Source: https://law.justia.com/cases/federal/appellate-courts/F2/730/1128/345075/
Timestamp: 2020-07-16 03:40:40
Document Index: 44472584

Matched Legal Cases: ['§ 510', '§ 363', '§ 541', '§ 510', '§ 510', '§ 1123', '§ 1125', '§ 1126', '§ 1129', '§ 1102']

In Re Flight Transportation Corporation Securities Litigation.drexel Burnham Lambert Incorporated and Moseley, Hallgarten,estabrook & Weeden, Inc., on Behalf of Themselvesand All Others Similarly Situated, Appellants, v. Flight Transportation Corporation, Ftc Executive Aircharter, Inc., Ftc Cayman, Ltd., and Williamrubin, Appellees,putnam High Yield Trust, United High Income Fund, Inc.,opperheimer High Yield Fund; Continental Illinois Nat'lbank & Trust Co. of Chicago, Greyhound Leasing, & Norwestbank Minneapolis, N.a., Norwest Bank Calhoun-isles, N.a.,and Named Plaintiffs in the Action of Frank P. Antinore, Etal., Intervenors.in Re Flight Transportation Corporation Securities Litigation.appeal of Fox & Company.in Re Flight Transportation Corporation Securities Litigation.appeal of Jack Adams, Jr., Ezell Jones, Russell T. Lund,jr., Wardwell M. Montgomery, Delbert Oldenburg,marjorie Terhaar, Larry Walston, Walstonwings, Inc., Lunds, Inc., Andedward Brunner.in Re Flight Transportation Corporation Securities Litigation.appeal of Reavis & Mcgrath, 730 F.2d 1128 (8th Cir. 1984) :: Justia
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In Re Flight Transportation Corporation Securities Litigation.drexel Burnham Lambert Incorporated and Moseley, Hallgarten,estabrook & Weeden, Inc., on Behalf of Themselvesand All Others Similarly Situated, Appellants, v. Flight Transportation Corporation, Ftc Executive Aircharter, Inc., Ftc Cayman, Ltd., and Williamrubin, Appellees,putnam High Yield Trust, United High Income Fund, Inc.,opperheimer High Yield Fund; Continental Illinois Nat'lbank & Trust Co. of Chicago, Greyhound Leasing, & Norwestbank Minneapolis, N.a., Norwest Bank Calhoun-isles, N.a.,and Named Plaintiffs in the Action of Frank P. Antinore, Etal., Intervenors.in Re Flight Transportation Corporation Securities Litigation.appeal of Fox & Company.in Re Flight Transportation Corporation Securities Litigation.appeal of Jack Adams, Jr., Ezell Jones, Russell T. Lund,jr., Wardwell M. Montgomery, Delbert Oldenburg,marjorie Terhaar, Larry Walston, Walstonwings, Inc., Lunds, Inc., Andedward Brunner.in Re Flight Transportation Corporation Securities Litigation.appeal of Reavis & Mcgrath, 730 F.2d 1128 (8th Cir. 1984)
US Court of Appeals for the Eighth Circuit - 730 F.2d 1128 (8th Cir. 1984) Submitted Oct. 11, 1983. Decided March 26, 1984
A few days later, on June 18, 1982, the SEC halted trading in FTC securities and commenced an action against FTC, its subsidiaries, and Rubin in the United States District Court for the District of Minnesota, alleging that the defendants had violated several provisions, especially the antifraud provisions, of the federal securities laws.2 The SEC sought an injunction against further violations, appointment of a receiver, an accounting, and an order of disgorgement so that, apparently, restitution might be made to defrauded investors. See SEC v. Flight Transportation Corp., 699 F.2d 943, 945 & n. 2 (8th Cir. 1983). The District Court entered a temporary restraining order and appointed a receiver, who caused some $22.7 million, the remaining proceeds of the June 3 and 4, 1982, offerings, to be transferred from FTC's account in the New Jersey bank to a segregated, interest-bearing account in a Minneapolis bank (the Escrow Fund).3
During the following months, the litigation became increasingly complex. A number of separate individual and class actions were filed against FTC, its subsidiaries, its officers and directors, its accountants, and its underwriters. Certain defendants cross-claimed for indemnity, and some of FTC's directors brought suits for damages directly against FTC. On October 8, 1982, about 22 cases were consolidated when a class-action complaint was filed on behalf of all persons who purchased FTC securities between November 30, 1979, and June 18, 1982. Antinore v. Flight Transportation Corp., Master Docket No. 4-082-874 (D. Minn. 1982), Jt. App. 693. Moreover, on June 29, 1982, several major creditors filed an involuntary Chapter 11 bankruptcy petition against FTC in the Bankruptcy Court for the District of Minnesota. When the District Court stayed the bankruptcy as well as all other proceedings against the defendants, several appeals to this Court ensued. We directed that the bankruptcy action be allowed to proceed, SEC v. Flight Transportation Corp., 693 F.2d 66 (8th Cir. 1982) (per curiam); SEC v. Flight Transportation Corp., Nos. 82-1964, -1990 (8th Cir. Mar. 8, 1983) (order dismissing appeals), and that one of FTC's creditors and William Rubin's wife be allowed to intervene in the SEC action in the District Court, SEC v. Flight Transportation Corp., 699 F.2d 943 (8th Cir. 1983). We left open the other major issue on appeal, that of whether the District Court or the Bankruptcy Court should decide the constructive-trust and disgorgement claims, noting that the issue could be addressed in the lower courts and thereafter reviewed on appeal if necessary. SEC v. Flight Transportation Corp., Nos. 82-1964, -1990 (8th Cir. Mar. 8, 1983) (order dismissing appeals).
