Document: 335 U.S. 211 68 S.Ct. 1454 92 L.Ed. 1911 COMSTOCKv.GROUP OF INSTITUTIONAL INVESTORS, etc., et al., and three other cases. Nos. 451 to 454. Argued March 9, 10, 1948. Decided June 21, Rehearing Denied Oct. 11, See 69 12. Mr. Maxwell Brandwen, of New York City, for petitioners. 1 Charles W. McConaughy, respondents, Group Institutional Investors, others. 2 [Argument Counsel from page 212 intentionally omitted] 3 Harry Kirshbaum, Bondholders group. 4 Leonard P. Moore, Manufacturers Trust Co., trustee. 5 Justice JACKSON delivered the opinion Court. 6 Since 1933 Missouri Pacific, Orleans, Texas Mexico Railway Co. a number affiliated railroad corporations have been in reorganization under Bankruptcy Act, 11 U.S.C. § 205, U.S.C.A. 205. A second plan reorganization, approved by Interstate Commerce Commission, was before District Court Eastern Missouri. Comstock then, 1944, made objection allowance claim approximately 10 million dollars one debtor corporation, against another, which, during years proceedings, had unchallenged. The issues raised his were severed problems which do not concern us here. After full hearing findings wrote an opinion, In re Pacific R. D.C., 64 F.Supp. 64, overruling objections. Circuit Appeals Eighth affirmed. v. 8 Cir., 163 F.2d 350. 7 fact, contested long hearing, are review. Petitioner assured us, support petition certiorari here, that 'there is no factual controversy this Court' 'we assume Our challenge directed only legal import these unchallenged facts.' Much petitioner's argument seems depart assumptions invite reach conclusions voluminous record case, contrary those reached two courts below. This we cannot do. seasoned wise rule makes concurrent below final here absence very exceptional showing error. Stuart Hayden, 169 1, 18 274, 42 639; Brainard Buck, 184 99, 22 458, 46 449; First National Bank Littlefield, 226 110, 33 78, 57 145; Baker Schofield, 243 114, 37 333, 61 626; Second Russian Insurance Miller, 268 552, 45 593, 1088; & N.O.R. Brotherhood S. Clerks, 281 548, 50 427, 74 1034; Page Arkana Natural Gas Corp., 286 269, 52 507, 76 1096; Pick Mfg. General Motors 299 3, 81 4; Virginian System Federation No. 40, 300 515, 592, 789; United States O'Donnell, 303 501, 58 708, 82 980; Anderson Abbott, 321 349, 531, 88 793, 151 A.L.R. 1146; Allen 326 630, 66 389, 90 367; Dickinson, 331 745, 67 1382, 91 1789. such error claimed petitioner. 9 concluded findings, can better than adopt statement facts Appeals, 350, 352, on basis propositions law predicated must be decided. essential so recited are: 'It appears acquire controlling interest capital stock Orleans at end 1924 times relevant owned 93 percent total $15,000,000 par value stock, January, 1925, until simultaneous commencement proceedings bankruptcy both 1933, it managed affairs through officers who given corresponding positions corporation. An expansion program companies carried throughout course operations advancements improvements betterments Orleans. Some repaid, but February filed its application with Commission Section 20a(2) Transportation 49 20a(2), indebted accumulation advances over period remaining unpaid sum $10,355,226.78, requested issue demand notes therefor amount $9,955,226.78 Pacific. It partially complied issuing note $400,000.00, for.$2,498,500, after finding as required statute,1 authorized $7,456,726.78. So time same date $10,355,226.78 outstanding unpaid. Under authorization granted pledged aggregating security loans Reconstruction Finance Corporation. additional pledge Railroad 'After appointment trustees railroads August 29, 1938, officer company notes, plus item advancement $210,000.00, $10,565,226.78, describing consideration 'cash operation, payments, various 1929 inclusive.' items up $10,565,226.78 clearly specified evd ence validity debt adduced early stage 77 (11 205), obligation deemed valid ahead Orleans' stockholder all accountings, computations adjustments resulting determined court 1940. has also considered order now appealed from. 12 1926 issued caused sold public 1/4% Secured Serial Bonds $13,156,000, secured of.$1000.00 each.$1000.00 principal bonds, put charge came fiduciary creditors stockholders each handle honestly each. 13 'Comstock owns some said virtue ownership bonds he creditor payment thereon, secure bonds. On November 22, objections plea equitable treatment interests. Certain contained charges mismanagement detriment bondholding separately numbered involved relate wrongs alleges done company. 