Source: http://www.chanrobles.com/usa/us_supremecourt/372/633/case.php
Timestamp: 2018-01-17 04:57:36
Document Index: 643712392

Matched Legal Cases: ['§ 249', '§ 249', '§ 249', '§ 249', '§ 241', '§ 641', '§ 247', '§ 249', '§ 501', '§ 77', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 241', '§ 247', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 156', '§ 159', '§ 188', '§ 249', '§ 191', '§ 249', '§ 249', '§ 241', '§ 158', '§ 156', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249', '§ 249']

This case concerns two orders of the District Court for the Southern District of New York made in a proceeding chanroblesvirtualawlibrary
We decide only the issues presented by the Court of Appeals' reversal of the District Court's order applying § 249 to Weinstein and Fried, adjudicated sub nom. In re Nazareth Fairgrounds & Farmers' Market, Inc., Debtor, chanroblesvirtualawlibrary
Both Weinstein and Fried traded in the Debtor's stock while serving respectively as President and General Manager. [Footnote 2] Both held their positions with the approval of chanroblesvirtualawlibrary
The District Court, after hearings upon the nature and extent of Weinstein's and Fried's duties and activities, concluded that each was a "fiduciary" within the meaning of § 249. [Footnote 4] The District Court thereupon ordered that chanroblesvirtualawlibrary
their compensation be terminated, that Fried be discharged as General Manager, and that Weinstein, whose removal as President the court believed was beyond its powers, have nothing further to do with the management of the business. [Footnote 5] The Court of Appeals reversed the order in its entirety on the ground that § 249 applied to neither Weinstein nor Fried. The Court of Appeals indicated that "doubtless" a literal reading of the statute's terms would include both, but held that § 249 was to be construed as applicable not to every "person acting in the proceedings in a representative or fiduciary capacity," but only to such persons in the particular capacities named in §§ 241, 242 and 243, 11 U.S.C. §§ 641, 642 and 643 -- petitioning creditors, court officers and their attorneys, indenture trustees, depositaries, reorganization managers, committees, creditors and stockholders, or their representatives, and the attorneys for chanroblesvirtualawlibrary
them or for "other parties in interest" -- who, under § 247, are entitled to a hearing upon applications for allowances after notice to certain interested groups and individuals. 296 F.2d 682-683. In reversing the District Court on this ground, the Court of Appeals found no occasion to consider the question whether, in addition to denial of compensation, removal from office was authorized or required where § 249 was applicable, since, in its view, "the order of removal cannot survive the fall of its underpinning." ,296 F.2d 683.
Leiman v. Guttman, 336 U. S. 1, 336 U. S. 7. Section 77B, among other significant reforms, created important new judicial powers to regulate chanroblesvirtualawlibrary
the payment of compensation and the reimbursement of expenses. See Dickinson Industrial Site, Inc. v. Cowan, 309 U. S. 382, 309 U. S. 388-389. Passage of the Chandler Act four years later measurably strengthened these powers of judicial superintendence, particularly with respect to corporate reorganizations, through the new provisions of c. X, 11 U.S.C. §§ 501-676, see Brown v. Gerdes, 321 U. S. 178, 321 U. S. 181-182. In curbing the pre-statutory abuses, the general provisions of § 77B had proved inadequate. [Footnote 7] Chapter X sought also to broaden the participation of interested groups in the reorganization by ensuring compensation to several classes which theretofore often served the estate as volunteers. [Footnote 8] chanroblesvirtualawlibrary
The relevant legislative materials leave no doubt that the purpose behind § 249 was to codify the rule of these decisions and to give pervasive effect in Chapter X proceedings to the historic maxim of equity that a fiduciary may not receive compensation for services tainted by disloyalty or conflict of interest. [Footnote 9] Cf. 45 U. S. 556-560; Weil v. Neary, 278 U. S. 160; Magruder v. Drury, 235 U. S. 106, 235 U. S. 119-120. Indeed, we have several times declared that the general statutory authorization in the Bankruptcy Act for "reasonable" compensation for services "necessarily implies loyal and disinterested service in the interest of those for whom the claimant purported to act." Woods v. City Nat. Bank & Trust Co., 312 U. S. 262, 312 U. S. 268; see also American United Mutual Life Ins. Co. v. Avon Park,@ 311 U. S. 138.
