Broadly that decision established the doctrine that in reorganization the shareholders may not acquire any share in the reorganized enterprise unless the creditors of all classes are afforded equitable opportunity and terms under the reorganization plan. The specific holding seemed unduly harsh. An unsecured creditor was granted recourse against the property, fifteen years after the reorganization. It is true that the Supreme Court divided five to four on the question. But a subsequent decision established the doctrine beyond all question and it has since been uniformily followed.8

The security which counsel in corporate reorganization felt when there was a decree of court transferring the property to the new corporation seems to have been unwarranted. The decree of sale is a device only. It could hardly be expected that the courts could or would shut their eyes to the obvious fact that the decree is but a step in reorganization.10 The decision in the Boyd case is placed on the "trust fund" doctrine."1 The simple principle of identity seems to be a more rational basis for it. The essential thing is that when the old stockholders continue as stockholders in the new corporation, the new corporation is but the old in different guise. It is not surprising that the doctrine of the Boyd case has been a veritable nightmare to counsel. If a non-assenting unsecured creditor can attack the reorganization, so also can a non-assenting secured creditor. The danger of attack by either or both deters new and often sorely needed capital. It may disrupt the new corporation.

Writers who have discussed the problem recently agree that some means must be found to compel a recalcitrant minority to accept a fair and equitable plan of reorganization.12 Reorganization is dictated by necessity. Judge Hough estimates that fifty per cent. of the American corporations have passed through some form of reorganization in the last twenty years." Protracted receiverships are artificial and expensive. Reorganization is the corporation's

13

"Kansas City Ry. Co. v. Guardian Trust Co., 240 U. S. 166 (1915). "Central Improvement Co. v. Cambria Steel Co., 210 Fed. 696 (1913); Blue Ridge Electric Co. v. American Note Co., 237 Fed. 755 (1916); Howard v. Maxwell Motor Co., 269 Fed. 292 (1920); Farnsworth v. Muscatine Ice Co., 177 Ia. 21 (1916); Sebree v. Cassville Ry. Co., 212 S. W. (Mo.) II (1919); Pittsmont Copper Co. v. O'Rourke, 49 Mont. 281 (1914).

The only case found where recovery by a creditor was barred is Pennsylvania Transportation Company's Appeal, 101 Pa. 576 (1882). The question was not seriously discussed and the reasoning is poor.

10"It rarely happens in the United States that foreclosures of railroad mortgages are anything else than the machinery by which arrangements between the creditors and other parties in interest are carried into effect and a reorganization of the affairs of the corporation under a new name brought about." Waite, C. J. in Canada Southern Ry. Co. v. Gebhard, 109 U. S. 527, 539 (1883). "Scovill v. Thayer, 105 U. S. 143 (1881).

"James N. Rosenberg, A New Scheme of Reorganization, 17 Col. L. Rev., 523-537; Roberts walker, Reorganization by Decree, 6 CORNELL LAW QUARTERLY 154-167; James N. Rosenberg, Reorganization-The Next Step, 22 Col. L. Rev. 14-27; Robert T. Swaine, Reorganization-The Next Step: A Reply to Mr. James N. Rosenberg, 22 Col. L. Rev. 121-132; Samuel Spring, Upset Prices in Corporate Reorganizations, 32 Har. L. Rev. 489-515.

"As quoted by Paul D. Cravath in Reorganization of Corporations, Some Legal Phases of Corporate Financing, Reorganization and Regulation, p. 154.

only salvation. It is not surprising that the courts look upon it with favor.14 It is but a "normal phase of corporate life".15 To insist strictly on contract rights, after an equitable plan of reorganization has been adopted by a majority of the stockholders and creditors strikes at the very life of the corporation. Sacrifice is imperative. Fair majority control is the ultimate solution. But who will enforce it? England has pointed the way by statute.16 Under it, the terms of a reorganization plan may be embodied in a decree of court and become binding upon all the security holders of all the classes affected.17 The plan must have been approved by a certain percentage of the stockholders and creditors. It must impress the court as being fair and reasonable. The basic test is the good of the corporation.

There seems to be general agreement on the necessity for similar legislation in this country. An amendment to the Bankruptcy Act has been proposed.18 The remedy suggested is federal in scope, apparently upon the theory that it would be easy for the large corporations to bring themselves within federal jurisdiction on the ground of diversity of citizenship. If a state passed such a statute it might be held unconstitutional on the ground that it was an impairment of contract rights.19 There is no similar prohibition on the federal government. Kentucky has such a statute, however, modelled closely after the English statute.20 So far as can be ascertained, its constitutionality has never been litigated.

Another possible constitutional objection to such a statute, whether state or national in scope, is that it is a taking of property without due process.21 But in passing upon the constitutionality of Canadian legislation of this character in Canada Southern Ry. Co. v. Gebhard, the Supreme Court said22: "when insolvency is threatened

14Shaw v. Little Rock Ry. Co., 100 U. S. 605 (1879); Paton v. Northern Pacific Ry Co., 85 Fed. 838, 842 (1896).

