FOLEY v. BLAIR & CO.
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Leo H. Raines
Chief Justice Warren E. Burger: We will hear arguments next in Foley against Blair & Co., 72-1154.
Mr. Raines, you may proceed.
Mr. Leo H. Raines: Mr. Chief Justice and may it please the Court.
Blair & Co. was one of the larger stockbrokers in New York and it apparently ran into very severe financial trouble with the end of its fiscal year of 1969.
And it appears that between 1969, that is September of 1969 and September of 1970, they gradually liquidated their company by giving away, literally giving away branches of their stock brokerage concern to other concerns, to which some of their employees are officers, went and became members of.
They paid out or permitted subordinated debenture holders who were members of their Boards of Directors to get their money out of the company.
And late in September of 1970, they entered into a contract with a New York Stock Exchange special fund, by the terms of which, the special fund was permitted to appoint a person as a Liquidator to liquidate Blair & Co. and, as a matter of form, the special fund loaned $1,000 to Blair & Co. and proceeded to appoint a man, Mr. Scorese, as a Liquidator in a very carefully drawn and very ornate and very carefully drafted contract in which his powers was specifically set forth and in a power of attorney which clearly set forth all of his powers.
And I submit to you, without going too deeply into the record, that there isn’t a power that appears in the contract or that appears in the power of attorney that differs in any way from any power that was ever given to any receiver or any trustee that was ever appointed by any court or was ever appointed by any insolvent debtor.
He was given greater powers than a receiver because he didn’t have to file a bond.
He didn’t have to apply to a court for leave to sell anything or to dispose off anything.
And what is most important as distinguished from other agents, he was the sole judge of his own powers.
Unknown Speaker: Did he have any powers vis-a-vis the creditors of Blair & Co. that Blair & Co. itself would not have had?
Mr. Leo H. Raines: He had no greater power.
Unknown Speaker: That was my question.
Mr. Leo H. Raines: He had no greater power.
He could settle, compromise, dispose or pay out any creditor’s claim.
Unknown Speaker: Just as Blair & Co. itself could’ve done before his appointment.
Mr. Leo H. Raines: It could’ve done it, yes, just as it could’ve.
Unknown Speaker: And he didn’t have any special defense as to any creditor’s claims that Blair & Co. would not have any --
Mr. Leo H. Raines: None that I was aware of.
None that I was aware of.
Unknown Speaker: What if you were another member of the Exchange and you wanted to get after Blair, and the Exchange Liquidator was in charge?
Mr. Leo H. Raines: I don’t quite understand your question, sir.
Unknown Speaker: Could you go to court or would the Exchange provide -- expect you to deal with their Liquidator?
Mr. Leo H. Raines: Well, now, this is one of the issues in the case.
Apparently, the position taken by the New York Stock Exchange is that it is a power greater than the court because, by the constitution of the Exchange as I understand it, the powers were limited to arbitration within the New York Stock Exchange and, as a matter of fact, these very petitioners sought to rescind their contract.
Because, what had occurred here was --
Unknown Speaker: But an ordinary non-Exchange creditor wouldn’t have been barred from suing Blair & Co. in the court.
Mr. Leo H. Raines: Not at all.
Unknown Speaker: Just by the appointment of a Liquidator.
Mr. Leo H. Raines: Not at all, sir.
Unknown Speaker: But an Exchange member might.
Mr. Leo H. Raines: An Exchange member might have, but my clients who are subordinated creditors were in an extremely difficult position because, being subordinated, they were debenture holders who put their money in on a subordinated basis at a time when the insiders had already taken their money out.
And in order for my client to go into court and to sue as a subordinated creditor, they would’ve been faced with the overwhelming burden of having to establish, firstly, that there were sufficient assets in Blair & Co. to pay all of the un-subordinated creditors before their right to sue would arise.
Now, the problem in that case that before they could proceed with such a suit, before they could proceed with a proof to establish their right to bring such a suit, four months would easily have elapsed.
Within which, any act of bankruptcy such as preference, fraudulent conveyance would’ve expired.
We were confronted with a very, very difficult problem.
In that, we found on practically two days notice, am I departing from your question?
Unknown Speaker: Well, somewhat.
I just wondered if, briefly, whether you thought the Liquidator had any power to keep Exchange members rescind --
Mr. Leo H. Raines: I don’t know.
Unknown Speaker: You just don’t know.
Mr. Leo H. Raines: I don’t know and I don’t know that it enters into by problem.
Justice William H. Rehnquist: If he did have, it would be as a result of private agreement and not any provision of law.
Mr. Leo H. Raines: As a result of the constitution of the New York Stock Exchange which compelled -- resort to the procedures within the Exchange.
Unknown Speaker: But this is part of a self-governing mechanism that is authorized by statute.
Mr. Leo H. Raines: This is the great problem here.
I don’t know that it’s authorized by statute.
It’s authorized by the Securities and Exchange Commission where the New York Stock Exchange is permitted to avoid the consequences of other acts by arrangements with the Commission.
I do know that these petitioning creditors in this case, when they sought to rescind their lending to Blair & Co., were compelled to go through what seemed to us a very unfair and one-sided arbitration procedure.
The basic question on this appeal, lies in the fact that within four or five days of the appointment of the Liquidator we petitioned Blair & Co. into bankruptcy.
We cited three acts of bankruptcy, two of which were eliminated by Referee Herzog and were not pursued in as much as he held in our favor on the basic issue of the appointment of the Liquidator.
Our position was, as with Shakespeare, that a rose smells as sweet no matter what its name that this Mr. Scorese, although named as a Liquidator and at other times as an agent, actually came within the intent of this statute, and a reading of the history of this statute bears this out.
This statute was first enacted in the Bankruptcy Act in 1903, and it was subsequently amended on several occasions into its present form.
And throughout the several amendments, the basic expression that was involved here was the doctrine of the appointment of somebody to take charge of a liquidation.
This was the essential concept.
In the use of the words in the statute, it apparently was limited to a receiver or a trustee.
But, at the time this petition was filed, every case, every text, as I’ve cited in my brief before this Court which I won’t bother to repeat it, held that a Liquidator came within the scope of this statute.
