Petitioners Brief — Richardson v. Blue Grass Mining Co.

ee

—————

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1941

No. 1274

W. E. RICHARDSON, TrusrTEsr, ETC., ET ALS.,

‘aa Petitioners,

BLUE GRASS MINING COMPANY, er ats.

BRIEF IN SUPPORT OF PETITION FOR WRIT OF

CERTIORARI.

I.

Opinion of Lower Court.

The Cireuit Court of Appeals wrote no opinion in the

case, but merely entered a decree (R. VI, p. 2183), reciting

that, for the reasons set forth in the opinion of the District

Court, the cause, on both respondents’ original appeal and

petitioners’ cross-appeal, was affirmed. The opinion of the

District Court is published (29 Fed. Supp. 658), and will

be found in the record, Vol. I, p. 358. The Court of Ap-

peals affirmed without opinion.

Il.

Findings of Fact in the Lower Courts Relied Upon.

The findings of fact and conclusions of law by the District

Court, affirmed in the Court of Appeals, will be found in

the Record, Vol, I, at pp. 385-417,

14

III.

Statement of the Case.

We adopt the statement contained in the petition for

certiorari, though some additional facts may be brought to

the attention of the Court in brief and argument.

IV.

Probable Errors and Questions Presented.

The probable errors and questions presented for decision

are fully set out in the petition for certiorari and need not

be repeated.

V.

Jurisdiction.

We rely upon the Act of March 8, 1891, 26 Stat. 828, as

amended and codified in U. S. C. A., Title 28, See. 347, and

Rule 38 of this Court, especially Section 5, sub-section (b)

thereof, which provides for allowance of the writ.

‘‘Where a Cireuit Court of Appeals has rendered a

decision in conflict with another Circuit Court of Ap-

peals on the same matter, or has decided an important

question of local law in a way probably in conflict with

applicable local decisions * * *”’.

It is submitted that the Cireuit Court of Appeals, Sixth

Circuit, has rendered a decision:

(1) Probably in conflict with the decisions of other

Cireuits and of this Court;

(2) of an important question of local law probably in

conflict with applicable local decisions, and

(3) On an important question of general law in a way

probably untenable and in conflict with the weight of au-

thority.

Bite TETRIS EL rete ey teal

15

IV.

BRIEF AND ARGUMENT.

By applicable decisions of Kentucky, as well as by the

weight of authority of other circuits and of this Court, trus-

tees guilty of wilful fraudulent breach of trust, and who

denounce their trust and seek to appropriate the trust estate

to themselves, should be denied all compensation for

services.

In Erie Railroad v. Tompkins, 304 U. 8. 64, this Court

held that, except in matters governed by the Federal Con-

stitution or by acts of Congress, the law to be applied in

any case is the law of the State, whether it be declared by

legislative enactment or by its highest court in a deci-

sion.

304 U.S. 78.

The case at bar is of such local character. The corpora-

tions of which respondents were officers and directors, were

Kentucky corporations; their properties were situated and

their business transacted, in Kentucky; the contracts upon

which petitioners’ rights rest, were to be performed in Ken-

tucky; the trust was being administered by respondents

in Kentueky, and the cause of action arose there. Federal

jurisdiction rests alone upon diversity of citizenship. The

controlling law and public policy of Kentucky has been

announced by the highest court of that State.

Cominger v. Louisville Trust Co., 128 Ky. 697, 108

S. W. 950, 111 S. W. 681, 129 Am. St. Rep. 322.

We submit this case declares the law of Kentucky to be

that ‘‘a trustee guilty of fraud or misconduct in the man-

agement of the estate is not entitled to compensation’’, cer-

tainly if such misconduct is found as it was in the case at

bar, to be grounded in bad faith,

16

Again in Weakly v. Meriweather, 156 Ky. 304, 160 S. W.

1054, the rule was applied, though the trustee was not con-

victed of bad faith. The Court in the latter case, however,

might have been influenced by the fact that little service

was rendered by the trustee, who had commingled trust

funds with his own, other than payment of interest.

