406 U.S.

416
92 S.Ct. 1678.
32 L.Ed.2d 195

Mortimer M. CAPLIN, etc., Petitioner,

v.
The MARINE MIDLAND GRACE TRUST COMPANY OF
NEW YORK.
No. 70220.
Argued March 28, 1972.
Decided May 22, 1972.

Syllabus
Petitioner, the trustee of Webb & Knapp, Inc., under Chapter X of the
Bankruptcy Act, does not have standing to assert, on behalf of holders of
debentures issued by Webb & Knapp, claims of misconduct by an
indenture trustee. Pp. 417435.
439 F.2d 118, affirmed.
Charles H. Miller, New York City, for petitioner.
David Ferber, Washington, D.C., for the Securities and Exchange
Commission.
John W. Dickey, New York City, for respondent.
Mr. Justice MARSHALL delivered the opinion of the Court.

The sole issue in this case is whether petitioner, the trustee in reorganization of
Webb & Knapp, Inc., has standing under Chapter X of the Bankruptcy Act, 52
Stat. 883, 11 U.S.C. 501 et seq., to assert, on behalf of persons holding
debentures issued by Webb & Knapp, claims of misconduct by an indenture
trustee. The United States District Court for the Southern District of New York
held that petitioner lacked the requisite standing, and the United States Court of
Appeals for the Second Circuit affirmed en banc, with two judges dissenting,
439 F.2d 118 (1971). 1 We granted certiorari, 404 U.S. 982, 92 S.Ct. 443, 30

L.Ed.2d 366 (1971), and we now affirm the decision of the Court of Appeals.
2

* Webb & Knapp and its numerous subsidiaries were engaged in various real
estate activities in both the United States and Canada. In 1954, the corporation
executed an indenture with respondent, the Marine Midland Trust Company of
New York (Marine,) that provided for the issuance by Webb & Knapp of 5%
debentures in the total amount of $8,607,600. A critical part of the indenture
was the promise by Webb & Knapp that neither it nor any company affiliated
with it2 would incur or assume 'any indebtedness resulting from money
borrowed or from the purchase of real property or interests in real property . . .
or purchase any real property or interests in real property' unless the company's
consolidated tangible assets, as defined in the indenture, equaled 200% of
certain liabilities, after giving effect to the contemplated indebtedness or
purchase.3 By requiring the company to maintain an asset-liability ratio of 2:1,
the indenture sought to protect debenture purchasers by providing a cushion
against any losses that the company might suffer in the ordinary course of
business. In order to demonstrate continuing compliance with the requirements
of the indenture, Webb & Knapp covenanted to file an annual certificate with
Marine stating whether the corporation (debtor) had defaulted on any of its
responsibilities under the indenture during the preceding year.4

In its role as indenture trustee, Marine undertook 'in case of default . . . to

exercise such of the rights and powers vested in it by (the) Indenture, and to use
the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.'5 This
undertaking was qualified by language in the indenture that permitted the
trustee to rely on the accuracy of certificates or reports of Webb & Knapp, in
the absence of bad faith.6

Commencing in 1959, Webb & Knapp sustained substantial financial losses in

every year.7 Finally, on May 7, 1965, Marine filed a petition in district court
seeking the involuntary reorganization of Webb & Knapp under Chapter X of
the Bankruptcy Act, 11 U.S.C. 501 et seq. Pursuant to 208 of Chapter X, 11
U.S.C. 608, the Securities and Exchange Commission intervened on May 10,
1965.8 Marine's petition was subsequently approved and petitioner was
appointed trustee in reorganization on May 18, 1965.

With the approval of the District Court, petitioner exercised the powers
conferred upon him by 11 U.S.C. 567 and undertook an extensive
investigation of the financial affairs of Webb & Knapp. His investigation
showed that the company had total assets of $21,538,621 and total liabilities of
$60,036,164, plus contingent tax liabilities of $29,400,000. Included among the

liabilities were the 1954 debentures in the principal amount of $4,298,200 plus
interest subsequent to the inception of the reorganization proceeding.9
6

The investigation led petitioner to conclude that Marine had either willfully or
negligently failed to fulfill its obligations under the indenture. Petitioner
supported his conclusion with the following allegations: that from 1954 to
1964, Webb & Knapp's yearly certificates of compliance with the 2:1
assetliability ratio mandated by the indenture were fraudulent, because they
were based on grossly overvalued appraisals of real estate property; that from
1958 to 1964, Webb & Knapp did not have sufficient assets to comply with the
terms of the indenture; that Marine should have known or did know of the
inflated appraisals; and that because Marine permitted Webb & Knapp to
violate the indenture by engaging in transactions that its impaired asset-liability
ratio forbade, Webb & Knapp suffered great financial losses.10

Having obtained the approval of the District Court, petitioner filed an

independent action on behalf of the debenture holders against Marine seeking to
recover the principal amount of the out-standing debentures as damages for
Marine's alleged bad-faith failure to compel compliance with the terms of the
indenture by Webb & Knapp. Petitioner also filed a counterclaim in the same
amount against Marine in the reorganization proceeding in which Marine had
previously filed a claim for services rendered. In the reorganization proceeding,
petitioner also filed an objection to the claim for services rendered, on the
ground that even if petitioner could not obtain an affirmative recovery against
Marine on behalf of the bondholders, he could at least raise Marine's improper
conduct as a reason why the claim for services rendered should be denied.11
Finally, petitioner moved to compel an accounting by Marine.

