Appendix — Cohen v. Glass

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UNITED STATES COURT OF APPEALS

For tHe Seconp Cirevir

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No. 284—October Term, 1953.

(Submitted June 22, 1954 Decided January 11, 1955.)

Docket No. 22426

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Josepu A. PHELAN,

Complainant,

—_—V.—

Mippie States Om. Corroratrion, et al.,

Defendants.

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Meyer WKravsuasr and Sopute D. Connex, as executors of

William W. Cohen, deceased, Sopuie D. Conen, indi-

vidually, and Levy Broruers.

Appellants,

—vV —

JosepH Guass and Joseru P. Tumuury, Jr. executor of

Joseph P. Tumulty, receivers, and Mippie States Pr-

TROLEUM CORPORATION,

Appellees.

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Before: ;

L. Hanxp, Swan and Frank,

Circuit Judges.

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Appeal by Meyer Kraushaar and Sophie D. Cohen, as

executors of William W. Cohen, by Sophie D. Cohen, indi-

vidually, and by Levy Brothers, from a judgment of the

United States District Court for the Southern District of

New York (Joseph J. Smith, J., presiding), overruling

objections to the application of Joseph Glass and Joseph

P. Tumulty, for a discharge, as receivers of United Qj]

Producers Corporation, granting them such a discharge,

and dismissing a claim against Middle States Petroleum

Corporation.* Joseph P. Tumulty died pending the appeal

and Joseph P. Tumulty, Jr., his executor, has been sub-

stituted in his place.

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Meyer KrausHaar for the appellants.

Lesure Kirscu for Glass.

Ratpn MontcoMery Arkusn for the Middle

States Petroleum Corporation.

JosepH P. Tumeuuty, Jr. pro se.

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L. Hann, Circuit Judge:

We dismissed an appeal from the judgment in this case

because it was not final against Glass, and because, al-

though it was so against Tumulty and the Middle States

Petroleum Corporation, it would have resulted in creat

duplication of time and expense to go over the saie is-

sues twice. We suggested then that the parties might stipu-

late to delete those parts of the judgment that limited its

finality as to Glass and to discharge him unconditionally.**

This they did, but in two other opinions, on January 15

and February 8, 1954,' we concluded that such amendments

sa 124 Fed. Supp. 728.

7 Phelan vy. Middle States Oil Corporation, 203 Fed. (2) 836.

+ Phelan vy. Middle States Oil Corporation, 210 Fed. (2) 360,

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must be approved by the district court under Rule 23 (¢);

and we therefore remitted the cause to Judge Smith. On

May 21, 1954, after hearing on notice to all parties he en-

tered a judgment amending the judgment, from which, as

amended, the original appellants have again appealed, The

present judgment (disregarding the reversal of the dis-

missal of the counterclaim of the Middle States Petroleum

Corporation against the executors of Cohen) now uncon-

ditionally declares (1) that Cohen’s executors, and Levy

Brothers and Sophie D. Cohen individually “have failed

to establish any right to surcharge against Joseph P.

Tumulty and Joseph Glass, as Receivers of the United Oi]

Producers Corporation, or recovery against Middle States

Petroleum Corporation in favor of the estate of United

Oil Producers Corporation or any of those claiming through

said estate”; (2) denies all motions to surcharge the re-

ceivers and approves their accounts; (3) discharges them

as such receivers; (4) dismisses the “general charges of

fraud and conspiracy”; and (5) dismisses nine “specific

claims of fraud and conspirac¢y” which it describes severally

in detail. The judgment leaves undisposed of all liabilities

of Glass and Tumulty, as receivers of the Middle States

Oil Corporation, or of any of its 35 and more subsidiaries.

We need not decide many of the issues litigated at the trial,

even though these related to the rights and liabilities of

the United Oil Producers Corporation against, or to Middle

States Oil Corporation, or any of its subsidiaries, save as

decisions on these bear upon the value of the assets of

United Oil Producers Corporation, sold in reorganization.

Ordinarily, of course, it would be necessary to liquidate

these claims as to both their validity and amount in order

to appraise their value, and to decide whether the price at

which they were sold to the Middle States Petroleum

Corporation was “fair.” However, as we shall show, it is

not necessary to do this in the case at bar because the

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intereorporate claims were complicated far beyond any

possible liquidation within the time allowed by the district

court for that purpose. The only question is whether the

price fixed and obtained was the best attainable in the

circumstances, If it was, that was all for which the appel-

lants can now demand the receivers of the United Oj]

Producers Corporation to account. For these reasons we

shall not discuss any claims of Cohen’s executors, as share-

holders of the Southern States Oil Corporation, or the

claims of Sophie D. Cohen, individually, or of Levy Broth-

ers, as such shareholders. These have no bearing upon the

liability of Glass and Tumulty to the bondholders or cred-

itors of United Oil Producers Corporation. Nor has the

claim of Sophie D. Cohen, as a shareholder of the Oil

Lease Development Comp: iy, any such bearing, because,

even though we will assume for argument that she may

have been entitled to prosecute the claims of that company,

its only claim against the receivers of United Oil Pro-

ducers Corporation, was as a pledgee of some of the bonds

of that company, so that whatever disposes of the interest

of Cohen’s executors, as holders of such bonds, applies

equally to the interest of Sophie D. Cohen, as shareholder

of Oil Lease Development Company.

We shall use the following abbreviations: The ‘“Bond-

holders” will mean all those bondholders who did not de-

posit their bonds in reorganization; “U.O.P.” will mean

United Oil Producers Corporation; “M.S.O.” will mean

Middle States Oil Corporation; “M.S.P.” will mean Middle

States Petroleum Corporation; the “Receivers” will mean

Glass and Tumulty, as receivers of United Oil Producers

Corporation. The appeal involves only three questions:

(1) Whether the sale to “M.S.P.” in reorganization of the

assets of “U.O.P.” was conducted as the law requires;

(2) whether the plan of reorganization satisfied the Boyd

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Rule* by giving to bondholders an “equitable equivalent”

1 “M.S.P.” of their former claims against “U.0.P.”; and

(3) how far the “Receivers” are liable personally if either

answer to the foregoing questions is negative. The claim

against “M.S.P.” is that, as it was a party to the sale and

to the consequent plan of reorganization, it was a grantee

of a fraudulent conveyance. The charge against Glass

rests more particularly upon the allegation that he activ ely

promoted the reorganization fraudulently as part of a

conspiracy to secure an interest for himself in “M.S.P. af

and that, even if not a party to any such actual fraud or

conspiracy, he had such personal interests in transferring

the assets of “U.O.P.” to “M.S.P.” as conflicted with his

duty as receiver, and threw upon him the burden of justify-

ing his conduct, a burden which he did not carry. Further-

more, the “Bondholders” charge that, even though Glass

was not engaged in a conspiracy to defraud them, the

“Receivers” were derelict in their duty as such, in the

conduct of the sale of the assets, and that the burden of

proof lay upon them to show the extent of the loss incurred

and their profits therefrom.

After a long and warmly contested trial, Judge Smith

handed down a comprehensive opinion, accompanied by

272 findings of fact, in which he decided that the “Bond-

holders” had failed to establish any liability against the

“Receivers” or “M.S.P.”; but which dismissed the counter-

claim of “M.S.P.” against Cohen’s executors. To the

allegation that Glass and the committee that reorganized

“M.S.P.” united in a conspiracy to secure the assets of

“U.O.P.” in fraud of the “Bondholders,” Judge Smith

found that the “general charges of fraud and conspiracy

are not prove ed.” Of Glass he said that “he gave the im-

pression, during his extended testimony, of sincerity and

’ Northern Pacific Railway v. Boyd, 228 U. 8S. 482.

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honesty of purpose. He was unconvincing on two subjects—

the explanation of his erroneous testimony that his “M.S.P.”

salary was not ineluded in the overhead allocated to the

corporations in receivership, and in his testimony as to

the meaning of his statements on the Manning trial in

Delaware. With these possible exceptions, he appeared

through the long weeks on the stand, frank and honest

in testimony and thoroughly convinced of the good faith

of his every action in the receiverships. Moreover, many

of the individual actions attacked by the objectants turned

out to be convincing illustrations of Glass’ good faith in

dealing with the trust. The readjustment of inter-corpo-

rate claims after reorganization, in May, 1°30, for instance,

operated to the disadvantage rather than to the advantage

of M.S.P. The appraisals and the eventual realization by

M.S.P.’s subsidiaries from the sales in the ancillary juris-

dictions are convincing proof of meticulous care that the

sellers be treated fairly. So also with the comparative

price paid receivership estates and outsiders for similar

securities purchased by M.S.P. Some of Glass’ transac-

tions may have been harmful to some of the receivership

estates. If so, the Court is convinced that they were not

the result of active fraud or attempts to despoil the receiver-

ships for his own benefit or that or M.S.P.” Although it

is of course true that such a finding is not exempt from

review by us, “it is not enough that we might give the facts

another construction, resolve the ambiguities differently,

and find a more sinister cast to actions which the District

Court apparently deemed innocent.” * We have again and

again laid especial weight upon the importance of find-

ings that touch the good faith and honesty of a witness,

whom the judge has seen; for, as we have said, on such

occasions the printed record does not preserve a part of the

a United States vy. National Association R. E. B., 339 U. S. 485, 495.

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evidence, which on that issue is often crucial. To ascertain

another’s motives we are of necessity driven to inferences,

for they are never manifest to our senses; no one can see,

hear or feel what has actuated someone else. Among the

sensible facts on which we must rely is the manner in

which the witness utters his testimony: i.c., his address

and bearing, his frankness, his directness and freedom

from evasion, his assurance as to what he has personally

observed, and his readiness to admit his uncertainty as

to what he has not: all these things are among the most

convincing means of deciding whether to believe his testi-

mony. And so, when a judge of tried experience has had

the opportunity to observe a person through days of the

most searching and provocative cross-examination; and

when he has made findings and written an opinion that

show the most painstaking and impartial solicitude to

reach the truth, his decision about that person’s motives

is nearly conclusive; and we should disturb it only when

the objective circumstances make it clear that the unpre-

served evidence could not have properly overhalanced the

inherent improbability and inconsistency of his spoken

words. We can find nothing in this record that would

sustain such a conclusion as to Glass. The “Bondholders’ ”

brief abounds in charges that gravely impugn his honesty,

and impute to him a ruthless disregard of his duty to the

creditors of “U.0.P.,” or of the other subsidiaries. Were

they true, nothing could excuse him; but, so far as we have

discovered, there are none that Sartigh any affirmative

proof against him. It is quite true that, once one assumes

that he was bent upon forcing all to join the reor ganization,

what he did was consistent with that purpose, but that

is altogether irrelevant, if it was equally consistent with

innocence, as it was.

It would take too long to go over in detail all that is

mustered against him; but one or two illustrations may

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deserve notice. The brief repeatedly asserts that Glass

had planned to become president of the new company a

good while before the sale of the “U.O.P.” assets in 1929;

and that his letters covertly betray this wish. On the

contrary, the letters bear every evidence of an unwilling-

ness to be president, though they quite frankly declare

that he would like to be the lawyer for the reorganized

corporation. Take for example this passage from a letter

written in October, 1927, to one, Gilbert, a banker in Okla-

homa: “I have personally reached the definite decision that

I do not care to continue with the reorganized company

in any executive capacity, as I do not feel that I would want

to subordinate my professional practice to the daily neces-

sities of a going business, and I feel that if I were to attempt

it, the company’s interests would suffer. The only relation-

ship on my part with the company in the future that will

be possible, as far as I am concerned, will be a professional

relationship, if my legal services should at any time be

required.” Conceivably such language might have been

used to disarm opposition while Glass was in fact intrigu-

ing to get the job; but on what imaginable ground can it

be taken as affirmative evidence that he was doing so?

To take it as written in fulfillment of such a clandestine

purpose is completely to pervert its natural meaning.

Again, take the agreement that the “Receivers” got

from the reorganization committee in the following terms:

“Tt is the understanding of counsel for the Reorganization

Committee that the acts of any persons who are employees

of the Receivers and are permitted by them to participate

in such action of the Boards” (7.e. “resolutions authorizing

the filing of answers admitting the allegations of the bills

of complaint”) ‘shall not be deemed the action of the

Receivers or action taken on their behalf; and that the

action of the respective Boards * * * shall in all respects

be without prejudice to the right of the Receivers to raise

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any question with respect to the subject matter of said

suits or any of them in the event that the Reorganization

Plan as now existing or hereafter amended shall fall

through.” Of this the “Bondholders” say in their brief that

it “of course * * * meant that these judgments and decrees,

though absolute on their face, were subject to be vacated

at the instance of the Receiver if the plan was not carried

out. It is difficult to see, therefore, in view of all the cir-

cumstances, how this sale was not collusion or ‘hocus-

pocus.’”” As we understand this argument, it means that

the “Reorganization Plan” would have “fallen through,”

if an outsider had appeared at the sale and outbid the

reorganization committee; and that in that event the

“Receivers” had the option of vacating the decrees on

which the sale was made. In the first place the “Plan”

would not have “fallen through,” if that had happened,

for it was a condition precedent of the “Plan” itself that

they should be offered to outsiders, and that, if a bidder

appeared, who should outbid the reorganization committee,

the properties should pass to him. The “Plan” would not

in that event have gone into effect, but the properties would

have passed beyond the power of the court, exactly as it

was intended they should. The “Plan” would not miscarry,

if the prescribed alternative to it had been realized. In

the second place even if we impose that meaning on the

words, “fallen through,” the agreement did not give the

“Receivers” the power to “vacate” the “judgments and

decrees.” All it did was to provide that the “Receivers”

should be free to take such action as seemed to them to

be for the best interest of the defendant corporations, re-

gardless of the fact that the “action of the Boards” in

consenting to any “judgments and decrees,” might have

required the votes of employees of the “Receivers.” It

was plainly no more than a precaution—probably unneces-

sary—to retain whatever power they had had to provide for

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any occasion that might arise after a breakdown. How it

can be thought to have been any evidence of conspiracy

to seize the properties we cannot understand.

Finally, although we are prepared to make large allow-

ances for the heat of advocacy in a litigation that has

engendered so much feeling, we cannot pass without men-

tion that part of the “Bondholders’” brief that imputes

to Judge Smith a partiality in favor of the “Receivers,”

For example: “The Trial Judge treated the Receivers with

the utmost tenderness, resolving every question of fact,

every adverse inference in favor of the Receivers and grant-

ing them a clean bill of health, whereas the objectants

and their counsel were subjected to express and implied

unwarranted criticism.” It is curious to find this charge

supported by the amendment to the 79th Finding of Fact,

from which at the “Bondholders’” demand the judge de-

leted the adjectives “reckless” and “careless” that he had

originally used to characterize their conduct, and which,

as it now stands, criticizes equally that of both parties.

Again: “Yet we are compelled to submit most earnestly

that he apparently had a blind spot when it came to judg-

ing the Receivers’ conduct, particularly Glass’.” It is

indeed always proper for an appellant to show that the

trial judge was guilty of partiality, or of any other judi-

cial impropriety relevant to his decision, and, indeed,

nothing can more justly move an appellate court to reverse;

but it is a charge that gravely miscarries when it is not

made good; and it would be difficult to imagine less sup-

port for it than in the case at bar, where the record through-

out shows a patience and will to do even-handed justice,

that might serve as a model for imitation anywhere.

However, although we put aside, as we do, the charge

that Glass was a party to any fraud or conspiracy, we

agree with the “Bondholders” that the burden would never-

theless be upon him to prove that they had suffered no

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actionable loss by any of his acts or decisions in which

he could have been actuated by a personal interest that

conflicted with his duty to them. Moreover, in that event

it would not relieve him of the burden even to prove, if

he could, that his putative interest did not in fact influence

him, for the law will not attempt to weigh how far such

an interest may have played a part in the result, once it

be shown to have existed. What we said on the first ap-

peal we repeat with equal emphasis. Nevertheless, before

the burden of proof shifts, the beneficiary must prove that

there was such a conflict; it therefore rested on the “Bond-

holders” to prove that Glass had some personal interest

in putting through the reorganization that conflicted with

his duty as receiver. In considering that question we must

at the outset distinguish between an occasion where the

conflicting interest is personal to the fiduciary, and one

where it arises between two or more of his beneficiaries.

