# Appendix — Cohen v. Glass > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386417_2626%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1955 - **Citation:** 349 U.S. 929 ## Text BLEED THROUGH POOR COPY UNITED STATES COURT OF APPEALS For tHe Seconp Cirevir o No. 284—October Term, 1953. (Submitted June 22, 1954 Decided January 11, 1955.) Docket No. 22426 oe e Josepu A. PHELAN, Complainant, —_—V.— Mippie States Om. Corroratrion, et al., Defendants. ee. "e 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. oe o Before: ; L. Hanxp, Swan and Frank, Circuit Judges. ee. “ 2017 AA en 2) See Wott SLAs Senne, 7B, : 3 j 4 + , ‘ 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. de. ~~ Meyer KrausHaar for the appellants. Lesure Kirscu for Glass. Ratpn MontcoMery Arkusn for the Middle States Petroleum Corporation. JosepH P. Tumeuuty, Jr. pro se. &. ww 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, 2018 BLEED THROUGH POOR COPY 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 2019 tai ie RR sal ear ‘SSS sO Sn 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 2020 BLEED THROUGH POOR COPY 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. 2021 LAR LATE RD ARM se 2) Sie ee eet iss hice Sea | an ti 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. 2022 BLEED THROUGH POOR COPY 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 2023 eee eee eee | SRLS REAL EAL eo aa Sines RP ORES FS ets cat ihe 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 2024 BLEED THROUGH POOR COPY 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 2025 SB Sa SEE Na ar) nat COMMENT oi Pe Fal te ato 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 2026 BLEED THROUGH POOR GOPY 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 2027 ll 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 2028 BLEED .THROUGH POOR COPY 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 2029 3 q 4 LAGE PARE oe SESSA DRE AILES | ie | ‘i 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 2030 BLEED THROUGH POOR COPY 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 2031 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 sd : 3 2 >] rs 3 a 3 z % Bi 4 fai % 3 # % & Ca xi ‘ a ° § 170, Comment (ce). 2032 pieces cans ia it oT Ken. ate Se: these balance-sheets tentative treatment will be given to intercorporate accounts.” The receivers added: “It is the purpose of the receivers thereafter to present recommenda- tions to the court for the disposition, without litigation, of these intercorporate accounts upon notice to all interested parties. * * * Fortunately, the end is in sight. The com. plications which remain are few in number.” This Was about one and a half years before the receivers filed their petition on which the court based its order of December 1; 1929. And why, at the very latest, could not the tentative “ad- justment” have been made soon after the plan’s publication on July 29, 1929? The time-table of events is revelatory: Receivers’ Third Report ........................ May 27, 1928 Reorganization plan published ............ July 29, 1929 Decree of sale of unpledged assets .... Nov. 22, 1929 Notice Of this sale ooo... ccc. Nov. 26, 1929 Receivers’ Statements filed with the i ND ENON TES Dee. 6, 1929 Order tentatively adjusting intercor- PE SON Scbiinsinihn cnc sea. Dee. 14, 1929 Sale of Unpledged Assets ................... Dee. 16, 1929 Confirmation Order .2........ccccccccececoees. Dee. 24, 1929 But even if we ascribe the unsatisfactory and tardy method of tentatively adjusting these claims to judicial pres- sure for speed, it is difficult to comprehend why the UOP claims against MSO which (as my colleagues say) had been “liquidated,” by the order of December 14, 1929, at $1,370,000, should have been valued by the reorganization committee and Glass at some $300,000, and why they fixed its sale price at some $200,000. My colleagues say of these 2110 BLEED THROUGH POOR COPY low figures, “We do not know how they were reached, nor is it necessary that we should; they stand unless they are shown to be incorrect and they have not been.” If, however, Glass had the burden of proof, then it was necessary for him to show how these figures were reached and that they were correct and fair. If UOP had been separately reorganized, its claim against MSO would not have been sold but enforced. I recur to the fact that no one has explained why UOP was not separately reorganized. Had it been, the new (re- organized) UOP would have been in a position to assert against MSO its creditor claim which (according to the receivers) amounted to at least $1,730,000. In such cir- cumstances, that claim would not have been sold at a judi- cial sale but would have been litigated or settled—and not on the basis of a mere guess that it was worth only $300,000. Because of Glass’ non-disclosure of his personal inter- ests, he may be required to repay part of the compensation paid him as receiver of UOP. Since Glass did not, before confirmation of the sales, disclose to the judge his personal interests, and because the judge acted on Glass’ tainted advice, Glass may be required to repay part of the compensation paid him as receiver.” 50 See, e.g., Crites, Inc. v. Prudential Company, 322 U. §, 408, 418; Woods vy. City Bank, 312 U. 8. 262, 268; Wadsworth y. Adams, 138 U. S. 380, 388; Mechem, Agency (2d ed. 1914) See. 1588; Restatement of Agency, Sec. 390 and Comment f, Sec. 469 and Comment ¢; Warren v. Burt, 58 Fed. 101, 103 (C. A. 8); Beatty v. Guggenheim Exploration Company, 223 N. Y. 294, 304; Everhart y. Searle, 71 Pa. St. 256; Little v. Phipps, 208 Mass. 331, 333-334; Rice vy. Wood, 113 Mass. 133; Lemon vy. Little, 21 So. Dak. 628, 636-637 ; Tracy v. Willys Corp., 45 F. (2d) 485 (C. A. 6). 