Petition for Writ of Certiorari — Duryee v. Erie Railroad

FILE COPY ~—Lss

AUG 26 1949

CHARLES ELMORE CROPLI

CLE

»

IN THE

Supreme Cowt of the Ruited States

Ocrosper Term, 1949

Peter Duryver, Trustee of the Prope: £ The New Jersey

and New York Railroad Company,

Petitioner,

vs.

Erre Ramroap Company.

— ee

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SIXTH CIRCUIT

J Riomarp Sway BvueELL,

Attorney for Peter Duryee, Trustee

of the Property of The New Jersey

and New York Railroad Company,

Petitioner.

August 25, 1949.

Opinions below

Jurisdiction

Questions presented

Statute and rules involved

Statement

Reasons for granting the writ

Conclusion

CrraTions

Cases:

Arenas v. United States, 322 U.S. 419, 431, 434

Arnstein v. Porter, 2 Cir., 154 F. 2d 464

Associated Press v. United States, 326 U.S8.1,6....

Bozant v. Bank of New York, 2 Cir., 156 F. 2d 787 ..

Comstock v. Group of Investors, 335 U. S. 211

Consolidated Rock Co. v. DuBois, 312 U. S. 510, 523-

Davis v. Alexander, 269 U. S. 114, 117

Doehler Metal Furniture Co. v. United States, 2 Cir.,

149 F. 2d 130, 137

Fogelson v. American Woolen Co., 2 Cir., 170 F. (2d)

17

li INDEX

Hazel-Atlas Co. v. Hartford Co., 322 U. S. 238 ...... 17

Madeirense Do Brasil S/A v. Stulman-Emrick Lum-

ber Co., 2 Cir., 147 F. 2d 399, cert. den. 325 U. §.

oR ee NE FP Br che nett a Reap eS ANOS LEY 18

Mohonk Realty Corporation v. Wise Shoe Stores, 2

Cir., 111 F. (2d) 287, cert. den. 311 U. S. 654... 17

Northern Pacific Ry. v. Boyd, 228 U. S. 482 ........ 17, 20

Peckham v. Ronrico Corporation, 1 Cir., 171 F. (2d)

DEE sth bbdSnkk bade Ckasike eherncus abe 17

Pepper v. Litton, 308 U. S. 295, 304-305 and cases

WRT Sic os haw hance cackns be4 cus eieee 17, 20

St. Louis € S.F.R.R. v. Spiller, 274 U. S. 304, 314-316 2

Sartor v. Arkansas Natural Gas Corp., 321 U. S. 620,

WE EE, Ketcinukces weneads one hades babaws cage 15, 16

Stone v. Eacho, 4 Cir., 127 F. (2d) 284 ............. 19

Wayne Gas Co. v. Owens Co., 300 U. S. 131, 135-137 .. 17

STATUTES

United States Code (Title 28) Sections 1254(1) and

ME care DOcehun enc leatt cece skcckca lee ueen)

Bankruptcy Act (Section 77) ..............0.0005. 2, 3,6

Bankruptcy Act (Section 77B) ....................

Bankruptcy Act (Section 21(a)) ..................

Bankruptcy Act (Section 77(f)) .............. 4, 5, 14, 20

Bankruptey Act (Section 77(g)) ............0.005.

Bankruptey Act (Section 77) (47 Stat. 1474, 11

RON ie I OU ek can fo cd yay coe

Federal Rules of Civil Procedure

SE TOD abe aceuk chee cok hin eles cade 5, 26

od... SRNR ie Fae pia eens 4, 5, 16, 26

SNM 520 ons Cs Suen na kau cakean dtu eee

We OE kb SaaS hee cal ivesucceiuces: 5, 15, 16, 17, 24

INDEX iii

“

MISCELLANEOUS

PAGE

Matter of Application of The New Jersey and New

York Railroad Company For Classification As a

Separately Operated Railroad, 198 I.C.C. 504... 11

Douglas and Shanks, Insulation from Liability

Through Subsidiary Corporations, 39 Yale L.J.

Se CREE f wdciick bias Mae kos diae ee 19

IN THE

Supreme Court of the United States

Octoser Term, 1949

+

Peter Duryee, Trustee of the Property of The New J ersey

and New York Railroad Company,

Petitioner,

vs.

Erie Ramroap Company.

dy

i

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SIXTH CIRCUIT

Petitioner, Peter Duryee, Trustee of the Property of The

New Jersey and New York Railroad Company, prays that

a writ of certiorari issue to review the judgment of the

United States Court of Appeals for the Sixth Circuit,

entered on June 1, 1949, affirming a judgment of the District

Court of the United States for the Northern District of

Ohio, Eastern Division, granting summary judgment

against petitioner (R. 314-315).*

* References noted as such are to the transcript of record.

References (fol. —) are to the transcript of record by folio number.

References to pages of the Erie Reorganization Record are referred

toas (E—),

Opinions Below

The opinion of the Court of Appeals (R. 334-345) is not

yet reported. The opinion of the District Court (Wilkin,

J.) (R. 304-312) is reported in 76 F. Supp. 635.

Jurisdiction

The judgment of the Court of Appeals was entered on

June 1, 1949. The jurisdiction of this Court is invoked

under Title 28, United States Code, sections 1254(1) and

2101(c).

Questions Presented

The ultimate question is whether the Court of Appeals

erred in affirming summary judgment against the trustee

of a short-line subsidiary railroad in reorganization under

Section 77 of the Bankruptcy Act in an action brought by

him against the parent railroad for an adjudication that,

under the doctrine of Consolidated Rock Co. v. DuBois,

312 U. S. 510, 523-524, and other decisions, the parent is

liable for certain obligations and debts of the subsidiary by

virtue of the parent’s long-continued domination, control,

management and unified operation of the subsidiary as a

mere department, adjunct and instrumentality of the

parent.