Marine moved to dismiss the independent action and the counterclaim, moved
to strike the objection to the claim for services rendered, and opposed the
motion to compel an accounting. The District Court found that petitioner had no
standing in his capacity as a trustee in reorganization under Chapter X of the
Bankruptcy Act to raise claims of misconduct by an indenture trustee on behalf
of debenture holders and granted both of Marine's motions to dismiss. Viewing
the motion to compel an accounting as merely a third vehicle to raise the same
claim on behalf of the debenture holders, the District Court denied that motion
also. Only petitioner's objection to the claim for services rendered was left
standing.12 Petitioner appealed the dismissal of his claims and the denial of his
motion for an accounting to the Court of Appeals. Marine filed a cross-appeal
from the denial of its motion to strike petitioner's objection to the claim for
services rendered. The Court of Appeals affirmed the decision of the District
Court in its entirety.

II
9

The issue confronting us has never before been presented to this Court. It is an
issue that has only rarely been presented to other courts, and on those rare
occasions, it has caused even the most able jurists to disagree. The first time the
issue arose was in Clarke v. Chase National Bank, 137 F.2d 797 (CA2 1943).
Judge Augustus Hand wrote the opinion of the court holding that a trustee in
reorganization did not have standing to sue a third party on behalf of
bondholders. Judge Learned Hand disagreed and dissented. It is this decision
that the lower courts found controlling in the instant case. The Clarke case is, in
fact, the only other case in which the issue that is raised here was squarely
presented.13 The issue is a difficult one, and, as we point out later, it is one that
is capable of resolution by explicit congressional action. Lacking a specific
legislative statement on this issue, we must resolve it as best we can by
examining the nature of Chapter X proceedings, the role of the trustee in
reorganization, and the way in which standing to sue on behalf of debenture
holders would affect or change that role.

10

Chapter X, enacted in 1938, stemmed from a comprehensive SEC study that

disclosed widespread abuses under the then-existing provisions for business
reorganizations. See Securities and Exchange Commission, Report on the
Study and Investigation of the Work, Activities, Personnel and Functions of
Protective and Reorganization Committees (19371940). This same study
gave birth the following year to the Trust Indenture Act of 1939, 53 Stat. 1149,
15 U.S.C. 77aaa et seq., which is discussed infra.

11

In enacting Chapter X, Congress had protection of public investors primarily in

mind. SEC v. American Trailer Rentals Co., 379 U.S. 594, 85 S.Ct. 513, 13
L.Ed.2d 510 (1965). 'The aims of Chapter X . . . were to afford greater
protection to creditors and stockholders by providing greater judicial control
over the entire proceedings and impartial and expert administrative assistance in
corporate reorganizations through appointment of a disinterested trustee and the
active participation of the SEC.' Id., at 604, 85 S.Ct., at 519. In
contradistinction to a bankruptcy proceeding where liquidation of a corporation
and distribution of its assets is the goal, a Chapter X proceeding is for purposes
of rehabilitating the corporation and reorganizing it. Ibid. Chapter X
proceedings are not limited to insolvent corporations but are open to those
corporations that are solvent in the bankruptcy (asset-liability) sense but are
unable to meet their obligations as they mature. United States v. Key, 397 U.S.
322, 329, 90 S.Ct. 1049, 1053, 25 L.Ed.2d 340 (1970); 11 U.S.C. 530(1).

12

The trustee in reorganization is the center of the statutory scheme.

12
H.R.Rep.No.1409, 75th Cong., 1st Sess., 43, 44. Title 11 U.S.C. 567 gives
the trustee broad powers:
13

'The trustee upon his appointment and qualification

14

'(1) shall, if the judge shall so direct, forthwith investigate the acts, conduct,
property, liabilities, and financial condition of the debtor, the operation of its
business and the desirability of the continuance thereof, and any other matter
relevant to the proceeding or to the formulation of a plan, and report thereon to
the judge;

15

'(2) may, if the judge shall so direct, examine the directors and officers of the
debtor and any other witnesses concerning the foregoing matters or any of
them;

16

'(3) shall report to the judge any facts ascertained by him pertaining to fraud,
misconduct, mismanagement and irregularities, and to any causes of action
available to the estate;

17

'(5) shall, at the earliest date practicable, prepare and submit a brief statement
of his investigation of the property, liabilities, and financial condition of the
debtor, the operation of its business and the desirability of the continuance
thereof, in such form and manner as the judge may direct, to the creditors,
stockholders, indenture trustees, the Securities and Exchange Commission, and
such other persons as the judge may designate; and

18

'(6) shall give notice to the creditors and stockholders that they may submit to
him suggestions for the formulation of a plan, or proposals in the form of plans,
within a time therein named.'

19

Title 11 U.S.C. 587 expands these powers:

20

'Where not inconsistent with the provisions of this chapter, a trustee, upon his
appointment and qualification, shall be vested with the same rights, to be
subject to the same duties, and exercise the same powers as a trustee appointed
under section 72 of this title, and, if authorized by the judge, shall have and
may exercise such additional rights and powers as a receiver in equity would
have if appointed by a court of the United States for the property of the debtor.'

21

The powers given a trustee appointed under 72 are set forth in a footnote.14

21
22

Petitioner argues that these powers are broad enough to encompass a suit on
behalf of debenture holders against an indenture trustee who has acted in bad
faith, and who has, therefore, violated the indenture and the Trust Indenture Act
of 1939, 15 U.S.C. 77aaa et seq.

