Opposition Brief — Prudence Realization Corp. v. Eddy

Bhkes ~ Supreme Coan,

FILE COPY... = 1 peau

She.

IN THE

Supreme Court of the United States

October Term 1947

No. 572

PRUDENCE REALIZATION CORPORATION

Petitioner,

agaist

GEORGE E. EDDY, et.al.

BRIEF OF RESPONDENT GEORGE E. EDDY IN

OPPOSITION TO PETITION FOR WRIT OF

CERTIORARI

/ SamMvueEL SmBicEr,

Counsel for Respondent, George E. Eddy.

Supreme Printinc Co., Inc., 41 Murray Street, N. Y., BArctay 7-0349

ees

INDEX

PAGE

Brier or Responpent Greorce E. Eppy ...........- 1

Opinion Below .............scccecescccesccnes 1

be OD PNET ey TY eT eyes Yi eee 1

Question Presented ..............seeeeeeeeeeee 2

eS tn rrr ee eT rr ers 3

The Order Subordinating Bonds Held by Prudence

Realization Corporation, and the Settlement

Agreement ...... 06.0 cece cen cece eeccccenees 16

Point I—The Petition herein does not present any

special question of public importance; there is

no conflict with decisions of other circuits, the

State Courts, nor this Court, so as to merit re-

Pr nor pe errs eee ror eer 18

ANON. a ccc cc sasebacdaccebaddeesyieeces 25

Table of Cases

American Equitable Corporation v. Parkhill, 252

App. Div. 260 .......cccccccccscccseccsscenccs 23

Case v. Los Angeles Lumber Co., 308 U. 8. 106 ..... 18, 19

Central Hanover Bank and Trust Company v. Presi-

dent & Directors of the Manhattan Company, 105

Consolidated Rock Co. v. Du Bois, 312 U. 8. 510 ....

Ferris v. Prudence Realization Corporation, 292

N. Y. 210, aff’d 323 U. S. 650

Florscheim v. Mechanics & Traders Bank, 206 N. Y.

.

ii

PAGE

Group of Investors v. Milwaukee Railway Co., 318

WCE ASS Cs nu ekdenkh salewad oe hEN eee de “s 18

Hill v. Wampler, 298 U. S. 460, 466 ................ 23

In re Home Title Insurance Company (Mortgage No.

RO Ae RO Os GO bbc ea geen nhs scsnnvess 20

In re Hopk: »s Laks Drive Corporation, U. 8. D. C.

Md., Dec. 6, 1934 (no official citation) ........... 5

In re Matter of Title & Mortgage Guarantee Co., 275

et SE CUeeaa ORGS: RUGRESWAGEA ROS GR ESS OES 20

In re N. Y. Railways Corporation, 82 F. 2d 739 .... 7

Lawyers Title and Guaranty Company, In re For-

shay, 279 N. Y. 571 aff’g 254 App. Div. 653, aff’g

PE Kn nka nth ed Ukanecabus axssaseee 20

Matter of Hidden, 243 N. Y. 499 ...............0.. 23

Matter of Title & Mortgage Guarantee Co., 275 N. Y.

BOE NGe kak AAW ORAS EORER MARSA MOREE S WEES 10

Northern Pacific R. R. Co. v. Boyd, 228 U. S. 482 ....5, 7, 18

iy ae Ue Ue ee errr rer 20

President and Directors of Manhattan Company v.

Kelby, cert. den’d 324 U. S. 866 .............. 10 fn., 17

Re 620 Church Street Building Corp., et al., 299

RR ES ee re re eer e ye ee 7

Tennessee Publishing Co. v. American National

Bank, 299 U. S. 18, on November 9, 1936 ........ 7

Ticonic National Bank v. Sprague, 303 U. S. 406 .... 20

Vanston Committee v. Green, 329 U. 8. 156 ........

Vv

Statutes Cited

PAGE

Bankruptcy Act, as amended:

I iden cadi chat rae iwie seta boinwemasn 1

ER: earner aSReeneee MaReae be

Judicial Code, as amended:

SE aa hG rans baehk es Gadde bewn Chas i's 1

a ie |

IN THE

Supreme Court of the Anited States

October Term 1947

No. 572

Prupence ReaizaTiON CORPORATION,

Petitioner,

agaist

Grorce E. Eppy, et al.

‘oe

oe

BRIEF OF RESPONDENT GEORGE E. EDDY IN

OPPOSITION TO PETITION FOR WRIT OF

CERTIORARI

Opinion Below

The opinion of the Cireuit Court of Appeals for the

Second Circuit is printed in the Record at pages 614-624.

The opinions of the District Court, unreported are

printed at R. 22-47, 479; and the unreported opinion of

the Special Master is printed at R. 28-72.

Jurisdiction

The petitioner invokes the jurisdiction of this Court

under Section 240 (a) of the Judicial Code, as amended,

and under Section 24 (c) of the Bankruptcy Act, as amended.