The specific questions will be enumerated after the fol-

lowing brief summary of the factual background.

In January 1938 the parent railroad petitioned a federal

district court in Ohio for reorganization under Section 77

of the Bankruptcy Act. Six months later the subsidiary

petitioned the same court for reorganization as a part of

the parent’s reorganization. The two trustees of the parent,

one of whom was its president, were appointed the trustees

3

of the subsidiary. Under orders of the court, the time for

filing claims against the parent expired on a date in 1938

which was several days prior to the earliest date for filing

claims against the subsidiary. No claims against the parent

were filed by the trustees or by the bondholders or other

- ereditors of the subsidiary.

A plan of reorganization of the parent was confirmed

by the court in Ohio in June 1941. The plan contained no

provision as to the subsidiary or its creditors. On petition

of the trustees, the court ordered on December 9, 1941,

that the property and rights of the subsidiary be vested as

of January 1, 1942 in petitioner as trustee appointed by the

federal district court in New Jersey, in which court another

Section 77 proceeding for reorganization of the subsidiary

had been brought and has continued. On December 20,

1941, a bar order was entered in the court in Ohio dis-

charging the parent, as of December 22, 1941, from all

except certain of its debts, obligations and liabilities. Those

excepted did not specifically include any owing to the

subsidiary or its creditors. The bar order reserved in the

district court in Ohio, and that court has retained, juris-

diction for all purposes necessary to carry out the bar

order and the plan of the parent, including the purpose of

‘‘passing upon claims of creditors of, or claims against”’,

the parent. No plan of reorganization of the subsidiary

has been filed either in the proceeding in New Jersey or in

that in Ohio.

In 1947, after officers of the parent had been examined

in hearings under Section 21(a) of the Bankruptcy Act

in the proceeding in New Jersey, petitioner, pursuant to

authority granted by the district court in New Jersey,

instituted the present action in the district court in Ohio

for an adjudication that the parent is liable for tax claims,

bonded indebtedness and tort obligations totalling

$1,434,428.01 (plus interest) incurred by the subsidiary

prior to its petition for reorganization.

| SSSR See a ey nea

4

The complaint alleged that from 1897 until the date of

the parent’s petition, the parent had continuously and com.

pletely dominated, controlled, managed and unifiedly

operated the subsidiary as a mere department, adjunct and

instrumentality of the parent. The answer denied these

allegations, but admitted other of the complaint’s aver.

ments, including that the parent had continuously owned

more than 80% of the outstanding voting stock of the

subsidiary. By way of. affirmative defense, the answer

pleaded that the action was barred by the bar order and

other proceedings in the reorganization of the parent,

This defense being deemed denied or avoided (Federal

Rules of Civil Procedure, Rule 8(d)), petitioner served

no reply.

On the parent’s motion for summary judgment based

mainly on its alleged affirmative defense, affidavits annex.

ing various exhibits were filed by it in support of the

motion, and by petitioner in opposition thereto. Those

filed by petitioner, while not contesting the existence of

the plan or bar order relied on by the parent and while not

expressly avering fraud by way of avoidance, supplemented

the circumstances hereinbefore summarized which appeared

from documents filed in the action and which were con-

tended by petitioner as showing a sufficiently strong pos-

sibility or probability of fraud or breach of trust to call for

full trial. Such trial was requested by petitioner on other

grounds as well.

The district court granted summary judgment for +3.

parent on the ground that the action was barred by Section

77(f) of the Bankruptey Act and by the bar order. It held,

however, that petitioner’s claim could be asserted as a

defense or set-off to a counterclaim which the parent had

filed. The parent thereupon dismissed its counterclaim.

The specific questions presented by the Court of Appeals’

affirmance of summary judgment are:

5

1, Whether, considering the disputed issues of fact and

the complexity of the case, summary disposition was per-

missible under Rule 56 of the Federal Rules of Civil

Procedure.

2. Whether the Court of Appeals committed reversible

error in holding, and to some extent basing its affirmance

of summary judgment on the ground, that the complaint

failed to state a claim because it did not allege fraud,

spoliation, waste or unfair management to the advantage

of the parent and to the detriment of the subsidiary.

3. Whether, in the circumstances, the bar order was

applicable to petitioner’s claim.

4, Whether the bar order, if it was applicable to peti-

tioner’s claim, constituted a complete defense available to

the parent.

5. Whether the action was barred by Section 77(f) of

the Bankruptey Act.

Statute and Rules Involved

The pertinent provisions of Section 77 of the Bankruptcy

Act (47 Stat. 1474, 11 U. S. C., § 205), as amended, are

set forth in Appendix ‘‘A’’, infra, pages 22-24.

The pertinent provisions of Rule 56, and Rules 7a and

8d, of the Federal Rules of Civil Procedure are set forth

in Appendix ‘‘B’’, infra, pages 24-26.

Statement

Petitioner is the Trustee of the Property of The New

Jersey and New York Railroad Company (hereinafter

called ‘‘The New Jersey’’) in reorganization under Sec-

6

tion 77 of the Bankruptcy Act in the United States District

Court for the District of New Jersey. On April 2, 1947,

pursuant to that court’s authorization (R. 11-13), he insti.

tuted the present action against respondent, Erie Railroad

Company (hereinafter called ‘‘Erie’’), in the United States

District Court for the Northern District of Ohio, Eastern

Division (hereinafter called ‘‘the district court’’ or **the

district court in Ohio’’). The New J ersey is a subsidiary

of Erie, and the action was brought for the benefit of mort.

gage bondholders and other creditors of The New Jersey,

The States of New Jersey and New York on account of

unpaid taxes and various persons to whom The New J ersey

is indebted on account of personal injuries and deaths are

included among such creditors (R. 7-10).

