Opposition Brief — Flynn v. Reconstruction Finance Corp.

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INDEX

Page

Opinions below 1

Jurisdiction .... 1

' Question presented pad wURS San Cekseaneent-s 2

REET aE any A 2

3 i a ne 3

eS hha a WE slic twkavieednabek enn kbaes ones 6

LES OA npg hs op eeavk Sean 12

CITATIONS

Cases :

ee ED 10

Carpenter v. Wabash Ry. Co., 309 U, 8.23. ........... 10

Cherry Cotton Mills v. United States, 327 U. S. 536..... 8

Chicago, R. I. & P. Ry., In re, 90 F.2d 312............. ll

City of Chelsea v. Dolan, 24 F. 2d 522, certiorari denied,

ME 64 eh MMe h 06 Ch 6 akSONCbA Kas sc pas dn 10

Illinois v. United States, 328 U.8.8................... 7

Inland Dredging Corp., In re, 61 F. 2d 765, certiorari de-

Tn ag 10

Jay & Dee Store Co., In re, 37 F. Supp. 989 by 10

Kuehner v. Irving Trust Co., 299 U.S. 445 ............ 10

Old Aigteve, In ve, 100 F. 94 S74... ...... 2.2... 8. 10

eS Seal ne 10

Sloan Shipyards Corp. v. United States Fleet Corp., 258

es ac icbuk 7

Temple, In re, 174 F. 24 145. ... pak ama ang y 11

United States v. Emory, 314 U. S. SEL mR 7

United States v. Marzen, 307 U. S. 200.............. 7

United States v. Remund, 330 U.S.539................ 8

William Akers, Jr., Co., In re, 31 F. Supp. 900, reversed,

i coe coves, Aner wbasxeceik chon ov 10

Statutes :

Public Law 548, 80th Cong., 2d Sess., Act of May 25,

1948, Sec. 3, 62 Stat. 262, 15 U.S.C. Supp. II,

ee SSCL, . Wis duh cae mk AW ack bible Soe Kia's 2, 5, 6, 9, 10

6 a 4, 10

Reconstruction Finance Corporation Act, as amended... 2

ER, neo ok kn 4 ea ae cca ea’ 6,7

56 Stat. 354, 356, 50 U.S.C. App. 1104(f), Se 10

Miscellaneous :

SE a i a 8

Executive Order 9665, December 27, 1945, 3 C.F.R., 1945

OE SSS SS eee re 4,10

H. Rep. 1836, 80th Cong., 2d Sess., p. 11... ... yess: ll

S. 2287, 80th Ceng., 2d Sess............... ripba eine 8

S. Rep. 974, 80th Cong., 2d Sess., p. 20....... 6.2.2... 8

S. Res. 132, 80th Cong., let Sems....................... 8

(1)

EEE minehetiiiteaes

Ynthe Supreme Gourt of the Wnited States

OcroBeEr TERM, 1949

No. 282

JoHN L. Fitynn, Trustee or LirHaLoys Corpora-

TION AND LITHALOYS CORPORATION, DEBTOR, PETI-

TIONERS

v.

RECONSTRUCTION FINANCE CORPORATION

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SECOND CIR-

cUIT

BRIEF FOR RECONSTRUCTION FINANCE CORPORA-

TION IN OPPOSITION

OPINIONS BELOW

The opinion of the United States District Court

for the Southern District of New York (R. 15-20)

is not reported. The opinion of the United States

Court of Appeals for the Second Circuit (R. 28-32)

is not yet reported.

JURISDICTION

The judgment of the Court of Appeals was

entered on June 8, 1949 (R. 32). The petition for

(1)

2

writ of certiorari was filed on August 19, 1949.

The jurisdiction of this Court is invoked under 28

U.S. C. 1254(1).

QUESTION PRESENTED

Whether Section 3 of the Act of May 25, 1948,

62 Stat. 262, 15 U.S. C., Supp. IT, 603(a), entitles

the Reconstruction Finance Corporation to a

priority in payment, in a pending Chapter X bank-

ruptcy reorganization proceeding, for debts owed

to Defense Plants Corporation and Smaller War

Plants Corporation which were transferred to

Reconstruction Finance Corporation upon the dis-

solution of those corporations.