23

As pointed out above, the trust Indenture Act was passed one year after Chapter
X was enacted. Prior to its enactment, indenture trustees immunized themselves
from any liability for either deliberate or negligent misconduct by writing
exculpatory provisions into the indenture. Even in cases where misconduct by
the indenture trustee was the proximate cause of injury to debenture holders,
they found themselves impotent under the terms of most indentures to take
action against the trustee. See generally 2 L. Loss, Securities Regulation 719
725 (2d ed. 1961). This problem and others are specifically mentioned in 15
U.S.C. 77bbb as establishing a necessity for regulation.

24

The regulation provided by the Act takes many forms. 15 U.S.C. 77eee
requires that whenever securities covered by the Trust Indenture Act are also
covered by the registration provisions of the Securities Act of 1933, 48 Stat. 74,
15 U.S.C. 77a et seq., certain information about the indenture trustee and the
terms of the indenture must be included in the registration statement. Title 15
U.S.C. 77ggg provides that when securities are not registered under the 1933
Act but are covered by the Trust Indenture Act, the indenture must be
'qualified' by the SEC before it is legal to sell the securities. Standards for
eligibility and disqualification of a trustee are established by 15 U.S.C. 77jjj,
and the duties and responsibilities of a trustee are enumerated in 15 U.S.C.
77ooo.15

25

The indenture giving rise to this litigation was qualified by the SEC pursuant to
the Trust Indenture Act of 1939. By alleging that the indenture trustee
negligently or intentionally failed to prevent Webb & Knapp from violating the
terms of the indenture, petitioner clearly alleges a violation of the 1939
legislation. 15 U.S.C. 77ooo.16 But the question remains whether petitioner is
a proper party to take corrective action.17

26

Petitioner urges that the reorganization trustee is in a far better position than
debt investors to discover and to prosecute claims based on the alleged failure
of an indenture trustee to live up to the provisions of the indenture. He points to
11 U.S.C. 567, set forth supra, and emphasizes that not only does the
reorganization trustee have possession of the records of the debtor, but he also
has a statutory duty to investigate the debtor's affairs and to 'report to the judge
any facts ascertained by him pertaining to fraud, misconduct, mismanagement
and irregularities, and to any causes of action available to the estate.' Reference

is made, too, to 15 U.S.C. 77bbb(a)(1), which states that one of the problems
Congress saw with respect to misconduct by indenture trustees was that '(A)
individual action by . . . investors for the purpose of protecting and enforcing
their rights is rendered impracticable by reason of the disproportionate expense
of taking such action, and (B) concerted action by such investors in their
common interest through representatives of their own selection is impeded by
reason of the wide dispersion of such investors through many States, and by
reason of the fact that information as to the names and addresses of such
investors generally is not available to such investors.'18
27

Finally, petitioner asserts that to give him standing to sue on behalf of

debenture holders will not encourage vexatious litigation or unduly deplete the
resources of the debtor that he has been appointed to reorganize. He supports
the first half of this proposition by noting that any action he takes is subject to
the supervision of the District Court and to intervention by the SEC. The
second half of the proposition finds support in the argument discussed above
that petitioner already has a duty of investigation and that the minimal
additional burden of prosecuting a lawsuit will not be great.

28

At first blush, petitioner's theory, adopted in the opinion of the dissenters in the
Court of Appeals, seems reasonable. But, there are three problems with
petitioner's argument and these problems require that his position be rejected.

29

First, Congress has established an elaborate system of controls with respect to

indenture trustees and reorganization proceedings, and nowhere in the statutory
scheme is there any suggestion that the trustee in reorganization is to assume
the responsibility of suing third parties on behalf of debenture holders. The
language, in fact, indicates that Congress had no such intent in mind. The
statute, 11 U.S.C. 567(3), gives the trustee the right, and indeed imposes the
duty, to investigate fraud and misconduct and to report to the judge the
potential causes of action 'available to the estate.' Even assuming that this
section is read as if the quoted words were not present, and that it authorizes a
trustee in reorganization to report whether he believes an indenture trustee has
violated a duty to third-party debenture holders, there is nothing in the section
that enables him to collect money not owed to the estate. Nor is there anything
in 11 U.S.C. 110, set forth in relevant part in footnote 14, supra, that gives
him this authority. His task is simply to 'collect and reduce to money the
property of the estates for which (he is trustee).' 11 U.S.C. 75.

30

The only support petitioner finds in the relevant statutes is in that portion of 11
U.S.C. 587 which gives reorganization trustees the additional rights that a
'receiver in equity would have if appointed by a court of the United States for

the property of the debtor.' Petitioner relies on McCandless v. Furlaud, 296

U.S. 140, 56 S.Ct. 41, 80 L.Ed. 121 (1935), to support the proposition that a
receiver in equity may sue third parties on behalf of bondholders. But, the
opinion of the Court by Mr. Justice Cardozo clearly emphasizes that the
receiver in that case was suing on behalf of the corporation, not third parties; he
was simply stating the same claim that the corporation could have made had it
brought suit prior to entering receivership.19 The debtor corporation makes no
such claim in this case. See generally 2 R. Clark, Law and Practice of Receivers
362, at 619 (3d ed. 1959).
31

This brings us to the second problem with petitioner's argument. Nowhere does
petitioner argue that Webb & Knapp could make any claim against Marine.
Indeed, the conspicuous silence on this point is a tacit admission that no such
claim could be made.20 Assuming that the fact remains that in every
reorganization there is going to be a question of how much the trustee in
reorganization should be permitted to recover on behalf of the debenture
holders. The answer is, of course, whatever he cannot recoup from the
corporation. Once this is recognized, the wisdom of Judge Augustus Hand in
Clarke v. Chase National Bank, 137 F.2d, at 800, becomes readily apparent:

32

'Each creditor, including the debenture-holders, can prove the full amount of his
claim, and only to the extent that a debenture-holder fails to satisfy it from the
bankruptcy estate will be suffer a loss which he can assert against the defendant
through its failure to enforce the negative covenants.'