The common law of Virginia, from whose territory the

State of Kentucky was carved, seems to have been declared

to the same effect.

Boyd v. Boyd, 3 Grath, 113;

Ward v. Funston, 86 Va. 359, 10 S. KE. 415.

This latter may not be material, except insofar as it

discloses a settled policy of these people of a common stock

who at one time acknowledged a common independent

sovereignty.

But if the question be treated as one of general law, rather

than one of local law, the decision below is probably unten-

able and contrary to the weight of authority, including

decisions of this Court and the Courts of other circuits.

Walker v. Beal, 9 Wall. 743, 19 L. Ed. 814-20;

Barney v. Saunders, et al., 16 Howard 535, 14 L. Ed.

1047, 1050;

Wadsworth v. Adams, 138 U. S. 380, 34 L. Ed. 984;

Lewis v. Ingram (C. C. A. 10th), 57 F. (2d) 463-465,

certiorari denied 287 U. S. 614, 77 L. Ed. 533;

Munro v. Smith (C. C. A. 1st), 259 Fed. 1;

Flint River Pecan Co. v. Fry (C. C. A. 5th), 39 F. (2d)

457;

Backus v. Finklestein (C. D. Minn.), 23 F. (2d) 357,

appeal discontinued by stipulation 31 F. (2d) 1011;

In Re Polansky (D. C. 8. D. N. Y.), 41 F. (2d) 547;

Caldwell v. Hicks (D. C. 8. D. Ga.), 15 Fed. Supp. 46;

Davis v. Swedish Am. Nat. Bank, 78 Minn, 408, 80 N.

W. 953, 81 N. W, 210, 79 A. S. R. 400;

17

In Re Hodges Estate, 66 Vermont 70, 44 A. S. R. 820;

In Re Kline, 280 Pa. St. 41, 124 Atl. 280, 32 A. L. R.

926;

Turner v. Ryan (Iowa), 272 N. Co. 60, 110 A. L. RB. 554,

and note at p. 572.

In the Restatement of the Law of Trusts, See. 243, sub-

sec. d, the rule is thus succinctly stated:

‘Tf the trustee repudiates the trust or misappropri-

ates the trust property or if he intentionally or negli-

gently mismanages the whole trust, he will ordinarily

be allowed no compensation.’’ (Italics ours.)

The Distriet Court found, and the Circuit Court of Ap-

peals concurred therein:

(1) The Kentucky group ‘‘attempted to appropriate

all of the stock to themselves, without notice to the Ten-

nessee Group. In numerous other ways they revealed

a deliberate design to deprive their Tennessee asso-

ciates of all beneficial interest in the corporations.’’

Opinion 29 Fed. Supp. 664;

Finding of facts (23) R. I, p. 391.

(2) That they engaged in various specific instances

of misconduct, and in ‘‘various other questionable trans-

actions in connection with the business, all without

the knowledge of or notice to the Tennessee Group’’.

Finding of facts (21) R. I, pp. 390-391.

(3) That their use of trust funds to promote their

own interests, ‘‘was clearly wrong and indefensible’’.

Finding (44) R. I, pp. 399-400,

(4) That they were guilty of ‘‘fraudulent breach

of trust’,

Conclusion (20) R. I, p. 416.

We cite some of the instances making up the ‘‘fraudulent

breach of trust’? found by the Couris below:

18

Reference has already been made to the deliberate at-

tempt of the Kentucky group at the organization meetings

to appropriate to themselves all of the stock of both cor-

porations (R. VI, pp. 1812-18), and this at a time when Mr.

