Opposition Brief — National Union Fire Insurance v. Camp, 113 S. Ct. 1366 (1993) (No. 92-1046)

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(5 Supreme Court, U.S.

No. 92-1046 FILED

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IN THE |

OFFICE OF THE Cicek

Supreme Court of the Gnited- States” —

OCTOBER TERM, 1992

NATIONAL UNION FIRE INSURANCE Co.

OF PITTSBURGH, PA.,

Petitioner,

VS.

JOHN R. CAMP, JR., TRUSTEE,

and SECURITIES INVESTOR PROTECTION CORPORATION,

Respondents.

————

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Eleventh Circuit

OPPOSITION OF RESPONDENTS TO MOTION OF

AMERICAN INSURANCE ASSOCIATION FOR

PERMISSION TO FILE AMICUS CURIAE BRIEF

NEAL B. SHNIDERMAN

AporNo & ZEDER, P.A.

2601 South Bayshore Drive

Suite 1600

Miami, Florida 33133

Telephone: (305) 858-5555

Attorneys for John R. Camp, Jr.,

Trustee

THEODORE H. FOcHT

General Counsel

Counsel of Record

Of Counsel: SECURITIES INVESTOR PROTECTION

MICHAEL E. Don CORPORATION

Deputy General Counsel 805 Fifteenth Street, N.W.

, Suite 800

JOSEPHINE WANG Washington, D.C. 20005

Associate General Counsel Telephone: (202) 371-8300

a RRA CE

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

uo

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .00...0.........cccccccosececeeeceeee, li

PRELIMINARY STATEMENT. .............cccccccocccccccceeess. 1

MOTE Wicsiddeniegea chai iatesicctitacitannai ii ee ot 2

1. The Amicus Brief Restates NUFIC’s Ar-

gument As To The Bank Cases. ............. 3

2. The Issue As To Constitutionality Is Un-

GRR HIE. neitiisinctssssiscsatncedaneseiaciisanat 4

3. The Constitutional Issue Lacks Merit. .... 5

4. The Amicus Brief Reflects a Misunder-

taming Of BIPA., ..........cccsscoseccccsccvesssossece 6

SPIT | sssinavseniiicdticlaatuinscbesnctanseondstknineupbirnedeain 8

ii

TABLE OF AUTHORITIES

CASES:

A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir.),

cert. den., 479 U.S. 876 (1986) veeccccecece.s-......,

In re Bell & Beckwith, 937 F.2d 1104 (6th Cir.

URE) «svininsnistisesienientntielinns atime aes oh

Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380

LEOET) <sessecsninhenhenisansnlieialeiinae tree Le

Matter of Gulf Tampa Drydock Co., 49 B.R. 154

(Bankr. M.D. Fla. 1985) ooo. sccccecsseesesccees.,.,

SEC v. Aberdeen Securities Co., 480 F.2d 1121 (3d

Cir.), cert. den. sub nom., Seligsohn v. SEC,

414 U.S. 1111 Pe cinmngema

SEC v. Albert & Maguire Sec. Co., 378 F.Supp. 906

BD. Be. TER siccninsenies ee.

SIPC v. Ambassador Church Finance/Development

Group, Inc., 788 F.2d 1208 (6th Cir.), cert. den.

sub nom., Pine Street Baptist Church v. SIPC,

479 U.S. 850 (1986) .......ccccccscssessssssoeseececess....,

SIPC v. Associated U: ters, Inc., ‘423 F.Supp.

BOS GP. SIR BITE cciciccicisnminsiaeceec

Tepper v. Chichester, 285 F.2d 309 (9th Cir.

EO) ovasnicsveanminssltnssiiinidsianiocidaiapee icc

Wright v. Union Central Ins. Co., 304 U.S. 502

CED esicistvniinasansvarneemedee ee ES

Page

iii

Table of Authorities Continued

Page

CONSTITUTION OF THE UNITED STATES:

I I ns sumnnnachenmseseneeeoceeece 6

I isa vaeseindneamnnsdasnedacsbaveuceoes 5

STATUTES AND RULES:

Securities Investor Protection Act of 1970, as amended,

15 U.S.C. §

AE

I NMIAL Liss uiiseacustansussinivenninssanssdaseresionssbsssnosearaae

SES ee ern 2,

Other Statutory Provisions

BB Wes, SIGRILONIAVA) ......crccccecccscseccescsecoccesccesns 4

Rules

Rules of the Supreme Court of the United States

et iddiciica nascnanedsvensessissilabseddesaasintceses 1

LEGISLATIVE MATERIALS:

S. Rep. No. 989, 95th Cong., 2d Sess. (1978) ....... 4

IN THE

Supreme Court of the United States

OCTOBER TERM, 1992

No. 92-1046

NATIONAL UNION FIRE INSURANCE Co.