33

In other words, debenture holders will not be able to recover damages from the
indenture trustee until the reorganization is far enough along so that a
reasonable approximation can be made as to the extent of their losses, if any. It
is difficult to see precisely why it is at that point that the trustee in
reorganization should represent the interests of the debenture holders, who are
capable of deciding for themselves whether or not it is worthwhile to seek to
recoup whatever losses they may have suffered by an action against the
indenture trustee. Petitioner appears to concede that any suit by debenture
holders would not affect the interests of other parties to the reorganization,
assuming that the Court of Appeals is correct on the subrogation point. It would
seem, therefore, that the debenture holders, the persons truly affected by the
suit against Marine, should make their own assessment of the respective
advantages and disadvantages, not only of litigation, but of various theories of
litigation.

34

This brings us to the third problem with petitioner's argument: i.e., a suit by him
on behalf of debenture holders may be inconsistent with any independent

actions that they might bring themselves. Petitioner and the SEC make very
plain their position that a suit by the trustee in reorganization does not pre-empt
suits by individual debenture holders. They maintain, however, that it would be
unlikely that such suits would be brought since the debenture holders could
reasonably expect that the trustee would vigorously prosecute the claims of all
debt investors. But, independent actions are still likely because it is extremely
doubtful that the trustee and all debenture holders would agree on the amount
of damages to seek, or even on the theory on which to sue.21 Moreover, if the
indenture trustee wins the suit brought by the trustee in reorganization, unless
the debenture holders are bound by that victory, the proliferation of litigation
that petitioner seeks to avoid would then ensue. Finally, a question would arise
as to who was bound by any settlement.22
35

Rule 23 of the Federal Rules of Civil Procedure, which provides for class
actions, avoids some of these difficulties. It is surely a powerful remedy and
one that is available to all debenture holders.23 Some of the factors that
formerly deterred such actions have been changed by the Trust Indenture Act of
1939. Title 15 U.S.C. 77lll, for example, now requires that the debtor
corporation maintain lists of debenture holders that it must turn over to the
indenture trustees at regular intervals. Such lists are available to the individual
debenture holders upon request. Debenture holders would also be able to take
advantage of any information obtained by the trustee in reorganization as a
result of the investigation which the statute requires that he make. In addition,
petitioner himself maintains that counsel fees would be recoverable if the
action was successful. Brief for Petitioner 20; cf. 15 U.S.C. 77nnn.

36

Thus, there is no showing whatever that by giving petitioner standing to sue on

behalf of the debenture holders we would reduce litigation. On the contrary,
there is every indication that litigation would be increased, or at least
complicated.

III
37

38

For the reasons discussed above we conclude that petitioner does not have
standing to sue an indenture trustee on behalf of debenture holders. This does
not mean that it would be unwise to confer such standing on trustees in
reorganization. It simply signifies that Congress has not yet indicated even a
scintilla of an intention to do so, and that such a policy decision must be left to
Congress and not to the judiciary.
Congress might well decide that reorganizations have not fared badly in the 34
years since Chapter X was enacted and that the status quo is preferable to

inviting new problems by making changes in the system. Or, Congress could
determine that the trustee in a reorganization was so well situated for bringing
suits against indenture trustees that he should be permitted to do so. In this
event, Congress might also determine that the trustee's action was exclusive, or
that it should be brought as a class action on behalf of all debenture holders, or
perhaps even that the debenture holders should have the option of suing on
their own or having the trustee sue on their behalf. Any number of alternatives
are available. Congress would also be able to answer questions regarding
subrogation or timing of law suits before these questions arise in the context of
litigation. Whatever the decision, it is one that only Congress can make.
39

Accordingly, the judgment of the Court of Appeals is affirmed.

40

Judgment affirmed.

41

Mr. Justice DOUGLAS, with whom Mr. Justice BRENNAN, Mr. Justice
WHITE, and Mr. Justice BLACKMUN concur, dissenting.

42

With all respect, today's decision reflects a misunderstanding of the important

role which a reorganization trustee under Chapter X of the Bankruptcy Act, 11
U.S.C. 567, is supposed to perform. Though prior to Chapter X the debtor
had usually remained in possession, Chapter X effected a basic change by
putting a disinterested trustee in charge. H.R.Rep.No.1409, 75th Cong., 1st
Sess., 4344. Working under the direction of the Court, the reorganization
trustee was to make the necessary investigations concerning the debtor, the
operation of its business, and the desirability of its continuance 'and any other
matter relevant to the proceeding or to the formulation of a plan, and report
thereon to the judge.' 11 U.S.C. 567 (emphasis added). The reorganization
trustee is, indeed, charged by 11 U.S.C. 569 with the responsibility of
formulating a plan.1