Pe AIP SAT ICET 20m

—~

Question Presented

Under the plan of reorganization of the collateral under.

lying outstanding bonds of the Debtor (after an adjudica-

tion that the Debtor was insolvent and it and its general

creditors were adjudged to have no interest in such col-

lateral), did the Circuit Court >elow correctly interpret the

plan, in holding that the public holders of the bonds in

the several eighteen issues of Prudence Bonds, are entitled

to receive payment in full of the principal of their bonds,

together with interest thereon at the rate of 54% per

annum, as guaranteed by the Prudence Company, Inc. before

said guarantor, or its successor, Prudence Realization Cor-

poration, petitioner herein, as a holder of some of the bonds

can participate in the distribution of the proceeds of the

respective trust funds?

Statement

The District Court by four orders directed payment to

be made of the subordinate bonds of the guarantor’s suc-

cessor, the petitioner herein, although the deficiency in the

payment of the accrued interest on the publicly held bonds

at the guaranteed rate of 54% in the Fifth Series amounts

as of August 1, 1945, to $411,783.18 (54); such deficiency

in interest payments to the public bondholders in the Ninth

Series, as of August 1, 1945 amounts to $604,606.17; the

like deficiency in the Sixth Series as of July 26, 1946

amounts to $251,405.28 (499); and similar deficiencies in

interest payments to the public bondholders exist as to all

otk.r series of said bond issues.

The Circuit Court construed and interpreted the plan

of reorganization herein and reversed the District Court.

—

Such reversal was predicated on the special circumstances

and facts involved in the particular relationship to the trust

funds of the public bondholders and the guarantor of the

bonds.

No controversy of public interest or importance with

respect to legal principles is involved. The decision of the

Cireuit Court does not conflict with any decisions of other

Circuit Courts, and is in conformity with equitable prin-

ciples as heretofore established by this Court.

3

The Facts

Prudence Bonds Corporation, the Debtor was a cor-

poration organized under the Business Corporation Law of

New York, with a capital stock of $50,000, all of which was

owned by New York Investors, Ine. (241-242). The Prudence

Company, Inc. was organized as an investment company

under the Banking Law of New York State. All of its

common stock outstanding and also 50% of its outstanding

preferred stock were owned and held by New York

Investors, Inc. Both the Debtor and The Prudence Com-

pany, Inc. were subsidiaries of and completely controlled

by New York Investors, Inc. (242), and were organized by

it to engage in the guaranteed mortgage in vestment busi-

ness (242-243).

To that end, various bonds and mortgages, cash and

other securities owned by The Prudence Company, Inc.,

were transferred by it to the Debtor, and by the latter, in

turn, transferred under trust agreements to various trust

companies as trustees to secure the payment of the debtor’s

bonds, which were delivered by the Debtor to The Prudence

Company, Inc. (243). There were eighteen series of such

bonds aggregating $56,000,000 (109). Thereupon, The

ee

2 TE NS RIE REPEC RA EET OT

4

Prudence Company, Inc. sold the bonds to the general

public and guaranteed their payment, both as to principal

and interest (109), which was at the rate of 542% per

annum (110). In this way there was sold and transferred

to the public all but $1,910,300 of such bonds, which remained

in the possession of or were held by the guarantor (31;

111).

This was the situation of the Debtor when on June 29th,

1934 it filed its petition for reorganization under Sec. 77B

of the Bankruptcy Act, and trustees were duly appointed,

qualified and acted as such. Clifford S. Kelsey is the sole

surviving Trustee of the Debtor (29).

The Debtor’s first proposed plan related solely to the

Fifteenth Series of its bonds, and the object sought to be

attained thereby was to scale or cut down its obligations

on its bonds by a modification of their terms; extending the

maturity of the bonds to May 1, 1945; reducing them to

income bonds up to 442% and cumulative income at 344%

payable on maturity, and reducing the obligations of the

guarantor, The Prudence Company, Inc. to a guaranty of

the bonds only as modified (194; 206-7). This proposed plan

was amended so as to incorporate a provision for the

separate reorganization of each of the Eighteen Series of

Bonds as a step for the complete reorganization of the

Debtor under a General Plan (208).

The respondent Eddy, duly filed objections to said plan

based, among others, on the contentions that the plan was

unfair and inequitable because the Debtor was insolvent

and it ‘‘was a device to prefer the stockholders of the Debtor

and the New York Investors, Inc., and The Prudence Com-

pany, Inc., to the creditors of the Debtor and secure the sub-

ordinate rights of such stockholders at the expense of the

prior rights of the creditors’’ and ‘‘that the acceptance and

5

confirmation of such plan would violate the 5th Amend-

ment to the Constitution of the United States’’ (212).

The said plan and objections were referred to James G.

Moore, Esq., as Special Master, for hearing and report. By

his report dated March 29th, 1935 (212); he rejected the

authorities relied on by respondent, namely, the cases of

Northern Pacific R. R. Co. v. Boyd, 228 U.S. 482; Florscheim

y. Mechanics etc. Bank, 206 N. Y. 745; and In re Hopkins.

