Petitioner, the trustee of Webb & Knapp, Inc., under Chapter
X of the Bankruptcy Act, does not have standing to assert, on
behalf of holder of debentures issued by Webb & Knapp, claims
of misconduct by an indenture trustee. Pp.
406 U. S.
417-435.
439 F.2d 118, affirmed.
MARSHALL, J., delivered the opinion of the Court, in which
BURGER, C.J., and STEWART, POWELL, and REHNQUIST, JJ., joined.
DOUGLAS, J., filed a dissenting opinion, in which BRENNAN, WHITE,
and BLACKMUN, JJ., joined,
post, p.
406 U. S.
435.
MR. JUSTICE MARSHALL delivered the opinion of the Court.
The sole issue in this case is whether petitioner, the trustee
in reorganization of Webb & Knapp, Inc., has standing under
Chapter X of the Bankruptcy Act, 52 Stat. 883, 11 U.S.C. § 501
et seq., to assert, on behalf of persons holding
debentures issued by Webb & Knapp, claims of misconduct by an
indenture trustee. The United States District Court for the
Southern District
Page 406 U. S. 417
of New York held that petitioner lacked the requisite standing,
and the United States Court of Appeals for the Second Circuit
affirmed en banc, with two judges dissenting, 439 F.2d 118 (1971).
[
Footnote 1] We granted
certiorari, 404 U.S. 982 (1971), and we now affirm the decision of
the Court of Appeals.
I
Webb & Knapp and its numerous subsidiaries were engaged in
various real estate activities in both the United States and
Canada. In 1954, the corporation executed an indenture with
respondent, the Marine Midland Trust Company of New York (Marine),
that provided for the issuance by Webb & Knapp of 5% debentures
in the total amount of $8,607,600. A critical part of the indenture
was the promise by Webb & Knapp that neither it nor any company
affiliated with it [
Footnote 2]
would incur or assume
"any indebtedness resulting from money borrowed or from the
purchase of real property or interests in real property . . . or
purchase any real property or interests in real property"
unless the company's consolidated tangible assets, as defined in
the indenture, equaled 200% of certain liabilities, after giving
effect to the contemplated indebtedness or purchase. [
Footnote 3]
Page 406 U. S. 418
By requiring the company to maintain an asset-liability ratio of
2:1, the indenture sought to protect debenture purchasers by
providing a cushion against any losses that the company might
suffer in the ordinary course of business. In order to demonstrate
continuing compliance with the requirements of the indenture, Webb
& Knapp covenanted to file an annual certificate with Marine
stating whether the corporation (debtor) had defaulted on any of
its responsibilities under the indenture during the preceding year.
[
Footnote 4]
In its role as indenture trustee, Marine undertook
"in case of default . . . to exercise such of the rights and
powers vested in it by [the] Indenture, and to use the same degree
of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own
affairs. [
Footnote 5]"
This undertaking was qualified by language in the indenture that
permitted the trustee to rely on the accuracy of certificates or
reports of Webb & Knapp, in the absence of bad faith. [
Footnote 6]
Commencing in 1959, Webb & Knapp sustained substantial
financial losses in every year. [
Footnote 7] Finally, on May 7, 1965, Marine filed a
petition in district court seeking the involuntary reorganization
of Webb & Knapp under Chapter X of the Bankruptcy Act, 11
U.S.C. § 501
et seq. Pursuant to § 208 of Chapter X, 11
U.S.C. § 608, the Securities and Exchange Commission intervened
Page 406 U. S. 419
on May 10, 1965. [
Footnote
8] Marine's petition was subsequently approved and petitioner
was appointed trustee in reorganization on May 18, 1965.
With the approval of the District Court, petitioner exercised
the powers conferred upon him by 11 U.S.C. § 567 and undertook an
extensive investigation of the financial affairs of Webb &
Knapp. His investigation showed that the company had total assets
of $21,538,621 and total liabilities of $60,036,164, plus
contingent tax liabilities of $29,400,000. Included among the
liabilities were the 1954 debentures in the principal amount of
$4,298,200 plus interest subsequent to the inception of the
reorganization proceeding. [
Footnote 9]
The investigation led petitioner to conclude that Marine had
either willfully or negligently failed to fulfill its obligations
under the indenture. Petitioner supported his conclusion with the
following allegations: that from 1954 to 1964, Webb & Knapp's
yearly certificates of compliance with the 2:1 asset-liability
ratio mandated by the indenture were fraudulent because they were
based on grossly overvalued appraisals of real estate property;
that from 1958 to 1964, Webb & Knapp did not have sufficient
assets to comply with the terms of the indenture; that Marine
should have known or did know of the inflated appraisals; and that,
because Marine permitted Webb & Knapp to violate the indenture
by engaging in transactions that its impaired asset-liability
Page 406 U. S. 420
ratio forbade, Webb & Knapp suffered great financial losses.