14 'By 'Numbered 19 related objections,' charged when controlled majority between management pay dividends illegally out improvidently declare unjustified business condition Orleans; improperly loaned money purpose enabling dividends; (the Orleans) indebtedness growing expansion; operated unfair advantage loss itself, generally mismanaged committed spoliation waste property interests financial benefit There trustee failed perform duties interest. Although Exhibit 'A' attached assumed set forth details, remained sweeping general form few exceptions.2 15 'The objector prayed $10,565,227 disallowed; alternative, claims subordinated 16 allegations breaches obligations part traversed pled ings parties main burden producing witnesses evidence justify handling prove trial Investors Holding Refunding Mortgage Company Protective Committee holders Company. They recognized fully nature equity attributed reason while stockholder, terms entitled receive itself (lawfully properly declared) corpus manage corporate exercise honest judgment good faith preserve inviolate. 17 did question or deny executed negotiable promissory drawing interest, conceded Corporation innocent holder thereof could hold their face contention wrongdoings either should He assert tender show any individuals working companies, misappropriated wrongfully diverted own use assets stockholders. tendered system expansion, including improvement financing thereof, adopted fraudulent reckless improvement. As contemplated would advance additions short loans, intervals became sufficient size bond refund it. worst depression coincidentally refunding expected impossible. 'From testimony frankly himself, record, case presented herein report Senate subcommittee criticized 1940, bought about cents dollar then employed accountant make studies accounts, records reports based accountant's studies. extraneous newly discovered evidence. alleged (1925 1933) expired many acquired ordinarily felt obliged instance try merits past provable contemporaneous accessible. sanction buying into lawsuit. 'But disapproved, according whether fair equitable. proposed included postulates tha accumulated amounted around eighteen dollars. No judicial determination upon ever adversary thirteen year like Comstock's hands $13,500,000. owners representation great counsel, guilty laches failing present proof invalidity almost entirely evidenced notes,3 adjudication should, therefore did, hear covering whole tried merits. 20 expert called produced large exhibits prepared books, individual explained connection them inferences drawn expressed opinions tending charges. centered attack largely accounting fourteen subsidiary treated unit purposes indicated consolidated balance sheets. By disregarding character Gulf Coast Lines held inferred much less favorable position shown personal knowledge transactions covered testimony. 21 sustain defense men engaged, department, involved, they testified concerning matters intimately familiar. Also William Wyer, graduation Yale Massachusetts Institute Technology served construction operation government World War I, Administration Federal Control, afterwards Division Operations, Accounts Assistant Comptroller. From 1920 1927 occupied important Southern Denver Rio Grande Western, latter being 'fifty percent. System.' February, 1929, Chairman Board Directors later Secretary Treasurer subsidiaries, except six years. handled involving supervision started provided substantially upn plans based. testifying chief executive Central Jersey. thoroughly informed conversant policies expanding financing, depend, well reporting maintained disclosing them. what done, touch gave extensive direct cross examination obvious understanding relevancy importance. His testimony, supported summarizing exhibits, effect beneficial 'Judge presiding trial, exercised jurisdiction most course, questions, comments directions reflect close attention trial. written reported Pac. 64. care thoroughness, appear responsive adduced, appellant our refusal respect presented. vast extent intricate structures railroads, inevitably serious attempts accountants picture been. respects holding small fraction (around 11%) mileage stocks securities group comprising relatively substantial public. For roads dependent acting necessary unitary functioning principal. fundamental available accounts establish true different within results on. Wyer identified sheets compiled direction submitted keep members discharge duties. management. Though say went minds others, leaves room doubt understood how arrived relied usual business. familiar phases culminate, although admitted perfection never attained, together employees work, fuly justified court's reliance conclusions. But disputes conflicts fact. imposed if proved invalid ought enforced stockholders, pending stand. 