Laks Drive Corporation, U. S. D. C. Md. Dee. 6, 1934 (no

official citation) and recommended that the objections be

overruled (215-216) and the plans be approved as being

feasible and equitable (211). The necessary consents of two-

thirds of the bondholders had not been obtained, but never-

theless the District Court confirmed the said report in

October, 1935, overruled said respondent’s objections

thereto, approved the plan as filed in good faith and

adjudged that it was fair and feasible’ From this order, no

appeal was iaken by respondent Eddy.”

The learned judge below in his opinion, dated October 29, 1935

stated :

“It seems to me that the plan proposed is a fair and feasible

one * *¢

Of course, no confirmation of the plan can take place until

it has been accepted by the required number of consents, but

I see nothing in the objections that this Court must refrain

from expressing its opinion of the proposed plan until such

consents have been filed and the matter is before the Court

for final confirmation. * * *”

? Counsel advised Mr. Eddy that the order was only tentative

and could not be made final until the plan was consented to by the

requisite number of bondholders and as the proposed plan had not

been accepted and confirmed he in no way suffered injury and the

decree was therefore not appealable. It was not until September

1938 that the scope of the Appellate jurisdiction of the Circuit Court

was clearly broadened by the Chandler Act to cover appeals from

all interlocutory orders in reorganization proceedings.

~weaaree oe omer mo ERENT >

I ee REE RE oe GT ONENESS ON

6

Thereafter similar separate plans of reorganization of

the other seventeen series were proposed by the Debtor,

the only substantial change being in the modification of the

bonds to income bonds up to interest at the rate of 544%

and the omission of any provision for cumulative interest

at a fixed rate (164; 219).

The Debtor, failing to secure the desired consents to

such plans, and meeting with strenuous opposition to the

provision relating to the guaranty of The Prudence Com-

pany, Inc., again amended its proposed plans by eliminating

the provision reducing The Prudence Company, Inc., guar-

anty to a guaranty only of the payment of the bonds as

modified, and substituting therefor a provision preserving

the rights of the bondholders on the said guarantees to the

extent permitted by law (178-179; 221).

Subsequently and about August, 1936, the clause relating

to said guaranty was further amended by an additional

paragraph being added thereto and providing that—if, as

a matter of law, the bonds owned by The Prudence Com-

pany, Inc. are subordinate to the Publicly Held Bonds, such

bonds so held by the guarantor shall not be entitled to

receive any distribution of the proceeds of the Trust Funds

‘*Until all of the Publicly Held Bonds have been fully paid,

redeemed, purchased or retired’’ (179).

All these plans proposed by the Debtor contained sim-

ilar provisions for the modification of its bonds and con-

verting them to bonds bearing interest at 544% if earned

(164) ; all contained a clause providing for their integra-

tion into a general plan for the complete reorganization of

the Debtor (222; 208).

About February 11, 1936, the Debtor proposed a gen-

eral plan of reorganization which was referred to James

G. Moore, Esq., for hearing and report (225, 227).

In the interim, from the time of the approval by the

Special Master and the District Court of the plan for the

Fifteenth Series in October, 1935, and pending the consider-

ation of the general plan and the other Seventeen Series

separate plans, the Circuit Court in March, 1936, rendered

its decision in re N. Y. Railways Corporation, 82 F. 2d.

739, re-affirming the doctrine of Northern Pacific R. R. Co.

v. Boyd, 228 U. S. 482. Certiorari was denied June Ist,

1936, 298 U. S. 687; and this Court rendered its decision in

Re 620 Church Street Building Corp., et al., 299 U. S. 24

and Tennessee Publishing Co. v. American National Bank,

999 U. S. 18, on November 9th, 1936.

Thereupon and on March 11, 1937, the Special Master

rendered an intermediate report on the Debtor’s general

plan wherein he found ‘‘that the Debtor is insolvent; that

ihe fair market value of all of the assets pledged to secure

ull of the series of First Mortgage Collateral Bonds of the

Debtor is insufficient, in each series, to pay the Debtor’s ob-

ligations for principal and interest upon said First Mort-

gage Collateral Bonds; that the Debtor has no equity in the

pledged collateral ; that the general creditors have no equity

in the pledged collateral; * * *’’ (259) and concluded

‘It necessarily follows, as conclusions of law,

that the Debtor’s Plan is unfair and inequitable ; that

it discriminates unfairly in favor of general cred-

itors and stockholders as against the bondholders

and that it cannot be approved in its present form”’

(260).

Up to the time this intermediate report of the Special

Master was made, the bondholders consisting of the general

public and The Prudence Company, Inc., were classified as

+ ARETE CRN NEE RRS NT eT

ee ae

one group of creditors of the Debtor (212), and the Special

Master apparently assumed that The Prudence Company,

Inc., as guarantor of the bonds, and the public bondholders

had a co-ordinate and equal interest in the collateral trust

funds (218).