[
Footnote 10]
Having obtained the approval of the District Court, petitioner
filed an independent action on behalf of the debenture holders
against Marine seeking to recover the principal amount of the
outstanding debentures as damages for Marine's alleged bad faith
failure to compel compliance with the terms of the indenture by
Webb & Knapp. Petitioner also filed a counterclaim in the same
amount against Marine in the reorganization proceeding in which
Marine had previously filed a claim for services rendered. In the
reorganization proceeding, petitioner also filed an objection to
the claim for services rendered, on the ground that, even if
petitioner could not obtain an affirmative recovery against Marine
on behalf of the bondholders, he could at least raise Marine's
improper conduct as a reason why the claim for services rendered
should be denied. [
Footnote
11] Finally, petitioner moved to compel an accounting by
Marine.
Marine moved to dismiss the independent action and the
counterclaim, moved to strike the objection to the claim for
services rendered, and opposed the motion to compel an accounting.
The District Court found that petitioner had no standing in his
capacity as a trustee in reorganization under Chapter X of the
Bankruptcy Act to raise claims of misconduct by an indenture
trustee on behalf of debenture holders and granted both of Marine's
motions to dismiss. Viewing the motion to compel an accounting as
merely a third vehicle to raise the same
Page 406 U. S. 421
claim on behalf of the debenture holders, the District Court
denied that motion also. Only petitioner's objection to the claim
for services rendered was left standing. [
Footnote 12] Petitioner appealed the dismissal of his
claims and the denial of his motion for an accounting to the Court
of Appeals. Marine filed a cross-appeal from the denial of its
motion to strike petitioner's objection to the claim for services
rendered. The Court of Appeals affirmed the decision of the
District Court in its entirety.
II
The issue confronting us has never before been presented to this
Court. It is an issue that has only rarely been presented to other
courts, and, on those rare occasions, it has caused even the most
able jurists to disagree. The first time the issue arose was in
Clarke v. Chase National Bank, 137 F.2d 797 (CA2 1943).
Judge Augustus Hand wrote the opinion of the court holding that a
trustee in reorganization did not have standing to sue a third
party on behalf of bondholders. Judge Learned Hand disagreed and
dissented. It is this decision that the lower courts found
controlling in the instant case. The
Clarke case is, in
fact, the only other case in which the issue that is raised here
was squarely presented. [
Footnote 13]
Page 406 U. S. 422
The issue is a difficult one, and, as we point out later, it is
one that is capable of resolution by explicit congressional action.
Lacking a specific legislative statement on this issue, we must
resolve it as best we can by examining the nature of Chapter X
proceedings, the role of the trustee in reorganization, and the way
in which standing to sue on behalf of debenture holders would
affect or change that role.
Chapter X, enacted in 1938, stemmed from a comprehensive SEC
study that disclosed widespread abuses under the then-existing
provisions for business reorganizations.
See Securities
and Exchange Commission, Report on the Study and Investigation of
the Work, Activities, Personnel and Functions of Protective and
Reorganization Committees (1937-1940). This same study gave birth
the following year to the Trust Indenture Act of 1939, 53 Stat.
1149, 15 U.S.C. § 77aaa
et seq., which is discussed
infra.
In enacting Chapter X, Congress had protection of public
investors primarily in mind.
SEC v. American Trailer Rentals
Co., 379 U. S. 594
(1965).
"The aims of Chapter . . . were to afford greater protection to
creditors and stockholders by providing greater judicial control
over the entire proceedings and impartial and expert administrative
assistance in corporate reorganizations through appointment of a
disinterested trustee and the active participation of the SEC."
Id. at
379 U. S. 604.
In
Page 406 U. S. 423
contradistinction to a bankruptcy proceeding where liquidation
of a corporation and distribution of its assets is the goal, a
Chapter X proceeding is for purposes of rehabilitating the
corporation and reorganizing lt.
Ibid. Chapter X
proceedings are not limited to insolvent corporations, but are open
to those corporations that are solvent in the bankruptcy
(asset-liability) sense but are unable to meet their obligations as
they mature.
United States v. Key, 397 U.
S. 322,
397 U. S. 329
(1970); 11 U.S.C. § 530(1).