The prayer of the complaint was that, (a) the court find

and order that specified obligations and debts of The New

Jersey owing to said creditors as of June 30, 1938, the date

of The New Jersey’s petition for reorganization, and

totalling $1,434,428.01, together with accrued and penalty

interest, are obligations and debts of Erie and are due and

payable; and (b) the court render judgment against Erie

for the total amount thereof, including accrued and penalty

interest ; and (c) the court grant such other relief as might

be just and equitable, together with costs and disburse-

ments (R. 2-10).

The complaint alleged, inter alia, that: The New Jersey

was organized in 1885 under the laws of New Jersey;

Erie is a corporation organized under the laws of New

York and having its principal operating office and place

of business in Cleveland, Ohio; on June 30, 1938, a

voluntary petition for reorganization, under Section 77,

was filed in the district court in Ohio by The New Jersey

as a subsidiary debtor of Erie; since January 18, 1938,

Erie has been in reorganization under Section 77 in the

same court; during the period of reorganization of The

New Jersey in the district court in Ohio, the trustees of

7

The New Jersey were the same individuals who were trus-

tees of Erie; and the reorganization proceedings of The

New Jersey in the district court in Ohio were transferred

to the district court in New Jersey on January 1, 1942, on

which date petitioner became Trustee of the property of

The New Jersey (R. 2-4).

The complaint further alleged that: from 1897, continuing

to the date of the complaint, Erie owned and controlled

more than 80% of the outstanding voting capital stock

of The New Jersey; from 1897 until June 30, 1938, The

New Jersey was continuously and completely dominated,

controlled, managed and unifiedly operated by Erie as a

mere department, adjunct and instrumentality of Erie;

throughout said period, Erie caused the physical operations

and administrative organization of The New Jersey to be

carried on as a mere department, adjunct and instru-

mentality of Erie; during the period through June 30,

1938, The New Jersey incurred the obligations and debts set

forth in the complaint, for which judgment was prayed;

The New Jersey was and is unable to satisfy any such

obligations or debts or the accrued or penalty interest

thereon, although due demand has been made therefor;

and prior to commencing the action, petitioner as trustee

duly demanded that Erie pay over to him the amount of

the obligations and debts with interest, but Erie failed and

refused to do so (R. 2-10).

The complaint alleged that Erie’s domination, control,

management and unified operation of The New Jersey as

a mere department, adjunct and instrumentality of Erie

was accomplished by the following, among other, means:

Erie, by virtue of its stock ownership and control, elected

all of the members of the board of directors of The New

Jersey, of whom a substantial majority were either direc-

tors, officers or key personnel of Erie; the directors of

The New Jersey, so elected and composed, were under the

complete control of Erie or its board of directors or officers,

8

and they elected or appointed an executive committee and

officers and key personnel for the operation of The New

Jersey who were all directors, officers or key employees of

Erie and whose primary duties were owed to Erie rather

than to The New Jersey; the directors or officers of The

New Jersey caused to be effected and amended from time

to time an operating contract or arrangement between Erie

and The New Jersey, under which, equipment of Erie was

leased to The New Jersey and under which the officers and

key personnel of Erie were required to operate The New

Jersey, the charges for such leasing and services being

apportioned on a formula embracing Erie and its sub.

sidiaries collectively known as the Erie Railroad System;

from time to time the directors or officers of The New

Jersey also caused to be executed collective bargaining

contracts with its operating employees, which contracts

provided, in substance, that such employees were joint

employees of Erie and The New Jersey and had important

rights on other railroads of Erie’s system; the directors

or officers of The New Jersey caused its principal operat-

ing office to be moved from New York, N. Y., to Cleveland,

Ohio, when or about when Exie’s principal operating: office

was moved from New York to Cleveland, and caused all

necessary papers and documents to be executed on behalf

of The New Jersey by individuals whose primary duties

were owed to Erie rather than to The New Jersey; from

time to time, Erie paid interest on the bonds of The New

Jersey and paid the railroad taxes paid to the State of New

Jersey ; and Erie openly represented to the public that The

New Jersey was part of the Erie Railroad System (R. 4-6).

Erie’s answer to the complaint admitted certain of the

allegations thereof including those as to the reorganization

proceedings, the identity of the trustees of Erie and The

New Jersey prior to the transfer of the reorganization of

The New Jersey from the district court in Ohio to the dis-

trict court in New Jersey, and Erie’s ownership and con-

trol of more than 80% of the stock of The New Jersey.

9

The answer denied the allegations as to Erie’s domination,

control, management and unified operation of The New

Jersey as a department, adjunct and instrumentality of

Erie. In addition, the answer alleged matters by way of

affirmative defense, and contained a counterclaim (R. 14-

20).

For affirmative defense, the answer alleged, inter alia,

that: by order entered May 7, 1938, in the Erie reorganiza-

tion proceedings, the district court in Ohio fixed October 1,

1938, as the time within which claims of Erie’s creditors

had to be filed or evidenced if they were to participate

(R. 16-17); neither petitioner nor his predecessor trus-

tees filed or evidenced any claim against Erie therein

(R. 17); the district court in Ohio approved the Plan

of Reorganization of Erie by order entered December 30,

1940, confirmed the Plan by order entered June 16, 1941,

and by Order No. 386 (hereinafter called the ‘bar order’’)

entered December 20, 1941, provided for the vesting of the

estate of Erie Railroad Company, Debtor, and all right,

title and interest of the trustees therein, in reorganized

Erie as of December 22, 1941 (R. 16); petitioner’s alleged

cause of action was barred by said bar order and was

barred also by laches (fols. 50, 46); and his only remedy,

if any, was to file a petition in the Erie reorganization

proceeding for leave to file a claim therein, the district

court in Ohio ‘‘having reserved and still retaining juris-

diction over claims, pursuant to said Order No. 386”

(fol. 50). Copies of the bar order (R. 75-133) and order

approving (R. 21-60) and order confirming (R. 61-74) the

Plan of Erie were annexed to the answer.

