The opinion of the court was delivered by: DUFFY
This appeal from an order of the Bankruptcy Judge granting a preliminary injunction presents important issues concerning the jurisdiction of both the Bankruptcy Court and the Securities and Exchange Commission ("SEC," "the Commission"). The SEC has intervened as amicus curiae in support of appellant's position and the United States Trust Company of New York, as successor indenture trustee, has intervened in support of affirmance.
There are two aspects to the question before this Court: first, is a debtor's listing on a national securities exchange property within the meaning of the Bankruptcy Act such that a bankruptcy court may enjoin delisting procedures by the exchange; and, second, does the Securities Exchange Act of 1934 ("Exchange Act") divest a bankruptcy court of subject matter over delisting procedures on a national securities exchange.
Cavanagh Communities Corporation ("Cavanagh") is a publicly held corporation with both common stock and 9% convertible subordinated debentures listed on the New York Stock Exchange ("NYSE," "the Exchange"). On February 18, 1975, Cavanagh filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, Sections 301 et seq., 11 U.S.C. § 701 et seq. On the same date, the Exchange issued a press release announcing that trading had been suspended in Cavanagh's securities and that application would be made to the SEC to delist them.
Thereafter, Cavanagh moved before the Bankruptcy Court for an injunction against initiation of delisting procedures by the Exchange arguing that the listing was a valuable asset of the debtor which should be preserved for the benefit of creditors and shareholders. At no time has Cavanagh attempted to challenge the suspension of trading in its securities; only the listing itself is sought to be retained.
Bankruptcy Judge Roy Babitt concluded that the Exchange listing is property within the summary jurisdiction of the Court. In doing so, he drew an analogy to Chicago Board of Trade v. Johnson, 264 U.S. 1, 68 L. Ed. 533, 44 S. Ct. 232 (1924) which held that individual membership on a commodity exchange is property within the meaning of the Bankruptcy Act despite certain restrictions on transferability. Judge Babitt reasoned that there would be no injury to the public and thus no conflict with the jurisdiction of the SEC in enjoining delisting procedures on a temporary basis.
Before considering the issues of bankruptcy law presented by this appeal, I must first consider whether the Exchange Act ousts the Bankruptcy Court of jurisdiction in this situation.
In passing the Exchange Act, Congress recognized that registration of securities, and their issuers was insufficient to protect the investing public. Thus, it provided for regulation and registration of the exchanges on which the securities would be traded. Section 5-6, 15 U.S.C. §§ 78e-f.
Section 12(a) of the Exchange Act prohibits trading in a security on a national securities exchange unless the security is registered with the exchange. 15 U.S.C. § 78 l(a). Section 12(b) outlines in considerable detail the information which must be provided to the exchange by an issuer seeking to list its security, 15 U.S.C. § 78 l(b). Stock exchange officials are required to certify approval of a security to the SEC and the listing cannot become effective until thirty days after filing with the Commission, 15 U.S.C. § 78 l(d).
Once the security is approved for listing, neither the exchange nor the issuer may delist the security without SEC approval.
"A security registered with a national securities exchange may be withdrawn or stricken from listing and registration in accordance with the rules of the exchange and, upon such terms as the Commission may deem necessary to impose for the protection of investors, upon application by the issuer or the exchange to the Commission. . . ."
Section 12(d), 15 U.S.C. § 78 l(d).
SEC regulations promulgated pursuant to Section 12(d) govern the grounds and procedures for delisting. 17 CFR § 240.12d2-2(a)-(f). One such regulation incorporates the internal rules of the securities exchange as a basis for delisting by the SEC. 17 CFR § 240.12d2-2(c). Furthermore, under Section 19(b) the SEC is empowered "to alter or supplement the rules of [the] exchange . . . in respect of such matters as . . . (3) the listing or striking from listing . . . ." 15 U.S.C. § 78s.
In the present case the NYSE, a registered national securities exchange, sought to delist the Cavanagh securities pursuant to its own internal rule 499 which provides that "[securities] admitted to the list may be suspended from dealings or removed from the list at any time." Among the criteria for delisting outlined by the exchange is "[an] intent to file under any of the sections of the bankruptcy laws . . . or a filing . . . ." (Section A16 at A-293). The NYSE internal delisting procedures provide that the issuer is entitled to an evidentiary hearing before a Committee of the Board of Directors of the Exchange ...