2111 See tat eA = law Prrarmatly Aawneed 14. Boyd-case rule violation My discussion thus far has dealt with those aspects of the case unrelated to the doctrine of Northern Pacific y, Boyd, 228 U.S. 482. I now turn to that doctrine. I think that it was violated here, and that therefore Glass js liable hecause, he aided that violation and, in so doing, was guilty of disloyalty to the UOP bondholders, since he was serving his personal interests. In our former opinion, 154 F. (2d) at 999, we said: “The Boyd case principle was violated if stockholders or credi- tors of Middle States, without adequate consideration, received under the plan a participation in United assets and if United bondholders were not offered in the plan the equivalent of payment in full, since even the creditors of Middle States were not creditors of United but creditors of a stockholder of United.” Significant here is the fact that (as previously observed) contrary to then well-es- tablished practice, the reorganization committee did not submit the plan to the court, and the court, before confirm- ing the sales, refrained from holding, pursuant to notice, a hearing on, antheiccing on, the fairness of the plan. Unquestionably (as shown infra) the plan, in several important respects, disturbed the position of the UOP bonds with reference to Eureka and the unpledged UOP assets, and allowed MSO stockholders and its creditors to participate in the new company, in such a manner that they were benefited by the new company’s ownership of these UOP assets." Glass testified that in November 1929 “there was no equity in the MSO Corporation—no residuum of equity available for stockholders.” Judge Smith found 51 Of the MSO serial notes—given a substantial participation in the new company under the plan—Judge Smith found they “were of doubtful validity, to say the least.” The holders of those notes were but creditors of UOP’s stockholderg, MSO. 2112 BLEED THROUGH POOR COPY that it was then insolvent and that “the old MSO stock- holders as such did not provide any new consideration.” ¥ Judge Smith said that the fact that assets were provided hy others did not make the Boyd rule inapplicable so far as the MSO stockholders were concerned] shall, however, assume, arguendo, that this conclusion would not necessarily he correct, if (1) a “system” reorganization were essential, and (2) the contributed assets had a worth sufficient to give the UOP bondholders the equivalent of their displaced rights. However, the “equivalent” doctrine—permitting stock- holders to participate, despite displacement of senior credi- tor rights, if the reorganization plan provides an equivalent for those displaced rights—does not apply unless the par- ticipation of stockholders in the reorganization js essential. See, e.g., Nansas City Terminal Com pany v. Central Union Trust Co., 271 U.S. 445: “Generally, additional funds wil] he essential to the success of the undertaking, and it may be impossible to obtain them, unless stockholders are permitted to contribute and retain an interest sufficiently valuable to move them. In such or similar cases, the Chancellor may exercise an informed discretion concern- ing the practical adjustment of the several rights.” °* In Consolidated Rock Products Company v. Du Bois, 312 U.S. 510, 529, the court held that the “absolute priority” rule precludes participation by stockholders unless there is “a necessity of seeking new money from them” (or new assets). But here (as I think I have shown above) so far 52 See Railroad Company v. Howard, 7 Wall. 392, and the discussion of that case, as affecting the Boyd doctrine, in Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganizations, 19 Va. L, Rev, (1933) 542, 544-547, 53 Emphasis added. Cf. Kansas City Railway vy. Guardian Trust Company, 240 U. 8. 166, 178, 2113 idee 3 as UOP was concerned, a “system” or “merger” reorganiza- tion was not essential, i.e., UOP could easily have been separately reorganized and such a separate reorganization would have been better for the UOP bonds. Therefore, displacement of their rights was not justified: Surely, when insolvent Company A could be reorganized by itself, and so reorganized, could easily obtain all needed addi. tional funds, it is not lawful to merge it with insolvent Company B under a reorganization plan which cuts off some of the substantial “absolute priority” rights of Com- pany A’s creditors, and gives those rights to its stock. holders, merely because Company A’s creditors receive an equivalent of their reduced rights in the form of secur. ties of the new company resulting from the merger. (It does not concern us here whether a different rule would govern were one of the companies a railroad or public utility; see First National Bank v. Flershem, 290 U.S. 340.) However, in the balance of this Boyd-rule discussion, I shall generally assume, arguendo, that a “system” reor- ganization was essential. On that assumption, in order to make the plan fair to the UOP bondholders, it was neces. sary that the new company have assets, theretofore not available to the UOP bonds, of sufficient value to make u for the rights of which the UOP bonds were deprived. The plan did displace the rights of the UOP bonds as follows: (1) The new bonds allotted to them bore interest at 644%. The old bonds carried interest at 8% plus “interest participation” not exceeding 20%4%. The new bonds were thus “an inferior grade of securi- ties.” * 54 Consolidated Rock Products Company v. Du Bois, 312 U. 8. 