Johnson concedes the Tennessee Group were entitled to equal

ownership of the stock (R. III, p. 790, Qs. 620-21). In the

face of this action, Mr. Johnson, Sr., wrote Messrs. Powell

and McArthur, of the Tennessee Group, advising them that

the organization meetings had been held and requesting

that they put up their part of the agreed working capital

(R. II, pp. 80-81). The Tennessee group were not advised

of this action and did not know of it until near the close of

the trial below, when Mr. Johnson produced some min-

utes which were written up after this suit started (R. VI,

pp. 1820-24). Johnson, Sr., was asked why he did not

invite Richardson and Garth to attend the organization

meetings, the latter of whom was on the ground, to which

he replied he thought the Tennessee group were to pay for

their stock only if the first sale was confirmed on appeal.

Thereupon the Court reminded him this action was taken

before the reversal of the first sale (R. III, pp. 817-20).

This excuse is clearly a specious one. If it were not in-

tended that the Tennessee group should take and pay for

one-half of the stock, why did the parties go to the trouble

of having them subscribe for one-half?

The Kentucky group appropriated to themselves large

salaries, the first year of the operation of the business, to-

wit: the year 1930, aggregating the sum of $34,100.00 (BI.

Grass Min. Co. Aud. p. 35, and Pendleton Store Audit, p.

39).

The only statements ever rendered to the Tennessee

eroup for January, February and Mareh, 1930 (R. UI, pp.

410-43 and R. III, 433-446), showed no salaries to proprie-

tors or executives but Pendleton Store statements did show

19

a payment to J. E. Johnson, Jr., of $50.00 for legal services,

and salary of Arch Pendleton of $150.00 (R. II, p. 425) and

a payment to ‘‘Wm. Pendleton of $150.00 (salary for Jan-

uary, Feb. and March)’’, (See R. III, p. 434). These state-

ments were false. The minutes of the meeting of January

15, 1930, showed the directors had fixed the salaries for

Pendleton Store for Wm. Pendleton at $2,400.00 for 1930;

for Arch Pendleton at $5,000.00, and for J. KE. Johnson,

Jr., at $2,400.00 ‘‘Said salary to be in lieu of all other

fees’’ (R. VI, pp. 1819-20). As a matter of fact the minute

entry was false, as well as the entry on the books of ac-

count at July 31, 1930, setting up salaries for the Kentucky

group and charging them with stock subscriptions, because

the witnesses testified no salaries were agreed upon or fixed

until November or later in 1930 (R. III, pp. 661-2; 681-2;

810-12).

The day after Mr. Johnson had by false representations

induced Richardson, Trustee to sign the alleged contract

of February 18, 1931, putting as he evidently thought, the

Tennessee group in the position of minority stockholders,

he began having Blue Grass lend money to Black Gold Min-

ing Company (they had already furnished labor and credit

(R. IV, pp. 1414-15)), the first loan being February 19,

1931, and kept it up until the total loans and advancements

aggregated $22,242.31. (Ex. X Lavinder.) Mr. Johnson

very distinetly recalled no loans were made until after the

alleged contract of February 18, 1931 (R. V, p- 1640). Less

than three months before these loans started Mr. Johnson

had written Mr. MeArthur that the Blue Grass was having

a hard time to get money to meet its pay roll (R. II, p.

399). In August, 1931, Johnson began lending the corpo-

rate funds to the aggregate of $4,302.15, to Chavies Coal

Co. (Ex. X Lavinder), a Johnson company organized by

him to take over one which he had operated to bankruptey

(R. V, pp. 1702-4). And in August, 1931, he caused Blue

20

Grass Mining Company to lend $1,000.00 to Johnson Supply

Company and to buy its stock certificate book for $5.25

(x. X Lavinder). This was a Johnson Company (R. V,

pp. 1700-01). In November, 1933, Johnson caused corpo-

rate funds to be loaned to Eagle Coal Company in the sum

of $816.00 (Ex. X Lavinder) which was owned by Johnson,

Pendleton and Davis (R. V, p. 1701). In 1934 he loaned

corporate funds to Sun Fire Coal Company to the extent

of $7,750.00 (R. IV, pp. 912-18), this latter company being

owned by J. E. Johnson, Jr., Wm. Pendleton and Arch Pen-

dleton (R. V, p. 1701). These loans were subsequently re-

paid. No interest was paid on any of these loans, except a

small amount on a part of the Black Gold loan.