The trustee in reorganization is the center of the statutory
scheme. H.R.Rep. No. 140, 75th Cong., 1st Sess., 43, 44. Title 11
U.S.C. § 567 gives the trustee broad powers:
"The trustee upon his appointment and qualification -- "
"(1) shall, if the judge shall so direct, forthwith investigate
the acts, conduct, property, liabilities, and financial condition
of the debtor, the operation of its business and the desirability
of the continuance thereof, and any other matter relevant to the
proceeding or to the formulation of a plan, and report thereon to
the judge;"
"(2) may, if the judge shall so direct, examine the directors
and officers of the debtor and any other witnesses concerning the
foregoing matters or any of them;"
"(3) shall report to the judge any facts ascertained by him
pertaining to fraud, misconduct, mismanagement and irregularities,
and to any causes of action available to the estate;"
"
* * * *"
"(5) shall, at the earliest date practicable, prepare and submit
a brief statement of his investigation of the property,
liabilities, and financial condition of the debtor, the operation
of its business and
Page 406 U. S. 424
the desirability of the continuance thereof, in such form and
manner as the judge may direct, to the creditors, stockholders,
indenture trustees, the Securities and Exchange Commission, and
such other persons as the judge may designate; and"
"(6) shall give notice to the creditors and stockholders that
they may submit to him suggestions for the formulation of a plan,
or proposals in the form of plans, within a time therein
named."
Title 11 U.S.C. § 587 expands these powers:
"Where not inconsistent with the provisions of this chapter, a
trustee, upon his appointment and qualification, shall be vested
with the same rights, be subject to the same duties, and exercise
the same powers as a trustee appointed under section 72 of this
title, and, if authorized by the judge, shall have and may exercise
such additional rights and powers as a receiver in equity would
have if appointed by a court of the United States for the property
of the debtor."
The powers given a trustee appointed under § 72 are set forth in
a footnote. [
Footnote
14]
Page 406 U. S. 425
Petitioner argues that these powers are broad enough to
encompass a suit on behalf of debenture holders against an
indenture trustee who has acted in bad faith, and who has,
therefore, violated the indenture and he Trust Indenture Act of
1939, 15 U.S.C. § 77aaa
et seq.
As pointed out above, the Trust Indenture Act was passed one
year after Chapter X was enacted. Prior to its enactment, indenture
trustees immunized themselves from any liability for either
deliberate or negligent misconduct by writing exculpatory
provisions into the indenture. Even in cases where misconduct by
the indenture trustee was the proximate cause of injury to
debenture holders, they found themselves impotent under the terms
of most indentures to take action against the trustee.
See
generally 2 L. Loss, Securities Regulation 719-725 (2d
ed.1981). This problem and others are specifically mentioned in 15
U.S.C. § 77bbb as establishing a necessity for regulation.
The regulation provided by the Act takes many forms. 15 U.S.C. §
77eee requires that, whenever securities covered by the Trust
Indenture Act are also covered by the registration provisions of
the Securities Act of 1933, 48 Stat. 74, 15 U.S.C. § 77a
et
seq., certain information about the indenture trustee and the
terms of the indenture
Page 406 U. S. 426
must be included in the registration statement. Title 15 U.S.C.
§ 77ggg provides that, when securities are not registered under the
1933 Act but are covered by the Trust Indenture Act, the indenture
must be "qualified" by the SEC before it is legal to sell the
securities. Standards for eligibility and disqualification of a
trustee are established by 15 U.S.C. § 77jjj, and the duties and
responsibilities of a trustee are enumerated in 15 U.S.C. §
77
ooo. [
Footnote
15]
The indenture giving rise to this litigation was qualified by
the SEC pursuant to the Trust Indenture Act of 1939. By alleging
that the indenture trustee negligently or intentionally failed to
prevent Webb & Knapp from violating the terms of the indenture,
petitioner clearly alleges a violation of the 1939 legislation, 15
U.S.C. § 77
ooo. [
Footnote 16] But the question remains whether petitioner
is a proper party to take corrective action. [
Footnote 17]
Page 406 U. S. 427
Petitioner urges that the reorganization trustee is in a far
better position than debt investors to discover and to prosecute
claims based on the alleged failure of an indenture trustee to live
up to the provisions of the indenture. He points to 11 U.S.C. § 57,
set forth
supra, and emphasizes that not only does the
reorganization trustee have possession of the records of the
debtor, but he also has a statutory duty to investigate the
debtor's affairs and to
"report to the judge any facts ascertained by him pertaining to
fraud, misconduct, mismanagement and irregularities, and to any
causes of action available to the estate."