Access to inside information or strategic position in a corporate reorganization renders the temptation to profit by trading in the Debtor's stock particularly pernicious. The particular dangers may take two forms: on the one hand, an insider is in a position to conceal from other stockholders vital information concerning the Debtor's financial condition or prospects, which may affect the value of its securities, until after he has reaped a private profit from the use of that information. On the other hand, one who exercises control over a reorganization holds a post which might tempt him to affect or influence corporate policies -- even the shaping of the very plan of reorganization -- for the benefit of his own security holdings, but to the detriment of the Debtor's interests and those of its creditors and other interested groups. [Footnote 10] chanroblesvirtualawlibrary
In the light of its clearly revealed objectives, no congressional purpose to exclude from § 249 insiders such as Weinstein and Fried -- who are, as the District Court found, no less fiduciaries of the Debtor than committee members, trustees or attorneys -- can be perceived. Certainly the possibilities for abuse of their access to inside information and its clandestine use for personal profit are chanroblesvirtualawlibrary
The policies underlying Chapter X and § 249 itself suggest two further reasons for not recognizing such a distinction. First, if the class of "fiduciaries" or "representatives" whose trading is regulated by § 249 was meant chanroblesvirtualawlibrary
In terms of the purposes and the underlying policies of § 249, there is therefore no justification for the Court of Appeals' construction exempting Weinstein and Fried. We turn now to the parsing of the provisions of the Bankruptcy Act by which the Court of Appeals reached its conclusion. chanroblesvirtualawlibrary
Our reading of the same sections leads us to the contrary conclusion; in our view, they support our broader reading of § 249. First, it is significant that the coverage of § 249 is defined in terms quite unlike those of the earlier sections of the article. While §§ 241-243 and § 247 detail with care the classes of persons to whom compensation is to be allowed and by whom application is to be made, § 249 speaks generally of "any committee or attorney, or other person acting in the proceedings in a representative or fiduciary capacity. . . ." Had the Congress meant the coverage of this section to be coextensive with that of its predecessors in the article, it would presumably either have referred expressly to the earlier sections as the guidelines for § 249, or would have enumerated the same groups again in chanroblesvirtualawlibrary
We turn next to the argument that § 249 cannot have been intended to embrace officers and employees in light of certain provisions concerning their compensation in Article VIII. Section 191, for example, authorizes the Debtor in possession to "employ officers of the debtor at rates of compensation to be approved by the court." The suggestion is that, once the court has approved a rate of compensation under that section, such approval must be taken to immunize the officer from the sanctions of § 249. We cannot accept that suggestion, for surely there are various forms of disloyalty or conflict of interest which would disentitle an officer to compensation chanroblesvirtualawlibrary
The approval of an officer's rate of compensation does not confer an immunity from equitable sanctions, nor can it immunize him from § 249. Section 191 does no more than vest the court with additional authority to pass in advance upon the qualifications and the salary of an officer of the Debtor before he assumes or continues in office. There is no suggestion in that section or elsewhere that such approval was intended to diminish in any way the court's statutory powers over fees and allowances conferred broadly by the Chandler Act. That officers and other employees may receive their compensation on a weekly or monthly basis while other persons subject to § 249, such as attorneys and trustees, customarily serve without compensation until the conclusion of the proceeding, is a difference without legal significance in this context. [Footnote 14] The application of § 249 turns not upon the chanroblesvirtualawlibrary
Consideration of the function and responsibility of the officers of a Debtor corporation left in possession also supports our construction. The concept of leaving the Debtor in possession, as a "receivership without a receiver," [Footnote 15] was designed to obviate the need to appoint a trustee for the supervision of every small corporation undergoing reorganization, even though it appeared capable of carrying on the business during the proceeding. Continued possession by the Debtor, authorized by § 156, is subject at all times to judicial termination and the appointment of a disinterested trustee under § 159. But so long as the Debtor remains in possession, it is clear that the corporation bears essentially the same fiduciary obligation to the creditors as does the trustee for the Debtor out of possession. [Footnote 16] Moreover, the duties which the corporate Debtor in possession must perform during the proceeding are substantially those imposed upon the trustee, § 188. It is equally apparent that, in practice, these fiduciary responsibilities fall not upon the inanimate chanroblesvirtualawlibrary
