Petitioners Brief — Missouri Pacific Railroad v. Thompson

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BRIEF IN SUPPORT OF PETITION.

Opinions Below.

The United States District Court for the Eastern Dis-

trict of Missouri, Eastern Division, entered an order deny-

ing the petition for a compromise of the RFC claim on

November 16, 1942 (R. 10). The opinion of the Circuit

Court of Appeals for the Kighth Circuit dismissing the ap-

peals (R. 84-89) is reported in 134 F. (2d) 139.

Jurisdiction.

The orders of the Circuit Court of Appeals for the Eighth

(ireuit were entered on March 5, 1943 (R. 89-92). The

jurisdiction of this Court is invoked under the provisions of

Section 240 (a) of the Judicial Code (28 U. 8. C. A. See.

347 (a) as amended by the Act of February 3, 1925, 43 Stat.

938).

Statement of the Case.

A summary statement of the facts is given in the peti-

tion, pages 3-5 above.

Statutes Involved.

The jurisdiction of appellate courts is regulated by the

Act of June 22, 1938, c. 575, Sec. 1, 52 Stat. 854 (11 U. S.

C. A. See. 47) which provides:

‘‘ Jurisdiction of appellate courts.

a. The Cireuit Courts of Appeals of the United States

and the United States Court of Appeals for the District

of Columbia, in vacation, in chambers, and during their

respective terms, as now or as they may be hereafter

held, are hereby invested with appellate jurisdiction

from the several courts of bankrupcty in their respec-

tive jurisdictions in proceedings in bankruptcy, either

interlocutory or final, and in controversies arising in

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proceedings in bankruptcy, to review, affirm, revise or

reverse, both in matters of law and in matters of fact:

Provided, however, That the jurisdiction upon appeal

from a judgment on a verdict rendered by a jury, shall

extend to matters of law only: Provided further, That

when any order, decree, or Judgment involves less than

#500, an appeal therefrom may be taken only upon

allowance of the appellate court.

b. Such appellate jurisdiction shall be exercised by

appeal and in the form and manner of an appeal.

e. The Supreme Court of the United States is hereby

vested with jurisdiction to review judgments, decrees,

and orders of the Cireuit Courts of Appeals of the

United States and the United States Cireuit Court of

Appeals for the District of Columbia in proceedings

under this title in accordance with the provisions of the

laws of the United States now in force or such as may

hereafter be enacted.’’

Specifications of Errors to be Urged.

1. The Cireuit Court erred in dismissing the appeals from

the order of the District Court.

2. The Cireuit Court erred in holding that the petition-

ers herein did not have an interest entitling them to appeal

from the order of the District Court.

3. The Cireuit Court erred in not holding that the fact

that the Trustee had taken an adverse position entitled

the petitioners herein to appeal from the order of the

District Court.

Summary of Argument.

I.

The petitioners herein are directly and adversely affected

by the District Court’s denial of the petition.

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II.

Anorder of a District Court refusing to direct the Trustee

to administer the estate economically may be appealed

from by ereditors and stockholders, particularly where

the question of economical administration vitally affects

their participation in the reorganization.

IIl.

Where the trustee has taken a position adverse to that

of creditors and stockholders, they are entitled to take an

appeal.

ARGUMENT.

8

The petitioners herein are directly and adversely affected

by the District Court’s denial of the petition.

In dismissing the appeals the Circuit Court of Appeals

for the Kighth Cireuit found that the order of the District

Court ‘‘does not directly adjudicate upon any claim of

any creditor, secured or unseeured’’ and that ‘‘each cred-

itor retains after the order the same claim it had before

and the assets are unchanged.’’ Such conclusions ignore

the substance of petitioners’ contention. It is, as in the

Fonda Railway case supra, the refusal of the District Court

to direct the effectuation of a saving in which the peti-

tioners have a vital interest, that is the basis of their right

to appeal. The fact that the appeals were taken from an

order denying a payment out of the estate can of course

make no difference; the question is not one of form, but

of substance. As the Cireuit Court of Appeals for the

Second Cireuit said in the Fonda Railway case, in answer-

ing the contention that the order there did not grant the

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abandonment but refused it, and in holding that the motion

to dismiss the appeal must be denied:

‘*But it is seldom, if ever, that the right of appeal

is made to depend upon whether an issue presented

for decision is determined affirmatively or negatively,

We cannot think Congress intended to cut so fine”

(95 F. (2d) 397, 399).

In the Fonda Railway case the interest of the appellants

was only that of bondholders interested in the economical

operation of the trust estate; and there the debtor’s trustee,

instead of opposing the desire of the bondholders to effect

economies, was in entire accord with them. Certainly the

effectuation in the instant proceeding of an immediate

saving of more than $4,600,000 of past interest and a

future annual saving of $1,388,000 seems no less in either

kind or degree than the saving to sustain which the Circuit

Court of Appeals for the Second Cireuit held that bond-

holders there had a right to appeal.

The petitioners herein are creditors and stockholders.

