Flight Transp. Corp. Securities Litigation, In re

• Decision Date: 12 May 1989
• Docket Number: No. 87-5414,87-5414
• Citation: 874 F.2d 576
• Parties: , Bankr. L. Rep. P 72,878 In re FLIGHT TRANSPORTATION CORPORATION SECURITIES LITIGATION. MANUFACTURERS HANOVER TRUST COMPANY, as Indenture Trustee, Appellant, v. Thomas C. BARTSH, Receiver/Debtor-in-Possession; Committee of Unsecured Creditors; and William Westphal, U.S. Bankruptcy Trustee, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 576

874 F.2d 576

19 Bankr.Ct.Dec. 584, Bankr. L. Rep. P 72,878

In re FLIGHT TRANSPORTATION CORPORATION SECURITIES LITIGATION.

MANUFACTURERS HANOVER TRUST COMPANY, as Indenture Trustee, Appellant, v. Thomas C. BARTSH, Receiver/Debtor-in-Possession; Committee

of Unsecured Creditors; and William Westphal,

U.S. Bankruptcy Trustee, Appellees.

No. 87-5414.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 19, 1988.

Decided May 12, 1989.

Edward Roberts, II, New York City, for appellant.

Thomas Bartsh and Howard S. Myers, III, Minneapolis, Minn., for appellees.

Before McMILLIAN and ARNOLD, Circuit Judges, and LARSON, ^* Senior District Judge.

McMILLIAN, Circuit Judge.

Manufacturers Hanover Trust Co. (MHT) appeals from an order entered in the District Court ¹ for the District of Minnesota denying in part its application for administrative expenses under 11 U.S.C. Sec. 503(b)(3)(D), (4), (5). In re Flight Transportation Corp. Securities Litigation, 78 B.R. 562 (D.Minn.1987). For reversal MHT argues the district court erred in holding that, as a matter of law, an indenture trustee that has fulfilled its statutory fiduciary duties has not, by virtue of that fact alone, made a "substantial contribution in a [reorganization] case" under 11 U.S.C. Sec. 503(b). Alternatively, MHT argues the district court erred in granting it only $18,457 for compensation and expenses pursuant to Sec. 607 of the Indenture Agreement under 11 U.S.C. Sec. 502. For the reasons discussed below, we affirm in part, reverse in part and remand for further proceedings.

This is one of the final chapters in the story of the sudden, and expensive, collapse of Flight Transportation Corp. (FTC). For a more complete history of the FTC litigation, see In re Flight Transportation Corp. Securities Litigation, 730 F.2d 1128 (8th Cir.1984), cert. denied, 469 U.S. 1207, 105 S.Ct. 1169, 84 L.Ed.2d 320 (1985). FTC and its subsidiaries were in the air charter business and provided general aviation services. In June 1982 there were two public offerings of FTC securities--one of 715,000 shares of common stock and another of 25,000 "units" consisting of debentures plus stock warrants. Pursuant to an Indenture Agreement executed on June 14, 1982, MHT was the indenture trustee for $25 million of FTC 11 1/4% Sinking Fund Debentures due June 1, 1995. In Sec. 607 of the Indenture Agreement, FTC agreed to pay MHT reasonable compensation for its services and to reimburse it for its reasonable expenses, including its attorney's fees and expenses.

On June 18, 1982, the Securities and Exchange Commission (SEC) halted trading in FTC securities and filed enforcement proceedings against FTC, its subsidiaries, and its president and chief executive officer, William Rubin, in federal district court in Minnesota, alleging they violated federal securities laws. The SEC alleged that FTC securities were sold at artificially inflated values because FTC had overstated its revenues and inaccurately reported its performance history. The SEC sought an injunction against further violations, an accounting, and an order of disgorgement. The district court granted a temporary restraining order and appointed a receiver. The receiver transferred some $22.7 million, representing the remaining proceeds of the June 1982 securities offerings, from FTC's corporate bank account to an escrow account in a different bank.

Almost immediately, various interested parties began filing lawsuits and claims against the escrow fund. On June 23, 1982, FTC's lead underwriters, Drexel Burnham Lambert Inc. and Moseley, Hallgarten, Estabrook & Weeden, filed a class action in federal district court in Minnesota, on behalf of themselves and others who had purchased FTC securities, and sought to impose a constructive trust on the escrow fund. On June 29, 1982, several major creditors filed an involuntary Chapter 11 bankruptcy petition against FTC in the bankruptcy court in Minnesota.

Other individual and class action lawsuits were filed against FTC, its subsidiaries, officers, directors, accountants, underwriters, bankers, and insurers. Many of these defendants filed cross-claims for indemnification against other defendants. By October 1982 some 22 cases had been filed. These cases were consolidated with a class action that had been filed on behalf of all persons who had purchased FTC securities between November 30, 1979, and June 18, 1982, the date the SEC halted trading in FTC securities. Antinore v. Flight Transportation Corp., Master Docket No. 4-082-874 (D.Minn.1982).

