decided as amended november 1 1971.: September 13, 1971.
Hastie, Chief Judge, and Kalodner and Gibbons, Circuit Judges.
These appeals present the narrow issue whether the District Court was "clearly erroneous" in its fact-finding that the petition for reorganization of the debtor, Business Finance Corporation, under Chapter X of the Bankruptcy Act*fn1 was filed in "good faith" within the meaning of § 146(3) of the Act.*fn2
The District Court made the "good faith" finding in its Order of July 6, 1970, which granted the Chapter X reorganization petition filed by the debtor, its Receiver in then pending proceedings under Chapter XI of the Bankruptcy Act, and a Committee representing 350 holders of $2,800,000 of its long term debentures. The latter are subordinated to loans of $2,007,000 owed by the debtor to the five appellant banks. Four of the banks are secured creditors;*fn3 the fifth is unsecured.*fn4
The debtor is a publicly-owned corporation, with some 200 shareholders. It is engaged in the commercial finance business, viz., commercial loans which are collaterally secured, and, in the venture capital field, viz., equity investments in various other corporations. The debtor, and a wholly-owned subsidiary, Pennsylvania Capital Growth Corporation ("PCGC"), licensed as a Small Business Investment Company, under the Small Business Investment Act of 1958, have numerous investment and equity interest in various businesses. All of the capital stock of PCGC is pledged to the four appellant banks specified in footnote 3.
The distilled essence of the appellants' contention is that the evidence failed to establish a reasonable expectation that the debtor could be reorganized under Chapter X, and thus the District Court's finding of "good faith" was "clearly erroneous."
In support of this contention, the banks urge that the evidence establishes that (1) the debtor is "substantially insolvent" because it has liabilities of $1,247,873 in excess of its assets of $3,796,204, and, even giving effect to the debtor's appraisal of its investments, its liabilities exceed its assets by $502,709; (2) the debtor "has no working capital for new loans or investments," and "has no prospects of repaying in a reasonable time senior bank debt of approximately $2,000,000 which is in default"; (3) the debtor "has suffered huge losses," and "proceeds of principal assets" are being currently expended; and (4) the debtor "was unable to submit a plan in an [preceding] arrangement proceeding under Chapter XI of the Bankruptcy Act for a period in excess of seven months."
It must be noted at this juncture that the banks opposed approval of the Chapter X reorganization below on the ground that it would delay repayment of their loans, and that in doing so, counsel for the banks stated to the District Court that in his opinion the realizable assets of the debtor would make the banks whole and that "there might be some distribution to the debenture holders who would come next in line."
In reply to the banks' contentions, the debtor and Debenture Holders Committee*fn5 urge that the evidence supported the District Court's finding that the Chapter X petition was filed in "good faith," and that it established "it is most reasonable to expect that a plan [of reorganization] can be effected" in light of the fact that the debtor's holdings have substantially appreciated in value.
Discussion of the stated contentions must be prefaced by this statement:
On November 5, 1969, an involuntary petition in bankruptcy was filed against the debtor, Business Finance Corporation ("BFC"), and a Receiver was appointed.
On November 18, 1969, BFC filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, and the matter was assigned to a Referee in Bankruptcy. On November 19, 1969, the Referee entered an Order authorizing the previously appointed Receiver to operate the business of BFC. It has been in operation ever since. On November 26, 1969, the Referee entered an Order authorizing the Receiver to employ BFC's president, vice-president and treasurer to operate the business. The president and vice-president are still employed at salaries aggregating $45,000 annually.
On January 5, 1970, arrangement schedules were filed, and the Referee entered an Order fixing February 3, 1970 for a first meeting of creditors. At that meeting the Referee fixed April 3, 1970 for filing of BFC's Plan of Arrangement. On April 3, 1970, BFC filed a petition for a 60-day extension of time to file its Plan, stating therein that it had "informally proposed a Plan of Arrangement to its major creditors in an effort to work out a Plan of Arrangement which, when filed will be acceptable to its creditors, and will not require later amendment." The Referee, however, allowed only a 30-day extension to May 4, 1970. A further extension was granted to June 1, 1970, upon BFC's petition stating that its efforts to ...