Petition — Zeldes v. Manufacturers Hanover Trust Co.

Court, U. 4.

FILED

IN THE

g YUN 16 1977

Supreme Court of the United States

Ocroser TERM, 1976 MICHAEL RODAX, In., ci EN

61794 "

>

In the Matter of

THe New York, New Haven AND Hartrorp

RAULROAD CoMPANy,

Debtor.

Jacosp D. Zevipes, Successor Indenture Trustee Under the

New York, New Haven and Hartford Railroad Com-

pany’s General Income Mortgage Dated as of July 1,

1947,

Petitioner,

— .

MANUFACTURERS Hanover Trust Company, Former Inden-

ture Trustee Under the New York, New Haven and

Hartford Railroad Company’s First and Refunding

Mortgage Dated as of July 1, 1947; and

Ricuarp Joyce Smiru, Trustee of the Property of the

New York, New Haven and Hartford Railroad Com-

pany, Debtor,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Jacos D. ZeLpes

ELAINRE S. AMENDOLA

Zeldes, Needle & Cooper

A Professional Corporation

P. O. Box 1740

Bridgeport, Connecticut 06601

Counsel for Jacob D. Zeldes, Petitioner

June 15, 1977

INDEX

PAGE

Opinions Below . 2

J LL Ce Rae a 2

Statute Primarily Involved . . . . . . 3

. sntclinsdbicdeasisdewbunsie 3

LEED SRE . 4

Reasons ror GRANTING IAR WRIT

Summary Jſ— 14

Feen 28

e . ... 1a

TaBLe or AUTHORITIES

Cases:

In re American Acoustics, Inc., 97 F. Supp. 586 (N.J.),

affirmed, 192 F. 2d 81 (3 Cir. 1951) .. bine | aD

Berner v. Equitable Office Building Corp., 175 F.2d 218

(2 Cir. 1949) 19, 20, 21

Carey v. Selected Investments Corp., 319 F.2d 578 (10

Cir. 1963) 1 0

Certain Tweed Products Corp. v. Topping, 171 F. 2d 241

een ee ee 22

Chicago & West Towns Rys v. Friedman, 230 F. 2d 364

(7 Cir.), cert. denied, 351 U.S. 943 (1956) 20

PAGE

In re Food Town, Inc., 208 F. Supp. 139 (Md. 1962) .. 23

In re Inland Gas Corp., 309 F.2d 176 (6 Cir. 1962) — 27

Meinhard v. Salmon, et al., 249 N.Y. 458, 164 N. E. 545

(1928) ..... ; 28

In re Midland United Co., 159 F.2d 340 (3 Cir. 1947) .. 23

Mosser v. Darrow, 341 U.S. 267 (1951) 25, 26

Nazareth Fairgrounds and Farmers Market, Inc. v.

Wolf, 296 F.2d 678 (2 Cir. 1961) ies 18

New Haven Inclusion Cases, 399 U.S. 392 (1970) 4

In re N. V., N.H. & H. R. R. Co., 330 F. Supp. 131 (Conn.

F 6 8

In re Philadelphia & W. Ry. Co., 73 F. Supp. 169 (E. D.

ü e rinnnnr 23

In re Ritz Carlton Restaurant & Hotel Co. of Atlantic

City, 60 F. Supp. 861 (N. J. 1948990———7r————— 26

Silbiger v. Prudence Bonds Corp., 180 F.2d 917 (2 Cir.),

cert, denied, 340 U.S. 813 (1950) 19, 21

In re Walchef Development Corporation, 388 F. Supp.

1064 (S.D. Cal. 1975) 21

Wolf v. Weinstein, 372 U.S. 633 (1963) ........18, 19, 20, 24, 25

Woods v. City National Bank and Trust Co., 312 U.S.

262 (1941) ..... 12, 14, 15, 16,

17, 18, 19, 24, 28

Young v. Potts, 161 F.2d 597 (6 Cir. 1947) 22

PAGE

Statutes:

Bankruptey Act, Section 77 (e) (12), 11 U.S.C. 6205

,,,, ˙—0%ô!—————...... 3, 14

Bankruptey Act, 6249 . 18

F ̃ 5s ⁵— . 2

28 U.S.C. 2101 (e) — A oO 2

Authorities:

Rules of the Supreme Court of the United States:

e 2

Note, Bankruptcy—Corporate Reorganisation —Trus-

tee has Burden of Proving Under 4249 that Stock-

holder’s Attorney Seeking Compensation Acquired

Interest in Debtor’s Stock, 63 Harv. L. Rev. 1056

Z 20

Note, Conflict of Interests as a Factor in the Allow-

ance of Representatives Claims in Insolvent Cor-

porate Reorganizations, 106 U. Pa. L. Rev. 1139

(1958) 20, 22, 23

Note, Denial of Compensation to Bondholders’ Repre-

sentatives Serving Conflicting Interests in Corporate

Reorganization, 50 Yale L.J. 1492 (1941) 20

IN THE

Supreme Court of the United States

OcToBER Tuas, 1976

——

>

In the Matter of

Tue New Tonk, New Haven AND Hartrorp

Rarroap Company,

Debtor.

Jacos D. Ze.pges, Successor Indenture Trustee Under the

New York, New Haven and Hartford Railroad Com-

pany’s General Income Mortgage Dated as of July 1,

1947,

Petitioner,

——

Manvracturers Hanover Trust Company, Former Inden-

ture Trustee Under the New York, New Haven and

Hartford Railroad Company’s First and Refunding

Mortgage Dated as of July 1, 1947; and

Ricnarp Joyce Smirn, Trustee of the. Property of the

New York, New Haven and Hartford Railroad Com-

pany, Debtor,

Respondents.

—

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Opinions Below

The United States Court of Appeals for the Second

Cireuit (the “Court of Appeals“)! rendered its decision

March 18, 1977. The decision has not yet been reported, and

it is reproduced in the appendix to this petition (Ia).“ The

opinion of the Reorganization Court is reported at 421

F. Supp. 249 (Conn. 1976), the relevant portions of which

are reproduced in the appendix to this petition (39a).

jurisdiction

The Court of Appeals’ decision is dated March 18, 1977.

The jurisdiction of this Court is invoked under 28 U.S.C.

1254 (1), 28 U.S.C. 2101 (e) and Rule 19 of the Rules of

this Court.

Other frequently used contracted forms of reference herein are:

The New York, New Haven and Hartford Railroad Company,

Debtor, is referred to as “New Haven.”

The Penn Central Transportation Company, Debtor, is referred

to as “Penn Central.”

The United State District Court for the District of Connecticut

is referred to as “reorganization court.” ‘

Manufacturers Hanover Trust Company and A. Frederick

Keuthen together are referred to as “Manufacturers.”

Simpson, Thacher and Bartlett is referred to as “Simpson

Thacher.”

Kelley, Drye, Newhall, Marginnes and Warren is referred to as

“Kelley Drye.”

References to the numbered pages of the appendix to this peti-

tion are indicated ( a).

8

Statute Primarily Involved

Section 77 (e) (12) of the Bankruptcy Act, 11 U.S.C.

5205 (e) (12) (1970), in pertinent part provides:

“Within such maximum limits as are fixed by the Com-

mission, the judge may make an allowance, to be paid

out of the debtor’s estate, for the actual and reason-

able expenses (including reasonable attorney’s fees)

incurred in connection with the proceedings and plan

by parties in interest and by reorganization managers

and committees or other representatives of creditors

and stockholders, and within such limits may make an

allowance to be paid out of the debtor’s estate for the

actual and reasonable expenses incurred in connec-

tion with the proceedings and plan and reasonable

compensation for services in connection therewith by

trustees under indentures, depositories and such as-

sistants as the Commission with the approval of the

judge may especially employ. .. .”

Question Presented

Whether a former indenture trustee under the mort-

gage of the debtor railroed, as a claimant under 577 (e) (12)

of the Bankruptcy Act, can recover payments for compen-

sation, expenses and attorneys’ fees from the debtor’s

estate against which it was and remains in conflict by

actively pursuing interests adverse to the estate on the

central issue of the reorganization.

Statement of the Case

The New Haven has been in reorganization under Sec-

tion 77 of the Bankruptcy Act since July 7, 1961 and from

that time Circuit Judge Robert P. Anderson, sitting by

designation, has exercised jurisdiction over the reorganiza-

tion of the New Haven. On June 30, 1976, the reorganiza-

tion court rendered a decision which, inter alia, awarded

payments of compensation and disbursement of expenses

to Manufacturers, a former indenture trustee which the

reorganization court had found acted in a conflict of in-

terest, had hired two counsel who had taken directly con-

flicting positions on the central issue facing reorganization,

had damaged the New Haven estate and was continuing

to do so. 421 F. Supp. 249 (39a). At issue is that order

awarding payment to Manufacturers which was affirmed

by the Court of Appeals for the Second Circuit (la). Peti-

tioner is the successor indenture trustee under the New

Haven’s General Income Mortgage and respondents are

Manufacturers and the New Haven Trustee, Richard

Joyce Smith.

On December 31, 1968 the transportation plant of the

New Haven was conveyed to Penn Central for a tenta-

tively agreed upon price of approximately $125 million

(5a). On June 29, 1970, in the New Haven Inclusion Cases,

399 U.S. 392 (1970), this Court determined the total con-

sideration to be paid by Penn Central for the New Haven

assets aggregated $174.6 million (6a).

On June 21, 1970, just eight days before this Court’s

decision in the New Haven Inclusion Cases, supra, Penn

Central filed its petition for reorganization under Section

77 of the Bankruptcy Act. Although the price to be paid

— —

5

for the New Haven assets was fixed, the New Haven estate

still has not been paid by Penn Central (11a). The major

efforts of the New Haven Trustee and other parties to

the reorganization of the New Haven since 1968 have

been directed at obtaining payment as a secured creditor

from the Penn Central.

From the time of the filing of the Penn Central petition

until this time, Manufacturers, through separate counsel,

has been in conflict with and has acted against the inter-

ests of the New Haven estate, from which it sought and

was awarded payment for compensation and expenses.

Manufacturers, in the precise words of the reorganization

court judge who has supervised this proceeding since its

inception 16 years ago

“has ‘pursued [an] interest adverse to the New Haven

estate’ in pursuing the interests of the 18 New York

Central and/or Pennsylvania Railroad iadentures .. .

“... it is clear that the breach of fiduciary duty by

Manufacturers Hanover to the New Haven’s first

mortgage bondholders has impeded, and therefore

damaged, the New Haven reorganization trustee’s col-

lection of the sums owed the New Haven estate from

the Penn Central for the transferred properties of

the New Haven and has frustrated the further develop-

ment of a plan of reorganization for the New Haven

... 421 F. Supp. at 266 (47a-48a). (Emphasis added.)

The source of the conflict was stated by the Court of

Appeals:

“On the one hand, it was the indenture trustee under

the first and refunding mortgage of the New Haven;

and, on the other hand, it was a creditor of the Penn

Central and trustee under mortgages of the New York

Central” (7a). (Footnotes omitted.)

The nature of the conflict was explained more accurately

by the reorganization court:

«* . . In August, 1970 the New Haven reorganization

court called for statements of position by the parties

in interest relative to the remand ordered by the Su-

preme Court in the Inclusion Cases. There arose at

that time an important issue in which the Manufac-

turers, as indenture trustee for the New Haven’s

First and Refunding Mortgage and epresented by

the Simpson, Thacher firm of attorneys, was sharply

at odds with the Manufacturers, as indenture trustee

of the New York Central and Hudson River Railroad

Company Gold Bond mortgage [in which capacity the

same trust company was] represented by the Kelley,

Drye firm of attorneys. On June 21, 1971 Manufac-

turers resigned as indenture trustee for the First and

Refunding Mortgage of the New Haven. As recently

as July 21, 1975, the Manufacturers sought leave of

the United States District Court for the Eastern Dis-

trict of Pennsylvania to resign as indenture trustee

for New York Central and Hudson River Railroad

Company Gold Bond mortgage dated Jume 1, 1897,

because of potential conflict with its former position

as indenture trustee for the New Haven mortgage. So

far as is known, Manufacturers continues to act as

indenture trusiee for the 17 remaining mortgages.

“The Manufacturers Hanover’s petition to the Penn

Central reorganization court to resign as indenture

— paso

7

trustee for the New York Central and Hudson River

Railroad Company Gold Bond Mortgage, dated June

1, 1897, was granted by the Penn Central reorganiza-

tion court. It is undisputed that Manufacturers Han-

over Trust Company is ccntinuing to act as indenture

trustee for each of the several bond issues of the New

York Central and/or Pennsylvania Railroads which

have interests contrary to those of the estate of the

New Haven Railroad in reorganization. Moreover, the

Manufacturers Hanover Trust Company, as indenture

trustee of the New York Central and/or Pennsylvania

Railroad bond issues, is of the opinion that it still has

a duty to assert, on behalf of the bondholders of those

issues, claims contrary to the interests of the New

Haven estate, so long as it is in the interests of and

the desire of the New York Central and/or Pennsyl-

vania Railroad bondholders to do so.” 421 F. Supp.

at 263-264 (41a-42a). (Emphasis added.)

The importance of the conflict, which, as found by the

reorganization court, Manufacturers faced since Penn

Central filed its petition for reorganization on June 21,

1970, 421 F. Supp. at 264 (42a), was realized when the

controversy arose as to how to secure the $174.6 mil-

lion due the New Haven from the Penn Central. The

New Haven trustee’s position that the reorganization court

should declare the existence, since December 31, 1968, of

an equitable lien and constructive trust was supported by

Manufacturers through Simpson Thacher. At the same

time, however, Penn Central’s opposition to the security

devi was supported by Manufacturers through Kelley

Drye. As Judge Anderson said:

8

“The startling result was that, on opening court one

morning, the New Haven reorganization court was

handed a brief by the Simpson, Thacher firm from

Manufacturers Hanover Trust Company for the New

Haven side of the case, and it was then handed an-

other brief by the Kelley, Drye firm from the Manu-

facturers Hanover Trust Company for the other side

of the same case.” 421 F. Supp. at 265 (46a).

The reorganization court’s decision imposing the equi-

table lien and constructive trust in favor of the New Haven

estate issued on June 11, 1971. In re N. F., N.H. & H. R. R.

Co., 330 F. Supp. 131 (Conn. 1971). Acting through the

Kelley Drye firm, Manufacturers, together with the Penn

Central Trustees, appealed to the Court of Appeals for

the Second Circuit, and as the reorganization court stated,

the conflict

“was dramatized by the successful action which Manu-

facturers Hanover, as indenture trustee for the Gold

Bonds, brought, through the attorneys for its trust

department, Kelley, Drye, Warren, Clark, Carr &

Ellis, against the New Haven reorganization trustee

on the ground that the New Haven reorganization

court lacked jurisdiction, on remand of the Inclusion

Cases by the Supreme Court, to pass upon the secured

status of the New Haven’s claim for payment for the

New Haven’s sale and transfer of its operating prop-

erty.’ [457 F.2d 683 (2 Cir.), cert. denied, 409 U.S.

890 (1972)].” 421 F. Supp. at 264 (43a).

The record simply does not support the factual asser-

tions of the Court of Appeals that

— —-— —

9

“(ijn July 1970 Manufacturers undertook to extri-

cate itself from this conflict of interests. It informed

both the New Haven and the Penn Central reorganiza-

tion courts, as well as the various trustees and their

counsel, of the situation” (Sa).

. .. Manufacturers made every possible effort to ex-

tricate itself” (28a).

„. . .it is clear that the court was aware of the con-

flict .. .” (29a).

The evidence is precisely to the contrary and the reor-

ganization court so found.

Manufacturers, as the reorganization court stated,

“should have resigned from both” estates immediately as

its Chairman of the Board had directed. 421 F. Supp. at

265 (46a, 59a-60a). Instead, Manufacturers—as the testi-

mony of Robert A. Byrne, the Vice President and only

witness whom Manufacturers presented to justify its peti-

tion for payment indicated—attempted to insulate itself

from its conflicts problems by maintaining separate counsel

for its conflicting interests: Simpson Thacher to represent

its New Haven interests and Kelley Drye to represent its

Penn Central interests. 421 F. Supp. at 265 (46a, 59a, 62a-

63a).

As to Manufacturers’ insulation theory, it was developed

on the advice of counsel from both Simpson Thacher and

Kelley Drye (62a-63a). The two sets of lawyers, moreover,

reported to the same officials at Manufacturers (62a). The

insulation theory was approved neither by the New Haven

reorganization court nor by the Penn Central reorganiza-

tion court (62a). The record is absolutely clear, moreover,

that Manufacturers never informed nor petitioned either

the New Haven reorganization court or the Penn Central

10

reorganization court with regard to the appointment of a

guardian ad litem, substitute trustees, or, for that matter,

any advice or instructions concerning its conflicting situ-

ation (60a-61a). The evidence is undisputed that the con-

flicts issue was never taken up with the New Haven reorgan-

ization court at all (61a).“ For obvious reasons, Manufac-

turers never claimed to the New Haven reorganization court

that it had advised that court of its conflicting interests.