OF PITTSBURGH, PA.,

Petitioner,

VS.

JOHN R. Camp, JR., TRUSTEE,

and SECURITIES INVESTOR PROTECTION CORPORATION,

Respondents.

OPPOSITION OF RESPONDENTS TO MOTION OF

AMERICAN INSURANCE ASSOCIATION FOR

PERMISSION TO FILE AMICUS CURIAE BRIEF

PRELIMINARY STATEMENT

Pursuant to Rule 37.4 of this Court, John R. Camp, Jr.,

the Trustee for the liquidation of Government Securities

Corporation (‘““GSC’’), and the Securities Investor Protec-

tion Corporation (“SIPC”) submit this opposition to the

motion of American Insurance Association (‘‘the Associa-

tion’”’) for permission to file an amicus curiae brief in this

case.1 The motion should be denied because the Associa-

tion, which is appearing in this case for the first time,

raises no relevant matter. By and large, its brief merely

‘Motion to File Brief of Amicus Curiae and Brief of Amicus Curiae

American Insurance Association In Support of Petition for Writ of

Certiorari, dated January 7, 1993. References herein to the motion

shall be to ‘‘amicus motion,” and to the brief, “amicus brief’.

2

restates the arguments made by National Union Fire In-

surance Co. of Pittsburgh, PA. (“NUFIC”), in its petition

for a writ of certiorari (“Cert. Pet.’’) herein. Furthermore,

the constitutional issue which the Association asserts, in

addition to having no merit, has never been raised by any

party or considered by any court in this case. These rea-

sons and others for denying the motion are discussed in

more detail below.

ARGUMENT

This adversary proceeding arises within the liquidation

proceeding under the Securities Investor Protection Act,

15 U.S.C. §78aaa et seg. (“SIPA”’),? of GSC, formerly a

securities broker-dealer. On May 12, 1987, on an appli-

cation by SIPC, the United States District Court for the

Southern District of Florida placed GSC in liquidation,

appointed Mr. Camp as trustee, and removed the liqui-

dation proceeding to the Bankruptcy Court for the same

a fidelity bond to GSC to protect it against damages re-

sulting, among other things, from dishonest acts of its

had resulted, the Trustee filed a claim under the bond.

NUFIC refused to honor the claim based on a provision

of the bond which, in pertinent part, automatically ter-

minated the bond upon the appointment of a liquidator

(“the termination clause’’). The Trustee filed the instant

suit, seeking declaratory relief that under section

541(cX1XB) of the Bankruptcy Code, made applicable by

SIPA section 78fff(b), the termination clause was invalid.®

* “References herein to provisions of SIPA shall be to the United

States Code, and for convenience, hereinafter shall omit ’’15 U.S.C.”

* The Association incorrectly asserts that the termination clause was

held invalid “{ujpon application of the SIPC.” Amicus motion at 2. In

fact, the instant suit was initiated by the Trustee and not SIPC. SIPC’s

participation in this matter has been pursuant to SIPA section 78eee(d).

The issue of whether section 541(cX1\B) applies has been

addressed by three courts in this case—the most recent

one being the Eleventh Circuit. Unanimously, these courts

have concluded that section 541(cX1XB) applies. The de-

cision of the Eleventh Circuit does not conflict with the

decision of any other court. Nevertheless, relying upon

cases involving thrifts and a bank in conservatorship or

receivership (collectively, ‘“‘the Bank cases’’), in which ter-

mination clauses were upheld, NUFIC has attempted to

create a conflict where none exists. See Cert. Pet. at 3-

4.

1. The Amicus Brief Restates NUFIC’s Argument As

To The Bank Cases.

The Bank cases are not relevant because they involve

different facts, different insured institutions, and most im-

portantly, different statutes. Because notwithstanding its

special customer protection features, a SIPA proceeding

essentially is a bankruptcy liquidation,‘ provisions of Title

11, including section 541(cX1XB), are made applicable to

SIPA cases under SIPA section 78fff(b). However, the

same provisions cannot apply to banks and thrifts. As set

forth in the legislative history of the Bankruptcy Reform

Act of 1978, ‘bjanking institutions ... are excluded from

liquidation under the bankruptcy laws because they are

bodies for which alternate provision is made for their liq-

Under that section, SIPC is ‘‘a party in interest as to all matters

arising in a liquidation proceeding, with the right to be heard on all

such matters.”