The ink was searcely dry on the Sun Fire loan when Pen-

dleton and Joe Johnson, Jr., in response to an urgent appeal

from Mr. Powell who was sick and needed help, wrote Mr.

Powell that Blue Grass Mining Company was hard up,

could not keep enough money to run the business and had

to borrow to meet expenses (R. IV, pp. 902-4).

Although it appears by pleadings sworn to by Mr. Jobn-

son, and orders entered in suits involving the properties

that the properties were bid in at the second sale by John-

son, Jr., for the use and benefit of Blue Grass Mining Com-

pany (R. V, pp. 1673-78; 1688-92; 1694-99) and admitted by

Johnson, Sr., that it was bought at the second sale for Blue

Grass Mining Company (R. III, p. 728; R. III, p. 791),

Johnson, Jr., insisted he bought it for himself and father

(R. IV, p. 959), and they set up royalties on books of the

Blue Grass Mining Company of nearly Forty Thousand

Dollars (R. V, p. 1534; R. II, pp. 699-703).

Johnson, Sr., used $9,020.00 of Blue Grass funds in 1939

to buy a tract of coal land needed by the Company, known

as the Crawford tract. However, he took title in his own

name, later borrowed money on a note to be paid out of

royalties to repay the Mining Company, leased the land to

21

the Mining Company and at the time of this suit had drawn

$12,245.00 in royalties (R. III, p. 610; R. V, p. 1416; R. III,

pp. 851-56), (Decree Sec. VII, R. I, pp. 422-23). We par-

ticularly invite the Court to read Mr. Johnson’s testimony

regarding this transaction, under questioning by the Dis-

trict Judge beginning at Record III, p. 852, as illustrating

his callousness toward his obligations as a trustee. He

insisted upon holding this land until ordered in the case to

convey it to the Mining Company.

The Baker tract was purchased by Wm. Pendleton for

$600.00, leased by him to Blue Grass by whom it was

needed, and from which the royalties drawn by Mr. Pendle-

ton and the Johnsons amounted to over six thousand dol-

lars (R. IV, pp. 928-35; R. V, pp. 1415-16; R. I, p. 395; R.

ILI, p. 611; R. V, p. 1415; Decree See. VIII, R. I, pp. 424-5).

The Kentucky group organized a sales company with

funds of Blue Grass Mining Company and claimed the stock

in their own names and insisted upon such claim until the

Court decreed ownership to Blue Grass Mining Company

in this case (R. VI, pp. 1749-53; R. I, p. 425).

The Kentucky group employed numerous members of

their families and not only paid them salaries but paid and

set up large bonuses for them, which the Court was com-

pelled to order paid back or cancelled (R. I, pp. 400-01; R.

VI, pp. 2070-98; Decree XIV, R. I, p. 427).

The Kentucky group always led the Tennessee group to

believe the companies were making no money and were hard

up (R. I, pp. 206-7; 333; Ex. 11, R. II, p. 344; Ex. 17, R.

II, pp. 355-56; p. 547; R. IV, pp. 901-5; R. IV, p. 912; R.

IV, p. 917). Notwithstanding these representations they

were lending Blue Grass money to themselves and their

other corporations in sums aggregating in excess of $40,-

000.00, and drew out of the two corporations in cash, from

1930 until this suit was tried $166,655.07 in salaries (R. I,

pp. 405-6; R. VI, pp. 1983-89), and from Black Gold, financed

22

largely or altogether by Blue Grass funds, over $50,000.00

(R. I, p. 407), and in 1936, while this suit was pending they

declared to themselves a 100% dividend on all stock of

Pendleton Store, Inc., and a 50% dividend on all the stock

of Blue Grass Mining Company, to the exclusion of peti.

tioners (R. I, p. 393). They made all sorts of false entries

upon the books (R. IV, pp. 1156-58 ; 1163-68 ; 1173-74; 1189;

1193-94; 1211-12; 1262; R. V, pp. 1501-04; 1550-51 ; 1518-22;

1760, 1810).