It could’ve been a simple thing for these petitioning creditors to have gone into the State Court of New Jersey and move for the appointment of the state court receiver, and then file a petition in bankruptcy which would have clearly come under Section 3 (a) (5) of the Act.
But because of the exigencies of the situation where the four-month period was about to run out and, as a matter of fact we filed it on the last day, was about to run out on about $3.5 million worth of preferences.
Based upon the texts and upon the laws, we filed it.
And as it had been promulgated to that date, we filed the petition directly.
And our position on this appeal and the decision of Referee Herzog below and the decision of Judge Cooper below have clearly held that the appointment of Mr. Scorese came within the scope of Section 3 (a) (5) of the Bankruptcy Act despite the fact that, in their wisdom, the attorneys who represented Blair & Co. or the New York Stock Exchange shows to denominate and designate purely as a matter of naming Mr. Scorese not as a trustee which he actually was, not as a receiver which he actually was, but as a liquidating agent.
Unknown Speaker: May I ask, Mr. Raines, your time is running.
Are you going to get to the effect of the Chapter 11 proceedings on the issue that you’re bringing?
Mr. Leo H. Raines: I will, if Your Honor, asked me this question, alright.
I had submitted a memorandum on the question of mootness and I was prepared to argue the case to the Chief rather than the question of mootness.
The Chapter 11 proceeding was filed as a result of the filing of this petition.
There would’ve been no Chapter 11 if we had not filed the petition.
Throughout two years, there was the threat of confirmation of the Chapter 11, but it was never confirmed.
Just before this case came up for argument on October 2nd , the most amazing order of confirmation was entered.
In the 25 years that I have personally practiced before the Bankruptcy Courts, I have never seen such an order of confirmation because two-thirds of the claims which are supposed to be taken care of in the order of confirmation are reserved for later litigation.
My client has a block of stock that is worth a million dollars which is unregistered and cannot be transferred, and this stock is being held in limbo and is going to be the subject of further litigation.
We have already made a motion directed to this order of confirmation.
We did not know the order was entered.
It is our opinion that the order was entered --
Justice William H. Rehnquist: Well, you did have notice of the proceeding at which it was going to -- which the thing was being taken out, didn’t you?
Mr. Leo H. Raines: In the practice of bankruptcy, when the original Chapter 11 is filed the referee sends out a notice of first reading and, in the same notice, he says a notice of date of confirmation is also set.
This date was set two years ago, and it is constantly postponed and postponed and postponed, and it is virtually impossible to keep up with every single adjournment that takes place.
We never knew when the hearing on confirmation took place.
Justice William H. Rehnquist: Well, isn’t it a practice if once you appear and sign up as one of the interested parties before the referee, that you get notices of postponement?
Mr. Leo H. Raines: We never get repeated notices, sir.
We must appear on every occasion and, I frankly state, I don’t have the staff to do it.
We must appear on every occasion, make a note of every adjournment.
And then on the one particular occasion when the debtor, he likes to hold his hearing on the question of feasibility and the question of whether the settlement is in the best interest of creditors, they simply hold it and then they submit the order of confirmation to the referee relatively expired.
There is no new notice.
Under Section 355 of the Bankruptcy Act, creditors are supposed to receive a notice of the entry of an order of confirmation.
But, we never received such a notice --
Unknown Speaker: Was the order on appeal at all?
Mr. Leo H. Raines: Sir?
Unknown Speaker: Is the order of confirmation on appeal?
Mr. Leo H. Raines: No, sir.
We did not know that it was entered.
We have made a motion to reconsider the order of confirmation, but it is only --
Unknown Speaker: Where is that pending?
Mr. Leo H. Raines: Before Referee Babbitt, but it is only in relation to our particular problem.
We could not make it at launch.
This is a most peculiar Chapter 11.
There was never a Committee of Creditors appointed.
Unknown Speaker: Well, let’s assume that it isn’t though.
That it’s a perfectly normal Chapter 11 and it is a final order of Chapter 11 and that that proceeding is over.
Would you still contend that this case is not moot?
Mr. Leo H. Raines: I would still contend that it’s not moot, sir, and interestingly enough, in one of the cases in which rely heavily in my approach to this Court, Bank of Marin against England.
The same question was also raised as to whether the decision was moot.
Now, this Court held that there was going to be further litigation even outside of the bankruptcy proceeding, and there will be further litigation in this case.
The determination of what happens to our Roger Stock is specifically keyed to whether or not there is going to be an adjudication here.
By an exhibit, which I attach to my memorandum --
Unknown Speaker: Well, you can’t -- there isn’t going to be an adjudication now, is there?
Mr. Leo H. Raines: Well, I’m asking this Court to reverse the Court of Appeals and direct an adjudication.
Unknown Speaker: Well, you mean in a place of a Chapter 11 confirmation?
Mr. Leo H. Raines: Yes, the Chapter 11 order of confirmation can still be set aside.
There is a six-month period within which a motion can be made to set aside an order of confirmation.
Unknown Speaker: Well, can it be?
Mr. Leo H. Raines: Sir?
Unknown Speaker: Can it be an adjudication until its set aside?
Mr. Leo H. Raines: Well, the adjudication is separate from the order of confirmation.
Unknown Speaker: Yes, but normally Chapter 11 proceedings -- well, often, Chapter 11 proceedings superseded bankruptcy adjudication.
Mr. Leo H. Raines: They superseded in a sense that they set it aside.
Unknown Speaker: That’s right.
Mr. Leo H. Raines: That’s right.
They do not dismiss it.
The problem -- one of the problems in this case is that when we moved to dismiss the Chapter 11 proceeding, early in the proceeding, Referee Babbitt held up the decision for about nine or ten months.
And, when the Court of Appeals came down with a decision reversing the court below and vacating the order of adjudication, in part of his decision which I put in my memorandum, he said “I can’t dismiss the proceeding now because if in view of the fact that there is no order of adjudication, this Court would lose jurisdiction of this case and it would be sort of flowing the case to the wolves.”
