Court Opinion

ID: 9443557
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:24:46.422787+00
Date Added: 2024-06-11T17:25:09.226115
License: Public Domain

CLARK, Circuit Judge
(dissenting).
I do not see why the principle of Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, 76 A.L.R. 1198, applying Bankruptcy Act § 70e, 11 U.S.C. § 110(e), is not directly in point and controlling. Of course we must apply bankruptcy law if there is any. Prudence Realization Corp. v. Geist, 316 U.S. 89, 62 S.Ct. 978, 86 L.Ed. 1293. The statutory provision appears to me to cover the matter in express terms; objections to its application here are along lines — “windfall,” unjust enrichment of certain creditors — similar to those overruled in the Moore case and following precedents; and the objective of equality of distribution without attempting fine differentiations of supposed equities among kinds and classes of creditors is equally strong. Hence I would apply the rule to require refund of the payment made in breach of fiduciary obligation, together with interest during the *642period it has been held. At the same time I think defendant should be restored to its position of creditor and receive its dividend in reorganization with other creditors.1
I am not sure that I understand all the objections to the application of Moore v. Bay relied on in the opinion. I take it, however, that they are three: (1) that the purpose of § 70e does not extend to transfers to avoid which a creditor must resort to a right acquired by virtue of a transaction between himself and the transferee, and not between himself and the bankrupt; (2) that the bondholders could not have avoided the payment when made in 1932 or at any time before the reorganization in 1940; and (3) that the trustee owed a duty only to the bondholders, not to the estate at large, and only for the proportion that they have supposedly lost.
For an understanding of the. first two points in particular, we must note the terms of the Act which, as amended in 1938, are somewhat more inclusive than the portions quoted in the opinion. Sub. (1) of 11 U.S.C. § 110(e) is as follows: “A transfer made or suffered or obligation incurred by a debtor adjudged a bankrupt under this title which, under any Federal or State law applicable thereto, is fraudulent as against or voidable for any other reason by any creditor of the debtor, having a claim provable under this title, shall be null and void as against the trustee of such debtor.” Sub. (2) goes on to state: “All property of the debtor affected by any such transfer shall be and remain a part of his assets and estate, discharged and released from such transfer and shall pass to, and every such transfer or obligation shall be avoided by, the trustee for the benefit of the estate.”
A use of the debtor’s property such as we find here, if it is to have any validity as against the debtor, must have been made in the exercise of some power which stems in the last analysis from the debtor. Here this is all the more apparent, for the debtor made the payments, however unwillingly, in part even before the loan from Chase was due. 196 F.2d at page 672. So there was at least an “obligation incurred by a debtor” in the words of the statute. And in view of the manifest objective of the legislation I can see no basis for reading in or adding to the statute such a restriction as is attempted in Point 1.
So as to Point 2, to say that the bondholders could not have avoided the payment from 1932 to 1940, but could have asked only for- security, seems to me fanciful. No authority is given; the precedents cited indeed look the other way. The view presented is contrary to first principles of trust law. Moreover, it conflicts with the salutary holding in our first decision herein. Either the payment was a violation of fiduciary obligations or it was not. If it was the former, as we have held, I know no basis upon which its .avoidance could be denied or the beneficiaries barred from remedies for the restoration of the trust. If later the threatened insolvency passes, that may lessen the impulse for remedial action, or possibly cut down the extent of the recovery; but it hardly changes the fact of the breach. Even when the lesser and partial remedy of security is conceded, a breach of duty and hence a case under the statute are admitted in effect. I therefore believe the statute to be fully applicable in letter and intent.