Erie’s counterclaim was for alleged debts of The New

Jersey or its trustees aggregating $6,803,922.35 to April 30,

1947, plus interest, allegedly based on cash advances,

freight interchanged, per diem and rent of passenger cars,

loss and damage claims, interline ticket balance, and ‘‘mis-

cellaneous contract and other charges’’ (this item totaling

—

10

$4,201,418.39). These alleged debts for the period prior

to June 30, 1938, aggregated $5,803,983.62 plus interest

(R. 19-20).

Petitioner served no reply to the counterclaim, but

made a motion, supported by affidavit and exhibits, to dis.

miss the counterclaim on the ground, in substance, that

the district court in New Jersey had exclusive jurisdic.

tion to entertain claims against petitioner as trustee (R.

134). While this motion was pending, Erie made a mo-

tion, (1) to dismiss the complaint for alleged failure to

state a claim upon which relief could be granted, or in

the alternative, (2) to enter summary judgment for Erie

on the ground that the action was barred by the Erie reor-

ganization proceeding in the same court (i. e., the district

court in Ohio), or in the alternative, (3) that the court

ascertain what material facts existed without substantial

controversy and what material facts are controverted, and

make an order specifying the facts in the first category

and directing such further proceedings as are just (R. 224).

Two affidavits incorporating exhibits were submitted by

Erie in support of its motion, and two others incorporating

other exhibits were submitted by petitioner in opposition to

the motion (R. 225-303). Those submitted by Erie per-

tained mainly to the matters of the affirmative defense

alleged in its answer (R. 225-303). Those submitted by

petitioner did not dispute that the bar order and other

orders invoked by Erie had been issued in the Erie reor-

ganization proceeding, and did not specifically aver fraud

with respect to such orders; but included, inter alia, a

certified copy of the Report of Special Master dated Janu-

ary 23, 1946, made in the New Jersey proceeding after

hearings pursuant to Section 21(a) of the Bankruptcy Act

at which officers of Erie were examined, and a certified

copy of the New Jersey district court’s order confirming

the Report (R. 263-264, 174-223). The Report contained

the following, among other findings:

11

‘Since 1922 Erie has owned 83.6% of the Debtor’s

(t. e., The New Jersey’s) stock. It was testified that

there was no question but that Erie elected the direc-

tors of the Debtor and ran its business prior to the

bankruptcy. The Debtor was a subsidiary of and was

solely and directly controlled by Erie. * * * at all

times prior to 1938 a majority of the directors of the

Debtor were directors, officers or employees of the

Erie. Erie’s officers above the grade of superintendent,

were the same individuals as were the Debtor’s officers.

When the general offices of Erie were removed to

Cleveland, Ohio, the general offices of the Debtor were

likewise removed to Cleveland, Ohio, even though the

Debtor operated no railroad in Ohio’’ (R. 212-213).*

The facts principally relied on by petitioner in opposing

Erie’s motion for summary judgment appeared from the

record of the Erie reorganization proceedings, which

record, pursuant to stipulation, was incorporated in the

record herein.

On the basis of whole record, petitioner contended that

the circumstances as to the conduct of those proceedings,

presented, in the aggregate, a strong possibility or proba-

bility of fraud and breach of trust on the part of Erie and

its trustees with respect to The New J ersey and its credi-

tors and with respect to the bar order; that such fraud or

breach of trust, if proved, would vitiate Erie’s alleged

affirmative defense; and that, since Erie disputed the occur-

rence of any such fraud or breach of trust, genuine issues

of fact precluding summary disposition were presented on

*In a railway mail

mission had decided in

a

12

Erie’s motion, even apart from the factual issues raised by

the pleadings. The suspicious coincidences particularly

emphasized by petitioner were, among others, that: The

New Jersey, after petitioning for reorganization as a part

of the Erie’s reorganization, was excluded from the Erie

plan ;* the two trustees of Erie, one of whom was Erie’s

president, were also the trustees of The New Jersey dur-

ing the reorganization in Ohio (E. 735-739); under court

order obtained by the Erie Trustees, the time for filing

claims against Erie expired October 1, 1938, which was

several days prior to the earliest date for filing claims

against The New Jersey, such date having been set by

court order obtained by such same individuals as trustees

of The New Jersey (R. 306); such individuals as Trustees

of The New Jersey petitioned for and obtained, on Decem-

ber 9, 1941, an order for the dismissal of the reorganiza-

tion proceedings of The New Jersey in Ohio (E. 4213-4218,

4265-4267) without even token compliance with Section 77

(g) of the Bankruptcy Act, i. ¢., requirement for full hear.

ing and consideration of the recommendation of the Inter-

state Commerce Commission; and following this court

order of December 9, 1941 such same individuals knowing

that the property and rights of The New Jersey would

be vested in petitioner under said order as of January

1, 1942, caused a petition for the bar order to be filed

with the court on December 12, 1941. Such bar order be-

* The Director of the Bureau of Finance of the Interstate Com-

merce Commission, in a letter dated December 23, 1947, responding

to an inquiry of counsel, stated that he could recall only one other

instance where a subsidiary debtor, once having filed its petition

for reorganization as a subsidiary debtor, was not so reorganized in

connection with or as a part of the reorganization of the parent com-

pany (R. 270-272). In that instance, however, oil was discovered

adjacent to the subsidiary’s right-of-way during the pendency of the

proceeding, and the subsidiary received substantial returns from

settlements with oil companies and, on its own request for dis-

missal of the reorganization proceedings as to it, took back its

property (id.).