Under the Sharing Agreement, persons, including the receiver and the bankruptcy estate, who have claims against FTC or other defendants agree to prosecute their claims jointly, to pool their recoveries, whether from the Escrow Fund, other assets of FTC, or damage actions against any of the defendants, and to disburse the money among themselves in accordance with an agreed-upon schedule. Defendants, defined as " [a]ny PERSON against whom any CLAIMANT has any claim for a monetary recovery arising out of or related to the CLAIMANT's claim against FTC," Jt.App. 360, are excluded from the Sharing Agreement.
CREDITORS $11,000,000 SUBCLASS I and II 500,000 SUBCLASS III 1,250,000 SUBCLASS IV 11,000,000 SUBCLASS V 500,000 EXPENSE FUND 750,000
CREDITORS $1,500,000 SUBCLASS I and II 500,000 SUBCLASS III 1,000,000 SUBCLASS IV 1,500,000 SUBCLASS V 500,000
CREDITORS $1,800,000 SUBCLASS I and II -0- SUBCLASS III 500,000 SUBCLASS IV 2,700,000 SUBCLASS V -0-
The appellees argue that we do not have jurisdiction to hear these appeals because none of the orders appealed from is final. We disagree. Under 28 U.S.C.A. Sec. 1292(a) (1) (West Supp.1983), we have jurisdiction of appeals from " [i]nterlocutory orders ... refusing ... injunctions ...." When an order has the practical effect of refusing an injunction, it is immediately appealable under Sec. 1292(a) (1) if it "might have a 'serious, perhaps irreparable, consequence' " and "can be 'effectually challenged' only by immediate appeal." Carson v. American Brands, Inc., 450 U.S. 79, 84, 101 S. Ct. 993, 996, 67 L. Ed. 2d 59 (1981) (quoting Baltimore Contractors, Inc. v. Bodinger, 348 U.S. 176, 181, 75 S. Ct. 249, 252, 99 L. Ed. 233 (1955)).
The District Court, by entering the orders which, taken together, both approve the Sharing Agreement and permit the parties to implement it, effectively denied Drexel-Moseley's motion for a preliminary injunction to prohibit the commingling or disposition of the Escrow Fund, since the very purpose of the Sharing Agreement is to create and disburse a pooled fund consisting, in large part, of the Escrow Fund.6 Since claimants who receive distributions from the Escrow Fund would probably spend or otherwise dissipate them, Drexel-Moseley's ability to trace the proceeds of the June 1982 offerings, a necessary element of their constructive-trust claim, see, e.g., Restatement of Restitution Sec. 215 (1937), would be impaired. And since the difficulties of tracing would become greater as time went on, Drexel-Moseley might not be able to obtain relief on appeal after a final order was entered. Thus, Drexel-Moseley has made a sufficient showing of the possibility of serious or irreparable harm, so that we have jurisdiction under Sec. 1292(a) (1).7
We think the Sharing Agreement is more like a compromise or settlement than a plan of reorganization. The main thrust of the Agreement is to conclude the parties' controversy as to (1) whether the entire Escrow Fund is properly includible in the bankruptcy estate, subject to the claims of FTC's general creditors, who, under 11 U.S.C. § 510(b), would have priority over the claims of security holders, or (2) whether no part of the Escrow Fund became property of the estate, but rather belonged entirely to the June 1982 purchasers by virtue of a constructive trust. The parties compromised by agreeing that part of the Escrow Fund would go to the bankruptcy estate and part would go to the security holders.9 The bankruptcy case will proceed according to regular bankruptcy procedure.