And, this was one of the reasons that Referee Babbitt gave for refusing to dismiss the Chapter 11 proceeding.
Unknown Speaker: Do attorneys for petitioning creditors in an involuntary bankruptcy proceeding -- are they normally allowed fees?
Mr. Leo H. Raines: Yes, they are allowed fees.
Unknown Speaker: On the other hand, if you petition alleging an act of bankruptcy that turns out not to be an act of bankruptcy, you may not get fees.
Mr. Leo H. Raines: That’s a question before Referee Babbitt from which there might be some disagreement.
Unknown Speaker: Yes, but that’s -- and the attorneys for petitioning creditor in an involuntary bankruptcy proceeding is entitled to fees.
Mr. Leo H. Raines: Yes, sir.
Unknown Speaker: And if that proceeding is superseded by a Chapter 11 case --
Mr. Leo H. Raines: He is still entitled to fees.
Unknown Speaker: He is still entitled to fees.
Mr. Leo H. Raines: Yes.
Unknown Speaker: But if he is superseded by a Chapter 11 proceeding and the bankruptcy proceeding --
Mr. Leo H. Raines: The adjudication is --
Unknown Speaker: -- itself was invalid, you may not be entitled to fees?
Mr. Leo H. Raines: I may not be.
I’m not --
Unknown Speaker: Is that enough to --
Mr. Leo H. Raines: This is one of the elements --
Unknown Speaker: Is that enough to make this case not moot?
Mr. Leo H. Raines: I think it would -- I did not so state in my memorandum because I felt that my personal affairs is of no concern to this Court.
But in as much as Your Honors been good enough to raise it, it certainly is one of the elements that I’m deeply concerned.
And also, as a question of cost, my client has lost $3 million and he is now faced with a bill of course in the Court of Appeals in excess of $4,000.
Justice William H. Rehnquist: Well, it’s clearly settled that a cost outstanding don’t prevent something from becoming moot, I think.
Mr. Leo H. Raines: Well, it’s a consideration.
It’s an element of consideration.
But, basically, the reason I say it is not moot is because, as I argued in my memorandum of law judge, this decision on Judge Friendly’s of the Court of Appeals is, in my opinion, one of the most dangerous.
Justice William H. Rehnquist: But that doesn’t prevent him from being moot even if it’s totally 100% wrong.
The case might still be moot.
Mr. Leo H. Raines: It could be moot on a matter of theory, but it isn’t moot because there is much litigation that is still to follow in this case.
And the question of adjudication becomes a paramount importance in this subsequent litigation.
Unknown Speaker: I want to make it clear, -- a while ago, you answered that if you were entitled to fees in the involuntary bankruptcy proceeding, if you were, and then a Chapter 11 proceeding came along.
The Chapter 11 proceeding would have to recognize your claim to fees.
Mr. Leo H. Raines: Well, I would be entitled to fees as attorney for petitioning creditors --
Unknown Speaker: Right.
Mr. Leo H. Raines: The bankruptcy proceeding --
Unknown Speaker: In our view --
Mr. Leo H. Raines: -- does not lapse.
Unknown Speaker: That’s right.
Mr. Leo H. Raines: It merely is set aside.
It is --
Unknown Speaker: But the Chapter 11 proceedings must pick up the estate’s obligations to you for fees.
Mr. Leo H. Raines: That is my opinion, sir, yes.
Unknown Speaker: Well, it’s your opinion, but is it the law?
Mr. Leo H. Raines: There are cases so holding.
Unknown Speaker: And you don’t get them unless this was an act of bankruptcy?
Mr. Leo H. Raines: Well, I can’t answer that because that is a question that I have --
Unknown Speaker: Well, you don’t want to --
Mr. Leo H. Raines: No, I know of no case that holds --
Unknown Speaker: Well, what it did --
Mr. Leo H. Raines: That if it is subsequently not adjudicated --
Unknown Speaker: Well, let me put it this way.
If it was in fact an act of bankruptcy, then you’re home free on fees, is that it?
Mr. Leo H. Raines: Well if the law is, then I get it, whether it’s adjudicated or not, then I’m home free.
Unknown Speaker: How is it if you only get -- you get it only if --
Mr. Leo H. Raines: If I win.
Unknown Speaker: And only if it is an act -- only if you win on this on the merits.
Mr. Leo H. Raines: As far as Leo Raines is concerned, it is a very important and non-moot.[Laughter]
It is very important.
I have rested, if I may go back to my case in chief, I have rested my position on this appeal, as I did below, on the fact that this Court has ruled to get it again on basic paramount issues that the Bankruptcy Act and the Federal Courts have paramount an exclusive jurisdiction of the liquidation of insolvent estate.
Based upon the cases of the Bank of Marin against England, and Pepper against Litton, the doctrine that substance will not give way to form and that technical considerations will not prevent substantial justice from being done.
Now, these principles were followed by other courts.
In 1941, in the District Court of Oklahoma, a petition was filed which was technically incorrect and the court itself, in rendering its opinion, stated that it had very serious doubts whether technically it came within the specific scope of the statute.
But the court said the court will not stand on a technicality with reference to form when substance is alleged.
And it held, that despite its doubt that the appointment of a Liquidator by contract constituted an assignment for the benefit of creditors, nonetheless found it sufficient to constitute an act of bankruptcy.
Now this case, in the manner of R.V. Smith, was cited in Talius (ph), cited in Remington, the two leading text on the subject, as the guide to which we attorneys follow.
And, as I’ve cited in my brief, Talius specifically said in so many words, on page 4 -- that a liquidating trust -- that a Liquidator appointed by contract came within the scope of the statute.
In 1953, Judge Winfield, who I’m certain Your Honors will recognize as one of the outstanding jurists on the question of Bankruptcy, wrote a landmark decision in which he argued -- in which he stated, if I may, I’ve cited it in my briefs, again following the principle of Pepper against Litton, “it is not required that the transferee of the property be formally appointed as trustee by a ceremonial document referring to him as such.
The method adopted to affect the transfer is immaterial.
It is the end result that counts.