13

came effective ten days later (i. e., December 22, 1941,

prior to the vesting of The New Jersey’s property and

rights in petitioner) (E. 4807-4873).

Erie’s motion for summary judgment and petitioner’s

motion to dismiss Erie’s counterclaim were heard and de-

termined in conjunction with a motion of Erie, similar to

its motion herein, made by it in an action like the instant

brought against Erie by Waldo H. Beckley, a first mortgage

bondholder of The New Jersey; and in conjunction also

with a petition filed in the Erie reorganization proceeding

by Charles Massie, another bondholder, for an order declar-

ing that the bar order did not preclude him from bringing

an action to enforce rights claimed by The New J ersey

bondholder, or for an order opening and modifying the bar

order to permit such an action (R. 304-305).

The opinion of the district court (Wilkin, J.) in all three

cases was rendered March 15, 1948 (R. 304-312). It sus-

tained Erie’s motion against Beckley (R. 305); denied

Massie’s petition (R. 309) ; and stated as to the present case

that “the court overrules grounds 1 (i. e., motion to dis-

miss complaint as not stating a cause of action under

Rule 12b) and 2 (i. e., motion for summary judgment under

Rule 56) of the motion for dismissal and summary judg-

ment, and sustains part 3 of the motion’’ (fol. 927), and

that petitioner’s motion for dismissal of the counterclaim

“will be overruled’’ (fol. 933). The court held that peti-

tioner, unlike the bondholders, was not chargeable with

laches (fols. 934-941), that petitioner’s claim had never

been adjudicated (fol. 935), and that the claim alleged in

his complaint could be asserted as a defense and set-off

to Erie’s claim against The New Jersey (fols. 934-936,

942). It held, nevertheless, that petitioner’s claim could

not be asserted generally (i. e., as a plenary action) or as

a reason for reopening Erie’s Plan of Reorganization

(fols. 936, 941-942). The opinion did not set forth an ex-

plicit ground for this conclusion, but the district court’s

Bi.

14

judgment specified as the reason that ‘‘such action is

barred by Section 77(f) of the Bankruptcy Act and by

Order No. 386’’ (i. e., the bar order) (fol. 942).

The district court’s judgment (R. 314-315) was entered

June 9, 1938. Differing from the opinion, and after Erie’s

voluntary dismissal of its counterclaim, it granted the

motion for summary judgment. The judgment specified

that it was without costs and without prejudice to the

rights of petitioner ‘‘in any other proceeding or action,

to assert the claim pleaded in the complaint herein solely

as a defense and set-off against the claim or claims of Erie,

herein pleaded’’ (fol. 944).

The judgment of the district court neither denied nor

granted petitioner’s motion for dismissal of the counter-

claim, Erie having filed a voluntary dismissal of its counter.

claim in the interim subsequent to the court’s opinion and

prior to judgment (R. 312).

Petitioner appealed to the Court of Appeals for the Sixth

Circuit from the portions of the judgment which held that

petitioner’s claim was barred by Section 77(f) and by the

bar order, and which granted Erie’s motion for summary

judgment, and from related portions (R. 316). Erie cross-

appealed from the portions which held that petitioner could

not be charged with laches and that his claims had never

been adjudicated, and could be asserted as a defense and

set-off (R. 317). No appeal was taken by Erie on lower

court’s refusal to dismiss complaint as not stating a cause

of action (supra, p. 13).

On June 1, 1949, the Court of Appeals rendered its opin-

ion and judgment affirming the judgment of the district

court (R. 333-345).*

*On the same date the Court of Appeals affirmed the summary

judgment against Beckley. It did so per curiam on the authority

of its decision herein. ere was no appeal by Massie.

15

Reasons for Granting the Writ

1, In affirming summary disposition of this involved

case affecting the rights of various creditors, the Court

of Appeals has decided a federal question in a way prob-

ably in conflict with applicable decisions of this Court

construing Rule 56 of the Federal Rules of Civil Proce-

dure, and has so far sanctioned a lower court’s departure

from the accepted and usual course of judicial proceedings

as to call for review. Cf. Sartor v. Arkansas Natural Gas

Corp., 321 U. S. 620, 621, 627; Arenas v. United States,

322 U. S. 419, 431, 434; Fountain v. Filson, 336 U. S. 681.

The impropriety of summary judgment in cases where,

as here, the circumstances and issues are complex and the

whole truth is not clear from the papers filed, is particu-

larly evident from this Court’s decision and opinion in the

Arenas case. On certiorari therein the Court, upon the

following grounds stated in its opinion, reversed the

afirmance of a summary judgment which, based on prior

litigation, had been granted for the defendant:

“‘The outlines of the controversy are clear, but the

summary disposition of the case had precluded the

adversary trial which alone would give reliable foun-

dation for determining it * * *’’ (322 U.S. at 431).

‘“* * * the duty of the Court under the jurisdictional

act can be discharged in a case of this complexity

only by trial, findings and judgment in regular

course’’ (322 U. S. at 434).

