American United Mutual Life Insurance v. City of Avon Park

Background

A creditor of the city challenged a city debt-refunding plan that a District Court had approved and a Court of Appeals had affirmed. The city hired R. E. Crummer & Co. as fiscal agent to arrange the refunding; Crummer paid the costs and was to be reimbursed by charging participating bondholders $40 per $1,000 or $20 if they sold certain interest coupons. Crummer and an affiliate bought a large block of the city’s claims, apparently at heavy discounts, and about 69% of bondholders assented to the plan — but without the Crummer interests’ votes the law’s required two-thirds approval would not have been reached.

Reasoning

The Court asked whether the confirmation was fair when the fiscal agent had multiple undisclosed financial interests and its votes were counted. The Court held that the bankruptcy court failed to examine the aggregate benefits Crummer stood to gain, whether those benefits exceeded reasonable pay for services, and whether full disclosure was made to bondholders. Because Crummer acted in a dual role and its votes were decisive, the Court found the record did not show assents were fairly obtained or given in good faith, and that the approval could not stand.

Real world impact

The ruling sends the case back for further proceedings and requires bankruptcy courts to demand full disclosure, to scrutinize fiscal agents’ total gains as well as fees, and to ensure that votes by closely aligned claim holders are not counted without protection for investors. Municipalities, bondholders, and fiscal agents must expect closer court oversight of refundings.