Petition for Writ of Certiorari — Cohen v. Glass

APR 1 1955

HAROLD B, WILEY, Clerk

“Supreme Court of the Rnited States

OCTOBER, 1954 TERM

. 698

Sorme D. Conen and Meyer Kravsuaar, Executors of the

Estate of William W. Cohen, Deceased,

Petitioners,

against

Bussiz G. Giass, Executrix of the Estate of J oseph Glass,

Deceased, Joszrx P, Tumutry, Jz., Executor of the Estate

of Joseph P. Tumulty, Deceased, and Mropie States Perro-

tzum CorPoraTION,

: Respondents.

_ PETITION OF SOPHIE D. COHEN AND MEYER

_ KRAUSHAAR, AS EXECUTORS OF THE ESTATE

_ OF WILLIAM W. COHEN, DECEASED, FOR A WRIT

_ OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE SECOND CIRCUIT

Meyer Kravusnaar,

Attorney for Petitioners,

42 Broadway,

New York 4, N. Y.

er corn TWO HIICcw POOR COPY

_

——

INDEX

PAGE

Opinions Below Sie at »

Jurisdiction Eee ates. Se ae

Statutes Involved Be ruNries, 2

Questions Presented Cis Saimin Sas

igs cpg pet pig 4. oN TEED LTE ESN RENE 4

Reasons for Allowing the Writ... 13

Conclusion 0. pbebecesacutnces: RE TS pierces Syma

og i cceicng ee ee Oe

TABLE OF CASES CITED

tinder, Re, 137 Ohio St. 26, 129 A. L. R. 130. 14

Bond & Mortgage Guarantee Co., In re, 303 N. Y.

IPG Hine tans ers elt et 14, 15

Case v. Los Angeles Lumber Co., 308 U.S. 106.

Consolidated Rock Products Co. y. DuBois, 312 U.S.

ea Nek ie LD ATOR RS

Detroit Trust Company v. Mason, 309 Mich. 281, 306.. 14

Dodds v. MeColgan, 229 App. Div. 273.00... 5

merich vy. City Bank Farmers Trust Co., 300 N. Y.417 15

Minnegan v. MeGuffog, 203 N. Y. 342... :C«WYW

First National Bank v. Basham, 238 Ala. 500, 125

Kirst National Bank of Cincinnati v. Flersheim, 290

U.S. 504

Glover v. National Bank of Commerce, 156 App. Div.

247

Gutterson & Gould v. Lebanon Iron & Steel Co., 151

a ea te alin hace eis

Harkin v. Brundage, 276 U.S. 36.....................

Holmberg v. Armbrecht, 327 U.S. 392...

Hubbell’s Will, In re, 302 N. Y. 246... ae

Jackson v. Simith, 254 U.S. 586...

Lightfoot v. Davis, 198 N. Y. 261

Litton v. Pepper, 208 U. 8. 295, 306-7._____

Magruder v. Drary, 236 0. 5. 1066 Fk.

Martin v. Luster, 85 Fed. (2) 833 (7th Cir.), cert. den.

300 UL S. 667 sinc tiatasipiomtedseneluldantatbilantitaceaadpicete

Marvin v. Brooks, 94 N. Y. 71... COs Pn mie

Meinhard v. Salmon, 249 N. Y. 458._..______

Merriam v. Wimpfheimer, 25 F. Supp. 405, 408...

Michigan v. Michigan Trust Co., 286 U.S. 384... pers

Michoud v. Girod, 4 How. (U. 8S.) 502

Mosser v. Darrow, 341 U.S. 267.

Nasaba Corporation v. Harfred Realty Corporation,

ae. te ie RED Nee enn cae eniee Soe enee hemor eens

National Surety Co. v. Coriell, 289 U. S. 426...

Northern Finance Corp. v. Byrnes, 5 F. 2d 11, 12-18

oy a es EpSM SREB IM ance we

Northern Pacifie R. Co. v. Boyd, 228 U.S. 482

Sage v. Culver, 147 N. Y. 241...

