Court Opinion

ID: 8884909
Source: CourtListenerOpinion
Date Created: 2022-11-26 21:35:40.701096+00
Date Added: 2024-06-11T17:06:51.967829
License: Public Domain

IRVING R. KAUFMAN, Circuit Judge
(with whom HAYS, Circuit Judge, concurs), dissenting in part:
I see no justification for continued adherence to the long since eroded rule announced over Judge Learned Hand’s vigorous dissent in Clarke v. Chase Nat’l Bank, 137 F.2d 797 (2 Cir. 1943). I *125would permit Caplin to assert his counter-claim and maintain the plenary action.
Indeed, Judge Hand himself in effect announced the demise of the Clarke rule in Prudence-Bonds Corp. v. State Street Trust Co., 202 F.2d 555 (2d Cir. 1953), without saying so expressly. The plaintiff in Prudence-Bonds, like Caplin, sought redress on behalf of bondholders for the alleged default by the trustee of a bond indenture. The reorganized corporation, successor to the reorganization trustee and proceeding pursuant to an order of the bankruptcy court, alleged that the indenture trustee had negligently failed to demand payment by a guarantor of a mortgage pledged to the indenture trustee as security for the bonds, following the mortgagee’s default. Although at the time of the default and for a period thereafter the guarantor was solvent and presumably could have made good on its guarantee, the guarantor’s insolvency followed close upon that of the debtor. Learned Hand, joined by Chief Judge Swan and Judge Frank, found that the broad authority of the reorganization court to implement a reorganization plan furnished ample authority for the newly reorganized corporation to assert before the bankruptcy court the liability of the indenture trustee “to the bondholders for any loss that resulted” from that trustee’s alleged breach. See 11 U.S.C. §§ 621-629.
In its brief on appeal, Marine attempted to distinguish Prudence-Bonds in several respects, but each is inconsequential. The relevance of the assertion that Marine successfully opposed Caplin’s application for an accounting by Marine or that Marine is not now seeking a release as trustee, escapes me altogether. Such considerations would seem to bear more on jurisdiction than standing. And the claim that the bondholders’ interests here are unsecured, unlike those in Prudence-Bonds, is also of no moment. Moreover, I would not attribute to Congress the perverse purpose of permitting a bankruptcy court to authorize a corporation already reorganized to assert bondholders’ claims against the indenture trustee, as in Prudence-Bonds, while denying it the power to dispose of those claims in more orderly fashion by permitting the trustee to raise them before the reorganization plan has jelled.
The majority concedes that Prudence-Bonds is indistinguishable in any of these respects, but suggests that it may be explained away on yet another ground. The opinion tells us that a Chapter X trustee may proceed against an indenture trustee for failure to enforce a guaranty by a third party that secures the trust res, as in Prudence-Bonds, but not for failure to enforce a promise by the debtor himself contained in the trust indenture, as here, which also protects and secures the trust res. This anomalous result is said to be forced upon us because of language in Learned Hand’s Prudence-Bonds opinion having nothing to do with that court’s discussion of the standing problem.
But when a hypothesis as to a law’s meaning is seen to yield such awkward conclusions, it is perhaps better to reexamine the hypothesis than to ascribe to Congress an intent to fashion so irrational a design. In this instance, the pressure to ascribe such an intent is very slight indeed. For in purporting to set forth the reasoning of the Prudence-Bonds court with respect to the standing problem, 202 F.2d 555 at 560, the majority relies entirely on dictum which occurs in the court’s later analysis of the merits of the successor corporation’s action against the trustee. 202 F.2d at 561. The finding of standing in Prudence-Bonds is not premised at all on this dictum, but rather “of the broad imple-mentary powers of a judge when a plan is confirmed” and specifically on an order of the reorganization court permitting the new corporation to pursue “any objections” (emphasis added) to the indenture trustee’s accounts “on its own behalf and on behalf of” the bondholders. There is no basis in the Prudence-Bonds opinion for limiting this language, which clearly would comprehend such an action as Caplin’s, by transposing into *126the court’s discussion of standing later dictum intended to bear — and even then incidentally and by way of speculation and musing — only on the merits of the new corporation’s action, and not on its right to bring it.
In distinguishing Prudence-Bonds the majority is compelled to rely on dictum in the opinion irrelevant to the question presently before this court. But, we can understand this, for otherwise the majority would be required to show in detail why there should have been standing in Prudence-Bonds under the rationales that it advances to support its decision today. My brothers rightly conclude, and no one has asserted otherwise, that Caplin’s claim against Marine could not “by the remotest stretch of language or even of imagination” be considered an action to “collect and reduce to money the property of the [estate] for which” Caplin is trustee, citing Section 47 of the Bankruptcy Act. But it requires no lesser feat of linguistic gyration to conclude that the action in Prudence-Bonds was such an action. The action in Prudence-Bonds was one for an accounting for the loss to the bondholders, on behalf of the bondholders alone, that resulted from the indenture trustee’s breach of a negative covenant, as here. It was not in any sense an action for restoration of the trust fund or the debtor’s property (unless Caplin’s action may also be so described). Indeed Judge L. Hand specifically observed that “the breach was at most a failure properly to protect a part of the res” — which is precisely the situation here — “and not a ‘surrender or release’ ” of the res. 202 F.2d at 559.