The same grounds for reversal exist here. A decision

to that effect by this Court would be of twofold impor-

tance. It would further clarify the proper scope of

Rule 56 for the guidance of the federal courts, and it would

safeguard the rights of the considerable number of credi-

tors in whose behalf petitioner brought this action and

seeks a full trial.

ee

a

16

Even apart from the degree of complexity of a par.

ticular case, summary judgment is authorized under

Rule 56 ‘‘only if there is no dispute as to any materia] .

fact’’. Fountain v. Filson, supra, at 683; Sartor v. Arkan.

sas Natural Gas Corp., supra, 627; Associated Press v.

United States, 326 U. S. 1, 6. Since in the present case

Erie’s answer to the complaint denied petitioner’s allega-

tions as to Erie’s continuous domination, control, manage.

ment and unified operation of The New Jersey as a mere

department of Erie, and as to specified means by which

such were accomplished (R. 14-15, 4-7), and since those

allegations of fact were material to, indeed were the

heart of, petitioner’s claim (see infra, p. 18), the pleadings

clearly presented a dispute as to material fact. No finding

or statement to the contrary appears either in the opinion

of the district court granting summary judgment or in that

of the Court of Appeals affirming. Nor does either opinion

even refer to Rule 56 or its requirements, although the

point was presented and fully briefed by petitioner in both

courts below.

The matters alleged as affirmative defense in Erie’s

answer were not, and ought not to be, held to have ren-

dered the aforesaid factual dispute immaterial or spv-

rious for purposes of Rule 56. Indeed, Erie’s affirmative

allegations interjected some additional factual dispute.

Under Rule 8(d) they were and are to be deemed denied

or avoided. In both courts below, moreover, petitioner

contended that they gave rise to particular questions as

to whether the bar order and the other orders invoked

by Erie were obtained as part of a scheme of fraud and

breach of trust of Erie or its trustees, and that these

questions could be determined reliably only by full trial.

The bona fides of these questions is apparent from the cir-

cumstances hereinbefore summarized (pp. 6-8, 10-12) dis-

closed by the record herein. Their materiality has not

been denied by Erie or either of the courts below, nor

could it be validly, since any such fraud or breach of trust

17

should be ground for reopening the bar order and other

orders and should vitiate them as a defense available to

Erie. Cf. Northern Pacific Ry. v. Boyd, 228 U. 8. 482;

Wayne Gas Co. v. Owens Co., 300 U. S. 131, 135-137 ; Pep-

per v. Litton, 308 U. S. 295, 304-305 and cases cited n. 11;

Hazel-Atlas Co. v. dartford Co., 322 U. S. 288; Mohonk

Realty Corporation v. Wise Shoe Stores, 2 Cir., 111 F. (2d)

287, cert. den. 311 U. S. 654.

2. If the decision of the Court of Appeals were con-

strued as a holding that summary judgment was justified

because the affidavits and exhibits relied on by petitioner

in opposing the motion did not contain definite proof of

fraud on the part of Erie or its trustees in obtaining the

bar order or the other orders invoked as affirmative de-

fense, it would conflict in principle with decisions of the

Court of Appeals for the Second Circuit in Arnstein v.

Porter, 154 F. (2d) 464; Bozant v. Bank of New York,

156 F. (2d) 787 and Fogelson v. American Woolen Co.,

170 F. (2d) 660, 662. See also Doehler Metal Furniture

Co. v. United States, 2 Cir., 149 F. (2d) 130, 187; Peckham

v. Ronrico Corporation, 1 Cir., 171 F. (2d) 653, 657.

Those decisions stand for the proposition that, at least

as to matters peculiarly within the defendant’s knowl-

edge, where the plaintiff’s proof ‘‘must be drawn largely

from’? him (Fogelson case, supra, at 662), and where

credibility is involved, the plaintiff, in opposing sum-

mary judgment under Rule 56, need not submit affidavits

or other evidence directly refuting or avoiding the show-

ing made by defendant, but need only show that there

is ‘‘the slightest doubt as to the facts.’’ Doehler case,

supra, at 135; Peckham case, supra, at 657. The sus-

picious circumstances hereinbefore summarized (pp. 6-8,

10-12) meet that test amply in the present case.

The question as to the validity of such test is of im-

portance in the application of Rule 56 and is one not

“==

SSE RANGES NIC

18

hitherto determined by this Court and likely to recur fre.

quently in the lower federal courts until so determined,*

Review, therefore, would be warranted apart from any

conflict of decisions.

3. The opinion of the Court of Appeals in the present

case discloses that the court held, or, in any event, con. _

sidered that, under the authority of Comstock v. Group —

of Investors, 335 U. S. 211, the complaint failed to state

a claim, in that it did not allege fraud, constructive fraud,

spoliation, waste or unfair management on the part of

Erie to the benefit of Erie and the detriment of The New

Jersey (R. 341, 343, 344). The court stated that ‘the rule

laid down in the Consolidated Rock Products case (312

U. S. 510), is not here applicable, under the authority of

Comstock’’ (R. 341). This apparent holding was made by

the Circuit Court, notwithstanding the decision by the

lower court upholding the sufficiency of the complaint (fol.

927) and the further fact that Erie did not appeal from

such lower court decision (R. 317; supra, p. 14).

The opinion further indicates that this misapprehension

of the Comstock decision contributed to the court’s affirm.

ance of summary judgment and, therefore, should not be

regarded as harmless (R. 341, 343, 344). Passages of

the opinion indicate that, if the court had deemed the

complaint to state a claim under the Consolidated Rock

case, the court might conceivably have upheld petitioner’s

contention that it would be inequitable and in contraven-

tion of public policy to hold the action barred without

* The majority opinions in the Arnstein and Doehler cases, supra,

were written by Judge Frank. His dissenting opinions in other cases

wherein a different bench upheld summary judgment, and the dis-

senting opinion of Judge Clark in the Arnstein case, indicate a con-

trariety of view on the present point among the judges of the Court

of Appeals for the Second Circuit. See Madeirense Do Brasil S/A

A Stulman-Emrick Lumber Co., 2 Cir., 147 F. 2d 399, cert. den. 325

. S. 861.