43

A Chapter X plan does not look forward to a discharge of the debtor as does
ordinary bankruptcy, but rather to an overhaul of its capital structure, a
simplification of it, if need be, and the determination of the fair share which
each class of old creditors shall receive and what participation, if any, the old
stockholders may be granted. The test which the court must ultimately apply
under Chapter X is whether a plan is 'fair and equitable, and feasible.' 11
U.S.C. 574. The test of 'fair and equitable' derives from the old equity
receiverships and was adopted in former 77B of the Bankruptcy Act and
under Chapter X.2 As stated in the House Report 'the (reorganization) trustee is
required to assemble the salient facts necessary for a determination of the

fairness and equity of a plan of reorganization.' H.R.Rep.No.1409, 75th Cong.,

1st Sess., 43.
44

The requirements of 'fair and equitable,' which the court must apply, entail the
application of the absolute priority rule which we discussed at length in Case v.
Los Angeles Lumber Products Co., 308 U.S., 106, 60 S.Ct. 1, 84 L.Ed. 110,
and which was followed in Consolidated Rock Products Co. v. Du Bois, 312
U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982. It not only gives creditors full priority
over stockholders, but protects senior classes of creditors against the claim that
'junior interests were improperly permitted to participate in a plan or were too
liberally treated therein.' 308 U.S., at 118, 60 S.Ct., at 8. Unsecured creditors
need not be paid in cash as a condition of stockholders retaining an interest in
the reorganized company, for they may be protected by the issuance "on
equitable terms, or income bonds or preferred stock," Id., at 117, 60 S.Ct., at 8.
And, as we said in the Du Bois case:

45

'If the creditors are adequately compensated for the loss of their prior claims, it
is not material out of what assets they are paid. So long as they receive full
compensatory treatment and so long as each group shares in the securities of the
whole enterprise on an equitable basis, the requirements of 'fair and equitable'
are satisfied.' 312 U.S., at 530, 61 S.Ct., at 687.

46

The face amount of the debentures in litigation here was $4,298,200. The
damages sought against the indenture trustee are in the same amount. If we
assume, arguendo, that there is merit in the cause of action and that the
indenture trustee is fully responsible, one entire class of security holders is
eliminated from any necessary consideration in the plan. Or if there is only
partial recovery, there is a pro rata change in the relative positions of the
various classes of creditors. A plan cannot be designed without a final
determination of the status of the debenture holders vis-a-vis the indenture
trustee, or at least an informed judgment concerning the value of that claim.

47

It is said that the assets of the debtor were some $21 million and the liabilities
some $60 million. Whether conditions have changed so as to leave some equity
for the old stockholders, we do not know. The rule announced by the Court
today, however, is not for this case alone but is applicable to all reorganizations
under Chapter X. In some cases the elimination of one entire class of creditors
or a pro rata reduction in their claims would give stockholders a chance to
participate in the plan. There is no opportunity to make that determination
without investigation, without a pursuit of claims, and without their prosecution

or settlement. The reorganization trustee has full authority to do just that under
the direction of the court. And unless he can take those steps, he will not be
able to formulate a plan of reorganization for submission to the court.
48

Of course, debenture holders or a protective committee representing them may

in some cases take the lead. But Chapter X was written with the view that such
matters should not be left to happenstance. That is why the reorganization
trustee was made the 'focal point' for taking an inventory of assets available to
the several claimants and providing what plan would be fair and equitable in
light of the security of some claimants or the payment of claims rightfully due
them.3

49

There is, with all respect, no merit in the argument that, if the reorganization
trustee recovers against the indenture trustee on behalf of the debenture holders,
the indenture trustee will be subrogated to the debenture holders, leaving the
total claims affected by the plan wholly unchanged.

50

The complaint against the indenture trustee charged willful misconduct or gross
negligence. What the merits may be we, of course, do not know and intimate no
opinion. But, if true, the Trust Indenture Act of 1939, 15 U.S.C. 77ooo gives
no immunity.4

51

We said in Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 245, 246, 84
L.Ed. 281, that 'the bankruptcy court in passing on allowance of claims sits as a
court of equity' and we cited the cases showing that claimants in a fiduciary
position may have their claims either wholly disallowed or subordinated. Id., at
311, 312, 60 S.Ct., at 247. As stated in American Surety Co. v. Bethlehem Nat.
Bank, 314 U.S. 314, 317, 62 S.Ct. 226, 228, 86 L.Ed. 241, while the surety is 'a
special kind of secured creditor' it has a right that 'can be availed of only by a
surety alert in discharging its duty . . . and one not guilty of inequitable
conduct.' The indenture trustee is not, of course, a surety. It would have to seek
subrogation under the general equitable doctrine, stated as follows by the
American Law Institute:5

52

'Where property of one person is used in discharging an obligation owed by

another or a lien upon the property of another, under such circumstances that
the other would be unjustly enriched by the retention of the benefit thus
conferred, the former is entitled to be subrogated to the position of the obligee
or lien-holder.'

53

It is not imaginable that any court would ever hold that an indenture trustee,

found culpably responsible for the default on debentures, would be subrogated

with respect to funds which otherwise would go to innocent creditors or
stockholders on the ground that paying money to them rather than to it would
constitute unjust enrichment. A person 'who invokes the doctrine of
subrogation must come into court with clean hands.' German Bank v. United
States, 148 U.S. 573, 581, 13 S.Ct. 702, 705, 37 L.Ed. 564.
54

I agree with Judge Kaufman and Judge Hays, dissenting below, and would
reverse this judgment.

The District Court delivered three separate opinions in this case. They are
unreported, but are included in the appendix prepared by the parties at 58a
70a. The Court of Appeals heard the case en banc after a panel of three judges
determined that it was inclined to overrule the case on which the District Court
had placed almost exclusive reliance. 439 F.2d 118.

Those companies in the affiliated group include any corporation that was
entitled to be included in a consolidated tax return of Webb & Knapp. See 26
U.S.C. 1502. Section 1.1 of the Indenture gave Webb & Knapp authority to
consider other companies as affiliates if it chose to do so.

Indenture of June 1, 1954, Webb & Knapp, Inc., to the Marine Midland Trust
Company of New York 3.6 (hereinafter referred to as Indenture).

Indenture 3.11.

