Court Opinion

ID: 9424888
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:13:01.369593+00
Date Added: 2024-06-11T17:22:52.593058
License: Public Domain

Mr. Justice Douglas,
with whom Mr. Justice Brennan, Mr. Justice White, and Mr. Justice Blackmun concur, dissenting.
With all respect, today’s decision reflects a misunderstanding of the important role which a reorganization trustee under Chapter X of the Bankruptcy Act, 11 U. S. C. § 567, is supposed to perform. Though prior to Chapter X the debtor had usually remained in possession, Chapter X effected a basic change by putting a disinterested trustee in charge. H. R. Rep. No. 1409, 75th Cong., 1st Sess., 43-44. Working under the direction of the Court, the reorganization trustee was to make the necessary investigations concerning the debtor, the operation of its business, and the desirability of its continuance “and any other matter relevant to the proceeding or to the formulation of a plan, and report thereon to the judge.” 11 U. S. C. §567 (emphasis added). The reorganization trustee is, indeed, charged by 11 U. S. C. § 569 with the responsibility of formulating a plan.1
A Chapter X plan does not look forward to a discharge of the debtor as does ordinary bankruptcy, but rather to an overhaul of its capital structure, a simplification of it, if need be, and the determination of the *436fair share which each class of old creditors shall receive and what participation, if any, the old stockholders may be granted. The test which the court must ultimately apply under Chapter X is whether a plan is “fair and equitable, and feasible.” 11 U. S. C. § 574. The test of “fair and equitable” derives from the old equity re-ceiverships and was adopted in former § 77B of the Bankruptcy Act and under Chapter X.2 As stated in the *437House Report “the [reorganization] trustee is required to assemble the salient facts necessary for a determination of the fairness and equity of a plan of reorganization.” H. R. Rep. No. 1409, 75th Cong., 1st Sess., 43.
The requirements of “fair and equitable,” which the court must apply, entail the application of the absolute priority rule which we discussed at length in Case v. Los Angeles Lumber Co., 308 U. S. 106, and which was followed in Consolidated Bock Co. v. Du Bois, 312 U. S. 510. It not only gives creditors full priority over stockholders, but protects senior classes of creditors against the claim that “junior interests were improperly permitted to participate in a plan or were too liberally treated therein.” 308 U. S., at 118. Unsecured creditors need not be paid in cash as a condition of stockholders retaining an interest in the reorganized company, for they may be protected by the issuance “ 'on equitable terms, of income bonds or preferred stock.’ ” Id., at 117.
*438And, as we said in the Du Bois case:
“If the creditors are adequately compensated for the loss of their prior claims, it is not material out of what assets they are paid. So long as they receive full compensatory treatment and so long as each group shares in the securities of the whole enterprise on an equitable basis, the requirements of 'fair and equitable’ are satisfied.” 312 U. S., at 530.
The face amount of the debentures in litigation here was $4,298,200. The damages sought against the indenture trustee are in the same amount. If we assume, arguendo, that there is merit in the cause of action and that the indenture trustee is fully responsible, one entire class of security holders is eliminated from any necessary consideration in the plan. Or if there is only partial recovery, there is a pro rata change in the relative positions of the various classes of creditors. A plan cannot be designed without a final determination of the status of the debenture holders vis-á-vis the indenture trustee, or at least an informed judgment concerning the value of that claim.
It is said that the assets of the debtor were some $21 million and the liabilities some $60 million. Whether conditions have changed so as to leave some equity for the old stockholders, we do not know. The rule announced by the Court today, however, is not for this case alone but is applicable to all reorganizations under Chapter X. In some cases the elimination of one entire class of creditors or a pro rata reduction in their claims would give stockholders a chance to participate in the plan. There is no opportunity to make that determination without investigation, without a pursuit of claims, and without their prosecution or settlement. The reorganization trustee has full authority to do just that under the direction of the court. And unless he can take those *439steps, he will not be able to formulate a plan of reorganization for submission to the court.
Of course, debenture holders or a protective committee representing them may in some cases take the lead. But Chapter X was written with the view that such matters should not be left to happenstance. That is why the reorganization trustee was made the “focal point” for taking an inventory of assets available to the several claimants and providing what plan would be fair and equitable in light of the security of some claimants or the payment of claims rightfully due them.3
There is, with all respect, no merit in the argument that, if the reorganization trustee recovers against the indenture trustee on behalf of the debenture holders, the indenture trustee will be subrogated to the debenture holders, leaving the total claims affected by the plan wholly unchanged.
The complaint against the indenture trustee charges willful misconduct or gross negligence. What the merits may be we, of course, do not know and intimate no opinion. But, if true, the Trust Indenture Act of 1939, 15 U. S. C. § 77ooo, gives no immunity.4
We said in Pepper v. Litton, 308 U. S. 295, 307, that “the bankruptcy court in passing on allowance of claims sits as a court of equity” and we cited the cases showing that claimants in a fiduciary position may have their claims either wholly disallowed or subordinated. Id., at 311, 312. As stated in American Surety Co. v. Bethle*440hem Bank, 314 U. S. 314, 317, while the surety is “a special kind of secured creditor” it has a right that “can be availed of only by a surety alert in discharging its duty . . . and one not guilty of inequitable conduct.” The indenture trustee is not, of course, a surety. It would have to seek subrogation under the general equitable doctrine, stated as follows by the American Law Institute: 5
“Where property of one person is used in discharging an obligation owed by another or a lien upon the property of another, under such circumstances that the other would be unjustly enriched by the retention of the benefit thus conferred, the former is entitled to be subrogated to the position of the obligee or lien-holder.”
It is not imaginable that any court would ever hold that an indenture trustee, found culpably responsible for the default on debentures, would be subrogated with respect to funds which otherwise would go to innocent creditors or stockholders on the ground that paying money to them rather than to it would constitute unjust enrichment. A person “who invokes the doctrine of subrogation must come into court with clean hands.” German Bank v. United States, 148 U. S. 573, 581.
I agree with Judge Kaufman and Judge Hays, dissenting below, and would reverse this judgment.

