Opposition — Zeldes v. Manufacturers Hanover Trust Co.

Supreme Court, U. &

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tt IST

l

MICHAEL RODAK, JR. CLERK

IN THE

Supreme Court of the United States 7

October Term, 1976

No, 76-1794

IN THE MATTER OF THE New York, NEw HAVEN

AND HARTFORD RAILROAD COMPANY, Debtor

JACOB D. ZFELDES, Successor Indenture Trustee Under The New

York, New Haven and Hartford Railroad Company's General

Income Mortgage Dated as of July 1, 1947,

Petitioner,

Vv.

MANUFACTURERS HANOVER TRUST COMPANY, Former

Indenture Trustee Under The New York, New Haven and Hart-

ford Railroad Company's First and Refunding Mortgage Dated

as of July 1, 1947; and

RICHARD JOYCE SMITH, Trustee of the Property of The New

York, New Haven and Hartford Railroad Company, Debtor,

Respondents.

BRIEF OF RESPONDENT MANUFACTURERS

HANOVER TRUST COMPANY IN OPPOSITION

WHITNEY NorTH SEYMOUR

Counsel for Respondent

Manufacturers Hanover Trust Company

One Battery Park Plaza

New York, New York 10004

ALBERT X. Baper, Jr.

WILLIAM K. BLOMOQUIST

SIMPSON THACHER & BARTLETT,

Of Counsel.

TABLE OF CONTENTS

PAGE

IEEE PS 1

Counterstatement o/ Questions Presented ......... 2

Counterstatement of the Case .................... 3

Reasons for Denying the Writ ................... 7

TE ook os csc ev acunce éeccecees 7

I. There Has Been No Showing of an Abuse of

Discretion by the Reorganization Court in its

Careful Exercise of the Traditional Powers of a

ETO 8

ll. The Decision Below Does Not Conflict With

Kither This Court’s Decision in the Woods Case

or with Decisions of Other Courts of Appeals .. 10

ILI. Petitioner’s Reliance Upon Wolf v. Wein-

stein and Other Cases Construing § 249 of the

Bankruptey Act, is Misplaced ................ 15

Ce cbeccctecoces 17

il

TABLE OF AUTHORITIES

PAGE

CasEs

American United Mutual Life Ins. Co. v. City of

Avon Park, 311 U.S. 138 (1940) ....... oc'es sky Bey ae

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

ee 2: eee rye err 11, 12

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

{ 9 eR eter roy Le Te 13, 14

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

364 (7th Cir.), cert. denied sub nom. Elward v.

Friedman, 351 U. S. 943 (1956) .............. 12

In re Inland Gas Corp., 309 F.2d 176 (6th Cir.

BD. hi caVivewsinens cbbcdusndecedeetaendsen 16

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

SE. cvccieancontdissebdsckesaies chtcatbases 13, 15

Mosser v. Darrow, 341 U.S. 267 (1951) ......... 16

New Haven Inclusion Cases, 399 U. S. 392 (1970) 3

In re New York, New Haven & Hartford RR., 457

F.2d 683 (2d Cir.), cert. denied, 409 U. S. 890

CHD n.d bikdddsa ss Senin Kacsdeen ewer coeate ts 6

SEC v. Chenery Corp., 318 U. S. 80 (1943) ...... 11

SEC v. United States Realty & Improvement Co.,

SED U, GH. Ge Geb waodecvevacscscsesdccss Bi

Silbiger v. Prudence Bonds Cerp., 180 F.2d 917

(2d Cir.), cert denied, 340 U. S. 813 and sub

nom. Prudence Bonds Corp. v. Silbiger, 340

Os Ge GD veh édeds sive cececcsecs<ves 11,12

Surface Transit, Inc. v. Saxe, Bacon & O’Shea,

266 F.2d 862 (2d Cir.), cert. denied, 361 U.S. 862

ERED évccdevecdcaccuvecdccictotasaeausndess 16

Wolf v. Weinstein, 372 U. 8. 633 (1963) ......... 15, 16

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

Cr, i ee CHD .ccecadusteasceietices 10, 11, 14, 15, 16

Young v. Potts, 161 F.2d 597 (6th Cir. 1947) .... 14,15

OR RE RE me

iii

PAGE

STaTuTEs

Bankruptey Act, Section 77, 11 U.S. C. > Fre 2

Bankruptcy Act, Section 249, 11 U. S. C. § 649... 13-16

Securities Exchange Act of 1934, Section 16(b

15 U. S. C. § 78 p(b) a, ee

iwhécws puedes benuabes cn tt 15

OrnerR Mareriaus

Restatement (Second) of Trusts, § 170, Comment

EE FU bLs dake iheseatcaxekesicacel, 5)