Indenture 10.1(a). This was also a statutory duty. See 15 U.S.C. 77ooo.

Indenture 10.1(d).

Webb & Knapp showed a loss for tax purposes each year, although the
company did show a gain on its books for 1961 attributable to a write-up of
property owned by a wholly owned subsidiary of a company in which Webb &
Knapp held 50% of the stock.

The SEC has supported petitioner throughout this litigation. The agency is 'an
unnamed respondent before this Court.' See Protective Committee for
Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S.
414, 420 n. 3, 88 S.Ct. 1157, 1161, 20 L.Ed.2d 1 (1968). When referring to
arguments made by petitioner, this opinion assumes, unless otherwise stated,
that the SEC had made the same arguments.

The difference between this amount and the amount of the debentures
originally issued represents the amount of the principal that Webb & Knapp
had repaid.

10

These are merely allegations of petitioner, not findings of the lower courts.
Because the District Court and the Court of Appeals held that petitioner had no
standing, they had no occasion to consider the validity of the allegations.

11

In its capacity as indenture trustee, Marine also filed a claim on behalf of all the
debenture holders for the unpaid principal on the debentures.

12

This objection differs from the other claims in one respect: i.e., it is an attempt
to preserve the remaining assets of the debtor for all creditors other than
Marine, whereas the other caims represent an attempt by the petitioner to
increase the assets of the debtor for the benefit of a specific class of creditors,
the debenture holders. Although Marine appealed the ruling of the District
Court denying its motion to strike the objection, it did not seek review here of
the decision of the Court of Appeals affirming the District Court on this issue.
This issue is, therefore, not before us, and we offer no opinion on the propriety
of the lower courts' ruling.

13

Petitioner and the two dissenting judges in the Court of Appeals argue that the
issue was presented in Prudence-Bonds Corp. v. State Street Trust Co., 202
F.2d 555 (CA2), cert. denied, 346 U.S. 835, 74 S.Ct. 47, 98 L.Ed. 357 (1953),
and that the decision of the court in that case by Judge Learned Hand overruled
Clarke v. Chase National Bank, 137 F.2d 797 (CA2 1943), sub silentio. They
also argue that the issue was presented and decided contrary to Clarke in In re
Solar Manufacturing Corp., 200 F.2d 327 (CA3 1952), cert. denied sub nom.
Marine Midland Trust Co. v. McGirl, 345 U.S. 940, 73 S.Ct. 831, 97 L.Ed.
1366 (1953). But, the majority of the Court of Appeals found these cases to be
distinguishable, and Marine urges that the majority was correct. We do not
intend to become enmeshed in this controversy and merely indicate its
existence.

14

Title 11 U.S.C. 110 gives the trustee title to the following 'property':
'(a) The trustee of the estate of a bankrupt and his successor or successors, if
any, upon his or their appointment and qualification, shall in turn be vested by
operation of law with the title of the bankrupt as of the date of the filing of the
petition initiating a proceeding under this title . . . to all of the following kinds
of property wherever located (1) documents relating to his property; (2)
interests in patents, patent rights, copyrights, and trade-marks, and in
applications therefor . . . (3) powers which he might have exercised for his own
benefit, but not those which he might have exercised solely for some other

person; (4) property transferred by him in fraud of his creditors; (5) property,
including rights of action, which prior to the filing of the petition he could by
any means have transferred to which might have been levied upon and sold
under judicial process against him, or otherwise seized, impounded, or
sequestered . . . (6) rights of action arising upon contracts, or usury, or the
unlawful taking or detention of or injury to his property; (7) contingent
remainders, executory devises and limitations, rights of entry for condition
broken, rights or possibilities of reverter, and like interests in real property,
which were non-assignable prior to bankruptcy and which, within six months
thereafter, become assignable interests or estates or give rise to powers in the
bankrupt to acquire assignable interests or estates; and (8) property held by an
assignee for the benefit of creditors appointed under an assignment which
constituted an act of bankruptcy, which property shall, for the purposes of this
title, be deemed to be held by the assignee as the agent of the bankrupt and
shall be subject to the summary jurisdiction of the court.'
15

The SEC is given general supervisory powers over indentures in various

sections of the Trust Indenture Act. See, e.g., 15 U.S.C. 77ddd(c), (d), (e);
77eee (a), (c); 77ggg; 77sss; 77ttt; 77uuu. In addition, 15 U.S.C. 77hhh
provides that the SEC may order consolidation of reports or certificates filed
under the Trust Indenture Act with information or documents filed under the
Securities Act of 1933, 48 Stat. 74, 15 U.S.C. 77a et seq., and the Securities
Exchange Act of 1934, 48 Stat. 881, 15 U.S.C. 78a et seq., the Public Utility
Holding Company Act of 1935, 49 Stat. 838, 15 U.S.C. 79 et seq.

16

The provisions of the indenture discussed previously comply with the

requirements of 15 U.S.C. 77ooo. While the indenture trustee is not permitted
by the statute to exculpate himself from liability for noncompliance with the
indenture, the indenture trustee may rely in good faith on certificates or reports
filed pursuant to the indenture and in compliance with the provisions thereof.

17

We assume, arguendo, that violation of 15 U.S.C. 77ooo would give rise to a

cause of action against an indenture trustee by debenture holders. If there is a
cause of action, 15 U.S.C. 77vvv would seem to give federal courts
jurisdiction. The Court of Appeals inferred that such suits would be proper, 439
F.2d, at 123 n. 5, but did not decide the point. Since we conclude that even if
such suits may be brought, petitioner lacks standing to bring them, we do not
decide the question.