 11 U. S. C. § 569 provides:
“Where a trustee has been appointed the judge shall fix a time within which the trustee shall prepare and file a plan, or a report of his reasons why a plan cannot be effected, and shall fix a subsequent time for a hearing on such plan or report and for the consideration of any objections which may be made or of such amendments or plans as may be proposed by the debtor or by any creditor or stockholder.”

 The “fixed principle” that senior interests must be made whole before junior interests may participate in a reorganization has its roots in Northern Pacific R. Co. v. Boyd, 228 U. S. 482. In that case Boyd was a general and unpaid creditor of the old corporation. In a reorganization Boyd was not fully compensated although the old stockholders were allowed to participate in the new company. He proceeded against the assets of the new venture on the ground that since the old stockholders continued in the business the latter had received property which belonged to the creditors. This Court ruled for Boyd and said “if purposely or unintentionally a single creditor was not paid, or provided for in the reorganization, he could assert his superior rights against the subordinate interests of the old stockholders in the property transferred to the new company.” Id., at 504. This principle came to be known as the “absolute priority rule.” See Bonbright & Bergerman, Two Rival Theories of Priority Rights of Security Holders in a Corporate Reorganization, 28 Col. L. Rev. 127 (1928). The rule was incorporated into equity receiverships. Kansas City Southern R. Co. v. Guardian Trust Co., 240 U. S. 166; Kansas City Terminal R. Co. v. Central Union Trust Co., 271 U. S. 445. Later, in Case v. Los Angeles Lumber Co., 308 U. S. 106, 116, we held that the absolute-priority rule was part of the gloss which the case law had placed upon the phrase “fair and equitable,” language which had been used in § 77B (f)(1) of the newly enacted § 77B bankruptcy reorganization statute. 48 Stat. 919. We concluded that Congress had intended that the Boyd rule be carried forward. Consolidated Rock Co. v. Du Bois, 312 U. S. 510, 527, reaffirmed this holding and further held that the requirement of absolute priority extended to cases where the debtor was solvent as well as those where the debtor was insolvent. Later, we made clear that the Boyd requirement obtained under Chapter X. Marine Harbor Properties, Inc. v. Manufacturers Trust Co., 317 U. S. 78, 85-87. As recent cases reflect, the absolute-priority doc*437trine has been continued and is firmly entrenched in Chapter X law. E. g., Protective Committee v. Anderson, 390 U. S. 414, 441; United States v. Key, 397 U. S. 322, 327 (see also concurring opinion, at 333). The reach of that doctrine, however, has not been restricted to Chapter X proceedings but has also been applied to railroad reorganizations under § 77 of the Bankruptcy Act, Ecker v. Western Pacific B. Co., 318 U. S. 448, 484; Group of Investors v. Milwaukee R. Co., 318 U. S. 523, 535, 571; Reconstruction Finance Corp. v. Denver & R. G. W. R. Co., 328 U. S. 495; to dissolutions under the Public Utility Holding Company Act of 1935, 49 Stat. 838, Otis & Co. v. SEC, 323 U. S. 624, 634 (but see dissenting opinion concluding that the rule had not been faithfully followed, at 648-649) ; SEC v. Central-Illinois Corp., 338 U. S. 96, 130; to Chapter IX bankruptcy proceedings, Kelley v. Everglades District, 319 U. S. 415, 420-421, n. 1; and to affirm a dismissal of a Chapter XI petition on the ground that a Chapter X reorganization would provide more protection for creditors than a Chapter XI arrangement, SEC v. U. S. Realty Co., 310 U. S. 434, 452, 456-458. And see General Stores Corp. v. Shlensky, 350 U. S. 462, 466.

 See Hearings on H. R. 8406 before a Subcommittee of the Senate Committee on the Judiciary, 75th Cong., 2d Sess., 126.

 While the indenture trustee may rely on certificates or opinions concerning the truth of statements and the correctness of opinions “in the absence of bad faith” (15 U. S. C. § 77ooo (a) (1)), it is not exempt from liability “for its own negligent action, its own negligent failure to act, or its own willful misconduct” (15 U. S. C. § 77ooo (d)), save for errors in judgment made in good faith. Ibid.

 Restatement of Restitution § 162 (1937).