15Samuel Spring, Upset Prices in Corporate Reorganizations, supra, n. 12 at p. 490.

16"If a majority in number representing three-fourths in value of the creditors, or class of creditors, or of the members or class of members *** agree to any compromise or arrangement, the compromise or arrangement shall if sanctioned by the court be binding on all the creditors or the class of creditors **** and on the company." Sec. 120, British Companies Act. See 5 Halsbury, Laws of England, pp. 602, 604, 609.

17Before the Act, a single creditor could without reason prevent the adoption of an equitable plan. In Re Canada Freehold Estate Co., (1886) 55 L. T. 347, 351.

18James N. Rosenberg, A New Scheme of Reorganization, supra, n. 12. 19Constitution, Art. 1, sec. 10 (1).

20"and if, upon the hearing thereof *** the court shall approve the same and such plan or scheme so approved shall receive the assent of the holders of three-fourths of the class of securities proposing the same, and a like proportion of all other classes of creditors subordinate thereto, and the court shall be of the opinion that the said plan and scheme of reorganization is fair and equitable the court shall adjudge and order that said plan or scheme of reorganization shall be adopted and carried out Sec. 771 a (2), Carroll's Kentucky Statutes. The statute is discussed by Morefield Storey in an address delivered before the American Bar Association, reprinted in 30 Am. L. Rev. 51.

21Constitution. Art. 14, sec. I.

Supra, n. 10, at p. 535.

and the interests of the public as well as creditors are imperilled by the financial embarrassments of the corporation a reasonable 'scheme or arrangement' may, in our opinion as well be legalized as an 'ordinary composition in bankruptcy.' In fact, such 'arrangement acts' are a species of bankrupt acts."

1123

Whether equity has power in the absence of legislation to enforce a fair reorganization plan on an unwilling minority is a contentious question. Before the Boyd case the proposition would have been regarded as startling.24 A reorganization was looked upon merely as a contract between the stockholders, bondholders and general creditors.25 Judicial interference was regarded as judicial usurpation. True, when a receiver is appointed the res is in the custody of the law but it was said that the court is "a harbor of refuge, not a repair shop" 26 In 1890, the Supreme Court declared flatly that "the appointment of a receiver vests in the court *** no general authority to displace vested contract liens."27 In the Boyd case, however, the following language was used: "This conclusion does not, as claimed, require the impossible and make it necessary to pay an unsecured creditor in cash as a condition of stockholders retaining their interest in the reorganized company. His interest can be preserved by the issuance on equitable terms of income bonds or preferred stock. If he declines a fair offer *** he could not thereafter be heard in a court of equity to attack it."28 While this is pure dictum it has ably been argued that this is a holding that the courts have the power to enforce a fair reorganization plan.29 Whatever may have been the intention of the Supreme Court, the language quoted above has been used by the lower courts to authorize a measure of judicial supervision hitherto seldom attempted. In the two most important reorganization decisions following the Boyd case, federal courts refused to enter decrees of sale until fair and equitable provision was made for the creditors.30 In the Aetna Explosives case 31 which one writer has characterized as "A Milestone in Reorganization",32 the court examined a reorganization plan in extenso and held flatly that it had the power to inquire into the merits of the scheme. This was giving honest minorities a chance to exact modifications in unjust reorganization plans before the courts would enter consent decrees.

23Held constitutional in Sturgis v. Crowinshield, 17 U. S. 122 (1819). "Lake Ry. Co. v. Ziegler, 99 Fed. 114 (1900); Merchants Co. v. Chicago Railways Co., 158 Fed. 923 (1907).

25 Wabash Ry. Co. v. Central Trust Co., 22 Fed. 138 (1884), Chable v. Nicaragua Canal Co., 59 Fed. 846 (1894).

26Chable v. Nicaragua Canal Co., supra, n. 25, at p. 848.

27 Kneeland v. American Loan Co., 136 U. S. 89, 97 (1890).

28 Supra, n. 6 at p. 508.

29James N. Rosenberg, Reorganization-The Next Step, supra, n. 12. The opposite view is maintained by Robert T. Swaine, Reorganization-The Next Step: A Reply to Mr. James N. Rosenberg, supra, n. 12.

30North American Co. v. St. Louis & San Francisco Ry. Co., (D. C. E. D. Mo. E. Div. Mar. 3 1916) Cons. Caus. Eq. No. 4174 (not reported); St. Louis— San Francisco Ry. Co. v. McElvain, 253 Fed. 123 ((1918).

31Graselli Chemical Co. v. Aetna Explosives Co., 252 Fed. 456 (1918). "James N. Rosenberg, in 20 Col. L. Rev. 733–740.