As to Manufacturers making “every possible effort to

extricate itself” from the conflicts, the reorganization court

specifically found:

“The Trust Company, as indenture trustee for the New

York Central and/or Pennsylvania Railroad inden-

tures did speak of resigning but was dissuaded from

* Manufacturers did indeed argue in the Court of Appeals that

in July, 1970, it had advised both the New Haven and the Penn

Central reorganization courts of its conflicts. However, as noted,

the record in these lengthy proceedings is wholly devoid of any-

thing to support either Manufacturers’ claim or the statement by

the Court of Appeals that Manufacturers had “informed both the

New Haven and the Penn Central reorganization courts” of its

conflicts (8a). To support this statement, the Court of Appeals

apparently relied on a claim of counsel in the reply brief which

Manufacturers had filed in the New Haven reorganization court

in support of its petition for compensation. In that reply brief

Simpson Thacher referred to Kelly Drye’s petition to intervene

in the Penn Central reorganization—a document which is not in

this record and which hardly informed the New Haven reorganiza-

tion court of the conflict. With respect to informing the New

Haven reorganization court, Manufacturers, in the Court of Ap-

peals referred solely to counsel’s affidavit in support of Manufac-

turers’ petition for compensation dated June 12, 1975, almost five

years after the conflict arose. That affidavit merely notes some

informal discussion among various counsel concerning the conflict,

and, in any event, is wholly inconsistent with the only testimony

produced by Manufacturers in support of its petition:

“The Court: You didn’t take the issue up with the Court

at all?

“The Witness: No“ (61a).

— ee

—~ en ee ——

11

doing so. It never took a strong stand for that propo-

sition and never, when contemplating its dilemma, re-

fused to serve, following this stand by pressing for

or seeking an authoritative court declaration of its

rights and duties, as it should have done.” 421 F.

Supp. at 266 (48a). (Emphasis added.)

“The petitioner plainly breached its fiduciary duty to

the New Haven Railroad in reorganization and for

five years has continued to do so. It has expressly

stated its intention to adhere to this position in the

future and to oppose and contest the claim of the New

Haven estate in reorganization that the purchase price

due for the New Haven’s property, based upon the

Supreme Court’s judgment against the Penn Central

in the Inclusion Cases, is secured by an equitable lien.

For the past three years, at least, the petitioner has

made no genuine effort to resign as Indenture Trus-

tees for the remaining 17 bond issues for which it is

still Indenture Trustee.” 421 F. Supp. at 274 (57a).

(Emphasis added.)

Moreover, the Court of Appeals stated that there was

no support for petitioner’s “assertion that the court would

have ordered Manufacturers to resign if it had petitioned

the court for instructions” (28a). But Judge Anderson

had stated:

“Manufacturers Hanover should have resigned from

both, as its Chairman had said, but apparently no one

felt the necessity of following through on his admoni-

tion.” 421 F. Supp. at 265 (46a).

A petition for instructions or an attempt to resign, ac-

cording to the Court of Appeals “would have been futi.e”

12

(30a) since “Manufacturers was in a complete bind“ (29a).

But the reorganization court considered the practical diffi-

culties facing Manufacturers and concluded:

“Nevertheless the prospect of more problems super-

imposed upon already existing ones of immense diffi-

culty cannot operate to condone a breach of fiduciary

duty or justify it.” 421 F. Supp. at 265 (45a).

In passing on Manufacturers’ claim,‘ the reorganization

court allowed Manufacturers’ expenses of $103,018.34 and

treated its direct compensation request for $304,416.67 on

a contingent basis due to its conflict, ruling that Manu-

facturers could recover one-quarter (14) of one per cent

(1%) of payments made to the New Haven by Penn Central

for the purchase of the New Haven properties, but not to

exceed the claimed $304,416.67. 421 F. Supp. at 267 (49a-

50a).

Although he recognized that the prime authority on al-

lowances, Woods v. City National Bank and Trust Co.,

312 U.S. 262 (1941), “authorized a complete disallowance

* Manufacturers’ claim, incurred from July 7, 1961 to August

30, 1971, was as follows:

1. Compensation to Manufacturers $ 304,416.67

2. Expenses of Manufacturers 103,018.34

$ 407,435.01

3. Legal fees of Simpson, Thacher

4 $ 107,000.00

4. Disbursements of Simpson,

Thacher and Bartlett 8 15,234.81

1.715, 234.81

62, 122,669.82

13

of fees for services and reimbursement of expenses

421 F. Supp. at 266 (49a), Judge Anderson isolated Manu-

facturers’ claim as to Simpson Thacher from its direct

claim and awarded Simpson Thacher’s disbursements of

$15,234.81 and legal fees of $808,000, plus such contingent

addition as may later eventuate in accordance with a pro-

vision not relevant to the issues raised by this petition.’

It is against this background that the Court of Appeals

upheld the definite award of $926,253.15 and the potential

award of $1,535,568.83 out of the New Haven estate to

Manufacturers while it continues to occupy fiduciary posi-

tions in conflict with the New Haven estate on the central

issue involved in the reorganization. Petitioner urges this

Court to grant certiorari and seeks reversal of the judg-

ment below affirming the reorganization court’s order, inso-

far as it awarded any compensation or reimbursement of

expenses at all to Manufacturers.

»The total definite award to Manufacturers is:

1. Expenses of Manufacturers $ 103,018.34

2. Legal fees of Simpson, Thacher

and Bartlett 8 808,000.00

3. Expenses for Simpson, T Thacher

and Bartlett inn 15,234.81

Definite Award 8 926,253.15

which potentially can be increased

by the contingency factor as fol-

ow:

4. Contingency to Manufacturers $ 304,416.67

5. Contingency to Simpson,

Thacher and Bartlett 304,899.01

Contingent Award $ 609,315.68

Total Award 61.,535,568.83

14

REASONS FOR GRANTING THE WRIT

Summary

This Court should grant certiorari because this case in-

volves fundamental equitable principles governing the con-

duct of fiduciaries in bankruptcy reorganizations and the

decision of the Court of Appeals stands in blatant defiance

of this Court’s decisions establishing a strict rule of deny-

ing compensation and expenses to a fiduciary which has

breached its duty by serving interests in the reorganization

conflicting with those of its cestui. This most recent de-

parture by the Second Circuit from this Court’s long

standing principles of equity is the culmination of a line

of cases emanating from the Second Circuit, which have

gradually eroded the inflexible rule of equity demanding

undivided loyalty of fiduciaries established by this Court

in Woods v. City National Bank d Trust Co., 312 U.S.

262 (1941).

This case also highlights the need for this Court’s clarifi-

cation of the standards governing fiduciaries promulgated

in Woods because, unlike the Second Circuit, other circuit

courts have followed Woods strictly. Only this Court can

resolve the conflict among the lower federal ed ts.

Although petitioner maintains that the ~ ior e

sented is controlled by Woods, as noted by the Court of

Appeals (16a), the effect of a conflict of interest on an

application for compensation under §77(c)(12) in a rail-

road reorganization is one of first impression, and peti-

tioner maintains that it should be settled by this Court.

15

If the Court of Appeals decision is allowed to stand, it

will set dangerous precedent for railroad reorganizations

and all bankruptcy law, in that it allows a fiduciary to

receive compensation from a debtor’s estate against which

it was and remains in conflict by actively pursuing interests

adverse to the estate. The decision will have broader

detrimental effects, not limited to the rights of bond holders

in railroad reorganizations, for it is replete with justifica-

tions for undermining established guidelines governing

the conduct of fiduciaries in the law of trusts.

Finally, the decision of the Court of Appeals consists

merely of declinations which offer no standards by which

district courts may implement its flexible approach to judge

the conduct of fiduciaries.

While it continues to occupy fiduciairy positions in con-

flict with the New Haven estate on an issue at the heart

of the New Haven reorganization, Manufacturers has been

awarded a direct payment of $926,253.15 plus a contingent

payment of up to $609,315.68 as an indenture trustee of

the New Haven estate. The action of the Court of Ap-

peals can only encourage Manufacturers to maintain its

hostile position advanced as a fiduciary in the Penn Central

reorganization and attempt to thwart the New Haven’s ef-

fort to collect the $121,959,605.02 balance due from Penn

Central, so as to virtually eliminate the New Haven's

ability to honor its obligations to its bondholders.

Although recognizing that Manufacturers “had, and con-

tinues to have, o conflict of interest” (14a), “that such con-

duct constituted a breach of fiduciary duty under Woods v.

City National Bank and Trust Co., 312 U.S. 262 (1941);

and, that such breach ‘impeded, and therefore damaged,

16

the New Haven reorganization trustee’s collection of the

sums owed the New Haven estate . . and has frustrated

the further development of a plan for the New Haven . *

(13a), the Court of Appeals refused to follow the equitable

principles established by this Court in Woods on the ground

that to do so “would render equity inequitable” (15a, 21a).

Adopting a strict rule in order to foreclose the “tendency

to evil” implicit in such cases, 312 U.S. at 268, this Court

held that neither the indenture trustee—a fiduciary serving

interests conflicting with those of his cestui—nor his coun-

sel was entitled to receive compensation for his services,

regardless of his good faith. 312 U.S. at 270.

1. “‘{R]leasonable compensation for services ren-

dered’ necessarily implies loyal and disinterested ser-

vice in the interest of those for whom the claimant

purported to act.” 312 U.S. at 268. (Emphasis added.)

2. “Where a claimant who represented members of

the investing public, was serving more than one mas-

ter or was subject to conflicting in‘erests, he should

be denied compensation. It is no answer to say that

fraud or unfairness were not shown to have resulted.

.. What is struck at in the refusal to enforce con-

tracts of this kind is not only actual evil results but

their tendency to evil in other cases.’ Weil v. Neary,

278 U.S. 160, 173. Furthermore, the incidence of a par-

ticular conflict of interest can seldom be measured with

any degree of certainty.” 312 U.S. at 268. (Emphasis

added.)

3. “Where an actual conflict of interest exists, no

more need be shown in this type of case to support

a denial of compensation.” 312 U.S. at 268. (Emphasis

added.)

17

4. A fiduciary who represents security holders in

a reorganization may not perfect his claim to compen-

sation by insisting that although he had conflicting in-

lerests, he served his several masters equally well

or that his primary loyalty was not weakened by the

pull of his secondary one.” 312 U.S. at 269. (Emphasis

added.)

5. “Only strict adherence to these equitable princi-

ples can keep the standard of conduct for fiduciaries

‘at a level higher than that trodden by the crowd.’ ”

312 U.S. at 269. (Emphasis added.)

In the case at bar, Manufacturers is not “disinterested,”

serves “more than one master,” and has an “actual con-

flict of interest.” Certainly “no more need be shown” than

is on this record to revoke the award made to Manufac-

turers by the reorganization court for its own compensa-

tion, its attorneys’ compensation and its expenses.

The Court of Appeals has interpreted Woods as merely

recognizing “the inherent discretionary power of a reor-

ganization court to disallow compensation and expenses on

the ground of conflict of interest” (16a). But the Woods

opinion never once mentions “flexibility” or “discretionary

power” to reach its holding denying compensation, but

rather adopts a prophylactic rule specifically stating that

a fiduciary serving conflicting interests “should be denied

compensation.” 312 U.S. at 268.

The inflexibility of the Woods rule regarding compensa-

tion is manifest from this Court’s relaxation of the rule

to allow discretion solely with respect to the reimburse-

ment of the fiduciary’s costs and expenses. As this Court

noted,

18

“The rule disallowing compensation because of conflict-

ing interests may be equally effective, to bar recovery

of the expenditures made by a claimant subject to

conflicting interests. Plainly, expenditures are not

‘proper’ within the meaning of the Act where the

claimant cannot show that they were made in further-

ance of a project exclusively devoted to the interests

of those whom the claimant purported to represent.

Such classification of expenses, at times difficult, rests

in the sound discretion of the bankruptcy court.” 312

U.S. at 269-270. (Emphasis added.)

The fundamental principles of equity, proclaimed in

Woods, were forthrightly reaffirmed by this Court in a

related context applying §249 of the Bankruptcy Act:

“Moreover, it is well settled that when the question

arises in a terminal application for compensation or

reimbursement under §247, an applicant who has en-

gaged in forbidden transactions near the end of the

proceeding is to be denied compensation for all ser-

vices he has rendered to the Debtor, however valuable

those services may have been.” Wolf v. Weinstein, 372

U.S. 633, 654 (1963).

The Court of Appeals took great pains to undermine

the importance of Wolf, claiming it dealt only with “a

specific statutory rule” (23a), and holding “§249 and Wolf

are inapplicable” (24).°

Wolf, ironically, reversed the Second Circuit which had found

that §249 did not embrace certain officers and employees and had

held, as it did here, that the issue of compensation should rest upon

the exercise of judicial discretion rather than the automatic forfei-

ture which §249 required. Nazareth Fairgrounds and Farmers

Market, Inc. v. Wolf, 296 F.2d 678 (2 Cir. 1961).

19

But, as this Court explained in Wolf, the Congressional

purpose behind 5249 was “to codify the rule” of federal

decisions denying compensation to persons holding fidu-

ciary positions in reorganization proceedings who had

traded in the debtor’s stock and “to give pervasive effect

in Chapter X proceedings to the historic maxim of equity

that a fiduciary may not receive compensation for services

tainted by disloyalty or conflict of interest.” 372 U.S. at

641 (Emphasis added). This Court in Wolf, therefore,

considered the admittedly harsh provisions of §249 to be

reflective of the equitable principles announced in Woods,

explaining,

“The rationale underlying the denial of compensation

and expenses is that allowances may be made, under

general equitable limitations and the statutory pro-

visions alike, only for ‘loyal and disinterested service

in the interest of those for whom the claimant pur-

ported to act.’ Woods v. City Nat. Bank d T. Co.,

supra (312 U.S. at 268). Section 249 does no more than

declare that one who invests in the Debtor’s stock dur-

ing a reorganization ceases to be disinterested for pur-

poses of compensation and allowances.” 372 U.S. at

653 n. 20.

Notwithstanding recognition of the Woods rule that “the

law does not countenance such activity by a fiduciary—even

an indenture trustee,” 421 F.Supp. at 266 (47a), the reor-

ganization court—presided over by “a wise and compre-

hending chancellor” (3a), a characterization by the Court

of Appeals with which petitioner agrees—felt bound by

the decisions in Berner v. Equitable Office Building Corp.,

175 F.2d 218 (2 Cir. 1949), and Silbiger v. Prudence

Bonds Corp., 180 F.2d 917 (2 Cir.), cert. denied, 340 U.S.

20

813 (1950), which in the Second Circuit, at least, tem-

pered” the strict rule of Woods, 421 F.Supp. at 266 (49a).

These two Second Circuit cases,’ and now the decision

below, which repeatedly resorts to the concept of “flexi-

bility” (16a, 19a, 21a) for its professed equitable founda-

tion, have seriously diluted this Court’s “inflexible rule of

denying compensation to creditors’ representatives serving

conflicting interests” established in Woods. See note,

Denial of Compensation to Bondholders’ Representatives

Serving Conflicting Interests in Corporate Reorganization,

50 Yale L. J. 1492, 1493 (1941).°

Berner, the apparent source of the Second Circuit’s “flexi-

ble,” “discretionary” or “less harsh” approach to compen-

sating fiduciaries representing adverse interests, conflict-

ing, as it does, with this Court’s decisions in Woods and

Wolf, has not been followed by the majority of federal

courts and has been termed “peculiar to the Second Cir-

cuit.” Note, supra, 106 U. Pa. L. Rxv., 1155, 1156.“

7 One other case, Chicago & West Towns Rys v. Friedman, 230

F.2d 364 (7 Cir.), cert. denied 351 U.S. 943 (1956), was referred

to below; but, as noted by the Court of Appeals, it merely cited

Berner and Silbiger to support its “penalty of less than full for-

feiture” 230 F.2d at 369 (21a).

Another authority, cited by this Court in Wolf v. Weinstein,

372 U.S. 633, 642 n. 10, regards Woods as “adopting a strict rule

that a fiduciary serving interests conflicting with those of

his cestuis may receive reimbursement for proper expenditures

but may not receive compensation for services regardless of his

good faith.” Note, Conflict of Interests as a Factor in the Allow-

ance of Representatives Claims in Insolvent Corporate Reorganiza-

tions, 106 U. Pa. L. Rev. 1139, 1143 (1958).

° For another authority criticizing the Second Cireuit's decision

in Berner, see Note, Bankruptcy—Corporate Reorganization—Trus-

tee has Burden of Proving Under §249 that Stockholder’s Attorney

Seeking Compensation Acquired Interest in Debtor’s Stock 63

Harv. L. Rev. 1056 (1950).

21

Comparing Silbiger,” so heavily relied on by the See-

ond Circuit below, to this Court’s decision in Woods, one

commentator has noted:

“The Woods case seemed to establish an acceptable and

desirable sanction for the control of committee con-

duct in corporate reorganization proceedings; how-

ever, it was apparently ignored by Judge Learned

Hand in deciding Silbiger v. Prudence Bonds Corp.

„. . [I]t is submitted that, because of the underlying

theory of the Supreme Court in the former case, the

two cases reach opposite results. The Woods case, in

establishing a prophylactic rule, seems to compel com-

plete denial so long as the relationship of dual repre-

sentation of persons with adverse interests is present.

Neither the good faith of the representative in entering

into the proceeding nor any beneficial results which

might have accrued as a result of his participation are

considered by the court under this theory.

“

9 ee

_A recent California case, In re Walchef Development Corpora-

tion, 388 F. Supp. 1064, 1070 (S.D.Cal. 1975), applying the —

lenting rule of Wol/ to a 9249 case, significantly relied heavily on

the District Court opinion in Berner, In re Equitable Office Build-

ing Corp., 83 F. Supp. 531 (S.D.N.Y. 1949), which the Second Cir-

cuit had reversed.