They engaged in other questionable transactions too

numerous and some too petty to annoy the Court with, such

as payment of the license for a privately operated tavern;

withdrawal of $5000.00 from the insurance or Workmen’s

Compensation fund. Finally, after having treated and

dealt with complainants as co-stockholders and co-adven-

turers for about seven years, they come into Court and

denounce their trust, deny complainants have any rights

or interest, and assert that the $2500.00, one-half of agreed

working capital called for by Mr. Johnson (Powell Ex. 2,

R. LU, pp. 80-81), and promptly put up by complainants

(R. Il, pp. 9; 45; 82-3), was not working capital at all but

was advanced as a loan (Amended Ans. R. I, p. 213). In-

deed their bookkeeper and witness Simpson, said it was a

gift (R. V, p. 1535).

This claim was so utterly unfounded as to border upon

the ridiculous and very properly received scant attention

by the Trial Court (R. I, pp. 364, 366, 387). The Kentucky

group never did put up their one-half the working capital,

though Mr. Johnson did advance $1495.00 in opening the

mine which he charged to expenses and got back in 1930

(R. VI, p. 2056), and this $2500.00 was all the actual invested

capital ever put into the two companies. In the face of this

fact, and of their own failure to put up their share of the

capital, Johnson, Sr., swore in this case that $5000.00 capital

was wholly inadequate (R. III, p. 649). But on cross

23

examination he admitted that this $2500.00 was all the

money put into the corporations and had resulted in earn-

ing about $80,000.00 (this was after the auditor threw back

into earnings royalties set up), and had paid executive

salaries in excess of $150,000.00 (R. III, pp. 713-32, Q. 389).

We thus find a wilful, premeditated fraud running

through all of the dealings of these members of the Ken-

tucky group with the corporations and with their eo-stock-

holders, the members of the Tennessee group. We know of

no case where trustees who have been guilty of such a con-

sistent course of misconduct have been allowed compensa-

tion for their services. We respectfully submit the case of

Pierce v. Dahlgren, 300 Fed. 268 (C. C. A. 6th) cited by the

Honorable District Judge does not support his allowance

of compensation. In that case, the Circuit Court of Ap-

peals, Sixth Circuit, speaking through Judge Denison,

before allowing the Trustee’s salary, was at great pains to

discover whether she was acting in good or bad faith in her

dereliction of duty in making a loan to herself secured by a

pledge of her interest in the estate. The care with which

Judge Denison went into the question of good faith strongly

indicates his decision would have been otherwise if the mis-

conduct had been wilful and in bad faith. Judge Denison

cited in support of the decision of the court in the Pierce

ease, the case of Garesche v. Levering Co., 146 Mo. 436, 48

8. W. 653, 46 L. R. A. 232. An examination of this last case

reveals that the good faith of the trustee was made the

touchstone for the allowance of compensation. The same

is true of Paducah Land é&c. Co. v. Hayes, 15 Ky., L. R. 517,

24S. W. 237, likewise cited by the learned Wistrict Judge in

support of his opinion. In this latter case the Court held

the trustee, President of the corporation, had accounted

for all stock sold, and as to stock not sold, but held by him,

he was liable for its value rather than for the price at which

he might have sold it, ‘‘as his was not a wrongful conver-

24

sion’. Thus he was acquitted of any fraud or intentional

wrong, and nothing other than mistake of judgment stood

in the way of allowance of compensation. Nor do we believe

the other authorities cited, that is, 65 C. J., p. 929, Sec. 840

(R. I, p. 377), afford support for the opinion under the

facts of the case at bar. In fact that section opens witha

statement of the general rule that a trustee who neglects

his duties, or is guilty of bad faith, or violates his obliga-

tions, ‘‘or who repudiates the trust, claiming title as absolute

owner,’ forfeits his compensation. (Italics ours.) The see-

tion then states the exceptions to the general rule, but we

submit the case does not come within the exceptions. Qn

the contrary in the case at bar the trustees violated their

obligations, were guilty of bad faith, repudiated the trust,

and claimed the title as absolute owners.

