Petition for Writ of Certiorari — Dure v. Glazebrook

we

IN THE .

Supreme Court of the United States

OCTOBER TERM, 1945

LEON S. DURE, TRUSTEE OF THE GEORGIA, FLORIDA & ALABAMA

RAILROAD COMPANY, AND THE GEORGIA, FLORIDA & ALA-

BAMA RAILROAD COMPANY, DEBTOR, Petitioner,

Vv.

Otis A. GLAZEBROOK, JR., JOSEPH FRANCE AND S. RALPH

WARNKEN, CONSTITUTING THE REORGANIZATION COM-

MITTEE OF THE SEABOARD AIR LINE RAILWAY COMPANY,

AND LEGH R, POWELL, JR., AND HENRY W. ANDERSON, AS

RECEIVERS, Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS FOR

THE FOURTH CIRCUIT AND BRIEF IN SUPPORT

THEREOF.

JAMES H. PRICE,

Greenville, S. C.

Attorney for Petitioners.

Of Counsel

PRICE & POAG,

Masonic Temple,

Greenville, S. C.

MILLER & MILLER,

Persons Bldg.,

Macon, Ga.

Wty 2 1946

SUBJECT INDEX

Page

Statement of the Matter Involved __-.-----_-_______ 1

Summary Statement of Undisputed Facts _________ a

BE I ei ih ernie hedirss ca serene eeadeninctintaianiapomtsiiiiibnts 8

RIG SPIE siatcdciathachitn tne sonesianrocerebreantudsiontintaiipiboiedhin eres 9

ED phlciedienscctntintmnsseietase bamspbaiiiocupbikeepauonataaeah 9

Reasons Relied on for the Allowance of the Writ ______ 9

Supporting Brief (begins) ~_____._-___-_____ fe Ea 12

ee I dcnncidiperainrbsictadndbnhaccndaaiapiiinchiscichainineainnaned —

Net Earnings of G. F. & A., were Due ____________ > 15

Not an Issue Between Seaboard Creditors and G. F. A.,

IT ee II octets incticicninnsttiaricineg pencils Se Oe

Impounding Orders no Defense to Breach of Fiduciary

ID Wihiaeie didgtn chute nctibteioasitabastiesabeekintiioensbih eee ae 17

SE ED cits sretitincnipeiinninnt aonivelialescdiinieriitan: 17

SIND = rcevtnca:csinsentqe-nsntpeeseadietelepiincabeaenndstiepsricectgss tsthdertg neat 18

TABLE OF CASES

Buffum vs. Barcelous Co., 289 U. S. 277 ___-_____-__ 9, 10

Finefrock vs. Kenova Mine Car Co., 22 Fed. (2nd) 627__ 11

Trice vs. Comstock, 121 Fed. 620 __.__________________ 11

United States vs. State of North Carolina, 6 Peters 29.. 16

a is I: I la, SO, I ates iectepristinnsabeiceinersnnere —

Young vs. Highbee, 65 Sup. Ct. Rep. 594 89 L. ed. 578__2, 9, 13

EEL IIMS crccetcenelecitetcesnciassatnln bmnsattadebenbicainedacias 17, 18

Pens)

aes

IRQS

Re tn

IN THE

Supreme Court of the United States

OCTOBER TERM, 1945

LEON S. DURE, TRUSTEE OF THE GEORGIA, FLORIDA & ALABAMA

RAILROAD COMPANY, AND THE GEORGIA, FLORIDA & ALA-

BAMA RAILROAD COMPANY, DEBTOR, Petitioner,

V.

OTIs A. GLAZEBROOK, JR., JOSEPH FRANCE AND S. RALPH

WARNKEN, CONSTITUTING THE REORGANIZATION CoM-

MITTEE OF THE SEABOARD AIR LINE RAILWAY COMPANY,

AND L2GH R. POWELL, JR., AND HENRY W. ANDERSON, AS

RECEIVERS, Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS FOR

THE FOURTH CIRCUIT AND BRIEF IN SUPPORT

THEREOF.

To the Honorable, the Chief Justice and Associate Justices of

the Supreme Court of the United States:

The above-named Petitioners respectfully pray that a Writ

of Certiorari issue to review the judgment of the United Stat-

es Circuit Court of Appeals for the Fourth Circuit entered in

the above entitled cause on January 28rd, 1946, dismissing Pe-

titioner’s appeal from an order and judgment of the United

States District Court for the Eastern District of Virginia.