19

affording petitioner a trial at which he would have an

opportunity to prove fraud in avoidance of, or as a basis

for reopening, the bar order (id).

In the Consolidated Rock case, which involved a Sec-

tion 77B proceeding, this Court held that the bondholders

of subsidiaries which had been operated as mere depart-

ments of the parent, could, for that reason, reach the

assets of the parent. The Court said (at 524):

“** * * It is weili settled that where a holding com-

pany directly intervenes in the management of its

subsidiaries so as to treat them as mere departments

of its own enterprise, it is responsible for the obliga-

tions of those subsidiaries incurred or arising during

its management. Davis v. Alexander, 269 U. S. 114,

117; * * * (citing other decisions).’”*

The Comstock case did not involve any question of

liability of a parent for debts of a subsidiary. It involved

the converse, namely, the claim of a parent against its

subsidiary under the so-called Deep Rock doctrine. The

majority opinion in the Comstock case nowhere refers to

the Consolidated Rock case and, in petitioner’s view, is

not to be understood as having modified that decision in

any respect. Since, however, the Court of Appeals took

a different view, the instant case presents an appropriate

oceasion for clarification of the Consolidated Rock doctrine

as affected, if at all, by Comstock. An additional reason

for certiorari is that the opinion in Consolidated Rock

noted that the Court was not there dealing with ‘‘a situa-

tion where other creditors of a parent company are com-

peting with creditors of its subsidiaries’? (312 U. S. at

524). The question as to the applicability of the doctrine

in such a situation thus was reserved.

*See also: Douglas and Shanks, Insulation from Liability

Through Subsidiary Corporations, 39 Yale L. J. 193 (1929) ;

Stone v. Eacho, 4 Cir., 127 F. (2d) 284.

_

20

4 and 5. In interpreting the bar order and Section 77(f)

as applying to and precluding the claims asserted by pe-

titioner, the Court of Appeals has decided a question

which is of importance in the administration of the rail.

road reorganization provisions of the Bankruptcy Act

and which has not yet been passed upon by this Court.

So far as has been discovered, this Court has not had

previous occasion to construe Section 77(f). Its impor-

tance in the scheme of the Act is obvious, since it sets

forth the culminating steps in the process of railroad

reorganization and prescribes their effect.

The question of interpretation involves a reconciliation

of two competing policies. One is that when a plan of

reorganization is confirmed and the debtor’s property is

transferred or retained pursuant thereto, the debtor ordi-

narily should be regarded as discharged finally from all

preexisting debts and liabilities not specifically excepted

in the court’s orders. The other is that the bankruptcy

and other courts should be ever vigilant to prevent breach

of fiduciary duty, fraud, or injustice. The Court of Ap-

peals emphasized the first of these (R. 343). Petitioner

contends that, in the circumstances, greater weight should

have been accorded the second. Cf. Pepper v. Litton,

308 U. S. 295; St. Louis d S. F. R. R. v. Spiller, 274 U. 8,

304, 314-316; Northern Pac. Ry. Co. v. Boyd, 228 U. S. 482.

In the Pepper case this Court noted that ‘‘even though

the (bankruptcy) act provides that claims shall not be

proved against a bankrupt estate subsequent to six months

after the adjudication, the bankruptcy court in the exercise

of its equitable jurisdiction has power to permit claims to

be proved thereafter in order to prevent a fraud or an

injustice (citing cases)’’ (308 U. S. at 305). In the

Spiller case the Court held that a creditor’s ‘serious in-

advertence’’ in failing to file his claim in a receivership

suit within the time specified in an order of the court,

and his failure thereby to conform with the terms of the

21

reorganization plan, would not, where he had not been

guilty of laches, preclude him from being put, as nearly

as possible consistently with the rights of others, into

the position he would have occupied had he filed his claim

in time. Since in the present case the district court held

that petitioner could not be charged with laches (R. 310,

314) and this holding was undisturbed by the Court of

Appeals, and since the relief asked by petitioner would

not, so far as appears from the record, involved any in-

equity to others having equal or superior claims, the

principles of these decisions should be applied.

CONCLUSION

For the reasons stated, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

Ricnarp Swan BveEtt,

Attorney for Peter Duryee, Trustee

of the Property of The New Jersey

and New York Railroad Company,

Petitioner.

August 25, 1949.

22

Appendix “A”.

The pertinent provisions of Section 77 of the Bank.

ruptey Act (11 U. S. C. $205) are as follows:

(c) After approving the petition:

**(7) The judge shall promptly determine and fix

a reasonable time within which the claims of credi-

tors may be filed or evidenced and after which no

claim not so filed or evidenced may participate ex-

cept on order for cause shown, the manner in which

such claims may be filed or evidenced and allowed,

and for the purposes of the plan and its acceptance,

after notice and hearing, the division of creditors

and stockholders into classes according to the nature

of their respective claims and interests. Such divi-

sion shall not provide for separate classification un-

less there be substantial differences in priorities,

claims, or interests. ‘The trustee or trustees under

any mortgage, deed of trust, or indenture outstand-

ing against the property may, within the time pre-

scribed, file a verified claim in behalf of ali bonds

or securities outstanding under such mortgage, deed

of trust, or indenture, in which event it shall be un-

necessary for the holders of such bonds or securities

to file claims in their own behalf, but nothing herein

shall constitute such trustee or trustees the represen-

tative or representatives of such holders for the pur-

pose of accepting or rejecting any plan of reorganiza-

tion.’’

