Legal Document

406 U.S. 416 92 Supreme Court Reporter 1678. 32 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 195 Mortimer M. CAPLIN, etc., Petitioner,v.The MARINE MIDLAND GRACE TRUST COMPANY OF NEW YORK. Number 70—220. Argued March 28, 1972. Decided May 22, Syllabus Petitioner, the trustee of Webb & Knapp, Inc., under Chapter X Bankruptcy Act, does not have standing to assert, on behalf holders debentures issued by claims misconduct an indenture trustee. Pp. 417—435. 439 Federal Reporter, 2nd 118, affirmed. Charles or Haw. Hawai‘i KFH45 A2 Miller, New York City, for petitioner. David Ferber, Washington, D.C., Securities and Exchange Commission. John W. Dickey, respondent. Mr. Justice MARSHALL delivered opinion Court. 1 The sole issue in this case is whether petitioner, reorganization has 52 Statutes-at-Large 883, 11 Code KF62 § 501 et seq., persons holding District Southern held that petitioner lacked requisite standing, Appeals Second Circuit affirmed en banc, with two judges dissenting, 118 (1971).1 We granted certiorari, 404 982, 443, 30 366 (1971), we now affirm decision Appeals. 2 * Knapp its numerous subsidiaries were engaged various real estate activities both Canada. In 1954, corporation executed respondent, Marine Midland Trust Company (Marine,) provided issuance 5% total amount $8,607,600. A critical part was promise neither it nor any company affiliated it2 would incur assume 'any indebtedness resulting from money borrowed purchase property interests . property' unless company's consolidated tangible assets, as defined indenture, equaled 200% certain liabilities, after giving effect contemplated purchase.3 By requiring maintain asset-liability ratio 2:1, sought protect debenture purchasers providing a cushion against losses might suffer ordinary course business. order demonstrate continuing compliance requirements covenanted file annual certificate stating (debtor) had defaulted responsibilities during preceding year.4 3 role trustee, undertook 'in default exercise such rights powers vested (the) Indenture, use same degree care skill their exercise, prudent man circumstances conduct his own affairs.'5 This undertaking qualified language permitted rely accuracy certificates reports absence bad faith.6 4 Commencing 1959, sustained substantial financial every year.7 Finally, 7, 1965, filed petition district court seeking involuntary seq. Pursuant 208 X, 608, Commission intervened 10, 1965.8 Marine's subsequently approved appointed 18, 1965. 5 With approval Court, exercised conferred upon him 567 extensive investigation affairs Knapp. His showed assets $21,538,621 liabilities $60,036,164, plus contingent tax $29,400,000. Included among 1954 principal $4,298,200 interest subsequent inception proceeding.9 6 led conclude either willfully negligently failed fulfill obligations indenture. Petitioner supported conclusion following allegations: 1964, Knapp's yearly 2:1 assetliability mandated fraudulent, because they based grossly overvalued appraisals property; 1958 did sufficient comply terms indenture; should known know inflated appraisals; violate engaging transactions impaired forbade, suffered great losses.10 7 Having obtained independent action recover out-standing damages alleged bad-faith failure compel also counterclaim proceeding which previously claim services rendered. proceeding, objection rendered, ground even if could obtain affirmative recovery bondholders, he at least raise improper reason why rendered be denied.11 moved accounting Marine. 8 dismiss counterclaim, strike opposed motion accounting. found no capacity Act motions dismiss. Viewing merely third vehicle holders, denied also. Only petitioner's left standing.12 appealed dismissal denial cross-appeal entirety. II 9 confronting us never before been presented It only rarely other courts, those rare occasions, caused most able jurists disagree. first time arose Clarke versus Chase National Bank, 137 797 (CA2 1943). Judge Augustus Hand wrote sue party bondholders. Learned disagreed dissented. lower courts controlling instant case. is, fact, raised here squarely presented.13 difficult one, and, point out later, one capable resolution explicit congressional action. Lacking specific legislative statement issue, must resolve best can examining nature proceedings, reorganization, way affect change role. 10 enacted 1938, stemmed comprehensive SEC study disclosed widespread abuses then-existing provisions business reorganizations. See Commission, Report Study Investigation Work, Activities, Personnel Functions Protective Reorganization Committees (1937—1940). gave birth year Indenture 1939, 53 1149, 15 77aaa discussed infra. enacting Congress protection public investors primarily mind. American Trailer Rentals Co., 379 594, 85 513, 13 510 (1965). 