STATEMENT OF THE MATTER INVOLVED.

Because the District Judge and the Circuit Court of Ap-

peals, in affirming his judgment and opinion in a mere per

curiam order, both totally failed to apply the principles of con-

structive trusts, as recently announced by this Court in the

2

ease of Young v. Higbee Co., 65 Sup. Ct. Rep., p. 594,

g9 L. ed. 578, and a long line of decisions from this

Court and also decisions of the Circuit Court of Appeals for

the Fourth Circuit, and because of the serious matters involv-

ed, we earnestly petition this Court to grant the writ of cer-

tiorari prayed for and fully decide the case upon its merits.

SUMMARY STATEMENT OF UNDISPUTED FACTS

The Georgia, Florida & Alabama Railroad Company, here-

inafter referred to as the G.F.&A., is a Georgia railroad now

running from Tallahassee, Florida, to Richland, Georgia. Un-

til about 1942 it had a line extending from Tallahassee to

Carabele, Florida, on the Gulf of Mexico coast, but this line

was abandoned just at the beginning of the war. A glance at

the Seaboard Air Line system map will show the strategic po-

sition occupied by this little Georgia railroad company. The

G.F.&A. was chartered on July 16th, 1927, and was the succes-

sor to the Georgia, Florida & Alabama Railway Company. In

the new corporation the Seaboard Air Line Railway Company

was the sole owner of the common stock of 10,000 shares of

no par value, which in the reorganization, in consideration of

the lease hereinafter mentioned, was secured for only $1,-

000.00. In its reorganization, dictated and controlled by the

Seaboard, 19,000 shares of first preferred stock and 5,000

shares of second preferred stock of $100 par value each, were

issued. A bond issue of $1,750,000.00, secured by a first mort-

gage on all the properties of the G.F.&.A., was issued. At the

same time the Seaboard System leased the G.F.&A. lines for 99

years at a rental of approximately $180,500.00 per annum,

which guaranteed the payment of interest on the bonds and

the dividends on both first and second preferred stock. The

lessee was to pay all taxes and operation and maintenance

expenses.

Under this lease and the ownership of all the voting stock

at that time the Seaboard went into complete control of the

G.F.&A. When the Seaboard Air Line Railway Company

went into receivership in the United States District Court for

the Eastern District of Virginia on December 23, 1930, the

3

Receivers of that line took over the G.F.&A. The Receivers

paid the lease rental up to January 1, 1931, but since that day

neither the G.F.&A. nor its Receivers or Trustee have ever

received anything for the use of its lines by the Seaboard Re-

ceivers.

In about May, 1933 the Seaboard Receivers applied, at or

near the same time, for orders in the Receivership Court and

the Interstate Commerce Commission for the right to disaf-

firm the lease and abandon the operation of the G.F.&A. lines.

(See Order No. 143-B of Judge Way, July 6, 1984, and I.C.C.

Order, Exhibit No. 1 in Transcript of Evidence in final hear-

ing before Judge Chestnut on June 18, 1945, all of which were

offered in evidence and constituted a part of the Transcript of

Record before the Circuit Court of Appeals).

The Interstate Commerce Commission after full hearing

denied the petition, and thereafter the Seaboard Receivers

themselves applied for the operation orders in the Virginia

and Florida U. S. District Courts. A similar petition for op-

eration orders was filed in the United States District Court of

the Middle District of Georgia, where the G. F. & A. had like-

wise landed in receivership because of the default in the pay-

ment of the interest upon its bonds, due entirely to the breach

of the lease contract by the Seaboard System.

Clearly if the Seaboard Air Line Railway Company itself

had remained out of receivership, or had been returned by the

Court to its corporate management, and had committed the

acts later perpetrated by the Seaboard Receivers and the Re-

organization Committee, the Court would never have permit-

ted it to have taken advantage of its own wrong in defaulting

on its lease obligation.

But because of these operation orders, and other facts mis-

applied to the law by Judge Chestnut, it is contended that no

trust relationship existed between the parties in this action.

In substance the operation orders, all secured upon the pe-

tition or consent of the Seaboard Receivers, provide that the

lines of the G. F. & A. would be operated by the Seaboard Re-

PULL Y.

syne

See CARY ae 2 a

SSA

4

ceivers for the account of the G. F. & A. (Judge Akerman’s

Order, April 27, 1936, folio 98.) The accounting was to be in

accordance with the General Formula, and the operation could

cease at any time upon notice to the G. F. & A. with the ap-

proval of the Receivership Courts. It was provided that the

General Formula was adopted subject to any change there-

after made by the Courts. (See Judge Deaver’s Order in the

U. S. District Court for the Middle District of Georgia, April

27, 1936, and similar orders of the other Courts. Folio 109.)