Sedgwick’s Will, In re, 74 Ohio App. 444, 59 N. E. 2d

RE GG ores

Shapiro v. Wilgus, 287 U.S. 348. nner

eS ee rmrrarEe wary

oP SOT TAR Re

PAGE

PAGE

Spallholz v. Sheldon, 216 N.Y. 200 enc nceneeeoe Betnclee, 15

Sprague v. Ticonic National Bank, 307 U.S. 161... 13

Taylor v. Standard Gas & Electric Co., 306 U.S. 307. 14

Vernon Metal & Produce Co. v. Joseph Joseph &

II INI, Ste ae

Weber v. Empire Holding Corp., 149 Ore. 503, 41. P.

a MN hea oe he eae fase al aceuiias crane cavaimionn 14

Weil v. Neary, 278 U. S. 160... 13

Weadt ¥: Temes, 2 A. 3. oo. <3) ee

Woods vy. City Natl. Bank & Trust Co., 312 U.S. 2620. 15

STATUTES CITED

Civil Praetiece Act of the State of New York, Article 2:

ESE is PAR oct on nook Recaro Nee 2

Section 48, Subdiv. 5......... hbeemtiotes Re ee eee ee cae ed 2. 34

I MR ice eet ad UL ST eo cnceaentonaiis z

Tete 21 &. © Sete 1900)) ..... a

AUTHORITIES CITED

Drinker, Legal Ethies (1953) 74, 108-106, 109 2000 =—10

Glenn on Fraudulent Conveyances, Rev. Ed., Vol. 1,

Sections 222, 224, 225, pp. 386, 388, 389-393... 14-15

Restatement of Trust, Section 170.000 oo eee 14

Tardy’s Smith on Receivers, 2 Ed. (1920), Section 610,

Tee, Bert Sao. Be 3tee. 14

4 Am. Jur. Section SOA, on. 2 14

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Supreme Court of the United States

OCTOBER, 1954 TERM

Sopu1e D. CoHEN and Meyer Krausnuaar, Executors of the

Estate of William W. Cohen, Deceased,

Petitioners,

against

Bessie G, Guass, Executrix of the Estate of Joseph Glass,

Deceased, JosepH P. Tumutty, Jr., Executor of the Estate

of Joseph P. Tumulty, Deceased, and Mippie States Perro-

LEUM CORPORATION,

Respondents.

PETITION OF SOPHIE D. COHEN AND MEYER

KRAUSHAAR, AS EXECUTORS OF THE ESTATE

OF WILLIAM W. COHEN, DECEASED, FOR A WRIT

OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE SECOND CIRCUIT

To the Honorable Chief Justice and the Honorable Asso-

ciate Justices of the Supreme Court of the United States:

Petitioners pray for a writ of certiorari to review a

judgment of the United States Court of Appeals for the

Second Circuit entered January 11, 1955, affirming by a

divided court the judgment of the District Court for the

Southern District of New York entered May 21, 1954,

amending a judgment entered January 4, 1952, insofar as

the said judgments, both original and as modified, deny

all motions for surcharge on the final report and _ final

accounting of Joseph P. Tumulty and Joseph Glass, as

Receivers of United Oil Producers Corporation, and deny

a recovery against Middle States Petroleum Corporation

in favor of the estate of United Oil Producers Corporation

ental Se IE

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or any of those claiming through said estate, and whic!)

said judgments discharge both said Joseph P. Tumulty and

Joseph Glass as Receivers of United Oil Producers Corpo

ration, and insofar as said judgments dismiss the general

charges of fraud and conspiracy and disiniss petitioners’

specific claims of fraud and conspiracy. (Typewritten Sup

plemental Record and pp. 9a-13a.)

The title of the cause in which said judgments were en

tered is set forth in the opinion of the Court of Appeals,

found in the appendix (p. 2017).

Motion for rehearing was demed February 21, 1955.

(See appendix, p. 2131). Decision on appellate costs March

Oo.)

dm

25, 1955, see appendix, p. 21

Opinions Below

The District Court’s opinion is reported at 124 F. Supp.

728. It may be found in the appendix to the objectants.

appellants’ brief, Vol. 1, pp. l4a-178a.

The opinions in the Court of Appeals for the Seeond

Circuit are reported in 154 F. 2d 978; 156 F. 2d 697; 208 F.