510, 527. 528, See also Judge Learned Hand in Eddy y. Prudence Bonds Corpo- ration, 165 F. (2d) 157, 160-161 (C. A. 2), 2114 BLEED THROUGH POOR COPY (2) The old bonds matured by their terms on July 25, 1931. The new bonds matured on January 1, 1945. Again this made the new bonds “inferior.” ® (3) For the purpose of allotting new securities, the UOP bonds were entitled to their principal plus accrued interest, to the effective date of the plan, or about $4,450,000. Instead, the plan computed interest at but 8% up to July 29, 1929, making a total, for principal and interest, of but (about) $3,350,000. (4) The UOP bonds, being entitled to virtually all the UOP assets, were in a position, on a reorganization of UOP, to obtain voting control. Under the plan, they received far less than a majority of the new company’s Class A stock and none of the Class B stock.” But stockholders and other creditors of MSO (stockholders and creditors of the stockholders of UOP) received a majority of the Class A stock and the overwhelming majority of the Class B stock, thus putting ultimate voting control in their hands." 55 Consolidated Rock Products Company v. Du Bois, 312 U. 8. 510, 527- 528. 56 Consolidated Rock Products Company v. Du Bois, 312 U. 8. 510; In re Chain Investment Company, 102 F, (2d) 323, 324-325 (C. A. i Highland Towers Company v. Bondholders’ Protective Committee, 115 F. (2d) 591, 600 (C. A. 7). ~a co UOP and OLD bondholders were given approximately 58,000 shares of A stock out of 300,000 issued, and no B stock. Serial noteholders received 180,000 shares of A stock, 60% of the issue. 745,000 of the 895.000 shares of B stock issued went to old stockholders, and another 107,000 shares of B stock went to serial noteholders. Together the old stockholders and serial noteholders received almost 95% of the B stock. The Plan called for depositing all A and B stock in a voting trust, with full voting powers vested in five trustees. The trustees were to be selected by the Reorganization Committee as follows: “ persons whom the Reorganization Committee (which ineluded repre- 2115 Did the plan contain a “full compensatory provision * * * for the entire bundle of rights” ** of which the UOP bonds were deprived? It is suggested that this requirement does not apply where, as here, a reorganization involves a “merger.” I do not agree.’ A reorganization which vio. sentatives of junior interests) believed to be impartial as among holders of various classes of securities; _ person approved by the Bondholders’ Committee ; —_ person approved by the Serial Noteholders’ Committee and Gulf Coast Committee; — person approved by the Stockholders’ Committee. During the duration of the voting trust (ten years, subject to earlier termination by action of the trustees) the Board of Directors was to be constituted as follows: 1. During the first year of the trust, the Board was to be selected by the Reorganization Committee and to consist of three persons believed by them to be impartial as among holders of various classes of securities, two persons approved by the Serial Note. holders’ Committee, one by the Gulf Coast Committee and two by the Stockholders’ Committee. to During subsequent years of the trust: 3 directors chosen by the two impartial trustees, two chosen by the trustee approved by the Bondholders’ Committee, 2 by the trustee approved by the Serial Noteholders’ and Gulf Coast Committees and 2 by the trustee approved by the Stockholders’ Committee. 3. Upon the retirement of the new bonds the number of directors : was to be reduced by 2 and the voting trustee approved by the Bondholders to cease to act. After termination of the voting trust, A shareholders were, as 4 class, to elect 4 direetors, and B shareholders, as a class, to elect 4 directors. A and B shareholders would also vote, as classes, for a ninth a director, but the position was to be vacant unless the same person was voted for by holders of both a majority of A stock and a ma jority of B stock represented at the election. Neither A shareholders nor directors elected by them (nor, during the voting trust, trustees approved by Committees representing them) were to be permitted to vote on the question of redeeming A stock or in favor of voluntary dissolution or liquidation of the company. 58 Consolidated Rock Products Company v. Du Bois, 312 U. 8. 510 at 528. 59 That the Boyd doctrine applies to a merger, even of railroad eon: panies under Sec. 77 of the Bankruptcy Act, see, e.g., KR. F. C. v. Denver § Rio Grande Western R. Co., 328 U. 8. 495. 2116 ie NES eet Ra me crepe : Ch SDE ANAC MV Sawa ao Se a nT RS Mote’ ood BLEED THROUGH POOR COPY lates the Boyd doctrine is a fraudulent conveyance; and clearly a fraudulent conveyance can result from a merger. My colleagues suggest that this reorganization was so complex that, to determine whether the Boyd doctrine was violated, is an horrendous achievement. However, if I am correct in concluding that Glass had the burden of proof, then it was up to him to show that, in displacing the previous rights of the UOP bondholders, enough was supplied by way of substitution for the displacement of the UOP bond rights. It may well be, as my colleagues say, that, if Glass had had no personal interest in achieving the reorganization then, as her Wes inerely a “meddling outsider,” the bond- holders could assert a claim against him for any conduct which fell foul of the Boyd doctrine, only to the extent that they could prove an actual, specific, resultant