The G. F. & A. Receivers were likewise given the right to ter-

minate the operation upon the same notice of six months, and

in the event of termination by either party an accounting

should be had under the General Formula, subject to change

in formulas by the Courts. The Seaboard Receivers were giv-

en a first lien upon all G. F. & A. properties for any opera-

tion losses. The Receivers were thus given the advantage of

using the lines of the small Georgia corporation as an integral

part of its system but without any fear or risk of any losses in

the operation. The records of the Interstate Commerce Com-

mission and of the Receivership Courts indicate that the value

of the G. F. & A. properties at that time was at least $3,000,-

000.00. The accounts of G. F. & A. and the Seaboard Receiv-

ers were squared up, if such this maneuver could be called, to

December 31, 1934, leaving the G. F. & A. with a claim of some

sort for rent from January 1, 1931 to January 1, 1935, of ap-

proximately $829,000.00, which is still a mythical claim of

some character, never yet decided. (See Judge Deaver’s Or-

der, folio 108, and Reports by the G.F. & A. to the Interstate

Commerce Commission and the annual Seaboard Reports in

evidence before Judge Chestnut, and included in the Trans-

cript of Evidence before the Circuit Court of Appeals in this

case.)

Practically all of the annual reports of the Seaboard Re-

ceivers since 1936, particularly that of 1938 offered in evi-

dence before Judge Chestnut, contain this statement:

“Whether or not the GF&A has any allowable claim

against Seaboard Air Line Railway Company under the

5

lease for the period subsequent to December 23, 1930, or

for any part of such period, and the extent and amount

of such claim, if any, is a legal question.”

The records of the Seaboard Receivership show that after

many long months cf investigations and hearings Special Mas-

ter Taylor in his Final Report repudiated the General Formula

as unfair and recommended the Kennedy Formula for all Sea-

board Receivership settlements and for the Reorganization

program. His report was filed under date of July 20, 1943,

and his report in this respect, as well as most others, was ap-

proved by Judge Chestnut on December 13, 1948. (See Or-

ders of Judge Chestnut and Judge Akerman in the record, Fo-

lio 34.)

The application of the Kennedy Formula to the operation

of the GF&A lines by the Seaboard Receivers changed the

small Georgia corporation’s financial status tremendously.

Both formulas were applied to the actual freight and traffic

passing over the GF&A lines. Under the General Formula

the line was practically a deficit line; whereas under the Ken-

nedy Formula it was an earning line.

All the way through from December 23, 1930, the GF&A

had been operated by the Seaboard Receivers as a valuable

and integral part of the Seaboard System.

Immediately upon the adoption of the Kennedy Formula as

the yard stick for the settlement of the accounts of the GF&A,

the ownership of the bonds of that Company became a vital

matter. The Special Master in his plan of reorganization had

allotted the GF&A bondholders new certificates, etc. worth

about $750.00 per bond. Judge Chestnut in his Order of De-

cember 13, 1943, changed this to $750.00 cash, which was the

value placed by the Court itself upon the GF&A bonds. The

Reorganization Committee of the Seaboard about this time

had developed a plan whereby this Committee would get the

approval of the Court to have the Seaboard Receivers advance

sufficient funds by which t..2 Committee or the Court would

purchase the GF&A bonds at $750.00 per bond. About 90%

of the 1750 bonds issued by the GF&A were available for pur-

6

chase through a Bondholders’ Committee of the Georgia cor-

poration.

Accordingly in the early part of 1944 the Reorganization

Committee filed a petition before Judge Chestnut seeking the

approval of the Court for the completion of its plan. The

Special Master had recommended the appointment of the Re-

organization Committee to perfect the plan of reorganization

of the Seaboard’s System and Judge Chestnut shortly after

he had taken over the Seaboard matter after the death of

Judge Way of Norfolk appointed this Committee. Of course,

it had no powers other than those given by the Court, and

were powerless to act without the aid and cooperation of the

Seaboard Receivers.

Prior to this, in March 1943, the original holders of the

first preferred stock of the GF&A, despairing of receiving

anything for their stock, sold all of the 10,000 shares on the

open market to W. H. B. Simpson, of Greenville and W. G.

Borer, of Philadelphia, for approximately $5,000.00.

