# Petition — Zeldes v. Manufacturers Hanover Trust Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_2027%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1977 - **Citation:** 434 U.S. 833 ## Text 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_2027%3A1. Public record. Not legal advice.