Any action by one who is insolvent which effectively causes the transfer of his property to another for final liquidation purposes appoints the transferee a trustee to take charge of his property under Section 3 Subdivision (a) (5).
Now, this is the point we make here.
Mr. Scorese, whether you named him an agent or a Liquidator, a trustee, or a receiver was the identical person given the identical powers.
He was given completely in charge unlike an agent, as I’ve cited in Bogart and Trusts, unlike an agent, he had no responsibility to his principle.
As you read the contract, you realize that he was the sole judge of his own acts.
He was a trustee in every sense of the word, although called an agent.
And as I say to Your Honors, in looking at the substance rather than the language used rather than the form, you must hold that Mr. Scorese in his appointment was a trustee in every sense.
He was fully in charge and responsible to nobody.
He could buy.
He could sell.
He could transfer.
He could sign.
He could do everything that an owner could do.
But, in an attempt to avoid the paramount that exclusive jurisdiction of these courts, he was deliberately given another name in the hope of avoiding the consequences of his appointment.
And so I say my basic argument is that, in looking at this substance of his appointment, we came clearly within the scope of the intent of Congress in enacting 3 (a) (5).
And the latest manifestation of Congress’ intent is in the enactment of the Stockholders Protective Investment Act where in Section 5, under this new law which, frankly, was occasion as a result of the Blair insolvency and the insolvency of a few of the large stockbrokers houses.
The Congress specifically designated the appointment by a court and specifically stated that a court could find the jurisdiction under this Act if it found this that the particular debtor is the subject of a proceeding pending in any court or before the agency of the United States or any state in which a receiver, trustee, or Liquidator for such member has been appointed.
So that, if a Liquidator is appointed, if they do this again, that is if the Stock Exchange takes it upon itself to control its own liquidation under the Stock Holders Protective Investment Act.
Congress has declared its intention that liquidations must be under court control and not until private control.
This has been a tragic situation because if this order of confirmation stands, approximately $10 million was withdrawn illegally out of this corporation and this Liquidator, this so-called representative who was supposed to take charge of these assets did nothing to investigate.
They gave away branches of their company throughout the United States, and no investigation was ever made.
In the record is the story of a giveaway of $100,000 to a man by the name of Ligon (ph) as liquidated damages for a contract which was never performed, done within a few weeks prior to the filing of a petition and filing to the filing of the-- prior to the appointment of the Liquidator, and he never did a thing to get that $100,000 back.
There were $21 million of subordinated creditors who had been wiped out in this Chapter 11 proceeding, completely wiped out all at the liquidation of a private Liquidator appointed by the New York Stock Exchange.
This is a situation where, under Section 3 (a) (5), we have a right to supersede a court appointed receiver.
We have a right to supersede a statutory assignment for the benefit of creditors, to supersede a common law deed of trust.
And yet, the court below has held that we cannot supersede the appointment of a private Liquidator.
Now, that is not justice.
That is not the intent of the law.
This court, that is the Federal Courts, have exclusive jurisdiction and I respectfully ask Your Honors to reverse the Court of Appeals below and reinstate the adjudication of bankruptcy.
Thank you for your kindly attention.
Chief Justice Warren E. Burger: Thank you Mr. Raines.
Argument of Harvey R. Miller
Mr. Harvey R. Miller: Mr. Chief Justice and may it please the Court.
My name is Harvey R. Miller.
I represent the respondents in this cause.
It is our position, Your Honors, that the cause presented today is moot by reason of the determination of the Chapter 11 proceedings.
Approximately two weeks ago, we filed a memorandum in which we suggested that the cause is moot.
Subsequent to the filing of that memorandum, Mr. Raines filed a reply or an answering memorandum.
And basically, Mr. Raines had raised 12 points.
He agrees 100% with each of the authorities which we have cited to show that the cause is moot.
However, he says that the Court should consider the merits of this matter for the following reasons.
One, he did not receive notice of entry of the order of confirmation.
Notice of a hearing to consider confirmation of the arrangement was given by the Bankruptcy Court to all parties in interest, including Mr. Raines and his clients.
Under Rule 77 (d) of the Federal Rules of Civil Procedure as well as Rule 922 (a) of the Rules of Bankruptcy Practice which became effective on October 1, 1973.
There is no requirement that notice of entry be given and it specifically states that lack of notice of the entry does not affect the time to appeal or relieve of authorize the court to relieve a body for failure to appeal within the time allowed.
The order of confirmation is final for all purposes.
Distribution has been made to creditors.
Administration expenses have been paid.
Unknown Speaker: What’s the status of the motion?
Mr. Raines mentioned a motion to set aside --
Mr. Harvey R. Miller: There is.
We were served, Your Honor, with a motion which I believe is returnable December 5 to reconsider his clients’ claims, and I will get to that, if you will, Your Honor.
Mr. Raines says in his second point that the order of confirmation was entered prematurely.
Mr. Raines, on behalf of his client, made a motion to dismiss the Chapter 11 proceeding and the basis of the dismissal of the Chapter 11 proceeding was that you could not have an arrangement in this type of a case.
And, as I have found in practicing in the Bankruptcy Court, when you don’t have much law it becomes almost academic to cite Pepper v. Litton because the Bankruptcy practitioners take the position that under Pepper v. Litton you could do anything.
Well the motion to dismiss was denied by an order and an opinion of Referee Babbitt dated February 16, 1973.
And in the final paragraph of that opinion, Referee Babbitt said “Foley’s motion must be denied in all respects and upon this order becoming final, it is expected that Blair will move promptly to a confirmation of its arrangement.
Its creditors have waited long enough.”
Subsequent to February 16 and with the constant prodding of the Bankruptcy Court, over 9,500 claims were objected to and resolved.
Over 9,000 claims were expunged.
Distributions were made to all of the customer creditors during that period of time.
The arrangement was confirmed 30 months after it was filed.
I respectfully submit that nobody could say that it was a premature confirmation.
Further, Your Honor, in the brief in our position that we filed in this proceeding, at least three times we said that confirmation of the arrangement was imminent and that we were moving towards confirmation.
The third point which Mr. Raines --
Unknown Speaker: Do you think it would -- well, I’ll ask you.