The matter of the purchase of the bonds by the Reorgan-

ization Committee came up for hearing before Judge Chestnut

in Baltimore on February 8, 1944.

The record shows that shortly after acquiring the first pre-

ferred stock Mr. Simpson was elected President of the GF&A

and immediately attempted to get the Seaboard Receivers to

advance or loan the GF&A sufficient funds with which to buy

in its bonds and retire them. It also reveals that the Reorgan-

ization Committee had planned to purchase the same bonds, or

90% thereof, at $750.00 per bond and use the bonds for full

face value in the foreclosure proceedings pending in the Re-

ceivership action in the U. S. District Court for the Middle

District of Georgia. Principal and past due interest as of

February 8, 1944, made the bonds have a face value of slight-

ly over $2,000.00 each.

At the hearing at Baltimore on February 8, 1944, the rec-

ord shows that Mr. Simpson was present as a bondholder of

the GF&A and urged the Court to purchase the bonds for the

7

account of the GF&A instead of for the Reorganization Com-

mittee. It further shows that Judge Chestnut demanded in-

formation as to the existence of any funds or money due to

GF&A out of which he could purchase the bonds for its ac-

count. The S. A. L. Receivers were also present at the hear-

ing on February 8th and gave their full approval and con-

sent to the plan, and recommended the purchase of the bonds

as a sound investment of Seaboard Receivership funds. They

were silent as to the amount due the GF&A.

At the final hearing before Judge Chestnut on June 18,

1945, it appeared that as of February 1, 1944, the Chief Ac-

counting Officer of the Seaboard Receivers had made a cal-

culation as to the amount of operation profits coming to the

GF&A under the Kennedy Formula and that the amount as of

January 1, 1944, was approximately $1,100,000. (See testi-

mony of Jones at pages 110 and 111 of Transcript of Testi-

mony of June 18, 1945, F. 38). At the time of the de novo hear-

ing on June 18, 1945, the amount had increased to $1,667,455.

After the hearing on February 8, 1944, Judge Chestnut grant-

ed the petition of the Reorganization Committee and refused

the request of Mr. Simpson to purchase the bonds for the

account of the GF&A, and passed Order R-1 on that date. This

Order authorized the purchase of the bonds at $750.00 per

bond and directed the Seaboard Receivers to advance the

necessary funds for this purpose. The Reorganization Com-

mittee not only did not furnish the money but by the provi-

sions of Section F of the Order were expressly declared not to

be obligated in any respect for the repayment of the money

advanced by the Seaboard Receivers.

The foreclosure proceedings in Georgia were immediately

revived after a dormant session of six or eight years and it is

admitted that the bonds were to be used against the GF&A at

their full value.

The GF&A in July 1944 filed a petition for reorganization

under Sec. 77 in the U. S. District Court for the Middle Dis-

trict of Georgia.

The Trustee of the GF&A appointed by the Bankrupt Court

LES EE ae

or

ay fE SepR EN err + ewer os

a in +3 ie _

ita SSA OES I EI

sought by petition to bring the Seaboard Receivers and the

Reorganization Committee into the Georgia Court for the pur-

pose of accounting and to decide the ownership of the bonds.

The Respondents challenged the jurisdiction of the Georgia

Court and the late Judge Lovett, of Savannah, sustained their

plea to the jurisdiction of the Court.

As neither the GF&A, whose corporate status has been pre-

served and kept alive, nor its Receivers, were parties to the

hearing on February 8, 1944, the Reorganization Committee

realized that there would remain a serious question as to its

title to the bonds and, on March 14, 1945, petitioned Judge

Chestnut to reopen the matter and hear the case de novo (See

Mr. Adkins’ statement to the effect that the hearing was de

novo, page 9, Transcript of Evidence of the hearing on June

18, 1945, which was a part of the Transcript of Record be-

fore the Circuit Court of Appeals).

After full hearing Judge Chestnut reaffirmed his former

order and filed a lengthy opinion in which he said, among

other things: “I do not think the resulting relationship (creat-

ed by the operation orders) constituted a trust of any char

acter.” (F. 43)

THE ISSUE

So the issue is clear. Was there such a trust or fiduciary

relation between the Seaboard Receivers and G.F.&A. as to

prohibit them from directly or indirectly acquiring title to the

bonds in question, at about one-third of the face value, with

funds partiy built up by the GF&A as an integral part of the

Seaboard System and then using the bonds at full value against

the GF&A in order to obtain possession of its properties?