loss. But, once more, this ruling tumbles if Glass had the burden of proof. Here again enters the question, discussed above, of the fair going-concern value of Eureka. For that a fair price was paid at the forced sale of Eureka does not answer the Boyd-case question: The unfairness of the offer in a plan is not cured simply because the alternative js a proper share of the price paid at such a sale. Both alternatives must be fair. So, too, as to the fair going-concern value of the un- pledged VOP assets. Judge Smith says that, at the forced sale, the UOP claim against MSO was “sold at a fair price,” (7.e., $200,000). But again, even were that price fair, that fact would not meet the 3oyd problem. The re- celvers, as we have seen, obtained an order on December 14, 1929, “liquidating” that claim at $1,730,000. True, they “valued” it, before the sale, at $300,000. But, as my lleagues concede, that “valuation” was pure guesswork, 2117 Since Glass had the burden, it was up to him to prove that it was not worth at least $1,730,000. Judge Smith seeks to get rid of the question of the fair value of that claim by saying that “any claim under the Boyd rule as to that debt is washed out on its acquisition by Middle States Petroleum” (i.e., the new company), Not at all—unless the new securities allotted to the UOP bondholders gave them the equivalent of their rights in the UOP assets. In this connection, my colleagues once more employ the “judicial pressure” argument to justify the $300,000 valu- ation fixed by the reorganization committee and Glass. But, assuming, arguendo, the cogency of that argument with respect to the fairness of the price paid at the Judicial sale, it cannot excuse the use of that figure for purposes of ascertaining the fairness of the plan. Judge Smith, speaking of the plan’s provisions as they affected another interest (Southern States), said that “Some plan un- doubtedly could have been worked out which would have adjusted the accounts between the corporations” (as of the date of the adoption of the reorganization plan) “and provided additional” securities to be issued later when the accounts were finally adjusted. The same is true as to the UOP claim against MSO: The plan, to be fair, should have provided that securities were being reserved for issu- 60 Had UOP been separately reorganized, there would have been no sale of its claim against UOP, which was in amount at least $1,730,000. The separately reorganized new UOP would have been in a position 2 to demand that, for its claim, it receive new securities under a fair ; plan just as such securities were allotted to so-called “outside” creditors P of MSO for their claims. 61 Judge Smith also said, of certain “minority interests,” that whether they “were entitled to priority over the old stockholders, or whether they were entitled only to some sort of distributive share, some provision should have been made more effectively to protect them.” This comment should be applied to the UOP bonds. 2118 BLEED THROUGH POOR COPY ance to the UOP bonds, if, upon subsequent examination, the value of that claim should turn out to exceed $300,000. Such a provision would, in a simple way, have obviated the unfairness created by the pressure for speed. Here it should again be noted that, as Judge Smith said, (lass and the reorganizers “probably desired to effect a reorganization to be controlled by the interests represented on the reorganization committee.” Unfairness in cancelling the option to deposit at a time when a non-depositing bondholders could not know the amount of cash distributable to him if he failed to deposit. Judge Smith found: “The receivers made no affirmative effort to inform non-depositing United bondholders of facts upon which the bondholders could determine for themselves whether acceptance of securities under the plan or cash distributive values would be in the bondholders’ best in- terests.”. Nor could any such bondholder so determine until he knew the amount of cash he would receive if he failed to deposit under the plan. And this he could not know until’the court fixed it at about $698 per $1000 bond (face amount). Meanwhile, on May 14, 1930, the right to deposit was cut off. In these unusual circumstances, that cut-off was most unfair. The situation was unusual—and thus unlike Jameson v. Guaranty Trust Company, 20 F. (2d) 808, 815 (C. A. 7), cited by Judge Smith and my col- leagues—because, in the usual case, the securityholders know, before the cut-off, exactly the amount of cash they will receive if they elect not to deposit. 62 Of course, if the fair going value of (1) Eureka plus (2) the un- pledged UOP assets, exceeded the $4,450,000 (approximately) owing to the UOP bondholders, it was not improper to allot, under the plan, the excess to junior interests—provided a “system” reorganization was essential. 2119 IM Se Lol tts ASS RST A, Here the non-depositors had no such knowledge until July 25, 1933, when their distributive share of cash was fixed at about $698 per each $1000 bond (face amount), That distributive share bore no interest from the date of the sales’ confirmation to July 25, 1933. On September 12, 1930, Glass, as president of the new company, reported that it had made “a very considerable saving” as a result of the cut-off. He was then still a receiver of UOP. Accordingly, all else aside, the plan was unfair because there was not in it a “tender made and kept good” ® of new securities to the UOP bondholders. (It is interesting that the Class B shares, allotted to the old MSO stock. holders, apparently had a market value of some $10,000,000 in September 1952.) I think that Glass, who served his own personal interests in helping to consummate the plan, is liable for any resulting loss to UOP bondholders who did not deposit during the period from the end of 1929 to July 25, 1933. “What constitutes a fair opportunity of participation may depend on the circumstances. Directors of Manhattan Company v. Kelby, 147 F. (2d) 465. 