Before: MARIS, MCLAUGHLIN and HASTIE, Circuit Judges.
This is an appeal from an order of the District Court for the District of Delaware enforcing, on the application of the Securities and Exchange Commission, a plan for the dissolution of the Federal Water and Gas Corporation. The plan had been proposed by Federal Water and Gas Corporation and approved by the Commission under Section 11 (e) of the Public Utility Holding Company Act of 1935*fn1 The appellants, whom we shall call the Chenery group, were officers, directors and controlling stockholders of a predecessor company, Federal Water Service Corporation. They assert that the district court erred in approving and ordering to be enforced that part of the plan of dissolution which excludes them from participation as stockholders in the distribution of the assets of Federal Water and Gas Corporation with respect to preferred stock of Federal Water Service Corporation acquired by them during the course of the reorganization and which relegates them to the position of creditors of Federal Water and Gas Corporation with respect to that stock. The Commission and the Common Stockholders Committee of Federal Water and Gas Corporation oppose this contention. They assert that in prior proceedings for the reorganization by merger of Federal Water Service Corporation, its parent, Utility Operators Company, and its wholly owned subsidiary, Federal Water and Gas Corporation, from which the present Federal Water and Gas Corporation emerged, it was finally determined that the Chenery group were not entitled to become stockholders in the corporation which resulted from the merger with respect to the preferred stock in question but must be regarded as creditors of that corporation to the extent of the cost of that stock plus interest.
To determine the validity of the respective contentions of the parties we must examine the nature of the prior proceedings to which reference is made. We accordingly briefly review them.
The merger proceeding was initiated by a plan of reorganization and merger proposed by Federal Water Service Corporation in order to comply with the requirements of Section 11 of the Act. The plan was filed on March 30, 1940 under Section 7 of the Act. At hearings thereon it appeared that the members of the Chenery group had purchased shares of preferred stock of Federal Water Service Corporation in the years during which the plan of reorganization was being formulated by them as officers, directors and controlling stockholders. In an opinion filed March 24, 1941*fn2, the Commission concluded that the Chenery group was disqualified, upon equitable principles, from participating in the reorganization with respect to these shares. The Commission accordingly disapproved the proposed plan to the extent that it permitted the Chenery group to participate in the merger with respect to these shares and indicated that the group should be limited in participation to the actual cost of the stock thus purchased. On August 12, 1941, Federal Water Service Corporation amended the plan as suggested by the Commission so as to limit the participation of the Chenery group in the merger to the actual cost of the stock thus purchased by them with interest at the rate of 4% per annum from the dates of purchase to the effective date of the merger. The amendment provided that no shares of common stock of the merged corporation should be issued in lieu of the shares of preferred stock of Federal Water Service Corporation purchased since November 8, 1937 by the Chenery group, but that the merged corporation pay the holders their cost plus interest upon surrender of their shares. The plan as thus amended was approved by the Commission on September 24, 1941*fn3 Thereupon the Chenery group petitioned the Court of Appeals for the District of Columbia to review the Commission's order approving the merger agreement which as thus amended excluded them from participation as stockholders.
At stockholders' meetings held October 28, 1941, the amended agreement of merger was approved by the requisite majorities of stockholders of the three corporations involved. At this election the members of the Chenery group voted against the adoption of the merger agreement. The merger was consummated on October 31, 1941. Review proceedings for the ultimate determination of the rights of the Chenery group, as we have said, were then pending before the Court of Appeals.
The Court of Appeals on April 27, 1942 reversed the order of the Commission approving the merger agreement which excluded the Chenery group from participation as stockholders*fn4 Certiorari was granted upon petition of the Commission. On February 1, 1943 the Supreme Court remanded the case to the Court of Appeals with directions to remand it to the Commission for such further proceedings not inconsistent with the opinion of the Supreme Court as might be appropriate*fn5 While it is not necessary, in the view which we take of the case, for us to analyze the basis of the Court's action, it appears that the Court concluded that established equitable principles did not justify the Commission's action with respect to the Chenery group but that since the standards laid down by the Act might be construed by the Commission to do so, the case should be remanded in order to enable the Commission to give further consideration to the impact of those standards.
after remand of the case to the Commission, Federal Water and Gas Corporation on April 7, 1943 applied to it for approval of an amendment to the plan of reorganization under which the corporation had been formed on October 31, 1941. The amendment proposed that the merger agreement should be altered so as to provide for the issuance of stock of the reorganized corporation to the Chenery group with respect to the preferred stock of Federal Water Service Corporation in question upon the same basis upon which it had already been issued to the public investors in that stock. The Commission thereupon reconsidered the matter and determined upon the basis of standards which it drew from the Act that the proposed amendment to the plan could not be approved. Accordingly, on February 7, 1945 the Commission entered orders denying the application to amend the plan of reorganization and reapproving the plan as constituted on September 24, 1941*fn6 The Chenery group thereupon sought a review of these orders by the Court of Appeals for the District of Columbia and that court on February 4, 1946 set the orders aside*fn7 However, upon certiorari again sought by the Commission, the Supreme Court reversed the judgment of the Court of Appeals, holding that the Commission was within its province in concluding that the proposed amendment permitting participation by the Chenery group as stockholders in the merger was inconsistent with the standards of the Act*fn8 Accordingly, upon remand, the Court of Appeals for the District of Columbia vacated its prior judgment and entered a judgment affirming in all respects the orders of the Commission under review.
