Reply Brief — Collins v. Johnston

IN THE

Supreme Court of the United Srey ok

No. 80-1754 ie ee ED

JUN 2 “aad

OCTOBER TERM, 1980

WEBSTER A. COLLINS, HERBERT R. MorRISON,

HELEN O. MORRISON, and GLEN A. WILKINSON,

Petitioners,

V.

DAVID R. JOHNSTON, THE NORTHWESTERN BANK,

and JAMES R. GILLEY,

Reapondente,

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Fourth Circuit

PETITIONERS’ REPLY MEMORANDUM

CALVIN H. Cosr, Jr.

(Counsel of Record)

STEPTOE & JOHNSON

1250 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 862-2000

T. WINFIELD BLACKWELL, JR.

JACK F. CANADY

~ BLACKWELL, DBL ACKWELL,

CANADY & ELLER

2100 Wachovia Building

Winston-Salem, N.C. 27102

(919) 722-7161

HENRY A. MITCHELL, Jr.

CARL N. PATTERSON, Jr.

SMITH, ANDERSON, BLOUNT,

DORSETT, MITCHELL &

JERNIGAN

P.O. Box 31

Raleigh, N.C. 27602

(919) 821-1220

Attorneys for Petitioners

————_—_——ee———

WILSON - Eres PRINTING Co.. Inc. - 7869-0096 . WASHINGTON, D.C. 20001

TABLE OF AUTHORITIES

Cases Page

Dana Vv. SEC, 125 F.2d 542 (2d Cir. 1942) .......... 2

In re Duplan Corp., 450 F. Supp. 790 (S.D.N.Y.

aR? SRS SAL SSIES TIMERS 9 OI Pek 8

In re_S. Jersey Land Corp., 361 F.2d 610 (3d Cir.

fF ER RE AERA 2829S RP) AON poe “CVU Oe 2

In re Wonderbowl, Inc., 515 F.2d 18 (9th Cir.),

cert. denied, 423 U.S. 869 (1975) ...........00.2.0.. 8,4

Young V. Higbee Co., 8324 U.S. 204 (1945) ........... 2

Statutes and Regulations

55 As aes 1 OODELS, COS (ROT) ns ccncci ccc ieee 8

Be as Oe EE | wpnrciviceniecctosschenraconseencamanbuaabes 2

Miscellaneous

6 Collier on Bankruptcy (14th ed. 1978) ................ 2,38

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

No. 80-1754

WEBSTER A. COLLINS, HERBERT R. MORRISON,

HELEN O. MORRISON, and GLEN A. WILKINSON,

a Petitioners,

DAvID R. JOHNSTON, THE NORTHWESTERN BANK,

and JAMES R. GILLEY,

Respondents.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Fourth Circuit

PETITIONERS’ REPLY MEMORANDUM

I. RESPONDENTS’ CHALLENGE TO THE STAND-

ING OF THE PETITIONERS IS UNSOUND

A new issue raised in respondents’ opposing brief in

No. 80-1754 concerns the standing of investors to peti-

tion this Court for a writ of certiorari. See Respon-

dents’ Brief at 21-27. Briefly summarized, respondents’

argument is that the investors were not parties to the

reorganization proceedings and were not aggrieved by

the lower court’s reversal of the bankruptcy court’s

order authorizing the trustee to pay the costs of their

7%

-X

2

litigation. This argument is based on a fundamental

misunderstanding, inter alia, of the nature of Chapter

X reorganization proceedings, as distinguished from

regular bankruptcy proceedings.’

In a proceeding arising under Chapter X, “(t]he

debtor, the indenture trustees, and any creditor or stock-

holder of the debtor shall have the right to be heard on

all matters ....” 11 U.S.C. § 606 (1976) (emphasis

added). This Court has stated that this provision cre-

ates an exception to the general rules pertaining to

standing to be heard and to appeal in bankruptcy cases:

“TSection] 206 of the Chandler Act... , contrary to

the general bankruptcy procedure, grants any stock-

holder or creditor the right to be heard on all matters

relating to corporate reorganizations. Courts have lib-

erally construed this language as authorizing appeals.”

