32 195 Caplin v. Marine Midland Grace Trust Company of New York 8212 220

Citation32 L.Ed.2d 195,406 U.S. 416,92 S.Ct. 1678
Decision Date22 May 1972
Docket NumberNo. 70,70
Parties. 32 L.Ed.2d 195 Mortimer M. CAPLIN, etc., Petitioner, v. The MARINE MIDLAND GRACE TRUST COMPANY OF NEW YORK. —220
CourtUnited States Supreme Court
Syllabus

Petitioner, the trustee of Webb & Knapp, Inc., under Chapter X of the Bankruptcy Act, does not have standing to assert, on behalf of holders of debentures issued by Webb & Knapp, claims of misconduct by an indenture trustee. Pp. 417—435.

439 F.2d 118, affirmed.

Charles H. Miller, New York City, for petitioner.

David Ferber, Washington, D.C., for the Securities and Exchange Commission.

John W. Dickey, New York City, for respondent.

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 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).1 We granted certiorari, 404 U.S. 982, 92 S.Ct. 443, 30 L.Ed.2d 366 (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 it2 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.3 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. 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.'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.6

Commencing in 1959, Webb & Knapp sustained substantial financial losses in every year.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 inter- vened on May 10, 1965.8 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.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 assetliability 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 ratio forbade, Webb & Knapp suffered great financial losses.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 out-standing 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.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 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.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.13 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 (19371940). 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, 85 S.Ct. 513, 13 L.Ed.2d 510 (1965). 'The aims of Chapter X . . . 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 604, 85 S.Ct., at 519. In 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 it. 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, 329, 90 S.Ct. 1049, 1053, 25 L.Ed.2d 340 (1970); 11 U.S.C. § 530(1).

The trustee in reorganization is the center of the statutory scheme. H.R.Rep.No.1409, 75th Cong., 1st Sess., 43, 44. Title 11 U.S.C. § 567 gives the trustee broad powers:

'The ...

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