The question as to whether dissenting creditors would be bound by a reorganization plan approved by the court and in which they were to receive in satisfaction of their claims stock in the new corporation still persisted. An affirmative answer was given as early as 1917 in the so called Rock Island case33 where creditors were required to accept payment in stock and nothing else. In the following year, however, another federal court held directly contra.34 Three decisions in 1922 follow the Rock Island case.35 In one of them it was held that the court might decree a scaling down of the stock and unsecured debts and that dissenting creditors could not, the plan being fair, claim more than the securities alloted them.36 In another, it was held that unsecured creditors who did not come into this judicial scaling down of securities within a reasonable time fixed by the court would lose all of their interest in the reorganized corporation." In all three, the only provision for unsecured creditors was payment in stock of the new corporation. In two, even the formality of a sale was dispensed with 38

Whether equity really has the power asserted in these later decisions to enforce a plan of reorganization is questionable. It is true that the earlier doctrine of "hands off" has given way to a more liberal attitude.39 The power of the courts to refuse to enter a decree of sale unless the plan submitted is fair and equitable may well be supported on the principle that he who seeks equity must do equity. But the power asserted in the Rock Island cases to compel dissenting creditors to accept a plan is doubtful in the absence of legislation. If fair majority control has come to be a necessity in corporate reorganization, the power to order it would seem to be legislative on the analogy of the Bankruptcy Act. Courts may foreclose contract rights but they cannot change them. There is also a serious question of policy. If a court assumes the power to enforce a reorganization plan, it might well be called upon to choose between two or more plans which different groups submit. It would then be compelled to decide on questions of economic policy which should be left to business men. Judicial control of receiverships has been much criticized on this score.

One may well feel inclined to agree with Cook that "if there is any theory on which these Rock Island decisions can be sustained and

33 (D. C. N. D. Ill, E. D. June 12 1917), Cons. Caus. Equity No. 445 (not reported). See excellent discussion of this and other recent decrees by Roberts Walker, Reorganization by Decree, supra, n. 12.

"In Re Prudential Outfitting Co., 250 Fed. 504 (1918).

"Phipps v. Rock Island Ry. Co., 284 Fed. 945 (1922); Chicago Ry. Co. v. Lincoln Co., 284 Fed. 955 (1922); Walsh Timber Co. v. Missouri Ry. Co., 280 Fed. 38 (1922), petition for writ of certiorari denied, 260 U. S. 743. (1922). Phipps v. Rock Island Ry. Co., supra, n. 35.

$7Chicago Ry. Co. v. Lincoln, supra, n. 35.

18 Supra, notes 36, 37.

19"The conclusion is manifest that the general duty of a court in a railroad foreclosure suit to take cognizance of a plan of reorganization by the bondholders and stockholders which is to be aided by its decree, and to protect the equitable rights of all, becomes specific upon the complaint of an interested party." Hook, J. in Guaranty Trust Co. v. Mo. Pac. Ry. Co., 238 Fed. 812, 816 (1916).

***

become established law, the theory is diligently to be sought".40 But one also shares his doubt that there is any such theory. The remedy is with the legislature.

A. E. Gold.

Criminal Law: Evidence: Presumption of innocence upon a specific ground. In criminal cases it is a familiar rule that guilt must be established beyond a reasonable doubt. It is said, also, that there is a presumption of innocence in favor of an alleged criminal. These rules were given an unusual application in People v. Creasy, 236 N. Y. 205 (1923). The facts of the case were simple. A Miss Lavoy and the prisoner, who had had a rather unfortunate love affair, were in a room alone. Miss Lavoy was shot. Either Miss Lavoy or the prisoner caused the trigger to be pulled. The charge requested follows: "Since the defendant is presumed to be innocent until proven guilty beyond a reasonable doubt, the jury are bound to commence their consideration of the evidence in the case by a presumption that Edith Lavoy committed suicide and did not come to her death at the hands of this defendant." The court on appeal said that it was error to refuse to so charge and said that as the sole question "was whether the defendant killed Miss Lavoy or whether Miss Lavoy killed herself" a refusal of the requested charge would permit the jury to commence its deliberation without the customary presumption of innocence. The court also added that presumptions should favor the living rather than the dead. This ruling was most severely flayed in an annotation in the New York Law Review.3 The apparent purpose of the note was to point out that courts in presuming innocence were carrying the doctrine too far and that the principal case was an excellent illustration of the ridiculous extent to which the doctrine was being carried in certain cases. Many amusing (but extravagant) illustrations (imaginative) of specific acts as grounds of innocence were held up to ridicule.

The requested charge says that if innocence is to be presumed, the jury are bound to presume innocence upon the ground of suicide. In other words the jury are prohibited from considering innocence as based upon any other ground than that of suicide. One question that such a charge raises is whether it is permissible for a court to name a sole issue of fact upon the decision of which guilt is to be determined. If the court does do so, there is danger that in singling out a pivotal issue, it will go too far in its analysis and limit the field of contemplation of the jury where it should not be so limited. The danger, however, need not be great where proper discretion is used. Thus, in the principal case, it may be permissible for the court to single out an issue of fact as it is suggesed it should have done, but it is difficult to understand why a refusal to do so constituted error.

405 Cook, Corporations (8th. ed.), p. 4107.

'Principal case, at p. 223.

'Principal case at p. 218. 'I N. Y. L. Rev. 442.