Document: 372 U.S. 633 83 S.Ct. 969 10 L.Ed.2d 33 Irving J. WOLF, Robert H. Davidson, Richard S. Hull and Frederick Katzenell, Petitioners,v.Arnold A. WEINSTEIN, Jerome Fried, Nazareth Fairgrounds & Farmers' Market, Inc., et al. No. 70. Argued Feb. 20, 1963. Decided April 15, [Syllabus from pages 633-634 intentionally omitted] Melvin Lloyd Robbins, New York City, for petitioners. Alex L. Rosen Harold Harper, respondents. Mr. Justice BRENNAN delivered the opinion of Court. 1 This case concerns two orders District Court Southern made in a proceeding reorganization respondent corporation, Inc. (the Debtor), under Chapter X Bankruptcy Act, 11 U.S.C. §§ 501—676. One order determined controversy over rights numerous claimants to stock interests Debtor. The other order—predicated on findings that Weinstein, President Debtor, Debtor's General Manager, had traded during violation § 249 6491—directed Weinstein have nothing further do with operation business, Fried be discharged as Manager compensation both terminated forthwith. Neither was, however, directed return he received before date order. Appeals Second Circuit, separate opinions, reversed orders. We granted certiorari, 369 837, 82 868, 7 841. 2 decide only issues presented by Appeals' reversal Court's applying adjudicated sub nom. In re Cir., 296 F.2d 678. Decision those issues, which involve reach 249, is important administration Act. But our consideration underlying v. Margolis, 670, persuades us grant certiorari review these was improvident. Oral argument brought into sharper focus than apparent at time we writ primarily implicates questions Pennsylvania law presents no federal question substance. circumstances, judgment dismissed improvidently granted. Cf. Monrosa Carbon Black, 359 180, 183 184, 79 710, 712—713, 3 723. pertinent provisions disallow or reimbursement any person 'acting proceedings representative fiduciary capacity, who after assuming act such capacity has purchased sold * (of Debtor) without prior consent subsequent approval judge *.' Both while serving respectively Manager.2 held their positions which, permitting Debtor remain possession pursuant 156, 556, authorized continue serve Manager. court also approved salaries each.3 actively managed principal asset farmers' market located Eastern Pennsylvania. attorney, acted consultative advisory capacity. business prospered management despite considerable friction dissension between factions contending managerial control. 4 Court, hearings upon nature extent Weinstein's Fried's duties activities, concluded each 'fiduciary' within meaning 249.4 thereupon ordered terminated, whose removal believed beyond its powers, business.5 entirety ground applied neither nor Fried. indicated 'doubtless' literal reading statute's terms would include both, but construed applicable not every 'person acting capacity' persons particular capacities named 241, 242 243, 641, 642 643—petitioning creditors, officers attorneys, indenture trustees, depositaries, managers, committees, creditors stockholders, representatives, attorneys them 'other parties interest'—who 247 are entitled hearing applications allowances notice certain interested groups individuals. F.2d, 682—683. reversing this found occasion consider whether addition denial office required where applicable, since view 'the cannot survive fall underpinning.' 683. 5 disagree Appeals. hold performing functions performed subject 249. I. 6 virtual immunity active participants corporate reorganizations enjoyed judicial superintendence abuses payment one reasons enactment 77B Act 1934.6 'There spectacle fiduciaries fixing worth own services exacting fees often relation value rendered,' Leiman Guttman, 336 1, 7, 69 371, 373, 93 L.Ed. 453. Section 77B, among significant reforms, created new powers regulate expenses. See Dickinson Industrial Site, Cowan, 309 382, 388-389, 60 595, 598—599, 84 819. Passage Chandler four years later measurably strengthened superintendence, particularly respect reorganizations, through c. X, 501—676, see Brown Gerdes, 321 178, 181—182, 64 487, 488—489, 88 659. curbing pre-statutory general proved inadequate.7 sought broaden participation ensuring several classes theretofore served estate volunteers.8 No statutory sanction against trading securities provided However, 77B's broad mandate must 'reasonable' merit been sufficient authority courts holding stock. Paramount-Publix Corp., D.C., 12 F.Supp. 823, 828, rev'd part, 406; Republic Gas 35 300. These decisions even statute embodiment 'ancient equity rules governing conduct including deprivation there departure rules.' F.Supp., 305. 