In Silbiger, as noted by the Court of Appeals below (20a-21a),

since the award was paid from the bond series which was fully

compensated in the reorganization, the court considered that the

attorney’s allowance should only be reduced, not denied. In the

case at bar, it cannot be said that payment to Manufacturers will

come in no part out of any group that can be prejudiced, since the

payment will necessarily diminisa the funds available to meet the

— Agen — obligations to the 12 of its general income

a m petitioner represents, and may diminish the

to its first mortgage bondholders. N 9

22

“Tt would seem that, assuming some sanction is desir-

able to prevent the representation of conflicting inter-

ests in reorganization proceedings, the Woods case

reaches the better result.” Note, supra, 106 U. or Pa.

L. Rev. at 1144-1147.

Courts of Appeals in circuits, other than the Second,

ha applied the mandate of Woods strictly to deny com-

pensation to fiduciaries with conflicting interests. The

Tenth Circuit has held:

“In view of the crucial finding that within the time

covered by the claim, the claimant represented interests

which were in conflict with those of the debtor, the

claim was not payable out of the bankruptcy estate.

Woods v. City National Bank & Trust Co., supra.”

Carey v. Selected Investments Corp., 319 F.2d 578, 581

(10 Cir. 1963).

The Sixth Circuit applied Woods strictly to bar com-

pensation to a fiduciary representing conflicting interests

“for his own time, or for fees to counsel or out-

of-pocket expenses,” stating he “gambled at his own risk.

The gamble failed and he must foot the bill.” Young v.

Potts, 161 F.2d 597, 600 (6 Cir. 1947). Such reasoning

seems especially applicable to Manufacturers’ situation.

Highlighting the split of authority, the Second Circuit has

expressly refused to follow what it termed the “punitive

rule” of Potts. Certain Tweed Products Corp. v. Topping,

171 F.2d 241, 243 (2 Cir. 1948).

The Third Circuit has held that the strict principles set

forth in Woods barred compensation to an attorney who

had traded in the shares of the debtor’s subsidiary, inde-

23

pendent of 6249. In re Midland United Co., 159 F.2d 340,

346 (3 Cir. 1947). See also In re Philadelphia & W. Ry. Co.,

73 F.Supp. 169 (E. D. Pa 1947).

Although the command of Woods seems unambiguous,

the conflicting interpretations of Woods among the circuits

relating to the proper sanction to be imposed upon fiduci-

aries representing conflicting interests calls for ultimate

clarification by this Court. Note, supra, 106 U. Pa. L. Rev.

at 1147."

In its effort to avoid the impact of Wood’s strict rule, the

Court of Appeals attempts to distinguish Manufacturers’

conflict of interest as “involuntary” (28a). Relying on a

“basic tenet of trust law” that the “element of voluntariness

is critical” to establishing a breach of trust, the Court of

Appeals overlooks the findings of the reorganization court

that Manufacturers “plainly breached its fiduciary duty

to the New Haven Railroad and for five years has con-

tinued to do so,” 421 F.Supp. at 274 (57a). Once the Penn

Central defaulted, Manufacturers voluntarily maintained

its conflicting interests in both estates in spite of its Chair-

man’s direction to resign immediately from all indentures.

421 F.Supp. at 265 (46a, 28a, 59a). Once the conflict has

been found, voluntariness is no longer a criterion for meas-

uring the sanction for the breach under the Woods-Wolf

doctrine.

Recognizing that Manufacturers’ “breach concededly

affected the whole trust property and occasioned a loss”

(31a n. 26), the Court of Appeals nevertheless speaks of

™ Since it found no breach of duty, the court in In re Food

Town, Inc., 208 F. Supp. 139, 147 n. 4 (Md. 1962), found it

unnecessary to attempt to reconcile the conflicting views” pre-

sented by such cases as inter alia, Woods, Berner, and Silbiger.

24

“the undisputed value of the services of the fiduciary and

its counsel” (15a, 3la), thereby ignoring the Woods prin-

ciple that “a fiduciary... may not perfect his claim to

compensation by insisting that although he had conflicting

interests, he served his several masters well or that his

primary loyalty was not weakened by the pull of his sec-

ondary one.” 312 U.S. at 269. In any event, Simpson

Thacher’s efforts to enhance the value of the New Haven

estate were met by Kelley Drye’s efforts to diminish its

value. The inevitable consequence of Manufacturers’

serious conflict of interest is that what its right hand—

New Haven counsel—was giving, its left hand—Penn

Central counsel—was and still is taking away.

The position which petitioner urges is that a claimant,

such as Manufacturers, cannot be in a position of damaging

the estate and impeding the reorganization, as it clearly is,

while at the same time receiving from the debtor’s estate

payment for compensation or expenses, even if such serv-

ices and expenses, for which payment was sought and

made, in themselves did not cause the damage. Moreover,

the ultimate price to be received by the New Haven from

Penn Central is still very much in doubt.

It is of no moment, moreover, that many of the services

were performed before the conflict became ripe. Since

Manufacturers does not qualify as a fiduciary which has

rendered only loyal and disinterested service, it must be

denied compensation and reimbursement

“for all services [it] has rendered to the Debtor, how-

ever valuable those services may have been . . since

the start of the reorganization.” 372 U.S. at 654.

25

As to the payment to Manufacturers for its attorneys,

the Court of Appeals’ decision permitting this award to

stand establishes a rule of law, that a fiduciary—tainted

by conflict—can recover attorneys’ fees even after hiring

separate attorneys to advocate diametrically opposed

positions on the issue most seriously affecting the reorgan-

ization. Such a rule runs afoul of this Court’s precedent,

not only in Woods, which denied compensation to the at-

torney for the tainted indenture trustee, but also in Wolf

which set forth the stronger rule that proof of a conflict

by a fiduciary

“forfeits any claim to reimbursement for expenses in-

curred by the applicant in connection with the proceed-

ing.” 372 U.S. at 653 n. 20.

In Mosser v. Darrow, 341 U.S. 267 (1951), once again,

this Court proclaimed:

“Equity tolerates in bankruptcy trustees no interest

adverse to the trust. This is not because such interests

are always corrupt but because they are always cor-

rupting ...

“These strict prohibitions would serve little purpose if

the trustee were free to authorize others to do what

he is forbidden .. We think that which the trustee had

no right to do he had no right to authorize, and that

the transactions were az forbidden for benefit of others

as they would have been on behalf of the trustee her-

self.” 341 U.S. at 271-272.

The Mosser case is analogous to Manufacturers’ situation.

Manufacturers hired two counsel to represent its conflict-

ing interests. That which Manufacturers “had no right

to do,” it “had no right to authorize,” and if in doubt about

its duty to its cestui, it should have soaght instructions

from the reorganization court, as the Mosser court advised.

341 U.S. at 274. The trustee in Mosser made “an honest

mistake,” 341 U.S. at 276 (Black, J., dissenting), and the

trust estate profited. Yet this Court held him personally

liable for the profits which his employees made.

The principle that equity will not allow compensation

from the estate for services rendered on behalf of the inden-

ture trustee to attorneys, who are not themselves in conflict

but who nevertheless serve an indenture trustee with inter-

ests in conflict with its bondholders, was applied in In re

Ritz Carlton Restaurant q Hotel Co. of Atlantic City, 60

F.Supp. 861 (N.J. 1945). The court there invoked the

inflexible rule derived from Woods: that there can be no

recovery of attorneys’ fees for fiduciaries who do not pos-

sess the independence necessary for their duties.

The reasoning of the Court of Appeals that Simpson

Thacher was guilty of no improper conduct since it was

not tainted by Manufacturers’ conflict (35a n. 30, 37a), is

similar to that proferred by counsel in In re American

Acoustics, Inc., 97 F.Supp. 586, 589 (N.J.), affirmed, 192

F.2d 81 (3 Cir. 1951) (per curiam), where the court never-

theless applied the “general principles” of Wood and In

re Rite Carlton Restaurant Co., supra, to invoxe a strict

rule denying compensation to attorneys who represented

adverse interests.

The Sixth Circuit also invokes a rule of “strict enforce-

ment .. although often resulting in an obvious financial

27

hardship,” In re Inland Gas Corp., 309 F.2d 176, 181 (6

Cir. 1962), to deny reimbursement to a disqualified fiduciary

of its counsel’s out-of-pocket expenses.

The fallacy in the Court of Appeals’ position justifying

the award to Simpson Thacher is manifest from its state-

ment that “Manufacturers did not authorize Simpson

Thacher to pursue the conflicting interests that Manufac-

turers was forbidden to pursue” (36a). Obviously, it was

not Simpson Thacher, but Kelley Drye whom Manufac-

turers authorized to pursue interests adverse to the New

Haven estate, which conflicting interests are still being pur-

sued. Moreover, the assertion that “the trustee and the

attorneys self-consciously made sure that whatever taint

infected the trustee would not infect the attorneys” (37a), is

wholly untenable in light of the fact that counsel for both

sets of bondholders, Simpson Thacher for the New Haven

bondholders and Kelley Drye for the Penn Central bond-

holders, rep ted to the same officials at Manufacturers

(62a). Control of counsel’s actions in the New Haven reor-

ganization as well as in the Penn Central reorganization

rested with Manufacturers, which made the ultimate deci-

sions with respect to the position taken by Manufacturers on

both sides of the equitable lien issue. Under these circum-

stances, to attempt to evaluate the effect on the New Haven

estate as a result of Manufacturers’ conflicting interests,

would indeed be an exercise in speculation, which Woods

held the bankruptcy court need not do. 312 U.S. at 268.

Although both Manufacturers and the lawyers recognized

the conflict, Counsel did not advise Manufacturers to re-

sign from both estates, to seek instructions from the re-

organization courts involved, or to ask for a guardian ad

litem (60a-61a), even though the Chairman of the Board of

28

Manufacturers had directed that it resign immediately from

all mortgages in both estates (59a). But Manufacturers on

its own and with the advice of counsel chose its course of

action—a course which the reorganization court found was

improper.

The theory that representation on both aides of an issue

insulates the fiduciary from liability for breach of a fiduci-

ary obligation or protects the fiduciary and its attorneys

from loss of compensation defies this Court’s precedent

and is dangerous policy. The issue of Simpson Thacher’s

fee boils down to whether the breaching fiduciary or his

cestut and the estate should bear the expense of legal

services rendered to the fiduciary. Petitioner urges that

the fiduciary should bear the cost, and if the award is

vacated, Manufacturers will pay Simpson Thacher (63a).

CONCLUSION

The danger of this decision by the Court of Appeals

which attempts to justify its departure from this Court’s

strict equitable principles solely on “unusual circumstances”

and “unique facts” (3a), seems to have been envisioned

by Mr. Justice Cardozo writing for the New York Court

of Appeals and quoted by this Court in Woods, 312 U.S.

at 269:

“Uncompromising rigidity has been the attitude of

courts of equity when petitioned to undermine the

rule of undivided loyalty by the ‘disintegrating erosion’

of particular exceptions . . . Only thus has the level

of conduct for fiduciaries been kept at a level higher

than that trodden by the crowd.” Meinhard v. Salmon,

et al., 249 N.Y. 458, 164 N.E. 545, 546 (1928).

—————

29

For these reasons, then, and to foreclose the “tendency

to evil,” 312 U.S. at 268, implicit in the judgment of the

Court of Appeals awarding compensation and expenses to

a fiduciary serving conflicting interests, this Petition for

Writ of Certiorari should be—and petitioner respectfully

requests that it be—granted.

Respectfully submitted,

Jacos D. Ze.prEs

ELAINxRE S. AMENDOLA

Zeldes, Needle & Cooper, P. C.

A Professional Corporation

P. O. Box 1740

Bridgeport, Connecticut 06601

Counsel for Jacob D. Zeldes,

Successor Indenture Trustee Under the

New York, New Haven and Hartford

Railroad Company’s General Income

Mortgage Dated as of July 1, 1947

INDEX TO APPENDIX

PAGE

Opinion of the United States Court of Appeals for the

... A 1a

Relevant Portions of Opinion of the United States Dis-

trict Court for the District of Connecticut 39a

Excerpts of Testimony of Robert A. Byrne, Vice-Presi-

dent of Manufacturers (Transcript, May 18, 1976)* .. 59a

la

Opinion of the United States Court of Appeals

for the Second Circuit

UNITED STATES COURT OF APPEALS

For tHe Seconp Circuit

+O.

Nos. 399, 725, 726—September Term, 1976.

(Argued January 6, 1976 Decided March 18, 1977.)

Docket Nos. 76-5025, 76-5033, 76-5037

—

In THE Matrer or Tue New York, New Haven

AND Hartrorp Rarmroap Company, Destor

Lawrence W. Iannorti, Successor Indenture Trustee Un-

der The New York, New Haven And Hartford Railroad

Company’s First And Refunding Mortgage Dated As

Of July 1, 1947; and

Jacos D. Zeuipes, Successor Indenture Trustee Under The

New York, New Haven And Hartford Railroad Com-

pany’s General Income Mortgage Dated As Of July 1,

1947,

Appellants,

V.

Manvuracturers Hanover Trust Company, Former Inden-

ture Trustee Under The New York, New Haven And

Hartford Railroad Company’s First And Refunding

Mortgage Dated As Of July 1, 1947; and

Ricuarp Joyce Smiru, Trustee Of The Property Of The

New York, New Haven And Hartford Railroad Com-

pany, Debtor,

Appellees.

Before:

Moorr, Oakes and TimBeErs,

Circuit Judges.

——;

Cross-appeals from so much of a judgment entered June

30, 1976 in the United States District Court for the District

of Connecticut, Robert P. Anderson, Circuit Judge, sitting

by designation, 421 F.Supp. 249 (D.Conn. 1976), as allowed

compensation for services and expenses, including attor-

neys’ fees, to a former indenture trustee, Manufacturers

Hanover Trust Company.

Affirmed.

—

Irvine S. Scutoss, New Haven, Conn. (Law-

rence W. Iannotti, and Tyler, Cooper,

Grant, Bowerman & Keefe, on the brief),

for Appellant Iannotti.

Jacos D. Ze.pes, Bridgeport, Conn. (Elaine S.

Amendola, and Zeldes, Needle & Cooper,

on the brief), for Appellant Zeldes.

Whitney Nortna Seymour, New York, N.Y.

(Albert X. Bader, Jr., William K. Blom-

quist, Paul R. Gupta, and Simpson Thacher

& Bartlett, on the brief), for Appellee Man-

ufacturers Hanover Trust Company.

James WLAN Moore, New Haven, Conn., for

Appellee Richard Joyce Smith, Trustee of

The New York, New Haven and Hartford

Railroad Company, Debtor.

—

ͤ—ä— — — ee nt

—

Timsers, Circuit Judge:

This is the case of the wise and comprehending chancel-

lor.

The case comes to us on cross-appeals by two successor

indenture trustees from so much of a judgment of June 30,

1976, entered upon an opinion and order of the same date

in the United States District Court for the District of

Connecticut (the New Haven reorganization court), Robert

P. Anderson, Circuit Judge, sitting by designation, 421

F. Supp. 249 (D. Conn. 1976), as allowed to a former in-

denture trustee, Manufacturers Hanover Trust Company,

compensation in amount of $304,416.67 and expenses in

amount of $103,018.34, and to its counsel, Simpson Thacher

& Bartlett, attorneys fees in amount of $808,000 and ex-

penses in amount of $15,234.81.

The essential questions presented are (1) whether the

New Haven reorganization court as a court of equity had

the authority, absent a specific statutory directive to the

contrary, in the exercise of its discretion to allow or to

deny compensation and expenses, including attorneys’ fees,

to an indenture trustee which concededly represented con-

flicting interests under very unusual circumstances; and

(2) if so, whether the reorganization court exercised sound

discretion in allowing the compensation and expenses in

question. We hold that the reorganization court did have

such authority; that on the unique facts of this case it did

exercise its discretion soundly; and that it reached a fair

and equitable result in allowing the compensation and

expenses in question. We affirm.

I,

The conflict of interest that lies at the heart of this case

arose out of the complexities of two mergers and two

reorganizations. The companies involved, as now known,

4a

are the Manufacturers Hanover Trust Company (Manu-

facturers) ; the New York, New Haven and Hartford Rail-

road Company (New Haven); and the Penn Central

Transportation Company (Penn Central). A brief narra-

tive of how these companies reached their present status

is necessary to an understanding of the instant contro-

versy.

On July 7, 1961 the New Haven filed its petition for re-

organization under §77 of the Bankruptcy Act, 11 U.S.C.

§ 205 (1970), in the United States District Court for the

District of Connecticut. Since 1947 the Manufacturers

Trust Company (Trust Company), a predecessor of the

present Manufacturers, had been the corporate indenture

trustee of the New Haven’s first and refunding mortgage.’

The Trust Company intervened in the New Haven re-

organization through its general counsel, Simpson Thacher

& Bartlett (Simpson Thacher), which had represented the

Trust Company in its capacity as corporate indenture

trustee since 1947. Judge Anderson, who in 1961 was Chief

Judge of the District Court for the District of Connecticut,

has presided over all proceedings in the New Haven re-

organization continuously from their inception to date—a

period of nearly 16 years.

On March 9, 1962 the Pennsylvania Railroad Company

and the New York Central Railroad Company first pro-

posed the merger that ultimately led to the organization

of the Penn Central in February 1968. The New Haven

reorganization trustees sought inclusion of the New Haven

in the merged railroad, primarily under §5(2) of the

Interstate Commerce Act, 49 U.S.C. § 5(2) (1970), both by

private negotiations with the merging railroads and by a

petition filed with the Commission on June 26, 1962. The

Commission approved the Penn Central merger on April

1 Until July 1971 tnere was also an individual trustee, A. Frederick

Keuthen, an officer of the Trust Company.