18

It should be noted that the Trust Indenture Act of 1939 was enacted on August
3, 1939. The Federal Rules of Civil Procedure were not even one year old. They
were adopted by this Court on December 20, 1937, and they became effective
on September 16, 1938, 308 U.S. 647. The class action was a comparatively,

recent phenomenon with respect to damage actions and it was not tremendously
helpful in the early days. See, e.g., Moore, Federal Rules of Civil Procedure:
Some Problems Raised by the Preliminary Draft, 25 Geo.L.J. 551, 570576
(1937); Kalven & Rosenfield, The Contemporary Function of the Class Suit, 8
U.Chi.L.Rev. 684 (1941). It could not be said that the class action was an
efficacious remedy in 1939.
19

This point is especially clear in light of the fact that the Court split 54 on
whether Old Dominion Copper Mining & Smelting Co. v. Lewisohn, 210 U.S.
206, 28 S.Ct. 634, 52 L.Ed. 1025 (1908) (Holmes, J.), was binding in
McCandless v. Furlaud. The issue in the controversial Old Dominion case was
whether a corporation had a cause of action against promoter-directorstockholders.

20

If petitioner could sue on behalf of Webb & Knapp, the statute that requires
that he report possible causes of action to the court would require mention of
this cause of action. Moreover, petitioner has brought every conceivable claim
that is available to him as trustee. Not only has he brought this action against
the indenture trustee, but he has also sued former officers of Webb & Kanpp
charging them with waste. Brief for SEC 56. Certain settlements have
apparently been made in some of these other actions. Brief for Respondent 45
n. 18.
[430]
petitioner's allegations of misconduct on the part of the indenture trustee are
true, petitioner has at most described a situation where Webb & Knapp and
Marine were in pari delicto. Whatever damage the debenture holders suffered,
under petitioner's theory Webb & Knapp is as much at fault as Marine, if not
more so. A question would arise, therefore, whether Marine would be entitled
to be subrogated to the claims of the debenture holders. The Court of Appeals
thought that subrogation would be required, 439 F.2d, at 122.
If the Court of Appeals is correct, it is then difficult to see what advantage there
is in giving petitioner standing to sue, for as Chief Judge Friendly noted in his
opinion for the court below:
'It is necessary in the first instance to consider what effect a recovery by the
Chapter X Trustee would have on the reorganization. On a superficial view this
might seem substantialif, for example, the Chapter X Trustee were to achieve
a complete recovery, the debenture holders would be paid off and it might seem
there would be that much more for the other creditors and the stockholders. But
this pleasant prospect speedily evaporates when the law of subrogation is
brought into play. As a result of subrogation, Marine would simply be

substituted for the debenture holders as the claimant. Cf. ALI, Restatement of
Security 141 (1941). If the Chapter X Trustee recovered judgment in a lesser
amount, the claim of the debenture holders would still be provable in full, with
the division of the proceeds between them and Marine dependent upon the
results of the reorganization, and other creditors or stockholders would not be
affected.' 439 F.2d, at 122.
Even if the Court of Appeals is incorrect in its view of the propriety of
subrogation under the facts of this case,
21

Three private actions have been brought by debenture holders against Marine,
one in federal court and two in state court. See Brief for Petitioner 21 n. 9.
These suits make the same claims made by the petitioner in the instant case, as
well as others which he has not made, including alleged violations of the
securities laws.
The trustee may well have interests that differ from those of the bondholders.
For example, petitioner has sued not only Marine, but also the former officers
of Webb & Knapp. See n. 20, supra. In settling the suits brought against the
officers, petitioner may well take positions that conflict with those he would
take in a suit against Marine. The conflict may at times be unfavorable to the
debenture holders. One answer obviously is that the District Court and the SEC
can take action to prevent any such conflict from developing, e.g., by denying
the trustee in reorganization the right to sue on behalf of debenture holders in
selected cases. The problem with this answer is that the conflict may not appear
until the suit is well under way. In such a case the debenture holders might
regret placing their confidence in the trustee.

22

Chapter X, 11 U.S.C. 616(2), provides that a plan for reorganization 'may

deal with all or any part of the property of the debtor.' It also provides that the
plan 'may include provisions for the settlement or adjustment of claims
belonging to the debtor
or to the estate.' 11 U.S.C. 616(13). Despite these provisions, petitioner urges,
in effect, that he can settle a suit on behalf of bondholders without binding them
to the settlement. Reply Brief for Petitioner 78. But, as pointed out in the
text, supra, petitioner only has authority to pursue claims belonging to the
estate. Petitioner is thus caught on the horns of a dilemma: either he is incorrect
in asserting that the statutory definition of duties should be read so broadly as to
allow a trustee in reorganization to treat claims by debenture holders against
third parties as sufficiently related to the estate that the trustee may sue on
behalf of the debenture holders; or he is correct, and 616 would appear to
permit him to bind the debenture holders to a settlement. Even if petitioner can

have it both ways, his inability to bind the persons on whose behalf he sues
undercuts the utility of his suing. Because the debenture holders could bring a
class action and bind all members of the class, they can make a binding
settlement and avoid lengthy and expensive litigation. Petitioner cannot make
such a settlement. Moreover, if a reorganization trustee does settle a suit that he
has brought on behalf of debenture holders, he may find that rather than serving
as their representative, he is forced to oppose their interests when they bring
independent actions to recover more than the settlement figure. In this event,
the reorganization trustee would be forced to justify his settlement, and he
would theoretically join the indenture trustee in opposing the action of the
debenture holders. He would find himself on both sides of the same transaction.
23

Again we assume, arguendo, that the Trust Indenture Act gives a right of action
to debenture holders under these circumstances. Obviously, if the debenture
holders themselves have no cause of action, their surrogate is in no better
position.