IN THE

Supreme Court of the United States

October Term, 1976

No. 76-1794

()

Vv

Ix tHe Marrer or THe New Yoru, New Haven

AND Hartrorp Raitroavp Company, Debtor

Jacos D. ZeLpes, 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,

v.

M.nuracturers Hanover Trust Company, Former In-

denture 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 Company,

Debtor,

Respondents.

{)

BRIEF OF MANUFACTURERS HANOVER

TRUST COMPANY IN OPPOSITION

Preliminary Statement

This brief is submitted on behalf of Manufacturers Han-

over Trust Company (‘‘Manufacturers’’) in opposition

to the Pe‘ition for Certiorari filed by Jacob D. Zeldes,

Successor Indenture Trustee under the General Income

Mortgage of The New York, New Haven and Hartford Rail-

road Company (‘‘New Haven’’) to review a unanimous

decision of the Court of Appeals for the Second Circuit

which affirmed, so far as appealed, a decision of the District

Court for the District of Connecticut, sitting as a Court for

the Reorganization of a Railroad under Section 77 of the

Bankruptey Act, 11 U.S.C. § 205, determining fees and al-

iowances, including attorneys’ fees of certain trustees and

former trustees.

Counterstatement of Questions Presented

The opinion of the Court of Appeals accurately sets

forth the questions presented:

(1) ‘‘Whether the New Haven reorganization

court as a court of equity, had the authority, absent

a specifie 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 repre-

sented conflicting interests under very unusual cir-

cumstances; and

(2) if so, whether the reorganization court ex-

ercised sound discretion in allowing the compensa-

tion and expenses in question’? (App. 3a).*

*For convenience, we refer to record references in the following

fashion:

References to the appendix attached to the Petition for

Certiorari are cited as “App. a.”

References to the Petition for Certiorari are cited as “Pet.

References to the Joint Appendix on Appeal to the Second

Circuit are cited as “Jt. App. A “d

Counterstatement of the Case

A clear and orderly statement of the facts pertinent

here is found in the decision of the Court of Appeals

(App. 3a-l4a). However, because of certain errors in

the Petition, and to acquaint the Court with the most

important elements of the ‘‘unusual circumstances”’ empha-

sized by the Court of Appeals, the following points are

noted here:

First, Petitioner persists in asserting that the Court of

Appeals had no grounds for its unequivocal findings that

Manufacturers made every possible effort to extricate itself

from a sudden, unexpected and involuntary conflict situa-

tion and fully informed the Reorganization Court, which

had supervised the New Haven reorganization from the

beginning, of its predicament (Pet. 8-9; App. 8a, 28a-29a).

The situation arose when, eight days before this Court’s

decision in the New Haven Inclusion Cases, 399 U.S. 392

(June 29, 1970), the Penn Central Transportation Com-

pany (Penn Central)* filed its petition for reorganization

in the District Court in Philadelphia.

After careful consideration, the Court of Appeals unani-

mously approved the Reorganization Court’s exercise of

its plenary discretion which Petitioner here challenges

anew. Petitioner again asserts (Pet. 10, fn. 3) that there

1) . » -vidence to support Manufacturers’ statement that it

h informed both the New Haven and Penn Central

rev.ganizat.... courts’? (Court of Appeals Opinion, App.

8a) of the couflict situation when it suddenly arose. As

was pointed out to the Court of Appeals, this erroneous

assertion completely ignores the sworn statements of

Horace J. McAfee (dated June 12, 1975), a senior partner

of the firm representing Manufacturers, which was part of

* The surviving entity after the merger of the Pennsylvania Rail-

non ai (Penn) and the New York Central Railroad Company

entral).

