Petition for Writ of Certiorari — Badenhausen v. Baetjer

a

Supreme Court of the United States

October Term, 1944.

F. G. BADENHAUSEN, WILLIAM 8. SPATCHER

and HOWARD H. HUBBARD, constituting the

Protective Committee for the holders of Georgia

and Alabama Railway First Mortgage Consolidated

Five Per Cent. Gold Bonds, Due 1945, and LES-

THR MARTIN,

Petitioners and Appellants Below,

AGAINST

EDWIN G. BAETJER, GEORGE ¢. CUTLER, AU-

STIN McLANAHAN and A. H. §. POST, constitut-

ing the Seaboard Air Line Railway Company Un-

derlying Bondholders’ Protective Committee,

Respondents and Appellees Below.

Eee

Petition for a Writ of Certiorari to the United States

Circuit Court of Appeals for the Fourth Circuit, &

and Brief in Support Thereof. %

.

—

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PEDDIE LE TOOL TE ING BAM: ei SY LOT POT ARE pr emer Te AES eg

a

Apranam Mrrnoverz,

of New York City,

Attorney for Petitioners.

Harry O, Levin,

of Baltimore, Maryland,

Of Counsel.

Looms Arreat Parss, Inc., 65-67 Duane St., N. ¥. ©, Tel WOrth2.068D

RUNDE ree esctr ain? eseenenrm eects

INDEX.

Petition:

Statement of the Matter Involved ................ 2

This Court Has Jurisdiction ................... 6

The Questions Presented ....................... 7

8

1

Reasons Relied Upon for Allowance of Writ

MUNIN: a sd'ndnucekoaeudesil civelan sien 1

Brier:

Opinions of Courts Below

Jurisdiction

Statement of the Came . oo... oc. ccc ccc cen ccce. 14

Specification of Errors

ARGUMENT:

Summary of the Argument ..................... 15

Pont I.—A conflict of interest unquestionably ex-

ists between the several divisional mortgages

purportedly represented by the Underlying

Bondholders Protective Committee .......... 15

Port II.—A Protective Committee may not repre-

sent conflicting interests as it is unfair to in-

vestors and not consistent with public policy or

pee NE oid cass accieera coro. 21

Post II.—This Court has held that Protective

Committees, as well as Indenture Trustees, are

fiduciaries and cannot represent conflicting in-

terests in a reorganization. The decree of the

Cireuit Court of Appeals is in conflict with the

applicable decisions of this Court ........... 27

. Conclusion

PEASE IN AED NIE SPURT TAREE NAGS DINERS PRN

ii INDEX.

CASES CITED.

PAGE

American United Mutual Life Insurance Company

v. City of Avon Park, 311 U. S. 188 ..7, 8, 10, 14, 24, 25

Bullard v. City of Asco, 290 U. S. 179 ........ 6, 8, 14, 27

Jackson v. Smith, 25 U. S. 586, 589 .............. 25

Meinhard v. Salmon, 249 N. Y. 458, 464; 164 N. E.

ME M4 REMEEEADARERESROERA ROKS A HASEA 0h 459004 27

Weil v. Neary, 278 U. S. 160, 173 ................ 26

Woods v. City National Bank and Trust Company

of Chicago, et al., 312 U. S. 262 . .6, 8, 14, 24, 26, 27, 28

AUTHORITIES CITED.

C. 229; 43 Stat. 938, Amending Judicial Code, Sec-

tion 240, Title 28, U. S. C. A., Section 347 and

under Rule 38, subdivision 5, of the Rules of

er Ce edict ce ta aehabaye ae ree 6, 13

Report on the Study and Investigation of the Work,

Activities, Personnel and Functions of Protec-

tive and Reorganization Committees made pur-

suant to Sec. 211 of the Securities and Exchange

FG BARES ee rere ye Teer eee 21

General Rules and Regulations of the Securities and

I Sg cw ck cw ka ceascsenaans 22

meee, Te GE MOAMETONOCT BOt oo... ce cacncnesesccens 2, 23, 26

ee ak cdc cawacacsessecns 2, 26

Supreme Court of the United States

Ocroser Term, 1944.