11 U.S.C. 569 provides:

'Where a trustee has been appointed the judge shall fix a time within which the
trustee shall prepare and file a plan, or a report of his reasons why a plan cannot
be effected, and shall fix a subsequent time for a hearing on such plan or report
and for the consideration of any objections which may be made or of such
amendments or plans as may be proposed by the debtor or by any creditor or
stockholder.'

The 'fixed principle' that senior interests must be made whole before junior
interests may participate in a reorganization has its roots in Northern Pacific R.
Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931. In that case Boyd was a
general and unpaid creditor of the old corporation. In a reorganization Boyd
was not fully compensated althogh the old stockholders were allowed to
participate in the new company. He proceeded against the assets of the new
venture on the ground that since the old stockholders continued in the business
the latter had received property which belonged to the creditors. This Court
ruled for Boyd and said 'if purposely or unintentionally a single creditor was
not paid, or provided for in the reorganization, he could assert his superior
rights against the subordinate interests of the old stockholders in the property
transferred to the new company.' Id., at 504, 33 S.Ct. at 560. This principle
came to be known as the 'absolute priority rule.' See Bonbright & Bergerman,
Two Rival Theories of Priority Rights of Security Holders in a Corporate
Reorganization, 28 Col.L.Rev. 127 (1928). The rule was incorporated into
equity receiverships. Kansas City Southern R. Co. v. Guardian Trust Co., 240
U.S. 166, 36 S.Ct. 334, 60 L.Ed. 579; Kansas City Terminal R. Co. v. Central

Union Trust Co., 271 U.S. 445, 46 S.Ct. 549, 70 L.Ed. 1028. Later, in Case v.
Los Angeles Lumber Products Co., 308 U.S. 106, 116, 60 S.Ct. 1, 7, 84 L.Ed.
110, we held that the absolute-priority rule was part of the gloss which the case
law had placed upon the phrase 'fair and equitable,' language which had been
used in 77B(f)(1) of the newly enacted 77B bankruptcy reorganization
statute. 48 Stat. 919. We concluded that Congress had intended that the Boyd
rule be carried forward. Consolidated Rock Products Co. v. Du Bois, 312 U.S.
510, 527, 61 S.Ct. 675, 685, 85 L.Ed. 982, reaffirmed this holding and further
held that the requirement of absolute priority extended to cases where the
debtor was solvent as well as those where the debtor was insolvent. Later, we
made clear that the Boyd requirement obtained under Chapter X. Marine
Harbor Properties, Inc. v. Manufacturers Trust Co., 317 U.S. 78, 8587, 63
S.Ct. 93, 9798, 87 L.Ed. 64. As recent cases reflect, the absolute-priority
doctrine has been continued and is firmly entrenched in Chapter X law. E.g.,
Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc.
v. Anderson, 390 U.S. 414, 441, 88 S.Ct. 1157, 1171, 20 L.Ed.2d 1; United
States v. Key, 397 U.S. 322, 327, 90 S.Ct. 1049, 1052, 25 L.Ed.2d 340 (see
also concurring opinion, at 333). The reach of that doctrine however, has not
been restricted to Chapter X proceedings but has also been applied to railroad
reorganizations under 77 of the Bankruptcy Act, Ecker v. Western Pacific R.
Corp., 318 U.S. 448, 484, 63 S.Ct. 692, 712, 87 L.Ed. 892; Group of
Institutional Investors v. Chicago, Milwaukee, St. P. & P.R. Co., 318 U.S. 523,
535, 571, 63 S.Ct. 727, 735, 752, 87 L.Ed. 959; Reconstruction Finance Corp.
v. Denver & R.G.W.R. Co., 328 U.S. 495, 66 S.Ct. 1282, 90 L.Ed. 1400, to
dissolutions under the Public Utility Holding Company Act of 1935, 49 Stat.
838, Otis & Co. v. SEC, 323 U.S. 624, 634, 65 S.Ct. 483, 488, 89 L.Ed. 511
(but see dissenting opinion concluding that the rule had not been faithfully
followed, at 648649, 65 S.Ct., at 494495); SEC v. Central-Illinois
Securities Corp., 338 U.S. 96, 130, 69 S.Ct. 1377, 1395, 93 L.Ed. 1836, to
Chapter IX bankruptcy proceedings, Kelley v. Everglades Drainage District,
319 U.S. 415, 420421, n. 1, 63 S.Ct. 1141, 11441145, 87 L.Ed. 1485 and
to affirm a dismissal of a Chapter XI petition on the ground that a Chapter X
reorganization would provide more protection for creditors than a Chapter XI
arrangement, SEC v. U.S. Realty & Imp. Co., 310 U.S. 434, 452, 456458, 60
S.Ct. 1044, 1051, 10531054, 84 L.Ed. 1293. And see General Stores Corp. v.
Shlensky, 350 U.S. 462, 466, 76 S.Ct. 516, 100 L.Ed. 550.
3

See Hearings on H.R. 8406 before a Subcommittee of the Senate Committee on

the Judiciary, 75th Cong., 2d Sess., 126.

While the indenture trustee may rely on certificates or opinions concerning the
truth of statements and the correctness of opinions 'in the absence of bad faith'
(15 U.S.C. 77ooo(a)(1)), it is not exempt from liability 'for its own negligent

action, its own negligent failure to act, or its own willful misconduct' (15
U.S.C. 77ooo(d)), save for errors in judgment made in good faith. Ibid.
5

Restatement of Restitution 162 (1937).