For example, in the case at bar the “Bondholders” repeat-

edly complain that Glass failed to pay the interest on the

“U.O.P.” bonds at times when that company was in ade-

quate funds to do so. This, they argue, was because he pre-

ferred the interest of ““M.S.O.” which at the time he thought

had more pressing need for the money. To a similar charge

Judge Smith made what we regard as the proper answer;

it might be true, he said, that “in some instances such as

failure earlier to realize on the collateral behind the

Chatham-Phenix note he” (Glass) “was unconsciously in-

fluenced by a desire to benefit the group of receiverships as

a whole and later M.S.P., rather than to act solely for the

benefit of the estate of Western. That was a danger incurred

by the Court in order to avoid the expense of some thirty-

eight additional receiverships. If it did occur and cause

damage to the estate of Western, some means must be

found to rectify it.” But he did not include among those

means a surcharge of Glass on the theory that he was

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a fiduciary subject to a conflict of interests. Similarly,

assuming for argument that there were moneys of “U.O.P.”

that Glass might have used to pay the interest on its bonds,

his interest, as receiver of “*M.S.O.,” which owned directly

or indirectly substantially all of “U.O.P.’s” shares, even if

it conflicted with that of the “U.O.P.” bondholders, was a

conflict inevitable in the set-up of 58 or 39 receiverships

all conducted as one. Glass owed the same duty to “M.S.0.”

as to “U.O.P."; both duties had been imposed upon him by

the court, and he was not only free, but bound—if they con-

flicted—to decide which need was the more imperative.

It must be remembered that the “U.O.P.”) bondholders

had no legal interest in the income as yet; as mortgagor,

that company was free to use its income until the mort-

gagee, the indenture trustee, moved to sequester it for

the bonds.

Nor was it necessary for the “Receivers” to procure an

order of the court whenever a conflict of interest arose

between any of the 38 corporations with custody of whose

assets they had been entrusted. The interests of all were so

enmeshed that countless transactions were likely to involve

“U.0.P.” with “M.S.O.,” or with one of its subsidiaries,

that the court would have been obliged constantly to inter-

vene in the administration of the suits. That was exactly

what Judge Knox meant to avoid, because as Judge Smith

found: “During the receiverships * * * temporary loans

were made by the receivers * * * from one receivership

estate to another. This was done without Court order in

reliance upon the order of appointment, requiring the prop-

erties and business of all the companies to be administered

as an entirety.” Moreover, even if it had been a fault

not to get an order, the “Bondholders” have not shown

that Judge Knox would not have granted leave to use the

money, so that no loss was shown; and they had the burden

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of proving that they were damaged, so long as the “Re-

ceivers” had no personal interest in the decision.

However, there were other occasions when the “Bond-

holders” assert that Glass had a personal interest that

conflicted with his duty, which if they were right, would

have shifted the burden of proof. The first of these is as

follows. Glass had been a member of the firm that had

represented Shivers, the plaintiff in a shareholders’ suit

against “M.S.O.” commenced in 1924. All that was ever

done in that suit was to move for a receiver, which was

denied; and almost at once Phelan, a creditor of “M.S.O.,”

filed the suit against “M.S.O.,” followed by the others of

which the action at bar is one. The services of the firm

in this shareholders’ suit could hardly have had any but a

trifling value; but in any event they stand or fall with the

services in the creditors’ suits themselves. All these were

of the type common thirty years ago before the amend-

ments to the Bankruptcy Act, or the passage of the S.E.C.

legislation. They were a variant of the long existent judg-

ment creditors’ bill in equity, and were designed to effect

an equal distribution of a corporate debtor’s property

among its creditors. They usually alleged that if this was

abandoned to a scramble of attachments and executions,

the creditors generally would be losers; and the jurisdic-

tion in equity rested upon this circumstance. Since origi-

nally such a bill lay only after judgment and was to reach

assets not subject to execution, it was necessary before

judgment for the debtor to consent toe the appointment of

a receiver. In the case at bar after the “Receivers” were

appointed, the debtor’s creditors in all 38 suits formed

committees, and Glass’s firm represented them in all, so

long as Judge Mayer remained in office. After his death

Glass was substituted in his place, and his firm at once

ceased to represent any of the committees. The “Bond-

holders’” argument is that, since the firm’s allowance, as

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counsel for these committees, had not been fixed before the

sale of “U.O.P.” assets in December, 1929, and since he

therefore retained an interest in what should be allowed,

he had a personal interest that was in conflict with his

duty as receiver. Moreover, the firm had agreed with the

succeeding counsel that its allowance should be a propor-

tion of the allowance made to their successors so that

Glass became directly interested, not only in what should

be allowed for his firm’s services rendered before he be-

came receiver, but for those rendered thereafter; and a

successful reorganization would be likely greatly to enhance

his allowance. A complete answer to this is that not only

Glass, but Jackson, a member of the succeeding firm, swore

that this agreement was made in 1930, after the sale of the

“U.O.P.” assets, and after “M.S.P.” had undertaken to

pay all expenses of the receivership. We can find no testi-

mony to the contrary and Judge Smith’s general acceptance

of Glass’s credibility serves in place of a finding. It was

still true that all through his receivership and up to the

sale, Glass’s allowance remained undetermined, but we

cannot see that that created an interest with which a sale

as opposed to a reorganization would conflict. The argu-

ment must be that Glass’s firm, as attorneys for the eredi-

tors’ committees, performed services during the first year

of the receivership, the allowance for which would in

some measure depend upon whether five years later a

reorganization went through. That appears to us too re-

mote and speculative a conflict to fall within the doctrine

invoked by the “Bondholders.” We shall deal more at large

with the general question in a moment when we come to

Glass’s hope to be counsel for “M.S.P.”

The second supposed conflict between Glass’s duty and

his personal interest was this. His firm had retained one,

Hamburg, to take charge of extensive tax claims against

“M.S.O.,” of course including “U.O.P.” It was part of the

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agreement that Hamburg should assign a proportion of

his allowance to the firm, in place of paying rent for the

use of their offices. We cannot see that the amount of

Hamburg’s allowance would have been larger if “M.S.0.”

was reorganized, rather than if the properties were sold

to an outsider. The allowance was an expense of admin-

istration and had to be paid in either event. Had it been

liquidated before the sale, Glass would indeed have had

an interest in not opposing it, but it was not. Moreover,

even then the conflict would have tainted, so to say, only

the allowance granted Hamburg.

The third alleged conflict is that Glass had a covert

understanding that he was to be president of “M.S.P.”

when formed; and, in default of that, that he hoped and

expected to be its counsel. We have already indicated

that Judge Smith’s findings as to the future presidency

of “M.S.P.” are, not only not “clearly erroneous,” but

that the attack upon them is without any support whatever

in the evidence and is indeed positively contradicted by

contemporaneous correspondence. It is not necessary to do

more in disposing of this charge than to quote the findings

themselves. “A month and a half after the organization of

the new company, and after ascertaining that the Court had

no objection” (to) “Glass’ serving as president of the new

company, on an understanding with the company that,

in any case in which the company’s interest conflicted with

his position as receiver, he would act as receiver and not

for the company, Glass accepted election as president of

the new company. He had not actively sought election to

the position, having made known his desire to terminate

his management responsibilities although he hoped to con-

tinue to be associated in a legal capacity with the new

corporation. Search on the part of the members of the

reorganization committee for an experienced oil man to

head up the new company was, however, unsuccessful and

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by the offer of a salary of $50,000 a year, with the right

to continue his law practice, Glass was induced to continue

as the executive head of the reorganized company.”

The fourth and last supposed conflict was that Glass

hoped and with good reason expected to be chosen counsel

for “M.S.P.” when it was reorganized; and that he had no

such expectation if the Eureka shares were knocked down

to an outsider. True, it did not follow that such a putative

outsider might not have wanted him as counsel, but that

we disregard as too remote. Moreover, we agree that al-

though he had no contract with the reorganization commit-

tee, he had good reason for thinking that “M.S.P.” when

organized would follow the obvious preference of the com-

mittee and offer the job to him. Was that such a conflict

as invokes the doctrine? It enables the beneficiary to hold

the fiduciary liable for any profits he may make, or losses

he may cause, in order to deprive him of any inducement

that will affect his absolute and disinterested loyalty;

and there is no doubt that an expectation or hope of future

advantage may do so, even though it is not secured to him

as an existing legally protected interest. Therefore, if the

doctrine be inexorably applied and without regard to the

particular circumstances of the situation, every transaction

will be condemned once it be shown that the fiduciary had

such a hope or expectation, however unlikely to be realized

it may be, and however trifling an inducement it will be,

if it is realized. We do not understand that it is to be ap-

plied so rigidly, or to so literal an extreme. The Restate-

ment of Trusts* states it in these words: the “trustee

violates his duty to the beneficiary not only where he pur-

chases trust property for himself individually, but also

where he has a personal interest in the purchase of such

a substantial nature that it might affect his judgment in

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making the sale.” And this has been incorporated in ipsis-

simis verbis into Scott on Trusts.* That statement we

accept, and the question at bar is whether Glass’s expecta-

tion of being counsel was an interest so “substantial * * *

that it might affect” his promoting as much as he should

have done, the sale of the Eureka shares in place of includ-

ing them in the reorganization of “M.S.O.” it is true we

cannot know that the chance of employment could not

have had any influence upon his conduct; and it is of course

true that, if the “Bondholders” had shown that in fact it

did have any, he would not only have to disgorge any profits

he had got, but to prove that what he did was an impeccable

discharge of his full duty, or to make good any loss that

it caused. But we are not dealing with such an occasion; we

have to determine the scope of the implementary rule that

dispenses with the need of proving that his personal in-

terest had any part in determining the fiduciary’s conduct;

indeed, with a rule that altogether forbids any inquiry

whether it had any such part. We have found no decisions

that have applied this rule inflexibly to every occasion

in which the fiduciary has been shown to have had a per-

sonal interest that might in fact have conflicted with his

loyalty. On the contrary in a number of situations courts

have held that the rule does not apply, not only when the

putative interest, though in itself strong enough to be an

inducement, was too remote, but also when, though not

too remote, it was too feeble an inducement to be a deter-

mining motive.

In Bullivant v. First National Bank, 246 Mass. 324, 334,

shareholders of a company who had deposited their shares

in trust with a bank sought to enjoin it from voting the

shares for a proposed reorganization of the company, be-

cause the bank, as a creditor, had a conflicting interest that

: § 170.10.

disqualified it from voting. The court held otherwise,

saying that the “facts reported by the master did not dis-

close any proposed violation of this rule”: i.e. that a “trustee

cannot become purchaser of property title to which he

holds in his capacity as trustee.” In Anderson v. Bean,

272 Mass. 432, 446, the trustee held all but three of the

6000 shares of a corporation—half, as trustee, half, indi-

vidually. He sold 100 shares of those that he held as

trustee: 25 to his son, 25 to each of the sons of a deceased

brother, and 25 to the superintendent of the factory. The

beneficiaries sought to charge the trustee with the value of

the 100 shares above their sale price on the ground that by

their sale he had gained a personal advantage: i.e. control

of the corporation. The court disallowed the surcharge,

saying that the “disturbance of the equal balance of hold-

ings of stock by the trust and by the trustee as an individual

is not as matter of law, apart from other circumstances,

unconscionable advantage or disadvantage.” It agreed that

a trustee “cannot derive any personal advantage at the

expense of the estate, nor put himself in a position antag-

onistic to the beneficiaries of the trust”; but that that

doctrine “simply is not applicable to the facts here dis-

closed.” Yet, surely voting control “might” very easily

“affect” a fiduciary’s “judgment,” if we are dealing in all

possibilities, however remote. In Jn Re Harton’s Estate,

331 Pa. St. 507, 515, 516, a trustee invested part of the

fund in a participation in a mortgage; and at the same

time “undertook the task of acting as rental agent for the

mortgagor and received from him a commission of five

per cent on rentals so collected.” As to this the court said:

“The compensation received by the trustee as rental agent

for the owner was not money which the participating trust

interests would otherwise be entitled to. They would have

belonged to the owner, or would have been paid out to some

other rental agent as fair compensation for services ren-

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dered. It was not shown that the rental commissions were

in any sense a profit; on the contrary, they were just charges

for services performed by accountant in its required ad-

ministration of the trust, and their receipt does not offend

the admitted rule against a trustee’s obtaining a bonus or

commission from dealing with specific trust property, as

commented upon in American Law Institute, Restatement

of Trusts, §§170 and 203, pp. 438 and 549.” Pike v. Camden

Trust Co., 128 N. J. Eq. 414, 422-424, involved substantially

the same situation and the decision was the same; indeed,

it relied upon the passage from Jn Re Harton’s Estate

that we have just quoted. In Dabney v. Chase National

Bank, we said:* “it is not every possibility, however

remote, of a conflict of interest between a trustee and his

beneficiary which will forbid his entering into a transac-

tion with a third person. * * * There must come a point at

which he is not bound to take against himself a future chain

of events, each link of which carries a substantial coefficient

of improbability. * * * The law ought not make trusteeship

so hazardous that responsible individuals and corporations

will shy away from it. As we said in York v. Guaranty

Trust Co., 2 Cir, 145 Fed. (2) 508, 514: ‘Of course, the courts

should not impose impractical obligations on a trustee.

Merely vague or remote possible selfish advantages to a

trustee are not sufficient to prove such an adverse interest

as to bring his conduct into question.’ ”

The trustee’s advantage in Dabney v. Chase National

Bank, supra,* was security for a loan, and the increase

in its value was indeed very “substantial”; but our deci-

sion rested on the unlikelihood that the increase would

ever be realized. In the two Massachusetts cases the ad-

vantage was immediate and certain, but the court thought

. 196 Fed. (2) 668, 675.

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it too insignificant in value to count; and in the other

two decisions the advantage was employment by the pur-

chaser, just as it was here; and, indeed, the trustee had

actually been engaged and thus had a legal right to the

job. Moreover, as in the case at bar, the advantage was

obtainable only by means of a quid pro quo—services to be

rendered—which of course diminished its inducement. Fi-

nally, we should remember that, although Glass was indeed

reasonably sure to be retained, nevertheless he had no

contract and his employment depended upen what the ad-

ministration of “M.S.P.” might decide. It appears to us

most undesirable upon all possible occasions to forbid a

purchaser of property from a fiduciary to continue him

in its management, upon the assumption that the prospect

of getting the job may taint the purity of his decision to

sell. Again and again it must be in the interest of the pur-

chaser to keep him; and that possibility may contribute

to give the property a greater value than it otherwise would

have. Taking the situation in the case at bar as a whole,

we do not believe that the prospect of a retainer by “M.S.P.”

was a “personal interest * * * of such a substantial nature”

as was likely enough to cause Glass to fail in his duty to

promote the sale of the Eureka shares, and to throw the

burden of proof upon him; and we conclude, not only that

the “Receivers” were not parties to any fraud or conspiracy

against the “Bondholders,” as Judge Smith found; but also

that the “Bondholders” had the burden of proving that they

had lost through some dereliction of Glass in his duty to

them as receiver of “U.O.P.”” It was of course open to them

to prove that the “Receivers” did default in the discharge

of their duty, and what they did lose; but in a situation so

extravagantly complicated and so impervious to analysis

as the welter of legal rights and obligations left by Haskell

and his fellows, the party that has the burden of proof is

nearly sure to lose.

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The “Bondholders” do allege that they showed affirma-

tively that the “Receivers” did fail to discharge their full

duty, and that they have shown what was their loss and

at least Glass’s profit. This they claim to have proved as to

Glass in two respects: (1) that he was party to fixing the

minimum prices of the “U.O.P.” assets too low; and (2)

that he not only failed to give adequate publicity to the

sale, but that he actually “chilled” the bids. We repeat

what we said upon the first appeal, that a receiver “is ‘bound

to act fairly and openly with respect to every aspect of

the proceedings before the court. * * * The court, as well

as all the interested parties,’ have ‘the right to expect that

all its officers,’ including the receiver, will not ‘fail to re-

veal any pertinent information or use their official position

for their own profit or to further the interests of them-

selves or any associates.’* <A receiver has the ‘affirmative

duty to endeavor to realize the largest possible amount’

for the assets of the estate.** If he has vital information

which, if disclosed, might bring a better price for the

property * * * he must fully disclose it ‘prior to the sale

when the prospects (are) greater for successful bargain-

ing.” It is with these principles in mind that we will

consider what the record discloses as to both the faults

charged against Glass. First, as to the minimum prices that

the reorganization committee—with the consent of Glass—

fixed for the sale of the “U.O.P.” assets. These consisted

(1) of all the shares in the Eureka company, which held

82.44% of the shares of the Turman Company, which in

turn had three extremely profitable leases in the Oklahoma

oil fields; (2) of a guaranty by the Imperial Oil Corpora-

Crites, Inc. Vv. Prudential Co., 322 U. 8. 408; Woods v. City Bank Co..