'The aims afford greater creditors stockholders judicial control over entire proceedings impartial expert administrative assistance corporate reorganizations through appointment disinterested active participation SEC.' Id., 604, S.Ct., 519. contradistinction bankruptcy where liquidation distribution goal, purposes rehabilitating reorganizing it. Ibid. are limited insolvent corporations but open solvent (asset-liability) sense unable meet mature. Key, 397 322, 329, 90 1049, 1053, 25 340 (1970); 530(1). 12 center statutory scheme. H.R.Rep.No.1409, 75th Cong., 1st Sess., 43, 44. Title gives broad powers: qualification— 14 '(1) shall, judge shall so direct, forthwith investigate acts, conduct, property, condition debtor, operation desirability continuance thereof, matter relevant formulation plan, report thereon judge; '(2) may, examine directors officers debtor witnesses concerning foregoing matters them; 16 '(3) facts ascertained pertaining fraud, misconduct, mismanagement irregularities, causes available estate; 17 '(5) earliest date practicable, prepare submit brief form manner may creditors, stockholders, trustees, designate; 18 '(6) give notice suggestions proposals plans, within therein named.' 19 587 expands these 20 'Where inconsistent chapter, qualification, rights, subject duties, section 72 title, authorized judge, additional receiver equity debtor.' 21 given set forth footnote.14 22 argues enough encompass suit who acted faith, has, therefore, violated 23 As pointed above, trust passed enacted. Prior enactment, trustees immunized themselves liability deliberate negligent writing exculpatory into Even cases proximate cause injury impotent indentures take generally L. Loss, Regulation 719—725 (2d ed. 1961). problem others specifically mentioned 77bbb establishing necessity regulation. 24 regulation takes many forms. 77eee requires whenever securities covered registration 1933, 48 74, 77a information about included statement. 77ggg provides when registered 1933 'qualified' legal sell securities. Standards eligibility disqualification established 77jjj, duties enumerated 77ooo.15 rise litigation pursuant 1939. alleging intentionally prevent violating clearly alleges violation 1939 legislation. 77ooo.16 But question remains proper corrective action.17 26 urges far better position than debt discover prosecute live up He points 567, supra, emphasizes possession records duty debtor's 'report estate.' Reference made, too, 77bbb(a)(1), states problems saw respect '(A) individual purpose protecting enforcing impracticable disproportionate expense taking action, (B) concerted common representatives selection impeded wide dispersion States, fact names addresses investors.'18 27 asserts will encourage vexatious unduly deplete resources reorganize. supports half proposition noting supervision intervention SEC. second finds support argument above already minimal burden prosecuting lawsuit great. 28 At blush, theory, adopted dissenters Appeals, seems reasonable. But, there three require rejected. 29 First, elaborate system controls nowhere scheme suggestion responsibility suing parties holders. language, indicates intent statute, 567(3), right, indeed imposes duty, fraud potential 'available assuming read quoted words present, authorizes believes third-party nothing enables collect owed estate. Nor anything 110, footnote 14, authority. task simply 'collect reduce estates (he trustee).' 75. statutes portion 'receiver relies McCandless Furlaud, 296 140, 56 41, 80 L.Ed. 121 (1935), Cardozo corporation, parties; made brought prior entering receivership.19 makes R. Clark, Law Practice Receivers 362, 619 (3d 1959). 31 brings argument. Nowhere argue make Indeed, conspicuous silence tacit admission made.20 Assuming going how much answer course, whatever cannot recoup corporation. Once recognized, wisdom F.2d, 800, becomes readily apparent: 'Each creditor, including debenture-holders, prove full claim, extent debenture-holder fails satisfy loss assert defendant enforce negative covenants.' 33 words, until along reasonable approximation losses, any. see precisely represent deciding worthwhile seek appears concede correct subrogation point. seem, truly affected Marine, assessment respective advantages disadvantages, litigation, theories litigation. 