5a

6, 1966 on the condition that the merged railroad would

purchase the New Haven’s assets. ‘n agreement (inclu-

sion agreement) was reached on April 21, 1966, between

the New Haven trustees and the Pennsylvania and New

York Central railroads, to include the New Haven in the

Pennsylvania/New York Central merger. The agreement

provided that the Penn Central would acquire the major

part of the New Haven’s assets for a consideration con-

sisting of cash, bonds, Penn Central stock, and the assump-

tion of certain of the New Haven’s obligations. See gen-

erally New Haven Inclusion Cases, 399 U.S. 392, 408-410

(1970). The New Haven trustees bound themselves to

support the agreement and the fairness of the proposed

purchase price of approximately $125,000,000 for the New

Haven’s assets. Unlike the New Haven trustees, however,

representatives of the New Haven’s bondholders remained

free to seek a higher price.

On October 24, 1966 the New Haven reorganization court

authorized presentation of the agreement to the Commis-

sion which approved the agreement on November 16, 1967.

Id. at 411-12. A final price had not been determined at

that time, but on December 24, 1968, as we later noted,

“because of the precarious financial condition of the New

Haven and the imminent termination of its rail service,

the [New Haven reorganization court] approved the trans-

fer of New Haven’s assets to Penn Central, leaving the

exact amount and form of consideration to be paid by

Penn Central to be settled finally at a later date.” In re

New York, N.H. & H.R. R., 457 F.2d 683, 685 (2 Cir.), cert.

denied, 409 U.S. 890 (1972). The Commission ultimately

set the purchase price for the New Haven’s assets at about

140 million, having previously concluded that the $125

million purchase price agreed to by the Penn Central and

6a

the New Haven trustees was “fair and equitable.” * In the

New Haven Inclusion Cases, swpra, the Supreme Court

held that the 140 million purchase price approved by the

Commission was grossly inadequate and itself set the price

at $174.6 million.“

On June 21, 1970, just eight days before the Supreme

Court’s decision in the New Haven Inclusion Cases, the

Penn Central filed a petition for reorganization in the

Eastern District of Pennsylvania. Penn Central securities

became virtually worthless overnight. As we later ob-

served, since Penn Central securities “were to [have]

comprise[d] a significant portion of the payment to the

New Haven estate, the Supreme Court remanded the case

for ‘[f]urther proceedings before the Commission and the

appropriate federal courts ... to determine the form that

Penn Central’s consideration to New Haven should prop-

erly take and the status of the New Haven estate as a

shareholder or creditor of Penn Central.’ 399 U.S. at

489 ....” In re New York, N.H. & H. R. R., 479 F.2d 8,

11-12 (2 Cir. 1973).

The inclusion of the New Haven’s assets in the merged

and later bankrupt Penn Central would not have resulted

in the conflict of interest with which we are here con-

cerned had there not been still another merger—a non-

railroad one. Backing up for a moment, in September

1961, two months after the New Haven filed for reorgan-

ization but hefore any of the other developments described

2 It was only after New Haven's bondholders successfully challenged

the Commission in two separate suits, ]» re New York, N.H. 4 H.R. R.,

289 F.Supp. 451 (D. Conn. 1968), and New York, N.H. 4 H. R. F. v.

United States, 289 F.Supp. 418 (S. D. N. V. 1968) (three-judge court),

that the Commission held further hearings and announced a new valu-

ation of 6140 million.

% The Supreme Court affirmed the reorganization court's valuation of

the New Haven's assets. 399 U.S. 392 (1970); see generally In re New

York, N. H. 4 H. R. R. 479 F. 2d 8, 11 (2 Cir. 19738).

7a

above, Manufacturers Trust Company merged with The

Hanover Bank (Hanover), to form the present Manufac-

turers Hanover Trust Company. Hanover had served as

trustee under mortgages of the New York Central since

1897. When Hanover merged with the Trust Company,

the merged bank’s trust department inherited those mort-

gages. The law firm then known as Kelley, Drye, Newhall,

Maginnes & Warren (Kelley, Drye), Hanover’s counsel,

continued to handle the legal work of the merged bank’s

corporate trust department. Since Simpson Thacher had

represented the Trust Company as corporate indenture

trustee of the New Haven’s first and refunding mortgage

since 1947, the firm continued to represent Manufacturers

in that capacity

Manufacturer’s position as trustee under mortgages of

the New Haven and of the New York Central presented

no conflicts problems prior to June 21, 1970. On that day,

however, when the Penn Central filed for reorganization,

Manufacturers found itself representing conflicting in-

terests. On the one hand, it was the indenture trustee

under the first and refunding mortgage of the New Haven;

and, on the other hand, it was a creditor of the Penn Cen-

tral‘ and trustee under mortgages of the New York Cen-

tral.®

4 Manufacturers is one of several bank participants in a $300 million

loan to Penn Central under a credit agreement dated April 1, 1969. It

also is one of the banks that loaned $50 million to the Pennsylvania

Company, a subsidiary of Penn Central, under a credit agreement dated

March 21, 1970. It also is the holder of certain equipment obligations

of Penn Central subsidiaries. See Petition of Manufacturers Hanover

Trust Company and A. Frederick Keuthen, 12 New York, N.H. & H.R.R.

Reorganization Proceedings 8721, 8722 (June 21, 1971).

5 Manufacturers was trustee under eighteen New York Central mort-

gages, including the New York Central & Hudson River Railroad Com-

pany Gold Bond mortgage which covers the Grand Central Terminal

properties.

8a

In July 1970 Manufacturers undertook to extricate itself

from this conflict of interests. It informed both the New

Haven and the Penn Central reorganization courts, as well

as the various trustees and their counsel, of the situation.“

It then began a comprehensive effort to find successor

corporate trustees for the New Haven mortgage and the

eighteen New York Central mortgages. Between July 1970

and June 1971 Manufacturers contacted at least sixty-two

banks. Its search included every commercial bank east of

the Mississippi that had a substantial trust department

and did not have a conflict of interest (such as being a

ereditor of the Penn Central). On July 29, 1971, the New

Haven reorganization court appointed the first of the

present individual successor trustees, for the reason that,

“fajlthough the underlying mortgage itself specified that

a successor trustee must be a qualified bank, the court

could not permit a valid trust to fail for lack of a trus-

tee... . 421 F.Supp. at 264. Manufacturers had not

included individuals in its search because of the terms of

the mortgage.

6 In Kelley, Drye's petition to intervene in the Penn Central reorgan-

ization proceedings, one of its partners stated:

“However the situation came about, we and Manufacturers have

decided, I believe correctly, that its duty to the bondholders under

these mortgages requires us to intervene in this proceeding as soon

as we can, rather than leaving them unrepresented until (and if)

separate trustees and counsel, unconnected with this reorganization,

ean be found for each trust.”

The court on that date appointed Lawrence W. Iannotti, Esq., one

of the anpellants here, as successor indenture trustee under the New

Ilaven’s first and refunding mortgage. Later, in January 1972, the

Chase Manhattan Bank, N. A., resigned as trustee under the New Haven's

general income mortgage because it was a creditor of the Penn Central.

The court appointed Jacob D. Zeldes, Esq., the other appellant here,

as successor indenture trustee under that mortgage.

Manufacturers remains to this day as trustee under seventeen of the

New York Central mortgages. It found a successor for, and resigned

from, the Gold Bond mortgage trusteeship on September 4, 1975. 421

F.Supp. at 265.

9a

Meanwhile, the potential conflict recognized by Manu-

facturers as of June 21, 1970 became an actual one very

quickly. Following the Supreme Court’s remand, the New

Haven reorganization court entered an order with broad

notice provisions to determine what should be done to

protect the New Haven’s creditors. This resulted in due

course in the entry of an order on June 22, 1971 pursuant

to which the court sought to give the New Haven estate

secured-creditor status by declaring “an equitable lien

on all of the former assets transferred by the New Haven

to Penn Central, exclusive of (a) rolling stock and (b) the

New Haven’s one-half interest in the excess income from

the Grand Central [Terminal] properties” and, as to “the

latter item of property ... [by declaring] a constructive

trust in favor of the New Haven estate.” In re New York,

N.H. d H.R. R., 330 F.Supp. 131, 142 (D. Conn. 1971).

During the proceedings which resulted in the order of

June 22, 1971, the New Haven’s interests were supported

by, among others, the New Haven’s trustee and Manufac-

turers as the indenture trustee, Manufacturers being repre-

sented by Simpson Thacher. Interests which opposed im-

position of an equitable lien or constructive trust included

the Penn Central, represented by the Washington, D.C.

law firm of Covington & Burling; and Manufacturers, as

indenture trustee under the Gold Bond mortgage, repre-

sented by Kelley, Drye. Covington & Burling assumed the

lead role in opposing imposition of the equitable lien and

constructive trust. The incongruity of the situation never-

theless was apparent. As the court put it,

“The startling result was that, on opening court one

morning, the New Haven reorganization court was

handed a brief by the Simpson, Thacher firm from

Manufacturers Hanover Trust Company for the New

Haven side of the case, and it was then handed an-

10a

other brief by the Kelley, Drye firm from the Manu-

facturers Hanover Trust Company for the other side

of the same case.” 421 F.Supp. at 265.

Through Simpson Thacher, Manufacturers supported the

New Haven trustee’s position in favor of imposing an

equitable lien and constructive trust. Through Kelley,

Drye, Manufacturers took the position that the New Haven

reorganization court lacked jurisdiction over the New

Haven assets that had been conveyed to the Penn Central.

Shortly after:the New Haven reorganization court’s de-

cision, referred to above, which imposed an equitable lien

and a constructive trust in favor of the New Haven estate

on the transferred assets, Manufacturers and Mr. Keuthen

on June 22, 1971 filed their applications to resign from

the New Haven’s first and refunding mortgage trusteeship.

On July 29 the court approved the resignations and ap-

pointed Mr. Iannotti as successor trustee.

Penn Central appealed to our Court from the order

entered on June 22, 1971. This appeal resulted in our

decision of March 17, 19 2 that the New Haven reorgani-

zation court lacked jurisdiction over the New Haven’s

assets which had been transferred to Penn Central. In re

New York, N. H. & H.R.R., 457 F.2d 683 (2 Cir.), cert.

denied, 409 U.S. 890 (1972). As in the proceedings before

the reorganization court, Manufacturers and Kelley, Drye,

in challenging the order under review, participated in a

subordinate role on the appeal and on the certiorari pro-

ceedings; Covington & Burling took the lead as counsel

to Penn Central. Manufacturers nevertheless did partici-

pate as it had to (and as it will continue to do if necessary)

in its capacity as trustee under the remaining New York

Central mortgages.

lla

The upshot is that the New Haven interests still have

not been paid by the Penn Central estate.“

II.

It was against this background that applications were

filed on June 16, 1975 in the New Haven reorganization

court by Manufacturers and several other bondholder rep-

resentatives seeking compensation for services rendered

and reimbursement of expenses, including attorneys’ fees.

The applications were filed pursuant to § 77(c)(12) of the

Bankruptey Act, 11 U.S.C. § 205 (e) (12) (1970).“ After a

8 The present balance due from the Penn Central is $121,959,605.02,

according to the Statement of Assets, Liabilities and Capital Deficit as

of September 30, 1976 submitted to the New Haven reorganization court

on October 21, 1976 by counsel for the New Haven Trustee.

Professor Moore informed us at the time of oral argument that

shortly prior thereto there had been submitted to the Penn Central re

organization court a consensual plan of reorganization for the Penn

Central providing for payment to the New Haven interests of

$174,000,000 or its equivalent.

9 Section 77(¢)(12) of the Bankruptey Act, 11 U.S.C. 6205 6% (12

(1970), in relevant part provides:

“Within such maximum limits as are fixed by the Commission, the

judge may make an allowance, to be paid out of the debtor's estate,

for the actual and reasonable expenses (including reasonable attor

ney's fees) incurred in connection with the proceedings and plan

by parties in interest and hy reorganization managers and com

mittees or other representatives of creditors and stockholders, and

within such limits may make an allowance to be paid out of the

debtor's estate for the actual and reasonable expenses incurred in

connection with the proceedings and plan and reasonable compen

sation for services in connection therewith by trustees under in-

dentures, depositaries and such assistants as the Commission with

the approval of the judge may especially employ. Appeals from

orders of the court fixing such allowances may be taken to the court

of appeals independently of other appeals in the proceeding and

shall be heard summarily... .”

Following the statutory procedure for 677 (e) (12) applications, the

reorganization court originally referred the applications to the Inter-

state Commerce Commission so that the latter could set maximum levels

of compensation. On February 5, 1976, however, Congress enacted the

12a

hearing on May 18, 1976 the court filed its opinion, order,

and judgment on June 30, 1976. To the extent here rele-

vant,” the court allowed compensation to Manufacturers

in amount of $103,018.34 as reimbursement for expenses

and in amount of $304,416.67 as compensation for services.

The court directed, however, that payment of the latter

amount be contingent on the New Haven’s recovery of the

purchase price of its assets owed by the Penn Central. This

was done by limiting Manufacturers’ compensation for

services to V of 1% of the amount to be recovered by the

New Haven from the Penn Central, such payment in no

event to exceed $304,416.67. The contingent basis of the

Railroad Revitalization and Regulatory Reform Act (the 4R Act), Pub.

L. No. 94-210, 90 Stat. 118. Section 618(b)(4) of the 4R Act in

relevant part provides:

“The powers and duties of the Commission under section 77 of

the Bankruptey Act (11 U.S.C. 205), with respect to a railroad

in reorganization in the region which conveys all or substantially

all of its designated rail properties to the Corporation or a sub-

sidiary thereof, or to profitable railroads in the region, pureuant to

the final system plan, and the requirement that plans of reorganiza-

tion be filed with the Commission, shall cease upon the date of

such conveyance. The powers and duties of the Commission under

section 77 of the Bankruptcy Act shall also so terminate, as of the

date of enactment of this paragraph, with respect to any railroad

in reorganization under such section 77 but not subject to this

Act which (1) does not operate any line or railroad, and (2) has

transferred all or substantially all of its rail properties to a rail-

road in reorganization in the region which was subject to this Act

prior to the date of enactment of this paragraph. Thereafter, such

powers and duties of the Commission shall be vested in the district

court of the United States which has jurisdiction of the estate of

any such railroad in reorganization at the time of such conveyance.

Since the AR Act terminated the Commission's jurisdiction over these

applications and vested in the reorganiration court the powers and

duties of the Commission with respect to them, the applications were

deemed refiled with the reorganization court.

10 In addition to the allowances granted to Manufacturers, the court

granted allowances to various other participants in the reorganization,

as set out int schedule of payments at 421 F.Supp. at 272-73.

13a

allowance to Manufacturers in this respect was grounded

on the court’s findings that Manufacturers had pursued

interests adverse to the New Haven estate by representing

the interests of the eighteen New York Central mortgages

(which interests, except for the Gold Bond mortgage, it

still is obliged to pursue) ; that such conduct constituted a

breach of fiduciary duty under Woods v. City National

Bank d Trust Co., 312 U.S. 262 (1941); and that such

breach “impeded, and therefore damaged, the New Haven

reorganization trustee’s collection of the sums owed the

New Haven estate . . and has frustrated the further

development of a plan of reorganization for the New

Haven ....” 421 F.Supp. at 266.

In addition to the allowance to Manufacturers itself

referred to above, the court also allowed to Manufacturers

the sum of $808,000.00 as compensation for its attorneys,

Simpson Thacher & Bartlett, plus $15,234.81 as reimburse-

ment for the latter’s expenses.”

11 The court also allowed to Manufacturers a contingent fee on account

of the legal services of Simpson Thacher. The contingent nature of this

allowance has nothing to do with Manufacturer's breach of fiduciary

duty. The award is a standard contingent fee. Simpson Thacher, along

with two other law firms who had represented the first mortgage bond-

holders committee and the Chase Manhattan Bank (Migdal, Tenney,

Glass & Pollak, and Dewey, Ballentine, Bushby, Palmer & Wood, re-

spectively), participated in the New Haven reorganization proceedings

on a contingent fee basis. Alchough the attorneys were successful in

obtaining an increase in the purchase price for the New Haven assets

as a result of the decision by the Supreme Court in the New Haven

Inclusion Cases, supra, there was no cash payment. As Professor Moore

stated at oral argument before us, “The price was excellent but the

New Haven was paid in Confederate money.” The New Haven reorgan-

ization court therefore ordered that “in the event that there is a future

recovery by the reorgauization tru- of payments by the Penn

Central . . , on account of the se price fixed by the Supreme

Court for the New Haven properties in the New Haven Inclusion Cases,”

each of the three law firms will receive a fraction of such payment or

payments, 421 F.Supp. at 272. Simpson Thacher in that event would

receive K of 1% of the amount recovered.

14a

The instant cross-appeals'* were taken by Messrs. Ian-

notti and Zeldes, the respective successor indenture trustees

under the New Haven’s first and refunding mortgage and

its general income mortgage, from that part of the court’s

judgment of June 30, 1976 referred to above. Appellees

are Manufacturers and Richard Joyce Smith, the New

Haven trustee. The latter has taken the position before

us, as he did before the New Haven reorganization court,

that, although Manufacturers was involved in a conflict of

interest, it should not be denied compensation for services,

expenses and attorneys fees. Appellants argue that Manu-

facturers should not recover any compensation for services,

expenses, or attorneys’ fees from the estate with which it

had, and continues to have, a conflict of interest.

The questions thus presented are whether the New Haven

reorganization court as a court of equity had the author-

ity in the exercise of its discretion to allow compensation

and expenses to Manufacturers and its counsel in view of

Manufacturers’ position of conflict; and, if so, whether the

reorganization court exercised sound discretion in granting

the allowances here involved.

III.

We turn to the first question presented: whether the

reorganization court had the authority in the exercise of

its discretion to grant any allowances at all to Manufac-

turers and its counsel.