Flint River Pecan Co. v. Fry, supra, and Backus v. Finkle-

stein, supra, in both of which compensation was denied, are

nearly parallel in their facts to the case at bar.

The record in this cause will disclose that the respondents

worked primarily at all times for their own benefit, and

only incidentally for the benefit of the corporations of which

they were officers and directors. Compensation should be

the reward of faithful and honest service, and never of un-

faithful self-service, especially where the trust estate and

beneficiaries have been by the trustees put to an enormous

expense as in this case, to establish the trust and bring the

trustees to account.

V.

The opinion and decree of the courts below permitting

the respondent trustees to hold the stock of Black Gold

Mining Company are probably contrary to the decisions

of this Court, the courts of other circuits including the

Sixth Circuit, and to the weight of authority.

The facts with reference to the organization by members

of the Kentucky group of Black Gold Mining Company, 4

—

25

found by the Trial Court and concurred in by the Circuit

Court of Appeals (Finding of Facts No. 44), will be found

at pages 399-400, Volume I of the printed record. Stated

in little more detail, they are as follows:

Black Gold Mining Company was organized by members

of the Kentucky group with whom is also associated W. E.

Davis, the Receiver in the State Court proceeding, from

whom the Blue Grass properties had been purchased, and

one H. K. English, a coal operator of repute in that section

.of Kentucky (R. III, p. 660). English put no money into

the business and soon sold out what interest he may have

had to Johnson, Sr., a member of the Kentucky group (R.

III, p. 721). William Pendleton and J. KE. Johnson, Jr.,

were or became interested (R. III, pp. 841 and 868). No

stock was ever issued, but the stockholders at the time of

the trial of this case were W. E. Davis, $1667.00; William

Pendleton $1667.00; J. E. Johnson, Jr., $1666.00, and the

stockholders of Jeda Coal Company, which is only a holding

company, were J. KE. Johnson, Sr., J. E. Johnson, Jr., Wm.

Pendleton, all members of the Kentucky group, and E. J.

Davis and W. EK. Davis. The stock, according to the books

was paid for by setting up salaries and charging those

salaries with stock subscriptions (R. V, pp. 1654-55).

On December 12, 1930, Hazard Coal Corporation, which

owned the property subsequently acquired by Jeda and

Black Gold, entered into a contract with J ohnson, Sr.,

and H. K. English agreeing to lease to Johnson, English

and W. KE. Davis, the properties known as the Ashless

properties, and permitting them to transfer it to a corpora-

tion of $25,000.00 paid in capital, or to make the lease

direct to the corporation and to lend to them $10,000.00 to

be repaid in installments equal to 5¢ per ton on coal mined

from the properties (R. VI, p. 1756). Davis did not sign

the contract but agreed to be bound (R. VI, pp. 1756-57).

The lease was subsequently executed by the Hazard Coal

26

Corporation direct to Jeda, which Company was to pay its

lessor 10¢ per ton royalty on all coal mined and also a

rental for the use of improvements and equipment on the

property, equal to 714¢ per ton on all coal mined, which

royalty and rental payments were actually paid by Black

Gold as sub-lessee direct to Hazard Coal Corporation (R.

V, p. 1711; R. IV, p. 1195).

Jeda never had any books and kept no bank account after

its organization, all of its accounts and books being handled

through Black Gold (R. V, pp. 1711-12; R. IV, pp. 1194-99).