312 U. 8. 262, 263.

=? Jackson v. Smith, 254 U. S. 586, 588.

t Phelan vy. Middle States Oil Corporation, 154 Fed. (2) 978, 991.

2037

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REEL LER PHASE RRO ES igs PORE GREE ER Bs

tion, and (3) of the intercorporate claims of “U.O.P.”

against “M.S.O.” and a number of its subsidiaries, which,

though not pledged to the bondholders, as were the Eureka

shares, were nevertheless security for any deficiency under

the mortgage because the bondholders were substantially

the only creditors of “U.O.P.” The price fixed by the com-

mittee for the Kureka shares was $1,450,000, and Judge

Smith found that it was “fair.” The “Bondholders” chal-

lenge this finding and the question is whether his finding

is “clearly erroneous.” In appraising the shares the judge

adopted four possible approaches; of which, however, we

need concern ourselves with only two, for he found that

“of the various balance sheets in evidence, those entitled

to most weight in determining value are those based on

capitalized earnings and contemporaneous market values

of stock.” There was no evidence of quotations of actual

sales of Turman shares during 1929; only of the bid and

asked quotations, and it is quite true that these are not very

reliable sources for “contemporaneous market values of

stock.” Indeed, in New York apparently they are treated

as wholly incompetent.* However, under Federal Rule

43 (a) evidence, incompetent under the law of the state

where the trial is had, may yet be received in a federal

court; and we do not see why actual asked prices in accepted

publications should be utterly incompetent as evidence at

least of maximum values, in absence of evidence impeach-

ing their good faith. True, bid and asked prices give us

nothing but the extremes between which sales, if any,

will take place, but it seems to us that the asked prices

may be taken as some evidence that the value was no

higher. The asked price for Turman shares, from April

10 to October 10, 1929, was between $4 and $8; and between

= Wildes vy. Robinson, 50 App. Div. 192; Beardsley v. Nieblo Manu-

facturing Co., 251 App. Div. 152.

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te

October 10, 1929 and April 10, 1930, it was between $4 and

$6. No doubt any attempted appraisal can be only approxi-

mate; but we cannot say that $4 was a “clearly erroneous”

approximation, in face of the fact that throughout this year

nobody appears to have been willing to offer more than

$5 for the shares,

Be that a it may, in several decisions* the Supreme

Court has treated as a particularly reliable method of

appraising the value of corporate shares (we assume this

to presuppose the absence of actual sales upon an open

market) the capitalization of the “reasonably to be antici-

pated earnings” of the corporation; and we have read these

cases as laying it down “that the best test of the value of a

going commercial enterprise is its earning capacity.” **

What is the proper coefficient to apply to the earnings the

Court naturally has never made any attempt to declare;

obviously it must vary with the nature of the business, and

in the case of a wasting asset, like an oilwell, it will be much

higher than in an ordinary industry, because the earnings

then include part of the capital. The earnings of the Turman

company for the five years preceding 1930 had varied

greatly owing to the fact that in 1927 some new wells went

into large production. The net income for the three years

1927, 1928 and 1929 (disregarding for the moment any

“non-recurrent” disbursements) was about $1,057,000, or

an average of $352,000. On the other hand the vears 1925

and 1926 had shown a net loss of about $64,000, so that if

the whole five years are considered together, the average

hecomes what Judge Smith found it to be: $198,519.57.

Moreover, the average income for the five vears from 1929

sd Galveston, IT. §& S. A. R. Co. v. Texas, 210 U. 8. 217, 226: Consolidated

Rock Products Co. v. Du Bois, 312 U. 8. 510, 525, 526; Group of Insti-

tutional Investors v. Chicago, M., St. P. § P. Ry., 318 U. 8, 523, 540.

bi Dudley v. Mealey, 147 Fed. (2) 268, 270.

20389

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to 1934 inclusive was $81,403.38. However, since the five

years that followed 1929 were those of the Great Depres-

sion, the “Bondholders” with some warrant protest against

their inclusion, for, although all values began to melt in

October of 1929, no one in December “reasonably antici-

pated” the extent of the collapse that followed. On the

other hand, it would be unfair to take the three productive

years 1927-1929 inclusive as a proper measure of the future,

for no one could know how long the new wells would last;

and indeed, the income for the year 1928 was already

only a little more than 75% of that for 1927, and that for

1929 was still less. The year 1925 resulted in a loss of

over $111,000; and, if it be thought unfair to include it,

certainly it would be permissible to take the four years

1926-1929 inclusive: which gives an average of about

$276,000. At a coefficient of 10 this would of course make

the value of the Turman shares $2,760,000 of which 82.44%

owned by Eureka would be $2,275,000, of which $1,450,000

is less than 64%. On the other hand the average coefficient

of appraisal in the case of nine oil corporations comparable

with Turman was 19.31, and that, even though it were ap-

plied to the average earnings for 1926-1929 inclusive, gives

a value of less than $1,430,000, of which 82.44% is only a

little more than $1,100,000. Indeed, if the lowest coeffi-

cient of six of the nine companies—15—he taken, the value

of the Eureka proportion is only about $1,500,000. Plainly

therefore $1,450,000 was not a “clearly erroneous” figure to

set as a “fair” price under this hypothesis.

The “Bondholders” complain of the omission from the

computation of the average annual income of the Turman

company of what they call the “non-recurrent” items ap-

pearing upon one of their exhibits—No. 170. Some of the

items deducted appear to be such that they would have

had, at least in part, some equivalents if the Eureka com-

pany had not been in receivership; from the face of the

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exhibit it is impossible to say that under another name

they might not have been a usual corporate expense. How-

ever, Suppose we accept them all as they stand, as “non-

recurrent,” and take an average of income for five years,

and, for a coefficient, the average, 19.31. At the average

for five years—$374,000—this would make the Turman

shares worth substantially $1,800,000, of which 82.44% is

$1,484,000. And even though we count only the four years,

1926-1929 inclusive, so that the average income was $414,-

500, the value of the Turman shares was less than $2,150,000,

of which 82.44% is $1,775,000, of which in turn $1,450,000

is more than 80%. Certainly, 20% of the price that a seller

would take at an unforced sale is not an unreasonable dis-

count for a price at a forced sale at auction. Thus, even

though we take the “non-recurrent” items at their face, the

minimum price for the shares was “fair”; certainly it

would be beyond any possible propriety to hold that a find-

ing that it was “fair” was “clearly erroneous.” On the

whole our guess is that it bordered on the high side.

The only other assets of “U.O.P.” were the guaranty

of the Imperial Oil Company and its claims against ““M.S.0.”

and the other corporations in the Haskell System. We shall

include these together in our discussion, for the same con-

siderations govern the disposition of each. Two orders were

entered, one, on December 14, 1929, and the other, in May,

1930, professing to liquidate the intercerporate claims of

the various enmeshed companies. The * Bondholders” pro-

test that these orders are not conclusive; and, although

we do not find it necessary to hold whether they were, we

will assume for argument that they were not. They were

nevertheless bona fide efforts to learn what were the mutual

credits and debits; and we accept them as some evidence

of what the claims were; certainly they are the best avail-

able. We need consider only the three largest claims of

“U.0.P.”: that against “M.S.0.” for nearly $1,400,000; that

2041

Peete vimercensnnswrsn. aR TN TC Te aM

against Reliable Securities Corporation for about $2,000,-

000; and that against Imperial Oil Corporation for about

2,250,000—a total of over $5,500,000. The first question

is whether it was proper to sell these claims without some

authoritative settlement of their validity and amount. In

the ordinary case it might indeed be true that it was not

proper, for obviously, until then bidders could not know

what they would get if their bids were accepted. However,

this was as far as possible from being the ordinary case.

The receiverships had been going on for five years, during

which the “Receivers” had been making continuous efforts

to find out what were the mutual rights and liabilities of

the maze of corporate entities. Judge Smith found that

“the books of the companies were either non-existent or

inaccurate. Advances had been made between the com-

panies, proceeds from the sale of stock recorded as income

from oil sales, and other irregularities existed.” As early

as November, 1924, an accounting firm employed by an

engineering firm, which in turn the “Receivers” retained,

had reported that the part of their work “by far the most

difficult of accomplishment” was to “develop a history of

transactions affecting capital stock and bond issues, the

acquisition of properties and securities, and establishing

the considerations paid, as well as real intrinsic values

thereof; ascertain dividends declared and paid, determine

present ownership of leaseholds and if possible ascertain

the earnings and expenses since incorporation in 1917.”

To this the accountants prophetically added that “the pos-

sibility looms up that all the real facts will never be en-

tirely disclosed.” In June of 1925 the “Receivers” reported

to Judge Knox that the books, records and accounts of

the Middle States Oil Corporation and its subsidiaries

prior to the Ist of January, 1924, were so incomplete. com-

plicated and confused that it was impossible readily to

ascertain approximately the financial condition of the com-

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ere ies 1

4

panies or their true financial relation to one another.”

It is quite true that in May, 1928, nearly three years later,

they reported that “inventories of all physical equipment

** * have been completed” and that “valuation engineers

are now at work completing their appraisals of all of the

leaseholds” which “will be used as the basis for proper book

entries as of January 1, 1928.” It was their purpose “to

thereafter present recommendations to the Court for the

disposition, without litigation, of these intereorporate ac-

counts upon notice to all interested parties.” They felt

it their duty, they said, to have the companies come out

“with their affairs in order. To bring such a condition

about, from the lack of record and the chaos as to existing

record which the receivers found * * * has been a mammoth

task.” “Fortunately the end is in sight. The complications

which remain are few in number. The facts with respect

to them have been clarified.” Nevertheless, they added

that the “solution depends in large part upon the common

sense attitude of the parties involved, in working out ad-

justments as between themselves. If they fail to apply

common sense, then they will have themselves only to thank

for any delay in the resumption of the business affairs

of these companies.” It turned out that the hopes of the

“Receivers” that the parties would adopt “common sense

attitudes” were not realized, and Judge Knox had already

become very restive at the continued delay, for, beginning

in March, 1928, he several times expressed his “grave con-

cern” at the accumulating cost; and on March 3, 1929, he

summoned the “Receivers” and the committee to appear

before him on the 9th and discuss “various features of the

case.” There followed a number of hearings at all of which

Judge Knox pressed both the “Receivers” and the commit-

tee to prepare a plan of reorganization that might put an

end to the extreme waste that kept on. Judge Smith found

that the “Court pressed for action looking toward reor-

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ganization and termination of the receiverships, insisting

in early 1929 that positive action be taken.” He also found

that “delay in reorganization would have run the costs up

so that the chance of any organization surviving would have

disappeared.”

It is against this background that the action of the com-

mittee with Glass’s concurrence is to be judged. We do not

mean to intimate that Judge Knox was wrong in insisting

that the Gordian knot must be cut at any cost; but we do

mean that, right or wrong, as to Glass at any rate his deci-

sion was imperative; for it would he patently absurd to

hold a receiver liable for complying with an order that was

within the jurisdiction of the court that appointed him.

Therefore, whatever were the consequences of selling the

claims before they were liquidated, and however necessary

liquidation ordinarily may be, Glass’s liability is to be

judged by whether he did the best he could within the lim-

ited time granted him. Nor can we find any evidence that

he concealed from Judge Knox anything that bore upon the

situation. His reports, after he became receiver, were very

full, and he was in constant communication with the judge.

The chief basis of the charge of concealment is that he

did not tell Judge Knox of his conflicting personal interests,

and as we have seen, there were none such. Incidentally,

Glass gave evidence of a proper sensitiveness upon the

score of divided loyalty after he accepted the presidency

of “M.S.P.,” though still a receiver. True, there was an

inevitable conflict of interest between the corporations

whose claims were being appraised, for any reduction in

the credit of one was a release of debit to another; but,

just as in the case of failing to pay interest upon the

“U.O.P.” bonds, these were conflicts that the very nature

of his duties required him to decide; and they can be

charged to him as a fault only by a misconception of the

meaning of the doctrine invoked.

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We must therefore accept it as an inescapable condition

that some value had to be set upon the claims of “U.O.P.”

against “M.S.O.” and its subsidiaries within a period that

did not allow any authoritative liquidation. We cannot

see what more either the committee or Glass could do than

to make the best approximation that was available; all

that was open to them was a “solution” that depended “in

large part upon the common sense attitude of the parties

involved in working out adjustment as between themselves.”

In short, they were bound to do the best they could within

the time they had even though the result were no better

than a guess. There is not the slightest evidence that this

is not exactly what they did; although the claims due to

“U.0.P.” on their face were for the very large amounts

we have mentioned, they appraised them at only $300,015,

of which they took $200,010 as a fair minimum price. This

appraisal depended upon the labyrinth of cross claims

between the corporations making up the “M.S.O.” system;

and we do not know how they were reached, nor is it neces-

sary that we should; they stand unless they are shown to

have been incorrect and they have not been. Moreover,

even were we to match our judgment against that of Judge

Smith, it would be the height of presumption for us to say

that his approval was “clearly erroneous.”

In one respect it is true that his finding does open a ques-

tion for our review. A price was apparently first fixed at

what was called the value of an asset for “reorganization

purposes,” meaning its value to a going concern, and the

minimum price was fixed at two thirds of that amount.

In the case of the Eureka shares the question does not arise

whether this was too large a discount because, as we have

shown, there was ample evidence justifying at worst an

appraisal of which the minimum price was 80%—a dis-

count too obviously proper to need any defence. In the

case of the guaranty and the intercorporate claims, al-

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Migs? MLA TI AE Sg 5

Lnstgae

though there is indeed no such objective test, the nature

of the property was such as to make a large discount in-

evitable. In order to judge the propriety of the appraisal

for “reorganization purposes,” let us first assume that

“U.O.P.” wished to dispose of all the intercorporate claims,

being free to keep them, if it did not get a satisfactory

price; but, nevertheless, desiring to do so without authorita-

tive liquidation. Such was the occasion on which $300,015

was set as a fair price for the claims, which, as we have said,

it was not “clearly erroneous” for Judge Smith to accept

as “fair.” Let us then contrast this with the “fair” price

at a forced sale at auction. “In business life forced sales

for cash are such a last resort for obtaining money that

a sale ‘under the hammer’ is synonymous with a sale at a

sacrifice, and prices obtained at such sales have usually

been rejected by courts when tendered as evidence of

value.” * How then can we say what was a “fair” price

when the seller was forced to sell at auction and without

any opportunity to bargain? The truth is that any decision

inevitably is a speculation, where no more may be demanded

than an honest effort to decide questions of validity that

have no available answer, and to measure values that are

not measurable. That does not indeed mean that a figure

could not have been put that was plainly wrong; but any

guess that we might substitute would have as little likeli-

hood of being right as the honest guess of those who were

very much better informed. The discount of one third,

used as to assets of this kind, was within permissible

latitudes.

Therefore we conclude that both as to the Eureka shares

and as to the guaranty and intercorporate claims Judge

Smith’s findings that the minimum prices set were “fair”

should not be reversed; and there remains only the ques-

. Geddes v. Anaconda Copper Mining Co., 254 U. S. 590, 602.