,,

ae

F. G. BapeNnausen, WILLIAM S. Sparcner and Howarp

H. Hvsgarp, constituting the Protective Committee for

the holders of Georgia and Alabama Railway First

Mortgage Consolidated Five Per Cent. Gold Bonds,

Due 1945, and Lester Martin,

Petitioners and Appellants Below,

AGAINST

\

\

Epwin G. Barrser, Grorcr C. Cutter, Austix McLan-

AHAN and A. H. §. Post, constituting the Seabdard

Air Line Railway Company Underlying Bondholders?

Protective Committee,

Respondents and A ppellees Below.

—o0—,

Petition for a Writ of Certiorari to the United States

Circuit Court of Appeals for the Fourth Circuit.

To the Honorable, the Supreme Court of the United States:

The petitioners, F. @. Badenhausen, William S.

Spatcher and Howard H. Hubbard, constituting the Pro-

tective Committee for the holders of Georgia and Alabama

Railway First Mortgage Bonds, and Lester Martin re-

spectfully petition this Honorable Court for a writ of cer-

tiorari to the United States Circuit Court of Appeals for

the Fourth Cireuit to review the decree of the Circuit

Court of Appeals entered on January 3, 1945, affirming the

order of the District Court dated May 20, 1944, which de-

nied the relief sought by the petitioners herein and dis-

missed the petition filed by them.

CEES ES NASD ED OE SURI I NE I LE SERGI D LSD SEERA EER OEE OOD LEO IRE” IEEE cI OE

2

Statement of the Matter Involved.

But one issue is presented to this Court—can a bond-

holders’ protective committee in a reorganization in equity

properly and legally represent and act for several conflict-

ing classes of mortgagees. The ‘‘Badenhausen’’ commit-

tee, one of the petitioners in this case, was authorized by

the Interstate Commerce Commission on August 23, 1943,

pursuant to Section 77 (p) of the Bankruptcy Act, 11

U.S. C. A., Section 205 (p), to solicit from holders of the

Georgia and Alabama Railway First Mortgage Bonds au-

thorizations to represent them in the consummation of a

plan for the reorganization of the Seaboard Air Line

Railway Company proposed in an equity proceediag in the

District Court; the petitioner Lester Martin is a substan-

tial holder of Georgia and Alabama Railway First Mort-

gage Bonds (Actuals), and also holds Georgia and Ala-

bama Railway Certificates of Deposit, which are at pres-

ent represented by a committee known as the ‘‘Seaboard

Air Line Railway Underlying Bondholders’ Protective

Committee’’,* in the principal amount of $321,000. The

Underlying Bondholders’ Committee consists of Edwin G.

Baetjer, Chairman, and George C. Cutler, Austin McLan-

ahan and A. H. S. Post.

The petition filed by the petitioners herein (R. 1-5)

prayed for an order directing that the Underlying Bond-

holders’ Committee cease to represent and act for bond-

holders of the Georgia and Alabama Railway, and to fur-

ther require it to show cause why the deposit of the Geor-

gia and Alabama Railway bonds with said committee

should not be withdrawn.

The petitioners filed their petition in the above cause

against Edwin G. Baetjer and others constituting the Un- ©

derlying Bondholders’ Committee on November 1, 1943,

while the hearings were pending before the District Court

*Hereinafter designated as ‘‘ Underlying Bondholders’ Committee’’.

Ae EIN SBM Y Bed ed RO Tre eS

on the plan of reorganization of the Seaboard Air Line

Railway in equity receivership. In due course, on Novem-

ber 5, 1943, the said Underlying Bondholders’ Committee

filed an answer (see R. 7-14) to said petition, but the hear-

ing was deferred by the District Court until April 20,

1944,* when a hearing was held on said petition and an-

Swer. Thereafter the District Court denied the relief

| sought by the petition herein and dismissed the same by

san order dated May 20, 1944. The appeal was taken from

.said order,

In addition to the Georgia and Alabama Railway First

Mortgage Bonds, the Underlying Bondholders’ Protective

Committee represents the holders of certificates of deposit

for nine other issues of divisional mortgage bonds of

the Seaboard Air Line Railway Company; also, the holders

of certificates of deposit for bonds of Georgia and Ala-

bama Terminal Company, a subsidiary of said Seaboard

Air Line Railway Company, said issues of underlying

divisional bonds being as follows: Carolina Central Rail-

road Company, Florida Central and Peninsular Railroad

Company, Florida West Shore Railway, Georgia, Carolina

and Northern Railway Company, Raleigh and Augusta

Air Line Railroad Company, Raleigh and Gaston Rail-

road Company, Seaboard Air Line Railway Atlanta-Bir-

mingham, The Seaboard and Roanoke Railroad Company, 4

and The South Bound Railroad Company-Sonthern Divi- :