Manufacturers’ application for an allowance, that (1) in

July 1970, he advised counsel for the New Haven Reorgani-

zation Trustee and then the Trustee himself that Manufac-

turers had a potential conflict of interest because of its

trusteeships of the New Haven and the Central, and would

seek a qualified successor and resign, and asked the Trus-

tee’s counsel to so inform the Reorganization Court, and

that (2) in September 1970, Mr, MeAfee spoke with Judge

Anderson about Manufacturers’ decision to resign because

of the conflicts and about its efforts to find a successor (Jt.

App. A 220-221)." | Mr, MeAfee was tendered on two occa-

sions for cross-examination at a hearing before the Reor-

ganization Court on May 18, 1976, at which Petitioner was

present (Jt. App. A 365-366, 382). Petitioner had no

questions for Mr. McAfee and did not question his affidavit.

Thus, the record completely supports the Court of Appeals’

finding on this matter.

Second, Petitioner ignores the facts, fully supported in

the record below and specifically found by the Court of

Appeals, that immediately after Penn Central’s bank-

ruptey, on June 21, 1970 Manufacturers, realizing the po-

tential for conflict in its situation, took immediate action

to find a qualified successor trustee for the New Haven’s

First Mortgage and resign (App. 8a).

The record is clear that Manufacturers promptly under-

took an exhaustive search for a corporate trustee qualified

to sueceed it under the New Haven First Mortgage. The

broad scope of that search was well known to the Reorgani-

zation Court (Jt. App. A 510) and was acknowledged by

the Court of Appeals (App. 8a).

When it became apparent in the spring of 1971 that,

despite these efforts, it was unlikely that any qualified

* Indeed, the Reorganization Court noted that it had itself tried

to find qualified corporate successor trustees without success.

ee

ae

corporate successor trustee free from conflicts similar to

those of Manufacturers and willing to undertake the trust

could be found, the Reorganization Court, at Manufac-

turers’ request, directed the appointment of a suecessor

individual trustee in order that the trust of the New Haven

First Mortgage might not fail for want of a trustee.

Upon the confirmation of Mr. Lannotti as successor

trustee, any brief conflict which might have existed with

respect to Manufacturers terminated since all fiduciary

obligations* of Manufacturers to the New Haven cestuis

ceased, Thereafter, Manufacturers had no further parti-

cipation in the New Haven reorganization proceedings,

except in matters relating directly to its fee application.

Thus, Petitioner’s assertions based on the existence of

a continuing conflict are groundless.

Third, it is not the case, as Petitioner would have it,

that ‘‘Manufacturers ... had hired two counsel who had

taken directly conflicting positions on the central issue

facing [sic] reorganization. ...’’ (Pet. 4). Manufacturers

Trust Company, whose general counsel was Simpson

Thacher & Bartlett (‘Simpson Thacher’’), and who served

as trustee under the New Haven’s First and Refunding

Mortgage since 1947, merged in September 1961 with The

Hanover Bank (‘‘ Hanover’’). Hanover, whose counsel was

Kelley Drye & Warren (as it is now known), had since

the 1890’s served as trustee under various Central mort-

gages. Thus, these representations were inherited, not

confected,

When it was suddenly faced, by reason of the Reor-

ganization Court’s order and notice of August 10, 1970,

with important questions relating to the reorganization of

_ ™ Other, of course, than a continuing obligation not to make any

improper use of its former fiduciary position, an act of which there

has been not the slightest suggestion during the course of these pro-

“oot See Restatement (Second) of Trusts § 170, comment g

the New Haven and of the Penn Central, rather than de-

fault in its then existing obligations to each group of ces-

duis, Manufacturers instructed both of its counsel to espouse

positions which were in the best interests of each group of

cestuis. ‘lo the extent that there was any alleged conflict

in that brief period before the New Haven trusteeship

could be resyonsibly resigned, it was a conflict in legal posi-

tions taken by counsel in papers publicly filed with the New

Haven Reorganization Court, which ultimately decided in

favor of the position of the New Haven representatives,

This was not a controversy between Manufacturers and

Manufacturers, as Petitioner would have it. It was one

between the New Haven interests (which sought an equit-

able lien and constructive trust and supported the juris-

diction of the New Haven Reorganization Court) and the

Penn Central interests (which opposed the equitable lien

and constructive trust and opposed the New Haven Court’s

jurisdiction). Each position was upheld by numerous well

qualified and capable counsel, The fight was in the open;

it was waged through filed briefs and at public hearings

before the courts. The Court of Appeals was fully familiar

with the controversy and all its implications for it ulti-

mately reversed the Reorganization Court’s decision, and

sustained the Penn Central’s position. Jn re New York,

New Haven & Hartford R.R., 457 F.2d 683 (2d Cir.),

cert, denied, 409 U.S, 890 (1972).