In re Blair, 538 F.2d 849, 852 (8th Cir. 1976) (footnote omitted). The Adams Group and Reavis & McGrath, to the extent that they are creditors, are concerned not with ensuring the future profitable conduct of the business, but with the size of the bankrupt's estate and how it is to be divided. Thus, if the Sharing Agreement is in some sense a reorganization, it is not a typical one. The Adams Group presented their arguments on these points to Judge Weiner at the hearing held on June 27, 1983. While Reavis & McGrath did not receive notice of the hearing, the arguments that they make here were presented by other parties in attendance. Neither appellant explains why the procedural provisions of Chapter 11 regarding the formulation and approval of a plan would have afforded them significantly greater benefits than those they received. See also In re Ericson, 6 B.R. 1002 (D.C.D. Minn. 1980).
In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983), cited by the appellants, is inapposite. Unlike the case before us, Braniff involved the question whether an agreement to transfer assets of the bankrupt was invalid under the "use, sale, or lease" provision of 11 U.S.C. § 363(b). Moreover, the Sharing Agreement, unlike the Braniff agreement does not dictate the terms of any future reorganization plan, since the assets of the bankruptcy estate will be distributed in the normal course of the bankruptcy proceeding; it does not require any claimant to vote in favor of any future reorganization plan; and the only release of claims involved is the class plaintiffs' release of their own claims against FTC's estate.
The approval of a settlement under Fed. R. Civ. P. 23(e) as fair, reasonable, and adequate "is committed to the sound discretion of the trial judge." Grunin v. International House of Pancakes, 513 F.2d 114, 123 (8th Cir.), cert. denied, 423 U.S. 864, 96 S. Ct. 124, 46 L. Ed. 2d 93 (1975) (quoting Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 34 (3d Cir. 1971)). In exercising its discretion, the District Court must consider all factors bearing on the fairness of the settlement, including
Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1929). Accord, Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25, 88 S. Ct. 1157, 1163, 20 L. Ed. 2d 1 (1968). Drexel and Anderson involve approval of settlement in bankruptcy cases, and the same standards apply to the approval of a class-action settlement under Rule 23(e). Grunin, supra, 513 F.2d at 124.
Anderson, supra, 390 U.S. at 434, 88 S. Ct. at 1168. Nonetheless, if
Id. at 437, 88 S. Ct. at 1170. Here, the record reflects that the District Court had before it the information necessary to consider the fairness of the Sharing Agreement. All the arguments made before us were presented to the District Court. Accordingly, we shall review the District Court's action on the basis of the record before us.
Drexel-Moseley, Fox, and Reavis & McGrath10 argue that the Sharing Agreement is unfair to the June 1982 purchasers, that Drexel-Moseley's entitlement to a constructive trust on the Escrow Fund is so clear that Judge Weiner abused his discretion by approving a settlement that, in effect, bargained away almost half of it. They assert that the Escrow Fund never became "property of the estate" under 11 U.S.C. § 541 (1982), pointing to the principle that
Nicklaus v. Bank of Russellville, 336 F.2d 144, 146, 147 (8th Cir. 1964); see also, e.g., In re Teltronics, Ltd., 649 F.2d 1236, 1239 (7th Cir. 1981).
We agree that Nicklaus correctly states the general rule. Under Sec. 541(a) (1), the bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." This principle is refined in Sec. 541(d):
Thus, where, under state law, the debtor's fraud or other wrongful conduct gives rise to a constructive trust, so that the debtor holds only bare legal title to the property, subject to a duty to reconvey it to the rightful owner, the estate will generally hold the property subject to the same restrictions. E.g., In re Shepard, 29 B.R. 928, 931-32 (Bkrtcy.M.D. Fla .1983); 4 Collier on Bankruptcy p 541.13 (15th ed. 1983).