2d 836; 210 F. 2d 360; and the final opinion rendered Jan-

uary 11, 1955, is as yet unreported, and the opinion on re-

hearing dated February 21, 1955, as yet is unreported. The

decision on appellate costs made March 25, 1955, is as vet

unreported.

All the opinions in the Court of Appeals may be found in

the appendix.

Jurisdiction

The jurisdiction of this court is invoked under ‘Title 2s

0.8. C. 411).

Statutes Involved

Civil Practice Act of the State of New York, being

Article 2, §§ 24, 48 Subdiv. 5, and 55, set forth in the

appendix (p. 2207).

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--*

™

Questions Presented

|. Did the receivers, appointed ina friendly non.

adversary creditors suit brought for the conservation of

assets of a debtor corporation, its associates and subsidi-

aries, act with undivided loyalty toward the beneficiaries

they represented when they brought about a judicial sale

in said suit and judicial confirmation thereof without dis-

closing to the court and the parties interested that one of

them had a personal or selfish interest in the tran-actions

which might or could have been in conflict with the inter-

ests of some of the beneficiaries whom they represented?

2. Assuming that such receivers had no such personal

interest but nevertheless found that they represented

estates of debtor corporations whose interests might or

could have come in conflict if such assets were sold at

judicial sale, before bringing about such sales were the

receivers obliged to apply to the court for instructions

after full and complete disclosure on notice to the parties

interested ?

3. In any case, did the receivers have the burden of

proof on their accounting, where the sales were challenged,

of establishing that the prices paid by the purchaser for

such assets were fair!

4. By sponsoring, underwriting or representing that

a plan of reorganization of a “system” holding corporation

was fair to all parties concerned, did the receivers render

themselves liable to surcharge where the plan of re-

organization Was discovered, on the receivers’ accounting,

to be unfair and in violation of the fixed principle that

creditors must be paid in full before participation is al-

lowed to stockholders and, as a result, creditors or bond-

holders having a prior right were not paid in full but

were accorded distributive values for less than their ad-

4

initted claim as a result of judicial sales brought about by

the receivers pursuant to such plan and without notice to

persons affected?

5. Is the reorganized company, who accepted the trans-

fer of assets through the challenged judicial sales under

the circumstances disclosed by the facts in the record,

liable to the extent of the losses sustained by the bond-

holders?

6. Is the New York statute of limitations applicable to

the claims of U. O. P. bondholders against the reorganized

company?

7. Was the Court of Appeals warranted in imposing sub-

stantial appellate costs on petitioners!

Statement of the Case *

The complexities of this case are thus reselved and eon

cisely stated in the concluding paragraph of the dissenting

opinion of Judge Frank: “In more conerete terns, the

salient features of the story are as follows: Glass, ori

nally a lawyer representing stockholders of ULOLP., he

comes its receiver and is handsomely rewarded for that

service.” Having a continued, personal interest in. the

*1. The appeal in the Court of Appeals was heard upon the original

record and original exhibits and upon appendices to the brief and reply briet

of appellants and the joint appendix to the brief of the appellees. These

appendices did not contain all the testimony nor did they reproduce all

exhibits, but only those or parts of those as the parties deemed necessary to

fairly present the issues on appeal were printed. References were made to

original exhibits, both at the argument and in the briefs which were not

printed either in whole or in part in the appendices. Wherever references

will be made to the record and appendices the following symbols will be used.

To refer to the pages of the Supplemental and Amended Objections attached

to the appellant’s appendix, the symbols “S. A. p.” will be used. References

to appellants’ appendices both in the appendix to the main brief and the

appendix to the reply brief will be made by page number followed by “a”

Where reference is made to the appellees’ joint appendix it will be prefaced

by “ja”.

2. Petitioners’ exhibits are referred to herein preceded by the symbol “OB.”

or “OBJ.” Respondents’ exhibits will be indicated by “R. Ex.” Middle

States Oil Corporation will be referred to as M.S.O. Middle States Petroleum

Corporation will be referred to as M.S.P. United Oil Producers Cor-

poration will be designated as U.O.P. and Oil Lease Development Company

as O.L.D.