Reference is made, too, to 15 U.S.C. § 77bbb(a)(1), which states
that one of the problems Congress saw with respect to misconduct by
indenture trustees was that
"(A) individual action by . . . investors for the purpose of
protecting and enforcing their rights is rendered impracticable by
reason of the disproportionate expense of taking such action, and
(B) concerted action by such investors in their common interest
through representatives of their own selection is impeded by reason
of the wide dispersion of such investors through many States, and
by reason of the fact that information as to the names and
addresses of such investors generally is not available to such
investors. [
Footnote 18]
"
Page 406 U. S. 428
Finally, petitioner asserts that to give him standing to sue on
behalf of debenture holders will not encourage vexatious litigation
or unduly deplete the resources of the debtor that he has been
appointed to reorganize. He supports the first half of this
proposition by noting that any action he takes is subject to the
supervision of the District Court and to intervention by the SEC.
The second half of the proposition finds support in the argument
discussed above that petitioner already has a duty of investigation
and that the minimal additional burden of prosecuting a lawsuit
will not be great.
At first blush, petitioner's theory, adopted in the opinion of
the dissenters in the Court of Appeals, seems reasonable. But there
are three problems with petitioner's argument, and these problems
require that his position be rejected.
First, Congress has established an elaborate system of controls
wit respect to indenture trustees and reorganization proceedings,
and nowhere in the statutory scheme is there any suggestion that
the trustee in reorganization is to assume the responsibility of
suing third parties on behalf of debenture holders. The language,
in fact, indicates that Congress had no such intent in mind. The
statute, 11 U.S.C. § 567(3), gives the trustee the right, and
indeed imposes the duty, to investigate fraud and misconduct and to
report to the judge the potential causes of action "available to
the estate." Even assuming that this section is read as if the
quoted words were not present, and that it authorizes a trustee in
reorganization to report whether he believes an indenture trustee
has violated a duty to third-party debenture holders, there is
nothing in the section that enables him to collect money not owed
to the estate. Nor is there anything in 11 U.S.C. § 110, set forth
in relevant part in footnote 14,
supra, that gives him
this authority. His task is simply to "collect and reduce to
Page 406 U. S. 429
money the property of the estates for which [he is
trustee]."
11 U.S.C. § 75.
The only support petitioner finds in the relevant statutes is in
that portion of 11 U.S.C. § 587 which gives reorganization trustees
the additional rights that a "receiver in equity would have if
appointed by a court of the United States for the property of the
debtor." Petitioner relies on
McCandless v. Furlaud,
296 U. S. 140
(1935), to support the proposition that a receiver in equity may
sue third parties on behalf of bondholders. But the opinion of the
Court by Mr. Justice Cardozo clearly emphasizes that the receiver
in that case was suing on behalf of the corporation, not third
parties; he was simply stating the same claim that the corporation
could have made had it brought suit prior to entering receivership.
[
Footnote 19] The debtor
corporation makes no such claim in this case.
See
generally 2 R. Clark, Law and Practice of Receivers § 362, at
619 (3d ed.1959).
This brings us to the second problem with petitioner's argument.
Nowhere does petitioner argue that Webb & Knapp could make any
claim against Marine. Indeed, the conspicuous silence on this point
is a tacit admission that no such claim could be made. [
Footnote 20] Assuming that
Page 406 U. S. 430
petitioner's allegations of misconduct on the part of the
indenture trustee are true, petitioner has, at most, described a
situation where Webb & Knapp and Marine were
in pari
delicto. Whatever damage the debenture holders suffered, under
petitioner's theory, Webb & Knapp is as much at fault as
Marine, if not more so. A question would arise, therefore, whether
Marine would be entitled to be subrogated to the claims of the
debenture holders. The Court of Appeals thought that subrogation
would be required, 439 F.2d at 122.
If the Court of Appeals is correct, it is then difficult to see
what advantage there is in giving petitioner standing to sue, for,
as Chief Judge Friendly noted in his opinion for the court
below:
"It is necessary in the first instance to consider what effect a
recovery by the Chapter X Trustee would have on the reorganization.
On a superficial view, this might seem substantial -- if, for
example, the Chapter X Trustee were to achieve a complete recovery,
the debenture holders would be paid off and it might seem there
would be that much more for the other creditors and the
stockholders. But this pleasant prospect speedily evaporates when
the law of subrogation is brought into play. As a result of
subrogation, Marine would simply be substituted for the debenture
holders as the claimant.
Cf. ALI, Restatement of Security
§ 141 (1941). If the Chapter X Trustee recovered judgment in a
lesser amount, the claim of the debenture holders would still be
provable in full, with the division of the proceeds between them
and Marine dependent upon the results of the reorganization, and
other creditors or stockholders would not be affected."