Do you think it will have any impact whatsoever on the finality of the confirmation if the Court of Appeals were reversed?
Mr. Harvey R. Miller: None whatsoever, Your Honor.
Unknown Speaker: You would say that because the case -- you think the case is moot.
Mr. Harvey R. Miller: The proceeding is terminated, Your Honor.
Under the authorities which we have cited in the memorandum suggesting --
Unknown Speaker: Well, what about the fee question?
Mr. Harvey R. Miller: Mr. Raines has reserved his right to file an application for allowance.
Unknown Speaker: But the confirmation in paying administrative expenses did not schedule his fee claim.
Mr. Harvey R. Miller: Mr. Raines and in fact, Your Honor, I happened to be in the courthouse that day when Mr. Raines’ partner appeared and I was called in by Judge Babbitt who asked me if we had any objection if Mr. Raines filed his application subsequently.
And I believe there was a letter from the Referee in which --
Unknown Speaker: Well, but he’s not entitled to his fees unless this was an act of bankruptcy.
Mr. Harvey R. Miller: No, I’m not certain, Your Honor, that I would agree with that principle.
He’s entitled to a fee.
Maybe the quantum of the fee would be different if he sustained efficiently.
Unknown Speaker: Well, let’s assume that it would be for a moment.
Mr. Harvey R. Miller: It may well be, Your Honor.
Unknown Speaker: If this is a valid act of bankruptcy -- I mean, if this was an act of bankruptcy and he was entitled to have an involuntary adjudication, he is entitled to fees.
Mr. Harvey R. Miller: He may be entitled to a larger fee.
Unknown Speaker: And as an expense of administration of the Chapter 11 proceeding would have to recognize.
Mr. Harvey R. Miller: Yes, Your Honor.
I would agree with that, Your Honor.
The third point which Mr. Raines has raised is that the arrangement was voted and approved by the slim vote of general and secured creditors.
We have set forth in our subsequent memorandum the actual findings that the Bankruptcy Court made in respect of the acceptance of the plan.
And of the 7,633 customer creditors whose claims aggregated $37,380,000; 6,350 customer creditors whose claims aggregated to $33,100,000 accept that the arrangement of the general creditors, and 93 creditors whose claims totaled $3,261,000; 66 accepted the arrangement and their claims aggregated $2,800,000, hardly a slim majority.
Chief Justice Warren E. Burger: What would be the source of the enhanced fee, in your terms?
Mr. Harvey R. Miller: In my terms, Your Honor?
Chief Justice Warren E. Burger: Where would that come from if the fee were enhanced because of the circumstance suggested by Mr. Justice White?
Mr. Harvey R. Miller: Under Section 64 (a) of the Bankruptcy Act, Your Honor, which is entitled priorities, the Court is authorized to allow one reasonable attorney’s fee in respect of the attorney for petitioning creditors.
My understanding of the precedence in connection with the matter is if you sustain the petition, then you are entitled to a greater fee depending upon the type of opposition you met, the complexity of the problems, the amount of time which was devoted to it, the quality of your opposition.
So, there’s a possibility that he could be entitled to a greater fee if this court were to reverse the plea.
Unknown Speaker: Who pays him?
Mr. Harvey R. Miller: I beg your pardon?
Unknown Speaker: Who pays him?
Mr. Harvey R. Miller: Blair would pay it, Your Honor.
It’s an administration expense and it would have to be paid from the estate.
Justice William H. Rehnquist: Well, if you’re totally unsuccessful in petitioning on behalf of a creditor for bankruptcy, you get nothing, I take it, if I were --
Mr. Harvey R. Miller: The literal language of the statute, Your Honor, doesn’t seem to indicate that.
I wouldn’t certainly argue that in connection with Mr. Raines.
Justice William H. Rehnquist: Well, I would sure argue it if I were representing the --
Mr. Harvey R. Miller: Well, I have seen, Your Honor, where the Bankruptcy Court has given a token fee of $100 or $250.
Justice William H. Rehnquist: Well, who pays it if there’s no adjudication of bankruptcy?
Mr. Harvey R. Miller: If the bankruptcy proceeding, Your Honor, is superseded by a Chapter 11 proceeding, whether there has been an adjudication or not.
For example, if immediately subsequent to the filing of the involuntary petition, without going to trial on the issue of adjudication, Blair had filed a Chapter 11 proceeding and the question of adjudication was never resolved because you have a constructive adjudication in the Chapter 11 proceeding --
Justice William H. Rehnquist: If the adjudication has resolved adversely to the petitioning creditor, then there’s no question of the fee.
Mr. Harvey R. Miller: I would think not, Your Honor, although I have heard from Mr. Raines’ respondent for the contrary.
Mr. Raines’ fourth point, Your Honor, is in respect to the mootness point, is that I made a statement before the Second Circuit Court of Appeals that if the District Court decision was reversed, Blair would move to dismiss the Chapter 11.
I never made any such statement.
His fifth point is that 80% of the claims included in the schedules of distribution are subject to objections as to allowance.
Mr. Raines pays no attention to the fact that approximately 9,500 claims were objected to. Trials were heard before the bankruptcy court, and those claims were resolved.
Moreover, there aren’t objections pending as 80% of the claims.
All Blair did was reserve its right to file objections if necessary.
If Blair does not file objections within 90 days, then those claims are allowed automatically.
His next point is that Foley’s motion to dismiss the Chapter 11 petition was denied by the Referee in bankruptcy who was strongly influenced by the decision of United States Court of Appeals.
Mr. Raines does not advise the court in his memorandum that an appeal was filed from the denial of a motion to dismiss the Chapter 11 proceeding, was heard in the United States District Court for the Seventh District of New York and the Referee in bankruptcy was affirmed.
And former Chief Judge Sylvester Ryan held that the grounds argued by Foley for dismissal to be frivolous and without merit or substance.
Mr. Foley never took an appeal from that decision and that is a final decision.
His next point is that the New York Stock Exchange was being unjustly enriched and creditors might possibly get a greater return in liquidation under the supervision of a court appointed trustee.