sion. de

The Underlying Bondholders’ Committee holds on de-

posit at the present time approximately fifty per cent, of

all issued and outstanding Georgia and Alabama Rail. F

way Company First Mortgage Bonds, pursuant to the

terms of the deposit agreement dated August 1, 1931.

This deposit agreement grants to the said Underlying

Bondholders’ Committee certain rights and powers, includ-

LEE TL ETO TRIN ER

LPP NS

OO

*The Plan of Reoreanization of the Seaboard Airline Railway was ap-

Proved by the District Court December 13, 1943.

4

ing actual title to the bonds on deposit, with the right to

vote, represent or assent, on behalf of the bonds deposited

with it, to any plan of reorganization or recapitalization,

and particularlydifthe pending equity receivership and re-

organization proceedings involving the recapitalization of

the Seaboard Air Line Railway and the allocation of new

securities to the sal underlying divisional mortgages.

Each of the underlying divisional mortgage issues re-

ceives different treatment under the plan of reorganization

proposed by the Special Master, which was confirmed by

the District Court, with certain modifications.

Prior to the reorganization, the grand total of principal

and interest of secured debt in the hands of the public

was $340,251,484.64, exclusive of capital stock. Under the

plan of reorganization, the total capitalization, including

all debt and stock, was $196,870,000.

Under the plan of reorganization and recapitalization

approved by the District Court, some of the underlying

divisional mortgage liens received full payment, others re-

ceived varying amounts or proportions of the principal

and interest due on said mortgage liens. It is estimated

that the Georgia and Alabama Railway bondholders re-

ceive approximately thirty per cent. of their total claims

for principal and interest, under the pending plan of re-

organization.

It is clear that the fund which is to be divided among

the various underlying divisional mortgages is a limited

fund. It is likewise clear that each underlying divisional

group of bondholders received different treatment under

the plan of reorganization approved by the District Court.

The answer filed by the respondents to the petition

admitted that a conflict of interest existed between the

various mortgage divisions the moment there was a lim-

ited common fund to be divided among the several under-

lving liens (R. 11). This was likewise admitted by Mr.

Baetjer, Chairman of the Underlying Bondholders’ Com-

5

mittee, who testified on cross-examination (R. 20-21; 25-

28).

Mr. Baetjer admitted that one of the primary reasons

his committee was formed to represent ten different divi-

sional mortgages was due to the fact that his clients, the

trust companies and banks (who are represented on the

committee), owned bonds of all of said mortgage issues

(R. 17-19; 29-30).

He further stated that at the time he organized the

Underlying Bondholders? Committee in August, 1931, his

main objective was to see that all of the underlying bonds

were paid in full (R. 18-19, 26). However, Mr. Baetjer

admitted on cross-examination that he realized some time

in 1934 or 1935 that all the underlying liens would not be

paid in full (R, 26, 27, 28-31).

Mr. Baetjer further admitted that he knew the several

mortgage divisions represented by the Underlying Bond-

holders’ Committee were of different and unequal value

(R. 20, 22, 23, 32). Mr, Baetjer on cross-examination ad-

mitted that the Underlying Bondholders’ Committee un-

dertook to determine the equitable distribution of the

limited funds to each of the underlying divisional mort-

gages it represented, but contended that the committee

had that right under the deposit agreement (R. 32, 34-

35; 39-41).