174-475 (C.C. A. 2). 2196 =e f= e ae sem Aas 8 £5 DAMD CPOwmyYV on this record, did not constitute a release or surrender of assets within the meaning of the New York decisions.*’ Moreover, there is nothing to show that Cohen purchased these bonds in New York or that the bonds were in New York when he purchased them. Applying the New York rule of conflict of laws, the effect of a transfer of a negoti- able instrument is determined by the law of the place where the instrument is at the time of transfer: see Restatemcu! of Conflicts, § 349, and New York Annotations thereof (1935); ef. United States v. Guaranty Trust C'o., 59 TP. (2d) 599, SOL (C. C. A. 2). In several other jurisdictions it has heen held that a right of action for a tort to property, either real or personal, including a tort resulting from fraud, passes with the sale of the property to the purchaser al- though the seller does not expressly assign it: and, in cases not unlike the instant case, the federal courts, in pre-K ric- Tompkins days, so held.** These decisions are at odds with the apparent rationale of the New York decisions announc- ing the New York rule, i.e. that a mere assignment of a con- *? Glass, as receiver, had a fiduciary position with respect to the interest Of United in the Eureka stock; he held the “equity”; and Glass, it is charged, colluded with the reorganization committee to bring about the default which led to the sale of that stock and at a price which was below its real worth. As to the difficulty, under the New York decisions, of determin- ing when wrongful conduct by a trustee involves a surrender of assets, cf. President & Directors of Manhattan Co. v. Kelby, supra. at 474. 38 See, e.g., Tracer v. Clews, 115 U. S. 528, 539-541: Comeyys Vv. Vasse, 1 Pet. 191, 213, 215-216; Erwin v. United States, 97 U. S. 392, 396; Pattiz v. Semple, 12 F. (2d) 276, aff'd 18 F. (2d) 955 (C.C. A. 7); Zinn v. Denver Live Stock Commission Co., 68 Colo. 274, 187 Pac. 1033; Rice v. Howard, 136 Cal. 432, 69 Pac. 77, 81-82: Emmons v. Barton, 109 Cal. 662; Sherman v. International Life Ins. Co., 236 U. S. 634, 639 (Mo.); Billingsley v. Clelland, 41 WW. Va. 234, 23'S. FE. 812, 820-821 ; Scott v. Brazile, 292 S. W. 185 (Tex.): 3C. J. 892; 6 C. J. S. 1085-1086; 8 C. J. 387; 10 C. J. S. 690-691 ; ef. Parkersburg v. Brown, 106 U. S. 487, 503 (see p. 495 to the effect that the bonds were sold at 80¢ on the dollar) : Chapman vy. County of Douglas, 107 U. S. 348, 360; Board of Commissioners v. Irvine, 126 Fed. 689, 693-694 (C. C. A. 8): Chelsea Savings Bank v. City of Ironwood, 130 Fed. 410, 413 (C. C. A. 6). 2197 Ar tepainitie Saal Oi taste aan ie tract usually does not carry with it a claim for a breach occurring before the assignment.°® lor all we know, as the record now stands, the jurisdic. tion where the bonds were when Cohen purchased them was one which does not follow the New York doctrine. We haye found no other jurisdiction in which that doctrine prevails especially where a sale of negotiable instruments is in. volved. Since, then, this question of appellants’ standine Was not raised by appellees in the court below or even here. we should, if we considered the New York decisions appli- cable to a claim against a federal court's receiver, and if we concluded that there was here no surrender oi assets, vo no further than we have done in other similar cases, je.. remand for ascertainment of the facts as to the location of the bonds at the time of Cohen's purchase"? ‘ 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 js not against an ordinary trustee but against a court's officer, Who has the right to assert such a claiin is a question affect. ing the integrity of the court itself!’ Phe federal courts, in holding their own officers to accountability, should not be hampered by state court decisions relating to ordinary trus- “9 Elkind v. Chase National Bank, supra, at 666; Hendry vy. Title Guarantee & Trust Co., supra, at 500. 4% Benz v. Celeste Fur Dyeing & Dressing Corp., 136 F. (2d) 845, 848 (C. C. A. 2); Nachman Spring-Filled Corp. v. May Mfg. Co.. 139 F. (2d) 781, 787 (C. C. A. 2); Zalkind v. Scheinman, 139 F. (2d) 895, 904 (C. C. A. 2); United States v. Rio Grande Dam & Irrigation Co., 184 U. S. 416, 423, 424; Estho v. Lear, 7 Pet. 130; Irmstrong Vv. Lear, & Pet. 52, 74; Security Mortgage Co. v. Powers, 278 U. S. 149, 159, 160; Pfeil v. Jamison, 245 F. 119 (C. C. A. 3); Wyant v. Caldwell, 67 F. (2d) 374 (C. C. A. 4): Columbus Gas & Fuel Co. v. City of Columbus, 55 F. (2d) 56, 58 (C. C. A. 6). 40 Cf. Mercoid v. Mid-Continent Investment Co., 320 U. S. 661, 671; Hazel-Atlas Co. v. Hartford Co., 322 U. S. 238, 246. 