Young v. Higbee Co., 324 U.S. 204, 210 (1945) (foot-

note omitted) .?

1 None of the decisions cited by respondents in their argument

on the standing issue involves proceedings under Chapter X. In

fact, at least one of respondents’ authorities comments upon the

significant difference between Chapter X and other bankruptcy

proceedings in the area of standing to appeal. 6 Collier on Bank-

ruptcy Part 2 9.28[2], at 1700-01 (14th ed. 1978).

2One of the decisions cited with approval by this Court in

Young Vv. Higbee Co. held that shareholders and creditors need

not intervene in the district court in order to have standing to

appeal to the circuit court of appeals. Dana v. SEC, 125 F.2d 542,

548 (2d Cir. 1942) (per curiam) (panel of L. Hand, Chase and

Clark, JJ.). Rather, creditors and stockholders may appeal from

any order deciding any matter in a Chapter X proceeding. Jd. In a

subsequent decision, the Third Circuit held that a creditor who

made no appearance at the hearing before the district court per-

taining to an alleged fraudulent transfer of the debtor’s property

to that creditor nevertheless had standing to appeal the district

court’s order requiring it to reconvey the property to the debtor.

In re S. Jersey Land Corp., 361 F.2d 610, 614 (8d Cir. 1966). The

law on this point was recently summarized by Judge Duffy of the

Southern District of New York as follows: “‘[T]he right to be

vy

i

3

As a result of section 206, creditors and stockholders

“are by statute parties to the case.” 6 Collier on Bank-

ruptcy Part 2 7 9.23[1], at 1694 (14th ed. 1978). The

record clearly establishes that petitioners are stockholders

and creditors* of the debtors herein. For purposes of

Chapter X, the term “creditor” is simply defined as “the

holder of any claim.” 11 U.S.C. § 506(4) (1976). The

term “claims” is defined to include “all claims of what-

ever character .. . whether or not such claims are prov-

able under section 103 of this title and whether secured

or unsecured, liquidated or unliquidated, fixed or con-

tingent.” Id. § 506(1).

As creditors and stockholders of the debtors, the de-

frauded investors have the same statutorily protected

interest in the order in question as do respondents. In

fact, all creditors and stockholders of the debtors have

a very clear interest in the issues presented. If the

bankruptcy judge’s January 16 order is upheld, the

trustee’s expenditure of the debtors’ funds for costs of

the Gilbert action is likely to result in a substantial re-

duction or elimination of the claims against the estate,

as well as a substantial improvement in the viability of

any plan of reorganization, and the prospects for finan-

cial recovery by all creditors and stockholders will there-

fore be greatly enhanced.‘ Therefore, the respondents’

heard’ provided for in Section 206 and Rule 10-210(a) (1) includes

the right of appeal even absent participation in the proceeding

resulting in the order from which the appeal is taken.” In re

Duplan Corp., 450 F. Supp. 790, 792 (S.D.N.Y. 1978).

®The class plaintiffs’ claims in Gilbert against the debtors’

directors, officers and agents could also be claims against the

debtors themselves. Indeed, the petitioners herein filed proofs of

claima in the reorganization proceedings on September 14, 1979.

Respondents’ Brief at 18.

* Far less substantial interests have been held to confer stand-

ing to appeal orders in reorganization proceedings. See, e.g., In

re Wonderbowl, Inc., 515 F.2d 18, 19 (9th Cir.) (stockholder

ao

4

assertion that the defrauded investors “have no rights

to seek this review” is without merit.