Representatives of the purchasers of FTC securities and certain business creditors soon began negotiating among themselves in order to resolve their competing claims to the escrow fund. These negotiations resulted in the Sharing Agreement which was signed on April 15, 1983, and approved by the district court. (The Sharing Agreement has been amended several times.) Under the Sharing Agreement, persons, including the receiver and the bankruptcy estate, who had claims against FTC or other defendants (that is, the underwriters, accountants, bankers, etc.) or both, agreed to pool their recoveries, whether from the escrow fund, other assets of FTC, or damage actions against any of the defendants, and to disburse the money among themselves according to an agreed-upon schedule. This court upheld the Sharing Agreement in In re Flight Transportation Corp. Securities Litigation, 730 F.2d at 1132-33.

In the meantime, the FTC bankruptcy cases were withdrawn from the bankruptcy court and assigned to Judge Weiner. In April 1984, however, a year after the Sharing Agreement was signed, the receiver proposed a partial reference of the bankruptcy litigation back to the bankruptcy court. In March 1986, over MHT's objection, Judge Weiner referred the bankruptcy litigation back to the bankruptcy court ² for confirmation and implementation of the proposed plan of reorganization. In September 1986, Bankruptcy Judge Kressel confirmed the plan of reorganization.

In August 1986, MHT sought to modify the scope of the order of reference to exclude its application for administrative expenses because Judge Weiner had presided over most of the consolidated FTC securities and bankruptcy litigation and was thus uniquely qualified to evaluate its performance as indenture trustee. In November 1986, Judge Weiner clarified the scope of the earlier order of reference: all "core proceedings" in the bankruptcy litigation were referred to the Bankruptcy Court for the District of Minnesota, but the district court retained jurisdiction to determine the amount due MHT under the indenture agreement or as an administrative expense. In re Flight Transportation Corp., No. 4-82-1154 (D.Minn. Nov. 7, 1986) (Pre-trial Order No. 274).

MHT argued that it was entitled to administrative expenses under 11 U.S.C. Sec. 503(b) ³ because it had made a "substantial contribution" in the FTC reorganization case by fulfilling its fiduciary duties as required by the Trust Indenture Act of 1939, 15 U.S.C. Sec. 77aaa et seq. (TIA). Section 315(c) of the TIA, 15 U.S.C. Sec. 77ooo (c), provides that in the event of a default, the indenture trustee is "to exercise ... such of the rights and powers vested in it by such indenture, and to use the same degree of care and skill in their exercise, as a prudent [person] ⁴ would exercise or use under the circumstances in the conduct of his [or her] own affairs." MHT sought a total of $174,603.36, plus interest--$2,691.59 for its expenses as indenture trustee under 11 U.S.C. Sec. 503(b)(3)(D) $153,454.77 for its attorney's fees and expenses under 11 U.S.C. Sec. 503(b)(4), and $18,457 as reasonable compensation for its services as indenture trustee under 11 U.S.C. Sec. 503(b)(5). Most of the amount requested represented MHT's attorney's fees and expenses. MHT had initially retained the New York law firm of Kelley Drye & Warren for advice in connection with the indenture agreement; MHT later retained as local counsel the Minneapolis law firm of Leonard, Street & Deinard.

In the alternative, MHT argued that this amount was an "allowed claim" under 11 U.S.C. Sec. 502 because, in Sec. 607 ⁵ of the Indenture Agreement, FTC had agreed to pay MHT reasonable compensation for its services and to reimburse MHT for its reasonable expenses, including its attorney's fees and expenses. MHT had filed a proof of claim for its fees and expenses in July 1983.

The receiver, the unsecured creditors' committee and the United States Trustee filed objections to MHT's application.

The district court denied MHT's application for administrative expenses under Sec. 503(b). 78 B.R. at 563-65. First, the district court held there was no difference between indenture trustees and the other entities listed in Sec. 503(b)(3)(D). Id. at 563. Then the district court decided there was no conflict between the "substantial contribution" standard in Sec. 503(b) and the TIA's "prudent person" standard, id., and specifically held that "an indenture trustee who performs meritorious service in accordance with its indenture responsibilities for the benefit of debenture holders is not, simply by virtue of that fact, considered to have made a 'substantial contribution' to the [bankruptcy] estate." Id. at 564. The district court then reviewed the application, affidavits and exhibits and found that MHT had "not made a substantial contribution to the progress of these proceedings" because, although MHT had acted properly to protect the interests of the debenture holders, it did not participate in the formulation of the Sharing Agreement. Id.

The district court then turned to MHT's alternative Sec. 502 claim. The district court interpreted Sec. 607 of the Indenture Agreement as an agreement by FTC to pay MHT "reasonable compensation for services rendered which are beneficial to the proper administration of the debtor's estate." Id. The district court found, however, that "only a small...