439 F.2d at 122. Even if the Court of Appeals is incorrect in
its view of the propriety of subrogation under the facts of this
case,
Page 406 U. S. 431
the fact remains that, in every reorganization, there is going
to be a question of how much the trustee in reorganization should
be permitted to recover on behalf of the debenture holders. The
answer is, of course, whatever he cannot recoup from the
corporation. Once this is recognized, the wisdom of Judge Augustus
Hand in
Clarke v. Chase National Bank, 137 F.2d at 800,
becomes readily apparent:
"Each creditor, including the debenture holders, can prove the
full amount of his claim, and only to the extent that a debenture
holder fails to satisfy it from the bankruptcy estate will he
suffer a loss which he can assert against the defendant through its
failure to enforce the negative covenants."
In other words, debenture holders will not be able to recover
damages from the indenture trustee until the reorganization is far
enough along so that a reasonable approximation can be made as to
the extent of their losses, if any. It is difficult to see
precisely why it is at that point that the trustee in
reorganization should represent the interests of the debenture
holders, who are capable of deciding for themselves whether or not
it is worthwhile to seek to recoup whatever losses they may have
suffered by an action against the indenture trustee. Petitioner
appears to concede that any suit by debenture holders would not
affect the interests of other parties to the reorganization,
assuming that the Court of Appeals is correct on the subrogation
point. It would seem, therefore, that the debenture holders, the
persons truly affected by the suit against Marine, should make
their own assessment of the respective advantages and disadvantages
not only of litigation, but of various theories of litigation.
This brings us to the third problem with petitioner's argument:
i.e., a suit by him on behalf of debenture holders may be
inconsistent with any independent actions
Page 406 U. S. 432
that they might bring themselves. Petitioner and the SEC make
very plain their position that a suit by the trustee in
reorganization does not preempt suits by individual debenture
holders. They maintain, however, that it would be unlikely that
such suits would be brought, since the debenture holders could
reasonably expect that the trustee would vigorously prosecute the
claims of all debt investors. But independent actions are still
likely, because it is extremely doubtful that the trustee and all
debenture holders would agree on the amount of damages to seek, or
even on the theory on which to sue. [
Footnote 21] Moreover, if the indenture trustee wins the
suit brought by the trustee in reorganization, unless the debenture
holders are bound by that victory, the proliferation of litigation
that petitioner seeks to avoid would then ensue. Finally, a
question would arise as to who was bound by any settlement.
[
Footnote 22]
Page 406 U. S. 433
Rule 23 of the Federal Rules of Civil Procedure, which provides
for class actions, avoids some of these difficulties. It is surely
a powerful remedy, and one that is available to all debenture
holders. [
Footnote 23] Some
of the factors that formerly deterred such actions have been
changed by the Trust Indenture Act of 1939. Title 15 U.S.C. §
77
lll, for example, now requires that the debtor
corporation maintain lists of debenture holders that it must turn
over to the indenture trustees at regular intervals. Such lists are
available to the individual debenture
Page 406 U. S. 434
holders upon request. Debenture holders would also be able to
take advantage of any information obtained by the trustee in
reorganization as a result of the investigation which the statute
requires that he make. In addition, petitioner himself maintains
that counsel fees would be recoverable if the action was
successful. Brief for Petitioner 20;
cf. 15 U.S.C. §
7nnn.
Thus, there is no showing whatever that, by giving petitioner
standing to sue on behalf of the debenture holders, we would reduce
litigation. On the contrary, there is every indication that
litigation would be increased, or at least complicated.
III
For the reasons discussed above we conclude that petitioner does
not have standing to sue an indenture trustee on behalf of
debenture holders. This does not mean that it would be unwise to
confer such standing on trustees in reorganization. It simply
signifies that Congress has not yet indicated even a scintilla of
an intention to do so, and that such a policy decision must be left
to Congress, and not to the Judiciary.
Congress might well decide that reorganizations have not fared
badly in the 34 years since Chapter X was enacted, and that the
status quo is preferable to inviting new problems by
making changes in the system. Or Congress could determine that the
trustee in a reorganization was so well situated for bringing suits
against indenture trustees that he should be permitted to do so. In
this event, Congress might also determine that the trustee's action
was exclusive, or that it should be brought as a class action on
behalf of all debenture holders, or perhaps even that the debenture
holders should have the option of suing on their own or having the
trustee sue on their behalf. Any number of alternatives are
available. Congress would also be able to answer questions
regarding subrogation or timing of law suits before these
questions
Page 406 U. S. 435
arise in the context of litigation. Whatever the decision, it is
one that only Congress can make.
