Securities and Exchange Commission v. Krentzman

• Decision Date: 28 June 1968
• Docket Number: No. 25774.,25774.
• Citation: Securities and Exchange Commission v. Krentzman, 397 F.2d 55 (5th Cir. 1968)
• Parties: SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. Honorable Ben KRENTZMAN, District Judge of the United States District Court for the Middle District of Florida, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

397 F.2d 55 (1968)

SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. Honorable Ben KRENTZMAN, District Judge of the United States District Court for the Middle District of Florida, Respondent.

No. 25774.

United States Court of Appeals Fifth Circuit.

June 28, 1968.

David Ferber, Philip A. Loomis, Jr., Paul Gonson, Richard F. Kotz, Attys., Sec. & Exchange Comm., Washington, D. C., for petitioner.

George E. Allen, Fort Myers, Fla., for respondent.

Before WISDOM, GOLDBERG and GODBOLD, Circuit Judges.

GODBOLD, Circuit Judge:

The Securities and Exchange Commission seeks a writ of mandamus directed to the Honorable Ben Krentzman, United States district judge for the Middle District of Florida. In a hearing conducted in a reorganization proceeding under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., the referee ruled that counsel for the Commission had no standing to cross-examine a witness. The Commission is a party to the reorganization by virtue of the district court's approval of the Commission's notice of appearance filed pursuant to § 208 of the Act. 11 U.S.C.A. § 608. The Commission moved the district court to direct the referee to allow it to conduct the desired cross-examination, to offer evidence and to participate fully in the hearing. The motion was denied. Original petition for a writ of mandamus was filed with us, and the Respondent has filed an answer as required by Fifth Circuit Rule 13a, and a brief.

The Commission was a "party in interest" in the reorganization pursuant to § 208 of the Bankruptcy Act.¹ The reorganization is of Tower Credit Corporation. The trustee filed a petition seeking return to Tower of a large block of its own stock alleged to be mistakenly in the possession of the trustee in bankruptcy of another company, First Mortgage Corporation, and seeking determination of the rights in another large block as between the First Mortgage trustee and a bank which had purchased the second block at a sale on execution.

At the request of the reorganization trustee a show cause order was issued by the district judge requiring the First Mortgage trustee and the bank to file pleadings setting forth their positions, the matter then to be heard by the referee to ascertain whether the reorganization trustee was entitled to the first described block of stock, and to determine the rights, if any, of the First Mortgage trustee to the second shares held by the bank. (There were several other blocks of stock, involving several other parties, the rights to which were to be determined in the same manner and at the same hearing.)

In the hearing the First Mortgage trustee testified on direct in behalf of his bankruptcy estate and was subjected to cross-examination by a party or parties other than the Commission. Counsel for the Commission then sought to cross-examine, and before he commenced the referee sua sponte ruled he would not be allowed to do so. The referee's grounds set out in an oral colloquy with Commission counsel were that the hearing was the trial of a lawsuit, of a controversy in which the sole parties in interest were the reorganization trustee as plaintiff, the First Mortgage trustee as defendant, and the bank as a third party defendant, with issues between them defined by the pleadings and with burdens of proof, that if the Commission was entitled to cross-examine each of the numerous creditors was similarly entitled which would make it impossible to conduct the trial, and that discovery procedures were available to the Commission if it desired to pursue them.

Counsel for the Commission stated that his purpose was to develop more facts. In further colloquy with the referee counsel referred to a claim of right to offer evidence as well as to cross-examine. The further the matter went the broader the Commission's position became. The motion presented to the district judge added a claim of right to participate fully in the hearing. The petition filed with this court seeks to establish the right to participate fully, including examination of witnesses and presentation of evidence, in all hearings and matters in the corporate reorganization, whether before the referee, the district judge or a special master.

When the Bankruptcy Act was amended to permit intervention in corporate reorganizations by the Commission, it was made clear that the Commission was charged with a responsibility to protect the public interest, the general interest of investors, and to serve in an advisory capacity to the bankruptcy court. Hearings on H.R. 8046 Before a Subcomm. of the Senate Comm. on the Judiciary, 75th Cong., 2d Sess. 12 (1938); Hearings on H.R. 8046 Before the House Comm. on the Judiciary, 75th Cong., 1st Sess., serv. 9, at 423-26 (1937); H.R. Rep. No. 1409, 75th Cong., 1st Sess. 38 & 47-48 (1937). Section 208 gives the court an option to request the Commission's assistance in the reorganization, and gives the Commission the option to intervene (with the Court's approval) in cases it deems appropriate. Once the Commission has intervened it is "deemed to be a party in interest, with the right to be heard on all matters arising in such proceeding."

A basic assumption of Chapter X is that "the investing public dissociated from control or active participation in the management, needs impartial and expert administrative assistance in the ascertainment of facts, in the detection of fraud, and in the understanding of complex financial problems." One of the major reforms of the chapter, therefore, was the introduction of the Securities and Exchange Commission into the reorganization process to fulfill that need.

6A Collier, Bankruptcy ¶ 9.27, at 324 (14th ed. 1965) (citations omitted). The Commission acts in an impartial advisory capacity "in the role of amicus curiae." Senate Hearings on H.R. 8046, supra at 12 (testimony of SEC Chairman, now Justice, Douglas). "Its disinterestedness and the extensive experience and knowledge of its staff of economic and legal experts make it a powerful force in the reorganization proceeding."² Under Section 172 of the Act, 11 U.S.C.A. § 572, the judge may, if the scheduled indebtedness of the debtor does not exceed $3,000,000, and must if such indebtedness exceeds $3,000,000, submit to the Commission for examination and an advisory report the plan or plans the judge thinks worthy of consideration. The record does not tell us whether Tower's scheduled indebtedness would bring it within the mandatory or the permissive provisions of § 172, but we do not consider that to be determinative. The judge may not approve a plan submitted to the Commission until it has filed its report, or has waited an unreasonable time without filing. § 173 of the Act, 11 U.S.C.A. § 573. 6 Collier, supra ¶ 7.30.

The assistance rendered by the Commission has been helpful in many instances and well received.³

Reading the language of § 208 against the backdrop of its legislative history, particularly the function the Commission was expected to perform, we believe Congress would not have intended there be power in the district court to deny the Commission carte blanche the right to propound questions to witnesses on cross-examination and to offer evidence. No sufficient reason is offered to us to carve out such an exception to the right of the Commission as "a party in interest with the right to be heard on all matters arising in such proceedings." Such a limitation would hamper the Commission severely in its tasks as adviser to the court and protector of the public interest. This is all the more clear if the debtor, as Tower, may have...