12 Appellants’ notices of appeal are denominated “eross-appeals” be

cause they followed notices of appeal by Manufacturers and the Com-

mission from the reorganization court's original order and judgment

of June 30, 1976, as supplemented by its order of August 23, 1976.

421 F.Supp. at 273. The Commission's appeal was withdrawn and Manu-

facturers appeal has not been pursued.

i 2

15a

Appellants ask us to hold that Manufacturers cannot

recover“ any payments in the reorganization court—either

“compensation for [its] services” or reimbursement of its

“actual and reasonable expenses ( including reasonable at-

torney’s fees)”. Appellants contend that, once a bank-

ruptey court finds a conflict of interest, it must close its

eyes to the equities and disallow any and all payments. In

short, appellants argue that the chancellor under such cir-

cumstances has open to him only one course: total dis-

allowance of all payments; or, put another way, he has no

discretion to act on the applications for allowances, even

if his discretion is exercised on the basis of long familiarity

with the reorganization, the undisputed value of the ser-

vices of the fiduciary and its counsel, and the nature and

cause of the conflict involved.

For the reasons below, we reject appellants’ interpreta-

tion of the law. It would strip the reorganization court

as a court of equity of its authority to exercise sound dis-

cretion, It would render equity inequitable.

As all counsel acknowledge,‘ the late Judge Learned

Hand was in the vanguard in articulating the equitable

principles with which we are here concerned. A good

starting point, it seems to us, is Judge Hand’s reference

to Aristotle’s description of the role of “the equitable” in

construing the law:

“All law is universal but about some things it is not

possible to make a universal statement which shall be

correct... Hence the equitable is just, and better

13 Appellants at the outset phrase the question presented as one of

law: [Whether a former indenture trustee . . . can recover payments

for compensation, expenses and attorneys’ fees from the debtor's estate.

. (emphasis added). We note this not as a matter of semantics,

but perhaps as an indication of the misapprehension of appellants’ able

counsel as to the role of a bankruptcy court as a court of equity, 11

U.8.C. 611 (1970), in dealing with the very unusual facts with which

the reorganization court here was confronted.

16a

than one kind of justice not better than absolute

justice but better than the error that arises from the

absoluteness of the statement. And this is the nature

of the equitable, a correction of law where it is defec-

tive owing to its universality. ...” Ethics, Book V,

Chapter 10 fol. 1137, lines 12-28, in IX The Works of

Aristotle (W.D. Ross trans. 1925), quoted in L. Hand,

The Bill of Rights 21-22 (1958).

Having in mind that flexibility is one of the essential char-

acteristics of equity and that conceptions of equity neces-

sarily will vary from chancellor to chancellor, the thread

that runs consistently through the cases is that the remedy

granted.or penalty imposed by equity must be tailored to

fit the particular case at hand.

This brings us to the applicable case law. We are not

aware of any case in which a railroad reorganization court

has construed the effect of a conflict of interest on an

application for compensation under 577 (e) (12)—the provi-

sion pursuant to which the instant application was filed.

The courts, however, have considered the issue under

Chapter X and its predecessor, §77B.

The leading cases which we believe at least point to the

correct decision here are two Supreme Court opinions,

Woods v. City National Bank d Trust Co., 312 U.S. 262

(1941); Wolf v. Weinstein, 372 U.S. 633 (1963), and two

opinions written by Judge Learned Hand for our Court,

Berner v. Equitable Office Building Corp., 175 F.2d 218

(2 Cir. 1949); Silbiger v. Prudence Bonds Corp., 180 F. 2d

917 (2 Cir.), cert. denied, 340 U.S. 813 (1950). We shall

discuss each briefly to the extent here applicable.

Woods v. City National Bank d Trust Co., supra, is the

leading Chapter X case in point. It recognizes the inherent

discretionary power of a reorganization court to disallow

compensation for services and expenses on the ground of

17a

conflict of interest; but it does not require that a reor-

ganization court do so. The Court in Woods did not reject

a district court’s allowance of compensation; rather, it

reversed the court of appeals’ reversal of the district court,

noting that the district court’s findings of a conflict that

warranted complete disallowance were “amply supported

by the evidence.” 312 U.S. at 269."

It is clear from the opinion in Woods that the Court

was considering the power of a reorganization court to

deny compensation, not its obligation to do so. “The basic

question involved in this case concerns the power of the

District Court in proceedings under Ch. X of the Chandler

Act (52 Stat. 840) to disallow claims for compensation

and reimbursement on the grounds that the claimants were

serving dual or conflicting interests.” Id. at 262 (footnote

omitted). The Court went on to explain that this power

derives from the “bankruptey court[’s] ... plenary power

to review all fees and expenses in connection with the

reorganization ....” Id. at 267. See also American United

Mutual Life Ins. Co. v. City of Avon Park, 311 U.S. 138,

146 (1940) (involving a plan for the composition of the

14 The nature of the conflict of interest in Woods was in sharp contrast

to that in the instant case. There, claims for compensation were filed hy

an indenture trustee, the members of a bondholders’ committee, and the

committee's counsel. The bondholders’ committee, originally organized

by the indenture trustee, included employees of the indenture trustee's

corporate reorganization department as well as employees of an under-

writer heavily interested in the debtor's stock and under threat of suit

for defrauding the bondholders. The same firm of attorneys which had

been retained by the indenture trustee was employed by the committee.

Thus the interlocking personnel of the committee and the indenture

trustee represented the depositing bondholders who were interested in

having a low upset price fixed for the debtor's property, the non-deposit.

ing bondholders who were interested in a high upset price, and a large

stockholder who sought a favorable position in the reorganization at

the expense of both. The essential ground upon which the reorganiza-

tion court disallowed the claims for compensation was that the claim

ants were pursuing interests of their own that were either of no bey

to the estate or were adverse to it.

18a

debts of a municipality under Chapter IX of the Bank-

ruptey Act).“

We do not overlook other language in Woods that can

be read more broadly. For example, “[w]here a claimant,

who represented members of the investing public, was

serving more than one master or was subject to conflicting

interests, he should be denied compensation.” 312 U.S. at

268. This statement of the general rule of course is under-

standable in view of the particular facts and actual holding

of the case. See note 14 supra. Application of the general

rule in Woods led to and buttressed the district court’s

denial of compensation and pointed up the error of the

court of appeals in reversing the district court. Woods’

recognition of the general rule, however, does not strike

us as a mandatory requirement that reorganization courts

woodenly must deny compensation in every case of conflict

of interest, regardless of the facts.“

15 The Court in American United, 311 U.S. at 145, in reaffirming the

essential character of a bankruptcy court as a court of equity, quoted

from the seminal opinion in SEC v. United States Realty ¢ Improvement

Co., 310 U.S. 434, 455 (1940):

“A court of equity may in its discretion in the exercise of the

jurisdiction committed to it grant or deny relief upon performance

— a condition which will safeguard the public interest.” (emphasis

ded).

16 We view likewise the statement of the Court in Woods that [where

an actual conflict of interest exists, no more need be shown in this

type of case to support a denial of compensation.” 312 U.S. at 268 (em-

phasis added). That is precisely what the Court held in Woods, namely,

that the findings of the district court were sufficiently supported by the

evidence to warrant denial of compensation. The Court did not hold

that denial of compensation would be required regardless of the district

eourt 's findings.

Moreover, the voluntarily assumed conflict-laden situation in Woods,

see note 14 supra, is a far cry from the unusual circumstances of the

instant case. We need not decide here whether the Court's approval of

the denial of compensation in Woods requires that compensation always

be denied in factually similar situations. See In re Ritz Carlton Restau-

rant 4 Hotel Co., 60 F.Supp. 861, 865-66 (D.N.J. 1945). Woods cer

19a

This need for flexibility to be exercised by a reorganiza-

tion court in dealing with a conflict of interest has been

recognized by our Court in the two corporate reorganiza-

tion cases referred to above which were decided after

Woods.

In Berner v. Equitable Office Building Corp., supra, a

Chapter X case, the district court had completely disal-

lowed compensation to Berner, an attorney, apparently on

the basis of §249 of the Bankruptcy Act, 11 U.S.C. 5649

(1970), which denies all compensation to a fiduciary who

has traded in the debtor's stock.“ Our Court, in an opinion

by Judge Learned Hand, reversed the district court on

the ground that there had not been adequate proof that

Berner had acquired an interest in the debtor’s stock. In

the course of the opinion which reviewed the applicable

authorities, including Woods, 175 F.2d at 220 & n. 3, Judge

Hand stated that “there was no proof of conduct which.

necessarily forfeited his rights either under 5249, or upon

general equitable principles; but that there was proof of

conduct which required his allowance to be reduced in an

amount which the district court should fix in its discre-

tion. .. Id. at 219 (emphasis added). Thus, after con-

cluding that Berner’s conduct in divulging inside informa-

tainly provides guidance to the reorganization courts on the issue. See

generally In re American Acoustics, 97 F.Supp. 586, 589 (D.N.J. 1951).

By the same token, however, Woods does not relieve a reorganization

court of its duty, once it has found a conflict, to weigh the facts of «

particular case for and against allowing compensation.

17 Section 249 of the Bankruptcy Act, 11 U.S.C. 6649 (1970), in relevant

part provides:

“No compensation or reimbursement shall be allowed to any com-

mittee or attorney, or other person acting in the proceedings in a

representative or fiduciary capacity who at any time after assuming

to act in such capacity has purchased or sold such claims or stock

or by whom or for whose account such claims or stock have, with-

out the prior consent of the judge, been otherwise acquired or

transferred.”

20a

tion to one Bell, who did purchase shares, amounted to a

breach of trust to the shareholders from whom Bell had

bought, Judge Hand remanded the case to the district

court with these instructions:

[Wie think that the consequences should be only those

which attend any breach of trust in equity: i.e., that

in determining what the trustee’s compensation shall

be, the court will, as a matter of discretion diminish

the allowance which it would otherwise make, in pro-

portion to the gravity of the breach.” Id. at 222 (foot-

note omitted).

In Silbiger v. Prudence Bonds Corp., supra, a §77B case,

where an attorney represented members of two classes of

bondholders whose interests conflicted, the district court

had allowed compensation to the attorney, to be paid from

funds distributed to the holders of the series of bonds

which were fully compensated in the reorganization. Judge

Learned Hand, who again wrote the opinion for our Court,

expressly followed the course taken in Berner of leaving

to the discretion of the district court “[h]low far the pen-

alty [because of the conflict of interest] should be miti-

gated,” 180 F.2d at 921, and remanded the case to the

district court for that purpose.

We recognize, as Judge Hand noted in Silbiger, that

“the usual consequence has been that [an attorney who

represents opposed interests] is debarred from receiving

any fee from either, no matter how successful his labors”,

id. at 920, and that usually “the prohibition is absolute

and the consequence is a forfeiture of all pay.” Id. at 921.

We further recognize that the salient distinguishing fac-

tor relied upon in Silbiger was the fact that the “attorney

[was] not paid in any part by the side he [had] opposed”,

or, expressed differently, that “the allowance . . [came]

21a

no part out of any group that [could] have been preju-

diced by the attorney’s divided allegiance.” Id. at 921.

By contrast, any allowance to Manufacturers in the in-

stant case necessarily will diminish the funds available to

meet the obligations of the New Haven estate to the hold-

ers of its general income bonds and may diminish the

payment to its first mortgage bondholders. Yet the pres-

ence of the particular circumstance which justified our

departure from the general rule in Silbiger should not be

treated as a necessary condition for departing from the

general rule in all caess. The critical point is that because

of the particular exceptional circumstance in Silbiger we

concluded that to deny the attorney compensation would

be inequitable, contrary to the rationale for denying com-

pensation in the first place. We did not rule out the

possibility that there might be other, equally compelling,

exceptional circumstances. In short, we decline appellants’

invitation to us to construe Silbiger in a way that would

render equity inequitable in the instant ease.“

This brings us to Wolf v. Weinstein, supra, another

Chapter X case, which appellants say worked a radical

change in the law. They argue that after Wolf the flexi-

bility that traditionally inhered in a court of equity’s treat-

ment of applications for compensation no longer is per-

missible. We disagree. We believe that Wolf bears only

18 Our holdings in Berner and Silbiger have been followed by the Seventh

Cireuit in Chicago ¢ West Towns Rys. v. Friedman, 230 F.2d 364 (7

Cir.), cert. denied, 351 U.S. 943 (1956). There a law firm represented

both a committee of the debtor’s bondholders and a potential buyer

of the debtor. The Court of Appeals, in reducing the district court's

award from $12,000 to $7,000 because of the firm's involvement in a

clear conflict of interest hetween buyer and seller, recognized that the

district court could have disallowed the fee completely on the authority

of Woods. The Court of Appeals chose instead to follow the less harsh

rule” of Silbiger and Berner, which would impose a “penalty of less

than full forfeiture’. 230 F.2d at 369.

marginally, if at all, on the question presented by the

instant appeal.

The issue in Wolf was whether certain persons who had

traded in the debtor’s stock during the reorganization pro-

ceedings were fiduciaries so as to trigger the prohibition

against compensation provided in §249 of the Bankruptcy

Act.“ The district court held they were. We held they

were not. The Supreme Court agreed with the district

court. It was undisputed that 5249 would operate auto-

matically to deny all compensation to the President and

General Manager of the debtor if they were considered

“other person[s] acting in the proceedings in a.. . fidu-

ciary capacity” within the meaning of the statute. Wolf

involved who comes under the statute, not whether the

statute’s prohibition against compensation is absolute,

automatic, and admitting of no exceptions. The only ques-

tion before the Court was whether 5249 was meant to

broaden the classes of fiduciaries to be subjected to [the]

traditional sanction” of denying compensation. 372 U.S.

at 645. The Court held that it was.

In reaching its decision, the Court discussed the legis-

lative history and purpose of 5249. It treated the problem

essentially as one involving “the evil of insider trading by

fiduciaries during corporate reorganization.” Note, 37

Temp. L.Q. 342 (1964). This is quite apparent from its

discussion of 5249, together with 516 0b) of the Securities

Exchange Act of 1934, 15 U.S.C. §78p(b) (1970), as a dual

attack by Congress on a single problem, 372 U.S. at 643,

and its recognition of the “common origins and parallel

purposes of §249 and §16(b)”. Id. at 643 n. 11. The Court

noted with approval the suggestion of several courts “that

a paramount objective of 5249 was to check the misuse for

private gain of inside information or control, to which the

19 See note 17, supra.

23a

position of a representative or fiduciary gives him access.”

Id. at 642 n. 10. As in §16(b) cases, the Court had little

trouble in applying §249 without exception “[i]n the light

of its clearly revealed objectives.” Id. at 643.

The Court made it clear that 5249 is based on traditional

equitable principles. Even before 1938, when Congress

enacted §249 as part of the Chandler Act,

“$77B’s broad mandate that fees and allowances must

be ‘reasonable’ to merit judicial approval had been

held sufficient authority by two federal courts to sanc-

tion denial of compensation to persons holding fidu-

ciary positions in reorganization proceedings who had

traded in the Debtor’s stock. In re Paramount-Publia

Corp., 12 F.Supp. 823, 828, rev’d in part, 83 F.2d 406;

In re Republic Gas Corp., 35 F.Supp. 300. These deci-

sions found even in the general terms of the statute

the embodiment of ‘ancient equity rules governing the

conduct of trustees, including deprivation of compen-

sation where there is a departure from those rules.’

....” 372 US. at 641.

Appellants argue, on the basis of the Court’s recogni-

tion in Wolf of the roots of § 249 in equity, that that stat-

ute’s absolute prohibition against compensation should

apply by analogy to all cases involving fiduciaries’ appli-

cations for compensation. They seek to transform the

narrow holding of Wolf and its discussion about the ante-

cedents of 5 249 into a binding interpretation of the rule

of equity applicable to all applications for compensation

by fiduciaries. In this manner appellants attempt to avoid

the critical fact that Wolf dealt with a specific statutory

rule.

To recognize, however, that § 249 is based on equitable

principles, or even that it codifies the rule of certain equi-

24a

table decisions, does not reduce the broad realm of equity

to the requirements of § 249. The lesser does not include

the greater. Congress may have made the general rule

the only rule, without room for exception, for the purpose

of dealing with a particular form of breach by fiduciaries,

but it most assuredly did not purport to reach all kinds

of conflicts of interest. Granted that trading in the debtor’s

stock is a form of conflict of interest in which the fiduciary

is torn between his duty to the debtor and his own self-

interest. In a particular case the harm may vary in degree

and it may be more or less deserving of sanction than

other forms of breach of a fiduciary. Congress chose,

however, to single out insider trading as a form of dis-

loyalty particularly to be discouraged, even in cases of

little or no actual harm. Surely equity may deny all com-

pensation in other cases of disloyalty; but just as surely,

equity is not required to do so. The Supreme Court rec-

ognized this in Wolf when it stated that “there are various

forms of disloyalty or conflict of interest which would

disentitle an officer to compensation under general prin-

ciples of equity and quite without regard to any statutory

provision.” 372 U.S. at 647-48 (footnote omitted). In those

cases, however, traditional notions of equity govern; § 249

and Wolf are inapplicable.”

20 We are not persuaded by appellants’ argument that, because §249

gives effect to traditional equitable principles, the Supreme Court in

Wolf considered the admittedly harsh impact of 6249 to he revresenta-

tive of those principles, as embodied for example in Woods. By giving

effect to a specific statutory provision and noting that such effect was

not inconsistent with what had been done before, we do not believe

that the Court meant to equate §249 with the “traditional sanction”.