Accordingly, the judgment of the Court of Appeals is
Affirmed.
[
Footnote 1]
The District Court delivered three separate opinions in this
case. They are unreported, but are included in the appendix
prepared by the parties at 58a-70a. The Court of Appeals heard the
case en banc after a panel of three judges determined that it was
inclined to overrule the case on which the District Court had
placed almost exclusive reliance. 439 F.2d 118.
[
Footnote 2]
Those companies in the affiliated group include any corporation
that was entitled to be included in a consolidated tax return of
Webb & Knapp.
See 26 U.S.C. § 1502. Section 1.1 of the
Indenture gave Webb & Knapp authority to consider other
companies as affiliates if it chose to do so.
[
Footnote 3]
Indenture of June 1, 1954, Webb & Knapp, Inc., to the Marine
Midland Trust Company of New York § 3.6 (hereinafter referred to as
Indenture).
[
Footnote 4]
Indenture § 3.11.
[
Footnote 5]
Indenture § 10.1(a). This was also a statutory duty.
See 15 U.S.C. § 77000.
[
Footnote 6]
Indenture § 10.1(d).
[
Footnote 7]
Webb & Knapp showed a loss for tax purposes each year,
although the company did show a gain on its books for 1961
attributable to a write-up of property owned by a wholly owned
subsidiary of a company in which Webb & Knapp held 50% of the
stock.
[
Footnote 8]
The SEC has supported petitioner throughout this litigation. The
agency is "an unnamed respondent before this Court."
See
Protective Committee v. Anderson, 390 U.
S. 414,
390 U. S. 420
n. 3 (1968). When referring to arguments made by petitioner, this
opinion assumes, unless otherwise stated, that the SEC has made the
same arguments.
[
Footnote 9]
The difference between this amount and the amount of the
debentures originally issued represents the amount of the principal
that Webb & Knapp had repaid.
[
Footnote 10]
These are merely allegation of petitioner, not findings of the
lower courts. Because the District Court and the Court of Appeals
held that petitioner had no standing, they had no occasion to
consider the validity of the allegations.
[
Footnote 11]
In its capacity as indenture trustee, Marine also filed a claim
on behalf of all the debenture holders for the unpaid principal on
the debentures.
[
Footnote 12]
This objection differs from the other claims in one respect:
i.e., it is an attempt to preserve the remaining assets of
the debtor for all creditors other than Marine, whereas the other
claims represent an attempt by the petitioner to increase the
assets of the debtor for the benefit of a specific class of
creditors, the debenture holders. Although Marine appealed the
ruling of the District Court denying its motion to strike the
objection, it did not seek review here of the decision of the Court
of Appeals affirming the District Court on this issue. This issue
is, therefore, not before us, and we offer no opinion on the
propriety of the lower courts' ruling.
[
Footnote 13]
Petitioner and the two dissenting judges in the Court of Appeals
argue that the issue was presented in
Prudence-Bonds Corp. v.
State Street Trust Co., 202 F.2d 555 (CA2),
cert.
denied, 346 U.S. 835 (1953), and that the decision of the
court in that case by Judge Learned Hand overruled
Clarke v.
Chase National Bank, 137 F.2d 797 (CA2 1943),
sub
silentio. They also argue that the issue was presented and
decided contrary to
Clarke in
In re Solar
Manufacturing Corp., 200 F.2d 327 (CA3 1952),
cert. denied
sub nom. Marine Midland Trust Co. v. McGirl, 345 U.S. 940
(1953). But the majority of the Court of Appeals found these cases
to be distinguishable, and Marine urges that the majority was
correct. We do not intend to become enmeshed in this controversy,
and merely indicate its existence.
[
Footnote 14]
Title 11 U.S.C. § 110 gives the trustee title to the following
"property":
"(a) The trustee of the estate of a bankrupt and his successor
or successors, if any, upon his or their appointment and
qualification, shall in turn be vested by operation of law with the
title of the bankrupt as of the date of the filing of the petition
initiating a proceeding under this title . . . to all of the
following kinds of property wherever located (1) documents relating
to his property; (2) interests in patents, patent rights,
copyrights, and trade-marks, and in applications therefor . . . (3)
powers which he might have exercised for his own benefit, but not
those which he might have exercised solely for some other person;
(4) property transferred by him in fraud of his creditors; (5)
property, including rights of action, which prior to the filing of
the petition he could by any means have transferred or which might
have been levied upon and sold under judicial process against him,
or otherwise seized, impounded, or sequestered . . . (6) rights of
action arising upon contracts, or usury, or the unlawful taking or
detention of or injury to his property; (7) contingent remainders,
executory devises and limitations, rights of entry for condition
broken, rights or possibilities of reverter, and like interests in
real property, which were nonassignable prior to bankruptcy and
which, within six months thereafter, become assignable interests or
estates or give rise to powers in the bankrupt to acquire
assignable interests or estates; and (8) property held by an
assignee for the benefit of creditors appointed under an assignment
which constituted an act of bankruptcy, which property shall, for
the purposes of this title, be deemed to be held by the assignee as
the agent of the bankrupt and shall be subject to the summary
jurisdiction of the court."
