Brief for the Respondent in Opposition — Prudence-Bonds Corp. v. Silbiger

IN THE

Supreme Court of the United States

OCTOBER TERM, 1949

No. 785

PrupEence-Bonps Corporation (New Corporation),

Petitioner,

against

SaMveL Sieicer, et al.,

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.

BRIEF FOR RESPONDENT WEIL, GOTSHAL

& MANGES, IN OPPOSITION

Opinion Below

The opinion of the court of appeals for the second cir-

cuit is as yet unreported but appears at R. 755-787. The

opinion of the district court appears at R. 318-322.

Jurisdiction

The decree of the circuit court of appeals was entered

on March 7, 1950 (R. 765). Petitions for rehearing filed

in that court were denied on April 5, 1950 (R. 786). The

jurisdiction of this court is invoked under Section 240(a)

of the Judicial Code, as amended, 28 U. S. C., Section

347(a) and Section 24(c) of the Bankruptey Act, as

amended, 11 U. 8. C., Section 47(e).

Questions Presented

The questions presented, insofar as they affect respond-

ent Weil, Gotshal & Manges, are:

(1) Assuming a client had two interests in conflict

with each other, can an attorney, who was retained

for and served only one of those interests, served

that interest loyally and served no other interest, be

held to have served conflicting interests so as to

require the denial of compensation to him?

(2) Does the Bankruptey Act ieyuire the denial .

of any allowance of compensation to an attorney whose

client, without the knowledge of the attorney, pur-

chased and sold securities of the corporation in re-

organization?

Statute Involved

The Bankruptcy Act, as amended, provides in pertinent

part:

Section 242 (11 U.S. C. Section 642). “The judge

may allow reasonable compensation for services ren-

dered and reimbursement for proper costs and ex-

penses incurred in connection with the administration

of an estate in a proceeding under this chapter * * *

* * * cl *

“(2) by any other parties in interest * * *; and

“(3) by the attorneys * * * for any of the fore-

going * * dad

Section 243 (11 U. 5. C. Section 643). “The judge

may allow reasonable compensation for services ren-

dered and reimbursement for proper costs and ex-

penses incurred by creditors * * * and the attorneys

for any of them, * * * in connection with the adminis-

tration of the estate. * * *.”

3

Section 249 (11 U.S. C. Section 649). “ * * * No com-

pensation or reimbursement shall be allowed to any

committee 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,

without the prior consent or subsequent approval of

the judge, been otherwise acquired or transferred.

* * #99

Statement

Respondent Weil, Gotshal & Manges has been awarded

an allowance of $20,000 for its services in the “Construc-

tion Proceeding”. That proceeding was necessary in

order to determine whether a “surplus”, existing in the

principal accounts of certain of the bond series, should be

used to pay interest in full on the publicly held bonds

of those “surplus” series in accordance with their original

tenor, or should be allocated to the payment of subordinate

bonds in the “surplus” series, and any balance remaining

thereafter, prorated among the so-called “deficit series”.

Determination of this question meant a gain or loss to

the public bondholders of the Fifth Series of $360,610.22,

and a gain or loss to the public bondholders of all the

“surplus” series of $1,994,453.79 (R. 168-169).

Until this problem arose, the public bondholders of all

series (both “surplus” and “deficit” series) had no di-

vergent interests. Accordingly, the New Corporation (the

petitioner herein) was able to and did act on behalf of

all series. However, when this problem of construction

arose, the New Corporation took the position that it must

remain neutral by reason of the divergent interests of

“surplus” series on the one hand, and “deficit” series on

the other (R. 288). It thus became necessary for those

‘The petitioner has set forth a brief summary of the various

proceedings in this Reorganization at pp. 4-9 of the petition. The

details of the Construction Proceeding appear at pp. 6-9 of the

petition.

+

bondholders who desired to protect their interests to in-

tervene in the proceedings (R. 359).

Respondent Weil, Gotshal & Manges was retained by

James L. White and several other public bondholders

to intervene in the Fifth Series (a “surplus” series) in

which they held bonds. This respondent thereupon took

the position that the publicly held bonds in each series

were entitled to be paid interest in full, in accordance

with their original tenor, before there could be any sur-

plus for distribution to subordinate bondholders in the

particular “surplus” series, and “deficit” series bond-

holders thereafter (R. 260-264). The special master to

whom the matter was referred took a contrary view in

which position he was sustained by the district court. An

appeal from the order of the district court was taken

by this respondent Weil, Gotshal & Manges and by re-

spondent Samuel Silbiger (R. 265). No other attorneys

so undertook to protect the rights of the public bond-

holders of the “surplus” series. On appeal, the court of

appeals for the second circuit reversed the district court

and held that the publicly held bonds were entitled to

full interest in accordance with their original tenor. At

this point in the proceeding, the petitioner, who had as-

serted that it must remain neutral, joined in a petition

to this court for the granting of a writ of certiorari.