2198 BLEED THROUGH POOR COPY tees! When the United States issues a check, rights in that check (despite Krie 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 obligations through misconduct, the title thereto is, we think, similarly to be determined hy “federal law.” What, then, ix the “federal law” applicable here? In an- swering that question, we observe that the New York doc. trine has this undesirable practical result: The seller of such bonds—ewx hypothesi’ unaware, at the time of the sale, of the wrong done by the trustee-—in actual fact can have no notion of retaining any cause of action against the trus- tee; and the seller of a bearer bond is exceedingly lard to trace, The practical consequence of the New York rule therefore is that most of the claims against a trustee for wrong done, especially to holders of bearer bonds, will never he prosecuted unless the trustee lias surrendered trust as sets. That rule thus often serves, pragmatieally, as a con. venient means of trustee execulpation. We think that it would be inost unfortunate to apply such arule toa wrongdoing federal receiver: it would do muel See, eg. as to “federal law" in various fields. Clearfield Trust Co. v. United States, 318 U. S. 363; Garrett v. Moore-McCormack (9; Sif 1.8. 239; Sola Llectric Co. v. Jefferson Electric Co., Si/ U.S.173; Prudence Realization Corp. v. Geist, 316 U.S. 89: United States v. Forness, 125 F. (2d) 928, 937-940 (C. C. A. 2): United States vy. Pelzer, 312 U. S. 399, 402-403; Morgan v. Commissioner, 309 U.S. 78, 80-81; Lycth v. Hoey, 305 U. S. 188, 193-194: Amer- ican Surety Co. of N. Y.v. Sampsell, 0 U.S... (Feb. 25, 1946) : Holmberg v. Armbrecht, 0. U.S... (Feb. 25, 1946). Many illustrations are given and discussed in Clark, State Laz in the Federal Courts, 55 Yale L.. J. (1946) 267. We do not here consider the following suggestion: Restrictions n the bringing of stockholders’ actions, such as those unposed by FR. C. P. 23(b) or state statutes, are procedural: cf. Piccard \. Sperry Corp., 120 F. (2d) 328 (C. C. A. 2, aff'g 36 F. Supp. 1006) ; Galdi v. Jones, 141 F. (2d) 984 (C. C. A. 2): Towner-Hill Con- nellsville Coke Co. v. Picdmont Coal Co., 64 F, (2d) 817, 828 CCo€. \. 4, cert. den, 290 U.S, 675); the restriction imposed by the New York courts on suits by assignees of bonds is similar. 2199 ie Wande Saea Ry gn hkes Roser ate Se ae 5 a - 7 ? to thwart the policy of inducing careful discharge of their duties by receivers. The doctrine, relative to receivers, of strict accountability, and of opposition to divided loyalties, is prophylactic; it aims not merely to punish actual evil in cases where it occurs but to avoid the “tendency to evil in other cases.” Woods v. City Bank, supra; Weil v. Neary, supra; Crites, Inc. v. Prudential Co., supra; Jackson y. Smith, supra; Magruder v. Drury, 235 U.S. 106, 119-120, It is suggested that a purchaser (such as Cohen) should have no right against a receiver because otherwise the pur- chaser would acquire a windfall, since, he like the seller, knew nothing of that right when he purchased. But in a great variety of instances, purchasers are permitted to ae- quire windfalls, e.g., a buyer of land on which oil is diseoy- ered after the sale. The Restatement of Contracts, § 171(2) reads : “Unless otherwise provided in the assigninent or by agreement of the assignee with the assignor or with the obligor, an assignee under an effective assignment for value has the same right to any securities for the assigned right that were available to the assignor, though he has not bar- gained for them, as if the assignor had agreed to trans- fer them.” 4 If Glass was guilty of wrongdoing, that Cohen’s estate will unexpectedly benefit can work no harm to Glass. We therefore reject the New York rule and apply the rule adopted elsewhere." Accordingly, we hold that appellants have the right, for their own benefit and that of other holders of non-deposited bonds,*#*” to have Glass surcharged on account of his wrong- doing, if any. In so holding, we do not mean that, even if appellant lacked that right, the district court should have disregarded the merits of appellants’ charges against Glass 42 See Williston, Contracts (Rev. ed. 1936) § 447A. And so where the assignee is ignorant thereof at the time of the assignment; see, e.g., Gay v. Hudson River Electric Power Co., 180 F. 222, 227: Edwards v. Bay State Gas Co., 184 Fed. 979, 982. #29 See, e.g., cases cited in note 38, supra. #26 See note 13, supra. 2200 BLEED THROUGH POOR COPY and should have refrained from directing un investigation for the benefit of whatever persons may have been injured hy Glass’ alleged misconduct. It is fortunate, however, that appellants have the requisite standing and self-interest in ihe investigation, since it might well be difficult for the court otherwise to obtain the needed services of a lawver and an expert accountant.*" §. Appellants contend that the New Middle States com- pany should be held liable together with the receivers. On oral argument appellants supported this contention by ref- erence to an agreement made by the new company, in con- nection with the reorganization, to discharge the receivers’ obligations. Appellees did not, on the oral argument, ques- tion the existence of such an agreement: but we have not found it in the record before us. If there is one, we think it would not include the kind of liability here sought to be imposed, absent fairly specific language indicating other- wise. We leave that question for the court below. Should it, however, appear (of course, we do not know that it will) when all the facts are before the court, that the reorganization committee and, through it, the new com- pany, conspired with Glass to deprive non-depositing United bondholders of their legitimate share of the United assets *? in a way which involved a fraud on the court.