2046

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tion whether Glass was delinquent in his duties, as receiver,

upon the sale. As we have already said, we can find noth-

ing to warrant the charge that he concealed from Judge

Knox any information that he had about the affairs of the

company; so that this phase of the dispute depends upon

(1) whether the sales of the U.O.P. assets were conducted

in accordance with the decrees; and (2) whether the “Re-

ceivers” failed to discharge any additional duties to secure

the attendance of bidders impliedly imposed on them as

receivers. The Eureka shares were sold apart from the

“unpledged” assets under the decree of November 15, 1929,

entered in a suit brought by the Chatham-Phenix Bank,

as mortgagee, to foreclose the mortgage upon them and

to enforce the guaranty of the Imperial Oil Company. The

“unpledged” assets—i.e. the intercorporate accounts—were

sold under the decree of November 22, 1929, in one of the

creditors’ suits brought by Phelan. The foreclosure de-

cree directed the special master to publish a notice of

the sale in certain specific newspapers, but the notice itself

gave no information about the shares. The decree in the

Phelan suit directed the sale of all the “unpledged” assets

of U.O.P. as one out of four separate “parcels,” and later

a sale of this “parcel” together with the three others:

the master was to accept the aggregate bid, or the sum of

the four bids, whichever was higher. Article Sixth of this

decree required the special master to “file with the Clerk

of the Court a statement showing and describing as defi-

nitely as practicable and made up to the latest day reason-

ably practicable, but in general terms,” the following in-

formation: (1) all the assets of the “Holding Companies”:

ie. “M.S.O.," “U.0.P.,” Imperial Oil Corporation and Oil

Lease Development Company; (2) all liens and charges by

pledge or deposit created by these four companies; (3) all

tax claims against them, state or federal; (4) all unpaid

liabilities including any executory contracts assumed, or

2047

executed, by the “Receivers”; and (5) all executory con-

tracts made by the companies themselves and still out-

standing. The receivers filed such a “statement” in four

parts: one for “M.S.O.,” one for Imperial Oil Company ;

one for “U.O.P.”; and one for Oil Lease Development Com-

pany. That for “U.O.P.” stated the cash on hand and the

Eureka shares, both as being held as security for the bonds;

next it stated certain claims, “amounts undetermined,”

against the Haskell interests; next, it mentioned “miscel-

laneous accounts receivable securities and assets believed

to be worthless and uncollectible’; next, it mentioned

“claims against various subsidiary and affiliated companies

for post receivership advances”; next, the three “inter-

company claims against subsidiary and affiliated companies”

aggregating about $4.500,000; next it set forth the mort-

gage securing the bonds; next, an “undetermined tax lia-

bility, if any”; and finally, it concluded by mentioning all

the open allowances “to be fixed by order of the Court,”

(“undetermined tax liability if any”—a repeat—) ; “current

office salaries and expenses,” “claims by various subsidiary

affiliated companies for post receivership advances”; no

executory contracts of any kind. All the four statements

contained the following addendum: “Further information

with respect to the foregoing may be obtained upon re-

quest at the offices of the Receivers, Room 1401, 170 Broad-

way, New York, N. Y.” In their offices the receivers did

have complete records of all the accounts and the results

of their work for the five vears that they had heen in office:

and, so far as appears, these would have been accessible

to anyone who showed a genuine interest in bidding at the

sale.

Judge Smith found that this statement “was wholly

inadequate to inform bidders as to the assets to be sold,

the receivers’ liabilities to be assumed by the bidders, and

the status of the government tax claims and the receivers’

2048

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claims for tax refunds.” On the other hand, he also found

that the “plan of reorganization available since June 1929,

had made it plain that all or almost all the tax claims were

expected to be defeated and refunds of substantial amounts

obtained.” True, the statement itself was positively “imis-

leading in that it listed large government tax claims with-

out reference to the favorable progress of the tax litiga-

tion”; but it was “unlikely that any prospective bidder

would stop at the perusal of the statement without further

inquiry of the receivers.”

In general the “complexities of

the inter-corporate relationships, and of bringing down to

date the valuations of physical assets and adjusting them

to their book listing for the intervening periods were so

great that no prospective bidder could have obtained suffi-

cient information to judge independently without assistance

from someone in the receivers’ organization the value of

the assets sold within the period from the filing of the

It would have been wholly im-

possible within the time allowed to make anything approach-

b]

statement to the sales.’

ing an adequate disclosure of the whole web of claims and

cross-claims that a group of utterly unserupulous stock

jobbers had woven before 1924, and that had been con-

tinued as a single business by order of the court. More-

over, even if it had been possible, no reasonable bidder

would have relied upon it without verification from the

offices. All that Article Sixth

required was that the statements should declare enough

’

documents in the receivers

to advise all who might be interested as to what was the

general character of the property, claims and liabilities

that were to he disposed of, in enough detail to send them

to the original sources, if they had any serious purpose

to buy. Indeed, the article itself required no more than

a statement “in general terms.” Not only was it impossible

to prepare more, but more would have heen useless, if it

had been prepared. The complaint that all the papers

2049

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were not filed in the clerk’s office is too trivial to justify

an answer. It may be true, as Judge Smith said, that as

to the tax liability the statement was, not only inadequate

but actually misleading, for taken by itself as it read, it

gave no intimation, not only that any liability was un-

likely, but that there would probably be a large refund.

It does not appear how much of the whole tax controversy

affected the interest of “U.O.P.,” with which we are alone

concerned here; but we will not rest upon that, because

we agree with the disposition made of it by Judge Smith:

“it is inconceivable * * * that anyone seriously interested

in bidding would not have made further inquiry of the

receivers.”

Since the foreclosure decree required no more than the

notice in fact published, the sales were in conformity with

its directions, and the question as to the sale of Eureka

shares is whether the “Receivers” should either have seen

to it that the decree contained more specific publicity, or

should, independently of the decree, have done more to

procure the attendance of bidders, both as to the shares

and the “unpledged” assets. We understand Judge Smith

to mean that they did fail to perform their duty, when

he said that “no intensive effort was made by the receivers

to find outside bidders.” This understanding of his mean-

ing is confirmed by the following additional passage: “un-

less therefore the receivers are to be required to make

good an amount in excess of what could have been obtained

on foreclosure and receivership sales had they completely

fulfilled their duty of disclosure, and active seeking of

prospective bidders, there is here no amount to be sur-

charged for their failure to fulfill that duty.” We agree

that a receiver is ordinarily under such a duty, but it is

one to be measured by the particular occasion; and the

scope of any duty is a question of law, not of fact, which

we are free to determine as res nova. Coming then to

2050

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the measure of the duty to seek out bidders, we note that

on September 25, 1928, June 1, 1929, and November 13,

1929, Glass did establish contact with corporations, Ameri-

can or Canadian, which might have been interested in merg-

ing with “M.S.0.”; and it does not appear that there were

any other opportunities for disposal of the assets in whole

or in part. The “Bondholders” reason as though the sale

had been of a piece of real property, the contents of a

house, a retail business, or a completely integrated mer-

cantile or industrial plant. That would be a completely

delusive analogy; no casual bidder was conceivable for

such property, either of the “Second Parcel”—the “U.O.P.”

assets alone—or all four “Parcels” together. The only

possible bidder for all four “Parcels” would have been

some group or combination, already familiar with the oil

business in Oklahoma; and it is extremely unlikely that

such a group would not have known that for over five

years “M.S.O.” had been in receivership. Moreover, they

would have expected that the receivership would end in

some sort of reorganization as a condition of which the

assets would almost surely be offered for open sale at

auction. It appears to us unreasonable to suppose that

any such group would have needed notice of such a sale,

involving as it did taking over the whole vast snarl of inter-

related corporate transactions during seven years and

more of stock juggling. So far as anyone could reasonably

anticipate, there would be no market for such an aggrega-

tion of rights and liabilities; but, if there was any, the

bidders did not need to be alerted. There was even less

reason to suspect the existence of any bidders for the

“U.0.P.” “unpledged” assets sold under the decree in the

creditors’ suit, for the major part of these was the inter-

corporate accounts, whose purchaser would have merely

bought into an incredibly complicated nest of law suits.

Therefore, except as to the Eureka shares sold in fore-

2051

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closure it seems to us that the “Receivers” cannot be said

to have failed in their duty. As to this property the

answer is certainly not plain. True, they were not the

kind of property that would be picked up by a random

purchaser looking for bargains. Nothing is more uncertain

than the life of an oil well; and those who buy them

would presumably be already familiar with the business

and likely to be aware of new developments. The Seminole

fields on which the value of the Turman, and of the Eureka,

shares depended had been in rich production for three

years, and it seems to us unlikely that any persons who

would have been interested in acquiring them would not

have learned who controlled them, and that they were to

be sold.

If we thought it necessary to decide the question, we

might, however, agree with what we understand to have

been Judge Smith’s conclusion, although it is not a finding

of fact, that the “Receivers” did not do their full duty as

to the Eureka shares. On the other hand, since the “Bond-

holders” had the burden of proof to show that this default,

if it was a default, resulted in loss to them, and since

they have not shown that there were any bidders for the

shares, it is not necessary to decide whether there was a

default. As Judge Smith said, there was “no evidence,

except the receiver’s own testimony, as to whether such

outside bidders, if found and fully informed, would have

made bids in excess of the reorganization committees’

bids”; and he accepted Glass’s testimony that the value

“placed on the mongrel assets” (by which we understand

the “unpledged” assets), “for reorganization purposes, was

considerably higher than any outside interests could safely

or would, with any degree of probability, have bid.” Again

in the same vein, he said: “Unless, therefore, the receivers

are to be required to make good an amount in excess of

what could have been obtained on foreclosure and receiver-

2052

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ship sales had they completely fulfilled their duties of dis-

closure, and active seeking of prospective bidders, there is

here no amount to be surcharged for their failure to fulfill

that duty.” It is true that the “Bondholders” deny that

the burden rested upon them to show that some loss resulted

from the “Receivers’” fault; they maintain that, as soon

as a beneficiary proves that his fiduciary has failed in the

discharge of any of his duties, he must clear himself by

proving that it caused no loss. However they refer us to

no decisions so holding; and of course the ordinary rule

as to tortfeasors is the opposite. Moreover, the practice

in equity was always to require the beneficiary to prove any

“surcharges,” which he wished to impose upon a fiduciary ;

and so far as we have found, no distinction has ever been

made between proof of the default and proof that some

loss arose from it.* We are to distinguish the well settled

doctrine that, when the sufferer from a tort proves that

it has caused him some loss, he is not bound to prove its

precise amount.** If the “Bondholders” had proved that,

if the “Receivers” had searched for bidders further than

they did, they would have secured one who would have

outbid the reorganization committee, we will assume that

that would have been enough; the “Bondholders” would

not have been bound to prove by how much such a bid

would not have paid the bonds; but they proved the exist-

ence of no such bidder. As res integra, we can see no

reason to extend the implementary rule to occasions, where

Berner vy. Equitable Office Building Corp., 175 Fed. (2) 218, 220

(C. A. 2); Palima vy. Fox, 182 Fed. (2) 895, 900 (C. A. 2); Pappathanos

v. Oakley, 263 Mass. 401; Campbell v. Campbell, 8 Fed. Rep. 460;

McManus v. Sawyer, 231 Fed. Rep. 231 (S. D. N. Y.) ; Daniels Chancery

Pleading & Practice, p. #1225; Bates Federal Equity Pleading, Vol.

II, § 763.

gic Eastman Kodak Co. v. Southern Photo Co., 273 U. §. 359; Story

Parchment Paper Co., 282 U. 8. 555; Bigelow v. RKO Radio Pictures,

327 U.S. 251.

2053

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although the fiduciary has been shown to be in default,

the beneficiary has failed to show that it has caused him

any loss. It is one thing to do that when the default in-

volves disloyalty to the beneficiary, for that is a violation

of the trust that lies at the very root of the relation, a

relation that by its nature gives the fiduciary power to act

for the beneficiary without his concurrence. But although

the fiduciary engages to act in the sole interest of the bene-

ficiary, he does not insure that he will always keep within

the limits of his duties. He may misunderstand them; he

may be forgetful; he may even be negligent; but he has not

been truant to the good faith that he promised to devote

to his undertaking. We see no reason why a lapse that

does not involve such a breach should throw upon him the

duty of disproving a loss that may not have happened at

all, and bestow on the beneficiary a windfall to which he

may not be entitled if the whole facts could be proved.

In such a posture of the proof we can see no reason for

not following the usual procedure.

There remains the question whether Glass is liable

under the Boyd Rule.* The argument is that the reorgan-

ization was illegal because the new securities to be issued

against the new assets of “M.S.P.” were not equal in

tenor and priority to the bonds of “U.O.P.” that the

‘“‘Bondholders” were to surrender in exchange. The Plan

proposed an exchange of the “U.O.P.” bonds (secured as

they were, principal and interest, by the Eureka shares)

for “M.S.P.” bonds for whose principal and interest all the

property of “M.S.P.” was lable. Since that property in-

eluded all the property of “U.O.P.,” and also all that of

the three other “Parcels,” and since no added secured bonds

were to be issued by “M.S.P.,” there could have been no

complaint if the new bonds had been the same in tenor

* Northern Pacific Ry. v. Boyd, 228 U. 8S. 482.

2054

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and priority as the old. This was however not true: the

maturity of the new bonds was accelerated, the future

interest was reduced from eight to six and one half per

cent, and the accrued interest, amounting to nearly a million

dollars, was refunded into a preferred stock—“Class A’”—

an issue shared with two creditors of “M.S.O.”: i.e. the

“Series Notes” and the “Gulf Coast Claim.” In deciding

how far this violated the rule, we must of course consider

its authoritative statement. At the outset the Court intro-

duced a caveat in these words: “This conclusion does not,

as claimed, require the impossible and make it necessary

to pay an unsecured creditor in cash as a condition of

stockholders retaining an interest in the reorganized com-

pany. His interest can be preserved by the issuance on

equitable terms, of income bonds or preferred stock” ;*

and in Kansas City Terminal Ry. Co. v. Central Union

Trust Co., 271 U. S. 445, 456, the Court rephrased this

as follows: “whenever assessments are demanded, they

must be adjusted with the purpose of according to the

creditor his full right of priority against the corporate

assets, so far as possible in the existing circumstances.”

Upon this variant in Case v. Los Angeles Lumber Prod-

ucts Co., 308 U. S. 106, 122, the Court appended the fol-

lowing gloss: “where the debtor is insolvent, the stock-

holder’s participation must be based on a contribution in

money or in money’s worth, reasonably equivalent in view

of all the circumstances to the participation of the stock-

holder”; the final statement of the doctrine is in Group

of Institutional Investors v. Chicago, Milwaukee, St. P.

dé P. R. Co., 318 U. S. 523, 565, and reads thus: “It is

sufficient that each security holder in the order of his

priority receives from that which is available for the satis-

faction of his claim the equitable equivalent of the rights

“ Northern Pacific Ry. v. Boyd, 228 U. 8. 482, 508.

ep:

| ees Ba Saad Se ai SOR a atta a

surrendered. That requires a comparison of the new securi-

ties allotted to him with the old securities which he ex-

changes to determine whether the new are the equitable

equivalent of the old. But that determination cannot be

made by the use of any mathematical formula.” This was

reaffirmed in Otis & Co. v. Securities & Exchange Com-

mission, 323 U. S. 624, 639, 640.

Applied to the case at bar, the relevant inquiry is there-

fore whether the addition to the property of “U.O.P.” of

the assets of the three other “Parcels” made the “M.S.P.”

bonds when issued “an equitable equivalent” of the old

bonds. In other words whether the added security so given

to the principal of the old bonds was a fair substitute for

reducing the future interest, accelerating the due date

and refunding the past interest into A shares. Judge

Smith found that it was, for he said that the ‘“‘bondholders

received * * * the substantial equivalent of the debt owing

to them, both principal and interest,” and if this is a find-

ing of fact, certainly it would not be “clearly erroneous.”

Assuming for argument that it is not such a finding, we

must weigh the value of the old securities against that of

the new, which it is impossible to do without a better

appraisal than is possible of the assets contributed by the

other ‘‘Parcels”: te. without a liquidation of the inter-

corporate claims. Thus, as to this question also the an-

swer turns upon who had the burden of proof to show

that the conveyance was fraudulent; and there is no rea-

son to impose it upon Glass. To the argument that he

was responsible for putting through the reorganization

before these facts could be ascertained, we answer, as we

did before, that the fault, if it was a fault, was not his,

for his orders were peremptory. Considering the means

of appraisal accessible to the committee within the time

allowed them, there was adequate evidence to support

Judge Smith’s conclusion, for the exchanges provided in

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Ps 3

ed

the Plan were the result of an honest attempt to take into

account the numerous factors that controlled values and,

so far as appears, the values assumed were as near the

truth as was possible in the circumstances.

It is true, as Judge Smith observed in his opinion, that

the Plan was apparently unfair to the creditors of “M.S.0.”

other than the “Series Notes” and the “Gulf Coast claim,”

in that they received only shares of B stock in “M.S.P.,”

part of which was distributed also to the shareholders of

“M.S.O.” However, he was plainly right in refusing to

allow the “Bondholders” vicariously to assert the wrongs

of the other creditors. We do not forget that on the first

appeal* we said that “the surcharging is not limited to

an amount measured by the interest of the particular per-

son thus objecting to the receiver’s accounting, since the

surcharge is for the benefit of all similarly situated per-

sons. For the court, in administering the estate in its

custody for all the beneficiaries, must see to it that none

of them suffers because of the misconduct of its receiver,

and the discharge of that obligation should not depend

upon their appearance in court to voice their objections

to that misconduct. Cf. Moon v. Winemann, 57 Minn. 415,

59 N. W. 494, 495. Thus, if the judge learned of the mis-

conduct from a wholly neutral source (ef. Investment Reg-

istry v. Chicago & N. E. Ry. Co., supra, 212 F. at page

608), he should surcharge the receiver and distribute among

all interested the money owing to the estate by the receiver

because of that misconduct.” This was a note in support

of the conclusion that the “Bondholders” should not be

harred because of Cohen’s possible laches; it did not sug-

gest that Glass could be held liable in this suit to creditors

of “M.S.O.,” or of any other corporation. The question is

. Phelan v. Middle States Oil Corporation, 154 Fed. (2) 978, 992,

note 13.