Well, even if this Court were to reverse, the Chapter 11 proceeding is finished.
Besides which, and specifically provided by Chapter 11 of the Bankruptcy Act, you may have a provision and an arrangement whereby, on the confirmation or the conclusion of the proceeding, the remaining assets of a debtor are transferred to a third party, usually it’s the party who put up the money.
Now, in the case of Bache, the New York Stock Exchange advanced $20.4 million to satisfy customer creditor claims in this case.
The assets remaining to Blair in no way measure up to $20.4 million.
In addition, in order to confirm a Chapter 11 proceeding, under Section 366 of the Bankruptcy Act, the Bankruptcy Court must make a determination that the arrangement is for the best interest of creditors.
The phrase “best interest of creditors” has been construed to mean “and require a determination by the bankruptcy court that the creditors will receive more in satisfaction of their claims pursuant to the Chapter 11 arrangement, and they would receive in a liquidation of the estate in ordinary bankruptcy.”
And there was an evidentiary hearing before the referee in bankruptcy and he made a finding that this arrangement was in the best interest of creditors that they would receive more under the arrangement than they would receive in the event of a liquidation under ordinary bankruptcy Chapters 1 through 7.
Mr. Raines’ next point is that an adjudication in bankruptcy can be used as a fulcrum upon which a more complete investigation and interrogation to the very justice of the plan and a reconsideration of the best interest of creditors should be predicated.
This arrangement was proposed by Blair on May 25, 1971.
Mr. Foley and all of the other creditors had at least two-and-a-half years to conduct whatever investigation they desired for the terms of the arrangement, the assets, liabilities or affairs of Blair.
In point of fact, Mr. Foley, through his attorneys, conducted extensive examinations of officers, employees of Blair, as well as Liquidator.
We submit that the bankruptcy proceedings are terminated by the final order of confirmation.
Mr. Raines goes on in his next point.
He says the decision of the United States Court of Appeals for the Second Circuit is a re-pleased throughout his brief.
He says that the decision is a royal road to our beacon-like to fraud and deceit and chicanery.
He never once mentions that there are other acts of bankruptcy which could be alleged.
If Blair was engaged in fraud, if Blair did make a fraudulent claim, Section 3 has six acts of bankruptcy.
If he missed on this one, he could’ve filed a petition in which he alleged that it was a fraudulent conveyance, in which he alleged there was a preference, in which he alleged that Blair admitted in writing its inability to pay its debts as they matured and its willingness to be adjudged the bankrupt.
Mr. Raines has referred to four-month period.
Many of the acts of bankruptcy in Section 3 are not limited by a four-month period.
A fraudulent conveyance can be six years under state law, New York State that is.
His next statement in which he persists in making is that Blair is guilty of a giveaway of $100,000 which has never been pursued or recovered by the Liquidator.
That so-called giveaway was in connection with the sale of a management contract for the Blair fund, that is, the position of Mr. Foley that Blair should have received a profit on the sale of that management contract.
Subsequent decisions by the Second Circuit Court of Appeals, in Rosenfeld versus Black, have established now that you cannot make a profit on the sale of that contract.
In any event, that transaction was never consummated.
Blair did deposit with the respective purchaser a $100,000 to serve his liquidated damages in the event that it did not perform in accordance with the contract.
Mr. Foley and Mr. Raines keep insisting that nothing was done to recover that $100,000.
We have told Mr. Raines, we have told Mr. Foley that an action was commenced in the Supreme Court of the State of New York and every effort was being made to recover that $100,000, and it just goes over the waterways.
The action was commenced in 1971.
In point of fact, that it was tried three or four months ago and by decision dated October 31, 1973 was decided by the Supreme Court of the State of New York, unfortunately, for the defendant.
His next point is that Blair seeks -- Foley, I’m sorry, seeks the recovery of securities he deposited with Blair and which are subordinated to the claims of other creditors.
This is not the first effort that Mr. Foley has made to recover his securities.
Before the bankruptcy proceedings, Mr. Foley commenced an action against Blair.
The action was commenced in the Supreme Court of the State of New York, New York County.
Blair moved to stay that action pending arbitration.
The Appellate Division of the State Supreme Court directed that the parties proceed to arbitration.
Mr. Foley litigated his right to receive back those securities.
He lost the arbitration.
The securities were deemed to be the securities of Blair for the satisfaction of claims of creditors.
The only reason why these particular securities were not sold is that they are unregistered and they’re restricted or some of the securities are subject to the 1% rule.
Otherwise, they would’ve been sold.
He has no right to those securities.
The arbitration award was confirmed by an order of the Supreme Court of the States of New York.
Mr. Foley never took an appeal from that decision.
In point of fact, I might also add, that Mr. Foley has pending at the present time two plenary actions.
He is suing all of the officers and directors of Blair alleging 10 (b) (5) violations in common law fraud, etcetera.
He is also suing the New York Stock Exchange in a plenary action in which he is asserting that the New York Stock Exchange failed to exercise and perform its duties of self-regulation.
So, that point has nothing to do with what this Court may do with this particular matter.
His next to the last point is that he is liable, Mr. Foley, for a cause awarded by the United States Court of Appeals for the Second Circuit.
As Mr. Justice Rehnquist has pointed out, there is an unbroken line of cases which establishes the rule that controversy as to cause alone does not salvage an otherwise moot the case.
And the lead case is Walling versus Reuter & Co., 321 U.S. 671, and other cases are cited in the footnote of Mr. Justice Fortas in the Bank of Marin case.
Unknown Speaker: Do you think that goes with attorney’s fees?
Mr. Harvey R. Miller: I think so, Your Honor.
I don’t see that Mr. Raines is in any event or position to change this controversy from one which is moot simply because he has an interest in getting a fee out of this case.
Unknown Speaker: Or in fact, he might effect it on his client, is that it?
Mr. Harvey R. Miller: He wants a fee out of this proceeding.
Unknown Speaker: Well, I know, but his client -- he might have left for his client.
It is the client that has the interest.
Mr. Harvey R. Miller: That’s a cost of the administration of the proceeding, Your Honor.
Unknown Speaker: Well, I agree with that.