The said intermediate report stated that the proceed-

ing for the reorganization of the Eighteen Series of the

Debtor’s bonds were being conducted on the theory that for

reasons of efficiency and economy it was advantageous to

the bondholders that they unite in a reorganization by

which their several interests would be under the manage-

ment of one corporation whereby they ‘‘should not only

preserve for themselves the full value of their own col-

lateral, but by union, they should enable the less fortunate

to be benefitted from any excess of collateral of the better

issues (261-262).

To attain these objects the Special Master proposed the

amended general plan for the reorganization of the Debtor,

entirely eliminating the Debtor, its stockholders and gen-

eral creditors from the picture; and providing that a new

corporation be formed to be owned and controlled by the

bond holders (262-263).

On April 27, 1937, the District Court approved and con-

firmed the Special Master’s report and adjudged that the

Debtor was insolvent and that the fair value of the collat-

eral securing each of the Kighteen Series of Bonds was less

than the principal amount of the outstanding bonds and

accrued interest thereon, and that the Debtor, its stock-

holders and general creditors had no equity in such col-

lateral (275).

The said report of the Special Master dated March 11,

1937, analyzed the value of the collateral underlying the

LL CL LO LC LEC eC CT TTI

Kighteen Series of Bonds and disclosed that in each series

the collateral was less than the outstanding publicly held

bonds. In the Sixteenth Series the deficit of the collateral

to meet the outstanding bonds was $904,394.74 (256, 257),

ihe amount of the bonds held by The Prudence Company,

Inc., was but $2,200 (32) making the deficit to meet the

publicly held bonds and interest over $902,000. In the

Tenth Series he found the deficit to be $360,000 (257). The

Prudence Company, Inc., held $19,000 (32) of Tenth Series

Bonds, leaving the Trust Fund deficit of over $340,000 to

meet the publicly held bonds.

But no recommendation was then made, nor was any

order then entered, to eliminate The Prudence Company,

Inc., from participation in the proceeds of the collateral

underlying the Eighteen issues of the Debtor’s bonds.

However, by an order made July 21, 1937, based in part

on a supplemental report of the Special Master dated

April 27, 1937, it was adjudged and decreed that the bonds

that had been held by the guarantor (which was itself in

reorganization), and then held by its Trustees, were sub-

ordinate to the bonds of the general public; that they were

not entitled to share in the collateral securing the Eighteen

Series of bonds and are not enforceable obligations either

as to principal or interest against their respective trust

funds, or the proceeds thereof * * * until all other Prudence

| Bonds in the hands of the general public have been pro-

vided for in full, both as to principal and interest hereto-

fore accrued or hereafter accruing * * * but if and when

and only after all other Prudence-Bonds in the hands of

the general public in a particular series have been paid or

provided for in full, both as to principal and interest, as

10

aforesaid, then, and in that event only, said Prudence.

Bonds held by the said Trustees of The Prudence Company,

Ine., in that particular series are entitled to share in the

said collateral and proceeds thereof as aforesaid; * * *

(112-113).

From the said decree determining and fixing the rela-

tionship to the trust funds of the public bondholders and

the guarantor as a holder of some of the bonds, the guar-

antor’s trustees in reorganization appealed to the Circuit

Court. The Court of Appeals of New York on July 13,

1937, had handed down its decision in the Matter of Title

& Mortgage Guarantee Co., 275 N. Y. 347, indicating that

a guarantor as part owner of the obligations guaranteed

by it was not entitled to share in funds securing such ob-

ligations on a parity with the public owners of such obli-

gations so guaranteed by it.

Thereupon, a compromise and settlement was effected

between the Trustees of The Prudence Company, Inc., and

the Trustees of the Debtor herein for the withdrawal of

said appeal upon the payment to the former of $150,000 out

of the trust funds as a reorganization expense (R. 147 F.

2d 465; 483, 487).* This settlement was approved by an

order of the District Court entered January 7, 1938 (113).

Upon the determination by the Court that the Debtor

was insolvent and the entry of the order eliminating the

Debtor, its stockholders and unsecured creditors from any

share or interest in the Eighteen Series Trust Funds, the

plans theretofore proposed by the Debtor and which had

for their object the ‘‘scaling down’”’ cf its obligations and

* Refers to Record in President and Directors of Manhattan Com-

pany v. Kelby, cert. den’d 324 U. S. 866.

11

ihe creation thereby for the Debtor of a previously non-

existent equity in the various trust funds at the expense of

the bondholders were necessarily unfair, inequitable and

not feasible and ran counter to the Court’s decision and

order. It became necessary therefore to convert the pro-

posed Debtor’s plans to plans for the reorganization solely

of the bondholders’ rights in the collateral securing the

respective series of bonds.