2057

a ERED SONS ORI 7 NRE aS ARS Ra Nats aN

not whether the conveyance, i.e. the reorganization, should

be set aside (nobody asks that); it is whether Glass should

be held liable because it is not set aside. His liability in

the case at bar is as receiver of “U.O.P.,” and it is irrele-

vant that he was also receiver of other corporations in other

suits. Any recovery in this suit would of course include

all the bondholders of “U.O.P”; but, even though we as-

sume, arguendo, that unsecured creditors of “U.O.P.” would

also be included, that would not serve the creditors of

other corporations. Judge Smith’s ruling is in entire con-

sonance with the note we have just quoted and we accept it.

The “Bondholders” further object that the option given

them to exchange their bonds for the new ones was fore-

closed on May 14, 1930. The original date had been five

times extended, covering an aggregate extension of four

and a half months. During that period, so far as appears,

no bondholder asked for any extension, or suggested that

he did not have the information necessary to make a choice;

nevertheless, the complaint is that the option should have

been held open until the dividend in distribution was deter-

mined. We answer that, as one extension after another

was granted, it should have been evident that there was

likely to be a limit, and that such bondholders, if there were

any, as were delaying their choice until the distribution

dividend was fixed, should have communicated with the

committee or the “Receivers,” and are in no position to

complain that their silence was taken as assent. But we

go further. Judge Knox had decided that the receivership,

already six years old, must be ended; and if “M.S.P.” was

to have a start unhampered by the past, it was essential

that it should know how many of the old bonds would be

refunded and how many it must pay off in cash. That

could not be known until the options had expired; and

not till then could Judge Knox’s decision be put into effect.

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Finally, we should not reverse the judgment on this

record, even if the “Bondholders” had proved that the

transfer violated the Boyd Rule, and that Glass had made

himself a party to the conveyance by his share in prepar-

ing it and in recommending its adoption to the chairman

of the reorganization committee. That a third party may

make himself liable to the creditors of the grantor of a

fraudulent conveyance is true ;* and apparently the original

distinction—which we followed in Duell v. Brewer, 92 Fed.

(2) 59—that the complaining creditors must have a lien is

no longer law; and in any event in the case at bar the

“Bondholders” were lienors. Mr. Glenn says that a third

person cannot be ‘charged under the statute of fraudulent

conveyances because the sole aim of that law is to nullify

the grantee’s title. The meddling outsider becomes liable

under principles that are easy to understand, but they do

not flow directly from the Statute of Elizabeth or any

modern substitute.” ** In the case at bar, even though Glass

was one of those who took part in bringing about the con-

veyance of the property of “U.O.P.,” and though he there-

fore did fulfil one of the conditions of liability, he would

not be liable unless he had known that the securities of

“M.S.P.” which were offered for the “U.O.P.” bonds were

not an “equitable equivalent”; or unless he had been in-

formed of facts from which a reasonable person would

have supposed that they were not “equitable equivalent.”

Suppose the new bonds were not in fact such an equivalent

for the old; certainly there is nothing in the record to

show that Glass thought so, or that from what he knew a

reasonable person would have thought so. On the contrary,

the only evidence is that he and the reorganization com-

_ Adler v. Fenton, 24 How. 407, 413; Findlay v. McAllister, 113 U. S.

104, 111, 114.

*

Glenn, Fraudulent Conveyances, § 56.

2059

S ~

mittee, which was more familiar with the facts than any-

one else except perhaps Glass himself, thought that the

exchange was of equivalents. Similarly, there was no evi-

dence that “U.O.P.” itself had that “intent to defraud”

which is a condition of any fraudulent conveyance under

the Statute of Elizabeth, except in cases where no fair

consideration whatever passes to the grantor,* which was

not the situation in the case at bar. “U.O.P.” was at the

time of the transfer in the custody of the court, whose

special master, as directed by the decree, executed the con-

veyance of the Eureka shares and of the guaranty and

interecorporate claims. The only persons whose intent could

have been relevant to this conveyance were the reorganiza-

tion committee itself and Glass, and the same considerations

that we have just mentioned touching Glass apply equally

to the committee. The judgment in favor of Glass will be

affirmed, and a fortiori that against Tumulty.

It is not necessary to discuss at length the “Bond-

holders’ ” claim against “M.S.P.” which was brought into

the suit after they filed their motion in 1944 to compel the

receivers to account. This claim is against “M.S.P.” as

”

;

4

4

i

4

4

4

4

4 grantee of “U.O.P.,” on the theory that the sale was a

es fraudulent conveyance; and if there was no fraudulent

3 intent there could be no recovery against even the grantee.

A

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3

a

Hence the same considerations that dispose of the claim

against Glass personally on the merits dispose of that

against “M.S.P.” However, we cannot agree with the con-

clusion below that the “Bondholders’ ” claim is not barred

3 by the New York Statute of Limitations under the doctrine

of Guaranty Trust Co. v. York, 326 U.S. 99. The jurisdie-

tion of the District Court depended solely upon diversity

a

4 of citizenship, and the substantive rights and_ liabilities

x probably depended upon the law of the place where the

4

. Uniform Fraudulent Conveyances Act, § 4.

3 2060

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transfer was made; at any rate they depended upon the

law of some state and not upon federal law. Although,

ax has appeared, the actual deed was made by a special

master of the court under its direction, the “Bondholders”

may not take the position that the transfer was illegal

under federal law, for the court confirmed it and they did

not appeal. They must argue that its validity depended

upon the same state law that determines such a conveyance

between individuals, and that the situation is as if “U.O.P.”

had made the conveyance in the course of a reorganization

out of court, in which event the Statute of Limitations of

New York would apply. Nor is it material that the final

decree in the main action enjoined all creditors from bring-

ing any action against “M.S.P.” That did not toll the

prosecution of its claims by the Bondholders”; all it did

was to compel them to assert their claims in the District

Court. Again, it is not material that Glass and Tumulty,

as receivers of the other corporations, had not been dis-

charged, As we said at the outset, the “Bondholders” had

no interest in the guaranty or the intercorporate claims

after their sale to “M.S.P.” Even if these had been sold

at too low a price, they passed to “M.S.P.” whose title

to them would not thereafter be affected by anything done

in this action. Hence the defence of the statute would be

a bar, even if the claim had been proved.

In what we have just said, we do not forget what we said

on the first appeal regarding the claim against the “Re-

ceivers”; nor do we wish in any way to throw doubt upon

it. This was what we did say, so far as it is relevant here.

“But we think that, with respect to the obligations of a

receiver appointed by a federal court, the New York rule

should not control. A claim against a derelict receiver

is not against an ordinary trustee but against a court’s

officer. Who has the right to assert such a claim is a

question affecting the integrity of the court itself. The

2061

spits

federal courts, in holding their own officers to account-

ability, should not be hampered by state court decisions

relating to ordinary trustees. When the United States

issues a check, rights in that check (despite Erie R. Co. v.

Tompkins, 304 U. S. 64) ‘are governed by federal rather

than local law.’ Clearfield Trust Co. v. United States, 318

U. S. 368, 366, 367. When a federal receiver incurs obliga-

tions through misconduct, the title thereto is, we think,

similarly to be determined by ‘federal law.’” Had the

action been against the special master who conveyed the

property to “M.S.P.,” this language would have applied,

just as it would have applied to Glass and Tumulty, had

they “misconducted” themselves. But the “Bondholders”

had no more claim against the special master than they had

against Judge Knox of whom he was the instrument; and,

to repeat, it is only on the theory that Judge Knox’s order

did not validate the conveyance, but left it as it would

have been if the conveyance had been out of court, that

any claim can exist. Hence, the state law must govern,

including its Statute of Limitations. The judgment dis-

missing the claim against “M.S.P.” must also be affirmed.

Judgment affirmed.

&.

~

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Frank, Circuit Judge, dissenting (as to the liability of

Glass) :

My colleagues concede that if Glass, as receiver of UOP,

violated his duty of undivided loyalty to any of the bond-

holders of that company, then he had the burden of proof

as to most of the matters now before us, and that then

many of Judge Smith’s findings, favorable to Glass, do

not stand up but are “clearly erroneous.” My colleagues

also concede, in effect, that whichever side ‘n this litigation

had that burden must lose the decision. I dissent primarily?

because I think that Glass was not (as my colleagues say

he was) “entirely innocent” and that he did violate that

duty, in that he had undisclosed interests, adverse to the

UOP bondholders, which might well have tended to in-

fluence him to further the interests of claimants junior

in rank to those bondholders, with respect to the assets

of UOP.

The court, in its decree of November 15, 1929, directing

the foreclosure sale of the Eureka stock, found that there

was due to the UOP bondholders, $4,500,000 (approxi-

mately), representing principal of about $2,500,000 and

interest of about $2,000,000.% So that UOP then owed

each holder of a $1,000 UOP bond about $1,833. Each holder

of such a bond, not deposited under the plan, received on

July 25, 1933, as a result of those sales, $698.55 in cash,

or about 39% of the amount due on November 15, 1929

1 I say “primarily,” since (as will appear, infra) I think that, as to

some important items, even if appellants had the burden of proof,

they discharged it.

The holders of the UOP bonds were entitled to receive semi-annual

payments at the rate of 8% plus so-called “interest participation” not

exceeding 20144% per annum.

The court, in its decree of November 15, 1929, stated that the overdue

interest and “interest participation” (together with interest thereon)

then came to approximately $2,000,000.

Omitting interest on interest, the figure was about $1,600,000.

—

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(but without interest, on the amount thus paid, from that

date to July 25, 1933). For reasons I shall state, I think

Glass had the burden of proving that this recovery was

not most inadequate and unfair.

1. Applicable Principles

As this case relates to the conduct of a receiver appointed

by a federal court, and thus affects the integrity of the

federal judicial process, I shall discuss that conduct in

some detail. The discussion divides into two major cate-

gories: (a) The unfairness of the prices paid at the

judicial sales for the UOP assets. (b) The unfairness of

the reorganization plan.

It will be helpful, by way of prelude to such a discussion,

to repeat these general principles stated in our former

opinion (154 F. (2d) at 991-992) and with which my col-

leagues now express agreement: “A receiver, as ‘an officer

or arm of the court,’ is a trustee with the highest kind

of fiduciary obligations. He owes a duty of strict imparti-

ality, of ‘undivided loyalty,’ to all persons interested in the

receivership estate, and must not ‘dilute’ that loyalty. He

is ‘bound to act fairly and openly with respect to every

aspect of the proceedings before the court. * * * The court,

as well as all the interested parties,’ have the ‘right to

expect that all its officers,’ including the receiver, will not

‘fail to reveal any pertinent information or use their

official position for their own profit or to further the

interests of themselves or any associates.’* A receiver

has the ‘affirmative duty to endeavor to realize the largest

possible amount’ for assets of the estate.’ If he has vital

information which, if disclosed, might bring a better price

2 Crites, Inc. v. Prudential Company, 322 U. S. 408; Woods y. City

Bank Company, 312 U. 8. 262, 263.

3 Jackson v. Smith, 254 U. S. 586, 588.

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for property * * * sold pursuant to court order, he must

fully disclose it ‘prior to the sale when the prospects [are]

greater for successful bargaining.’* Since failure to make

such full disclosure has ‘a tendency to dampen the sale,’

it is presumed that it did so, where the receiver had an

interest in the sale in conflict with that of any other parties

to the proceeding, ‘regardless of whether it actually had

an adverse effect or not,’ because ‘the incidence of a par-

ticular conflict of interest can seldom be measured with

any degree of certainty.’® A decree confirming such a sale

does not exculpate the receiver.” When the receiver has

brought about such a sale, and the property after the

sale has been transferred to a company in which interests

of innocent third persons have become vested, usually the

sale will not be set aside if there is available the more

practicable method of surcharging the receiver for the

difference between the price paid and the value of the

property.” Where a receiver has a possible personal inter-

ext adverse to those of any parties to the receivership, it

is usually unwise for him to participate in the reorganiza-

tion; if he does so, he must act with unusual caution. * * *

A receiver who has strayed from his duty to the injury

of anyone interested in the estate can and should be sur-

4 Crites, Inc. v. Prudential Company, supra.

fu Tbid.; ef. Button vy. Cities Fuel & Power Company, 300 F, 280, 299,

BOL (C. A. 4), cert. den, 266 U.S. 619; Investment Registry v. Chicago

g M. E. Ry. Co., 212 F. 594 (C. A. 7).

5 Crites, Inc. Vv. Prudential Company, supra; Woods v. City Bank,

supra; Jackson Vv, Smith, supra; cf. as to trustees generally, President

& Directors of Manhattan Company v. Kelby, 147 F. (2d) 465, 476

(C, A. 2); Restatement of Trusts, See. 170, comment e.

6 Crites, Inc. v. Prudential Company, supra; ef. Panaburn ¥. American

Vault, Safe § Lock Co., 205 Pa. 93, 54 Atl. 508, 510; Gutterson & Gould

v. Lebanon Iron §& Steel Co., 151 F. 72, 76-77.

i Pangburn Vv. American Vault, Safe § Lock Company, supra; ef.

Koontz v. Northern Bank, 16 Wall. 196, 202-203.

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charged when he asks approval of his final accounting.’

The rule that a receiver must not be motivated by personal

considerations is prophylactic; its sanction is a_sur-

charge.” ® See also Restatement of Agency, Secs. 387, 389

and Comments ¢ and e, Sec. 390 and Comments a and f;

Mechem, Agency (2d ed. 1914) Secs. 1188 et seq.; the

recent case of Mosser v. Darrow, 341 U. S. 267; and the

ancient authority, Matthew VI, 24: “No man can serve

two masters: for either he will hate the one, and love the

other; or else he will hold to the one, and despise the

other.”

2. My colleagues’ tacit, but untenable, key assumption,

i.e., that a “system” reorganization was essential, and that

a separate reorganization of UOP was impractical and not

for the best interests of the UOP bondholders.

Indispensable to all my colleagues’ conclusions, and there-

fore to their decision, and to Judge Smith’s, is an assump-

tion which neither they nor he ever discuss but which they

take for granted. I mean their tacit assumption that it

was impractical to reorganize UOP separately—apart

from the reorganization of the other companies in the

MSO holding company “system”—and that the UOP eredi-

tors (namely the UOP bondholders) were not disadvan-

taged seriously by a unified or “system” reorganization,

i.e., one involving the creation of a single new company

8 Crites, Inc. v. Prudential Company, supra.

9 Woods v. City Bank, supra; Weil y. Neary, 278 U. 8. 160, 173;

Crites v. Prudential Company, supra; Jackson vy. Smith, supra; Magruder

v. Drury, 235 U. 8. 106, 119, 120.

10 In an early case, it was said that a receiver is “the officer and

representative of the court * * * and having in his character of

receiver no personal interest but that arising out of his responsibility

for the correct and faithful discharge of his duties.” Beverly v. Brooke,

4 Gratt. 187, 208 (Va.).

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owning or controlling all the assets of UOP as well as

the assets of most of the other companies in receivership.

If (as I think) that assumption is untenable, then the

perspective becomes basically different. For then it ap-

pears that Glass had substantial personal interests (a)

which would be realized through the consummation of the

“system” reorganization that he furthered but (b) which

would not be realized if UOP were separately reorganized.

To make clear the fallacy of my colleagues’ key assumption,

I must briefly sketch the relation of UOP to MSO.

MSO, the top holding company, owned, directly and

indirectly, the stock of UOP. In turn, UOP owned all the

stock of Eureka, and Eureka owned some 82% of the

stock of Turman. UOP had issued, and there were out-

standing, about $2,400,000 of bonds secured by a pledge

of the Eureka stock. Of course, the lien of these bonds on

that stock (a first and only lien), and the claim of those

honds for any deficiency, were senior to any interest in

the Eureka stock which could be asserted by MSO, the

stockholder of UOP, or by stockholders or creditors of

MSO (who were but stockholders, or creditors of the stock-

holder, of UOP). The UOP bondholders were virtually the

sole creditors of UOP.