“69 Meanwhile, he still engages in practice as a lawyer.”

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a)

welfare of the (M.8.O.) stockholders, because of unpaid

fees owing to him from them, he promotes, and helps put

through, a reorganization. This reorganization favors the

(M.S8.O.) stockholders and injures the holders of unde-

posited U.O.P. bonds. It involves the creation of a new

company (M.S.P.) in which U.0.P.’s valuable assets are

not only merged but submerged, a company for which, be-

fore the judicial sales—exssential to that reorganization—

he had been virtually assured he would be counsel. As a

consequence of that reorganization, he receives fees (as

counsel for the stockholders’ committee) which could not

otherwise have been paid. Before confirmation of the

judicial sales, he does not disclose his personal interests to

the judge. A few weeks after confirmation of the sales, he

becomes president of the new company at a splendid sal-

ary." As president, and still U.O.P. receiver, he soon

favors the new company where its interests conflict: with

those of the holders of undeposited U.O.P. bonds. Ever

after, he remains U.O.P. receiver and president of that

company (M.S.P.), and controls it.) He and his family

buy and now own a highly valuable block of its outstanding

securities.7* All this he achieves by means which caused

“7° Glass’ annual salary was initially $50,000. During the depres-

sion it was reduced to $24,000 but was subsequently increased and

Is now about $56,000."

“Tt Judge Smith found that Glass and a group friendly to him

have ‘control and management’ of the new company, and ‘that he

has greatly profited over the years from his association’ with it. He

also found, “The boards of directors of the new corporation have

heen friendly to Glass’ management and have contained several men-

bers who, by means of employment by the corporation or by associa-

ton with Glass in his saw tirm, have been closely connected with

him.” And he found that the voting trust, which ‘ran out after ten

vears, was renewed, and that Glass, from the beginning, has been

a Voung trustee. The voting trust no longer exists.”

“T2 Judge Smith found that Glass and his family own 89% of the

voting trust certificates for Class A stock, the sole class of securities

now outstanding since the bonds of the new company were retired

on January 1, 1945.

Large dividends have been paid on that stock, which is now worth

several millions of dollars.”

SAE ERIE ORANG? BES i iM SRP TL ANCA aN Rte cl Ss SOO NR pi ery alia ati cg

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Ra aeiay

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SRS a hg BITS de RRS

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6

a serious loss to bondholders for whom he was obligated

to act as a fiduciary. I think a federal receiver may not

thus misuse his position.”

The cause or controversy arises out of a “friendly” cred-

itors bill filed more than thirty vears ago, to wit August 15,

1924, in the United States District Court for the Southern

District of New York, in which the court’s jurisdiction was

invoked because of diversity of citizenship (Ex. OB.CC,

S.A. pp. 122-128). The debtor corporation, MSO, was a

“system holding company.” The original bill contained no

charge that the company was insolvent, but rested solely

upon the claim that it was financially embarrassed and that

receivers were necessary to straighten out its affairs for

the protection of creditors and stockholders and to avoid

irreparable injury to them. The debtor, MSO, appeared

simultaneously with the filing of the bill, admitted the alle-

gations thereof and consented to the appointment of re-

ceivers (pp. la-2a).

Shortly antedating the filing of the bill, on June 15, 1924,

a stockholders bill had been filed (Mx. OB.N, S.A. pp. 70-

90) and a motion for the appointment of a temporary re-

ceiver denied primarily on the ground that the company

was not insolvent (pp. ja 2153-2157). That bill was filed

by a law firm representing a committee of stockholders of

the debtor corporation (Ex. OB.Y, Ex. OB. AA, S.A. pp.

116-119), and one of whose members (Glass) became, in

turn, attorney for the receivers (R. Ex. 5) and upon tlie

death of one of the original receivers, substitute receiver

(p. 4a, fol. 11; p. 19a, fol. 55).

