Caplin v. Marine Midland Grace Trust Company of New York

RESPONDENT: Marine Midland Grace Trust Company of New York
LOCATION: Stanford University

DOCKET NO.: 70-220
DECIDED BY: Burger Court (1972-1975)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 406 US 416 (1972)
ARGUED: Mar 28, 1972
DECIDED: May 22, 1972

Charles H. Miller - for petitioner
David Ferber - for the Securities and Exchange Commission
John W. Dickey - for respondent

Facts of the case


Media for Caplin v. Marine Midland Grace Trust Company of New York

Audio Transcription for Oral Argument - March 28, 1972 in Caplin v. Marine Midland Grace Trust Company of New York

Warren E. Burger:

We will hear arguments next in number 70-220, Caplin against the Marine Midland Grace Trust Company of New York.

Mr. Miller, you may proceed whenever you are ready.

Charles H. Miller:

Mr. Chief Justice and may it please the Court.

Mr. David Ferber, the Solicitor of the Securities and Exchange Commission and I have divided our time so that I will take the first 30 minutes and Mr. Ferber, 15 minutes with respect to the argument.

Mr. Ferber is similarly arguing for a reversal of the order of the Court of Appeals for the Second Circuit.

This case is before this Court on the writ of certiorari to the United States Court of Appeals for the Second Circuit.

The case involves the standing of a bankruptcy reorganization trustee, a Chapter X Trustee to prosecutor a claim in the reorganization proceedings.

I will discuss that claim as I spell out for the Court the facts with respect to those matters.

The courts below dismissed the trustees’ complaint and dismissed the other claims sought to be prosecuted by the trustee by a way of counter claim on the ground that the trustee had no standing to bring the claims which are in question here.

The petitioner in this matter is Mortimer M. Caplin.

Mr. Caplin was named in May of 1965 by the United States District Court, for the Southern District of New York as the reorganization trustee under Chapter X of Webb & Knapp, Inc.

At one time before its troubles, which led Webb & Knapp into the reorganization court, that that company was one of the largest real estate companies in the United States.

The defendant in this case is the Marine Midland Grace Trust Company of New York.

Marine Midland was the trustee under a trust indenture with respect to an issue of 5% debentures of the debtor.

There are still approximately $4,200,000.00 of these debentures outstanding.

In the trust indenture, a copy of which has been lodged with this Court, there were certain covenants, which were made by the debtor for the benefit of the debenture holders.

The single most important covenant for the purposes of this case was a covenant that the debtor would not incur any indebtedness or purchase any real property, unless its tangible assets were twice its liabilities.

That is the Section 3.6 of the Trust Indenture and that provision, which we call the Asset to Liability Ratio Provision, is at the heart of this case.

There were certifications required by the debtor to Marine Midland, the indenture trustee, year after year to the effect that the debtor was not in default in connection with these debentures.

Now, the Marine Midland requested appraisals with respect to the value of the real property here, because the principal assets of this corporation was real estate and from year-to-year, starting in or about 1957 at least, the debtor’s offices furnished the Marine Midland appraisals as to their opinion as to the value of the real property.

This was all for purposes of this Asset to Liability Ratio and ensuring that the debtor would not purchase more real property or incur more indebtedness unless the asset to liability ratio were indeed two to one as the covenant provided.

Now, these certificates and these appraisals, were accepted year after year by Marine Midland without any question being raised at all.

After Mr. Caplin was named as Reorganization Trustee, he commenced his statutory investigation of the debtors’ affairs under Chapter X of Chandler Act and he found that the appraisals and that the certificates, submitted annually by the debtors directors and offices, were in fact false and fraudulent on their face and that Marine Midland knew or should have known that this appraisals were inflated.

He further found that Marine Midland willfully disregarded these appraisals and these certificates and was grossly negligent in failing to recognize how false they were.

In fact, the trustee and reorganization, Mr. Caplin found at no time during the period between 1957 and 1965 had the required two to one tangible asset to liability ratio have been maintained.

We have in the petitioner's main brief at page four, an indication of one example of the kind of appraisals about which we are talking.

There are certain parcel of real property in Bronx County in New York.

That real property with a net book value of $2,800,000.00 had been appraised by the debtors offices at $15,000,000.00 in 1957, $27.5 million in 1958, one year later in 1959 at more than double that amount, $64 million and the same in 1960.

And by 1963, the same parcel without any significant improvements on it have been appraised by the debtors offices at -- 80% of it had been appraised at $91 million so that the whole parcel had to be appraised at more than a $100 million.

This is just one example of the kind of appraisals that were involved.