Kureka owned some 82% of the stock of Turman which

owned the most valuable property of any company in the

so-called holding company “system.” So the receivers had

stated in their reports filed in 1927 and 1928. The reorgani-

zation plan, dated July 29, 1929, said of Turman that “it is

the most successful and owns the most productive prop-

erties of all” the receivership companies. Glass testified

before Judge Smith that Turman was “really the most

important [company] in the receivership.”

The Supreme Court has recognized that the creation of

a single new reorganized company, to take over prop-

erties theretofore separate, may be justified, but only

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“where unified operations [by a new company] of separate

properties [by such a single new company] are deemed

advisable and essential.” Consolidated Rock Products Com-

pany v. Du Bois, 312 U. 8. 510, 530-531; ef. National Bank

v. Flershem, 290 U. S. 408. Here such a single new com-

pany was not at all essential to, but, as we shall see, sub-

stantially harmed, the non-depositing bondholders of UOP.

But never, so far as appears, did Glass propose, as an alter-

native to a “system” reorganization, the separate reorgani-

zation, by the UOP bondholders, of UOP. In the long trial

leading to this appeal, he did nothing to show, and Judge

Smith did not find, that such a separate UOP reorganization

was impractical or not markedly more advantageous to

UOP bondholders—as distinguished from MSO stock-

holders and MSO’s other creditors—than the “system” re-

organization which he recommended.

Such a separate reorganization could easily have been

accomplished by a foreclosure sale of the Eureka stock,

at which the UOP bondholders (with their huge claim

for principal and unpaid interest) could have outbid any-

one else. The earnings of Turman would have made it

entirely feasible for such a separately reorganized UOP

company to go it alone; the record contains nothing to

indicate (nor does Glass argue) the contrary.”’ In this

connection, it must not be overlooked that, as UOP re-

ceiver, Glass served as the fiduciary of all the UOP bond-

holders, not merely those who assented to the reorganiza-

tion plan.

1l In a letter of October 27, 1927, Glass wrote that there were some

of the companies in the “system” whose “only reason for being in

receivership is the misfortune of having been connected with Middle

States.”

The “misfortune” of the UOP bondholders was that, because UOP

had been “connected with Middle States,” Glass did not give con-

sideration to a plan for reorganizing it separately, since he had a per-

sonal interest in a “system” reorganization.

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I shall discuss later, in detail, the judge's pressure for

a reorganization. Here I note that never did the judge

press for a “system” reorganization; nor did he ever ap-

prove the plan, after notice and hearing, as to its fairness.

The provision of his order of October 3, 1924, appointing

the receivers, that the receivers, during the receivership,

should administer the properties of the several companies

“as an entirety,” was not, of course, a direction that a

reorganization plan should deal similarly with those prop-

erties. Indeed, that very order of October 3, 1924, -ex-

plicitly provided that the receivers should “keep and main-

tain all the properties and assets of the defendant

companies separate and distinct from those of the other

defendant companies, and do such things and preserve

and keep such records as shall maintain and preserve

separately at all times the identities of the respective

properties of the respective defendant companies, and to

open and keep separate books of accounts and records for

each and every of the defendant companies so as to show

at all times the separate business transactions of the

separate defendant companies.”

In the light of the foregoing, IT now address invself to

Glass’ personal interests adverse to those of the UOP

bondholders.

3. Glass’ undisclosed personal interest in a fee for ser-

vices rendered in 1924 to the MSO stockholders’ committee.

Glass’ career in these receiverships illuminates his con-

duct. That career began in 1994 when, in the court below,

as lawyer for Shivers, a stockholder of MS ), Ina stock

holders’ suit, he sought to have a receiver appointed for

that company. Before the court took action in that suit,

Phelan, a creditor of MSO—whom Glass did not repre.

sent—filed a bill, also in the court helow, seeking a receiver-

ship of MSO. The court consolidated the Shivers and

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Phelan suits, and appointed two receivers. Under an

amended and supplemental bill, the same two men were

also appointed receivers of UOP and of other companies

in the so-called holding company “system,” including UOP.

In those proceedings, Glass, represented a committee of

MSO stockholders.

Subsequently, his firm was appointed counsel for the

receivers of MSO, UOP and the other companies. in re-

ceivership.’* At that time his firm ceased to be j

for the MSO stockholders’ committee, and was succeeded

by other lawyers representing it. Still later, on January

27, 1926, he became one of the receivers. For the four

vears, 1926-1929, he was paid, as receiver, fees of $175,000."

But, during those years, he retained his interest in

his firm’s fee as lawyers for the MSO stockholders’ com-

mittee, a fact not known to the receivership judge until

Hlass privately disclosed it to the judge—but only (on or

about January 15, 1930) after the confirmation of the

judicial sales, at a time when the judge declared he had no

jurisdiction over such matters. In those circumstances,

on the direction of the reorganization committee, Glass’

firm was paid that fee, consisting of $15,000 in cash and

voting trust certificates for 150 Class B shares of the new

company.’* This was not, as my colleagues suggest, com-

pensation “trifling in value.”

12 The firm ceased to be counsel for he receivers when Glass became

a receiver. For these services, the firm received $67,500,

13 Thus he and his firm received from the receivership $242,500—aside

from the fees paid for services to the MSO stockholders’ committee

and the share of Hamburg’s fee.

14 Appellants say such was the fee. The record indicates that it was

$19,999.99 in cash and the 150 shares.

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fais baw

Without a “system” reorganization, Glass could not have

been paid this fee:

Everyone agrees that, at the time of the reorganization,

MSO was insolvent and that there was no “equity” in its

stock. Absent the reorganization, then, the MSO stock-

holders would have had nothing and the MSO stockholders’

committee could have paid its lawyers nothing, for their

fee was contingent upon a reorganization in which the

MSO stockholders participated. But such participation

depended on a “system” reorganization, i.e., one owning

or controlling most of the assets of the companies in the

system and especially the Eureka stock which was essential

to such a reorganization.

Thus Glass had a personal interest in bringing about

such a reorganization. To achieve just that, he untiringly

labored with the reorganization committee, “organized,”

so he reported in May 1928, “at the suggestion of the

receivers.” He wrote a letter, dated July 29, 1929, pub-

lished in the reorganization plan, urging all security-

holders to accept the plan.

The reorganization plan provided that the new company

would assume payment of counsel for the several com-

mittees, including the MSO stockholders’ committee, in

such amounts as the reorganization committee approved.

Because of his hearty cooperation with the reorganization

committee, beyond possible doubt that committee was most

friendly to Glass, and therefore most likely, if it became

the purchaser at the judicial sales, to pay the fee of Glass’

firm, as lawyers for the stockholders’ committee.” It was,

then, distinctly to his personal advantage to insure that

the reorganization committee should he the successful bid-

15 One member of the reorganization committee was chairman of the

MSO stockholders’ committee which Glass had represented as lawyer

in 1924,

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der and that the reorganization plan—which provided that

the new company would own the Eureka stock—should

become effective.

Glass’ cuttlefish argument.

Here Glass tries a cuttlefish argument: He says that,

when, in 1924, his firm was sueceeded by another firm

(the “Cunningham” firm) as counsel for the MSO stock-

holders’ committee, no arrangement was made to divide

the fees; that Jackson, a member of the Cunningham firm,

testified that this arrangement for splitting the fee was

not made until January 1980; that Glass, on January 15,

1950, first learned “that it was proposed (by one of Glass’

partners) to divide the fee to be paid to the Cunningham

firm in lieu of separate fixation of fees for the services

successively rendered by” Glass’ firm “and the Cunning-

ham firm as attorneys for the stockholders’ committee : and

that Glass then—z.e., about January 15, 1930—‘informed

the court of those facts.” In so arguing, Glass does not

deny the pivotal fact, <e., that, while acting as UOP re-

ceiver, he retained a personal interest in a claim for fees

against the stockholders’ committee,’® which interest he

did not reveal until he privately disclosed it to the court

several weeks after the court confirmed the sales to the

reorganization committee. All he then, belatedly, told the

court was that he would obtain the fee by sharing in the

Cunninghain firm’s fee instead of by a “separate fixation.”

Ifow that tardy revelation of the fact exculpates him is

incomprehensible.” The fact that he got his fee by sharing

16 Ile testified that his firm “had a potential interest in compensation

for serviees we rendered to the stockholders’ committee up to the time

of our resignation” as counsel for that committee.

17 This comment applies to Judge Smith’s equivocal finding: “Glass’

firm, in lieu of separate fixing of fees for its services to the stock-

holders’ committee in the early stages of the receivership prior to

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6 l, 2

in the Cunningham firm’s fee is not the point. The point

is that, as receiver, he had secretly retained a/right to a

fee from the stockholders’ committee. See Crites, Inc. v.

Prudential Co., 322 U.S. 408, 416.

His retained and undisclosed interest in that fee should

he compared with the statement in the receivers’ reports,

filed with the court in 1927 and 1928 and then mailed to

many securityholders, that the receivers had “no personal

interest in any company as against another.”

My colleagues say, concerning this fee, that it did not

give rise to any adverse personal interest in Glass because,

hefore the sales, the amount of this fee was unliquidated.

Sut that very fact underscores the existence—and the

vice—of this adverse interest: The fee was paid only

after the “system” reorganization plan became effective,

and would not have been paid otherwise. It was compensa-

tion “dependent upon a particular bidder being success-

ful.” See Crites, Inc. v. Prudential Co., 322 U. S. 408, 416.

Surely such an interest was not “remote or speculative.”

(See discussion, infra, in point 5.)

4. Glass’ personal interest in Hamburg’s fee.

In August 1926, Hamburg, together with his associates,

Ausberry and Barton, applied for an interim allowance of

$10,000 for services in connection with the receivership tax

matters. On August 25, 1926, Glass wrote the receivership

judge a private letter (not made part of the court records)

stating that he wanted the judge to know, before he acted

on this application, that there was “an arrangement whereby

its appointment as one of counsel for the receivers, shares in the allow-

ances to Moore, Hall, Swan & Cunningham, having first brought the

arrangement to the attention of the court.”

Note that Judge Smith did not find that, before confirmation of the

sales, Glass brought to the attention of the court any claim by his firm

for fees as counsel for the stockholders’ committee.

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my firm has an interest in all his [Hamburg’s] business in

return for rent, office accommodations and services and

business referred to him.”

More than three years later, on December 23, 1929, just

before confirmation of the sales, Hamburg applied in open

court for a final allowance. Glass, who was present, did not

then state to the court that this “arrangement” had con-

tinued and was still operative. Later, on February 4, 1930,

about six weeks after confirmation of the sales,* Glass

wrote the receivership judge a letter (not made part of the

court records), reminding him of the 1926 letter, and say-

ing “this interest continues at this time.” Hamburg. re-

ceived a final allowance of apparently $62,500 in which

Glass shared (in an amount not disclosed).

The fact that Glass felt the need of writing this letter of

February 4, 1930, to remind the judge of the 1926 letter,

goes to show that the judge, before he confirmed the sales in

December 1929, did not know that Glass had a continuing

interest in Hamburg’s fee.” Since the judge had no such

knowledge at that time, we have another instance of Glass’

personal interest tending adversely to affect his lovalty

as receiver. For a receiver, unburdened by conflicting inter-

18 Glass refers to the fact that, between 1926 and 1929, Hamburg had

received interim allowances in addition to the $10,000 allowance made

to him in 1926. The fact that Glass, in 1930, called the judge's atten-

tion to his 1926 letter, and to no intervening letter, goes to show that,

when the judge made interim allowances to Hamburg between 1926

and 1930, Glass had not told him that his interest in Hamburg’s fees

then continued.

The record contains no evidence to support Judge Smith’s finding

that Glass had brought to the court’s attention the arrangement with

Hamburg “prior to each application for allowance.” Indeed, Glass

testified that he drew Judge Knox’s attention to this arrangement

“upon the first application for an allowance” (i.e., in 1926) and that

“before any order was signed on his application for a final allowance”

(after confirmation of the sales), “I referred him to my original letter

and reminded him of my interest in the matter.”

19 The court ordered confirmation on December 24, 1929.

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ests, might have felt it necessary to suggest to the court

reorganization of UOP separately. But Glass, as a bene-

ficiary of Hamburg’s potential award, was interested in

effecting a plan whereby all of the assets from which the

award would be paid would be in hands not likely to oppose

the claim, «e., a “system” reorganization in which control

was exercised by persons friendly to Glass. Perhaps Glass’

stake in the Hamburg claim was insufficient to influence

his Judgment in respect of so major a question; but the

very possibility of conflict created, at a minimum, the duty

of the very fullest disclosure to the judge before confirma-

tion of the sales—a duty Glass did not perform. Crites,

Inc. v. Prudential Co., 322 U. S. 408, 416.

5. Glass’ undisclosed expectation of becoming lawyer for

the reorganized company.

Before the confirmation of the sales, Glass had rejected

suggestions by the reorganizers that he become president of

the new company. He did accept that post after the reor-

ganization; but I agree with my colleagues that, on the evi-

dence and the findings of Judge Smith, any expectation of

becoming president cannot be considered as motivating

Glass’ conduct.

My colleagues, however, concede that, long before the

judicial sales, Glass had “quite frankly declared” that he

would like to be “lawyer for the reorganized company.” ?%4

Since the reorganizers were eager to have him as president,

it goes without saying that Glass knew that the reorganizers

19a He so wrote in letters, dated October 27, 1927, in which he stated

he thought that, fairly soon, a reorganization “can be worked out.”

In one reply, the writer said, “I assume, of course, that your services

in a legal way will be engaged by the new corporation.” In another

reply, another writer said, “You should be retained in a legal capacity,

as the reorganized company would then have the benefit of your good

judgment on legal matters and all questions of policy.”

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would satisfy his desire to attain the less important position

of lawyer for the new company. Therefore he had far more

than a mere “hope”: His selection as lawyer did not (as

my colleagues say it did) depend on what the “administra-

tion” of the new company “might decide.” For he had a

virtual assurance from the reorganizers that the new com-

pany would choose him. To be sure, this assurance could

not be carried out unless the reorganization committee

became the successful bidder at the judicial sales. But that

contingency cannot obliterate the fact that Glass had an

interest in conflict with his duty of undivided loyalty.**®

This interest was not disclosed to the receivership judge.

My colleagues say that this interest was “too remote,”

“too feeble an inducement to be a determining motive.” That

might have been true if a “system” reorganization had been

essential, since then perhaps it would have done the UOP

bondholders no harm to have Glass aid such a reorganiza-

tion; in such circumstances, perhaps it could have been

said that this motive would not appreciably deflect his

loyalty to them.’*© But, since a “systein” reorganization

was not essential, that motive may well have counted heavily

in influencing him to plump for such a reorganization as

against a separate reorganization of UOP. It is this factor,

neglected by my colleagues, which renders inapposite the

cases they cite?

In Bullivant vy. First National Bank, 246 Mass. 324, the

plaintiff, president of a failing corporation, entrusted his

19b Cf. Restatement of Trusts, Sec. 170, Comment e: “If the trustee

sells to a third person for the purpose of repurchasing the property

from the third person, although at the time he has no understanding

with the third person as to the repurchase, he commits a breach of

trust, and if he subsequently reacquires the property, he can be ecom-

pelled to hold it subject to the trust.”

19¢ I say “perhaps,” because this particular “system” reorganization,

which Glass furthered, gave participation to MSO stockholders. See

point 14 of this opinion, infra.

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shares in the corporation to the defendant, a creditor of the

corporation, and agreed (subject to minor limitations) that

the bank, as voting trustee of the shares, would have full

ownership rights in them for three years. The plaintiff then

sought, in derogation of that agreement, to enjoin the

bank from voting the stock in favor of a proposed plan of

reorganization, on the ground of conflict between the bank’s

interest as trustee and as creditor. The injunction was

denied, for the bank was a creditor at the time of the agree-

ment—a fact which was then surely known to the plaintiff—

so that the bank’s dual interest was created by the bene-

ficiary and not concealed from him.

In Anderson v. Bean, 272 Mass. 432, the trustee owned

approximately half of the shares of a corporation in his

own right and the other half as trustee. He sold a part of

his trusteeship holdings, and thus put his personal holdings

in a dominant voting position. The beneficiaries sought to

surcharge him. The court found that the new arrangement

was of “no harm to the trust” and “no profit to the trustee.”