Under the plan of reorganization approved by the Com-

mission and the District Court,® stockholders are wiped out

and these creditors receive only partial payment of their

claims. The Convertible 544% Bonds of the Debtor, of

which some of the petitioners own and represent large

amounts, receive under that plan for each $1,000 principal

amount thereof and all unpaid interest thereon as of

January 1, 1940, only 2.42 shares of no par value common

stock.

5 On May 8, 1943, the Cireuit Court of Appeals for the Eighth Cireuit

remanded the appeals then pending in that Court on the plan of reorgani-

zation to the District Court, which has ordered that a hearing be held

before it to determine “whether (that plan of reorganization) shall be

confirmed and to determine any and all other matters relevant thereto.”

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The new securities allocated to the RFC under the

present plan of reorganization consist in the main of new

fixed interest First Mortgage Bonds and represent over

7% of the total of $423,722,500 in reorganization securities

which will be prior to the common stock that is the prin-

cipal security allocated to all but one of the petitioners

in respect of the indebtedness owed them (R. 45 and 239

I ¢. C. 7, 155, end of Appendix FE). Use by the Trustee

of idle cash now on hand to repay the RFC loan would

save annual charges prior to the common stock equivalent

to dividends of more than $1 per share on the common

stock of the reorganized company (ibid). This would

justify a large and material increase in the amount of the

common stock which could be made available in reorgan-

ization.

It is respectfully submitted that it is difficult to see how

it can be contended that the petitioners are not directly

and adversely affected by the refusal of the District Court

to direct such a saving.

The foregoing relates only to the petitioners who are

creditors. Some of the petitioners are holders of large

amounts of stock of the Debtor and under the present

plan are eliminated from any participation in the reorgan-

ized company. The only way in which present stockholders

have a possibility of participating in the new capitalization

proposed by the present plan is by the payment and elimina-

tion of prior claims. Accordingly, the payment of the

RFC and underlying debt, or conversely, the refusal of the

District Court to authorize such payment, may make all

the difference between participation in the plan of reorgan-

ization and non-participation—all the difference between

receiving something and nothing. It is not of course con-

tended that the refusal to authorize such payments con-

ca

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stitutes a denial of the claim of the petitioners—as to

which all the authorities agree there would be a right to

appeal; but the result is the same.

Accordingly, it is respectfully submitted that the denial

of the petition by the District Court directly and adversely

affects the interest of the petitioning creditors and stock-

holders whose claims are junior to the RFC loan.

II.

An order of a District Court refusing to direct the trus-

tee to administer the estate economically may be appealed

from by creditors and stockholders, particularly where the

question of economical administration vitally affects their

participation in the reorganization.

Appeals by creditors and stockholders have been taken

in numerous cases from orders of district courts approving

compromises in bankruptey and reorganization proceed-

ings.

Pullman Couch Co. v. Eshelman, 1 F. (2d) 885 (C. C. A.

4, 1924) ;

Drexel vy. Loomis, 35 F. (2d) 800 (C. C. A. 8, 1929);

Hair v. Byers, 92 F. (2d) 684 (C. C. A. 5, 1987) ;

Scott v. Jones, 118 F. (2d) 30 (C. C. A. 10, 1941).

Similarly, appeals were taken by creditors and stockholders

from compromises in equity receivership cases.

West v. Radio-Keith-Orpheum Corp., 68 F. (2d) 869

(C. C. A. 2, 1934) ;

McDonald y. Aetna Indemnity Company, 92 Atl. 154

(Sup. Ct. of Errors of Conn., 1914) ;

Gerdes, Corporate Reorganization, Vol, 2, p. 1223.

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Creditors and stockholders in bankruptcy and _ reor-

ganization proceedings have also been permitted to appeal

from various other orders of district courts for the purpose

of furthering a sound and economical administration of

the estate. See supra In re Fonda, J. & G. R. Co.; Van

Schaick v. McCarthy; In re Irving-Austin Building Corp.;

and Bankers Trust Co. v. Henwood.

Although the Distriet Court refused to authorize the ecom-

promise here on the basis of its not being ‘‘in the interest of

the trust estate and of the creditors’? (R. 18), the Cireuit

Court of Appeals held that the creditor and stockholder

petitioners herein have no appealable interest; that ‘such

general interest is (the Debtor’s Trustee’s) interest and not

the interest of the individual creditors or the Debtor or its

stockholders.’’ In reaching this conclusion the Court

relied upon decisions holding that creditors have no stand-

ing to appeal from orders of District Courts allowing the

elaims of other ereditors.® It is submitted, however, that

this principle is not applicable to appeals from the grant-

ing or denying of a compromise of the claim of another

creditor, particularly in Chapter X or Section 77 reorganiza-

tion proceedings. (In re Keystone Realty Holding Com-

pany, supra.)

While the two other decisions relied upon by the Cireuit

Court in the instant case support the decision of that court

(except for the important distinction discussed in Point ITI

below), Amick v. Mortgage Security Corp. and In re West-

® Chatfield vy. O'Dwyer, 101 F. 797 (C. C. A. 8, 1900) ; Jonas v. Bellerive

Inv. Co., 90 F. (2d) 688 (C. C. A. 8, 1937); Foreman v. Burleigh, 109 F.