At that time, the bondholders relied on the order of

July 27, 1937, and rightly believed that as all of the EKigh-

teen Trust Funds were insolvent the only parties entitled

to share in any distribution of the proceeds of the trust

funds were the public bondholders to the extent that such

funds realized sufficient to pay the public bondholders the

principal of their bonds, together with the interest thereon

at the rate of 514% per annum, and only after the payment

of the publicly held bonds in full with interest accrued and

to accrue at such rate of 514% could there be an excess or

surplus available for the discharge of the subordinate bonds

of The Prudence Company, Inc., guarantor, or its succes-

sors in interest.

With the avowed purpose of preserving these rights of

the public bondholders, and with the intent of preserving

for them the ‘‘full value of their own collateral’’ (262) the

proposed plans of the Debtor were modified under the

supervision of the representative of the Court, i.e. the Spe-

cial Master, and it was assumed that by changing the defi-

nitions so as to eliminate the Debtor from the picture and

by adding provisions integrating each plan with the Gen-

eral Plan proposed by the Special Master in his report of

March 11, 1937 the object sought was fully attained (272;

12

181). It was not suggested to the public bondholders that

acceptance of the plans so amended would vitiate the order

of July 21, 1937, or would diminish their priority rights

over the subordinate bonds of The Prudence Company, Ine.

and its successors; or that such subordinate bonds would

be able to participate in the Trust Funds before the priority

bonds were paid in full with interest at 514%; or that the

effect of the plan would be to transfer to the subordinate

bondholders the equity in any potential difference between

the earned income and fixed interest at the rate of 544%;

nor was any consideration paid by the subordinate bond-

holder to support and validate any such claimed transfer.

About January 18th, 1938 the amended general plan

and the separate plans for each series except the Fifteenth

Series were approved and confirmed (114). The new cor-

poration owned by the bondholders as the sole stockholders

was organized pursuant to the plan (115); March Ist, 1938

was fixed as the effective date of the Plan of Reorganiza-

tion, and Supplemental Trust Agreements were entered

into between the New Corporation and City Bank Farmers

Trust Company as Trustee of all eighteen trust funds (117).

No new capital was invested in the New Company but it

received funds to pay reorganization expenses and for

operating capital by contributions from the eighteen trust

funds (Ex. A, 574).

The Supplemental Trust Agreements recited that the

bonds shall bear interest * * * at the rate of 514% per

annum ‘‘if and only to the extent that the annual collections

of net income * * * received from the collateral shall suf-

fice to pay such interest.’’ The maturity date of the bonds

was extended to May 1, 1945, and it was provided that

13

“Any * * * deficiency or deficiencies of interest remain-

ing on May 1, 1945, or if the maturity of the Bonds be ex-

tended remaining on May 1, 1950, will not become due and

will not be paid by the Corporation and any right to such

deficiency or deficiencies will after the final maturity date

be void and of no effect’’ (121). The several plans con-

tained no provisions voiding the bondholders rights to such

deficiencies. On the contrary, the plans provided that the

old trust indenture should be modified to conform to the

plan and that the Modified Trust Indenture shall include

such additional or substitute provisions, not inconsistent

with the plan as may be necessary to carry out the Plan

(176-177), and the order approving the form of Supplemen-

tal Trust Agreement proceeds on the assumption that the

agreement was in compliance with the respective separate

plans of reorganization theretofore confirmed and did not

materially change or modify any provisions of the plans

(664). By each Supplemental Trust Agreement it was also

specifically provided that the purpose of the Supplemental

Trust Agreement was to set forth the amendments and

modifications required in the original trust agreements by

the plan of reorganization (318) and also that the agree-

ment of guaranty of The Prudence Company, Inc. * * *

the texts of the Bonds * * * and the guaranty of the Pru-

dence Company, Ine. * * * shall remain as set forth in the

Original Trust Agreement (321). The several Supplemental

Trust Agreements were not submitted to the bondholders

for their approval and consents thereto, but were approved

by the Court as not materially or adversely affecting the

rights of those who theretofore accepted the plans of reor-

ganization (R. 147 F. 2d 465; 1512-1513; 324 U. S. 866).

iin

14

By orders dated April 27, 1938 and June 6th, 1938 the

indenture trustees were directed to transfer the respective

trust funds to City Bank Farmers Trust Company; and

were authorized to file their respective accounts of their

acts and proceedings as trustees and apply for a judicial

sottlement thereof (116-117).

As a result of such accountings the accountant trustee

in the Fifth Series was surcharged with and paid into the

Trust Fund on May 16th, 1945 the sum of $1,572,991.03

(437) ; and on the same date paid a surcharge in the Ninth

Series in the sum of $221,533.04 (439). In all other series,

except Series A, 10th and 15th, which are still pending, the

indenture trustees paid various sums in settlement of the

objections to their accounts, with the approval of the Dis-

trict Court. .

The payments of the surcharges in the Fifth and Ninth

Series, brought about a new situation which was not within

the contemplation of the public bondholders at the time

the plans were accepted and confirmed, and at the time

the supplement trust agreements were entered into between

the New Corporation and the successor trustee.