23 'Comstock's erroneously proving him rather requiring proceed first disprove them, without merit. execution least formal making questioned there equivalent disclosure stated found proven detail administered company; proper purposes; paid bad faith, asserted arose allowed specified, recognition existence question, conformable requirements regarding participation classes stockholders.' 24 We confronted outset delay conduct duty pass Comstock, apparently wrong toward holds, nearly seven misconduct ended. Thus, victim wrongdoing whose depreciated low point bought. apparent grievance exploit reap rectification. Those realized sales could, event, indemnified proceeding. every viewpoint, asserting unusual. prejudicial due death named participants, among important. While barred laches, nonetheless adjudged 25 think that, proceeding, may entertain even might cause action behalf, subject matter goes beyond objector's affects fairness plan. view disagree 26 true, indicates, effort exhaust avail himself administrative remedies objection. Neither nor evidentiary laid hearings successive reora nization. requirement 'hold hearings, opportunity shall interested party heard following render report' ignored persons heard. staff especially qualified deal. express issue, go default it, Commission's involved. To by-pass original forum contentions encouraged. 27 refuse functions cast cases, not, discretion, consider though Commission. circumstances disclosed indicate remand withhold approval, deference objecting parties' rights because broad responsibility whole. will diligent protect approval plans, default, take right force evidently warrant inquiry merits, require discretion wisely exercised. 28 presents, several complicated transactions, single law. decision Taylor Standard Electric 306 307, 618, 59 543, 83 669, requires disallowed sustained. reformulated cases wholesome doctrine claimant corporation wholly dominated creating breached acted debtor. decision, 'This equities case—the history spoliation, mismanagement, faithless stewardship investors.' Pepper Litton, 308 295, 308, 60 238, 246, 84 281. 29 asks result despite explicit dealings 'the regard obligations, equitable, holders,' 'effect control advantageous pledges securities,' 'were earned surplus net income prior income,' subordination asked 'would unjustly enrich Bonds,' more detailed effect. 30 domination subsidiary, relationship seen fit proscribe. long-standing principles fashioned prevent i enriching breach trust. mere brings play; unconscionable afforded injury deprives wrongdoer fruits wrong. outgrowth legitimate neither design petitioner speaks. 31 Special emphasis placed fact borrowing represented claim. clear current earnings surplus, violation contract. Only earn currently dividends. Nevertheless legally permit Heavy investments borrowings policy finance dividend purposes. These used compensate funds borrowed securities, authorizations obtained. authority borrow. 32 additions, dividends, illegal, would, come ban subsidiary. dealing freedom fraud overreaching transactions. Such facts, stop intended over-all attained units unit. applies generally. unequivocal 'was pledgees securities.' criticised thus exonerated evil illegal intent established injurious special weight where, Judge's complete familiarity case. Western 328 495, 533, 1282, 1301, 1302, 1384, 1400. Affirmed are, grant certiorari, conclusive 34 Disallowance need questions issuance pledge. 35 36 Affirmed. Petitions 452, 453 454, addressed dismissals taken names. Thep etitions safeguards procedural review order. writs dismissed. 38 Writs 39 MURPHY, whom BLACK, DOUGLAS RUTLEDGE agree, dissenting. 40 binding one. applied blind manner simply involves complex situation. my view, affirmed Court's findings. And since sufficiently illuminated 350 quoted Court, I deem independent 41 grows joint subsidiaries undergoing so-called Deep Rock enunciated 669. unnecessary long, still unfinished marked railway system. instant proceeding directly revised 1944 Included Comstock. $80,000 Gold behalf investors excess $900,000 committee bondholders, representing $315,000 joined Of publicly outstanding, 1/2% specifically 43 19, sole concern, priority (hereinafter MOP) NOTM) proceedings. MOP NOTM's common completely NOTM began 1933. MOP's March, Most class owned, constituting 82% shares stock. sought looked security. desire respect. 