*? then it may be that, notwithstanding the decrees, the new company will be liable with the receivers. Jackson vy. Smith, supra; Ferguson vy. Wachs, 96 F. (2d) 910 (C. C. A. 7): ef. Irving Trust Company v. Deutsch, 73 F. (21) 121, 123, IZ (C. C, A. 2). *8 For the court merely to appoint a lawyer who would be paid on a contingent basis and who (unlike appellants’ lawyer, who may in any event look to the Cohen estate for payment) would go unpaid if unsuccessful, would be insufficient; the services of an expert ac- countant are also needed. The S. EF. C. is not authorized by statute 'o engage in such an undertaking except under the Chandler Act. ‘* We do not here refer to the doctrine of the Boyd case. "Cf. Hasel-Atlas Co. v. Hartford Co., 322 U. S. 238. 2201 SURE, RA 7. We think that undoubtedly, in connection with the re- ceivers’ final accounting and discharge, appellants should have access to the engineer's and accountants’ reports and, indeed, to anything in the books and papers in the hands of the receivers. Since, as Glass had made clear, the affairs of the various companies in the several receiverships were “administered as a unity,” and were “inextricably inter. twined,” there is every reason why appellants in. connce- tion with the United receivership, should have similar ge. cess to the receivers’ books, records and files in all the receiverships in the court below.% Appellees argue that the final accounting in each receivership should. stand on its own bottom. But it would seem from Glass’ statement that such a method would be highly artificial and might un- duly complicate matters, since facts revealed with respect to one receivership might so affect another as to necessitate undesirably the reopening of an order of discharge there- tofore made. We think orderly administration requires that the final aecountings and discharges should be dealt with just as the court dealt with the receiverships when they were active, Le. as a unit. Reversep ann Reaanpep #6 Appellees contend that the examination which appellants ask concerns the value of the physical properties; that the physical prop- erties were in the custody of ancillary receivers in other jurisdic- tions; and that, as those ancillary receivers have been discharged, it will be improper to permit such examinations. But, as the re- ceivers’ interim reports and Glass’ affidavits show, the ancillary receivers reported to the receivers in the court below. These re- ceivers reported on June 1925 that they “have conducted a principal office with which the ancillary receivers have been in constant touch by daily correspondence, telephone and telegraph concerning day to day developments, sale and storage of oil, drilling of wells and other affairs, in connection with the running of the business.” More important, appellants seek no relief with respect to the physical properties but want, and should be allowed, access to data concern- ing those properties since such data may have an important bearing on the questions involved here. med 0 he BLEED THROUGH POOR COPY sway, Corcuit Judge (dissenting) : These are appeals from two orders in an equity receiver. ship. One of the orders approved the final report and accounting of the receivers of United Oil Producers Cor- poration and discharged the receivers in respect of all mat- ters embraced in their said report and accounting: the other order denied a motion for a discovery and inspection of the books of account and other papers of the receiver- ship. The appellants are the exeeutors of William W. Cohen, deceased, and his widow, sole beneficiary under his will, Any rights they may have to surcharge the receivers or to inspect the books and papers of the receivership are derived under the will by reason of Cohen’s ownership of $32,200 of bonds issued by United. Unless Cohen at the tie of his death in 1940 had rights against the receivers hased on their conduct as such receivers, the appellants have no standing to object to the final accounting. It was imperative, therefore, for them to prove that Cohen did have such rights. In my opinion they failed to make sueh proof. Consequently the orders should be affirmed. The theory upon which the appellants assert a right to object to the receivers’ accounting is that they were guilty of a breach of fiduciary duty in not reporting to United’s hondholders and to the district court that United’s assets were of sufficient value to pay the bonds in full and in con sequence of the concealment of such information the as sets were sold at judicial sales in 1929 at too low a price. Such concealinent is said to be equivalent to a fraudulent misrepresentation as to the value of United’s bonds and to have caused the bondholders who elected to take cash instead of new securities under the plan of reorganization, to accept only 68 cents on the dollar instead of getting full payment of their bonds. Assuming these allegations to be true, the receivers’ misrepresentation was a breach of duty to the owners of bonds at the time when the misrepresenta- tion was made, that is, at a time prior to the judicial sales. 2205 The $52,200 of bonds upon which Cohen received G8 cents on the dollar were acquired by him at some unspecified dat after the judicial sales. Hence the receivers’ MISreprescy iations as to their value were not a tort against Cohen hy against the owner of the bonds in November 1929, Ip Klhias v. Clarke, 143 F. 2d 640, 644 (C. C. A. 2) we held that under New York law a claim for fraud or Inisrepresentatioy in connection with an obligation evidencing a debt, whethey for damages or reseission, does not pass with the transfe; of the obligation in the absence of a special assignment of the claim. Cohen was a securities broker in New York City and it is a natural inference that he purchased the bonds here. If so, neither he nor his executors acquired any right to claim damages for the receivers’ tort to his predecessor in title.’ If he acquired them outside the State of New York and in a state where the seller’s tort claim would pass without a special assignment of the claim, it devolved upon his executors to make proof of that fact in order to show their right to object to the receivers’ final accounting. They offered no such proof. The district cour held that they were “without standing to object to the final report and accounting.” This conclusion was right, whether or not we agree with the reasoning by which the district judge reached it. Aecordingly T think the orders should be affirmed. 'The majority opinion suggests that because this is a federal re- ceivership we may hold that Cohen’s purchase of the bonds, even if the transfer occurred in New York, passed to him the seller's tort claim against the receivers. This seems to me in direct conflict with the rule of Erte v. Tompkins. 2204 ae) ee ee ee ee | DnNpD fwOnpmyv (REPORTED 156 FED. (2) 697) UNITED STATES CIRCUIT COURT OF APPEALS For tHe Seconp Cireurr No. 314—-October Verm, 1945. (Argued June 11, 1946 Decided July 9, 1946.) Docket No. 2O2T5 JoskPH A. PHELAN, Complainant, Mippie Srares On. Corporation, et alu, Defendants. Sopuie D. Conen, individually and as Executrix, and Meyer Krausuaar and Clarence Cone, as Executors of the Last Will and Testament of William W. Cohen, de- ceased, Appellants, v. JosepH P. Tumutty and JoserpH Guass, as Receivers of United Oil Producers Corporation, et al., and Mrppie STATES PETROLEUM CORPORATION, Appellees. Before L. Hann, Swan and FRANK, Circuit Judges. P?205 Appeal from the District Court of the United States for the Southern District of New York. From an order entered on the mandate of this court, the executors of the will of William W. Cohen, deceased, and Sophie D. Cohen, individually, appeal. Meyer Krausnaar, for appellants. LesLiz Kirscn, for appellees. Per CurRIAM: This is an appeal from the order entered on the mandate of this court in a prior appeal entitled Phelan vy. Middle States Oil Corp., 154 F. 2d 978. In addition, the appellants have moved that our mandate be recalled and modified, or he construed in the manner they desire; while the appellees hav moved to dismiss the appeal. Without reciting the terms of the order it will suffice to say that it fully eon. forms to our mandate. The opinion on the former appeal did not order a reference to a special master. Rule 53(b) of the Federal Rules of Civil Procedure, 28 USCA follow. ing §723(¢) declares that a reference to a master is the exception, not the rule. Whether in a given case a refer- ence should be ordered is a matter primarily within the discretion of the district judge. He has not as vet exer- cised his discretion and the order on appeal leaves him free to do so hereafter. Nor does the order, as the appellants assert, unduly restrict their investigation. It grants them inspection of “all books, papers, documents, balance sheets, appraisals and inventories in the hands of the Receivers of any of the companies heretofore or now in receivership in this cause.” Tf it shall appear to the district court that examination of the books of the new company is essential to show values as of the time of the judicial sales, we can- not assume that such examination will be denied. The ap- pellants’ complaint on this score is premature. Both mo- tions are denied and the order appealed from is affirmed. 2206 BLEED THROUGH POOR COPY Statutes Involved. Civil Practice Act of the State of New York, Article 2, §¢ 24, 48 Subdivision 5, and 53: 24. Effect of stay of commencement of action. Where the commencement of an action has been stayed by injunction or other order of a court or judge or by statutory prohibition, the time of the continuance of the stay is not a part of the time limited for the commencement of the action. ) 48. Actions to be commenced within six years. The following actions must be commenced within six vears after the cause of action has accrued: * cd ae ¥ * ~ ). An action to procure a judgment on the ground of fraud. The cause of action in such a ease is not deemed to have accrued until the discovery by the plaintiff, or the person under whom he claims, of the facts constituting the fraud. * » * * * * ) 53. Limitation where none specially prescribed. An action, the limitation of which, is not specifically prescribed in this article, must be commenced within ten vears after the cause of action accrues. 2207 Judgment Appealed From. UNITED STATES COURT OF APPEALS Kor THE SECOND CircuIr At a Stated Term of the United States Court of Appeals, in and for the Second Circuit, held at the United States Courthouse in the City of New York, on the 11th day of January, one thousand nine hundred and fifty-five. Present: Hon. LEARNED HAnp, Hon. THomas W. Swan, Hon. JeERoME N. Frank, Circuit Judges. JosepH A, PHELAN, Complainant, MippLe SrateEs Oi Corporation, et al., Defendants. Appeal from the United States District Court for the Southern District of New York. This cause came on to be heard on the transcript of record from the United States District Court for the Southern District of New York, and was argued by counsel. Own ConsiperaATION WHEREOF, it is now hereby ordered, adjudged, and decreed that the judgment of said District Court be and it hereby is affirmed. It is further ordered that a Mandate issue to the said District Court in accordance with this decree. s/ A. DANTEL Fusaro, Clerk. 2208 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386417_2626%3A2. Public record. Not legal advice.