‘SIPC v. Ambassador Church Finance/Development Group, Inc., 788

F.2d 1208, 1210 (6th Cir.), cert. den. sub nom., Pine Street Baptist

Church v. SIPC, 479 U.S. 850 (1986) (“{e]ssentially, a liquidation under

the SIPA is a bankruptcy proceeding”); SEC v. Aberdeen Securities

Co., 480 F.2d 1121, 1123 (3d Cir.), cert. den. sub nom., Seligsohn v.

SEC, 414 U.S. 1111 (1973); Exchange National Bank of Chicago v.

Wyatt, 517 F.2d 453, 456-459 (2d Cir. 1975).

uidation under various State or Federal regulatory laws.”

S. Rep. No. 989, 95th Cong., 2d Sess. at 31 (1978), re-

printed in 1978 U.S. CODE CONG. & ADM. NEWS 5817.

See 11 U.S.C. §109(b\2) (excluding banks and thrifts from

liquidation under Title 11). Not only are stockbrokers and

thrifts and banks liquidated under different laws, but as

to the latter, Congress explicitly has enunciated a different

policy with respect to the enforcement of contracts such

as the one at hand. Thus, while it has expressed its intent

under 11 U.S.C. section 541(cX1\B), that trustees recover

under such bonds in stockbroker liquidations, it prohibits,

under 12 U.S.C. section 1821(eX12XA), bank receivers or

conservators from seeking a similar recovery. The Bank

cases have been extensively addressed both in the certiorari

petition and the joint opposition thereto. See Cert. Pet.

at 3-21; and Respondents’ Opposition thereto, dated Jan-

uary 15, 1993, at 6-21. By merely expounding upon

NUFIC’s arguments, the Association adds nothing to the

analysis. Instead, it obscures the issue in this case, by

seeking to have law that is irrelevant applied to its res-

olution.

2. The Issue As To Constitutionality Is Untimely Raised.

The Association’s motion also should be denied because

it interposes a constitutional question that was never raised

by any party to this case or considered by any court below.

Application of the general rule that federal appellate courts

do not review issues not passed upon by the lower courts,

is particularly appropriate here. Duignan v. United States,

274 U.S. 195, 200 (1927); Hormel v. Helvering, 312 U.S.

552, 556 (1941); Singleton v. Wulff, 428 U.S. 106, 120

(1976). There is no record upon which this Court may

decide the issue, and at this late juncture it is patently

unfair to the creditors of GSC, the Trustee, and SIPC,

that they be surprised with a new issue, and that the

litigation be prolonged by its resolution.

3. The Constitutional Issue Lacks Merit.

In any event, the Association’s claim as to any purported

lack of constitutionality is without merit. The contract be-

tween NUFIC and GSC was not impaired and there has

been no unconstitutional taking of property. Section

541(cX1XB) of the Bankruptcy Code, made applicable by

SIPA, had been in effect for nearly ten years when NUFIC

issued the fidelity bond to GSC. Consequently, NUFIC

knew that the-termination clause would not be enforced

if a liquidator was appointed for GSC.° See In re Prima

Co., 88 F.2d 785, 788 (7th Cir. 1937) (“parties to a contract

are, of necessity, aware of the existence of, and subject

to, the power of Congress to legislate on the subject of

bankruptcies. They were and are chargeable with knowl-

edge that their rights and remedies ... are affected by

existing bankruptcy laws... .’’); Federal Crop Ins. Corp.

v. Merrill, 332 U.S. 380, 384 (1947) (“everyone is charged

with knowledge of the United States Statutes at Large’”’);

Wright v. Union Central Ins. Co., 304 U.S. 502, 516 (1938)

(“existing laws read into contracts in order to fix obli-

gations as between the parties’’). In issuing the bond to

GSC, NUFIC measured the risk and determined that the

benefit to it outweighed that risk.