It transpires that after the distribution to the public

bondholders of the earned income in the Fifts Series—

said income being insufficient to pay interest at the rate of

514%—there will remain in principal account a sum ade-

quate to pay the principal amount of the publicly held

bonds and leave a substantial surplus. The same situation

is presented in the Sixth and Ninth oe and may arise

in some of the other series.

By a report of the Special Master, dated March 11th,

1938, the amount of outstanding bonds in the respective

_

15

series was fixed; also, the date to which interest thereon

had been paid at the rate of 544% as of the effective date

of the plans; also, the sums to be paid out of the corpus

of the respective trust funds to the New Corporation for

operating and reorganization expenses, and to be advanced

or loaned from income account where cash was not avail-

able in principal amount to pay same (Ex. A; 574).

In the present controversy, the Special Master in re-

spect to the Fifth and Ninth Series recommended that

after payment of the principal of the outstanding publicly

held bonds, the trust res should be applied to the payment

of the principal of the guarantor’s subordinate bonds; [in

the Fifth Series $67,200 (55) and in the Ninth Series

$105,700 (547, 583)] to a repayment by way of recoupment

to the surcharged accounting trustee [in the Fifth Series

$85,825 (57) and in the Ninth Series $88,124.98 (547, 583) ]},

and that any excess then remaining should be distributed

to other series of Prudence Bonds.

The District Court adopted said recommendation, al-

though there was an unpaid deficiency of interest due the

public bonds in the Fifth Series of $411,783.18 (54) and

in the Ninth Series of $604,606.17 (541, 586). In the Sixth

Series the deficiency of interest due the public bondholders

is $251,405.28 (499). By the order relating to all series, the

District Court instructed the Trustee to make like distribu-

tions, notwithstanding that in each series there is a similar

unpaid deficiency of interest due the public bondholders,

and in each series the trust fund is inadequate to discharge

the principal and interest at the guaranteed rate of 51%4%.

By disregarding the unpaid interest due to public bond-

16

holders, the decrees award to the guarantor’s subordinate

bonds the right to share in the distribution of the respective

trust res.

The Circuit Court of Appeals unanimously reversed

the District Court and held that the public bondholders

are entitled to be paid the said deficiencies in interest be-

fore the subordinate bondholders can participate or share

in such distribution (614-618).

The Order Subordinating Bonds Held by Prudence

Realization Corporation, and the Settlement

Agreement

The Prudence Company, Inc., predecessor of the peti-

tioner, filed its claims herein as holder of $1,910,300 face

amount of the Debtor’s bonds, with interest thereon (32).

It also filed claims as a general creditor in the aggregate

amount of approximately $9,000,000 (250).

By the order of April 27th, 1937, the Debtor was ad-

judged insolvent and that the Debtor, its stockholders and

general creditors have no equity in the pledged collateral

in any of the Eighteen Series of the Debtor’s bonds (275,

110). From this order no appeal was taken.

By a decree made July 21st, 1937, it was adjudged that

the bonds in the aggregate sum of $1,910,300 now held by

Prudence Realization Corporation, the petitioner herein,

were subordinate to the publicly held bonds, and were not

entitled to any share of the proceeds of the respective

trust funds until the publicly held bonds were ‘‘paid or

provided for in full, both as to principal and interest here-

tofore accrued or hereafter accruing * * *’’ (112-113).

&

17

From said decree the petitioner herein appealed to the

Cireuit Court below, and before decision, a compromise and

settlement was made and the appeal withdrawn, with the

approval of the District Court (113-114).

The petition aud settlement agreement respecting said

appeal are contained in the Record on Appeal in the pro-

ceeding entitled, President, etc. of the Manhattan Company

v. Kelby, pages 467-496; before this Court on a petition for

a writ of certiorari, which petition was denied in 324 U. S.

4B SLE.

The agreement of subordination of the guarantor’s

bonds subordinated such bonds to the rights of the bond-

holders as defined in paragraph 11 of the several plans of

reorganization and the order of July 21, 1937 (R. 324 U. S.

465, Sth Series, p. 488, fol. 1446) and provided:

‘*Nothing herein contained or the execution or con-

summation of this agreement is in any way, to affect,

vary, impair or increase the rights of the bond-

holders of the Eighteen Series of Prudence-Bonds

with respect to the guarantee thereof made by The

Prudence Company, Inc.’’ (R. 324 U. S. 465, 5th

Series p. 488, fol. 1463.)

18

POINT I

The Petition herein does not present any special

question of public importance; there is no conflict

with decisions of other circuits, the State Courts, nor

this Court, so as to merit review.

(a) 7

The decision below determined the priority rights of

secured creditors under the terms of the plans of reorgani-

zation. It construed what it considered equivocal language,

in the light of the surrounding factual circumstances, and

in so doing, it follows the principles of equity as enunciated

by this Court in,

Vanston Committee v. Green, 329 U.S. 156;

Consolidated Rock Co. v. Du Bois, 312 U. 8. 510;

Group of Investors v. Milwaukee Railway Co., 318

U. S. 523;

Case v. Los Angeles Lumber Co., 308 U. S. 106;

Northern Pacific Railroad Co. v. Boyd, 228 U. 8.