In fact after Jeda leased the property to Black Gold there

was no further necessity for its existence except to hold

the lease from the Hazard Company. Black Gold began

operating and shipping coal in January or February, 1931

(R. III, p. 660; R. V, p. 1653). In order to get Black Gold

started, Wm. Pendleton and F. A. Garth, employees of Blue

Grass, were loaned to Black Gold (R. V, p. 1711; R. I,

p. 620; R. IV, pp. 1414-15). It drew upon Blue Grass

Mining for cash, taxes, engineering expenses, labor, print-

ing, tramroad and miscellaneous items, aggregating in 1931

$9,386.64; and borrowed from Blue Grass Mining Company

on February 19, 1931, $1,500.00; February 28, 1931, $500.00;

April 4, 1931, $300.00; May 9, 1931, $300.00 ; May 12, 1931,

$3,000.00 and June 29, 1931, $200.00, the advancements and

loans from Blue Grass Mining Company to Black Gold

in that year of its organization $13,886.64. In 1982, the

Kentucky group had Blue Grass Mining Company to lend

Black Gold $2,405.00, and had it to advance it money to

pay expenses, labor, engineering, ete., $3,379.17, and in

1933 had the Blue Grass to lend Black Gold $500.00 and to

advance engineering costs of $601.80, the aggregate of the

funds loaned and labor and money advanced by Blue Grass

Mining Company to Black Gold in the years 1931 to 1933,

inclusive, being $22,342.61 (Lav. Ex. X; R. I, p. 400).

27

The $10,000.00 borrowed from Hazard Coal Corporation

by the organizers of Black Gold was not put into the busi-

ness until 1931, (R. V, pp. 1708, 1715), after the Company

had been started by the use of Blue Grass funds and was

shipping coal, and this $10,000.00 was paid back from the

sinking fund of 5¢ per ton on the coal mined.

It was not until April 17, 1931, when Black Gold was then

a going concern as the result of the use of Blue Grass money,

that the Kentucky group put any money into it whatsoever,

at which time, although petitioners insisted below no money

was put in by the Kentucky group, the Court found that

J. EK. Johnson, Sr., put $5,000.00 into the business. No other

money was put in by the Kentucky group or anyone else,

other than the $10,000.00 which was paid back from coal

mined (R. I, p. 399).

Black Gold and Jeda Corporations were founded and

financed to the operating stage wholly and exclusively by

Blue Grass funds and the credit for its foundation enabled

it to repay the $10,000.00 borrowed by its organizers from

the sinking fund of 5¢ per ton on coal mined, and further

cnabled it to pay $50,000.00 in salaries to members of the

Kentucky group and their associate, W. E. Davis. The

Court found that Black Gold was not financed wholly by

Blue Grass funds, and this may be technically correct in

that some money was borrowed by its organizers, but this

money was paid back out of coal mined and the mining

operations were started and the Company launched upon

a successful career wholly by the use of Blue Grass money.

This money was subsequently paid back by Black Gold Min-

ing Company to the Blue Grass Mining Company, but not

until after the $10,000.00 which had been borrowed by its

organizers and put into the business had been repaid, and

then only with interest on a part of it. By reason of this

repayment the trial Court held that the Blue Grass Mining

28

Company had not suffered a loss. However, the record

shows that these funds which the Kentucky group loaned

to themselves were at all times needed in the business of

the Blue Grass Mining Company, and that it suffered by

reason of not having this capital in its business in numer.

ous ways, according to the evidence of most of the Ken.

tucky group themselves. Whether it did or did not suffer

a loss, however, we submit is not controlling, but the fact

that the members of the Kentucky group loaned this money

to themselves, from which they made large profits, entitles

the Blue Grass Mining Company as a matter of law, to these

profits. As said by this Court in Barney v. Saunders:

‘It is a well-settled principle of equity, that wherever

a trustee, or one standing in a fiduciary character,

deals with the trust estate for his own personal profit,

he shall account to the cestui que trust for all the gain

which he has made. If he uses the trust money in

speculations, dangerous though profitable, the risk will

be his own, but the profit will inure to the cestui que

trust. Such a rule, though rigid, is necessary to pre

vent malversation.”’