8 relevant legislative materials leave doubt purpose behind codify rule give pervasive effect historic maxim may receive tainted disloyalty conflict interest.9 Michoud Girod, How. 503, 556—560, 1076; Weil Neary, 278 160, 49 144, 73 243; Magruder Drury, 235 106, 119 120, 77, 81—82, 59 151. Indeed, times declared authorization 'necessarily implies loyal disinterested service interest whom claimant purported act.' Woods City Nat. Bank Trust Co., 312 262, 268, 61 493, 497, 85 820; American United Mutual Life Ins. Co. Avon Park, 311 138, 157, 91. 9 Access inside information strategic position renders temptation profit pernicious. dangers take forms: On hand, an insider conceal stockholders vital concerning financial condition prospects, affect securities, until reaped private use information. exercises control holds post might tempt him influence policies—even shaping very plan reorganization—for benefit his security holdings detriment groups.10 Congress enacted distinct types sanctions prevent possible practices. appears 16(b) Securities Exchange 15 78p(b), prohibits realization insiders short-swing profits corporation's stock, when corporation solvent. Blau Lehman, 368 403, 451, 403. sanction, preventing insolvency reorganization, 249; it denies 'representative' if trades cumulative, alternative.11 light clearly revealed objectives, congressional exclude Fried—who are, found, less committee members, trustees attorneys—can perceived. Certainly possibilities abuse access clandestine personal less.12 Thus throughout context bankruptcy, recognized substantial distinction directors, example, managing employees obligation service. 'Since directors occupy (reorganization) period, actions higher standard imposed investing public.' Comm'n Chenery 332 194, 208, 67 1575, 1583, 91 1995. Pepper Litton, 308 295, 306, 238, 245, 281; Los Angeles Lumber Prods. 37 708. policies itself suggest recognizing distinction. First, class 'fiduciaries' 'representatives' regulated meant comprehend like, superfluous they were already bound settled principles equity. Even member dominant shareholder profited more trustee trust compromised loyalty. supra. said inherent power bankruptcy 'embraces contemplation proceedings.' supra, 147, 162, can conclude therefore subjected traditional sanction. 13 Second, define narrowly invite form evasion circumvention could readily defeat whole prophylactic rule. If director attorney disqualified how easily director-officer avoid ban relinquishing directorship retaining words, mere shifting titles enable regulation prohibitions. plainly did indulge exercise futility enacting 14 purposes justification construction exempting turn now parsing reached conclusion. II. Article XIII provides generally matters 'compensation allowances.' Sections 243 authorize allow specifically sections. 16 prohibitions apply 241—243, 247. reasoned lacation article 'strangers' mentioned rendered compensated approval, taken buttressed reference sections providing employees. 17 Our same leads contrary conclusion; support broader coverage defined quite unlike earlier article. While 241—243 detail care allowed application made, speaks 'any Had section coextensive predecessors article, presumably either referred expressly guidelines enumerated again essentially terms. That draftsmen used available approach suggests transcend bounds 18 Further reinforces There is, mention corporation. Yet seems little solvent shareholders, trade 711. entirely correct say authorizes become compensable save reorganization. applicants, seek compensation, least properly considered 'stranger' relationship arise solely out petition 19 next intended embrace VIII. 191, 'employ debtor rates court.' suggestion once rate section, immunize officer accept suggestion, surely various forms disentitle regard prohibition.13 20 officer's does confer equitable sanctions, 191 vest additional pass advance qualifications salary assumes continues office. elsewhere diminish way court's conferred broadly weekly monthly basis customarily conclusion proceeding, difference legal significance context.14 turns manner rather responsibilities being compensated. 