The appellees argue, however, that where, as here, the constructive-trust claim is based on a security holder's allegation of fraud, the general rule does not apply. They point to 11 U.S.C. § 510(b) (1982), which provides:
The legislative history indicates that Congress may have intended to foreclose constructive-trust claims by defrauded shareholders to the extent that such claims would give the shareholders priority over general unsecured creditors. H.R.Rep. No. 595, 95th Cong., 2d Sess. 194-96, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6154-57 (House Report). By enacting Sec. 510(b), Congress intended to resolve a "difficult policy question": whether a security holder who seeks to rescind his purchase should "be subordinated to, share pari passu with, or have priority over, unsecured creditors ...." House Report at 194, 195, U.S.Code Cong. & Admin.News 1978, p. 6155. After noting that the case law was unsettled and observing that " [t]here is also authority under present law that if a security holder can trace the consideration paid into proceeds of the estate then he can, in straight bankruptcy, either reclaim the consideration or assert a security interest in the proceeds as a secured creditor," House Report at 195, U.S.Code Cong. & Admin.News 1978, p. 6155, the Committee referred approvingly to the position set out by Professors Slain and Kripke in their article, The Interface Between Securities Regulation and Bankruptcy--Allocating the Risk of Illegal Securities Issuance Between Securityholders and the Issuer's Creditors, 48 N.Y.U. L. Rev. 261 (1973). According to this view, since "the unsecured creditor [relies] on an apparent cushion of equity securities in making the decision to extend credit," the risk of illegality in securities issuance should be borne by the securities purchasers, not the general creditors. House Report at 195, U.S.Code Cong. & Admin.News 1978, p. 6155. "The general creditors have not had the potential benefit of the proceeds of the enterprise deriving from ownership of the securities and it is inequitable to permit shareholders that have had this potential benefit to shift the loss to general creditors." Ibid.
It appears that no reported opinion addresses the precise question presented here. But cf. In re U.S. Financial Inc., 648 F.2d 515, 517-21 (9th Cir. 1980), cert. denied, 451 U.S. 970, 101 S. Ct. 2046, 68 L. Ed. 2d 348 (1981) (holding that, under prior law but using Slain/Kripke analysis, absolute-priority rule defeated claim for rescission and reclamation, even though res could be traced). We need not resolve it now. We merely hold that there was a substantial question whether Drexel-Moseley would prevail on its constructive-trust claim.11 The constructive-trust claim was not so strong as to make it an abuse of discretion to approve a settlement that roughly splits it in half. This conclusion is strengthened by the fact that the great majority of the purchasers of the June 1982 offerings--the parties who would benefit most from the unqualified success of the constructive-trust theory--support the settlement and urge its approval.
Of course, the principles of equitable subordination, now codified in 11 U.S.C. § 510(c) (1982), will continue to apply, and the bankruptcy court is free, in later proceedings, to determine upon a proper record that the claims of particular defendants should be subordinated to the claims of other creditors. See, e.g., Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281 (1939); Farmers Bank v. Julian, 383 F.2d 314, 322-23 (8th Cir.), cert. denied, 389 U.S. 1021, 88 S. Ct. 593, 19 L. Ed. 2d 662 (1967).
Pretrial Order No. 153, which certified a class of securities purchasers and named class representatives, effectively denied Drexel-Moseley's motion for certification of a constructive-trust-beneficiary class. Although orders denying class certification are ordinarily not immediately appealable, see, e.g., Coopers & Lybrand v. Livesay, 437 U.S. 463, 467, 98 S. Ct. 2454, 2457, 57 L. Ed. 2d 351 (1978), an exception exists where the denial of class certification is interdependent with the remainder of the appealed order, see In re Federal Skywalk Cases, 680 F.2d 1175, 1180 (8th Cir. 1982), cert. denied, --- U.S. ----, 103 S. Ct. 342, 74 L. Ed. 2d 383 (1983). Here, we view the orders appealed from as, in effect, one order that approves the Sharing Agreement and directs the parties to implement it, and we shall consider it as an integrated whole
The appellants assert that the District Court failed to comply with any of the statutory requirements regarding the contents of a reorganization plan, 11 U.S.C. § 1123; the preparation of disclosure statements regarding such a plan, 11 U.S.C. § 1125; the provisions for voting on the plan by all interested parties, 11 U.S.C. § 1126; the standards for the court's confirmation of the plan, 11 U.S.C. § 1129; and the appointment of a creditors' committee, 11 U.S.C. § 1102(a) (1)
For this reason, we reject the appellants' argument that the notice of the proposed settlement was deficient because it failed to advise the class members of the high likelihood of success on the constructive-trust claim. " [T]he notice may consist of a very general description of the proposed settlement, including a summary of the monetary or other benefits that the class would receive and an estimation of attorneys' fees and other expenses." Grunin, supra, 513 F.2d at 122. The notice sent in this case fully satisfied this standard. Nor, in view of the history of this litigation, do we believe that the time between the giving of notice and the hearing was unduly short. See id. at 121