Thus, in sontrast to Petitioner’s implication, the involve-

ment of different counsel representing two different view-

points in the New Haven reorganization proceedings in

the second half of 1970 was the fortuitous result of historical

allocations of work among counsel.* This sudden dilemma

* The Court of Appeals commented, “Indeed, the availability of

separate counsel already representing each side was the single positive

fortuity in this very difficult situation.” (App. 30a, fn. 24)

was resolved in the only practical manner, and there was

no departure from the most conscientious standards of

fiduciary responsibility,

Reasons for Denying the Writ

Summary

As the Court of Appeals recognized, this is a unique

case, and one singularly appropriate for resolution by a

‘wise and comprehending chancellor’’ (App. 3a), Because

of the Penn Central bankruptey, Manufacturers, which

had for almost 10 years labored single-mindedly on behalf

of the cestuis of the New Haven mortgage, suddenly found

itself also obligated to act as a fiduciary for the contrary

interests of the cestuis of Central mortgages. This unique

dilemma was, as recognized by the Court of Appeals, wholly

involuntary and due to no fault of Manufactr rers,

While it was seeking to find qualified successors and

then to resign, Manufacturers was obligated to represent

these competing interests in a litigation which was then

on-going. It made no secret of what it was doing or of the

problem it faced; it so advised both reorganization courts

and both sets of reorganization trustees, It authorized each

of its counsel to take the necessary legal steps to defend

the respective interests of the cestuis they represented,

while it proceeded with its efforts to find those successors

and resign.

Contrary to Petitioner’s assertion, this case presents

no broad question of federal bankruptey policy. The Re-

organization Court’s decision, which the Court of Appeals

unanimously affirmed, was a careful exercise of its tradi-

tional discretion as a court of equity on the specific facts

before it. It refleets no error or abuse of authority, in

light of the special facts with which the courts below have

dealt. The result is plainly equitable and correct.

As to the alleged conflict between the decisions below

and those of this Court and of other Courts of Appeals,

none has been shown. Rather, the cases reflect a consistent

recognition of the well-settled principle that a reorganiza-

tion court, as a court of equity, has discretion, absent

an explicit statutory mandate to the contrary, to allow or to

deny compensation and reimbursement to trustees and

their counsel.

I, There Has Been No Showing of an Abuse of Discre-

tion by the Reorganization Court in its Careful Exercise

of the Traditional Powers of a Court of Equity.

As seon as it became apparent to senior management

of Manufacturers in July 1970 that, upon the filing of Penn

Central’s petition for reorganization, Manufacturers faced

a unique dilemma between its duties as the New Haven

Indenture Trustee and its duties as Indenture Trustee for

Penn Central mortgages, the bank immediately commenced

steps, consistent with its obligations to all its cestuis,

to take orderly and appropriate action to resign. However,

realizing that it would be improper arbitrarily and sum-

marily to cease carrying out its fiduciary functions for its

New Haven and Penn Central cestuis, Manufacturers did

three things: (1) it advised both Reorganization Courts

that it had a conflict which it intended to cure by resigning

as soon as it could find qualified successors; (2) it embarked

upon an active search for such qualified successors; and

(3) through its respective counsel it continued to represent

the positions of the respective cestuis.

Nevertheless, according to Petitioner, any conflict—

however brief, however technical, however involuntary—

worked an immediate forfeiture of any and all compensa-

tion. Judge Timbers, writing for a unanimous Court of

Appeals, totally rejected these contentions of Petitioner,

pointing out that Manufacturers

‘* . , 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 chose the best possible

alternative. . . .’’ (App. 29-30a, emphasis in the

original).

We respectfully submit that Petitioner has misinter-

preted the applicable provisions of trust law in his

analysis of Manufacturers’ obligations to its New Haven

cestuis, Judge Anderson has exercised uninterrupted judi-

cial supervision of the New Haven reorganization for a

period of more than sixteen years. It is beyond dispute

that he is intimately familiar with these proceedings and

in the best position to have judged the propriety of the

actions by Manufacturers.

