000 of trade marks, goodwill and other intangible assets.