DECISIONS AND REPORTS

OF THE

SECURITIES AND EXCHANGE COMMISSION

[No. 1151]

IN THE MATTER OF

WALTER H. POLLAK, Trustee of ASSOCIATED GAS AND ELECTRIC COMPANY, Debtor, in Reorganization under Chapter X of the Bankruptcy Act

File No. 70-131. Promulgated September 4, 1940

(Public Utility Holding Company Act of 1935-Section 7)

ISSUE AND SALE OF SECURITIES OF REGISTERED HOLDING COMPANY OR SUBSIDIARY.

Trustee's Certificates.

Declaration, pursuant to Section 7 of the Public Utility Holding Company Act of 1935, with respect to the issue and sale of trustee's certificates of trustee of registered holding company in reorganization, the proceeds to be used to obtain funds for the administration of the estate, permitted to become effective, subject to the condition that the issue is authorized by the court under Section 116 (2) of the Bankruptcy Act.

The powers and duties conferred upon the Commission by the Congress with respect to the regulation of the issuance of securities of registered holding companies are in no way diminished by the fact that the particular securities are trustee's certificates issued in the course of a reorganization under the Bankruptcy Act.

APPEARANCES:

Lewis M. Dabney, Jr., of the Public Utilities Division of the Commission.

Walter H. Pollak, Samuel J. Silverman, and Joseph F. Monaghan, for Walter H. Pollak, trustee of Associated Gas and Electric Company.

Jack Lewis Kraus, II, and David C. Colladay, for the General Protective Committee for Security Holders of Associated Gas and Electric Company.

FINDINGS AND OPINION OF THE COMMISSION

Walter H. Pollak, trustee of Associated Gas and Electric Company, bas filed a declaration pursuant to Section 7 of the Public Utility Holding Company Act of 1935, covering the issuance and sale of $200,000 principal amount of trustee's certificates.

On January 10, 1940, Associated Gas and Electric Company (hereinafter called "AGECO") and its direct subsidiary, Associated Gas and Electric Corporation (hereinafter called "AGECORP"), filed voluntary petitions for reorganization under Chapter X of the Bankruptcy Act. AGECO holdings in AGECORP consist almost wholly of common stock and junior debt obligations. AGECO'S position in the AGECORP reorganization will depend to a considerable extent on whether it can sustain a claim it asserts against AGECORP arising out of the so-called Recap plan.1 AGECORP holds stock in various subholding companies which in turn hold the stock of almost all the operating companies in the system either directly or through other subholding companies.

On March 2, 1940, the declarant was appointed trustee for AGECO by the Honorable Vincent L. Leibell, United States District Judge for the Southern District of New York. Separate trustees were appointed for AGECORP.

The proposed certificates are to be sold in order to obtain funds for the administration of the estate. They will be issued only after authorization of the court under Section 116 (2) of the Bankruptcy Act. Application was made to the court for leave to issue these certificates and a hearing was held on August 12, 1940. At the hearing no objection was made to the issuance of the certificates except that counsel for the Commission referred to the necessity for an order of the Commission under Section 7 of the Public Utility Holding Company Act. No evidence was taken and the matter is pending before the court.

The certificates to be issued are assignable, will bear interest at a rate not to exceed 4 percent per annum and will mature within 2 years from the date of issuance with the right in the trustee to redeem at any time prior to maturity. They will rank on a parity with costs of administration and no additional trustee's certificates, not subordinated to the present issue, may be issued unless all certificates of the present issue are redeemed.

The trustee proposes to enter into a stand-by agreement with Lazard Freres & Co., investment bankers, under which the bankers will agree, for 1 year, to purchase at par any and all of the proposed certificates

1 See footnote 5, infra.

That section reads:

"Upon the approval of a petition, the judge may, in addition to the jurisdiction, powers, and duties hereinabove and elsewhere in this Chapter conferred and imposed upon him and the court

.. (2) authorize a receiver, trustee, or debtor in possession, upon such notice as the judge may prescribe and upon cause shown, to issue certificates of indebtedness for cash, property, or other consideration approved by the judge, upon such terms and conditions and with such security and priority in payment over existing obligations, secured or unsecured, as in the particular case may be equitable; . . .”

in multiples of $5,000. The trustee contemplates the issuance of $50,000 of the certificates upon authorization and the balance as funds are needed.

After appropriate notice, a hearing on the declaration was duly held. Briefs were submitted and we heard argument.

We find that the standards of Sections 7 (e) and (g) are inapplicable to the proposed securities, and that, if the issue is authorized by the reorganization court, the securities will comply with the standard of Section 7 (c). The remaining question is whether any adverse findings are required under Section 7 (d).