After a consideration of voluminous supporting ma-

terial and based upon its knowledge of the facts, the Re-

organization Court made the awards challenged here. As

the Court of Appeals pointed out, to reach the contrary

conclusion urged by Petitioner would ‘‘. . . strip the re-

organization court as a court of equity of its authority to

exercise sound diseretion’’ and ‘‘. , . would render equity

inequitable.’ (App. 15a). We do not believe that Manu-

facturers, having involuntarily and through no fault of its

own (as has been concluded by both courts below) found

itself in an impossible situation, was obligated to throw up

its hands and do nothing to protect its cestuis to avoid en-

dangering its just compensation for ten years of diligent

service prior to that time. To the contrary, we submit that

10

had Manufacturers abandoned its fiduciary obligations it

might have exposed itself to proper censure by the Reor-

ganization Court. The nature and value of the services

rendered during those ten years are fully set forth in the

record, ef. Jt. App. A 516-A 520; no one questions them.

Judge Anderson applied what he regarded as a proper

penalty for the conflict he found by making Manufacturers’

compensation contingent. No equitable considerations

suggest that a reorganization court should not have such

discretion or that it was abused here,

Il. The Decision Below Does Not Conflict With Either

This Court’s Decision in the Woods Case or with Deci-

sions of Other Courts of Appeals.

Petitioner argues that the decisions below are in con-

fliet with Woods vy. City National Bank & Trust Co., 312

U.S. 262 (1941) because, in his view, Woods requires auto-

matic disallowance of fees and expenses whenever a reor-

ganization court finds conduct which it characterizes as

involving a ‘‘conflict of interest’’ or ‘‘breach of trust’’, As

the Court of Appeals recognized (App. 16a-19a), this was

not the holding of Woods. Woods reinstated a decision of

a reorganization court exercising its discretion to day

allowances to self-dealing trustees and their self-de:* ag

counsel,

As the Court below noted, the fact pattern in Woods

was:

. in sharp contrast to that in the instant case.

There, claims for compensation were filed by an in-

denture trustee, the members of a bondholders’ com-

mittee, and the committee’s counsel. The bond-

holders’ committee, originally organized by the in-

denture trustee, included employees of the indenture

trustee’s corporate reorganization department as

11

well as employees of an underwriter heavily in-

terested 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 in-

denture trustee represented the depositing bond-

holders who were interested in having a low upset

price fixed for the debtor’s property, the nondeposit-

ing bondholders who were interested in a high upset

price, and a large stockholder who sought a favor-

able position in the reorganization at the expense

of both. The essential ground upon which the reor-

ganization court disallowed the claims for compen-

sation was that the claimants were pursuing interests

of their own that were either of no benefit to the

estate or were adverse to it.’’ (App. 17a, fn. 14)

This Court noted in SEC v. Chenery Corp., 318 U.S. 80,

89 (1943) that:

‘‘Woods v. City Bank Co., 312 U.S. 262, held

only that a bankruptcy court, in the exercise of its

plenary power to review fees and expenses in con-

nection with a reorganization proceeding under

Chapter X of the Chandler Act, 52 Stat. 840, could

deny compensation to protective committees repre-

senting conflicting interests.’’

Cf., with respect to the broad equitable power of a bank-

ruptey court, American United Mutual Life Ins. Co. v.

City of Avon Park, 311 U.S. 138, 146 (1940); SEC v.

United States Realty & Improvement Co., 310 U.S. 434,

455 (1940).

The Second Cireuit in Berner v. Equitable Office Bldg.

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

12

Bonds Corp., 180 F.2d 917 (2d Cir. 1950), consistent with

the teachings of Woods, has recognized the power of a dis-

trict court, in its discretion, to grant or deny fees to a fidu-

ciary in a reorganization proceeding who had acted

disloyally (in Berner, an attorney who had disclosed inside

information; in Silbiger, an attorney who had represented

two classes of bondholders, whose interests conflicted). In

the latter case, this Court denied a petition for certiorari

filed by the Trustee and supported by the SEC, sub nom.