21 Consideration function responsibility left supports construction. concept leaving possession, 'receivership receiver,'15 designed obviate need appoint supervision small undergoing though appeared capable carrying proceeding. Continued all termination appointment 159. so long remains clear bears possession.16 Moreover, perform substantially trustee, 188. It equally practice inanimate affairs surveillance court,17 188—191. If, therefore—as dispute statute—the himself logic consistency certainly similar tasks incur like obligations shareholders should treated differently purpose.18 22 foregoing discussion answers arguments grounded contended deemed outside because derives 'consensual arrangements' filing thereafter. overlooks, least, requirement itself. More important, employees, fails appreciate change remaining necessarily cause obligations, day-to-day activities responsible officials. status start most reflected director's continued contingent. principle underlies emphasizes willingness premised assurance depended carry trustee. And default respect, replace appointed 23 Finally, suggested differences 'what demanded what expected possession' require omission latter proves too much, cover such, listed although, himself, 'disinterested' 158(1). 'trustees' dispute, proposition provide answer 156 nonetheless regarded 24 concluding employee mean section. requires careful examination applicant's connection As participants—committee members example—the make applicable. groups—salaried part instance—it impose employee, applicant appraisal facts.19 25 took evidence responsibilities, 'fiduciary.' Unless erroneously interpreted statute, not, respondents bind case. Since ample findings, them, applies III. 26 bare violated automatically determine consequences violation. aspect proof contravention past then pending, disallowance future compensation.20 went far declined go further. required, fully effectuate restitution recoupment beneficial observed, fact paid preclude recoupment. 27 argued, late date, involved amounts carried apparently good faith knowledge existence imposes unduly harsh sanction—a remedy disproportionate offense. recognize indeed severe one, find anything less. To forfeits right place premium concealment transactions thereby jeopardize salutary statute. well arises terminal 247, engaged forbidden near end denied however valuable been.21 afford alternative 28 case, wholly consistent uniform lower courts. Circuit '(t)his result work harshly individual cases *. drastic results thought necessary eliminate serious existent reorganizations. excuses inadvertence de minimis permitted undermine Surface Transit, Saxe, Bacon O'Shea, 266 862, 868 (C.A.2d Cir.). uniformly immaterial minimal; never realized transaction, actually suffered loss; done response emergency; possessed attempted acquire bearing stock.22 seriousness prevent, exception dispensation frustrate manifest intent effective rule.23 occasionally bars inequitable disloyal absence reason suspend selective sanctions. 29 agree, discharge violator possesses extensive tenure unfit follow inexorably.24 present relieved Appeals, finding violation, saw nevertheless justified considerations 30 remove difficult complex state intricately interwoven.25 intimate officer, propriety exercising whatever exist. reconsidered below constitute disentitles compensation. 31 remanded opinion. ordered. 32 Judgment directions. HARLAN, STEWART joins, concurring dissenting part. 34 I agree dismissal respecting affirm 678, relating score Judge Friendly demanding indication Congressional inflicting' 'Draconian penalty' (296 683) decision petitioners triviality cautions acceptance ready 649: 'Any seeking costs expenses incurred chapter shall file statement oath showing claims against, of, debtor, any, interest, direct indirect, acquired transferred account, commencement account have, judge, otherwise transferred.' provision added June 22, 1938, 575, 52 Stat. 901. based alleged 1958 1959 (who still three shares fraction represented exercised options purchase six shares. bought 1957, resold 1958. Although conceding insisted unaware keep 'raiders,' profit. admitted transactions, maintained motivated improper motive enhance trading. At petition, President. previously Secretary-Treasurer, resigned posts charter. originally $100 Weinstein. Later increased $150 eventually $200 weekly, $50 591, permits merely salaried explicit employment required. Willow Cafeterias, 111 429, 431. conceded cross-examination 'fiduciary,' inquiry necessary, although probe services. did, examine some length concluded: '* you employee. You cop parking lot. ran wasn't there. admitted, operated property debtor. consulted got your structure agent.' 189 589, authorizing supervise operations supported entered close 'Jerome will debtor's employ once.' 