Upon the filing of the creditors bill, the same temporary

receivers were appointed in both cases and the causes

consolidated (Ex. OB.FF, OB.KK, OB.LL, OB.MM) and

their appointment was subsequently made permanent on the

creditors bill (R. Ex. 7, S.A. pp. 159-167). By means of

amended and supplemental complaints drafted by the re-

ceivers and their attorneys, and for the purpose of straight-

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=

‘

ening out the affairs of the associated subsidiaries, these

were brought into the suit and the receivership extended

(Ex. OB. 257, pp. 2, 3). Ancillary receivers were ap-

pointed for the operating subsidiaries in the states where

their properties were located (lx. OB. 257, p. 3, R. x. 285

ja 1983-1984). These were subsequently wound up after

the payment of their debts (R. Ex. 285, ja 1983-1984).

ive years after the receivership had been in force, dur-

ing Which valuable oil wells had been brought in by the

most Important operating subsidiary (R. Ex. 34 ja, pp.

346-1549; Ro Ex. 51, ja pp. 1398-1401) and which had

greatly improved the financial position of UOP, a plan of

reorganization (R. lex. 94, ja, p. 1566) for the system was

sponsored or underwritten by the receivers, as a result of

which judicial sales of all the assets of the system, includ-

ing those of COP, were sold to representatives of the reor-

vanization committee and thereafter acquired by the re-

organized company, M.S.P. (R. Ex. 108-R. Ex. 189 inel., ja,

pp. 1600-1780).

The reeeivers did not account or seek a discharge until

more than fifteen vears had elapsed since the confirmation

of the judicial sales, and this only after an application by

petitioners to compel the receivers to aceount (p. 5a).

Petitioners, COP bondholders and stockholders of associ-

ates and subsidiaries of M.S.P., filed an answer objecting

to the discharge of the receivers and asserting a counter-

claim against M.S.P. charging fraud in the acquisition of

the system company including the assets of UOP, which

consisted not only of the collateral to secure the UOP. bond-

holders but unpledged assets of UOP consisting of out-

standing receivables from other corporations in the svstem

which were so large that, if collected, they would have been

sufficient to discharge the entire indebtedness of U.O.P.

including the bonds.

* Judge L. Hand’s opinion at pp. 2029-2030 is in error in stating

that there were 38 suits in which receivers were appointed and that

the “Glass” firm represented creditors. There was only one suit

and the Glass firm represented only stockholders.

s

The receivers’ discharge was granted without a hearing

by the receivership judge (Knox, J.) and upon appeal to

the Court of Appeals (opinion by Frank, C.J., 154 BF. 2d

978, see appendix, pp. 2153-2202) the order was reversed

and an inspection of the books and papers of the receiver-

ship allowed. In implementing the mandate the receiver-

ship judge refused to appoint a master or to direct that all

accountings in all corporations involved in the suit be tried

as one. An appeal was again taken to the Court of Ap-

peals, but the order was affirmed on the ground that the

court's action was discretionary (156 F. 2d 697, see appen-

dix, pp. 2205-2206).

The receivership court then designated Hon. J. Joseph

Smith, District Judge for the District of Connecticut, “to

hear and determine and adjudicate this cause to the ex-

tent that the same involves a judicial settlement of the

final report and accounting of U.O.P. verified January 1,

1945, and the issues raised by the answer of objectants

verified April 3, 1945." The objections were thereupon

amended and supplemented (124 F. Supp. 728 at p. 735,

Finding 78; see also printed objections appended to ob-

jectants’ appendix).

After a protracted trial Judge Smith found that while

the plan of reorganization sponsored or underwritten by

the receivers was in fact a violation of the “fixed prin-

ciple” of Northern Pacific R. Co. v. Boyd, 228 U.S. 482,

that the claims of creditors must be paid in full or other-

wise provided for by full participation in the assets of the

debtor before its stockholders could participate (124 F.

Supp. at p. 781), nevertheless the receivers were not sur-

chargeable thereunder, and he further held that one of the

receivers, Glass, was innocent of wrong despite the fact that

he had in effect a personal or private interest in bringing

about the reorganization and the judicial sale of assets. He

dismissed all charges of fraud and conspiracy (124 F.

Supp. 779). He held the receivers not surchargeable with

respect to the U.O.P. transfers. He granted a discharge

to Receiver Joseph P. Tumulty, withholding discharge to

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2

Glass until all the other accountings involving the other

corporations should be adjudicated (124 F. Supp. at. p.