Prudenve Bonds Corp. vy. Silbiger, 340 U.S. 831 (1950),

alleging, inter alia, that that decision was in conflict with

Woods.* See also Chicago € West Towns Rys. v. Friedman,

230 F.2d 364 (7th Cir.), cert. denied sub nom. Elward v.

Friedman, 351 U.S. 943 (1956), where the court found a

conflict of interest which petitioning attorneys had taken

some trouble to conceal. The court affirmed a reduced

award, saying (230 F.2d at 369):

‘‘Authority exists for the disallowance of ail fees

[citing Woods]. But in several reorganization cases

a less harsh rule has been adopted. A _ penalty

of less than full forfeiture was approved in [Silbiger

and Berner]. We may decide the extent of the

penalty.’’

Clearly, Judge Anderson understood that upon deciding

there had been a conflict of interest, he was empowered in

the exercise of his discretion to deny compensation. Neither

Berner nor Silbiger questions that power. What they do

recognize, as did Judge Anderson, is that a chancellor

having a view to all of the circumstances, may, in his dis-

cretion, award compensation and apply limits which his

* Petitioner cites only 340 U.S. 813, where this Court denied the

attorney’s petition.

13

discretion ay suggest. So, we submit, do the other Courts

of Appeals.*

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

cited by petitioner (Pet. 23) as indicating a contrary view

on the part of the Third Circuit, in fact deals with trans-

actions specifically prohibited under Section 249 of the

Bankruptey Act. Discussing Woods and American United

Mutual Life Insurance Co, v. City of Avon Park, supra, the

court stated : .

‘‘They hold, as already pointed out, that the bank-

ruptey court had plenary power to deny compensa-

tion to a fiduciary in a reorganization proceeding

‘where an actual conflict of interest exists’ regardless

of whether ‘fraud or unfairness’ resulted.’’ 159 F.2d

at 346.

Finding that there was such a conflict, the Cireuit Court

affirmed the decision of the District Court to deny compen-

sation.

In Carey v. Selected Investments Corporation, 319 F.2d

578 (10th Cir. 1963) cited by Petitioner (Pet. 22) as being in

conflict with the Second Circuit’s decision here, the Tenth

Circuit noted,

‘‘Section 241 of the Bankruptcy Act . . . provides

in presently pertinent part that the judge may allow

reasonable compensation to the attorney for the

debtor. Under such grant, the court has implied

plenary power to review a claim for services of that

kind and to disallow it if the attorney at the time

of the rendition of the services also represented

* Instructively, Petitioner has never previously referred to any of

the decisions of Courts of Appeals he now claims are in conflict with

the decisions below.

14

another party or parties having interests in conflict

with those of the debtor’’,

citing Woods, 319 F.2d at 580, and thereupon affirmed the

determination of the District Court denying compensation.

Thus, both the Third and the Tenth Circuits, contrary to

Petitioner’s claim, are consistent with the Second and

Seventh Circuits in recognizing the discretion of the Re-

organization Court to grant, modify or deny compensation

when faced with a conflict of interest or a breach of trust.

Young v. Potts, 161 F.2d 597 (6th Cir. 1947), was an

action for an accounting against a stockholder-lawyer who

had taken an appeal on behalf of a class of stockholders

and then sold his shares and the appeal for a substantial

premium. In a subsequent accounting action, he sought to

credit against the judgment for the premium his expenses

and those of his law partner incurred in taking the appeal

he had sold. While it is not clear from the opinion whether

the decision of the Sixth Circuit disallowing any credit for

fees and expenses was based upon the fact situation there

presented, upon the absolute proscription in Section 249

of the Bankruptey Act, 11 U. S. C. § 649, diseussed infra,*

or upon the court’s construction of the Woods and Avon

Park cases, Young v. Potts, an obvious self-dealing case, is

plainly not applicable to the facts here.

* Petitioner’s quotations from Young v. Potts (Pet. 22) clearly

relate to the court’s discussion of Section 249 of the Bankruptcy

Act. The full quotation is:

“No credit will be allowed to Potts as compensation for his

own time, or for fees to counsel or out-of-pocket expenses. The

courts have repeatedly pointed out in interpreting Section [249

of the Bankruptcy Act], that trafficking in the securities of the

debtor has been one of the most persistent evils in reorganization

[citations omitted]. Potts gambled at his own risk. The gamble

failed and he must foot the bill.” 161 F.2d at 600.