34 argument: i.e., actions bring themselves. very plain pre-empt suits They maintain, however, unlikely since reasonably expect vigorously all investors. still likely extremely doubtful agree seek, theory sue.21 Moreover, wins bound victory, proliferation seeks avoid then ensue. arise settlement.22 35 Rule Rules Civil Procedure, class actions, avoids some difficulties. surely powerful remedy holders.23 Some factors formerly deterred changed 77lll, example, lists turn regular intervals. Such request. Debenture advantage result statute make. addition, himself maintains counsel fees recoverable successful. Brief 20; cf. 77nnn. 36 Thus, showing On contrary, indication increased, complicated. III 37 For reasons mean unwise confer reorganization. signifies yet indicated scintilla intention do so, policy judiciary. 38 well decide fared badly years status quo preferable inviting new making changes system. Or, determine situated bringing so. event, trustee's exclusive, perhaps option having behalf. Any number alternatives available. questions regarding timing law context Whatever decision, 39 Accordingly, judgment 40 Judgment 41 DOUGLAS, whom BRENNAN, WHITE, BLACKMUN concur, dissenting. 42 respect, today's reflects misunderstanding important supposed perform. Though usually remained possession, effected basic putting charge. 43—44. Working direction necessary investigations business, 'and judge.' (emphasis added). indeed, charged 569 formulating plan.1 43 plan look forward discharge bankruptcy, rather overhaul capital structure, simplification it, need be, determination fair share each old receive what participation, any, granted. test ultimately apply 'fair equitable, feasible.' 574. equitable' derives receiverships former 77B X.2 stated House 'the (reorganization) required assemble salient fairness reorganization.' 43. 44 equitable,' apply, entail application absolute priority rule length Case Los Angeles Lumber Products 308 U.S., 106, 60 1, 84 followed Consolidated Rock Du Bois, 312 510, 61 675, 982. protects senior classes 'junior improperly participate too liberally treated therein.' 8. Unsecured paid cash retaining reorganized company, protected "on equitable terms, income bonds preferred stock," 117, And, said Bois case: 45 'If adequately compensated claims, material paid. So long compensatory treatment group shares whole enterprise basis, satisfied.' 530, 687. 46 face $4,298,200. amount. If assume, arguendo, merit fully responsible, security eliminated consideration plan. Or partial recovery, pro rata relative positions creditors. designed without final vis-a-vis informed value claim. 47 $21 million $60 million. Whether conditions leave know. announced today, alone applicable X. elimination reduction chance There opportunity investigation, pursuit prosecution settlement. authority just court. And steps, formulate submission Of protective committee representing them lead. written view happenstance. That 'focal point' inventory several claimants light payment rightfully due them.3 49 that, recovers subrogated leaving wholly unchanged. 50 complaint willful gross negligence. What merits we, intimate opinion. true, 77ooo immunity.4 51 Pepper Litton, 295, 307, 238, 245, 246, 281, passing allowance sits equity' cited fiduciary disallowed subordinated. 311, 312, 247. Surety Bethlehem Nat. 314 314, 317, 62 226, 228, 86 241, while surety 'a special kind secured creditor' right 'can availed alert discharging guilty inequitable conduct.' not, surety. general doctrine, follows Institute:5 person used obligation another lien another, unjustly enriched retention benefit thus conferred, entitled obligee lien-holder.' imaginable ever hold culpably responsible debentures, funds otherwise go innocent paying constitute unjust enrichment. 'who invokes doctrine come clean hands.' German Bank 148 573, 581, 702, 705, 564. 54 N Dec. Immigration Nationality Decisions Kaufman Hays, dissenting below, reverse judgment. separate opinions unreported, appendix prepared 58a—70a. heard banc panel determined inclined overrule placed almost exclusive reliance. 118. Those companies include return 1502. Section 1.1 consider affiliates chose June 3.6 (hereinafter referred Indenture). 3.11. 10.1(a). duty. 77ooo. 10.1(d). year, although show gain books 1961 attributable write-up owned subsidiary 50% stock. throughout agency 'an unnamed respondent Court.' Committee Independent Stockholders TMT Ferry, Incorporated Anderson, 390 414, 420 n. 3, 88 1157, 1161, (1968). When referring arguments assumes, stated, arguments. difference between originally represents repaid. These allegations findings courts. Because occasion validity allegations. unpaid debentures. differs respect: attempt preserve remaining whereas caims increase Although ruling denying objection, review affirming issue. us, offer propriety courts' ruling. Prudence-Bonds Corporation State Street 202 555 (CA2), cert. denied, 346 835, 74 47, 98 357 (1953), overruled 1943), sub silentio. decided contrary re Solar Manufacturing Corp., 200 327 (CA3 1952), nom. McGirl, 345 940, 73 831, 97 1366 (1953). majority distinguishable, correct. intend become enmeshed controversy indicate existence. 