44 separate 19. carefully considering entered full; aggregates $18,000,0 0. further claim, allowed, addition, timely laches. At time, another approving reorganization. detailing reasons orders. dismissing 19.1 objection, erroneous. suggestion remanded back reconsideration revision. Wright cir., 1022. yet disposed matter. I. somewhat advanced agree precluded 47 commenced purchase soon investigating criticizing NOTM. S.Rep. 25, Part 76th Cong., 3d Sess. study relationships Not 1943 suggest irregularities MOP. November, really press allegations. 48 Prior decade process revelation impropriety Numerous investigations pre-reorganization administration subsidiaries. ample purchased conducted investigation. Many events relates took place twenty ago; able testify thereto dead. believe, however, applicable permittedM OP collect creditors. That bound test portion approve satisfied. American Mut. Life Ins. Avon Park, 311 138, 145, 146, 157, 161, 162, 85 91, 136 860. existent late day. emphasize surrounding give inquire otherwise done. Moreover, previously adjudicated added appropriateness juncture. examining certain accorded motives led holdings raise pertinent performance testing Nor decisive earlier bondholder. enough appropriate fashion compelled change occurred. 51 connection, noteworthy 'for litigation Courts.' Thus likely unsuccessful attempted going court. today, expressly holds involve Schwabacher States, 334 182, 958. phase am agreement determine applicability formulates. refused adjudicate aired inappropriate expression views. Despite difficulties age witnesses, comprehensive revolved statistics. draw intimate MOP-NOTM relationships, gained association Hence function concerned. 53 situation, desirability necessity determining equitableness far outweigh possible inconvenience presentation II. 54 supra, principle where parent presently subsidiary's preferred principle, become known doctrine, nature. 281, 55 fulcrum doctrine. $10,565,276.78 impregnated 56 answer giving rise faith. alone concerned propriety objective standpoint. 306, 245. Like negligence, inequity utmost subjective If undue harm dictates parent's officers, hardly justifies ignoring Equity looks directions. way community adequately protected. resolved operational benefits accrued underlying cliam. undoubtedly tied undertaking period. condoned presence accompanying depleted does MOP, parent, insolvent bar insolvency consequent certainly factors considered. Consolidated Products DuBois, 312 510, 524, 675, 684, 982; Prudence Realization Corp. Geist, 316 89, 97, 62 978, 983, 86 1293. necessarily particular situation turn something solvency parent. balancing competing reveals unjust advantages arising adhere overriding Or tainted unenforceability regardless insolvency. narrow instance, believe well-being subordinating associated undertook impeach Any wrongful dimii shed impair Subordination tend valuable realization bondholders. True, bondholders unable whatever collected recipients lacked immediate indirect suffer outweighed allowing represent type leads III. sum, deducting $10,565,226.78—which constitutes issue. greater $2,795,000 30, 1928, 27, 1931, properties made, phenomenon demonstrated table: Dates Dividends Advances Total Amount 63 Nov. 1928.. Dec. 1928. $300,000 $259,576 $233,231 65 Feb. 28, 1929.. Mar. 1929. 250,000 259,576 234,237 Aug. 31, Sept. 275,000 239,429 310,000 241,529 1930.. 1930. 260,000 242,072 May 1930... 242,212 70 300,000 243,360 71 1931. 75,000 243,510 72 1931... 200,000 244,387 73 244,527 1931-. 75 ------------- Reference bears GCL). 1924, thereby inherited GCL system, rail lines interlaced others primarily owning group, operating 11% mileage. St. Louis, Brownsville Brownsville) important, one-third group's question. contributing 61% 84% According fini ngs, advancing reimburse treasury banker 1925 1930 freight revenues cleared NOTM; received NOTM, credited created expenses, receipts, mounted. Finally begin loaning cover accounts. vigorously denied termed 'superficial' 'basic accounting.' denial, illustration used. Assume receives $200,000 cash January needed bill new yard knows April $100,000 due. Instead yard, uses purpose. Then, days date, borrows investment yard. saves months' spent loan thought coincidence, having connection. 78 insufficient dividend. borrow other. help unrealistic. just Two months choice (1) paying dividend, (2) chooses former action. action, 79 foregoing indicates amply demonstrates—namely, reality Considered entity, rarely start regular continue share Year Net Income 1925............. $839,679.00. $1,038,198 1926............ 1,393,806.58. 1,038,198 1927.............. 937,098.90. 1928.............. 742,058.00. 1929............ 1,153,257.54. 1930.............. 854,139.71. 1931............* 399,487.80. 