Counsel for the Public Utilities Division does not oppose the issuance of the certificates. He contends, however, that adverse findings must be made under Sections 7 (d) (2), (3), and (6) unless our order permitting the declaration to become effective is accompanied by conditions designed to secure the following:

(1) That the proceeds of the sale of these certificates be used by the trustee principally in the prompt investigation and prosecution of the so-called Recap plan litigation; "

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(2) That, in order to meet the standards of Sections 7 (d) (2) and (6), and in the light of doubts as to the earning power of AGECO at a time when it is unknown whether AGECO will prevail in the Recap plan litigation, all cash funds received by the estate, other than proceeds from the sale of trustee's certificates and including cash now

• Section 7 (c) provides in part:

The Commission shall not permit a declaration regarding the issue or sale of a security to become effective unless it finds that (1) such security is . . . (D) a receiver's or trustee's certificate duly authorized by the appropriate court or courts...

Our order will provide that it shall be effective only if, and to the extent that, the proposed securities are authorized by the reorganization court under Section 116 (2) of the Bankruptcy Act.

• Section 7 (d) reads in part:

If the requirements of subsections (c) and (g) are satisfied, the Commission shall permit a declaration regarding the issue or sale of a security to become effective unless the Commission finds that

(2) the security is not reasonably adapted to the earning power of the declarant; (3) financing by the issue and sale of the particular security is not necessary or appropriate to the economical and efficient operation of a business in which the applicant lawfully is engaged or has an interest;

(6) the terms and conditions of the issue or sale of the security are detrimental to the public interest or the interest of investors or consumers.

AGECO and its security holders assert various causes of action against AGECORP growing out of the so-called Recap plan and antecedent transactions, which, if successfully pursued, would improve the position of AGECO and its security holders in the AGECORP reorganization. An outline of the Recap plan is given in Associated Gas and Electric Corporation, 6 S. E. C. 605 (1940). A description of the history of AGECO and a more detailed analysis of the Recap plan and the financial transactions leading up to it are set forth in Part VII of the Commission's Report on Protective and Reorganization Committees. The term "Recap plan litigation" is used here in the broad sense to cover all causes of action growing out of the Recap plan and the transactions leading up to it.

on hand, when adjudicated to be available for expenses of administration, be immediately applied to pay off the trustee's certificates theretofore issued, and that such certificates be canceled and not reissued.

The trustee contends (1) that the imposition of the type of conditions urged is not within the statutory power of the Commission and would constitute a usurpation of the jurisdiction of the reorganization court, and (2) that, in any event, the proposed issue will comply with the standards of Section 7 (d) without the imposition of any such conditions.

a. Section 7 (d) (1) provides that if the requirements of subsections (c) and (g) are satisfied, the Commission shall permit a declaration under Section 7 to become effective unless it finds that the standards enumerated in Sections 7 (d) (1) to (6), inclusive, have not been met. We have found that subsection (g) is inapplicable here and that the requirement of subsection (c) is satisfied since the proposed security will be a "trustee's certificate duly authorized by the appropriate court." Under Section 7 (f) "any order" permitting a declaration to become effective "may contain such terms and conditions as the Commission finds necessary to assure compliance. with the conditions specified in this section." Thus, it is clear that to assure compliance with the standards of Section 7 (d), we have the power to impose terms and conditions in "any order" permitting a declaration under Section 7 to become effective.

Trustee's certificates bear no special immunity in this regard. The powers and duties conferred upon the Commission by the Congress with respect to the regulation of the issuance of securities of registered holding companies are in no way diminished by the fact that the particular securities are trustee's certificates issued in the course of a reorganization under the Bankruptcy Act. A mere reference to various provisions of the Public Utility Holding Company Act makes it seem to us clear beyond any question that the Congress contemplated that the administration of registered holding companies in bankruptcy should conform with the requirements of the Act. Thus, Section 11 (f) of the Act expressly provides that any plan of reorganization for a registered holding company in the federal courts should be submitted to the Commission for approval, and also expressly confers powers upon the Commission with respect to fees, expenses, and remuneration paid in connection with any such reorganization. Further

At the oral argument the trustee raised additional points directed to the constitutionality of the Public Utility Holding Company Act as applied in the particular case. It is. of course, well settled that an administrative body such as this Commission has no authorty to refuse to apply the provisions of a statute which it is called upon to administer by reason of the asserted unconstitutionality of such provisions. See Panitz v. District af Columbia, 112 F. (2d) 39 (App. D. C. 1940); Houston Natural Gas Corporation, 3 && C. 664, 671 (1938); Walston & Co., 5 S. E. C. 112, 113 (1939).