776). He found it unnecessary to pass upon the plea of

M.S.P. that all claims against it were barred by the New

York State statute of limitations and dismissed a counter-

claiin against petitioners as barred by the New York State

statute of limitations (124 F. Supp. at p. 805).

The Court of Appeals, on petitioners’ appeal, dismissed

so much of the appeal which sought to bring up for review

intermediate orders of the District Court and refused to

review the case until the judgment against Glass was

made final (208 F. 2d 836, see appendix, pp. 2134-2137),

calling for a stipulation to that effect. Upon filing the stip-

ulation, the court again refused to review until the judg-

ment below was modified (210 F. 2d 360, see appendix, pp.

2158-2146). At the same time it granted a new trial with

respect to M.S.P.’s counterclaim. Upon the judgment. be-

ing made final, it affirmed by a divided court, Judge Frank

dissenting in a long but remarkable and well-documented

opinion found in the appendix, pages 2063-2129 * in whieh

he summarizes the major derelictions of one of the re-

ceivers, Glass, as follows:

“(1) He urged and helped to consummate a ‘system’

reorganization, to his own benefit, and did not pro-

pose a separate U.O.P. reorganization which would

have been far more beneficial to the U.O.P. bond-

holders.

(2) He had a personal interest in fees, payments of

which depended on the sales in aid of the ‘system’

reorganization, but he did not disclose that interest

to the judge until after confirmation of the sales.

(3) He had a personal interest in becoming lawyer for

the new company which would result from the ‘sys-

tem’ reorganization, but he did not disclose that

interest to the judge.

* Original page numbers used by the Court of Appeals in its

opinion.

AB

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12

pellants’ charges against Glass and should have re-

trained from directing an investigation for the benefit

of whatever persons may have been injured by Glass’

alleged misconduct. It is fortunate, however, that ap-

pellants have the requisite standing and self-interest

in the investigation, since it might well be difficult for

the court otherwise to obtain the needed services of a

lawyer and an expert accountant. (For the court

merely to appoint a lawyer who would be paid on a

contingent basis and who [unlike appellants’ lawyer,

who may in any event look to the Cohen estate for pay-

ment| would go unpaid if unsuccessful, would be insuf-

ficient; the services of an expert accountant are also

needed. The S.E.C. is not authorized by statute to

engage in such an undertaking except under the Chand-

ler Act.)”

It was this implied direction to continue with the investiga-

tion : it prompted petitioners’ counsel to amend and sup-

plem t the objections and to inquire not only into the

receivers’ misconduct in connection with the U.O.P. account-

ing but other claims, which ultimately elicited the facts

theretofore undisclosed: that the receivers had made use

of receivership funds without court authority and had di-

verted $1,454,578.82 to the use of M.S.P. (see Findings 159-

164, 124 F. Supp. 728, 762) and had fraudulently allocated

overhead after reorganization (124 I. Supp. 728, 791-4, 799)

and had been guilty of questionable conduct in connection

with the assets of one of the companies in the system, to wit,

Western States Oil Corporation (124 F. Supp. 728, 800).

The latter findings were not reviewed by the Court of Ap-

peals, which confined itself solely to the review of the judi-

cial sales involving U.O.P., but these very sales also in-

volved the assets of O.L.D., Southern States Oil Corporation

and M.S.0. O.L.D. owned $389,800 of U.O.P. bonds, which

were sold at the same judicial sale through the reorganiza-

tion committee to M.S.P. for the sum of $225,000, with a

resultant loss to the stockholders of O.L.D. of $164,800 witl

accrued interest (Finding 166, 124 F. Supp. 728, 763),

25,35 of which was lost by Southern States and 42.63%

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13

by outside stockholders (Finding 87, 124 F. Supp. at p.

737). Thus, it is clear that Judges L. Hand and Swan were

in error in believing that [undepositing] U.O.P. bondholders

only had a small interest in the outcome and that the pro-

ceedings on the receivers’ accounting were not one involv-

ing publie interest.