Point 3 seems to me so much the usual objection of transferees and obligees to *643the Moore v. Bay principle — and so regularly overruled, as the cases collected in 4 Collier on Bankruptcy 1526-1537, 14th Ed. 1942, show — that I think I can properly term it the anti-windfall argument. I do not see that our case differs substantially in favor of the transferee from that, say, of a conditional vendor or chattel mortgagee who has not properly recorded his conditional sale or chattel mortgage and finds he has lost the goods for the benefit of all creditors, including those who were in no wise affected by the sale. Nor does it differ from one who has received a preference and must return it in full, no matter what the status or equities of the creditors. For it was to avoid that morass of attempted unscramblement that the statute was designed. It hardly lies in the mouth of the transferee to raise the objection; indeed, those bondholders who may be deprived of a greater dividend or even payment in full might -better be heard in complaint of a rule which would so cut down their recovery. But a reorganization court has obviously greater powers to adjust equities between security holders than obtained in straight bankruptcy proceedings; and if this well worn argument against Moore v. Bay is perchance still thought to have some force in the latter, it should have much less here. In fact, when this case was first before us, we thought that recovery would be for the indenture bondholders under the priority given them as such, and so stated, Clarke v. Chase Nat. Bank of City of New York, 2 Cir., 137 F.2d 797, 801. Nor do I understand that the provision quoted above for recovery by the trustee “for the benefit of the estate” is so ironclad as to exclude from a plan of reorganization such priorities as would be natural to safeguard indenture bondholders. The fact is that of course distribution of the fund is not before us. In any event, how the distribution would be fitted into a plan of reorganization, or perhaps adjusted to the plan already approved, In re Associated Gas & Elec. Co., D.C.S.D.N.Y., 61 F.Supp. 11, affirmed 2 Cir., 149 F.2d 996, certiorari denied Elias v. Clarke, 326 U.S. 736, 66 S.Ct. 45, 90 L.Ed. 439, seems to me not a matter for the delinquent fiduciary to decide. So I submit with deference that this contention is not entitled to the substantial weight it appears to have been given in the opinion.
My belief that Moore v. Bay controls is ventured with greater assurance in view of the curious, not to say bizarre, effects of the rule actually adopted, viz., to estimate recovery by the amount of debenture bonds outstanding in relation to the amount of total outstanding indebtedness of the debtor. (Applying that ratio here, the parties compute the recovery as cut by three-fourths.) Why 1940, the date of reorganization, is made crucial, rather than some other date, such as 1932, the time of the transfer, is not at all clear to me. But passing that, it is surely an anomaly to have the amount of a fiduciary’s refund decreased by an increase in the debtor’s obligation. For obviously increasing the divisor is going to decrease the quotient. Had Chase had both sufficient prescience and bold spirit of piracy, it might well have felt impelled to take all the steps it could after the 1932 transaction to aid and abet Hopson in his wild financial transactions; for the more he piled up obligations on the debtor, the less would be the refund ultimately due from Chase.
The original decision herein finding liability, Dabney v. Chase Nat. Bank of City of New York, 2 Cir., 196 F.2d 668, represented in my view a healthy development, applying the normal public interpretation of “trustee” to the hitherto anomalous bond indenture trustee; it seemed a sound recognition of what the investing public was entitled to expect. The present decision, whittling down recovery to a fraction on principles far from clear cut and on ratios variable from case to case — inversely to the size of the financial failure — does much to falsify that original holding.

. 'Though the argument based upon Moore v. Bay receives only secondary discussion in the opinion, it was actually the trustee’s primary contention. For the sake of brevity and because I think this so controlling, I do not discuss alternative contentions. But since I reject the scaling down of the fiduciary’s obligation by the amount of the debtor’s indebtedness, I would reach the same result whether under the rule of equity receiverships, of state law, or of indenture trustee’s accountability under § 212, 11 U.S.C. § 612. McCandless v. Furlaud, 296 U.S. 140, 56 S.Ct. 41, 80 L.Ed. 121; Corbin, The Subsequent Bondholder and His Trustee, 51 Col.L.Rev. 813; In re Solar Mfg. Corp., 3 Cir., 200 F.2d 327. Under any theory of recovery, its amount should be measured by the same standard, namely, the extent of the fiduciary’s delinquency.