Mr. Harvey R. Miller: And I don’t think it changes --
Unknown Speaker: There’s a Chapter 11 proceeding here.
Mr. Harvey R. Miller: It’s a cause and -- I suppose we’d state an ordinary bankruptcy, Your Honor.
It’s a cost of -- I would put that in the same category as the course which was set by the court
Unknown Speaker: It isn’t an attorney’s fee -- it isn’t an issue of attorney’s fees in this litigation in the Court of Appeals.
Mr. Harvey R. Miller: I’m not quite sure of that volume, Your Honor.
Unknown Speaker: Well, the attorney’s fee is not in connection with these proceedings.
Mr. Harvey R. Miller: Right.
If I understand what Your Honor is saying --
Unknown Speaker: In connection with proceedings in the bankruptcy court.
Mr. Harvey R. Miller: Yes, Your Honor.
If I understand what Your Honor is saying, Your Honor is saying that even though the matter may be moot, the fact that an attorney has a fee involved in it may change that from being a moot matter.
Unknown Speaker: What if the client -- the client has it?
Mr. Harvey R. Miller: Well, I don’t know what arrangements Mr. Raines may have made with his client.
He may have a contingent fee basis.
I don’t know.
Unknown Speaker: But it’s the petitioning creditor that gives the fee, isn’t it?
Mr. Harvey R. Miller: No, the Act reads in those terms, Your Honor, but the application is made by the attorney and the order of the bankruptcy court--
Unknown Speaker: But it’s, nevertheless, the petitioning creditor.
Mr. Harvey R. Miller: Well as the Act reads, Your Honor -- the Act, as I recall it says that the petitioning creditor shall be reimbursed for the fees which they may have paid to their attorneys.
Unknown Speaker: Exactly.
Mr. Harvey R. Miller: Which I would argue, Your Honor, it’s a cost of the proceeding and, in fact, I would say this petition was filed --
Unknown Speaker: It is a cost of the bankruptcy proceeding, it is not a cost of this proceeding.
Mr. Harvey R. Miller: Of this particular proceeding, no, Your Honor.
The last statement or the last point that Mr. Raines makes is that the situation is a scandal.
I don’t think I have any words which can respond to that argument.
I might point out, Your Honor, that when this petition in bankruptcy, this involuntary petition in bankruptcy was filed there were 28,000 customers of Blair who had their securities and their credit balances at Blair.
If this proceeding had gone through involuntary bankruptcy proceedings under Chapters 1 through 7 and Mr. Foley made an application for the appointment of a receiver which was denied by the District Court, the fees which would’ve been paid out of this estate and there would’ve been receivers, attorneys, accountants, disbursing agents, etcetera would’ve exceeded $7 million based upon the properties which were in the possession of Blair at the time that the petition was filed.
We respectfully submit to Your Honors, that this case is moot irrespective of what the Court may do.
And I certainly would not favor the court reversing the Second Circuit Court of Appeals.
Unknown Speaker: I take it, Mr. Miller, of course all of these events have arisen since the decision in the Court of Appeals, haven’t they?
Mr. Harvey R. Miller: Which events, Your Honor?
Unknown Speaker: This issue of mootness.
Mr. Harvey R. Miller: Yes, Your Honor, although we did argue in our position to the petition for certiorari --
Unknown Speaker: Yes, but I’m just wondering whether what view the Court of Appeals might take in this issue.
Mr. Harvey R. Miller: I could mention it, yes, Your honor.
Unknown Speaker: Should we decide it or should we let them take a crack at it first?
Mr. Harvey R. Miller: I think a remand might be appropriate, Your Honor.
Chief Justice Warren E. Burger: Let me be sure I understand your last response, Mr. Miller.
Were you telling us that the case was not moot when the Second Circuit decided it?
Mr. Harvey R. Miller: At the time that the Second Circuit decided it, Your Honor, I believe that it was still pending, the motion to dismiss the Chapter 11 proceeding.
Assuming that Mr. Raines and Mr. Foley had been successful in dismissing the Chapter 11 proceeding, we would’ve had to rely upon the dismissal of the ordinary bankruptcy petition.
We were faced with a situation in which the fees that would’ve been paid out of this estate would’ve made it impossible to satisfy customer claimants in full.
It would’ve required $35 million in order to have accomplished that fact.
We believe that the decision, the order of confirmation which was not appealed from and which, I submit to Your Honors, Mr. Raines knew it was coming on to be heard.
He’s been following this proceeding.
His partner checks the docket all the time.
It was a resignation on his part.
And moreover, he never took an appeal from the motion to dismiss the Chapter 11 petition in which he raised exactly the same points he is raising in his motion upcoming on in December, Your Honor.
And I might add, if I -- if Your Honor will, I will go into the case in point the merits of this matter.
We respectfully submit that the appointment of an agent to liquidate property who, as Mr. Justice Stewart points out, has no right -- has no powers over creditors.
He cannot affect creditors.
Mr. Justice White asked “could we stay broker dealers who did business with Blair?”
We could not stay them.
The only grounds that Blair might have had to stay a plenary action was that there was an arbitration contract and compelled to whoever was suing Blair to go into arbitration under the rules of the New York Stock Exchange.
But that’s only as to member firms.
If an over-the-counter broker had sued Blair, there would be a plenary action.
We had absolutely no power to deal with creditors.
Unknown Speaker: But the Liquidator did have some powers vis-a-vis other people -- vis-a-vis members.
Mr. Harvey R. Miller: Of the Exchange?
No, Your Honor, he did not.
Unknown Speaker: He could perhaps, keep them from going into court directly.
Mr. Harvey R. Miller: Only because there was the arbitration contract between Blair and there were many -- in fact, at the time of the appointment of the Liquidator, there were many plenary actions pending.
Unknown Speaker: I understand.
Justice William H. Rehnquist: Mr. Miller.
Mr. Harvey R. Miller: Yes, sir?M
Justice William H. Rehnquist: Am I right in thinking, under New York law, that if there had been a state court receiver appointed then the remedies of the creditors would’ve had to be directed against the receiver rather than against Blair?