Reasons for Allowing the Writ

A writ should be granted because “this case relates to

the conduct of a receiver appointed by a federal court, and

thus affects the integrity of the federal judicial process

***" (Dis. op., Frank, J., p. 2064). A receivership brought

about at the instance of a simple creditor in a “friendly”

creditors suit is watched with “jealous eyes”. Shapiro v.

Wilgus, 287 U.S. 348; Harkin v. Brundage, 276 U.S. 36:

Michigan v. Michigan Trust Co., 286 U. 8S. 334. There is

involved an important question of federal judicial admin-

istration. Sprague v. Ticonic National Bank, 307 U.S. 161.

Important questions applicable to the conflict of interest

hetween a federal receiver and the beneficiaries of his trust

are involved. Jackson v. Smith, 254 U. S. 586: Woods vy.

City Natl. Bank & Trust Co., 312 U.S. 262; Crites v. Pru-

dential Ins, Co., 322 U.S. 408: Mosser v. Darrow, 341 U.S.

267.

The majority opinion is or may be in conflict with the de-

cisions of this court in Magruder v. Drury, 235 U.S. 106:

Jackson v. Smith, 254 U.S. 586; Woods v. City Natl. Bank

& Trust Co., 312 U.S. 262; Crites v. Prudential Ins. Co., 322

U.S. 408; Mosser vy. Darrow, 341 U.S. 267; Weil v. Neary,

278 U.S. 160. These cases hold that any possible conflict

in interest which might influence a fiduciary renders the

transaction questionable and throws upon the fiduciary the

burden of proof that no damage was caused regardless of

good faith and honesty of purpose, and where a conflict

arises in the case of the same fiduciary representing con-

licting interests as hetween rival trusts, the fiduciary has

INA SR NE CSOT LT AON hi GENS ip Seep

Nad

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ree

fee ee TOS CAE RBG REREAD

14

a duty of full disclosure and must apply to the court for

instruction on notice to the parties. See also Michoud y.

Girod, 4 How. (U. 8.) 502; Litton v. Pepper, 308 U.S. 295,

306-7; Martin v. Luster, 85 Fed. (2) 833 (7th Cir.), cert.

denied 300 U. S. 667; Cowee vy. Cornell, 75 N. Y. 91; Sage

v. Culver, 147 N. Y. 241, 247: In re Bond & Mortgage Guar-

antee Co., 303 N. Y. 423.

The majority opinion is or may be also in conflict with

the following authorities holding that the burden of proof

is upon the fiduciary when his account is challenged: Gut-

terson & Gould v. Lebanon Iron & Steel Co., 151 Fed. 72;

Tardy’s Smith on Receivers, 2d Ed. (1920), See. 610, p.

1709, See. 613, p. 1714; Marvin v. Brooks, 94 N. Y. 71; Ver-

non Metal & Produce Co. v. Joseph Joseph & Brother, 241

N. Y. 544; Weber v. Empire Holding Corp., 149 Ore. 503, 41

P. 2d 1086.

It is or may be in conflict with the great weight of au-

thority holding that a fiduciary cannot act in the cireum-

stances here disclosed without either resigning from one

of the trusts or applying for instructions. /n re Hubbell’s

Will, 302 N. Y. 246; 54 Am. Jur. § 320, pp. 254-5, citing Re

Binder, 137 Ohio St. 26, 129 A. L. R. 130 and First National

Bank v. Basham, 238 Ala. 500, 125 A. L. R. 656; Restatement

of Trusts, § 170; Detroit Trust Company v. Mason, 309

Mich. 281, 306; In re Sedquwick’s Will, 74 Ohio App. 444.

59 N. FE. 2d 616, 624; Northern Finance Corp. v. Byrnes, 5

F. 2d 11, 12-13 (C. A. 8).

The majority opinion also is or may be in conflict with

National Surety Co. v. Coriell, 289 U. S. 426; Furst Na-

tional Bank of Cincinnati v. Flersheim, 290 U.S. 504; Tay-

lor v. Standard Gas & Electric Co., 306 U. S. 307; Case v.