This terminated the litigation with respect to the reorganization of Federal Water Service Corporation and its affiliated companies and the creation by merger of Federal Water and Gas Corporation. The merger, therefore, continued in effect as provided for by the merger agreement as originally amended and approved by the Commission. Accordingly the Chenery group never did become stockholders of Federal Water and Gas Corporation with respect to the preferred shares of Federal Water Service Corporation in question but on the contrary in accordance with the terms of the merger agreement became creditors for the amount of the actual cost of those shares, with interest.
Federal Water and Gas Corporation had previously on December 31, 1942 filed with the Commission pursuant to Section 11 (e) of the Act a plan under which it would cease to exist by dissolution or otherwise. A number of supplemental plans were filed from time to time thereafter and finally on November 7, 1947 the Corporation filed an amended and supplemental plan for its liquidation and dissolution which the Commission took under consideration. The amended plan purported to treat the rights of the Chenery group as still undecided. The Commission, however, concluded that the question had been finally settled in the prior proceedings in which it had been determined that the payment to the Chenery group by Federal Water and Gas Corporation of the cost of the preferred shares of Federal Water Service Corporation in question with interest, totaling $313,190.22, in full discharge of their claims, as provided by the amended merger agreement, would be fair and equitable. The amended plan of liquidation and dissolution was then further amended to conform to the Commission's conclusions and as thus amended was approved on July 27, 1948*fn9
On July 28, 1948 the Commission applied to the district court for approval and enforcement of the plan of liquidation and dissolution. On August 19, 1948, without opposition, the court ordered enforcement of the plan except as to the part which directed satisfaction of the claims of the Chenery group by payment of $313,190.22. The Chenery group objected to that part of the plan and, after hearing, the district court on December 2, 1949 filed its opinion*fn10 and on January 11, 1950 entered the order here under appeal enforcing the plan in full. The court's action was based on its conclusion that it was bound by the prior proceedings culminating in the second decision of the Supreme Court to find the plan fair and equitable in its treatment of the Chenery group.
The basic question which this appeal presents is whether the rights of the Chenery group in Federal Water and Gas Corporation were conclusively determined in the prior reorganization and merger proceedings before the Commission, the Court of Appeals and the Supreme Court to be those of creditors rather than stockholders. We agree with the district court that the reorganization and merger proceedings had that effect and that the question of the rights of the Chenery group in the present dissolution proceedings of Federal Water and Gas Corporation is res judicata. The Chenery group argue that the prior reorganization and merger proceedings were not the type of proceedings to which the rules of res judicata are applicable and that in any event the issue which they now seek to raise was not raised or decided in those proceedings. We do not agree. It is true that the Securities and Exchange Commission is an administrative agency and that it is vested with rule making powers of a legislative character. But in the reorganization and merger proceedings the Commission was not laying down rules of conduct for the future in the exercise of its quasilegislative power. On the contrary it was acting in a quasi-judicial or adjudicatory capacity to determine the existing obligations and duties of the holding companies in question and the rights of their creditors and stockholders under the legal standards laid down in the Act and in the light of their past conduct. The distinction between the two types of function was clearly pointed out by Justice Holmes in Prentis v. Atlantic Coast Line, 1908, 211 U.S. 210, 226, as follows:
"A judicial inquiry investigates, declares and enforces liabilities as they stand on present or past facts and under laws supposed already to exist. That is its purpose and end. Legislation on the other hand looks to the future and changes existing conditions by making a new rule to be applied thereafter to all or some part of those subject to its power."
When an administrative agency exercises power of a quasi-judicial or adjudicatory nature and its order has been affirmed by the final judgment of a reviewing court, the rights and liabilities necessarily determined by the judgment of affirmance become res judicata*fn11 Here it was necessary in the reorganization and merger proceedings for the Commission to decide whether the members of the Chenery group were, with respect to the shares in question, entitled to become stockholders in the corporation, Federal Water and Gas Corporation, which was to be formed by the merger, or whether their rights were only those of creditors of that corporation. After full hearing before the Commission and the fullest judicial review, including two separate days in the Supreme Court, it was finally decided that it was fair and equitable to the ...