Mr. Harvey R. Miller: Exactly, Your Honor.
And, in effect what would happen upon the appointment of receiver would be that the property would past into custodial legist and creditors would be constrained to file claims with the receiver and they would share pro rata.
This is exactly the point in Bonnie Classics which is relied on very heavily by Referee Herzog and Judge Cooper.
In the case of Bonnie Classics, when the corporation decided to liquidate under the New York Stock Corporation Law, the Board of Directors became vested with title as trustees and creditors were restrained from proceeding against the property of the corporation.
They had to wait until the assets were liquidated, the trust rates were distributed.
Every case in which it has been held that there is a receiver or a trustee appointed under 3 (a) (5), there has been an inhibition against the creditors proceeding.
This was not the case in connection with Blair.
In fact, there is a District Court case in Ray Ambrose Matthews and Co. which we cite in our brief in which there was a similar type agreement.
And the court held, and this is a District Court decision in New Jersey, as the instrument brought about no change in title to the property, either absolute or condition, nothing was conveyed nor transferred by it and it could not hinder, delay, or defraud creditors because any creditor could proceed to satisfy his claim from the corporation’s property to the same extent as though the instrument did not exist.
That is exactly the situation which occurred in connection with Blair.
Essentially, Mr. Scorese was an agent of the Board of Directors of Blair.
He had no greater powers than the Board of Directors had and he dealt with the property.
In fact, he could be removed by Blair.
All Blair had to do at that point in time was pay back to the New York Stock Exchange $1,000 and Mr. Scorese’s appointment was vacated.
And I might add on the $1,000, Your Honor, it’s simply a question in order to trigger the appointment of a Liquidator, the Exchange had to advance some money. Eventually, $20.4 million came into this case.
Now, in connection with the merits of the matter, under Section 3 (a) (5), the statute is very specific in talking about a receiver or a trustee.
It’s our position that the receiver or trustee must be judicially appointed or appointed pursuant to a statute.
And Mr. Raines has alluded to the development of Section 3 (a) (5).
We have set forth in some detail in our brief how the statute was developed.
The point which is relied upon very heavily by the petitioners here is that in the 1926 Amendment to Section 3 (a) (5), the words “appointed pursuant to the laws of any state or territory” were deleted.
As Chief Judge Friendly has noted in the majority opinion in the Court of Appeals and as we have set forth in our brief, the elimination of those words were described in the House Report as only a phraseology and there was no intent to change the substance of the statute.
And Chief Judge Friendly has gone into great detail in connection with the legislative history.
Furthermore, when Congress intended to use the language “an agent authorized to liquidate property,” and Congress has used that language in Section 2 (a) (21) which was amended as part of the or brought into the Bankruptcy Act as part of a Chandler Act of 1938, it specifically refers to an agent to authorized to liquidate property.
In 1952, the statute was amended again Section 69 (d) and that language was put into the statute.
In 69 (d), the statute puts under the jurisdiction of the court an agent authorized to liquidate for the purposes of accounting.
We submit on the basis of the amendments in the legislative history that if Congress had intended to include as an act of bankruptcy the appointment of an agent authorized to liquidate, it would’ve said so, as Chief Judge Friendly has pointed out.
We believe and we submit to the Court that this is a matter for the legislature to deal with, and I might point out to the Court that there is presently pending before the House and before the Senate a new Bankruptcy Act H.R. 10792 which is legislatively going to change the acts of bankruptcy and will include in those acts of bankruptcy an agent authorized to liquidate property.
On the basis of that, we submit that this is something that should be left to the legislature.
This Court should not enlarge Section 3 (a) (5) so that a petition can be filed simply because an agent is appointed to liquidate.
Filing a bankruptcy petition is not a matter which should be taken lightly.
There are many, many factors that are involved.
There are many, many people that are affected by the filing of the petition.
In this case, customs were adversely affected.
Securities and Exchange Commission issued a release in which they pointed out that the administration of these proceedings had caused an additional $5 million by reason of a bankruptcy petition.
They criticized the filing of the petition and the allowance of the Commission.
This is a situation which, frankly, I was little surprised to be here this morning.
I was sure that this is a case that requires no further action by any court.
The case is finished.
The customers have been satisfied.
The creditors have received the distribution to the extent their claims have been allowed.
And very substantial administration expenses have already been paid out.
Unknown Speaker: Do you realize that our practice is, here, if we hold the case moot, to vacate the judgment of the Court of Appeals and also the District Court?
Mr. Harvey R. Miller: I have no objection to that, Your Honor.
Unknown Speaker: Then, you wouldn’t have no authoritative decision in the Second Circuit with respect to whether this was an act of bankruptcy.
Mr. Harvey R. Miller: Your Honor, I would say, in case of a particular situation that has come before the court today, this will never happen again.
Mr. Raines has quoted a specific Act.
He has misquoted it.
Where a member firm or any broker dealer who’s registered under the 34 Act incurs financial difficulties of one type or another --
Unknown Speaker: Not a new statute?
Mr. Harvey R. Miller: Yes, it’s an obligation of the Exchange to advise to the SEC and then an application is made by subject for the appointment of a trustee.
This situation could never arise again in connection with member firms.
So that it’s really a sui generis case and it does not establish a precedent which is going to do harm to the administration of the Bankruptcy Act.
Hopefully, we’re going to have a new Bankruptcy Act that’s called the Bankruptcy Act of 1973 in the House Bill.
Hopefully, it will be passed within a reasonable period of time.
Unknown Speaker: How many years in the 1970s?
Mr. Harvey R. Miller: Well, I’m afraid, Your Honor, that the --
Unknown Speaker: In the 80’s?
Mr. Harvey R. Miller: The Treasury Department may have some objections to it.
Thank you very much, Your Honor.
Chief Justice Warren E. Burger: You have about two minutes left, Mr. Raines, if you --
Rebuttal of Leo H. Raines
Mr. Leo H. Raines: Oh!
That’s quite alright.
I said what I’ve got to say.
I’ll only be repeating myself.
Chief Justice Warren E. Burger: Thank you very much gentlemen.
The case is submitted.