482 ;

and by the New York Court of Appeals in,

Florscheim v. Mechanics & Traders Bank, 206

N. Y. 745, reversing 137 App. Div. 149 on dis-

senting opinion of Clark, J.

The petitioner concedes that ordinarily senior creditors

must be paid in full before junior creditors may take any-

thing; but urges that the rule does not apply in the in-

stant case—because it claims the right of seniority of the

19

public bondholders was disputed—and such senior rights

were partially surrendered under a compromise based upon

valuable consideration. But this contention is belied by

the undisputed facts.

In the compromise of petitioner’s claim, there was no

surrender by the public bondholders of their full legal pri-

orities—on the contrary, they were fully preserved. By

the withdrawal of its appeal, the petitioner herein accepted

the order of July 21st, 1937, as the final adjudication of its

status as a subordinate bondholder, and that the public

bondholders were entitled to receive payment of their

bonds in full together with interest accrued and thereafter

accruing, before it could share in the proceeds of the trust

funds.

Again, to support the alleged surrender by the public

bondholders of their priority rights, petitioner suggests

that it waived approximately $9,000,000 worth of claims—

but in truth and fact the claims were worthless. They were

general claims against the Debtor corporation. The Cor-

poration had been adjudged insolvent and its general credi-

tors and stockholders were eliminated by the prior order

of April 27th, 1937, from which no appeal was taken. The

petitioner paid no consideration for any surrender by the

public bondholders of their priority rights, but on the con-

trary the bondholders paid $150,000 for a claim that had

no greater dignity than a ‘‘sheer nuisance value.’’ Case

vy. Los Angeles Lumber Co., supra.

The compromise agreement did not subordinate the pe-

titioner’s bonds to the publicly held bonds ‘‘as modified

by the plans’’ but to the rights of the bondholders as sub-

ordination is defined in paragraph 11 (R. 178) of the sev-

20

eral plans (R. 324 U. S. 866; p. 482) and as such rights

were adjudicated by the order of July 21st, 1937. Indeed,

the specific provision of the compromise agreement was

that thereby the rights of the bondholders should not be

varied or impaired with respect to the guarantee of The

Prudence Co., Inc. (R. 324 U. S. 866, p. 488, fol. 1463).

The sole question then that the Circuit Court adjudi-

cated was what those rights of the public bondholders were

—-and its decision is in full accord with the decisions of

this Court and the Courts of New York State.

Ticonic National Bank v. Sprague, 303 U. 8S. 406;

Ferris v. Prudence Realization Corporation, 292

N. Y. 210, aff’d 323 U. 8. 650;

In the Matter of Title € Mortgage Guarantee Co.,

275 N. Y. 347;

Lawyers Title and Guaranty Company, In Re

Forskay, 279 N. Y. 571 aff’g 254 App. Div. 653,

aff’g 169 Misc. 266;

Pink v. Thomas, 282 N. Y. 10;

In Re Home Title Insurance Company (Mortgage

gage No. 19103), 255 App. Div. 635.

(b)

The petitioner, failing to point out any provision of the

plan of reorganization or the compromise agreement to

support its erroneous claims that such documents effected

a modification of the rights of the public bondholders so

as to reduce the obligation of the guarantor to a guarantee

of payment only of the earned income, advanced the spe-

cious contention that, in any event, such reduction of the

rights of the bondholders and the liability of the guarantor

21

were accomplished by reason of the provisions of the sup-

plemental trust agreement; that the District Judge had

rendered a decision that the supplemental trust agreement

did not materially affect the rights of the bondholders—and

as no appeal was taken, such decision is final, even if er-

roneous, and therefore the decision of the Cireuit Court

below is in disregard of settled principles of res judicata

and in conflict with decisions of this Court and other Circuit

Courts of Appeals; citing various cases which are inap-

posite and have no relation to the facts in this case.

The order approving the supplemental agreement was

made after the order of confirmation of the plan of reor-

ganization. The latter order stemmed from the power con-

ferred and the duty imposed on the District Court by the

provisions of the Bankruptey Act, Sec. 77B. f. Such an

order was an adjudication that determined conflicting rights,

having all the incidents of a judgment or decree, after a

due trial. Of course, such order, in the absence of an appeal,

is final and res adjudicata as to all matters comprised

within the litigation. The precedents relied on by petitioner

pertain to such a final decree, and are inapposite to an

incidental order, subsequent to the litigation, and which

has its origin or basis, not in any provision of the statute,

but in the terms of the plan.