Barney v. Saunders, 16 Howard 542-3, 14 L. Ed.

1051.

The opinion and decree of the lower courts are probably

in conflict with the decisions of this Court in Barney ¥.

Saunders, supra, and the following:

Hollins v. Brierfield Coal & I. Co., 150 U.S. 371, 14 Sup.

Ct. Rep. 127, 37 L. Ed. 1113.

Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed

328.

Koehler v. Black River Falls Iron Co., 2 Black 715, 17

Jackson v. Ludeling, 21 Wall. 616, 22 L. Kd. 492.

Wardell v. Union P, R. Co., 103 U. S. 651, 26 L. Ed. 509.

29

Wright v. Kentucky &c. G. E. R. Co., 117 U.S. 72, 6

Sup. Ct. Rep. 697, 29 L. Ed. 821.

Drury v. Milwaukee &c. S. R: Co., 7 Wall. 299, 19

L. Ed. 40.

See also Backus v. Finklestein, supra, Webster Loose

Leaf Filing Co., 252 Fed. 959. In lending money of the Blue

Grass Mining Company to Black Gold Mining Company,

the Kentucky group were lending it to themselves. Geddes

v. Anaconda Copper Min, Co., 254 U.S. 590, 65 L. Ed. 425;

Highland Cotton Mills v. Rayon Knitting Mills, 194 N. C.

88, 138 S. BE. 431.

The matters involved in this petition, while upon their

face appear to be a controversy between private citizens in

which it may be argued the public has no interest, never-

theless we respectfully submit that they are charged with

a public interest, since the very foundation of society rests

upon the principles of common honesty and fair dealing in

business matters, and it is a matter of public interest that

those occupying a fiduciary relation should be held to the

highest and strictest degree of good-faith and fair dealing.

We apprehend this may be accomplished by an unbending

application of the harsh rules to trustees found to be guilty

of wilful misconduct or of fraud in fact. Any relaxation

of the high standard set by the courts for the conduct of

persons occupying a fiduciary relationship must have an

effect reaching far beyond the circle of those immediately

involved. It is not enough that unfaithful trustees should

be required to restore a part or even all of their illegal gains

from the use of the trust property, as this would be an

encouragement of such trustees to gamble with trust funds

in the belief that if they should be challenged they at least

might reap some profit from or recover some compensation

for handling the trust estate. Where wilful misconduct,

bad-faith and fraudulent breach of trust are established, as

30

has been in this case, and as was found by the Courts belov,

the harsh rule should be applied, in our opinion, denying

the unfaithful trustees any compensation and stripping

them of all gains which they may have made by the use of

the trust estate.

We respectfully submit that the language used by the

late Mr. Justice Cardozo, then Chief Justice of the Nev

York Court of Appeals, in Meinhard v. Salmon, 249 N. Y,

458, 164 N. E. 545, 62 A. L. R. 1, is apropos:

‘‘Many forms of conduct permissible in a workaday

world for those acting at arm’s length are forbidden

to those bound by fiduciary ties. A trustee is held to

something stricter than the morals of the market place.

Not honesty alone, but the punctilio of an honor the

most sensitive, is then the standard of behavior. As

to this there has developed a tradition that is unbend-

ing and inveterate. Uncompromising rigidity has been

the attitude of courts of equity when petitioned to

undermine the rule of undivided loyalty by the ‘dis-

integrating erosion’ of particular exceptions. * * °

Only thus has the level of conduct for fiduciaries been

kept at a level higher than that trodden by the crowd.”

Respectfully submitted,

Baitey P. Woorton,

Wo. Ernest FauLKner,

A. B. Bowman,

J. R. Stmmonps,

Attorneys for Petitioners.

W. E. FauLkner,

Battey P. Wootton,

Hazard, Kentucky;

Stmmonps & Bowman,

Johnson City, Tenn.,

Of Counsel for Petitioners.

(585)