Again, only respondent Weil, Gotshal & Manges and re-

spondent Silbiger defended the rights of public bond-

holders of the “surplus” series by opposing the granting

of the writ. This court denied the petition.

Thereafter, the matter of the present allowances came

on before the district court and was referred to a special

master for the taking of testimony. At the hearings be-

fore the special master the following pertinent facts with

respect to respondent Weil, Gotshal & Manges were dis- ,

closed and were in no respect disputed:

(1) Respondent Weil, Gotshal & Manges was re-

tained and appeared in the Fifth Series only (R. 609-

610, 353, 355, 571-572).

SOLES IT SIM TE LAA RE ER —— ‘

5

(2) Respondent Weil, Gotshal & Manges at all tomes

advocated the claims only of the Fifth Seres puble

bondholders (R. 351).

(3) Respondent Weil, Gotshal & Manges had ne

knowledge of its client’s bond holdings in series other

than the Fifth until immediately prior to the hearings

on allowances (R. 570-571).

(4) Neither respondent Weil, Gotshal & Mangws,

nor any member of that firm, traded in the securities

of the debtor corporation (Petition, p. 20).

(5) Respondent Weil, Gotshal & Manges had no

knowledge that its clients had traded in the seeurities

of the debtor corporation until immediately prior to

the hearings on allowances (R. 570-571).

Argument

Petitioner claims that the allowance awarded to respond-

ent Weil, Gotshal & Manges (and we here restrict our-

selves solely to that respondent) is improper on two

grounds, firstly, that this respondent served conflicting

interests, and secondly, that Section 249 of the Bankruptcy

Act requires the denial of any allowance to this respond-

ent.

1. The Charge of Conflict of Interests

It is contended by the petitioner that, in view of the

fact that the clients of respondent Weil, Gotshal & Manges

owned bonds in both “surplus” and “deficit” series, these

clients had conflicting interests; since respondent Weil,

Gotshal & Manges served these clients, they necessarily

served “conflicting” interests. Hence, it is claimed, under

the doctrine of Woods v. City National Bank & Trust Co.,

312 U. S. 262, compensation should be denied this re-

spondent.

6

This argument is utterly fallacious. True, the clients

of this respondent held bonds in both “surplus” and

“deficit” series. They chose to press the claims of one

of these interests. Thus, it is undisputed that this re-

spondent was retained by its clients to represent them

as bondholders of the Fifth Series only, and instructed

this respondent to take the position it did. Respondent

represented bondholders of no other series. Moreover,

petitioner concedes (Petition, p. 10) that Weil, Gotshal

& Manges “confined their activities in the Construction

Proceeding to the Fifth Series” and, again, that Weil,

Gotshal & Manges “advocated in the Construction Pro-

ceeding the side of the surplus series” (Petition, p. 11). |

This respondent thus served the interests of their clients |

only insofar as they held bonds in the Fifth Series. (In |

fact, as appears above, this respondent knew of no other

interests of their clients.) By so doing, it served the

interests of all bondholders of the Fifth Series as well

as all other “surplus” series. It did not “serve individual

interests in conflict with the interests of the class” (public

bondholders of “surplus” series) as petitioner claims

(Petition, p. 21). On the contrary, the individual interests

(i.e., Fifth Series interests) served by respondent Weil,

Gotshal & Manges were identical with the interests of the

class.

The fact that the clients held bonds in other series in

no way affected the representation by Weil, Gotshal &

Manges of their interests in the Fifth Series. Weil, Gotshal

& Manges retained only in the Fifth Series, served one

master only, a Fifth Series master and served that master

consistently, undividedly, and well (R. 267). The pro-

priety of this respondent’s behavior, under these circum-

stances, cannot be questioned.

Spm asa AONE AT AIO ASE EY NE NOSE OAT A PRET ATED atti

REA Ra a ieee ni ee PEO NNER ~ cg

2. Client’s Dealings in Securities of the Debtor

The second contention made by petitioner is that since

the clients of respondent Weil, Gotshal & Manges traded

in the securities of the debtor during the pendency of

the proceeding, Weil, Gotshal & Manges should be denied

compensation in accordance with Section 249 of the Bank-

ruptey Act.