Although appellants are correct that the holding in Wolf is not that

6249 imposes a harsher penalty on certain fiduciaries than would gen

eral equitable principles, they fail to recognize that 6249 requires im

position of the penalty regardless of the equities. Section 249 may not

increase the harshness of the sanction in a particular case, but it in-

25a

Absent a statutory directive at least as clear as the

Court thought 5 249 to be, we see no warrant for requiring

a court of equity to close its eyes to the harshness of a

result “in proportion to the gravity of the breach.” Berner,

supra, 175 F.2d at 222. A majority of the Court in Wolf

was not troubled by the harshness of the result,? in part

because the result was

“wholly consistent with the uniform application of

[§ 249] by the lower courts. As the Court of Appeals

for the Second Circuit [had] recognized in an earlier

case, [this result may well work harshly in individual

cases. . . . But in § 249... Congress clearly intended

drastic results and thought them necessary to elimi-

nate the serious abuses of insider information which

had long been existent in equity reorganizations.’ ”

creases the frequency of the sanction and unshrinkingly compels its

imposition in every case in which it applies. Therein lies its harshness.

Despite the vigor with which appellants urge their “Woods/Wol/

synthesis", we think it is clear that Wolf deals only with 6249 and was

not intended to imply a radical change in one of equity's essential char-

acteristics. As one commentator has stated the distinction between the

rigid statutory bar of §249 and the more flexible equitable principles:

“The problem of Wolf v. Weinstein is a close and a difficult one.

It is not the question whether insider trading shall go unregulated

and uncontrolled. It is the problem whether it should be governed

by 6249, with its rigid penalty and its automatie impact or whether

it should be dealt with by the more flexible doctrines of equity. The

statutory remedy is more sure and direct in its impact; the equitable

one presents greater difficulties of proof, need not be as severe,

and can be tailored in its sanction to meet particular situations.”

Kaplan, Wolf v. Weinstein: Another Chapter on Insider Trading, 1963

S. Ct. Rev. 273, 290.

27 But see Mr. Justice Harlan's dissent:

“On that seore I fully agree with Judge Friendly that at ‘the very

least, courts are justified in demanding a clear indication of Con-

gressional purpose before inflicting’ such a ‘Draconian penalty’

(296 F.2d at 683) as the Court's decision now imposes on peti

tioners. .. .” 372 U.S. at 657.

27a

IV.

We turn next to the second question presented: whether

the reorganization court exercised sound discretion in

allowing the compensation and expenses in question. We

hold that it did.

372 U.S. at 654 (quoting Surface Transit, Inc. v. Saxe,

Bacon & O’Shea, 266 F.2d 862, 868 (2 Cir. 1959).“

The Court could hardly have made it more plain in Wolf

that universal harshness, absent a statutory directive, was

far from its intended result:

“In light of the seriousness of the abuses which the

statute was designed to prevent, it has been thought

that to allow e» exception or dispensation would

frustrate the aifest intent of Congress to impose

an effective prophylactie rule. That the rule occasion-

ally bars compensation to those whose conduct might

not have been considered inequitable or disloyal in

the absence of such a statute is no reason to suspend

or make selective the operation of the statute’s sanc-

tions.” 372 U.S. at 655-56 (footnote omitted).

We hold that the New Haven reorganization court here,

absent any statutory directive such as § 249, correctly con-

cluded that it had discretion as a court of equity to act on

the instant applications without being bound by an abso-

lute rule prohibiting compensation in a case of conflict of

interest regardless of the facts. We decline to alter the

essential nature of the equitable rule or to prohibit a

correction of law where it would be defective owing to its

universality.

22 Appellants argue that in Surface Transit we indicated that the —

eretionary approach of Berner, supra, might no longer be the law o

this Cireuit. We find it neither necessary nor appropriate for us to

rule on the effect of Surface Transit as a §249 case on Berner, for —

face Transit certainly does not undermine Judge Hand's view of equity's

discretion in the context of a case such as the instant one where that

statutory provision is not even arguably relevant.

Judge Anderson had presided over the New Haven re-

organization continuously since its inception in 1961. He

was fully aware of all the vicissitudes of the extraord-

inarily difficult and complex proceedings. He knew the

attorneys and parties involved. He was uniquely well

qualified to assess their respective contributions. He was

personally cognizant of all of the circumstances attending

Manufacturers’ conflict of interest, and was in the best

position to evaluate its bearing on the reorganization. He,

more than anyone else, knew the value of the assistance of

imaginative and cooperative creditor representatives in

helping with whatever steps were necessary to keep the

trains running. Under such circumstances, appellants have

a heavy burden of demonstrating that this experienced

judge, in dealing with the delicate situation presented by

Manufacturers’ application for compensation and expenses,

failed to act conscientiously and fairly—in short, that he

abused his discretion.

Although the reorganization court found a conflict of

interest on the part of Manufacturers, it made very clear

that Manufacturers was not at fault:

“The Manufacturers Hanover Trust Company, through

no action of its own, found itself in a position between

conflicting interests, as to each of which it was in a

position of indenture trustee. It could not help one

without hurting the other.” 421 F.Supp. at 266 (em-

phasis added).

28a

The italicized words emphasize the court’s critical finding

of fact with respect to the salient characteristic of this

conflict of interest: it was completely involuntary.

A basic tenet of trust law is that “[o]rdinarily a trustee

does not commit a breach of trust if he does not inten-

tionally or negligently do what he ought not to do or fail

to do what he ought to do.” Restatement (Second) of

Trusts §201 (1959), comment a. The element of voluntari-

ness is critical.“ Manufacturers did not commit a breach

of trust simply by finding itself between conflicting in-

terests when the Penn Central filed for reorganization.

If there was a breach at all, it would have occurred when

Manufacturers failed to extricate itself from the conflict.

The court, however, found that Manufacturers made

every possible effort to extricate itself. It was not until

the court decided to replace the bank with an individual

that a successor trustee could be found. It is true that all

concerned agreed that Manufacturers should have resigned

immediately from its trusteeships on one side or the other,

or both. The Chairman of the Board of Manufacturers

believed that that was the right thing to do. But that does

not support appellants’ assertion that the court would have

ordered Manufacturers to resign if it had petitioned the

court for instructions. To resign at the very moment the

bondholders needed representation at the hearings on

whether an equitable lien should be declared in New

23 Compare the undiscriminating effect of §249: ad

“It is not only voluntary purchases or sales of a debtor's securities

to which Section 249 applies. It denies compensation as well to

any person acting in a reorganization proceeding in a representa-

tive or fiduciary capacity for whose account claims against or secu-

rities of the debtor have been purchased or sold without the prior

consent or subsequent approval of the judge in the reorganization

proceeding. The bona fides of such purchases or sales is not mate-

rial under Section 249." In re Cosgrove-Meehan Coal Corp., 136

F.2d 3, 5-6 (3 Cir. 1943) (emphasis in original).

Haven’s favor would not have fulfilled Manufacturers’

fiduciary duties. Whatever Manufacturers did—resign and

leave the bondholders helpless or stay on in the middle of

a conflict—would not have comported with the duty it owed

to the bondholders on each side. In view of the irrebuttable

fact that Manufacturers was in a complete bind, the ques-

tion is whether there was anything Manufacturers could

have done that would save Manufacturers’ right to com-

pensation in the opinion of the successor trustees. Beyond

asserting that Manufacturers should have taken immediate

steps “to withdraw from one side or the other or both”,

appellants reply that Manufacturers should have peti-

tioned the court for instructions, see Mosser v. Darrow,

341 U.S. 267, 274 (1951) ; Silbiger v. Prudence Bonds Corp.,

supra, 180 F.2d at 921; Restatement (Second) of Trusts

§259 (1959), or should have taken the firm stand that it

would resign unless directed by the court to stay on. Al-

though such action on Manufacturers’ part would have

served immeasurably to clarify matters, we do not view

Manufacturers’ failure to do so as dispositive under the

circumstances of this case.

It is easy to look back years later and rethink Manu-

facturers’ alternatives. But viewing the situation realis-

tically, it is clear that the court was aware of the conflict ;

that Manufacturers was not trying to conceal anything ;

and that the court’s order that briefs be filed and a hearing

held on the equitable lien issue required immediate action

by all parties. Someone had to represent the bondholders

at the August 1970 hearing, which took place while the

search for a successor trustee was under way. Manufac-

turers had no sooner conceived the idea to resign than its

attorneys, on both sides, advised that it could not resign

without leaving the bondholders stranded. Thus, on the

advice of both of its firms of attorneys, Manufacturers

30a

chose the best possible alternative, by having each firm

represent separately the respective interests.“

Under such circumstances, a petition for instructions or

a gesture of resignation would have been futile. The law

does not require that one act in vain. Although a petition

for instructions might have been fruitful in assuring that

no question could be raised later about Manufacturers’

right to compensation, see Mosser v. Darrow, supra, 341

U.S. at 274, that is irrelevant to the question whether such

action would have better protected those to whom Manu-

facturers owed a fiduciary duty. It is unlikely that a peti-

tion for instructions would have resulted in any material

change in Manufacturers’ course of action. The likely

futility of petitioning for instructions distinguishes this

case from others in which the failure to seek instructions

was deemed significant. Yet even in Silbiger, supra, where

the court might well have instructed the attorney to cease

his representation of opposing interests and where nothing

justified the attorney’s failure to seek instructions from the

court, we held that the penalty of full forfeiture should be

ameliorated in the discretion of the district court.”

24 Appellants and the reorganization court discuss this so-called in-

sulation theory” as if it were an affirmative notion on the part of

Manufacturers. The opinion below states that Manufacturers’ “first

solution was to assign one of its lawyers to one side and another of

its lawyers to the other.” 421 F.Supp. at 265. This is perhaps an over

simplification in view of the facts related above about the history of

the merger of the respective trustees under the different indentures and

Manufacturers’ continuous use of separate counsel for what became the

two sides of this conflict. See ante at pp. 2443-2444. Indeed, the avail-

ability of separate counsel already representing each side was the

single positive fortuity in this very difficult situation.

25 We wish to emphasire that our holding in the instant case is not to

be construed as sanctioning dilution of the rule that a fiduciary in doubt

should petition the court for instructions. We merely hold that Manu-

facturers’ failure to do so under the unique circumstances of this case

does not operate as an automatic bar to Manufacturers’ compensation.

4

3la

Of crucial significance here is the undisputed fact that

the indenture trustee’s services and those of its counsel

were of tremendous value to the estate from 1961 until the

conflict arose in June 1970.“ No one has challenged the

value of those services.“ At oral argument appellants

corroborated appellees’ representation that the “vast ma-

jority of the claim” related to services rendered before

the conflict arose. Appellants stated that “the bulk of the

hours logged by Manufacturers and its lawyers without

question occurred prior to the conflict ....” This factor

properly was taken into account by the reorganization

court. The absolute principle that “an applicant [under

§249] who has engaged in forbidden transactions near the

end of the proceeding is to be denied compensation for all

26 The Restatement (Second) of Trusts §243 (1959), comment e, sets

out the following as guidelines for the exercises of a court's discretion

in deciding whether a trustee who has committed a breach of trust

a 1 a or whether his compensation should

“(1) whether the trustee acted in good faith or not; (2) whether

the breach of trust was intentional or negligent or without fault;

(3) whether the breach of trust related to the management of the

whole trust or related only to a part of the trust property; (4)

whether or not the breach of trust occasioned any loss and whether

if there has been a loss it has been made good by the ‘rustee; (5)

— the trustee’s services were of value to the trust.” (emphasis

In this case, Manufacturers beyond doubt acted in good fai

th and was

not at fault for the breach of trust. Although the breach concededly

affected the whole trust property and occasioned a loss, the court took

that into account in making Manufacturers’ compensation contingent

on New Haven's recoupment of the loss.

27 The court's opinion states that, had it not been for the existen

the conflict of interest, the reorganization court would, on — —

view, ordinarily [have found] that there was sufficient wnchallenged and

competent evidence to qualify [Manufacturers’ services] as legitimate

charges... . 421 F.Supp. at 263 (emphasis added). Appellants did

not challenge the value of the services before us. For this reason, we

find it neither necessary nor appropriate for us to review the reorgan-

ization court's exercise of discretion in passing on the applications for

compensation except to the extent relevant to the conflict of interest.

32a

services he has rendered to the Debtor, however valuable

those services may have been,” Wolf v. Weinstein, supra,

372 U.S. at 654, is no more applicable to this case than is

§249 itself.” To permit the New Haven estate to retain

the benefit of those services without paying for them would

amount to a windfall for the New Haven.

We hold that the court, having found a breach of fidu-

ciary duty, properly tailored the remedy to the nature of

the breach it found.

V.

Finally, we address ourselves, as the reorganization court

did, 421 F.Supp. at 267-69, to the different footings upon

which rest (1) the allowance to Manufacturers for its own

compensation and expenses, and (2) the allowance to Manu-

facturers for compensation and expenses of its attorneys.

Whatever may be said arguendo with respect to the merit

of the objections to the former, we hold that there is no

merit whatever to the objections to the latter.

Under §77(c)(12) Manufacturers as the indenture

trusteee filed an application covering both claims re-

ferred to above. The court granted the allowance for at-

torneys’ fees to the indenture trustee for and on account

of its attorneys, as an expense of the trustee, rather than

as direct compensation to the attorneys as claimants. In

this respect §77(c)(12) differs from 5242 of the Bank-

ruptey Act, 11 U.S.C. 5642 (1970), under which attorneys

for specified claimants may apply for compensation on

their own behalf.*® Appellants argue, based on this statu-

28 That the quoted sentence from Wolf refers specifically to §249 is

apparent from the Court's citation of In re Cosgreve-Meehan Coal Corp.,

136 F.2d 3 (3 Cir. 1943), which also dealt with §249.

29 Before passage of the Chandler Act in 1938, the predecessor of §77

(e) (12), then codified as 11 U.S.C. 6208 (e) (8), provided that the court

could,

“within such maximum limits as are fixed by the commission

allow a reasonable compensation for the services rendered and re-

ee ne eee

33a

tory pattern, that attorneys’ fees cannot be paid from the

estate when the claimant’s right to compensation is in

doubt or is denied because of a conflict of interest. On the

facts of this case we disagree. We hold that, even if Manu-

facturers were barred from receiving compensation for its

own services, the reorganization court would not have

abused its discretion in allowing attorneys’ fees to Manu-

facturers on behalf of Simpson Thacher.

We recognize, as appellants point out, that the discus-

sion of expenses in Woods is not really applicable here. In

imbursement for the actual and necessary expenses incurred in

connection with the proceeding and plan by officers, parties in in-

terest, reorgani:ation managers, and committees or other repre-

sentatives of creditors or stockholders, and the attorneys or agents

of any of the foregoing. .. .”

This language resembles that of 11 U.S.C. 6642. The present 677 (e) (12)

was proposed as an amendment during the debates on the Chandler Act.

Originally the proposed amendment did not provide for compensation

to any participants in a reorganization; it provided only for reimburse-

ment of actual and reasonable expenses. See 79 Cong. Rec. 13304 (1935).

Representative Sumners offered an amendment to proposed 677 (e) (12)

which became the present section. Jd. at 13307. In committee the

matter of compensating attorneys had been “one of the highly con-

troversial issues. “A large percentage of the committee felt that each

class should pay their own attorney fees. The committee rejected this

view, however, because it was thought that the difficulties of railroad

reorganization were too great to run the risk of creating a disincentive

to effective legal representation. [The committee was afraid to take

the responsibility to eliminate these fees. Id. (remarks of Rep. Sum-

ners). In the debates on the Senate bill, the House amendment was ex-

plained further:

“The present provisions of section 77 allow both expenses and

fees to be paid to the designated interested parties out of the

del tor's estate. . . . The House Judiciary Committee . . elim-

inated fees entirely, allowing only expenses. On further investiga-

tion it found that this was too rigorous. The effect of the amend-

ment is to allow expenses to all the interested parties and fees

only to trustees under indentures, depositaries, and such assistants

as are especially employed by the Commission with the approval

of the Judge.” Jd. at 13765 (remarks of Sen. Wheeler).

Thus compensation may be awarded only to a limited class of ap-

plieants, but compensation to attorneys may be allowed as a form of

expense.

34a

Woods the Supreme Court distinguished reimbursement of

expenses from compensation for services, explaining:

“The rule disallowing compensation because of con-

flicting interests may be equally effective to bar re-

covery of the expenditures made by a claimant sub-

ject to conflicting interests. Plainly expenditures are

not ‘proper’ within the meaning of I 242 of] the

[Bankruptcy] Act where the claimant cannot show

that they were made in furtherance of a project eæ-

clusively devoted to the interests of those whom the

claimant purported to represent. On the other hand,

those expenditures normally should be allowed which

have clearly benefited the estate. Thus where

taxes have been paid, needful repairs or additions to

the property have been made, or the like, equity does

not permit the estate to retain those benefits without

paying for them. Such classification of expenses, at

times difficult, rests in the sound discretion of the

bankruptcy court.” 312 U.S. at 269-70 (emphasis

added).

The Court did not have expenses such as attorneys’ fees

in mind since attorneys could apply directly to the court

for compensation. But the reasons for the difference be-

tween §§ 242 and 77(c)(12), see note 29 supra, are unre-

lated to the issue before us. Section 77(c)(12) therefore

should not be interpreted to impose a special burden on

a claimant in obtaining reimbursement of expenses which

would be allowed to the attorneys themselves if they could

make their own claim, as under § 242, and which qualify

as reimbursable expenses under the criteria articulated in

Woods. a

Applying the Woods criteria, we believe there can be no

doubt that the attorneys’ fees here in question were rea-

35a

sonable expenses which have clearly benefited the estate.“

Besides its participation in myriad facets of the New

Haven reorganization from its inception on July 7, 1961

until August 30, 1971, Simpson Thacher's services during

the New Haven Inclusion Cases litigation contributed sub-

stantially to the Supreme Court’s setting a purchase price

for the New Haven’s assets about $50 million higher than

the price agreed to by the New Haven trustees, or an in-

crease of about 40%. That the purchase price remains

unpaid is in no way attributable to Simpson Thacher."