If the fiduciary or trust relationship existed then this Writ

should be granted so that this Court, upon a full inquiry,

could decide whether the Circuit Court of Appeal’s decision

should be reversed. If a trust or fiduciary relationship did

not so exist, our petition should be denied.

9

OPINION BELOW

The per curiam opinion of the Circuit Court of Appeals, re-

ported in 152 Fed. (2nd) 756 appears in the printed record

at Folio 126. The opinion of Judge Chestnut thereby adopted

is reported in 62 Fed. Supp. at 207, and appears in the rec-

ord at Folios 15 and 27.

JURISDICTION

The jurisdiction of the Court is invoked under Sec. 240 (a)

of the Judicial Code, as amended by the Act of February 13,

1925 (U. S. Code Annotated, Title 28 Sec. 347 (a) ).

REASONS RELIED ON FOR THE ALLOWANCE

OF THE WRIT

1. The decision of the Circuit Court of Appeals ignores

the decision of this Court in the case of Young v. Higbee Co.,

65 S. Ct. Rep. 594; 89 L. ed. 578 and in not declaring

that a constructive trust existed for the benefit and protec-

tion of the GF&A and its stockholders, the decision appealed

from is contrary to that opinion.

2. The declaration of a constructive trust by a Court of

Equity in a proceeding properly before it is a matter of law,

if the essential facts are without dispute. Here the main

facts are admitted and both the District Court and the Circuit

Court have erred as a matter of law in failing to apply the

facts to the law and declaring the existence of a constructive

trust in favor of the GF&A and its stockholders. As the low-

er court has erred in this respect, we ask this Court to grant

the writ of certiorari and later to declare the trust in a hear-

ing upon the merits.

8. The decision below failed to apply the principles of

equity as to the duty of one in a trust or fiduciary relation-

ship with another as applied in a long line of decisions of this

Court, such as Buffum v. Barcelous Co., 289 U. S. 277, where-

in it was held that “the standard of duty is no different whe-

ther the trust to be enforced is actual or constructive. The im-

10

plication of a trust is the implication of every duty proper to

a trust.”

4. The decision below was perhaps influenced by the sym-

pathy of the lower court in the plan to perfect the reorgani-

ation of the Seaboard Air Line Railway System. The Receiv-

ers and the Reorganization Committee were arms of the Court

and these officers of the Court conceived and recommended

the plan to purchase the bonds of the GF&A, without consid-

ering the rights and interests of the much smaller corporation

and the lower court lost sight of the fact that “equity has its

distinctive standards of fidelity and honor, higher at times

than the standards of the market place.”

Buffum v. Barcelous Co., supra.

5. The decision below makes it impossible for the GF&A

to work out any tenable or basicly sound reorganization plan.

As of the date of the hearing before Judge Chestnut it had

an asset of $1,667,000.00 in net earnings due it from the Sea-

board Receivers, which the Circuit Court of Appeals’ decision

makes it impossible for the GF&A to use. By declaring, as it

does, that “the title to these GF&A bonds is vested in the Sea-

board Reorganization Committee free of any equity, claim or

lien” in favor of the GF&A or its trustee, the decision makes

it possible for the Reorganization Committee to file a claim

against the bankrupt Company for approximately $4,000,-

000.00 and enforce it, when they only used $1,169,250.00 of

Receivership funds in acquiring the bonds.

6. The decision below somewhat degenerates the issue to

a question as to the superior equities between the Seaboard

lien creditors and the GF&A and its stockholders, instead of

holding the inquiry to the sole point involved, viz, the existence

or non-existence of a trust or fiduciary relationship between

the parties.

7. The decision below failed to follow the decisions of this

Court and its own decisions to the effect that when the trust

or fiduciary relationship is found to exist, the inquiry should

stop and the transaction complained of should be set aside.

ll

Trice v. Comstock, 121 Fed. 620. cited by the Circuit Court

of Appeals for the Fourth Circuit as authority for its decision

in the case of Finefrock vy. Kenova Mine Car Co., 22 Fed.

(2nd) 627.

WHEREFORE, the Petitioners pray that a writ of certio-

rari issue to review the judgment of the United States Circuit

Court of Appeals for the Fourth Circuit entered in this case

on January 23, 1946.

JAMES H. PRICE,

Attorney for Petitioners

Of Counsel

PRICE & POAG,

Masonic Temple

Greenville, S. C.

MILLER & MILLER,

Persons Bldg.,

Macon, Ga.