'shall Debtor's) affairs, property.' acknowledged dictated office, '(b)ut don't power.' serve, willing so, stayed pending appeal. See, e.g., S.Doc.No.268, 74th Cong., 2d Sess. 59—63, details abuses, antedating adoption 77B. Comm'n, Report Study Investigation Work, Activities, Personnel Functions Protective Reorganization Committees, pt. II, 348—373; VIII, 221—231. background material given Collier, (14th ed.1947), 13.18; Bandler, Trading Fee Sharing Under Record Assn. Bar 230—234 (1960). much kind survived H.R.Rep.No.1409, 75th 1st 37—38 (quoting Commissioner William O. Douglas); Teton, Revised, 48 Yale L.J. 573, 591—592, 605 (1939); Developments Law—Reorganization Act—1934—1936, Harv.L.Rev. 1111, 1201—1202 (1936); Medill, Fees Expenses Corporate Mich.L.Rev. 331, 363—364 (1936). For reasons, established comprehensive exclusive system precludes granting therein for. supra; Lane Haytian 117 216, 219. allowance uncertain remuneration contributions divided availability participants. 13.01. Specific resolve ambiguities enumerating precision available, 641—643, procedure 647. Steinberg, Salient Features Awarding Allowances Proceedings Role Commission Their Final Determination, N.Y.L. Forum 253, (1962); Reorganizations: Changes Effected 36—37 (1938). codify, scope rule, Hearings H.R. 6439, House Committee Judiciary, 184 (statement Douglas: 'We visualized lot administrative difficulties determining actual used, decided best practical doing base bit establish thumb pattern Paramount case'). Douglas, Improvement Federal Procedure Reorganizations, A.B.A.J. 875, 877 (1938); Brudney, Insider Dealings During Crises, (1962). contained another explicit, vein. 221(4), 621(4), confirm if, inter alia, payments promised 'reasonable or, fixed confirmation plan, substance companion specific Several paramount objective check misuse gain control, gives access. Otis Insurance Bldg. 110 333, 335; Finn Childs 181 431, 441. note 8, 265; Ferber, Blasberg Katz, Conflicts Interest Public Utility Holding Company 1935 Geo.Wash.L.Rev. 319, 365—379 (1959); Note, Conflict Interests Factor Allowance Representatives' Claims Insolvent 106 U. Pa.L.Rev. 1139, 1160—1161 (1958); 63 1057—1058 (1950). common origins parallel outlined Loss, Regulation (2d ed. 1961), 1124—1125. 9, 8—10. analysis similarly unbending trading, see, Adler Klawans, 267 840, 844; Cook Feldman, 66 612, 622—623 (1953). officers, bring E.g., Gochenour Cleveland Terminals 118 89; Jersey Materials 50 428; 46 cf. Philadelphia W.R. 738, 741. 603; 20; 13.18, 4591—4592. superintendence. Manufacturers Becker, 338 304, 70 127, 94 107. director, always Conant, Duties Disclosure Insiders Who Purchase Shares, Cornell L.Q. 53 (1960), economically desirable proprietary Berle Means, Modern Corporation Private Property (1932), 122; Fiduciary Duty Officers Directors Not Compete With Corporation, 54 1191, 1196—1197 (1941). Midland 159 340, 345—346. Thus, transaction consistently reduce reimbursement. Cosgrove-Meehan Coal 136 3, (C.A.3d Cir.); Chicago West Towns Railways Friedman, 230 364 (C.A.7th Berner Equitable Office 175 218 1124—1125; 1155 (1958). Respondents subjecting insuperable problems, pay period authorized. contention applicants requirements apply; discussed, inevitable. nonofficer employment, Wil-low 429; initially Rather, incumbent contingent fulfilment obligations. phrase SEC (later Judge) Frank, 8046 Subcommittee Senate Judiciary Committee, 99. Avorn Dress 78 681, 683; 88; 18—19 1947), 2441—2442. I, 312—329, 868—872. commentator observed case: 'While respondents) owed extended dealing securities. read accountability odds rigorous embodied decisions.' n. 109, 36 Va.L.Rev. 751, 755—756 determination 'officer' flexible assessment rigid thumb. So held, Colby Klune, 178 872. Frank us, 'vice-president' 'comptroller' self-evident, functions. called company, i.e., corporation.' 875. Similarly, stockholder participating facts. Young Potts, 161 597; Higbee 324 204, 65 594, 89 890, undertook just determine, different related purpose, Bankruptcy: Reorganization: Survey Operation, N.Y.U.L.Q.Rev. 399, 475 862. claim Inland 176. unnecessary add penalties itself—for govern conditions investment rationale limitations alike, 'loyal 820. declare invests ceases allowances. Cf., 3. 340; Central States Electric 206 70; 862; Arcade Malleable Iron 461; Norwalk Tire Rubber 96 274. narrow exceptions relative claimant, Nichols 211 412. realize results, 415—416. generally, 45 1070 1071 (1959). 176; Remington, (Hayes rev.ed.1961), 535—538; 602—603 N.Y. 360 noted ordering duties, principally exclusively influenced standing alone, justify violator's discharge, automatically. event, think undertake first having why felt powerless Nor governed law. approve disapprove assumption matter stage

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