The foregoing discussion answers two further arguments grounded on statutory construction. First, it has been contended that officers and managing employees must be deemed to be outside § 249 because their compensation derives from "consensual arrangements" and because they were compensated before the filing of the petition for the very services they continue to perform thereafter. The suggestion overlooks, with respect to officers at least, the requirement imposed by § 191 of judicial approval not only of salary, but of the holding of office itself. More important, as to both officers and managing employees, the suggestion fails to appreciate the change which the filing of the petition and judicial chanroblesvirtualawlibrary
Finally, it is suggested that important differences between "what is demanded of a trustee and what is expected of officers of a debtor in possession" require the omission of the latter from § 249. 296 F.2d 683. The argument proves too much, for surely the prohibitions of § 249 cover persons other than the trustee -- various groups such, at the least, as those listed in §§ 241-243, who are held to a fiduciary standard although, unlike the trustee himself, they need not be "disinterested" within the meaning of § 158(1). That the officers of a Debtor in possession are not "trustees" for all purposes is beyond dispute, but that proposition does not provide an answer to the question before us -- which of those persons who are not disinterested and could not therefore serve as trustees under § 156 may nonetheless be regarded as fiduciaries within the meaning of § 249.
In concluding, as we do, that an officer or a managing employee of a Debtor in possession may be a fiduciary for purposes of § 249, we do not mean to suggest that one who holds such a position is necessarily within that section. That question requires in each case a careful examination chanroblesvirtualawlibrary
In this case, the District Court took evidence concerning both Fried's and Weinstein's activities and responsibilities, chanroblesvirtualawlibrary
But the bare holding that § 249 has been violated does not automatically determine the consequences of such a violation. We turn now to that aspect of the case. There is no doubt that proof of trading in contravention of the statute requires at least the denial of any application for past compensation then pending, and the disallowance of all future compensation. [Footnote 20] The District Court went so far, but declined to go further. We must now consider whether the District Court was also required, in order fully to effectuate the policies of § 249, to order restitution or recoupment of salaries already received by Fried and Weinstein for their beneficial services to the Debtor. As we have observed, the fact that these salaries chanroblesvirtualawlibrary
Surface Transit, Inc. v. Saxe, Bacon & O'Shea, 266 F.2d 862, 868 (C.A.2d Cir.). The lower federal courts have uniformly found it immaterial to the application of § 249, for example, that the extent of trading may have been minimal; that the applicant may never have realized the profit from the transaction, or may actually have suffered a loss; that the trading may have been done in response to a personal or corporate emergency; or that the applicant may neither have possessed nor attempted to acquire inside information bearing on the value of the Debtor's stock. [Footnote 22] In light of the seriousness of the abuses which the statute was designed to prevent, it has been thought that to allow any such exception or dispensation would frustrate the manifest intent of Congress to impose an effective prophylactic rule. [Footnote 23] That the rule occasionally bars compensation to those whose conduct might not have been considered inequitable or disloyal in the absence of such a statute is chanroblesvirtualawlibrary
The question of the bankruptcy court's power to remove a corporate officer is a difficult and complex one, in which state and federal law may be intricately interwoven. [Footnote 25] We therefore intimate no view concerning chanroblesvirtualawlibrary
178 F.2d 875.
I agree with the dismissal of the writ respecting the issues involved in Fried v. Margolis, 296 F.2d 670, but would affirm the judgment of the Court of Appeals in the Nazareth case, 296 F.2d 678, relating to § 249 of the Bankruptcy Act. On that score, I fully agree with Judge Friendly that, at "the very least, courts are justified in demanding a clear indication of Congressional purpose before inflicting" such a "Draconian penalty" (296 F.2d 683) as the Court's decision now imposes on petitioners Weinstein and Fried. The very triviality of the transactions involved in this particular case cautions against acceptance of the Court's ready construction of § 249.