Perhaps the court was wrong in believing there was no

advantage to the trustee; but the relevant fact, for present

purposes, is that the court thought there was no advantage,

and therefore an inquiry, into whether his actions were in-

fluenced by hope of private gain, would have been meaning-

less,

In In re Harton’s Estate, 331 Pa. 507, and in Pike v. Cam-

den Trust Co., 128 N. J. Eq. 414, a trust company, which

took over mortgages and allotted participation certificates

to trust estates administered by it, also acted as rental

agent for the mortgagor, and its commission as agent was

deducted from distributions of income to*the participating

certificate-holders. The courts in each of these cases held

there was no conflict of interests, and that a trustee may be

compensated for a service performed as part of the adminis-

tration of the trust estate.

ease eal aR Eau ae ae ao A ee ean ad aa Rad

oa DEL a sein PRES a:

These two cases reflect a recent tendency toward relax-

ing the strict rule that a trustee may not employ himself

because, in so doing, “he cannot perform one part of his

trust, namely, that of seeing that no improper charges are

made.” See Broughton v. Broughton, 5 DeGex, M. & G. 160;

Gray v. Robertson, 174 Ill. 242, 51 N. E. 248. Bogert, to

whom relaxation of the rule is apparently distasteful, ex-

plains the relaxation on the ground that the court is con-

fronted with a situation in which a service has already

been performed for the estate and that to deny the award

would unjustly enrich the estate. 3 Bogert, Trusts 142.

Whatever the reason, however, the conflict of interests

created by a trustee employing himself as lawyer, rental

agent, or whatever, can affect his judgment in only one

small matter, 7.e., passing on the award to be made to him-

self for the service rendered, while the conflict of interests

in Glass’ situation might have affected his judgment in re-

spect of major matters.

In Dabney v. Chase National Bank, 196 F. (2d) 668

(C. A. 2), there was only a possibility of a conflict of in-

terest dependent upon a series of unlikely contingencies

which, in fact, did not come about. In the instant case,

the conflict depended on oniy one contingeney—a_ svstem

reorganization—and the trustee, far from leaving the con-

tingency to chance, was active in bringing it about.

My colleagues quote a short excerpt from a passage in

our opinion in York v. Guaranty Trust Company, 143 F.

(2d) 503, 514 (C. A. 2). I think the entire passage, reading

as follows, states the applicable rule: “Of course, the courts

should not impose impractical obligations on a trustee.

Merely vague or remote possible selfish advantages to a

trustee are not sufficient to prove such an adverse interest

as to bring his conduct into question. But here the advan-

tages seem not to have been thus vague or remote. That a

trustee owes his beneficiaries undivided loyalty entirely un-

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tinged by considerations of any important benefits to him-

self is an old truth, and one whose edge cannot be dulled by

frequent use. If the trustee here allowed its judgment to be

affected by any such factors, it acted improperly. Cf.

Pepper v. Litton, 308 U. S. 295, 311, 60 S. Ct. 238. If it

failed to exercise the powers it held in trust because it en-

tertained a belief that such inaction might be to its own sub-

stantial benefit (while failing to consider the consequent

harm to any of its beneficiaries), then it breached its

obligations, regardless of whether its belief, objectively

viewed, was illusory. That is to say, the trustee should he

held liable, if the trial court reasonably infers from the

evidence at the trial that the trustee, in making its deei-

sion, Was moved to do so in any degree by the thought

that it might incidentally secure a substantial advantage

to itself. In such circumstances, nothing would turn on the

fact that the trustee did not in fact derive benefits, if its

inactivity caused loss to any of its beneficiaries.”

Glass cites Acker v. Hamilton, 85 F. (2d) 574, 576 (App.

D. C.) as if the court there had held that an “expectant

relationship” does not suffice to create a conflicting inter-

est. There, pursuant to statute, the Comptroller of the

Currency took charge of a bank and determined that it was

insolvent. Stockholders, who were assessed on their bank

stock, complained that a sale to another bank by the Con-

servator, who had heen appointed by the Comptroller, was

unfair (and resulted in a large deficiency). They argued

that, before the sale, the Conservator had been designated

as vice-president of the purchasing bank and, after the pur-

chase, was actually elected to that position. The court said:

(1) “The sale realized the full present market value” of

the assets sold. (2) The Comptroller had arranged the

sale, and the Conservator “served only as a medium through

which the scheme of salvage was affected. Here there was

neither occasion nor opportunity for the Conservator of this

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bank to consult his private interests. He acted as the mouth-

piece or agent of the Comptroller. The sale, therefore, was

the Comptroller’s sale, and it is obvious the Conservator

neither had nor could have any private interests to serve.”

(3) The Conservator’s designation as vice-president “was

not secret and was commonly known.” <All these cireum-

stances, the court said, must “qualify” the usual rule re-

garding fiduciaries “to the extent that something more

than an expectant relationship ought to be shown before a

transaction should be condemned and set aside which js

fair and equitable in all respeects—and in which the Con-

servator acted only by authority of his superior.” Plainly,

if the numerous qualifying facts, stated by the court, had

been absent, it would have held the other way.

6. Glass favored the junior interests at the expense of

the UOP bonds.

During the receivership, not one cent of interest on the

UOP bonds was paid. Glass explains this fact thus: By

October 1929, this unpaid interest (with interest thereon)

aggregated about $1,725,000. Payment of this huge sum

(says Glass) was impossible, since the sole means by which

the necessary funds could have been obtained was payment

of dividends by Turman to Eureka, and Turman was in

such financial condition that it could not have paid out

$1,725,000.

But that is not the question. The question is whether

not all but some ponderable part of that interest could have

been paid. Had it been, then, just to that extent, the UOP

bondholders .vould have benefited. But, just to that extent

MSO stockholders and creditors would have been disad-

vantaged, and the achievement of a “system” reorganiza-

tion would probably have been frustrated. This appears

from the statement to the court, on March 9, 1929, of

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Lehman, the lawyer for certain creditors of MSO (the MSO

Serial Noteholders’ Committee) that the receivers “have

been using the money, which should go to the [UOP] bond-

holders, for the purpose of improving the property for the

benefit of all the securityholders of Middle States Oil Cor-

poration” including its stockholders. Glass here favored

the MSO stockholders and aided the “system” reorganiza-

tion in which he had a personal stake.

There is evidence—in addition to Lehman’s candid state-

ment, undisputed by Glass who was present at the time—

that it was possible, long before the sales, to pay some con-

siderable part of the overdue interest:

(a) Judge Smith found, “In the early stages of the re-

ceivership, an attempt had been made [in the so-called Man-

ning suit] to obtain a domiciliary receivership in Delaware

which had been defeated primarily on the basis of. testi-

mony by Glass who had become one of the [federal court]

receivers that the companies were solvent in the sense that

they either had or could obtain whatever ‘unds were needed

to meet their admitted obligations.” In that Delaware suit,

Glass testified that one of the ways to meet those obligations

was by his causing subsidiary companies to declare and

pay dividends. At the trial, before Judge Smith, Glass

endeavored to explain away this testimony. Judge Smith

found that Glass was “unconvincing” in “his testimony as

to the meaning of his statements in the Manning trial in

Delaware.”

(b) As Judge Smith also found, the receivers, for other

purposes, caused MSO to borrow money from subsidiaries

for acquisition of property or to discharge debts. As al-

ready noted, the principal oil production and revenues of

the receivership companies derived from the properties in

the Seminole field, owned by Turman. In their report to the

court on May 7, 1928, the receivers stated that, by reason

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WICH eS Mesdaawisk

Mtge osc tta Aix we

i ~

of the Seminole development, the position of the Middle

States companies had greatly improved and that “claims

against the companies, $1,808,033.93, have actually been

paid off out of income during receivership.” *’ Yet not a

cent went to pay any of the interest on the UOP bonds.

(c) Glass now argues that, until the beginning of 1928,

when the matter was settled, there was litigation affecting

the title of Eureka to 30% of the Turman stock. But, even

so, this left Eureka, before 1928, with about 52% of Tur-

man stock not in dispute, so that apparently Eureka could

have caused Turman to declare substantial cash dividends

which could then have been used, in large part, to pay

United bond interest. Moreover, when the dispute re the

Turman stock was settled, Eureka then held, undisputed,

82% of the Turman stock.”

Judge Smith made no finding on the subject of the ability,

during the receivership and months before the judicial sales,

to pay a substantial portion of the interest. He found

merely that, at the time of the order directing those sales

—i.e., November 1929—United could not “have continued

[sic]** to pay the interest on the bonds.” This is not a

20 In their report of May 7, 1928, the receivers also said that, during

the latter part of 1929, they had commenced a “policy” of buying

oil acreage and continued, “Up to the time when creditors were pro-

vided for, the receivers could not make any such purchases without

possible detriment to creditors’ interest. They, however, now feel that,

when creditors have been fully provided for, they will best serve the

interests of the stockholders by conservative purchases of well-chosen

acreage in order to insure future production and income for these

companies.”

21 Glass testified before Judge Smith that it was “theoretically possible”

for him to cause Turman (by a reduction of its capital stock) to

declare a substantial dividend which could have been used to pay some

of the UOP interest. He did not explain why it was not practically

possible.

22 None had been paid since 1924.

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finding that UOP could not have paid some considerable

segment of the overdue interest long before that date.

Significantly, my colleagues do not discuss this question.

Even if it he assumed that, on this issue, the appellants

had the proof-burden, I think they discharged it. If, be-

cause of his selfish interest, Glass had that burden, he did

not discharge it.

Appellants make a more sweeping contention. They

argue that, all other factors aside, Glass’ conduct with

reference to the non-payment of interest was alone enough

to put on him the burden of proof as to all phases of the

ease, Answering this argument, my colleagues take this

position: The court, since it appointed Glass receiver of

both MSO and UOP, necessarily put him in a position

where, if any conflict arose between UOP interests and MSO

interests, he had the implied authority—indeed the implied

duty—to decide that conflict according to his own best

judgment. If, say my colleagues, he decided adversely to

UOP interests, and did so erroneously, he was liable to the

UOP bondholders, but the burden of proving the extent of

the loss was on them, since an erroneous decision involved

no deviation from his undivided-loyalty duty because the

court, by impliedly imposing on him the authority to make

such a decision, relieved him of that duty.

In taking this position, I think my colleagues overlook

the following: The cases hold that a trustee’s duty of un-

divided loyalty is breached not only when he is (or might be)

motivated by his own self-interest but also where he acts in

the interest of any third person; and the cases also hold

that one who is a trustee of two trusts, if he engages in deal-

ings hetween the trusts, is guilty of disloyalty to one or the

other, unless he shows that the transaction is fair to both,

and that his duty requires him, in eases of doubt concerning

such a conflict, either to resign as trustee of one of the

trusts, or to refrain from acting until he has obtained the

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instructions of a court.** Thus the Restatement of Trusts,

§170, states: “The trustee is under a duty to the beneficiary

to administer the trust solely in the interest of the bene-

ficiary,” and adds the following comments on that rule:

“p. Action in the interest of a third person. The trustee

is under a duty to the beneficiary in administering the trust

not to be guided by the interest of any third person. Thus,

it is improper for the trustee to sell trust property to a

third person for the purpose of benefiting the third person

rather than the trust estate. q. Duty of trustee under

separate trusts. Where the trustee is trustee of two trusts,

if he enters into a transaction involving dealing between

the two trusts, he must justify the transaction as being fair

to each trust. If the cireumstances are such that the inter-

ests of the beneficiaries of the different trusts are so con-

flicting that the trustee cannot deal fairly with respect to

both trusts, he cannot properly act without applying to the

court for instructions.” See, e.g., Mosser v. Darrow, 341

U. S. 267; Detroit Trust Company v. Mason, 309 Mich. 281,

306; In re Sedgwick’s Will, 74 Ohio App. 444, 59 N. EF.

(2d) 616, 624 (Ohio) ; ef. Berner v. Equitable Office Build-

ing Corp., 175 F. (2d) 218, 221 (C. A. 2). In the case of a

receiver, receipt of such judicial instructions has been

uniformly required. See, e.g., Northern Finance Corp. v.

Byrnes, 5 F. (2d) 11, 12-13 (C. A. 8).*

23 Judge Smith said: “Some of Glass’ transactions may have been

harmful to some of the receivership estates. * * * It may be * * * he

was unconsciously influenced by a desire to benefit the group of re-

ceiverships as a whole” rather than to act solely “for the benefit of

any one of them. * * * That was a danger incurred by the court

in order to avoid the expense of some thirty-eight additional receiver-

ships.” But Judge Smith added, “If it did oceur and cause damage”

to a particular estate, ‘some means must be found to rectify it.”

24 In Mosser v. Darrow, 341 U. S. 267, 273-274, the court said: “It is

argued, and the court of appeals appears to have been impressed

by the argument, that this surcharge creates a very heavy liability

upon a man who enjoyed no personal profit and must be condoned

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The receivers did not seek or obtain the instructions of

in March 1928, and again in March 1929, others brought

feet to the court’s attention, and the court did not then order

that any part of the overdue interest be paid. But I incline

to doubt whether the court’s failure to enter such an order

amounts to an instruction or to a ratification of the re-

ceivers’ previous inaction.

the court in respect of non-payment of the interest. ae’

A

7. Effect of Glass’ personal interests: He had the bur-

den of proof.

At any rate, disregarding the facts just narrated in

point 6, those discussed in points 3 and 5, supra,” suffice,

I think, to put the burden of proof on Glass.*" If so, Judge

Smith’s findings of fact, so far as favorable to Glass,

crumble—z.e., cannot be held not “clearly erroneous”—

since he rested them on his legal conclusions that (a) Glass

had not violated his lovalty-duty and therefore (bh) did not

have the burden of proof.

My colleagues virtually admit that, if Glass had that bur-

den, there is a lack of foundation for their ruling as to the

fairness of the prices bid at the sales, and in particular,

the price of the Eureka stock.

7a

‘so as not to strike terror into mankind acting for the benefit of others

and not for their own.’ 184 F. (2d) 1, 8. Trustees are often obliged

to make difficult business judgments, and the best that disinterested

judgment can accomplish with foresight may be open to serious criticism

by obstreperous creditors aided by hindsight. Courts are quite likely

to protect trustees against heavy liabilities for disinterested mistakes

in business judgment. But a trusteeship is serious business and is not

to be undertaken lightly or so discharged. The most effective sanction

for good administration is personal liability for the consequences of

forbidden acts, and there are ways by which a trustee may effectively

protect himself against personal liability.”

25 And probably also in point 4, supra.

25a = Cf., as to burden of proof, Restatement of Agency, Sec. 389 and

Comment e, Sec. 390 and Comment f.

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DETR ELs

Nes,

Glass delay and the loss of evidence.

Before | go further, I think it ‘les to bring out a feature

of this ease which emphasizes Glass’ burden of proof: Glass

delayed filing his final account, and seeking discharge,

as receiver of UOP, from the time of the confirmation of

the judicial sales, at the close of 1929, until 1945 (and

he then filed that account only after appellants procured an

order directing him to do so). Some part of that delay is

understandable. But why he waited fifteen years, Glass has

never explained. Yet he asserts that he has been harmed

because, during those fifteen years, documentary evidence

has been lost and important witnesses have died. Surely

this is a shoe-on-the-wrong-foot argument: The harm is to

appellants. (Cf. the discussion of delays in Southern Pacific

Company v. Bogert, 250 U. S. 483, and Northern Pacific

Ry. v. Boyd, 228 U.S. 482.) Glass has put this court in a

position where it must look at the facts as through a glass

darkly :* Thanks to this delay, this case is one of the most

complicated our court has ever encountered; we have de-

voted many months to a study of the record. (1 disagree

with some of the findings of Judge Smith, who was not the

receivership judge, but, considering the complexities, that

he made some mistakes of fact is not surprising; and I join

my colleagues in criticizing that part of appellants’ brief

which imputes to Judge Smith a partiality in favor of the

receivers. )

In 1944, appellants asked Glass, as receiver, for informa-

tion concerning UOP. He refused this request. In 1945

they made a motion that they be allowed access to important

receivership papers, never filed as part of the court's ree-

ords but which Glass had in his possession: Glass filed an

affidavit in opposition, in which he astonishingly referred to

“the danger” of making such information available to

26 See 1 Corinthians 13:11-12.

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them.” Judge Smith said that there was “a number of in-

stances of impatience of Glass with requests for full in-

formation,” and that because of “his reluctance to make full

disclosures,” Glass had no “cause * * * to complain about

the burdens to which he has been put by reason of objec-

tants’ [appellants’] attempts to develop the full story which

the objectants believed would substantiate their suspicions

of wrongdoing. * * * The delay [in filing his final account]

alone would give some basis for objectants’ suspicions.”

