Respondent securities broker was adjudged an involuntary
bankrupt for having committed the fifth act of bankruptcy under §
3a(5) of the Bankruptcy Act. This adjudication was reversed by the
Court of Appeals, but subsequently the bankruptcy court, on a
petition by the broker which had been filed shortly after the
adjudication, confirmed the broker's proposed arrangement with
creditors under Chapter XI of the Act.
Held: Where the issue of whether the confirmation of
the Chapter XI arrangement renders the case moot because the
petitioners no longer have a monetary stake in resolving whether
the fifth act of bankruptcy had been committed, was briefed and
argued before this Court, but, because of the sequence of events,
was necessarily not treated in the Court of Appeals' opinion, the
Court of Appeals should have the opportunity to consider such issue
in the first instance, and, in doing so, it should consider the
effect of § 64a(1) of the Act providing that "one reasonable
attorney's fee" for services rendered to petitioning creditors in
involuntary bankruptcy cases shall be treated as a priority
debt.
471 F.2d 178, vacated and remanded.
PER CURIAM.
Blair & Co., Inc., was a member of the New York Stock
Exchange, engaged in the general brokerage and commission business.
In the early summer of 1970, as the result of operating losses and
a shrinkage of capital,
Page 414 U. S. 213
Blair began a program of self-liquidation, which involved the
transfer of customer accounts to other broker-dealers and the
delivery of securities to customers so requesting. Blair apparently
believed that its resources were sufficient to allow it to
discharge its obligations to all customers and general creditors
through this program. In September, 1970, however, Blair concluded
that successful implementation of this program might require the
assistance of a Special Trust Fund which the New York Stock
Exchange had established in 1964 to avoid bankruptcy of member
firms. [
Footnote 1]
Consequently, on September 21, 1970, Blair entered into an
agreement with the New York Stock Exchange whereby the trustees of
the special fund would make loans and guarantees to protect Blair's
customers against loss. The agreement provided that the first such
loan, guarantee, or advance by the fund would give the New York
Stock Exchange the power to appoint a Liquidator of its own
choosing to manage Blair's affairs. The powers of the Liquidator
were set forth in the agreement. [
Footnote 2]
Page 414 U. S. 214
On September 25, 1970, the trustees made an initial advance of
$1,000, which triggered the appointment of respondent Patrick E.
Scorese as Liquidator. Any plans for further advances or loans were
terminated four days later, however, when the petitioners, holders
of subordinated debentures of Blair, filed an involuntary petition
in bankruptcy against Blair in the United States District Court for
the Southern District of New York.
Inter alia, the
petition alleged that the appointment of the Liquidator constituted
an act of bankruptcy under § 3a(5) of the Bankruptcy Act, 11 U.S.C.
§ 21(a)(5). That section makes it an act of bankruptcy if any
person,
"(5) while insolvent or unable to pay his debts as they mature,
procured, permitted, or suffered voluntarily or involuntarily the
appointment of a receiver or trustee to take charge of his
property."
Concluding that Blair's consent to the appointment of the
Liquidator in fact constituted this fifth act of bankruptcy, the
Referee adjudicated Blair an involuntary bankrupt. The District
Court denied a petition to review his order. On appeal, however, a
divided panel of the Court of Appeals for the Second Circuit
reversed, reasoning that the Liquidator was not a "receiver or
Page 414 U. S. 215
trustee" within the statutory definition. 471 F.2d 178. We
granted the writ of certiorari, 411 U.S. 930, in order to resolve
this issue of seeming importance in the administration of the
Bankruptcy Act, and oral argument was heard on November 12,
1973.
The respondents have suggested, however, that we should not
decide the merits of the controversy, because the present
circumstances of Blair & Co. render the case moot. The
suggestion is premised on a series of events following the filing
of the original involuntary petition. On April 15, 1971, two days
after the Referee had granted the petitioners' motion for summary
judgment on the issue of whether Blair had committed the fifth act
of bankruptcy, Blair filed a petition for relief under Chapter XI
of the Bankruptcy Act, pursuant to § 321 of the Act, 11 U.S.C. §
721. [
Footnote 3] On May 18,
1971, the Referee entered an order pursuant to § 325 of the Act, 11
U.S.C. § 725, staying ordinary bankruptcy proceedings under
Chapters I-VII pending the determination of the Chapter XI
petition.