It was by virtue of a provision of the plan that the

District Court made the order approving the supplemental

trust agreement. The plan provided that ‘‘The present

Trust Indenture shall be modified so as to conform with

the Plan,’’ and shall contain such additional or substitute

provisions ‘‘not inconsistent with the Plan as may be

necessary or advisable to carry out the Plan’’ (175) and

“shall be subject to the approval of the Court”? (176).

22

eg

The supplemental trust agreement was not intended to

be the medium of effecting any material alteration or modi-

fication of the rights of of the public bondholders, or to

change or in any way amend the Plan. It was not pro-

posed and offered for the approval of the Court as

‘‘amending’’ the plan, and the order approving the form

of the agreement was not the result of an adjudication

by the Court of contested rights of adversary litigants.

The Court approved the ‘‘form of Supplemental Trust

Agreement’’ recommended by the Special Master (660,

661) and was so thoroughly unapprised that such form of

Supplemental Trust Agreement proposed any material

modification of the plan that in the provision of the order

directing the execution of the Supplemental Trust Agree-

ments as to each of the Eighteen Series of bonds, he

directed that each Supplemental Trust Agreement ‘‘may

* * * be submitted to this Court without notice for ex-parte

approval’’ (665).

The approval of the form of Supplemental Trust Agree-

ment by the Court cannot be accorded any greater degree

of finality than if the plan had provided that the supple-

mental trust agreement should be approved by counsel.

If counsel approved the agreement, there would still be

open for adjudication by the Court the question whether

the parties entering into such agreement exceeded the

powers and authority conferred upon them by the Plan,

and a final adjudication within the rule of res adjudicata

would be applicable only after by adversary proceedings

the issue of the rights of the parties under the agreement

were presented to the Court for determination. The rule

has no application to a summary order, where the issue

was not directly presented to and passed on by the Court.

23

Hill v. Wampler, 298 U. S. 460, 466;

Matter of Hidden, 243 N. Y. 499;

American Equitable Corporation v. Parkhill, 252

App. Div. 260.

In the instant case the Special Master reported on those

provisions of the Supplemental Trust Agreement which in

any way deviated from or changed the plan, and recom-

mended that such modifications were not material or ad-

verse to the interests of the bondholders (675; 677).. Those

particular modifications of the plan directed to its atten-

ion the Court passed on and approved.

As to the rest of the agreement, which ‘‘descends to

particulars not found in the plan’’ the Special Master did

not direct the attention of the Court thereto; he did not

direct the attention of the Court to Sections 8 and 10 of

Article If of the Supplementary Trust Agreement or sug-

gest that thereby the plan was being modified or amended;

but reported that such particulars ‘‘are in accordance with

the spirit and purpose of the plans and are in no sense

modifications of or amendments to said plans’’ (676). —

Obviously, therefore, the question of whether Sections 8

(336) and 10 (340) of Article II of the Supplemental Trust

Agreements conflicted with Section 11 of the plans (178)

and the order of July 21, 1937 (112) and the terms of the

compromise agreement (R. 324 U. S. 866, pp. 482-488) was

not presented to the Court for determination and was not

passed on by it; and the principle of res judicata is inap-

plicable to the facts in this case.

It is clear from a reading of the plan of reorganization,

that the dominant purpose of the plan was to preserve all

24

the legal rights of the public bondholders; to create a

servicing agency to liquidate the collateral underlying the

respective eighteen bond issues in the interests of the public

bondholders, and that their priority rights in such collateral

should remain unimpaired, ‘‘irrespective of the provisions

of this Plan’’ (178-179).

The contention that ownership of the stock of the New

Corporation and the right to share in the income of the

New Corporation and in any excess collateral of other

series constituted compensation to the public bondholders

equivalent to a surrender of their priority rights in the

respective eighteen trust res is unrealistic and ignores the

fact that we are dealing with an insolvent estate; that the

liquidating agent, i.e., the New Corporation, had no assets

~ except as taken from the trust funds constituting the col-

lateral underlying the publicly held bonds; and had no

source of income except as derived from the servicing and

liquidation of such collateral; and as a liquidating agent

it could in no way be responsible except to perform its duty

to apply the income received and the proceeds of the col-

lateral to the pro rata payment of the publicly held bonds.

Of course, the New Corporation could not be obligated to

pay re income than was received, and its pro forma

agreement to pay the principal of the bonds at the extended

due date was an unenforceable promise except only insofar

as such collateral realized sufficient to pay the same. A

realistic view of the relationship of the public bondholders

and the New Corporation is that they were principal and

agent and not creditor and debtor. If it be assumed that

the New Corporation was a debtor, and not merely a liqui-

dating agency, then the New Corporation was totally in-

solvent from its birth, as it possessed no assets save only

the right to service the collateral. (Central Hanover Bank

and Trust Company v. President & Directors of the Man-

hattan Company, 105 F. 2d 130.)

CONCLUSION

The petition for a Writ of Certiorari to the Circuit

Court of Appeals for the Second Circuit should be

denied.

SaMveE. Srsicer,

Counsel for Respondent, George E. Eddy.

(9739)

SEE TT