[
Footnote 15]
The SEC is given general supervisory powers over indentures in
various sections of the Trust Indenture Act.
See, e.g., 15
U.S.C. §§ 77ddd(c), (d), (e); 77eee(a), (c); 77ggg; 77sss; 77ttt;
77uuu. In addition, 15 U.S.C. § 77hhh provides that the SEC may
order consolidation of reports or certificates filed under the
Trust Indenture Act with information or documents filed under the
Securities Act of 1933, 48 Stat. 74, 15 U.S.C. § 77a
et
seq., and the Securities Exchange Act of 1934, 48 Stat. 881,
15 U.S.C. § 78a
et seq., the Public Utility Holding
Company Act of 1935, 49 Stat. 838, 15 U.S.C.§ 79
et
seq.
[
Footnote 16]
The provisions of the indenture discussed previously comply with
the requirements of 15 U.S.C. § 77
ooo. While the indenture
trustee is not permitted by the statute to exculpate himself from
liability for noncompliance with the indenture, the indenture
trustee may rely in good faith on certificates or reports filed
pursuant to the indenture and in compliance with the provisions
thereof.
[
Footnote 17]
We assume,
arguendo, that violation of 15 U.S.C. §
77
ooo would give rise to a cause of action against an
indenture trustee by debenture holders. If there is a cause of
action, 15 U.S.C. § 77vvv would seem to give federal courts
jurisdiction. The Court of Appeals inferred that such suits would
be proper, 439 F.2d at 123 n. 5, but did not decide the point.
Since we conclude that, even if such suits may be brought,
petitioner lacks standing to bring them, we do not decide the
question.
[
Footnote 18]
It should be noted that the Trust Indenture Act of 1939 was
enacted on August 3, 1939. The Federal Rules of Civil Procedure
were not even one year old. They were adopted by this Court on
December 20, 1937, and they became effective on September 16, 1938,
308 U.S. 647. The class action was a comparatively recent
phenomenon with respect to damage actions, and it was not
tremendously helpful in the early days.
See, e.g., Moore,
Federal Rules of Civil Procedure: Some Problems Raised by the
Preliminary Draft, 25 Geo.L.J. 551, 570-576 (1937); Kalven &
Rosenfield, The Contemporary Function of the Class Suit, 8
U.Chi.L.Rev. 684 (1941). It could not be said that the class action
was an efficacious remedy in 1939.
[
Footnote 19]
This point is especially clear in light of the fact that the
Court split 5-4 on whether
Old Dominion Copper Co. v.
Lewisohn, 210 U. S. 206
(1908) (Holmes, J.), was binding in
McCandless v. Furlaud.
The issue in the controversial
Old Dominion case was
whether a
corporation had a cause of action against
promoter-director-stockholders.
[
Footnote 20]
If petitioner could sue on behalf of Webb & Knapp, the
statute that requires that he report possible causes of action to
the court would require mention of this cause of action. Moreover,
petitioner has brought every conceivable claim that is available to
him as trustee. Not only has he brought this action against the
indenture trustee, but he has also sued former officers of Webb
& Knapp charging them with waste. Brief for SEC 5-6. Certain
settlements have apparently been made in some of these other
actions. Brief for Respondent 45 n. 18.
[
Footnote 21]
Three private actions have been brought by debenture holders
against Marine, one in federal court and two in state court.
See Brief for Petitioner 21 n. 9. These suits make the
same claims made by the petitioner in the instant case, as well as
others which he has not made, including alleged violations of the
securities laws.
The trustee may well have interests that differ from those of
the bondholders. For example, petitioner has sued not only Marine,
but also the former officers of Webb & Knapp.
See
n 20,
supra. In
settling the suits brought against the officers, petitioner may
well take positions that conflict with those he would take in a
suit against Marine. The conflict may at times be unfavorable to
the debenture holders. One answer obviously is that the District
Court and the SEC can take action to prevent any such conflict from
developing,
e.g., by denying the trustee in reorganization
the right to sue on behalf of debenture holders in selected cases.