II. RESPONDENTS RELY UPON A DECISION OF

THE BANKRUPTCY COURT WHICH HAS BEEN

REVERSED ON APPEAL

Respondents have cited and appended to their oppos-

ing brief the entire text of an opinion written by the

< bankruptcy judge on May 15, 1980, which purported to

disallow the claims filed in the Chapter X proceedings

by petitioners. Respondents failed to report, however,

that upon appeal by the petitioners and the United

States Securities and Exchange Commission, the district

court has upheld petitioners’ right to file claims in the

Chapter X proceedings and reversed the bankruptcy

judge’s disallowance of those claims. Memorandum dated

May 18, 1981." Respondents also failed to disclose that

the bankruptcy judge’s May 15, 1980 order did not

alter or rescind his January 16, 1979 order which is the

subject of this petition. See Petition at 24a. Thus, the

bankruptcy judge’s now-reversed opinion and the un-

founded statements contained therein should have no

bearing on this Court’s decision to grant certiorari in

this case.

whose subordinated position renders his stock worthless neverthe-

less has standing to appeal order approving compromise in Chapter

X proceeding), cert. denied, 423 U.S. 869 (1975).

5 Attached hereto as Appendix A. This memorandum was trans-

mitted to counsel by the clerk of the district court on May 19,

1981, but counsel have previously been advised by the district

) court, on several occasions, that it intended to reverse the bank-

) ruptcy judge on this issue.

5

Respectfully submitted,

CALVIN H. Coss, JR.

(Counsel of Record)

STEPTOE & JOHNSON

1250 Connecticut Avenue, N.W.

Washington, D.C. 20086

T, WINFIELD BLACKWELL, JR.

JACK F. CANADY

BLACKWELL, BLACKWELL,

CANADY & ELLER

2100 Wachovia Building

Winston-Salem, N.C. 27102

HENRY A. MITCHELL, JR.

CARL N. PATTERSON, JR.

| SMITH, ANDERSON, BLOUNT,

DORSETT, MITCHELL &

| JERNIGAN

P.O. Box 81

Raleigh, N.C. 27602

Attorneys for Petitioners

June 1981

la

APPENDIX A

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF NORTH CAROLINA

OFFICE OF THE CLERK

Post Office Box V-1

Greensboro, North Carolina 27402

CARMON J. STUART, Clerk

Telephone (919) 378-5847

May 19, 1981

TO: ALL COUNSEL OF RECORD

RE: C-80-342-G; Shelton and Collins, et al. v.

Gilbert, et al.

(B-77-695 ete. Appeal)

Gentlemen:

Please see the attached memorandum dated May 18,

1981, of Judge Erwin’s ruling on the appeals from the

Bankruptcy Court Order dated May 15, 1980.

Your proposed judgment should be submitted to this

office no later than June 8 for coordination and forward-

ing to Judge Erwin.

Very truly yours,

/s/ Carmon J. Stuart

CARMON J. STUART

bf

Enclosure

2a

UNITED STATES GOVERNMENT

are memorandum

Date: May 18, 1981

/s/ Richard C. Erwin

Reply to ;

Attn of: Richard C. Erwin, U.S. District Judge

Subject: C-80-342-G; Shelton and Collins, et al. v.

Gilbert, et al. (Appeal B-77-695 etc.)

To: Mr. Carmon J. Stuart

Clerk of Court

The Court is ruling as follows on the above-referenced

appeal from the May 15, 1980 order of Judge Reynolds,

Bankruptcy Judge:

(1) As to the Collins, et al. claim (filed Septem-

ber 14, 1979):

a. Reverse Judge Reynolds as to Webster A.

Collins, Herbert R. Morrison and Helen

O.: Morrison, W. 0. Gregory, and Glen A.

Wilkinson.

b. Affirm as to “[Names and addresses of all

other similarly situated shareholders of the

Debtors known to or reasonably ascertain-

able by the Trustee].”

(2) As to the Shelton, et al. claim (filed Septem-

ber 14, 1979):

a. Reverse Judge Reynolds as to Thomas W.

Shelton, William F. Suddeth, and George

W. Fulk.

b. Affirm as to “[Names and addresses of all

other similarly situated employees and for-

8a

mer employees of the Debtors known to or

ascertainable by the Trustee],” but remand

to Judge Reynolds with instructions that he

consider the Proof of Multiple Claims filed

October 5, 1979 by George W. Fulk in his

capacity as fiduciary with respect to various

profit sharing, pension, and retirement plans

listed in the claim.

(8) The Court requests that all parties file a pro-

posed judgment within twenty (20) days of this

date in light of the above.