On May 26, 1971, Blair filed with the District Court its
proposed arrangement with its creditors under Chapter XI. On
September 27, 1971, the bankruptcy court found that the proposed
arrangement had been accepted in writing by the requisite majority
in number and amount of Blair's creditors, in accordance with §§
336(4) and 362 of the Act, 11 U.S.C. §§ 736(4), 762. [
Footnote 4] Shortly thereafter, on October 4,
1971, the petitioners moved in the District Court to dismiss the
Chapter XI proceedings. This motion was not acted upon until
February 16, 1973, after the Court of Appeals had reversed the
adjudication of Blair as an involuntary bankrupt; on that date,
Page 414 U. S. 216
the motion was denied. On June 12, 1973, the District Court
denied a petition for review of that order. On October 2, 1973,
while the present case was awaiting argument in this Court, the
bankruptcy court entered an order confirming the arrangement
proposed by Blair under Chapter XI. Apparently, no appeal was taken
from the order of confirmation.
In light of the confirmation of the Chapter XI arrangement, the
respondents suggest that this case no longer presents a live
controversy. They rely upon § 371 of the Act, 11 U.S.C. § 771,
which provides that confirmation of an arrangement "shall discharge
a debtor from all his unsecured debts and liabilities provided for
by the arrangement," and argue that the petitioners thus no longer
have any monetary stake in resolution of the controversy over
whether the fifth act of bankruptcy was committed.
See
generally 9 W. Collier, Bankruptcy 9.32, 9.33 (14th ed.1972).
The respondents also argue that the original adjudication of
bankruptcy is irrelevant to the present situation, since § 322 of
the Act, 11 U.S.C. § 722, does not make the pendency of bankruptcy
proceedings a prerequisite to the filing of a petition for relief
under Chapter XI.
While the issue of mootness was briefed and argued before this
Court, it was not treated in the opinion of the Court of Appeals,
no doubt because the final confirmation order was not entered by
the District Court until well after the appellate court had issued
its judgment. Under these circumstances, we think it appropriate
that the Court of Appeals have the opportunity to consider the
mootness issue in the first instance. In reviewing the question of
mootness, the Court of Appeals should consider the effect of §
64a(1) of the Act, 11 U.S.C. § 104(a)(1).
Inter alia, that
section provides that "one reasonable attorney's fee" for the
services rendered to
Page 414 U. S. 217
petitioning creditors in involuntary cases shall be treated as a
priority debt in bankruptcy proceedings, payable out of the estate
in advance of distribution of any dividends to creditors. Section
64 is made applicable to § 321 Chapter XI proceedings by § 302 of
the Act, 11 U.S.C. § 702, and thus might allow the treatment of at
least some of the petitioners' counsel fees as a priority expense.
See 8 W. Collier, Bankruptcy 5.33 [3.1] and n. 25 (14th
ed.1972);
see also Reading Co. v. Brown, 391 U.
S. 471,
391 U. S. 475.
[
Footnote 5]
For the reasons stated above, we vacate the judgment of the
Court of Appeals, and remand the case to that court to consider
whether it has now become moot.
It is so ordered.
[
Footnote 1]
The Special Trust Fund is authorized by the Constitution of the
New York Stock Exchange, Art. XIX, § 1.
[
Footnote 2]
Paragraph VIII of the agreement provided:
"Immediately following his appointment by the Exchange, the
Liquidator shall take control of the business and property of the
Corporation for the purpose of liquidating the business of the
Corporation and shall proceed as follows in connection with the
liquidation:"
"i.) he shall promptly take such steps as he may deem
practicable to reduce the Corporation's operating expenses and to
dispose of the Corporation's salable assets;"
"ii.) he shall have power to retain independent public
accountants, consultants, counsel and other agents and assistants
and shall have power to augment and reduce or eliminate the staff
of the Corporation;"
"iii.) he shall, as soon as practicable, assert and collect or
settle all claims and rights of the Corporation;"
"iv.) he shall pay any claim against the Corporation considered
by him to be a valid claim of any customer of the Corporation;"
"v.) he shall take such other steps as he deems necessary or
appropriate to liquidate the business of the Corporation."
"It is agreed that consistent with the duty of the Liquidator to
effect a fair and orderly liquidation of the business of the
Corporation to enable prompt settlement with its customers, the
Liquidator shall act in accordance with what he deems to be good
business practice."
On the same date that this agreement was signed, Blair executed
a second instrument that more specifically delineated the powers of
the Liquidator, who was described as "the true and lawful attorney
and agent of and for the Corporation [Blair]."
[
Footnote 3]
The actual order adjudging Blair a bankrupt was not issued until
April 27, 1971.
[
Footnote 4]
The September 27 finding was an oral one, made in open court.
Written findings to the same effect were filed on December 27,
1971.
[
Footnote 5]
While the effect of § 64a(1) upon the issue of mootness was
discussed at oral argument, it was not the subject of briefing by
either of the parties.