To determine the value of each mortgage division, it

was necessary to determine their earnings. Several the-

ovies or formulae were advocated for this purpose, as

well as several test periods. Mr. Baetjer admitted that

each proposed formula and test period applied to the vari-

ous divisional mortgages would produce different results,

some more favorable to one mortgage issue and some more

favorable to others (R. 34-37; 39, 54). Mr. Baetjer fur-

ther admitted that each divisional mortgage issue, if left

to its own bondholders and resources, would unquestion-

ably advocate the formula and test period most favorable

to that issne (R, 39, 41-44). Respondents also admitted

fy eee tae

RA, PME PERL LO ROTO OG MO UIE NEES

SOS ESM AMD cen

6

that when the bondholders deposited their bonds with the

committee and agreed to pay the committee for its serv-

ices, they did so in the belief and on the understanding

tnat their particular bond issues would receive the best

representation possible (R. 40-42; 43).

The issue involved in the case is whether a bondhold-

ers’ protective committee may legally or equitably repre-

sent conflicting interests or classes in a pending reorgani-

zation, or whether equitable principles and public policy

and public interest require that a protective committee

should not represent any group or class whose interests

conflict with another class which it represents.

This Court Has J urisdiction.

The decision of the issue involved in this case by the

Cireuit Court of Appeals is not only in conflict with the

weight of authority, but is clearly in conflict with appli-

cable decisions of this Court. (Supreme Court Rule 38,

Paragraph [5] [b].) This Court has held in the case of

Bullard v. City of Asco, 290 U. S. 179, that protective com-

mittees as well as indenture trustees are fiduciaries, In

the case of Wood v. City National Bank and Trust Com-

pany of Chicago, et al., 312 U. S. 262, in discussing the

question of compensation, this Court plainly indicated that

a fiduciary or protective committee could not represent

conflicting interests in a reorganization, when this Court

stated

‘‘A fiduciary who represents security holders in

a reorganization may not perfect his claim for com-

pensation by insisting that, although he had conflict-

ing interests, he served his several masters equally

well or that his primary loyalty was not weakened

by the pull of his secondary one. Only strict ad-

herence to these equitable principles can keep the

7

standard of conduct for fiduciaries, ‘at a level higher

than that trodden by the crowd’.”’

The same principles were authoritatively set forth by this

Court in the case of American United Mutual life Insur-

ance Company y. City of Avon Park, 311 U. 8S. 138.

The Circuit Court of Appeals stated (R. 123) that it

recognized the force and effect of the principles and reg-

ulations governing the representation by a protective

committee of conflicting interests. In addition, the Cir-

cuit Court of Appeals stated that the propriety of the un-

derlying principles set forth by the Supreme Court of

the United States could not be questioned, but the Cirenit

Court of Appeals nevertheless affirmed the decision of the

District Court which sanctioned such representation of

conflicting interests by a protective committee.

This Court clearly has jurisdiction to review and re-

verse the decision of the Circuit Court of Appeals which

is in conflict with applicable decisions of this Court.

The Questions Presented.

1. Does any conflict of interest exist between the vari-

ous divisional mortgage liens represented by the Underly-

ing Bondholders’ Committee?

2. If such a conflict of interest does exist, can the Un-

derlying Bondholders’ Committee equitably and legally

represent or act for the several conflicting classes of mort-

gage liens?

The total amount of new securities allocated to all the

underlying divisional bondholders is fixed and limited, and

is far less than the face amount of the present outstand-

ing obligations accrued and due on said mortgage liens.

It is apparent that any increase in the amount of securi-

oa ier

.

ee ee

ties received by one divisional group will be at the ex-

pense of one or more of the other divisional groups, end

to that extent the interest of each divisi ual group neces-

sarily conflicts with that of the other divisional groups.

It is petitioners’ contention that a conflict of interest

unquestionably exists hetween the several underlying divi-

sional liens represented by the Underlying Bondholders’

Committee; that it is improper in equity that the same

committee should represent conflicting interests or classes ;

and that publie policy and public interest require that a

protective committee should not represent any group or

class whose interests conflict with those of another group

or wlass which it purportedly represents,

Reasons Relied Upon for Allowance of Writ.

\

1. The decision beTow-of the Cireuit Court of Appeals

is in conflict with the decisions of this Court in the cases

of Wood v. City National Bank and Trust Company of

Chicago, et al., 312 U. S. 262, American United Mutual

Life Insurance Company V. City of Avon Park, 311 U.S.