STATUTE INVOLVED

Section 3(a) of the Reconstruction Finance Cor-

poration Act as amended by Section 3 of the Act

of May 25, 1948, 62 Stat. 262, 15 U.S. C., Supp. TT,

603(a), provides in pertinent part as follows:

* * * Debts due the Corporation, whether

heretofore or hereafter arising, shall not be

entitled to the priority available to the United

States pursuant to section 3466 of the Revised

Statutes (U.S.C., title 31, sec. 191) except

that the Corporation shall be entitled to

such priority with respect to debts arising

from any transaction pursuant to any of the

following Acts or provisions in effect at any

time: Sections 5d (1) and 5d (2) of the Re-

construction Finance Corporation Act added

by section 5 of the Act entitled ‘‘An Act to

authorize the purchase by the Reconstruction

Finance Corporation of stock of Federal home-

loan banks; to amend the Reconstruction

~7—“~“~—""™

3

Finance Corporation Act, as amended, and for

other purposes”, approved June 25, 1940 (94

Stat. 573); sections 4 (f) and 9 of the Act

entitled ‘‘An Act to mobilize the productive

facilities of small business in the interests of

successful prosecution of the war, and for

other purposes”’, approved June 11, 1942 (56

Stat. 354, 356) ; section 2 (e) of the Emergency

Price Control Act of 1942 (56 Stat. 26); the

Surplus Property Act of 1944 (58 Stat. 765

and the following) ; sections 11 and 12 of the

Veterans’ Emergency Housing Act of 1946 (60

Stat. 214, 215); and section 403 of the Sixth

Supplemental National Defense Appropria-

tion Act (56 Stat. 245).

STATEMENT

The application of Reconstruction Finance Cor-

poration in the District Court for the Southern

District of New York for an order, allowing its

claims against the debtor in reorganization as

priority claims, discloses the following facts, which

are undisputed :

In June, 1946, Lithaloys Corporation, the

debtor, filed a voluntary petition for reorganiza-

tion pursuant to the provisions of Chapter X of

the Bankruptcy Act. The District Court approved

the petition and appointed petitioner, John L.

Flynn, as trustee (R. 4). In October, 1946, a plan

of reorganization was proposed by a creditor, pred-

ieated upon the insolvency of the debtor and pro-

viding simply for the reduction of the assets of

the debtor to cash for distribution to creditors

4

(R. 4). On October 30, 1946, the District Court

ordered all proofs of claim to be filed on or before

November 18, 1946 (R. 4). The plan of reorganiza-

tion did not provide for separate classification or

treatment of creditors asserting general priority,

and the order of October 30, 1946, did not require

unsecured creditors to set forth any general prior-

ity claimed (R. 5).

On November 18, 1946, the final filing date al-

lowed by the District Court, RFC filed the claims

in issue. The first claim represented the balance due

on a secured loan owed by the debtor to Smaller War

Plants Corporation and transferred to RFC upon

the dissolution of SWPC, by Executive Order No.

9665, dated December 27, 1945, 3 C. F. R., 1945

Supp., p. 166. (R.5.) In May, 1947, this claim was

reduced by the amount realized on the security (R.

6). The second claim represented a debt arising

out of transactions between the debtor and Defense

Plants Corporation, which was transferred to

RFC, upon the dissolution of DPC by the Act

of June 30, 1945, 59 Stat. 319 (R. 5). The claim

was later amended in January, 1948, to in-

clude a small sum for the value of personal prop-

erty leased to the debtor by DPC (R. 6).

On January 3, 1947, the District Court entered

an order approving the plan of reorganization, as

amended. Inter alia, the order found the debtor to

be insolvent and amended the plan by providing

for payment of all priority claims prior to the dis-

tribution to general creditors. (R. 5-6.) On Feb-

5

ruary 14, 1947, the District Court confirmed the

plan of reorganization approved on January 3,

1947, and reserved jurisdiction (R. 6).

On May 25, 1948, Public Law 548, 80th Cong.,

2d sess , 62 Stat. 262, which amended the Recon-

struction Finance Corporation Act, became effec-

tive. Section 3 thereof, supra, pp. 2-3, provided

in part that ‘‘Debts due the Corporation, whether

heretofore or hereafter arising, shall not be entitled

to the priority available to the United States pur-

suant to section 3466 of the Revised Statutes

(U.S.C., title 31, sec. 191) except that the Cor-

poration shall be entitled to such priority with

respect to debts arising from any transaction pur-

suant to any of the following Acts or provisions in

effect at any time: * * *.’? The enumerated Acts

included ‘¢ * * * sections 4 (f) and 9 of the Act

entitled ‘An Act to mobilize the productive facili-

ties of small business in the interests of success-

ful prosecution of the war, and for other purposes’,

approved June 11, 1942 (56 Stat. 354, 306 [50

U. S. C. App. 1104(f), 1109]),’’ under which the

claims here involved arose.

On September 2, 1948, pursuant to Public Law

548, RFC filed a further amendment claiming

priority on $185,636.01 of its original claims (R. 7).