This is not the end of the majority’s difficulties with Prudence-Bonds. My brothers go to great lengths to show— wrongly, I believe — that “other creditors or stockholders would not be affected” by Caplin’s action in this case. But the reorganization in Prudence-Bonds had already been effected and was not likely to be altered retrospectively. Even had the suit been brought before a plan had been approved, the recovery would have inured to the benefit of no one but the bondholders, as is the case here.
There is a more fundamental answer, however, to the argument that only one class of creditors will be affected if Cap-lin recovers. Although the bondholders’ recovery will swell directly only the purses of the bondholders, the majority ignores the central consideration that certainty as to the bondholders’ rights against the indenture trustee cannot fail to affect the views of the interested parties and the court in passing on the fairness of the reorganization plan. 11 U.S. C. § 621(2). The majority thus seems to misconstrue the true scope and nature of a reorganization proceeding. The process of reorganizing is not performed merely by a nice, sharp, precise and mathematical apportionment of a debt- or’s estate according to fixed formulas. Rather, the objective is carried out through a process of negotiation, and some give-and-take, in an attempt to adjust equitably and with sensitivity to the nuances of the individual case the rights of competing interested parties. As Judge L. Hand argued persuasively in dissenting from the decision in Clarke, the reorganization court has jurisdiction over a case such as this as part of its obligation to “adjust the mutual rights of the debtor’s creditors as between themselves.” 137 F.2d at 802. I see no reason for denying to the reorganization court, as the majority does, the power to discharge this obligation here or properly to perform its duty to adjudge the equitableness of a proposed reorganization plan.
This latter consideration is particularly relevant to this case, where it appears that the indenture trustee may be implicated in the causes for Webb & Knapp’s bankruptcy. As Judge Hand put it, “the trustee should have prevented the debtor from siphoning its assets away from its creditors — the bondholders along with the other general creditors. * * * The loss was * * * of the debtor’s assets; the remedy will be in their restoration; I do not under*127stand how that can be alien to a reorganization.” 137 F.2d at 802.
Thus, the parade of horribles which my brothers assert would follow if Cap-lin were allowed to bring this claim— including virtually the confiscation of property of parties with no semblance of due process — is a phantasm. We are concerned here only with the standing of a trustee in reorganization to assert the claims of creditors, not to cancel them, where the reorganization trustee asserts that creditors have been damaged along with all other parties to the reorganization by the indenture trustee’s negligent failure to protect the debtor’s assets. It is a very narrow proposition that the majority rejects, not an infinitely expandable one. By rejecting it, the majority retreats from this court’s previously declared commitment to the flexible approach announced in Prudence-Bonds.
Moreover, the view of the majority appears significantly narrower than that of the Clarke majority. That court was unwilling to constrict itself to the narrow “property” analysis advanced by the majority, but suggested instead that the indenture trustee might have standing if “the claims for breach of the covenants [were] any part of the property of the bankrupt or would affect the plan of reorganization.” (Emphasis added.) 137 F.2d at 800. Immediately following this sentence, the Clarke court launched upon an extended discussion of the question whether the claim would affect the plan after which it appended, almost as an afterthought, the observation that “Moreover the trustee * * * has no title to the claims embraced in the first and third counts * * Although I believe that the Clarke majority was in error to hold that the claim would not affect the plan, its analysis was considerably broader than that adopted by my brothers.
Finally, the result today ill serves two reforms central to the scheme of the Chandler Act: to promote the collection and dissemination of all information relevant to the debtor and its affairs and to involve the Securities and Exchange Commission in complex reorganization proceedings as an advisor or friend of the court, a role it has assumed as a party to this appeal, in urging us to permit Caplin to pursue his claims. See H. Report No. 1409 on H.R. 8046, 75th Cong., 1st Sess., pp. 47-48 (1937).
The reorganization trustee is empowered to undertake a comprehensive investigation into the history and financial condition of the debtor by 11 U.S.C. § 567.' To compel the bondholders in these circumstances to proceed individually or in a separate class action, would only give rise to a massive redundancy of fact-finding. To restate the point somewhat more positively, a fair adjudication of the issue between the bondholders and Marine will be promoted if the information available to the trustee is efficiently brought to bear in that dispute and revealed to the court.1
Scrutiny or active participation by the SEC is provided for by numerous provisions of Chapter X (11 U.S.C. §§ 561, 567(5), 571-574, 590, 608 622). On few issues is that agency’s expertise more relevant than in a ease such as this, involving the adjudication of rights and duties of a trustee functioning under the Trust Indenture Act of 1939, 15 U.S.C. § 77aaa et seq. This expertise will be available in a reorganization proceeding but ordinarily not in individual or class action bondholders’ suits.
In short, today’s decision not only retreats from past precedent but is contrary to the purposes which motivated Congress to enact the Chandler Act.

. Tlie manifest inconvenience of the Clarke rule is magnified in a case where, as here, the indenture trustee filed a claim against the estate of the debtor for his services as trustee. A determination of the merits of Caplin’s plenary action and counterclaim will not require the bankruptcy court to investigate any matters that it would not have to pass upon in adjudicating Caplin’s objection to Marine’s claim.