**(9) The judge shall direct the trustee or trustees,

and may request the Commission through such of its

agencies as it may designate, to report to him any

facts pertaining to irregularities, fraud, misconduet,

or mismanagement, as a consequence of which the

23

Appendix ‘‘ A’’.

debtor may have a cause of action arising therefrom

against any person or corporation.”

*“*(f) Upon confirmation by the judge, the provi-

sions of the plan and of the order of confirmation

shall, subject to the right of judicial review, be bind-

ing upon the debtor, all stockholders thereof, includ-

ing those who have not, as well as those who have,

accepted it, and all creditors secured or unsecured,

whether or not adversely affected by the plan, and

whether or not their claims shall have been filed,

and, if filed, whether or not approved, including

creditors who have not, as well as those who have,

accepted it. Upon confirmation of the plan, the deb-

tor and any other corporation or corporations organ-

ized or to be organized for the purpose of carrying

out the plan, shall have {ull power and authority to,

and shall put into effect and carry out the plan and

the orders of the judge relative thereto, under and

subject to the supervision and the control of the judge,

the laws of any State or the decision or order of

any State authority to the contrary notwithstanding.

The property dealt with by the plan, when trans-

ferred and conveyed to the debtor or to the other

corporation or corporations provided for by the plan,

or when retained by the debtor pursuant to the plan,

shall be free and clear of all claims of the debtor,

its stockholders and creditors, and the debtor shall

be discharged from its debts and liabilities, except

such as may consistently with the provisions of the

plan be reserved in the order confirming the plan or

directing such transfer and conveyance or retention,

and the judge may require the trustee or trustees

appointed hereunder, the debtor, any mortgagee, the

trustee of any obligation of the debtor, and all other

24

Appendix “‘B’’.

proper and necessary parties, to make any such trans-

fer or conveyance and may require the debtor to join

in any such transfer or conveyance made by the trustee

or trustees. Upon the termination of the proceedings a

final decree shall be entered discharging the trustee or

trustees, and making such provisions as may be equi-

table, by way of injunction or otherwise, and closing the

ease.’’ se ¢

Appendix “B”.

The pertinent provisions of Rule 56 of the Federal Rules

of Civil Procedure are as follows:

**Rule 56. SUMMARY JUDGMENT.

(a) For Claimant. A party seeking to recover upon a

claim, counterclaim, or cross-claim or to obtain a declara-

tory judgment may, at any time after the expiration of 20

days from the commencement of the action, or after service

of a motion for summary judgment, move with or without

supporting affidavits for a summary judgment in his favor

upon all or any part thereof.

(b) For Defending Party. A party against whom a claim,

counterclaim or cross-claim is asserted or a declaratory

judgment is sought may, at any time, move with or with-

out supporting affidavits for a summary judgment in his

favor as to all or any part thereof.

(c) Motion and Proceedings Thereon. The motion shall

be served at least 10 days before the time fixed for the

hearing. The adverse party prior to the day of hearing

may serve opposing affidavits. The judgment sought shall

be rendered forthwith if the pleadings, depositions, and

4

25

Appendiz ‘‘B’’,

admissions on file, together with the affidavits, if any,

show that there is no genuine issue as to any material fact

and that the moving party is entitled to a judgment as a

matter of law. * * *

(d) Case Not Fully Adjudicated On Motion. If on mo-

tion under this rule judgment is not rendered upon the

whole case or for all the relief asked and a trial is neces-

sary, the court at the hearing of the motion, by examin-

ing the pleadings and the evidence before it and by inter-

rogating counsel, shall if practicable ascertain what

material facts exist without substantial controversy and

what material facts are actually and in good faith con-

troverted. It shall thereupon make an order specifying

the facts that appear without substantial controversy,

including the extent to which the amount of damages or

other relief is not in controversy, and directing such fur-

ther proceedings in the action as are just. Upon the trial

of the action the facts so specified shall be deemed estab-

lished, and the trial shall be conducted accordingly.

(e) Form of Affidavits; Further Testimony. Supporting

and opposing affidavits shall be made on personal knowl-

edge, shall set forth such facts as would be admissible in

evidence, and shall show affirmatively that the affiant is

competent to testify to the matters stated therein. Sworn

or certified copies of all papers or parts thereof referred

to in an affidavit shall be attached thereto or served there-

with. The court may permit affidavits to be supplemented

or opposed by depositions or by further affidavits.

(f) When Affidavits Are Unavailable. Should it appear

from the affidavits of a party opposing the motion that

he cannot for reasons stated present by affidavit facts

essential to justify his opposition, the court may refuse

the application for judgment or may order a continuance

to permit affidavits to be obtained or depositions to be

taken or discovery to be had or may make such other order

as is just.

26

Appendix ‘‘B””,

(g) Affidavits Made in Bad Faith. * * *”’

Rule 7(a) of the Federal Rules of Civil Procedure pro.

vides :

(a) Pleadings. There shall be a complaint and an

answer ; and there shall be a reply, if the answer con-

tains a counterclaim denominated as such; an answer

to a cross-claim, if the answer contains a cross-claim;

a third party complaint, if leave is given under Rule |

14 to summon a person who was not an original party;

and there shall be a third-party answer, if a third.

party complaint is served. No other pleading shall be

allowed, except that the court may order a reply to

an answer or a third-party answer.

Rule 8(d) of the Federal Rules of Civil Procedure pro-

vides:

(d) Effect of Failure to Deny. Averments in a

pleading to which a responsive pleading is required,

other than those as to the amount of damage, are ad-

mittéd when not denied in the responsive pleading.

Averments in a pleading to which no responsive plead-

ing is required or permitted shall be taken as denied

or avoided.