As of that date, no distribution under the plan of

reorganization had been made to any of the credi-

tors and the plan had not been consummated in any

respect other than the liquidation of the debtor’s

assets (R. 9). On September 10, 1948, the Trus-

—— —

et a NE AIOE

6

tee rejected this last amendment on the ground that

the time for filing claims had expired on Novem-

ber 18, 1946, and that the rights of creditors had

long since been fixed under the plan of reorganiza-

tion (R. 8, 10-11). RFC then filed its petition in

the District Court for an order allowing its claims

as priority claims (R. 4-14). The District Court

denied the motion (R. 21), holding that R. S. 3466,

31 U.S.C. 191 (the basic priority statute), did not

apply and that Section 3 of the Act of May 25,

1948, did not operate retroactively (R. 15-20). On

appeal the court below reversed (R. 32); it held

that Section 3 of the Act of May 25, 1948, clearly

provided that it should apply retrospectively and,

in the light of that holding, it concluded that it was

unnecessary to pass upon the applicability of R. 8.

3466 to the claims here involved.

ARGUMENT

1. The intention of Congress that Section 3 of

the Act of May 25, 1948, supra, pp. 2-3, be retro-

active in operation is manifest from the plain lan-

guage of the statute. Section 3 provides as

follows:

* * * Debts due the Corporation, whether

heretofore or hereafter arising, shall not be en-

titled to the priority available to the United

States pursuant to section 3466 of the Revised

Statutes (U. S. C., title 31, sec. 191) ex-

cept that the Corporation shall be entitled

to such priority with respect to debts arising

from any transaction pursuant to any of

the following Acts or provisions in effect

-— “—

at any time: * * * sections 4 (f) and 9

of the Act entitled ‘‘An Act to mobilize the

productive facilities of small business in the

interests of successful prosecution of the war,

* * #99

The Congressional mandate is unequivocal. The

Statute specifically encompasses ‘‘Debts * * *

whether heretofore or hereafter arising, * * *.”’

No limitation is imposed as to the time when such

debts, as a class, accrued, either for the purpose of

excluding them from or including them within the

priority conferred by “‘section 3466 of the Revised

Statutes,’ and the specified priority applies

unqualifiedly with respect to debts arising “‘from

any transaction’’ pursuant to the enumerated Acts.

Reference to the legislative history of Section

3 confirms the conclusion that RFC is entitled

to a priority for the debts here involved. Under

R. 8. 3466 (31 U.S.C. 191), which provides in part

that ‘Whenever any person indebted to the United

States is insolvent * * * the debts due the

United States shall be first satisfied; * * *,”’

two divergent lines of decision as to whether gov-

ernmental agencies and corporations are entitled to

the priority due the United States have emerged.’

Compare Sloan Shipyards Corp. v. United States

Fleet Corp., 258 U.S. 549; United States v. Marzen,

307 U. S. 200, with United States v. Emory, 314

U. 8. 423; Illinois v. United States, 328 U. 8. 8;

1 The court below found it unnecessary, for the purpose of

this litigation, to decide whether RFC was entitled to priority

under R. S. 3466 (R. 30).

Cherry Cotton Mills v. United States, 327 U. 8.

536; United States v. Remund, 330 U. 8. 539. In

submitting S. 2287 (later enacted into the statute

here involved), the Senate Committee on Bank-

ing and Currency included in Section 3 thereof

a provision to clarify, as to RFC, the confusion

existing with respect to R. 8S. 3466. The accom-

panying report states that (S. Rep. 974, 80th Cong.,

2d Sess., p. 20) :

Because of recent United States Supreme

Court decisions it may be that RFC is entitled

under the present law to the same priority in

bankruptcy which is enjoyed by the United

States. The Committee believes that RFC

should not have this priority with respect to

the recovery of funds advanced under its regu-

lar lending operations. A sentence is there-

fore added to this section which will remove

that priority except with respect to obligations

owed to RFC as a result of certain of its war

time activities. (Emphasis added.)

This legislative purpose was reiterated on the

floor of the Senate by Senator Buck, chairman of

the special subcommittee of the Senate Committee

on Banking and Currency which conducted the in-

quiry into the operations of RFC pursuant to S.

Res. 132, 80th Cong., Ist Sess., and reported out

S. 2287. Explaining the aim of Section 3, Sen-

ator Buck commented (94 Cong. Rec. 4108) :

* * * Because of a recent Supreme Court

decision, a question has arisen as to whether

eal

9

RFC may not be entitled to the priority in

bankruptcy which is available to the United

States. The Committee believes that RFC

should not have such priority with respect to

debts arising from its normal lending activ-

ities. A provision has been included in this

section which will eliminate that priority ex-

cept with respect to debts arising under‘ the

specific war powers which are designated

therein. * * * [Emphasis added.]