The problem with this answer is that the conflict may not appear
until the suit is well under way. In such a case, the debenture
holders might regret placing their confidence in the trustee.
[
Footnote 22]
Chapter X, 11 U.S.C. § 616(2), provides that a plan for
reorganization "may deal with all or any part of the property of
the debtor." It also provides that the plan "may include provisions
for the settlement or adjustment of claims belonging to the debtor
or to the estate." 11 U.S.C. § 616(13). Despite these provisions,
petitioner urges, in effect, that he can settle a suit on behalf of
bondholders without binding them to the settlement. Reply Brief for
Petitioner 7. But, as pointed out in the text,
supra,
petitioner only has authority to pursue claims belonging to the
estate. Petitioner is thus caught on the horns of a dilemma: either
he is incorrect in asserting that the statutory definition of
duties should be read so broadly as to allow a trustee in
reorganization to treat claims by debenture holders against third
parties as sufficiently related to the estate that the trustee may
sue on behalf of the debenture holders, or he is correct, and § 616
would appear to permit him to bind the debenture holders to a
settlement. Even if petitioner can have it both ways, his inability
to bind the persons on whose behalf he sues undercuts the utility
of his suing. Because the debenture holders could bring a class
action and bind all members of the class, they can make a binding
settlement and avoid lengthy and expensive litigation. Petitioner
cannot make such a settlement. Moreover, if a reorganization
trustee does settle a suit that he has brought on behalf of
debenture holders, he may find that, rather than serving as their
representative, he is forced to oppose their interests when they
bring independent actions to recover more than the settlement
figure. In this event, the reorganization trustee would be forced
to justify his settlement, and he would theoretically join the
indenture trustee in opposing the action of the debenture holders.
He would find himself on both sides of the same transaction.
[
Footnote 23]
Again we assume,
arguendo, that the Trust Indenture Act
gives a right of action to debenture holders under these
circumstances. Obviously, if the debenture holders themselves have
no cause of action, their surrogate is in no better position.
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., 444. 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. [
Footnote 2/1]
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
Page 406 U. S. 436
fair 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
receiverships, and was adopted in former § 77B of the Bankruptcy
Act and under Chapter X. [
Footnote
2/2] As stated in the
Page 406 U. S. 437
House 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 Rock 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
308 U. S. 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 308 U. S.
117.
Page 406 U. S. 438
And, 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
312 U. S.
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-a-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
Page 406 U. S. 439
steps, 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. [
Footnote 2/3]
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. § 77
ooo, gives no
immunity. [
Footnote 2/4]
We said in
Pepper v. Litton, 308 U.
S. 295,
308 U. S. 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
308 U. S. 311,
308 U. S. 312.
As stated in
American Surety Co. v.
Bethlehem
Page 406 U. S. 440
Bank, 314 U. S. 314,
314 U. S. 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: [
Footnote 2/5]
"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,
148 U. S. 581.
I agree with Judge Kaufman and Judge Hays, dissenting below, and
would reverse this judgment.
[
Footnote 2/1]
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."
[
Footnote 2/2]
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
228 U. S. 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,
308 U. S. 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,
312 U. S. 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,
317 U. S. 85-87.
As recent cases reflect, the absolute priority doctrine has been
continued and is firmly entrenched in Chapter X law.
E.g.,
Protective Committee v. Anderson, 390 U.
S. 414,
390 U. S. 441;
United States v. Key, 397 U. S. 322,
397 U. S. 327
(
see also concurring opinion at
397 U. S.
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 R. Co., 318 U.
S. 448,
318 U. S. 484;
Group of Investors v. Milwaukee R. Co., 318 U.
S. 523,
318 U. S. 535,
318 U. S. 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,
323 U. S. 634
(
but see dissenting opinion concluding that the rule had
not been faithfully followed, at
323 U. S.
648-649);
SEC v. Central-Illinois Corp.,
338 U. S. 96,
338 U. S. 130;
to Chapter IX bankruptcy proceedings,
Kelley v. Everglades
District, 319 U. S. 415,
319 U. S.
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,
310 U. S. 452,
310 U. S.
456-458.
And see General Stores Corp. v.
Shlensky, 350 U. S. 462,
350 U. S.
466.
[
Footnote 2/3]
See Hearings on H.R. 8406 before a Subcommittee of the
Senate Committee on the Judiciary, 75th Cong., 2d Sess., 126.
[
Footnote 2/4]
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. § 77
ooo(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. § 77
ooo(d)), save for errors in judgment made in
good faith.
Ibid.
[
Footnote 2/5]
Restatement of Restitution § 162 (1937)