138, and Bullard v. City of Asco, 2990 U. S. 179. In these

eases, this Court has authoritatively and foreefully set

forth the equitable principles that protective committees

as well as indenture trustees are fiduciaries, and that

fiduciaries and protective committees cannot represent

conflicting interests in a reorganization. The order of the

District Court which was affirmed by the Circuit Court

of Appeals and which denied and dismissed the petition

filed by the petitioners herein clearly sanctioned the repre-

sentation by a protective committee of several conflicting

interests in a reorganization.

2, The question of representation is not ‘‘moot”’.

The fact that the plan of reorganization has been ap-

proved by the District Court and by the Cireuit Court

ee ee ee ee et ees eee Sen

9

of Appeals for the Fourth Circuit does not render the

question of representation ‘‘moot’’, An appeal is still

pending and undetermined on the same plan of reorgani-

zation before the Circuit Court of Appeals for the Fifth

Cireuit, and, in addition, foreclosure proceedings are still

pending before the District Court, which will have to

determine the ‘upset price’? of the properties involved.

It has always been the contention of the petitioners that

the treatment afforded the Georgia and Alabama _ bond-

holders is inadequate and inequitable. Consequently,

petitioners will seek a higher ‘‘upset price’’, more repre-

sentative of the true value of the Georgia and Alabama

Division. On the other hand, it is understood that the

respondents do not seek a higher ‘‘upset price’’, as they

have approved the plan of reorganization and the treat-

ment accorded the Georgia and Alabama _ bondholders.

Furthermore, the respondents have signified their inten-

tion to assent to the plan of reorganization on behalf

of Georgia and Alabama bonds deposited with the com-

mittee, irrespective of the fact that many holders of

certificates of deposit, who are the true owners of these

Georgia and Alabama bonds, have indicated their dis-

sent and disapproval of the plan of reorganization. This

is clearly shown in the case of Lester Martin, one of the

petitioners herein, who holds and owns $321,000 of the

Georgia and Alabama Certificates of Deposit, and who has

unequivocally indicated his disapproval of the plan of

reorganization. Unless the decision of the Cireuit Court

of Appeals is reversed and the petition filed by the peti-

tioners herein is granted, the bonds of the Georgia and

Alabama Division held by the Underlying Bondholders’

Committee will be deposited in favor of a plan of reor-

ganization which is favorable to other interests repre-

sented by the respondent committee, but not to the Geor-

git and Alabama bondholders. Surely, a bondholder whose

bends are held by the Underlying Bondholders’ Commit-

Polen eee a

ROUTER bra ROR ste I

10

tee and who does not desire to approve the plan of reor-

ganization should have a right to insist that his bonds

be not used for this purpose when the same committee

which holds his bonds represents conflicting interests. It

will be noted, accordingly, that the question of represen-

tation presented in this petition for certiorari is far from

‘*moot’’.

3. The respondents have sought to justify their posi-

tion in representing conflicting interests by referring to

other railroad reorganizations, where certain institutional

groups appeared, representing several different bond is-

sues. The decision ef the Cireuit Court of Appeals

likewise relies upon this fact (R. 123). It is apparent

that any person or institution may appear in any pro-

ceeding to represent his or its interests, regardless of

the fact that he or it owns several of the: bond issues

involved in the reorganization, It is likewise apparent

that the interest of that person or institution may rest

primarily in one or more particular bond issues, which

are consequently favored, That is their prerogative, but

that situation is not analogous to the case in point. Here

we have a protective committee which purports to repre-

sent public holders, as distinguished from private inter-

exts. Here we have a protective committee which is act-

ing intrinsically in a fiduciary capacity for public in-

vestors, and which purports to and should have undivided

loyalty to the class which it represents. In addition,

the committee is charging the public investors fees and

compensation for services, which necessarily implies loyal

and disinterested service in the interests solely of those

for whom the committee purports to act. American United

Mutual Life Insurance Company V. City of Avon Park,

311 U. S. 138.

11

CONCLUSION.

For these reasons, we respectfully submit that this peti-

tion for a writ of certiorari should be granted.

Dated, March, 1945.

Respectfully submitted,

ABRAHAM MiTNovertz,

Attorney for Petitioners,

Harry O. Levin,

Of Counsel.

SPLOT