To the same effect, see H. Rep. 1836, 80th Cong.,

2d Sess., p. 11. It is evident from these statements

that Congress thought it was limiting an existing

right to priority and not creating new ones. But

jt also recognized that this Court had not decided

the specific problem, and it therefore employed

language which would leave no room for doubt. It

retroactively denied priority to certain classes of

claims and at the same time retroactively granted

priority to other classes. As the court below points

out, the syntax of the act bears out this intention.

‘‘The general clause, divesting the R. F. C. of gov-

ernmental priority, precedes the exceptions, pre-

serving that priority in certain instances’’ (R. 30).

A retroactive interpretation of Section 3 is

further compelled by the fact that any other read-

ing would defeat its very purpose. The debts here

involved accrued to the Defense Plants Corpora-

tion and the Smaller War Plants Corporation un-

der one of the acts enumerated in Section 3

herein, namely ‘‘sections 4 (f) and 9 of the Act

10

entitled ‘An Act to mobilize the productive facili-

ties of small business in the interests of successful

prosecution of the war, and for other purposes,’ ’’

56 Stat. 354, 356, 50 U.S.C. App. 1104(f), 1109; and

both DPC and SWPC were dissolved more than

two years prior to the enactment of Section 3(a),

and all of their assets were transferred to RFC

(Act of June 30, 1945, 59 Stat. 310; Executive

Order No. 9665, 3 C.F.R., 1945 Supp., p. 166).

If Section 3 is not to be applied retroactively,

the preservation of priority rights to RFC in

claims arising under the exercise of those war-

time powers by DPC and SWPC is patently

meaningless.

2. Although, as petitioner points out, the general

rule is that the rights of creditors in bankruptcy

are determined as of the filing of a petition (Pet.

p. 13), there is certainly no constitutional bar to

legislation which changes existing priorities. See

Kuehner v. Irving Trust Co., 299 U. 8. 445, 452;

Carpenter v. Wabash Ry. Co., 309 U. 8. 23, 28;

City of Chelsea v. Dolan, 24 F. 2d 522 (C.A. 1),

certiorari denied, 277 U. 8S. 606; Adams v. Bowen,

46 F. 2d 294 (C.A. 1); In re Inland Dredging

Corp., 61 F. 2d 765 (C.A. 2), certiorari denied,

288 U. S. 611; In re Old Algiers, 100 F. 2d 374

(C.A. 2); In re William Akers, Jr., Co., 31 F.

Supp. 900 (E.D. Pa.), reversed on other grounds,

121 F. 2d 846 (C.A. 3) ; In re Jay & Dee Store Co.,

37 F. Supp. 989 (E.D. Pa.) ; In re Prima Co., 88 F.

pa

2d 785 (C.A. 7) ; In re Chicago, R. I. & P. Ry. Co.,

90 F’. 2d 312 (C.A. 7). And on the facts herein, there

would seem to be no equitable ground for denying

RFC priority. Although the application for a

priority came after the time for filing claims had

expired and a plan of liquidation had been con-

firmed, no distribution had been actually made to

creditors and the District Court had expressly re-

tained jurisdiction to modify its order confirming

the plan of liquidation. Moreover, the plan simply

contemplated the reduction of the assets of the deb-

tor to cash for distribution to creditors, providing,

inter alia, for payment of all priority claims prior

to general distribution. Petitioner has made no

showing of any action, prejudicial to participating

creditors, which resulted from the failure of RFC

to assert its priority at an earlier date. We can

only conclude therefore, as did the court below,

that ‘‘We cannot see that the orderly proceedings

in bankruptcy will be disturbed if the priority is

allowed, and we do not find the authorities cited by

respondent [petitioner herein—Pet. pp. 13-15] to

require the contrary’’ (R. 31).

11

3. The same problem was considered by the Court

of Appeals for the Seventh Circuit in In re Temple,

174 F. 2d 145, in which that court similarly upheld

the claim of R. F. C. to priority under Section 3.

12

CONCLUSION

The decision below is correct, and there is no

conflict of decisions. It is respectfully submitted,

therefore, that the petition for a writ of certiorari

should be denied.

J Pui B. Pertmay,

J Solicitor General.

H. G. Morison,

[Asstetent Attorney General.

Pau A. SWEENEY,

BENJAMIN FORMAN,

Attorneys.

SEPTEMBER 1949

WU. &. GOVERNMENT PRINTING OFFICE: 1948 eseoe? 173