80 1932.......... (- 951,607.76). None files shows N.O.T. M.'s overstated (through understatement depreciation) $411,000. railroad's depreciation charged, deficit 1926—1931 $321,000 fixed Yet $5,580,000 M.' Sess., pp. 2—3. pricture equally indicative lack ability borrowing. $2,547,633. 1926.............. 1,783,287. 1927............ 202,438). 1928................ 956,433. 1929................ 845,064. 1930................ 674,950. 1931........... 1,122,422). Care taken, avoid appearance practice doubtful legality. Whenever inadequate meet prospective payment, Brownsville, steps Usually precise dividend.2 invariably pre-1931 declarations expense leaving Brownsville's debts supplies. paper capped 1931 ordered $4,155,000; $398,000. Bureau 1936 declared aware experience company, continued good, adequate future date.' rendered improper rules. too correct already closed, write off (some $1,400,000) profit loss. incident grew profit-and-loss $709,000 $606,000. $875,000 accruals. debit $772,000 more. demanding $1,038,000 year. problem solved previous years—by milking Brownsville. thorough. * solution extraordinary $3,500,000—a declared. Other N.O.T M. brought $4,155,000, fill N.O.T.M.'s enable favor chiefly Pacific.' p. 10. surpluses paid. ostensible declaration again transaction. today places affirming figment imagination. devices evolved officials attempt legalize payments resulted, devidends capital, procedure disguised behind faulty bookkeeping out-and-out regulations.' 14. $2,795,000, $2,654,000 $141,000. unaffected merely forced money; outside sources. seeks aggregate $4,795,000, engaging extending credit fiscal 'been eye interests' meaning 323, 550. Now 'inherent fairness' 'arm's length bargain,' ingredients pages Here, was, amounts see Commonwealth Light Power 141 734, 738. Compelling indebtedness. IV. 87 Another intercompany adjustment $1,261,009.84 October, 1932, height shortly began. International-Great Northern I-GN) I-GN materials ten subsidiaries; October account $1,261,009.84. 89 uncollectible. health I-GN. sources, improve shifting debtors. increasing decreasing figure. shuffle possible, owed. amount, crediting I-GN's obligated Appropriate entries journals affected companies. liable MOP; anything return assuming debt. suggested why shoulder obligation, Certainly essential, claimed, invulnerable respect, addition protection. owed I-GN, relieve uncollectible closely allied theory entity immaterial legitimatize view. enterprise distinct recognize distinctions write-up threshold nothing increase structure. possess vorable creditor's position. structure square saddled fairly allocated grow transfer promiscuously augment status inflict injustice shifted. calls causing transferred V. remainder five 'feeder' cost $5,500,000. acquisition entire usually acquisition.' Reorganization, 239 I.C.C. 7, 71. connect deficits property. lines. 94 aspect subsequently mistake mean scope 95 Indeed, thrust segment saturated bothering differentiate approach relationship. been, seen, examples situations separable operates parental inequitable. parent-subsidiary impossible restore distinguishing bad. VI. 96 uncontested conclude relating transaction otherwise, overlook. "* exceeding $7,456,726.78, aforesaid, lawful object purposes, compatible consistent service carrier, service, (b) reasonably purpose.' Notes, Docket 9817; 189 600, 601, (1933) (R. 20839 20840).' exhibit excerpts sub-committee System—Inter Advances, published July Orleans.' 'There minority stockholding means regulated corporation.' leading opposing appeal mortgage 10% 'no revolving about' expedite consideration. offered committee, litigation. committees, trustee, Alleghany Corporation, groups indenture trustees. respondents us. $2,855,336 $2,653,021 contended figure reduced $2,082,456, repaid counted. said, receiving followed natural pattern devoted improving 'near coincidence dates advances.' deduction $3,155,000 studying (composed Senators Wheeler Truman) follows: none years, $605,000 (exclusive subsidiary,t Mexico). road showed 6-year totaled bare $90,000 (as totaling $6,300,000). 'Even considerable overstatement. Each regularly expenses equipment. Consistently, year, inadequate. method bring typical exchange letters officials: 'Houston, 'Mr. L. Baldwin: NOT&M ending 30th, 1930, reflects $56,613.10, $316,188.85 quarterly December 1st, 'I attaching hereto September, 'Following practice, arrange Cole list next meeting StLB&M (Brownsville), resolution providing NOT&M. 'H. Safford. 'F.' reply letter 'St. Mo., 13, M r. Safford: Referring your 10th, file 482—2, reference declaring satisfactory line letter. 'L. Baldwin, 'Per C.D.P.' 17, $316,188.85, deficit; effective day

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