Although the expenses mentioned in Woods (taxes, re-

pairs, additions, “or the like”) are more routine than

attorneys’ fees, and their propriety more easily discern-

ible, their benefit to the estate is not necessarily greater

than attorneys’ services. Evaluation of the benefit of the

attorneys’ services here is not a problem because of the

quantifiable value of the New Haven Inclusion Cases judg-

ment and Judge Anderson’s complete familiarity with the

entire course of this reorganization. Unlike repairs, pay-

ment of taxes, and the like, which usually do no more

than preserve the status quo, Simpson Thacher’s services

contributed very substantially to an increase in the value

of the estate’s assets. It truly would be inequitable to

permit the estate to retain those benefits without paying

for them.” 312 U.S. at 270.

30 Appellants contend that Simpson Thacher itself contributed to the

conflict of interest by advising Manufacturers not to resign and to have

the two sides of the conflict represented by separate counsel (the so-

called “insulation theory”). We do not accept the inference that this

legal advice was anything more than an informed choice of the lesser

of two evils. We therefore decline to amplify its significance. Simpson

Thacher had no dealings with or obligations to the Penn Central in-

terests. It therefore was not tainted itself by the conflict at all. What-

ever advice it gave Manufacturers was given solely in the best interests

of the New Haven interests.

36a

Appellants contend that it is Manufacturers’ respon-

sibility to pay the attorneys’ fees. We fail to see how

the fact of its conflict of interest makes Manufacturers,

which derived no benefit of its own from the legal repre-

seniation, responsible for paying Simpson Thacher, not-

withstanding Manufacturers’ assertion that it probably

would feel morally, but not legally, obligated to pay the

firm if the estate did not.

Surely the law firm’s work for the indenture trustee was

“a project exclusively devoted to the interests of those

whom the claimant purported to represent.” This factor

makes appellants’ reliance on Mosser v. Darrow, 341 U.S.

267 (1951); In re American Acoustics, Inc., 97 F.Supp. 586

(D. N. J. 1951); and In re Rite Carlton Restaurant & Hotel

Co., 60 F.Supp. 861 (D. N. J. 1945), misplaced.

In Mosser a reorganization trustee who himself did not

trade in securities of the debtor’s subsidiaries was sur-

charged for profits made by his two key employees on

the ground that he expressly permitted them to engage

in such trading. Without such permission the employees

would not have remained. We are mindful of the Court’s

observation in Mosser that the strict prohibitions on “prof-

iting out of [a] position of trust”, 341 U.S. at 273, “would

serve little purpose if the trustee were free to authorize

others to do what he is forbidden.” Id. at 271. That obser-

vation is not relevant to the relationship between Manu-

facturers and Simpson Thacher. Manufacturers did not

authorize Simpson Thacher to pursue the conflicting inter-

ests that Manufacturers were forbidden to pursue. Manu-

facturers authorized Simpson Thacher to provide the New

Haven interests the “loyal and disinterested service”,

Woods, supra, 312 U.S. at 268, which it knew to be a fidu-

ciarv’s obligation but which it realized it had become

unable to render. We believe that the facts of Mosser are

completely unlike those of the instant case. The Court in

37a

Mosser took note of the employees’ pursuit of self-interest

which was encouraged by the trustee. It was in that con-

text of a “willful and deliberate setting up of an interest

in employees adverse to that of the trust” that the Court

concluded, “We think that which the trustee had no right

to do he had no right to authorize, and that the transac-

tions were as forbidden for benefit of others as they would

have been on behalf of the trustee himself.” 341 U.S. at

272.

The attorneys who were denied compensation in Ameri-

can Acoustics and Ritz Carlton had represented conflicting

interests themselves. The attorney in American Acoustics

had no relationship to the trustee. He represented the

debtor, its creditors, and the mortgagee in possession, all

of whose interests were adverse. In Ritz Carlton the court

denied compensation to a trustee’s attorney when the trus-

tee himself was denied compensation because he had served

adverse interests. It is clear from the facts of Ritz Carl-

ton, although the point is not made explicitly by the court,

that in representing the trustee who had served adverse

interests, the attorney also had represented the adverse

interests. In such a situation it is understandable that the

trustee and his attorney should be treated alike. That,

however, is not the situation in the instant case. Here the

trustee and the attorneys self-consciously made sure that

whatever taint infected the trustee would not infect the

attorneys, so that the bondholders on either side would be

protected. We believe that the instant case is distinguish-

able from American Acoustics and Ritz Carlton.

We hold under this section of our opinion that the re-

organization court acted well within permissible bounds

of discretion in granting to Manufacturers an allowance

for compensation and expenses of its attorneys, whether

or not Manufacturers should have been compensated for

its own services. Under the circumstances we do not be-

lieve that the provision of § 77 (e) (12), by which the inden-

ture trustee claims compensation for its attorneys as an

expense, should alter what otherwise would be Simpson

Thacher’s clear right to compensation.

Affirmed.

39a

Relevant Portions of Opinion of the United States

District Court for the District of Connecticut

—249—

UNITED STATES DISTRICT COURT

D. Connecticut

No. 30226

—

In the Matter of the New Yorx, New Haven &

Hartrorp Rartroap Company,

Debtor.

—

June 30, 1976.

Opinion Supplemented and Clarified,

Aug. 23, 1976.

In proceedings for the reorganization of a railroad, ap-

plications were filed for compensation and for reimburse-

ment of expenses incurred on behalf of the bankrupt estate.

The Distriet Court, Robert P. Anderson, Cireuit Judge,

sitting by designation, held that the evidence established

that the applicants were entitled to, inter alia, expenses,

fees for services rendered as indenture trustees, and coun-

sel fees, in varying amounts.

Applications granted in part and denied in part

40a

—262—

3. MANUFACTURERS HANOVER TRUST COM-

PANY, as Indenture Trustee for the Debtor’s First and

Refunding Mortgage.

With regard to the expenses incurred by the indenture

trustee, none of the items has been contested. It is noted

—263—

that, as set out in the affidavit of Mr. Kaestnor, a Senior

Vice President of the petitioner, the item of $91,398.26, an

advance to Simpson, Thacher & Bartlett, has been properly

deleted because it is reimbursable. The court finds the

account of the sums expended is correct and that they were

reasonable and necessary. They are, therefore, approved

and allowed under § 77 (e) (12), and ordered to be paid as

hereinafter set forth by the reorganization trustee to the

petitioner in the amount of $103,018.34.

As far as services of the Manufacturers Hanover Trust

Company as indenture trustee are concerned, the court

would, on careful review, ordinarily find thet there was

sufficient unchallenged and competent evidence to qualify

them as legitimate.charges except for the fact that, subse-

quent to the Penn Central’s filing of its petition in reorgan-

ization while the Manufacturers Hanover Trust Company

was acting as indenture trustee for the New Haven’s First

and Refunding Mortgage (from which position it resigned

on June 21, 1971), it was required as indenture trustee for

New York Central and/or Pennsylvania Railroad bonds to

take certain actions against the interests of the estate of

the New Haven Railroad in bankruptcy and did so. The

circumstances were described in this court’s opinion and

order of August 20, 1975 in this case, which are repeated

as follows:

“It appears that Manufacturers, as indenture trustee

for the New Haven’s First and Refunding Mortgage,

4la

was on December 31, 1968 also indenture trustee for

18 mortgages of the New York Central and/or the

Pennsylvania Railroads then merged into the Penn

Central Transportation Company. This circumstance

produced no conflicts between the interests of the

various bondholders until after the Penn Central filed

its application for reorganization on June 21, 1970 and

after the Supreme Court decision in the New Haven

Inclusion Cases on June 29, 1970. In August, 1970 the

New Haven reorganization court called for statements

of position by the parties in interest relative to the

remand ordered by the Supreme Court in the Inclusion

Cases. There arose at that time an important issue

in which the Manufacturers, as indenture trustee for

the New Haven’s First and Refunding Mortgage and

represented by the Simpson, Thacher firm of attorneys,

was sharply at odds with the Manufacturers, as in-

denture trustee of the New York Central and Hudson

River Railroad Company Gold Bond mortgage [in

which capacity the same trust company was] rep-

resented by the Kelley, Drye firm of attorneys. On

June 21, 1971 Manufacturers resigned as indenture

trustee for the First and Refunding Mortgage of the

New Haven. As recently as July 21, 1975, the Manu-

facturers sought leave of the United States District

Court for the Eastern District of Pennsylvania to

resign as indenture trustee for New York Central and

Hudson River Railroad Company Gold Bond mortgage

dated June 1, 1897, because of potential conflict with

its former position as indenture trustee for the New

Haven mortgage. So far as is known, Manufacturers

continues to act as indenture trustee for the 17 re-

42a

maining mortgages. The Commission, therefore, will

have before it for a finding, the factual issue of

whether there has been and continues to be a conflict

in interest on the part of the Manufacturers as for-

mer indenture trustee for the New Haven’s First and

Refunding Mortgage and as indenture trustee for the

New York Central and/or Pennsylvania Ruilroad

mortgages, and whether, if such conflict has existed,

it has impeded or impedes in any way the New Haven

reorganization.”

The Manufacturers Hanover’s petition to the Penn

Central reorganization court to resign as indenture trustee

for the New York Central and Hudson River Railroad

Company Gold Bond Mortgage, dated June 1, 1897, was

granted by the Penn Central reorganization court. It is

undisputed that Manufacturers Hanover Trust Company

is continuing to act as indenture trustee fer each of the

several bond issues of the New York Central and/or Penn-

sylvania Railroads which have interests contrary to those

—264—

of the estate of the New Haven Railroad in reorganization.

Moreover, the Manufacturers Hanover Trust Company, as

indenture trustee of the New York Central and/or Penn-

sylvania Railroad bond issues, is of the opinion that it still

has a duty to assert, on behalf of the bondholders of those

issues, claims contrary to the interests of the New Haven

estate, so long as it is in the interests of and the desire of

the New York Central and/or Pennsylvania Railroad bond-

holders to do so.

The court finds that after the filing by the Penn Central

of its petition for reorganization on June 21, 1970 and the

filing of the judgment of the Supreme Court in the Inclusion

43a

Cases on June 29, 1970, the Manufacturers Hanover Trust

Company, as indenture trustee for the New Haven Rail-

road’s first mortgage bonds for nearly 25 years, 1941-1971.

faced a conflict of interest with its position as indenture

trustee for the New York Central and Hudson River Rail-

rcad Company Gold Bond Mortgage as well as it did with

its position as indenture trustee for the 17 other New York

Central and/or Pennsylvania Railroad bond issues. This

was dramatized by the successful action which Manufac-

turers Hanover, as indenture trustee for the Gold Bonds,

brought, through the attorneys for its trust department,

Kelley, Drye, Warren, Clark, Carr & Ellis, against the

New Haven reorganization trustee on the ground that the

New Haven reorganization court lacked jurisdiction, on

remand of the Inclusion Cases by the Supreme Court, to

pass upon the secured status of the New Haven’s claim for

payment for the New Haven’s sale and transfer of its

operating property.

The evidence shows that the Chairman of the Board of

Manufacturers Hanover Trust Company was of the opinion

that the Trust Company had become disqualified to con-

tinue to act as indenture trustee for all of the bond issues

in question, i. e., both that of the New Haven and the 18 of

the New York Central and/or Pennsylvania Railroads, and

he so advised the appropriate officers of the Trust Com-

pany. The court is in entire agreement with that opinion.

Although the Manufacturers Hanover, in apparent good

faith, sought to resign from all of them and at the same

time went to extraordinary lengths throughout the eastern

United States to get qualified corporate banks to agree to

act as successor indenture trustees, it was unable to do so.

It did find a successor for the Gold Bond issue and on

44a

September 4, 1975 the Manufacturers Hanover’s resigna-

tion, as indenture trustee for the Gold Bonds, was accepted

by the Penn Central reorganization court and the successor

indenture trustee was appointed. The New Haven reorgan-

ization court ran into the same problem when, by the

most diligent and thorough searches and inquiries by the

Manufacturers Hanover Trust Company, Simpson, Thacher

& Bartlett, its counsel, and the New Haven reorganization

trustee(s) and their counsel no bank could be found to act

as successor trustee for the New Haven’s first and refund-

ing mortgage bends. Although the underlying mortgage

itself specified that a successor trustee must be a qualified

bank, the court, on the basic principle that it cannot permit

a valid trust to fail for lack of a trustee, appointed

Lawrence W. Iannotti, Esquire, a qualified practicing

lawyer in New Haven, Connecticut, as successor indenture

trustee under the first and refunding mortgage 4% bond

issue of the New Haven Railroad. Later in January, 1972,

when the Chase Manhattan Bank, N.A., resigned, because

it was a creditor of the Penn Central, the court appointed

Jacob D. Zeldes, Esquire, a qualified practising lawyer

in Bridgeport, Connecticut, as successor indenture trustee

under the New Haven Railroad’s general mortgage (second

series income bonds). This is not to suggest that a sim-

ilar course should have been followed in the cases of the

remaining 17 New York Central and/or Pennsylvania

Railroad bond issues. For what it is worth, it is the opinion

of this court that, considering the size and complexity

of the Penn Central reorganization, such an arrangement

would probably be entirely impractical. It is also under-

standable that those carrying on the reorganization pro-

ceedings of the Penn Central would probably not rise to

45a

—265—

their feet with unanimous outbursts of enthusiasm to see

17 new successor trustees with 17 new counsel enter the

ballpark. Nevertheless the prospect of more problems

superimposed upon already existing ones of immense dif-

ficulty cannot operate to condone a breach of fiduciary

duty or justify it.

Simpson, Thacher & Bartlett, as Manufacturers Han-

over’s counsel, argue there was no breach of fiduciary duty

by the Trust Company for these reasons:

Where a bank, such as the Manufacturers Hanover Trust

Company, is trustee under two separate trusts and the

cestuis of the two trusts are on opposite sides of a contro-

versy involving the interests of the trusts, the bank can

avoid responsibility for a breach of fiduciary duty if it

arranges to have counsel for one department of the bank

appear in the controversy in the name of the bank, on

the side of one cestui (the New Haven); and also arranges

to have counsel for another department of the bank appear

in the controversy in the name of the bank on the side

of the other cestui (the Penn Central). In its reply brief

it said,

“Admittedly, a potential conflict of interest existed,

which Manufacturers had already recognized and

sought to avert. The essence of the problem Manu-

facturers faced was that it ran the risk of breaching

its fiduciary duty to one group of bondholders or the

other if it failed fully to represent their interests dur-

ing the time before it could resign.”

It, therefore, weighed the relative risks of liability if it

took or appeared to take one side or the other between

the two cestuis; its first solution was to assign one of its

46a

lawyers to one side and another one of its lawyers to the

other. The startling result was that, on opening court one

morning, the New Haven reorganization court was handed

a brief by the Simpson, Thacher firm from Manufacturers

Hanover Trust Company for the New Haven side of the

case, and it was then handed another brief by the Kelley,

Drye firm from the Manufacturers Hanover Trust Com-

pany for the other side of the same case. This may have

been (to adopt a remark by Prof. Freund) an exercise of

the delicate art of threading that fine line “between parti-

ality on the one hand and impartiality on the other.” But

it was not proper action by an indenture trustee. Manu-

facturers Hanover should have resigned from both, as its

Chairman had said, but apparently no one felt the neces-

sity of following through on his admonition. Even though

the Manufacturers Hanover is a very large banking in-

stitution, it cannot be excused by saying that it was so

large its right hand could not know what its left hand was

doing nor could it be excused by doing through its at-

torneys, and agents what it was forbidden to do as a

corporate person. Its next solution was to resign from

the indenture of the New Haven and much later, after

being granted leave by the Penn Central reorganization

court, it resigned as indenture trustee for the Gold Bond

mortgage bonds. Meanwhile it has continued as indenture

trustee for the remaining New York Central and/or

Pennsylvania Railroad bond issues.

In its capacity as the indenture trustee for these 17

issues, it asserts that it is its duty to oppose the claim of

the New Haven reorganization trustee. Manufacturers

Hanover’s counsel in its brief makes reference to the New

Haven reorganization trustee’s citation of Woods v. City

47a

National Bank d Trust Company of Chicago, supra, in

support of the disqualification of Manufacturers Hanover

Trust Company as indenture trustee for the New York

Central and/or Pennsylvania Railroad bonds; but, as

counsel for the Trust Company, Simpson, Thacher asserts

that there was no breach of fiduciary duty, and says:

“The [New Haven reorganization t]rustee’s discussion

of the conflicts question is based on Woods v. City

Nat l Bank & Trust Co., 312 U.S. 262, [61 S.Ct. 493, 85

L.Ed. 820] (1941). As the Trustee notes, ‘the essential

basis for the disallowance of these claims by the re-

organizt tion court was that the claimants were pursu-

ing interests of their own that were either of no

benefit to the estate or, more often, were adverse to it.’