Moreover, under the facts of this case, there can be no

genuine question as to the authority of Congress to leg-

islate as it has under section 541(cX1\B) pursuant to its

bankruptcy power. U. S. CONST., Art. I, §8, cl. 4. This

conclusion is reinforced by the fact that the power to enact

* At the time NUFIC issued the bond, the case law was clear that

insurance contracts constituted property of the estate under section

541(a) of the Bankruptcy Code. A. H. Robins Co. v. Piccinin, 788 F.2d

994, 1001-1002 (4th Cir.), cert. den., 479 U.S. 876 (1986). Since that

property was subject to other provisions of the Code, see, e.g., Matter

of Gulf Tampa Drydock Co., 49 B.R. 154, 157 (Bankr. M.D. Fla. 1985),

it would have come as no surprise to NUFIC that it would be subject

to section 541(cX1\B) thereof as well.

SIPA, and thereby to make section 541(cX1XB) applicable

to a SIPA case, is grounded not only in the bankruptcy

clause, id., but also in the commerce clause. U.S. CONST.,

Art. I, §8, cl. 3. SEC v. Albert & Maguire Sec. Co., 378

F.Supp. 906, 911-912 (E.D. Pa. 1974); Exchange National

Bank of Chicago v. Wyatt, 517 F.2d 453, 459 (2d Cir. 1975).

See Tepper v. Chichester, 285 F.2d 309, 312-313 (9th Cir.

1960). Even assuming, arguendo, that such were the case

here, ‘the power of Congress to modify substantial rights

[under SIPA] rests upon a broad and substantial base.”

SEC v. Albert & Maguire Sec. Co., supra, 378 F.Supp. at

912.

4. The Amicus Brief Reflects a Misunderstanding of

SIPA.

Finally, the motion for permission to file an amicus brief

herein should be denied because it reflects a fundamental

misunderstanding of SIPA, and proceedings thereunder,

and therefore, is potentially misleading. The Association

contends that the decision of whether to issue a bond is

based upon the insurer’s assessment of the honesty of

existing officers of the insured, and their ability to hire

and supervise trustworthy employees. Because the take-

over of the insured by a third party requires the insurer

to underwrite the honesty of strangers, the bond is ter-

minated. Amicus brief at 1-2. The Association overlooks

the fact that because the objective of a SIPA proceeding

is the liquidation of the debtor, there is no continuation

of the debtor’s business upon the trustee’s appointment,

and therefore, no underwriting of the honesty of strangers.

SIPA §78fff(aX4). Upon appointment of the trustee, the

debtor is expressly prohibited from engaging in business.

§78jij(b). From the time of the Trustee’s appointment, the

debtor no longer has employees whose acts are covered

under the bond. Thus, as in the current case, a SIPA

trustee’s claim is based on losses caused by employees

retained by the officers whose honesty was assessed by

the insurer in underwriting the bond. Otherwise stated,

I a) eer nm

ee ect ee ee ee

the losses are the very ones which the insurer contracted

to insure.

Finally, the Association also incorrectly concludes that

the Trustee’s claim under the bond is an attempt to have

NUFIC satisfy losses that otherwise would be satisfied by

SIPC. Amicus brief at 19. Plainly, SIPA does not contem-

plate that SIPC funds take the place of a debtor’s estate.

Thus, to the extent of its advances to satisfy the claims

of customers, SIPC is subrogated to those customers’

claims against, among others, the estate. SIPA §78fff-3(a).

See In re Bell & Beckwith, 937 F.2d 1104, 1106-1110 (6th

Cir. 1991). Moreover, there is no protection under SIPA

either for customers whose claims exceed the monetary

limits of SIPA protection or for general creditors. SIPC

v. Associated Underwriters, Inc., 423 F.Supp. 168, 170-

173 (D. Utah 1975). Those categories of creditors also po-

tentially share in any proceeds recovered under a bond.

CONCLUSION

For the foregoing reasons, the motion of American In-

surance Association for permission to file an amicus curiae

brief should be denied.

Respectfully submitted,

NEAL B. SHNIDERMAN

ADORNO & ZEDER, P.A.

2601 South Bayshore Drive

Suite 1600

Miami, Florida 33133

Telephone: (305) 858-5555

Aitorneys for John R. Camp, Jr.,

Trustee

THEODORE H. Focut

General Counsel

Counsel of Record

Of Counsel: SECURITIES INVESTOR PROTECTION

MICHAEL E. Don CORPORATION

Shouts anaes Ceiintad 805 Fifteenth Street, N.W.

Suite 800

JOSEPHINE WANG Washington, D.C. 20005

Associate General Counsel Telephone: (202) 371-8300

Date: January 21, 1993