110 title 'property': '(a) bankrupt successor successors, filing initiating kinds wherever located (1) documents relating (2) patents, patent copyrights, trade-marks, applications therefor (3) benefit, solely person; (4) transferred creditors; (5) means levied sold process him, seized, impounded, sequestered (6) arising contracts, usury, unlawful detention (7) remainders, executory devises limitations, entry broken, possibilities reverter, like non-assignable which, six months thereafter, assignable acquire estates; (8) assignee assignment constituted act deemed agent summary jurisdiction court.' supervisory sections Act. See, e.g., §§ 77ddd(c), (d), (e); (a), (c); 77ggg; 77sss; 77ttt; 77uuu. 77hhh consolidation 1934, 881, 78a Public Utility Holding 1935, 838, 79 While exculpate noncompliance good faith thereof. 77vvv seem federal jurisdiction. inferred proper, 123 5, Since brought, lacks them, question. noted August Procedure old. December 20, 1937, became effective September 16, 647. comparatively, recent phenomenon damage tremendously helpful early days. Moore, Procedure: Problems Raised Preliminary Draft, Geo.L.J. 551, 570—576 (1937); Kalven Rosenfield, Contemporary Function Class Suit, U.Chi.L.Rev. 684 (1941). efficacious especially clear split 5—4 Old Dominion Copper Mining Smelting Lewisohn, 210 206, 634, 1025 (1908) (Holmes, J.), binding Furlaud. controversial promoter-director-stockholders. possible mention conceivable Not sued Kanpp charging waste. 5—6. Certain settlements apparently actions. Respondent 18. [430] described situation pari delicto. suffered, fault more arise, thought required, 122. correct, sue, Chief Friendly below: 'It instance Trustee superficial substantial—if, achieve complete off stockholders. pleasant prospect speedily evaporates play. subrogation, substituted claimant. Cf. ALI, Restatement Security 141 recovered lesser amount, provable full, division proceeds dependent results affected.' incorrect case, Three private state 9. violations laws. differ supra. settling officers, conflict times unfavorable One obviously developing, selected cases. appear way. regret placing confidence 616(2), 'may deal settlement adjustment belonging 616(13). Despite provisions, urges, effect, settle bondholders Reply 7—8. text, pursue caught horns dilemma: asserting definition broadly allow treat sufficiently related holders; 616 permit bind ways, inability whose sues undercuts utility suing. members class, lengthy expensive find serving representative, forced oppose figure. justify settlement, theoretically join opposing sides transaction. Again circumstances. Obviously, surrogate position. provides: fix effected, hearing objections amendments plans proposed creditor stockholder.' 'fixed principle' junior roots Northern Pacific Boyd, 228 482, 554, 57 931. Boyd althogh allowed company. proceeded venture continued latter received belonged ruled 'if purposely unintentionally single paid, superior subordinate company.' 504, 560. principle came 'absolute rule.' Bonbright Bergerman, Two Rival Theories Priority Rights Holders Corporate Reorganization, Col.L.Rev. 127 (1928). incorporated receiverships. Kansas City Guardian 240 166, 334, 579; Terminal Central Union 271 445, 549, 70 1028. Later, 116, absolute-priority gloss phrase 77B(f)(1) newly statute. 919. concluded intended carried forward. 527, 685, reaffirmed further requirement extended insolvent. Harbor Properties, Manufacturers 317 78, 85—87, 63 93, 97—98, 87 64. reflect, firmly entrenched law. E.g., 441, 1171, 1; 327, 1052, (see concurring opinion, 333). reach restricted applied railroad 77 Ecker Western 318 448, 484, 692, 712, 892; Group Institutional Investors Chicago, Milwaukee, St. KF135 P2 P.R. 523, 535, 571, 727, 735, 752, 959; Reconstruction Finance Denver R.G.W.R. 328 495, 66 1282, 1400, dissolutions Otis SEC, 323 624, 65 483, 488, 89 511 (but concluding faithfully followed, 648—649, 494—495); Central-Illinois 338 96, 130, 69 1377, 1395, 93 1836, IX Kelley Everglades Drainage District, 319 415, 420—421, 1141, 1144—1145, 1485 XI provide arrangement, Realty Imp. 310 434, 452, 456—458, 1044, 1051, 1053—1054, 1293. General Stores Shlensky, 350 462, 466, 76 516, 100 550. Hearings H.R. 8406 Subcommittee Senate Judiciary, 126. truth statements correctness faith' (15 77ooo(a)(1)), exempt 'for act, misconduct' 77ooo(d)), save errors faith. Restitution 162 (1937).

Classification Label: 7