(Trustee’s Statement, at 24). Woods, therefore, is

—266—

inapposite since Manufacturers neither pursued any

interest of its own nor pursued any interest adverse

to the estate.“

But it has “pursued [an] interest adverse to the New

Haven estate” in pursuing the interests of the 18 New

York Central and/or Pennsylvania Railroad indentures

and it declares it has a duty to continue to do so. That

is precisely what it has been doing over the past five years,

and the Woods case declares it to be a breach of fiduciary

duty. The law does not countenance such activity by a

fiduciary—even an indenture trustee. Woods v. City Na-

tional Bank d Trust Company of Chicago, supra; In re

Boston d Providence Corp., supra, 260 F.Supp. at 422.

Too much, of course, should not be read into or inferred

from such phrases as “breach of fiduciary trust” or “dis-

48a

qualified... as indenture trustee”. Such descriptive words

do not say or imply that the Trust Company indulged in

any conduct of a criminal nature or sought in any way to

take or use other persons’ property for its own use, or

otherwise acquire any personal gain for itself. The Man-

ufacturers Hanover Trust Company, through no action of

its own, found itself in a position between conflicting in-

terests, as to each of which it was in a position of indenture

trustee. It could not help one without hurting the other.

The Trust Company, as indenture trustee for the New

York Central and/or Pennsylvania Railroad indentures did

speak of resigning but was dissuaded from doing so. It

never took a strong stand for that proposition and never,

when contemplating its dilemma, refused to serve, following

this stand by pressing for or seeking an authoritative court

declaration of its rights and duties, as it should have done.

While it is clear that the breach of fiduciary duty by

the Manufacturers Hanover to the New Haven’s first

mortgage bondholders has impeded, and therefore damaged,

the New Haven reorganization trustee’s collection of the

sums owed the New Haven estate from the Penn Central

for the transferred properties of the New Haven and

has frustrated the further development of a plan of re-

organization for the New Haven, the extent of such damage

cannot be ascertained at the present time. Its measure

turns on the amount of money which the New Haven

estate will receive in payment of the Supreme Court’s

judgment on the price to be paid by the Penn Central for

the New Haven property. If the principal amount of that

purchase price is paid in full, the damage from the Man-

ufacturers Hanover’s breach of trust would be trivial and

de minimis. If no money were received by the New Haven

49a

on the purchase price, the damage would greatly exceed the

full amount of the Manufacturers Hanover claim for ser-

vices and expenses. If the purchase price payment were ul-

timately to fall somewhere between nothing and the entire

amount due under the terms of the judgment, the measure

of the damage inflicted by the Manufacturers Hanover

would go inversely up or down accordingly. The court

finds that the Manufacturers Hanover Trust Company, as

indenture trustee for the New Haven’s First and Refunding

Mortgage bonds, breached its fiduciary duty to the New

Haven estate in reorganization and has damaged it. While

Woods v. City National Bank d Trust Company of Chicago,

supra, authorized a complete disallowance of fees for serv-

ices and reimbursement of expenses, later cases in this

Cireuit and others have tempered this somewhat. See,

Berner v. Equitable Office Building Corp., 175 F.2d 218 (2

Cir. 1949); Silbiger v. Prudence Bonds Corp., 180 F. 2d 917

(2 Cir.), cert. denied 340 U.S. 813, 71 S.Ct. 40, 95 L.Ed.

597 (1950); Chicago d West Towns Rys. v. Friedman, 230

F.2d 364 (7 Cir.), cert. denied 351 U.S. 943; 76 S.Ct. 837,

100 L.Ed. 1469 (1956).

This court will allow Manufacturers Hanover Trust Com-

pany’s claim for reimbursement of expenses in full. There

has been no objection to them, qua proper expenditures,

they are found to have been reasonable and necessary and

they may be paid out of the debtor’s estate in the amount of

$103,018.34 as hereinafter directed.

In lieu of an absolute disallowance or reduction of the

*

Trust Company's petition for a fee for services as indenture

trustee for the New Haven's First and Refunding

Mortgage, the court will deal with its petition as follows:

The Trust Company's claim for services rendered in the

50a

amount of $304,416.67, or any recoverable part of it, is

ordered to be treated as contingent. The Manufacturers

Hanover Trust Company is ordered to accept in full accord

and satisfaction of the claimed sum and any and all claims

for services, rendered by it as indenture trustee for the

New Haven’s First and Refunding Mortgage in any man-

ner whatsoever, one-quarter (½) of one per cent. (1%)

of all payments made on and after the date of this judg-

ment, to the New Haven estate in reorganization, for and

on account of the purchase price, to be paid by the Penn

Central for properties of the New Haven, as fixed by the

judgment of the Supreme Court in the Inclusion Cases.

Said payment of . of 1% to the Manufacturers Hanover

Trust Company shall in no event exceed $304,416.67 and

no interest or other increments shall be added to this sum.

In the event that the Manufacturers Hanover Trust Com-

pany declines so to accept whatever may accrue to it under

the foregoing computation, the Trust Company’s claim for

services against the New Haven estate shall be disallowed

in toto.“

3(a). Simpson, Thacher d Bartlett, counsel for Manu-

facturers Hanover Trust Company, July 7, 1971-August

30, 1971.

Simpson, Thacher & Bartlett’s charges for attorneys’

fees, July 7, 1971-August 30, 1971, are presented as ex-

penses of the Manufacturers Hanover Trust Company as

indenture trustee for the New Haven’s First and Refund-

ing Mortgage.

This forfeiture provision is not intended to become operative

simply through the taking of an appeal from the judgment by the

Manufacturers Hanover Company.

5la

At the outset the court should call attention to the re-

marks made by the trustee for the debtor, in his statement

of position, relative to the Simpson, Thacher firm’s services

in this matter, involving its client’s breach of trust. They

are as follows:

“If the Court considers Manufacturers’ activities, in light

of its conflict of interest, to warrant either disallowance

or reduction of its fee, it is the Trustee’s position that

the Court should take into account that no question has

ever been raised concerning the conduct of its counsel,

Simpson, Thacher & Bartlett. Even though, as required

under § 77(c)(12), the petitioner is Manufacturers, rather

than its counsel, and even though counsel can theoretically

look to the client for payment, as a practical matter, a re-

duction in the amount allowed az reimbursement for legal

fees is likely to impact persons who, in the Trustee’s view,

have benefited the Estate and as to whom no misconduct

has even been intimated.” (Footnote omitted.)

Although the court disagrees with the conclusions reached

by counsel for the Manufacturers Hanover Trust Company

in its brief that there were sufficient reasons given by the

Trust Company to excuse it from a charge of breach of its

fiduciary duty as indenture trustee for the New Haven’s

First and Refunding Mortgage bonds, it does agree with

the statement by the New Haven reorganization trustee

relating to the Simpson, Thacher firm. Such deductions

as are made from the firm’s statement of its services to

the New Haven estate are for reasons which are in no way

connected with any breach of fiduciary trust by the Man-

ufacturers Hanover Trust Company.

The evidentiary material presented on behalf of the firm

by Horace McAfee, Esquire, a senior partner, in his affi-

52a

davit gave an excellent general narrative account of its

participation in the reorganization proceedings of the New

Haven Railroad from their inception on July 7, 1961 to

August 30, 1971. With this account there was attached a

thorough, detailed appendix which particularized every-

thing done by the Simpson, Thacher firm as counsel to the

indenture trustee for the New Haven’s First and Refunding

Mortgage bonds.

—268—

In general, the law firm of Simpson, Thacher & Bartlett,

as counsel for the indenture trustee, attended and par-

ticipated in every court hearing (other than a few which

were simply routine), which concerned the reorganization

of the New Haven Railroad. They also represented the

indenture trustee in the hearings before the three-judge

court in the Southern Distict of New York and at the

hearings held by the special master on the valuation of the

Grand Central Terminal Properties.

From time to time they met and conferred with the

reorganization trustees or trustee and their counsel on

various problems in the reorganization, including financing

(such as Trustees Certificates), tax problems, leasing of

cars and equipment, opposing harmful proposed amend-

ments to New York State tax laws, sales of pieces of

property subject to the mortgage of which Manufacturers

Hanover Trust Company was indenture trustee, involving

partial releases from the mortgage and the application

or use cf the proceeds, work on a plan of reorganization

of the Boston and J rovidence Railroad, representation of

the indenture trusie in aid of the New Haven estate

in reorganization concerning certain abandonment pro-

ceedings and an effort to discontinue the costly New Haven

Railroad passenger service, including a hearing before an

I. C. C. hearing examiner.

53a

With the reorganization trustees of the New Haven, and

cooperation of the United States Trust Company, as in-

denture trustee for the Harlem River Division Mortgage,

Simpson, Thacher played a very active and important role

including judicial proceedings before this court, the United

States Court of Appeals for the Second Circuit and peti-

tions for certiorari to the Supreme Court, in barring the

high priority claims of “six months” creditors of the New

Haven, including per diem claims for a total of approx-

imately $6,000,000.

After the reorganization trustees of the New Haven

had negotiated a tentative contract with the officers of the

Pennsylvania and New York Central Railroads, which were

seeking to merge, pursuant to which the New Haven re-

organization trustees were to turn over the transportation

plant of the New Haven Railroad to the merged railroads

for approximately $125,000,000, subject to the approval of

the New Haven reorganization court, the Pennsylvania and

New York Central Railroad negotiators requested and

were given to understand that the New Haven reorganiza-

tion trustees would not seek an increase in the amount of

the consideration to be paid by the merged Pennsylvania

and New York Central Railroads. The New Haven re-

organization trustees had thus established a beginning

and a foundation for an inclusion price. The agreement

never came before the reorganization court for approval

and it was routinely sent along to the I.C.C. for initial

study and action. All of the petitioners (or their predeces-

sors, as the case may be) took the position that the con-

sideration moving to the New Haven estate was wholly in-

adequate. As the New Haven reorganization trustees felt

disqualified to seek changes in the tentative contract be-

54a

cause of their understanding with the negotiators (a posi-

tion which the court understood and expressly approved),

the court left it entirely in the hands of the petitioners (or

their predecessors), at the time, to oppose the contract and

seek a larger payment or price for the property of the New

Haven. This involved pressing for disapproval of the

agreement by the I.C.C. which that body denied, hearings

before the three-judge court in the Southern District of

New York, a lengthy trial on review in the reorganization

court, followed, after a grant of certiorari, by briefing and

arguments before the Supreme Court. As counsel repre-

senting the indenture trustee for the New Haven’s First

and Refunding Mortgage bonds, Simpson, Thacher pulled

the laboring oar in presenting the case before the Com-

mission in the lower courts, and particularly in the Supreme

Court. The senior partner of Simpson, Thacher & Bartlett

prepared the brief and made the principal argument be-

fore the Supreme Court. He was ably seconded by the

arguments of Attorney Migdal for the Bondholders Com-

mittee, and by Attorney Auerbach, special counsel to the

—269—

reorganization trustee. Attorney Bushby of Dewey, Bal-

lantine, Bushby, Palmer & Wood, prepared and filed an

excellent brief.

The decision of the Supreme Court fixed the price to be

paid for the New Haven properties at $174,600,000. The

difference between this amount and approximately $125,-

000,000, i.e. $49,600,000, is roughly what the petitioners

claim is the portion of the judgment attributable to their

efforts except, they say, that there should be credited to

them errors in the I. C. C. computation which three of them

discovered. (1) The Dewey, Ballantine firm, counsel for

Chase Manhattan Bank, N.A., spotted a double countiag

553

by the I. C. C. of $16.2 million paid in taxes; (2) the Simp-

son, Thacher firm, as counsel for Manufacturers Hanover

Trust Company, discovered that cost of liquidation had not

been discounted to present value, resulting in an understate-

ment of $3,800,000; and (3) the Carter, Ledyard firm

found there was an error in the New Haven estate’s ap-

praiser’s valuation of the Bronx freight yards, resulting

in an underappraisal of $4,600,000. Disclosure of these

errors in the I. C. C. valuation determination added $24,-

600,000 to its computation and to the difference between

the first I. C. C. valuation and the ultimate price fixed by

the Supreme Court.

Another achievement to which Simpson, Thacher & Bart-

lett contributed was the holding by the Supreme Court

that the shares of stock of the Penn Central, to be used in

partial payment to the New Haven Railroad, particularly

in the light of Penn Central’s filing for reorganization under

§ 77, was substantially overvalued for the purpose of “un-

derwriting” the purchase price as ordered by this court

and that part of the case was remanded “to determine the

form that Penn Central’s consideration to New Haven

should properly take and the status of the New Haven estate

as a shareholder or creditor of Penn Central.” New Haven

Inclusion Cases, supra, 399 U.S. 392, at 489, 90 S.Ct. 2054,

at 2108, 26 L.Ed.2d 691.

The foregoing illustrative high points of the services

rendered by the Simpson, Thacher firm, if studied in con-

nection with the thorough review of the history of the New

Haven reorganization proceedings, contained in the Su-

preme Court opinion in the New Haven Inclusion Cases,

will reveal the complexity and, to a degree the novelty of

the wide variety of issues with which the firm was re-

quired to deal.

56a

The detailed account of the part it played and the con-

tribution it made to the reorganization proceedings, are

well set out in the affidavit of Horace J. McAfee, Esquire,

and the attached appendix, as mentioned above. The court

finds that the matters therein recited and the representa-

tions made are true and correct and that the fair and rea-

sonable value of their services as counsel to Manufacturers

Hanover Trust Company as indenture trustee for the New

Haven’s First and Refunding Mortgage bonds is $808,000,

plus such contingent addition as may later eventuate in

accordance with a provision hereinafter recited.

—273—

Orver SurrLEMENTING AND CLariryinc TRISA Covurt’s

Opinion or June 30, 1976

The Manufacturers Hanover Trust Company having filed

a petition for clarification of this court’s opinion, and cer-

tain respondents having filed answers and objections there-

to, and all parties in interest having been duly notified of

said petition and of the time and place assigned for hear-

ing thereon, and having been heard or having been given

an opportunity to be heard, this court now supplements and

clarifies its opinion as follows:

The allegedly unclear portion of the court’s June 30,

1976 opinion concerns the interpretation and application

of two sentences on page 266 which are: “Too much, of

course, should not be read into or inferred from such

phrases as ‘breach of fiduciary trust’ or ‘disqualified. . .

as indenture trustee’. Such descriptive words do not say

or imply that the Trust Company indulged in any conduct

of a criminal nature or sought in any way to take or use

57a

other persons property for its own use, or otherwise ac-

quire any personal gain for itself.” It still seems obvious

that the intent and purpose of these sentences were to

forfend against the drawing of extreme and unjustified

inferences by any of the parties in interest and by the

general public against this petitioner by equating the

phrase “breach of fiduciary trust” with criminal conduct

such as embezzlement and larceny or with civil conversion

or misappropriation of the trust res or a part of it. The

above quoted two sentences were included in the opinion

for the purpose above stated and no other. They are wholly

irrelevant to any claim of failure on the part of the peti-

tioner fully to carry out its equitable duties and obligations,

or any consequences thereof, as Indenture Trustee for the

New Haven bonds. The issues before the court at the time

—274—

the decision of June 30, 1976 was rendered, concerned only

the compensation of the petitioners and the reimbursement

of their expenditures.

The petitioner plainly breached its fiduciary duty to the

New Haven Railroad in reorganization and for five years

has continued to do so. It has expressly stated its inten-

tion to adhere to this position in the future and to oppose

and contest the claim of the New Haven estate in reorgani-

zation that the purchase price due for the New Haven’s

property, based upon the Supreme Court’s judgment against

the Penn Central in the Inclusion Cases, is secured by an

equitable lien. For the past three years, at least, the peti-

tioner has made no genuine effort to resign as Indenture

Trustee for the remaining 17 bond issues for which it is

still Indenture Trustee. In the light of all of these circum-

stances this court was unable to make an outright, uncondi-

tional award of compensation for services rendered the

58a

New Haven estate by the petitioner and therefore made it

contingent for obvious reasons.

This court in the proceedings on the petitions for com-

pensation and the judgment of June 30, 1976, did not ad-

judicate any past or future claim for damages based upon

a breach of fiduciary trust on the part of the Manufacturers

Hanover Trust Company as indenture trustee for the First

and Refunding Mortgage Bonds of the New Haven Rail-

road; and the finding of such a breach was made solely for

the purpose of disclosing the reason underscoring the con-

tingent nature of and the amount and time of payment of

compensation, if any, which might become payable to the

Trust Company. It was not intended to constitute a bar to

any defense the Trust Company might interpose in an

action for damages against it in any possible future litiga-

tion concerning its responsibilities as indenture trustee to

the estate of the New Haven Ralroad in reorganization.

The court retains and continues to retain jurisdiction

over the issues in this case and affirms its judgment of

June 30, 1976, discussed herein. It is so ordered.

59a

Excerpts of Testimony of Robert A. Byrne,

Vice-President of Manufacturers

(Transcript, May 18, 1976)

Cross Examination by Professor Moore:

Q. Well, Manufacturers did have a conflict of interest,

did it not, after at least Penn Central went into reorgani-

nation A. On June 20, 1970 when the Penn Central filed

for bankruptcy, we then felt that there was a potential

conflict at that time. Yes, sir.

Q. And you say “potential”. When did it in your mind

become actual? A. Well, we did the best we could. We

thought we were insulating ourselves from a conflict of

interest in that we assigned or retained separate counsel

to represent us in the Penn Central proceeding, Kelley,

Drye, Newhall and Cornelius, and Simpson, Thacher and

Bartlett in the New Haven proceedings. (Tr. 17-18)

Redirect Examination by Mr. Bader:

Q. Let me ask you a question. Prior to August 10, 1970,

had any discussions taken place within Manufacturers Han-

over Trust Company as to whether or not Manufacturers

Hanover should resign because there was a potential con-

flict of interest? A. Yes. There was.

Q. Do

This text is long and has been trimmed here. Open the source document for the complete record.