313 (C. C. A. 1, 1901); In re Lewensohn, 121 F. 538 (C. C. A. 2, 1903) ;

In re Chakos, 24 F. (2d) 482 (C. C. A. 7, 1928).

ern Pacific R. R. Co., supra, those decisions only increase

the confusion and emphasize the conflict between the Cir.

cuit Courts as to the right of creditors and stockholders

to appeal from orders (except orders allowing claims of

other creditors) entered by the District Courts in bank-

ruptey and reorganization proceedings.

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III.

Where the trustee has taken a position adverse to that of

creditors and stockholders, they are entitled to take an

appeal.

But even assuming arguendo that the decisions in the

Amick and Western Pacific cases are correct in the ordinary

situation and that the Keystone, Dana, Eshelman and

Fonda decisions are erroneous, the petitioners herein are

entitled to appeal.

The Trustee in this proceeding has taken a position on

the merits opposed to the petitioners and has been active

in opposition, filing an answer requesting the denial of the

petition (R. 59). By thus taking a position adverse to our

contentions, his sincerity not being questioned, the Trustee

has effectively barred himself from exercising an election

to appeal in behalf of these petitioners. Certainly after

having successfully opposed the petition, the Trustee could

not appeal from a decision in his favor. Accordingly, the

only avenue of appeal now lies through one or all of the

parties whom the Trustee has opposed.

This contention was strenuously argued before the Cir-

cuit Court by the petitioners herein, but the Cireuit Court

did not feel that this fact was of sufficient importance even

to justify mention. The Cireuit Court completely ignored

~ Pee OP SELES ESB LR LEIS NOG ELI LY PRG EEL A INEST ae

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the recognition of this principle in Christian v. Hoe & Co., ;

Inc., 79 F. (2d) 541 (1935), where the Cireuit Court of Ap- f

peals for the Second Cireuit, while holding that creditors

and stockholders generally have no right to appeal from

allowance orders, distinguished the situation where the |

order appealed from was one where the debtor’s trustee |

was in an adverse position, saying: .

‘‘But that rule does not apply to the allowance of the

trustee itself, or to that of its attorneys; obviously the

trustee would not appeal from these * * * We as-

sume without deciding that in so far as the trustee and

its attorneys were awarded anything for services ren-

dered in the proceeding as distinct from the suit, no

leave to appeal was necessary’? (pp. 541-2).

Relea arb nae rn

Eon eseN ties eeake se neers

It is thus clearly recognized that where the position of

the trustee is opposed to that of creditors or stockholders,

such creditors or stockholders have the right to appeal.

The decision of the Cireuit Court was erroneous in that

it failed to recognize this important principle. Thus, even

assuming that the Amick and Western Pacific cases are cor-

rect, they are not controlling in this situation for in neither

of those cases had the trustee aken an adverse position.

If the decisions of the Second, Third and Fourth Cir-

cuits in the Fonda, Dana, Keystone and Eshelman cases

are correct, a fortiort when the Trustee has taken a posi- ¥

tion which is adverse to that of the creditors, those creditors |

have the right to appeal from the orders of the District

Court.

Conclusion.

This cause involves federal questions of first importance

which should be reviewed and settled by this Court and writs

LAS BERN IOP ISIN NER LER cP oe

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of certiorari should issue for that purpose,’ as prayed in

the foregoing petition.

Dated June 3, 1943.

Respectfuly submitted,

Marion B. Pierce,

44 Whitehall St., New York, N. Y.,

Attorney for Missouri Pacific

Railroad Company, Debtor.

Epwarp F, Conapay,

1331 “G” St., N. W., Washington, D. C.;

Everett Pau GRIFFIN,

Security Bldg., St. Louis, Mo.,

Attorneys for Protective Committee of

First Mortgage Bondholders of Inter-

national-Great Northern Railroad

Company.

Harry KiIRsSHBAUM,

67 West 44th St., New York, N. Y.,

Attorney for Gerald Axctrod, et al.

LutHer M. WaALtreR,

135 8. LaSalle St., Chicago, II,

Attorney for Protective Committce

for Holders of Common Stock.

Davip TEITELBAUM,

Maucotm FoosHEEr,

2 Wall St., New York, N. Y.,

Attorneys for Alleghany Corporation.

Donovan, LetsurE, Newron & Lumsarp,

Of Counsel.

7 The importance of procedural questions of less seope and significance

in connection with the right to appeal in reorganization proceedings under

the Bankruptey Act has recently been clearly recognized by this Court in

Dickinson Industrial Site v. Cowan, 309 U. 8. 382 (1940). There this

Court granted certiorari.on the question whether an appeal could be taken

as of right from a decision which made an allowance of only $10,000—

expressly on the basis of a conflict with a ruling of another Cireuit Court

of Appeals which held that appeals can be taken as of right under the

Chandler Act from compensation orders involving $500 or more.

(6528)

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