Court Opinion

ID: 9638216
Source: CourtListenerOpinion
Date Created: 2023-08-22 15:37:42.126894+00
Date Added: 2024-06-11T18:10:04.743939
License: Public Domain

L. HAND, Circuit Judge
(dissenting in part).
I need consider only the indenture of 1929, because that of 1928 is in all relevant particulars the same. Article VI, § 2, provides that, whenever the debtor shall *802violate any of its promises the trustee may, and — when the right proportion of bondholders ask it to do so — must, declare a default; § 3 provides that when properly indemnified it must “proceed to protect and enforce its rights and the rights of the holders”; § 4 provides that “all rights of action under this Indenture * * * may be enforced by the Trustee * * * and any such suit * * * instituted by the Trustee shall be brought in its name as Trustee.” In the face of these provisions I do not see how it can be questioned that the trustee held some rights of action in trust for the bondholders; or that they were a “res.” My brothers agree that it is irrelevant whether the debtor retains any interest in the res; indeed, they quote from one of our decisions in which the debtor had actually conveyed away all its equity. In re Mortgage Securities Corp., 2 Cir., 75 F.2d 261. That means that, once the court gets jurisdiction of a reorganization, it will adjust the mutual rights of the debt- or’s creditors as between themselves. If we assume — as I shall try to show that we must — that the trustee had some positive duty, as a trustee, to prevent the violation of the covenants in the indenture, the case is on all fours with those cited in my brothers' opinion, in which we have held that it is a proper part of a reorganization to compel a trustee to restore the fund to that amount which it would have had, had he not been derelict in his duties. On that theory the trustee should have prevented the debtor from siphoning its assets away from its creditors — the bondholders along with the other general creditors. In what way does that differ from allowing a debt- or, in violation of the mortgage, to substitute improper collateral? What difference can it make that the beneficiaries of the covenants here in question were only a part of those — the creditors at large— who were aggrieved by the debtor’s conduct? The others had not provided themselves with a guardian over their interests, and have no one whom they can call to account. Although the measure of the guardian’s liability is that of his wards’ losses, what bearing has it that there were others who have no claim to restoration? The loss was nevertheless of the debtor’s assets; the remedy will be in their restoration; I do not understand how that can be alien to a reorganization. There is nothing in common between such a recovery and a right of action against a trustee for deceit on the sale of bonds. In re 1775 Broadway Corp., 2 Cir., 79 F.2d 108. Or between such a recovery and an action against a guarantor of the debtor. In re Nine North Church Street, Inc., 2 Cir., 82 F.2d 186, 187.
As to the case against the trustee upon the merits, I agree that ordinarily a trustee does not default in its duties by mere inaction; certainly not when it has protected itself by such covenants as these. Article VI, § 12 and Article IX, § 1, are in the standard pattern of immunity; I do not question that they protect a trustee in most cases; but there can be such open and brazen breaches of the obligor’s duty that mere connivance becomes active concert. I do not say that a trustee is charged with surveillance of the debtor, but I do say that he may not strip himself of all his fiduciary duties after peppering a whole document with fiduciary verbiage. Complaisance after notice may bring upon him a just charge of “gross negligence” or “bad faith”; and that will serve. Restatement of Trusts, § 222(2); Comment (b) ; Scott on Trusts, § 222.3. See also § 125, N.Y. Decedent Estate Law, Consol. Laws, c. 13. The allegations of this complaint go far enough, I believe, to meet this confessedly vague description of a confessedly vague standard of residual duty. Article 26 alleges that the defendant was advised by its lawyers that a “prior variant,” “differing only in non-essential details” from the debt- or’s scheme of draining off its assets, was “illegal and that it was the duty of defendant as trustee to attempt to procure an injunction to prevent its accomplishment.” That I think should answer on a motion like this. If the plaintiff can make good such allegations, I would hold the defendant liable in this proceeding for all losses which can be traced to its culpable indifference.
As to the fifth count, I am not clear that my brothers mean to say anything about the merits. If so, I do not join with them; I would merely dismiss the appeal.