Los Angeles Lumber Co., 308 U. 8S. 106 and Consolidated

Rock Products Co. v. DuBois, 312 U.S. 510, which hold that

a plan of reorganization which preserves an interest in

the stockholders of a debtor corporation before creditors

are fully provided for is invalid. See also Glenn on Fraud:

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15

went Conveyances, Rey. Ed., Vol. 1, 4§ 222, 224, 225, pp.

386, 388, 389-393.

The majority opinion tends to “erode” the uncompro-

mising rigidity of the undivided loyalty rule. As was said

hy Judge Cardozo in Wendt v. Fisher, 243 N. Y. 439:

“It stops the inquiry when the relation is disclosed,

and sets aside the transaction or refuses to enforce it,

at the instance of the party whom the fiduciary under-

took to represent, without undertaking to deal with

the question of abstract justice in the particular case’

(Munson v. Syracuse, ete., R.R. Co., supra, at p. 74;

cf. Dutton v, Willner, 52 N. Y. 312, 319). Only by this

uncompromising rigidity has the rule of undivided

loyalty heen maintained against disintegrating ero-

sion.”

See also Meinhard v. Salmon, 249 N. Y. 458; In re Bond &

Mortgage Co., 303 N. Y. 423. A federal receiver should

not be thus allowed to exeulpate himself.

Whether the beneficiaries of the fraud may escape lia-

bility on the plea of the statute of limitations presents an

important question which should be here reviewed involv-

ing, as it does, whether it falls into the purview of federal

law rather than state created rights, as in Holmberg v.

Armbrecht, 327 U.S. 392, and in any case, whether the

New York statute has been correctly applied since the

transfer to the reorganized company was accompanied by

concealment of the facts amounting to actual fraud tolling

the statute until discovery (N.Y. C, P. A. § 48(5) appendix,

p. 2207). Emmerich v. City Bank Farmers Trust Co., 300

N.Y. 417; Finnegan v. MeGuffog, 203 N. Y. 342; Spallhol:

v. Sheldon, 216 N.Y. 205; Nasaba Corp. v. Harfred Realty

Corp., 237 N. Y. 290; Lightfoot v. Davis, 198 N. Y. 261:

Dodds v. McColgan, 229 App. Div. 273: Glover v. National

Bank of Commerce, 156 App. Div. 247.

The decision sought to be reviewed holding, that the ju-

dicial sales affecting the pledged and unpledged assets of

U.O.P. are valid, will also affect the judicial sales of O.L.D..

Rare

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16

Southern States Oil Corporation and the assets of M.S.0.

If held valid, the stockholders of all 39 corporations in-

volved, large in number and scattered all over the United

States, are affected.

The decision of the Court of Appeals involving appellate

costs presents also a question which ought to be considered

by this court, involving as it does the federal judicial

process. That decision, if allowed to stand, is enough to

discourage any persons from investigating the abuse of a

federal receivership process and attempting to bring to

light wrongs perpetrated which might otherwise never see

the light of day. Cf. Merriam v. Wimpfheimer, 25 F. Supp.

405, 408. It would mean that a litigant who comes to the

aid of the courts, at the court’s very suggestion, must not

only pay his own expenses but those of the opposition as

well. The usual practice in equity, where there is a fund

involved under the court’s administration, is to impose the

expenses upon the fund, particularly where the investiga-

tion is not unjustified. While the receivers here claim there

is no such fund, yet M.S.P. has been the beneficiary, as the

district court found (124 F. Supp. at p. 762), of large sums

paid over by the general receivership estate in the guise

of loans. The entire receivership was thus made dry by

the act of the Receiver Glass himself.

In sum, therefore, there are special and important rea-

sons for the granting of a writ of certiorari because not

only is there involved the integrity of the federal judicial

process and the administration of justice in federal equity

causes, but because the Court of Appeals has decided an

important question of federal law which has not been, but

should be settled by this court, and has decided a federal

question in a way in conflict with the applicable decisions

of this court, and has also decided an important question

involving the New York State statute of limitations in a

way in conflict with the applicable New York State de-

cisions.

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CONCLUSION

For the foregoing reasons this petition for a writ of

certiorari should be granted.

Respectfully submitted,

Meyer KrausHaar,

Attorney for Petitioners,

42 Broadway,

New York 4, N. Y.

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