This contention is equally without foundation. Section

249 denies compensation to

“any committee or attorney, or other person acting

in the proceeding 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, without the prior consent or subsequent

approval of the judge, been otherwise acquired or

transferred.”

Respondent Weil, Gotsha! & Manges here seeks com-

pensation in its own right by virtue of Sections 242-243

of the Bankruptcy Act. It is undisputed that neither re-

spondent Weil, Gotshal & Manges, nor any member of

that firm traded in the securities of the debtor (Petition,

p. 20). Petitioner seeks to have compensation denied to

said respondent on account of trading, unknown to re-

spondent, by the clients.

Of course, any disability visited by Section 249 is a per-

sonal disability, extended only in rare instances to the

trading of a wife or partner on the basis of the assumed

benefit to the applicant. No case is cited by petitioner

for the proposition that an attorney must be denied com-

pensation on account of trading by his client. Moreover,

in the case cited by petitioner to buttress its contention,

the chairman of a committee was denied compensation

for having himself traded in the securities of subsidiaries

of the debtor corporation. Yet, this prevented neither

y,

8

the remaining members of the committee nor the attor-

neys representing the committee from being awarded com-

pensation. (In re Midland United Company, 64 F. Supp.

399, affd. 159 F. (2) 340.)

Again, in In re Mortgage Guarantee Company (40 F.

Supp. 226, 237, 238), the disability of a client by virtue of

Section 249 was specifically held not to extend to that

client’s attorney who was allowed compensation. This

view of the statute is approved by leading authorities.

Thus, it is stated in Collier on Bankruptey, Vol. 6, 14th

Edition, p. 4592:

“The fact that a representative of creditors is barred

from an allowance by virtue of § 249 will not prevent

the making of an allowance to i < counsel who has not

participated in any transfers prohibited by the sec-

tion, * =?

We submit that the position advocated by the petitioner

is clearly not the law. If, indeed, it were, it would only

be in the rare situation that the interests of small creditors

and minority groups would be protected in a situation such

as arose in the instant case. Clearly, if attorneys had here

known that they might be deprived of any allowance be-

cause, unknown to them, their clients held securities in

other series or traded in securities of the debtor, they

would have been extremely reluctant to embark on proceed-

ings which have been as protracted as this proceeding.

The present Bankruptcy Act, and more particularly its

revisions with respect to allowances, was intended to

democratize reorganization proceedings by encouraging the

participation of small creditors and minority groups. Such

groups could rarely obtain representation if petitioner’s

contentions were sound. Obviously, small creditors could

not undertake to compensate counsel fully for their services

in complicated and protracted proceedings of this kind.

Consequently, the Bankruptcy Act in order to assure such

representation, provided for payment of attorneys’ com-

pensation out of the estate. But, if petitioner’s position

9

is correct, the purpose of the latter provision would be

nullified. Few attorneys would undertake such represen-

tation where an allowance was wholly dependent on the acts

of a client beyond control of the attorney. As Judge

Learned Hand said in the court below:

“To charge him with his client’s dealings would

compel him, at the risk of losing all his labor, either to

keep an eye upon those dealings (which in practice

would be so irritating as to imperil the continuance of

their relations) ; or blindly to put any right to be paid

at his client’s mercy.”

Actually, mere “watching” of the client would be of no

avail. No attorney could be expected to prevent a client

from purchasing securities of the debtor where the client

was determined so to do.

We submit that the petitioner’s contentions find no sup-

port in either the applicable statutes or the pertinent deci-

sions. Furthermore the acceptance of such contentions

would lead to such absurd results as to demonstrate the

complete fallaciousness of its position. For, if respondent

Weil, Gotshal & Manges represented the entire class of pub-

licly held bonds in all “surplus” series, as necessarily con-

tended by petitioner, then said respondent would be de-

barred from any allowance if any of the thousands of pub-

lic bondholders of the entire class traded in the bonds of

any series or even owned a single bond in one of the

“deficit” series.

Bree

10

Conclusion

This brief has been restricted to the questions presented

insofar as they relate to respondent Weil, Gotshal &

Manges. We respectfully submit that in view of the lack

of conflict on these questions and in view of the fact that

petitioner’s contentions with respect to these questions

raise no issues which require further review by this Court,

certiorari should be denied in respect to respondent Weil,

Gotshal & Manges.

WeiL, GotsHaL & MANGEs,

Respondent.

Frank L. Wer,

Epwarp C. WALLACE,

Mitton HasELKoRN,

of Counsel.

May, 1950.

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