Cd ae SRS Ce at wt

Ill. Petitioners’ Reliance Upon Wolf v. Weinstein and

Other Cases Construing § 249 of the Bankruptcy Act,

is Misplaced. |

As we have noted, and as the Courts of Appeals have

consistently recognized, there are situations where Congress

has, by statute, limited the discretion of reorganization

courts to grant fees and allowances. Section 249 of the

Bankruptey Act, 11 U.S.C. § 649, which precludes any al-

lowance for fees or expenses to a reorganization fiduciary

who has engaged in insider trading, is such a statute. Wolf

v. Weimstein, 372 U.S. 633 (1963), deals with the definition

of the scope of that statute, specifically, whether responsible

managing employees are fiduciaries within the meaning of

§ 249.* This Court held that they were, and therefore were

subject to § 249’s absolute prohibition. In light of its de-

cision as to the reach of the statute, the Court found no

room to apply traditional equitable principles in mitigation,

such as the de minimis rule and the power of the chancellor

to limit the forfeiture to future payments. Wolf v. Wein-

stein, supra, 372 U.S. at 654-55."*

Petitioner’s reliance upon Wolf and other § 249 cases,

e.g., In re Midland United Co., supra; Young v. Potts,

supra, ig misplaced. No one contends that § 249 applies

here. The Second Circuit properly rejected Petitioner’s

efforts to synthesize from this Court’s decisions in Woods

and Wolf a single doctrine barring all fees and allowances.

It stated ‘‘we believe that Wolf bears only marginally, if

* Section 249 is a companion statute to Section 16(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78 p(b). See Wolf

v. Weinstein, supra, 372 U.S. at 643, fn. 11.

** Petitioner refers to this passage (Pet. 18, 24), but fails to

recognize that this Court’s discussion relates to the statutory penalty.

The sentence he quotes is followed by this statement: “Thus the

policies of the statute afford no alternative but to order the restitution

of all amounts. . . .” 372 U.S. at 654.

16

at all, on the question presented by the instant appeal’’

(App. 21a-22a).*

While In re Inland Gas Corp., 309 F.2d 176 (6th Cir.

1962), cited by Petitioner (Pet. 26-27), invokes, as Peti-

tioner avers, a rule of ‘‘strict enforcement’’, it is a rule

of ‘‘strict enforcement of the Section 249, although often

resulting in an obvious financial hardship, [which] is neces-

sary in order to discourage and eliminate’’

‘*trafficking in the securities of the debtor [,] ... one

of the most persistent evils in reorganization which

Congress attempted to eliminate in its enactment of

Section 249 of the [Bankruptcy] Act, [citing Young

v. Potts, supra, and Surface Transit, Inc. v. Saze,

Bacon & O'Shea, 266 F.2d 862 (2d Cir.), cert. denied,

361 U.S. 862 (1959) ].’’ 309 F.2d at 181.

Thus, contrary to Petitioner’s assertion, there is no

broad Wolf-Woods synthesis which precludes compensation

and reimbursement on the facts of this case, but rather a

general recognition of the equitable discretion of the reor-

ganization court, subject to specific statutory exceptions.

* Petitioner’s reliance (Pet. 25, 26) on Mosser v. Darrow, 341

U.S. 267 (1951), is also misplaced. He ignores the fact that Mosser

was not an allowance case but a self-dealing case. The Court held in

Mosser that a bankruptcy trustee—who had authorized and failed to

disclose a conflict of interest between his employees and the bank-

rupts—could be surcharged for the employees’ profits. The trustee

employed two assistants in managing bankrupt holding companies on

terms which permitted those employees to trade for their own profit

in the securities of the companies at the same time as the trustee was

purchasing them. The trustee made no disclosure of this agreement.

“Indeed, it appears that he did not even disclose this feature of the

transaction to his own counsel.” 341 U.S. at 274. The Mosser case

clearly does not require the unfair result which Petitioner asks this

Court to impose.

17

Conclusion

The decision of the court below, affirming the decision

of the Reorganization Court so far as appealed from, is

correct and does not present an issue warranting review by

this Court. There has been no showing of any conflict

between the decision below and that of other circuits or of

this Court. No question of general federal reorganization

or bankruptcy policy is involved. The petition should be

denied.

Respectfully submitted,

Wuuitney Nortu SEYMouR

Counsel for Respondent

Manufacturers Hanover Trust

Company

One Battery Park Plaza

New York, New York 10004

Axserr X. Baper, Jr.

Wun K. Biomauist

Simpson TuHacuer & Bartiert,

Of Counsel.