Concerning this delay, Judge Smith added: “His duty to

the court, so long as any of the receiverships remained open,

was to complete the work * * * of winding up the affairs of

all the estates so that any minorities which had any sur-

viving interest might have an opportunity to be heard on

his discharge from his receivership duties.” ®* Much in

point, then, are these remarks of the Supreme Court in

Mosser v. Darrow, 341 U. S. 267, 274-275, concerning a

bankruptey trustee: “A further remedy of a trustee for

limiting, not avoiding, personal liability, is to account at

prompt intervals, which puts upon objectors the burden of

raising their objections. * * * It hardly lies in the mouth of

a trustee to allow his liabilities to accumulate over such a

period of time and then ask the court to relieve him of them

because they have become too burdensome.” Cf. Matter of

Hubbell, 302 N. Y. 246, 254.

Our decision, in 1946, directed a full hearing on ap-

pellants’ objections to Glass’ discharge. In the long re-

sultant trial before Judge Smith, there became known, for

the first time, the facts concerning Glass’ personal interests,

adverse to the UOP bondholders, which could not have

been ascertained from a search of the court’s records or

files,

°

27 See our earlier opinion, 154 F. (2d) at 990.

28 The interim accountings, from 1924 until 1945, were meager and

uninformative.

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8. Glass abandons neutrality: He helps to bring about

forced sales at prices tailored to a “system” reorganiza-

tion, in violation of the doctrine of First National Bank y.

Flershem, 290 U.S. 504.

As a receiver, Glass had no obligation to help in the

formulation and consummation of a reorganization of any

of the companies in receivership: and, insofar as he did

participate in such an effort, his duty was to remain neutral,

as among the several interests. But, as above pointed out,

Glass assiduously sought to accomplish a “system” reor-

ganization; and the evidence shews that a reorganization

of the other companies, not including UOP, would have been

decidedly less desirable from the point of view of the in-

terest junior to the UOP bonds, as distinguished from that

of the holders of those bonds. Remembering that Glass

had come into this story initially as representative of those

junior interests, and that he would profit personally from

a “system” reorganization, it is not difficult to understand

why he persistently pushed for such a reorganization,

First National Bank vy. Flershem, 290 U. 8. 004, shows

how such a dominant purpose to preserve a “system” as an

“entirety” could well work injustice to the non-assenting

UOP bondholders. It “2 that, except in the case of a

railroad or the like, a “unitary” reorganization should be

regarded with marked suspicion.

The attitude of Glass and the reorganization committee

towards non-depositors sheds light on their arbit ‘ary

method of picking the prices to be paid at the judicial sales:

(a) Judge Smith said of “the receivers and reorganizers,”

“They may have, and probably did, as was normal in those

days, desired to effect a reorganization to he controlled

by those interests represented on the reorganization com.

mittee.” Whether that was “normal” practice in 1929 is

questionable. But, even if it was then the usual practice,

ed

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that fact cannot serve as a defense. For in First National

Bank v. Flershem, 290 U. S. 504 (1954), the court over-

turned such a practice adopted in a reorganization consum-

mated in 1931. If this were a suit against the members of

the reorganization committee for damages, perhaps their

good faith belief in the normality of their methods would be

pertinent. But that defense is not open to Glass, a receiver

who had a personal interest in promoting a reorganization

which disregarded the welfare of non-depositing UOP bond-

holders who were not “represented on the reorganization

committee” but whom Glass did represent,

(b) Arkush, the lawyer consulted by Glass and the re-

organization committee as a reorganization expert, testified

that Glass and the committee chose, as the sales prices,

6673%° of what they estimated as the “going-concern value”

of each of the properties. Asked why they picked 6624%,

he answered that that was then the conventional percentage

used in connection with reorganizations, in order to make

acceptance of a plan more attractive than the amount of

cash payable to a non-depositor. That percentage was there-

fore purely arbitrary. In agreeing to those prices, Glass

agreed that, as it turned out, the non-depositing UOP bond-

holders should receive in cash but approximately 69.8%

of the face of their bonds and # 39% of the amount due

them for principal and unpaid interest. (Even that amount

of cash was not payable until about 3% years after the

effective date of the plan and then without interest for

those years. )

The method here used of fixing judicial sales prices—

tailored to a “system” reorganization plan—was condemned

in National Bank v. Flershem, 290 U. §. 004.*") The court

made it plain that the prices paid at a judicial sale in such

29 We quoted from and applied the doctrine of that case in In re N. ¥.,

N. H. §& H. RB. Co., 147 F. (2d) 40, 49 (C. A. 2).

2089

circumstances are not to be considered the same as prices

at the usual “forced sale.” The court said that, as the aim

should be “to secure for non-assenting creditors the largest

possible sum in cash,” it was error “to treat the receivers’

sale as merely a necessary step in effectuating the plan of

reorganization.”

9. Glass’ tainted advice vitiates the order confirming

the sales.

It is suggested that the prices agreed upon by the reor-

ganization committee with Glass’ concurrence, were, in

effect, “upset prices.” But an “upset price” is one deter-

mined by the court before the sale, after notice and hear-

ing to all interested persons. It could be “a weapon with

which the court” is able to “bargain with the committee,”

by insuring that the property will not be sold at too low

a figure from the point of view of those not assenting to

the plan.*’ Here the reorganizers, with Glass’ approval,

deliberately decided not to ask the court to fix upset

prices—and the court did not fix them.

Glass argues that, before the sales, the receivership

judge—in private, it noted, not in open court—had

been informed by Glass and the committees of the details

of the reorganization plan; that consequently, in confirm-

ing the sales, the judge impliedly approved the plan; and

that the judge thus acted on full information, when, by

confirmation, he approved the prices, which therefore must

be deemed to have been informedly adjudicated as fair.

To this argument, there are several answers:

(a) Any receivership court properly regards its re-

ceiver as its eyes and ears. In this case, te more than the

usual degree, the receivership judge leaned on Glass’ ad-

30 6 Collier, Bankruptey (12th ed. 1947) 41.

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vice—and Glass had helped to fix the prices. But the judge

did not know, before the sales’ confirmation, that this

advice was tainted, i.e., that Glass had personal interests,

then undisclosed to the Judge, contingent upon the con-

summation of the reorganization plan via the judicial

sales at the prices agreed upon by Glass and the reorgani-

zation committee. On account of this taint, Glass cannot

hide behind the confirmation of the sales.”!

Glass makes much of the fact that the judge, on his own

initiative, asked for and received (in private) the inde-

pendent judgment, as to values. of Cannon, an assistant to

the receivers. But Cannon—w 0, before the receiverships,

had been president of MSOQ—in replying to the judge,

frankly stated that he was interested “in behalf of the

MSO stockholders.” Moreover, he said that if all the

assets of UOP were sold, the UOP stockholders would

receive the face amount of their bonds.

(b) The court deviated srom “standard practice” by not

holding a hearing, on notice, as to the plan’s fairness:

The reorganization committee, after carefully canvassing

the question, deliberately decided, with Glass’ concurrence,

not to ask the court, after a hearing, to pass on the fairness

of the plan,®? and the court explicitly stated that it re-

frained from doing so.

Glass argues that in 1929 it was not the practice in such

receiverships for the court to hold a hearing, on notice

to all interested persons, and then to pass on a plan’s

31 See, e.g., Matter of Hubbell, 302 N. Y. 246, 253; In re Trust Created

By Will Of Enger, 225 Minn. 229, 239-241 and cases there cited.

32 On the hearing on confirmation of the sales, the counsel for the re-

organization committee said he Was submitting a proposed order of con-

firmation. The court asked, “This includes the approval of the reorgani-

zation plan, does it not, or * * *” and was interrupted by counsel who

said, “The reorganization plan as such is not submitted to the court for

its approval, * * * »

RE OEE eS

Wa Dense

fairness. | cannot agree. The Boyd case, 228 U.S. 482, had

been decided in 1913. As a result, in the Missouri-Pacifie

reorganization in 1916—thirteen years before confirmation

of the sales in the instant case—the decree provided that

the court, in advance of the foreclosure decree, would,

after notice, hear complaints as to the fairness of the

plan’s offers to various named classes of creditors, includ-

ing bondholders.** With minor variations, this became the

“standard practice.” *

In 1926, in the important receivership-reorganization of

the industrial, Wilson & Company, Inc.,*° in the federal

district court for the Southern District of New York—

the very court in which the receiverships of UOP and

MSO were then being administered—Judge Bondy, in the

decree of sale, entered January 23, 1926, provided that,

on February 11, 1926, before the sale, he would hold a

hearing on complaints by interested persons as to whether

the offers to creditors and securityholders, set forth in

the reorganization plan, were fair, timely and equitable.

He held such a hearing, at which no one appeared and

complained. On February 13, 1926, before the sale, he

entered an order that the offers were fair, timely and

equitable. At the sale, on February 26, the successful

bidder was the reorganization committee: and the judge

confirmed the sale on the same day.

In December 1927—two years before confirmation of

the sales in the instant ease—there appeared in 27 (ol.

L. RV401, an article by Swaine (a leading reorganization

lawyer) which reported that, in all cases of railroad re-

33 This practice was begun in the Frisco Railroad reorganization in 1916,

See Swaine, The Cravath Firm (1948) II, 172.

34 Ibid., 172, 184, 186.

35 John Eiszener Company v. Wilson §& Co., Inc., U. 8. District Court.

Southern District of New York, in Equity, No. E 30-119.

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organizations and in many cases of public utility and

industrial reorganizations, the federal courts, after the

Missouri-Pacific reorganization, had employed (indeed im-

proved upon) the method there employed.** Doubtless,

this practice, well-established by 1929, was known to

Arkush, the reorganization specialist, and was commu-

nicated by him to Glass and the reorganization committee

who asked and acted upon his advice,** The outstanding

fact here is that, with Glass’ assent, the fairness of the

plan was not considered by the court after notice and a

hearing thereon.

The indenture trustee and Glass’ tainted advice.

Glass argues that the acquiescence in the confirmation

by the indenture trustee, under the indenture securing

the COP bonds, bound all the holders of the undeposited

UOP bonds. But, since the indenture trustee justifiably

relied upon Glass’ views, and since they were tainted by

his self-interest, Glass cannot use that acquiescence to

shield him from liability to holders of undeposited bonds.

Moreover, when a receiver has an interest conflicting with

3oa In the reorganization receivership of J. Z. Horter Co. y. Punta Alegra

Sugar Company, In Equity, No. E-54-44, pending in the court below, in

1952, the court held a hearing, on notice to all interested persons, as

to the fairness of the plan; then found the plan fair; and thereafter

ordered and confirmed the sale.

36 That it was so known to him, and that he did communicate it, appears

from the following: A memo by Arkush, dated September 20, 1929, dis-

cusses the alternatives of submission of the plan for “judicial approval”

before, or at, or after, entry of final decree. It states, ‘The most prae-

tical plan would be to submit Plan at time of decree or after decree and

before sale, with notice of hearing on Plan, if required, to run concur-

rently with published notice of sale.”

A memo of matters considered and decided at a meeting of counsel

for the reorganization committee and Glass on September 23, 1929 (three

days after the date of the Arkush memo) states that the draft of final

decree was not to mention upset prices or the Plan and that the Plan

Was not to be submitted at that time.

2093

his undivided-loyalty obligation, confirmation of a sale

does not exculpate him. Crites, Inc. v. Prudential Com pany,

322 U. S. 408; Woods v. City Bank, 312 U. S 262; ef,

President & Directors of Manhattan Co. v. Kelby, 147 F.

(2d) 465, 476 (C. A. 2); Restatement of Trusts, Sec. 170,

Comment e.

10. Unfair price paid for Eureka stock.

Glass’ basic argument, which my colleagues adopt, is

(a) that Judge Smith found that the price paid for the

Eureka stock was fair, and (b) that therefore any mis-

conduct by Glass with respect to the sale of that stock is

immaterial. I think that Judge Smith’s finding is “clearly

erroneous,” even if appellants had the burden of proof,

and especially so if Glass had it.

The reorganization committee, with Glass’ approval,

agreed that the committee at the sale should pay for the

Eureka stock, and it did, $1,450,000. This figure, as above

noted, was *4 of what the committee said it believed to

be the fair going-concern value of that stock. Their going-

concern valuation,on that basis, was therefore $2,175.000.

In finding—some twenty-two years after the sales—that

$1,450,000 was a fair price, Judge Smith used several

tests. As my colleagues, however, employ but two of those

tests, I shall discuss them only.

(a) The first consists not of market prices but of aver-

age bid and asked prices of the Turman stock for a period

of nine months in 1929. As my colleagues note, most courts

spurn such a criterion because of its extremely shaky

character. Here it is singularly shaky: Only a small part

of these shares were on the market. Public information

about Turman’s affairs was scanty.*? Turman was owned

37 Moody’s Investors Manual, on which my colleagues otherwise rely, in

its 1929 edition, after stating that Turman was owned by Eureka, a

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by a company in receivership; and Glass. on October 31,

1929, himself stated, “There is no doubt in my mind that

any company can operate out of receivership far more

economically than in receivership.” Even actual market

prices would not reflect the value of the controlling block—

82%—of the Turman shares owned by Eureka. Glass,

as receiver, in April 1927, purchased, at a private sale,

yeTurman shares at $9.72 a share, reporting to the court

‘ that, if there were an attempt to purchase “any substan-

tial block in the market,” the “price would rise substan-

tially” above that figure.

(b) Capitalization of earnings:

One of the tests applied by Judge Smith, and the one on

which my colleagues primarily rely, is the capitalization

of “reasonably to be expected” net annual earnings, ascer-

tained by using actual part average annual earnings. This

I think the correct yardstick.

subsidiary of MSO, and that MSO was in a receivership, reported merely

the following information concerning Turman:

“TURMAN OIL COMPANY: Incorporated in Delaware County 1917,

to produce crude oil and natural gas. Company owns leases on 8,423

acres of which about 35% are producing in Mid-Continent oil fields,

in Oklahoma and Kansas. Number of wells, 188. Production of oil

in April 1927, 10,126 bbls. daily. Capital stock: Authorized $6,000,-

000; outstanding, $4,629,284; par $10 (changed from $1.00 May

25, 1923). Middle States Oil Corporation owns 82% of outstanding

stock. Dividends paid at rate of 1% monthly from October 1921,

to June 20, 1923, inel.; also 2% extra each July 20 and October 20,

1922; and 1% extra May 20, 1923. Dividend period changed to

quarterly basis in April 1923, July 20, 1923, first quarterly dividend

of 3% was paid; none thereafter to April 1, 1929. Daily produc-

tion, 10,125 bbls. Minority Stockholders’ Protective Committee:

C. A. Holden, Tulsa, Okla., and J. 8, Sheppard, New York, General

Counsel.”

Moody’s 1930 edition contains no data re Turman.

38 See, e.g., Galveston, H. §& S. A. Ry. Co. v. Texas, 210 U. 8. 217, 226;

Rock Products Co. v. Du Bois, 312 U. S. 510, 525-526; Dudley vy. Mealey,

147 F. (2d) 268, 270 (C. A. 2).

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Judge Smith took the average earnings of Turman for

the five years, 1924-1929; allotted 82% to Eureka; capital-

ized at 10% ; and so reached a figure of $1,504,936.78.

My colleagues, after some discussion, conclude that the

proper years are not 1924-1929, but the four years, 1995.

1929. They also admit (somewhat grudgingly) that, to

those earnings, there should be added certain deducted

non-recurrent expenses. I agree. My colleagues say, cor-

rectly, that thus computed, the average net earnings of

Turman for the four years, 1926-1929, were $414,500, and

of Eureka, 82% thereof—which is approximately $339,800,

Using Judge Smith’s capitalization percentage—10%—

Eureka’s fair market value was $3,398,000.

But my colleagues reject J udge Smith’s finding that 10%

was the correct capitalization percentage. Instead, my

colleagues use 19.31%, and so reach a figure of $1,775,000,

In justifying the use of 19.31%, my colleagues rely en-

tirely on an exhibit showing the prices and earnings per

share of nine other oil-producing companies in 1929, as

reported in Moody’s Manual of Investments (1930 ed.).*

Other than the testimony of Glass, there was no evidence

39 Tnis exhibit reads as follows:

EARNINGS PER SHARE OF CRUDE OIL PRODUCERS, 1929

Source: Moody’s Manual of Investments, Industrial Securities, 1930

Edition.

Earnings Per Price Earnings

Company Share, 1929 1929 to Price

| ee 3.19 20 15.95

Darby Petroleum Corp.

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