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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1993

## Text

—

(5 Supreme Court, U.S.
No. 92-1046 FILED
— ween
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1830%3A3. Public record. Not legal advice.