Opinion ID: 1476888
Heading Depth: 1
Heading Rank: 3

Heading: Fox Transactions.

Text: The foregoing conclusions of fact find striking support in convincing evidence that the illicit arrangement between Davis and Kaufman was continued in the Fox bankruptcy cases in the Third Circuit, in which Davis played an active part in the years 1936 to 1938. Fox was a movie magnate, residing in New York, who controlled a number of corporations and amongst them, the American Tri-Ergon Corporation which owned patents deemed to be of very great value for processes relating to the recording of motion pictures and the accompanying dialogue. Suits on these patents were brought in the Second and Third Circuits and resulted in victories for the patentee. Judge Manton wrote the opinion in the Second Circuit in American Tri-Ergon Corporation v. Paramount Publix Corporation, 2 Cir., 71 F.2d 153, and Judge Davis wrote the decision in the Third Circuit, Altoona Publix Theatres v. American Tri-Ergon Corporation, 3 Cir., 72 F.2d 53. Murray Becker, who was Fox's attorney in New York, employed Kaufman as local counsel in the Third Circuit in 1932. Kaufman testified that he was paid $10,000 at the beginning of the litigation and expected to receive additional fees at the conclusion of the litigation since the patents were thought to be worth millions of dollars. The active counsel in this case for Fox were the New York firm of Ward, Crosby and Neale. The decisions in both circuits, however, were reversed when the Supreme Court, first having denied certiorari and later granting it, held that the patents were invalid, 293 U.S. 587, 55 S.Ct. 101, 79 L.Ed. 682; 293 U.S. 528, 55 S.Ct. 139, 79 L.Ed. 638; 294 U.S. 464, 55 S.Ct. 449, 79 L.Ed. 997; 294 U.S. 477, 55 S.Ct. 455, 79 L.Ed. 1005. After this defeat, Fox was unable to pay his debts and moved to Atlantic City in August, 1935 to avoid his creditors. There he filed a petition in bankruptcy on May 29, 1936, which was referred to Referee Robert E. Steedle, now deceased. Fox testified before the master in 1942 in the investigation in the pending proceeding, and this testimony was admitted in the evidence before us because Fox was too ill to appear. His testimony was denied in important particulars by Davis and Kaufman but we find it to be true. It contains the following account of his subsequent dealings with Davis and Kaufman. On account of these transactions, he was indicted with Davis and Kaufman for conspiracy to obstruct justice and pleaded guilty, and testified for the United States. He was sentenced to serve a year and a day in prison. United States v. Fox, 3 Cir., 130 F.2d 56. In May, 1936, Fox met Kaufman and Davis in Atlantic City and Kaufman, who had known Fox for ten years, introduced him to the judge. Fox asked them to influence the referee to take favorable action in his case. Davis himself testified that Kaufman later introduced him to the referee, and that during the summer of 1936, he befriended Steedle, took him fishing, invited him to meals and to his daughter's wedding, and asked him whether he would like to become United States District Judge in case Davis should retire. The referee's decisions, however, were unfavorable to Fox and were the subject of the appeals hereinafter discussed. In July, 1936, Kaufman told Fox in Atlantic City that Davis desired to borrow $15,000 from him, to enable Davis to pay the expense of his daughter's wedding. Fox borrowed the money from his daughter and gave it to Kaufman, who delivered the money in $50 and $100 bills to Davis in Kaufman's apartment in the Bellevue-Stratford in Philadelphia. Later in the year Davis borrowed $12,500 from Fox to enable Davis to restore his daughter's life savings which he had used. Fox borrowed the money from his daughter or his wife and gave it to Davis in $1000 bills, wrapped in newspaper, at the corner of Chestnut or Walnut Street and 12th Street in Philadepphia. Five $1,000 bills, whose numbers were recorded by an Atlantic City bank in which certain Fox corporations had accounts, were paid in May, 1936, to Fox's daughter in Atlantic City; and it was stipulated that the same bills were deposited in a Florida bank by Davis' daughter on April 14, 1937. Davis testified in the prior phase of this investigation that he received these bills from one David Lewis who died in September, 1937. The money was received, he said, in payment of certain loans which he and Mrs. Davis had made to Lewis; but he changed his story as to the time of payment a number of times, placing it in 1933, 1934, 1935 and in the early part of 1936, and did not fix the date of payment finally as July or November, 1936, until he learned that the bills were not issued to the Atlantic City Bank by the Federal Reserve Bank in Philadelphia until May 7, 1936. After the Davis investigation started, Fox met Davis in the middle of 1940 in the Pennsylvania Hotel in New York and Davis told him that the $1,000 bills had been traced to Davis' daughter. Davis warned Fox that if the Atlantic City Bank had kept records of the numbers of the bills, they were both in serious trouble. Davis met Fox again on March 17, 1941 at the Governor Clinton Hotel in New York City where Davis, according to his own admission, registered under the name of Herman Goldberg. The situation in which the men were placed was again discussed at this meeting. Davis also attended a conference with Fox and Kaufman in the latter's office in New York at which Davis, according to Kaufman's secretary, gave the name of Moon. At a meeting held in September, 1940, according to Fox, which Davis denied, Davis asked Fox whether he knew David Lewis, above referred to in Davis' explanation of his possession of the $1000 bills. Davis asked Fox whether he could remember paying these bills to Lewis in payment of a loan that Lewis had made to Fox. Davis told Fox that if this was so, it would explain Davis' possession of the money because Lewis had made a payment to him; but Fox took the position that the thing was too complicated and he preferred not to have anything to do with the arrangement. It was in September, 1940 that Davis appeared before the United States Attorney and gave his final version of the Lewis loan. Fox engaged Martin Littleton of the New York bar as his attorney, and acting under his advice, made a confession of his transactions with Davis to the United States Attorney in New York, and later pleaded guilty as above stated. Fox claimed that the United States promised him that if Davis and Kaufman should be acquited, he would be given an opportunity to withdraw his plea and stand trial, but that this promise was not kept. See United States v. Fox, 3 Cir., 130 F.2d 56. Five cases growing out of the Fox bankruptcy proceeding were appealed to this court, and were heard by Judges Buffington, Davis and Thompson in 1936, 1937 and 1938. All of the cases resulted in reversals of the action taken by the District Court, and all of the decisions were in favor of the Fox interests and adverse to the trustee in bankruptcy. The opinions in these cases appear under the name of Judge Buffington but all of them were actually written by Judge Davis. The conclusions announced in these opinions and the methods adopted by the Court in disposing of the cases, as shown by the uncontradicted testimony of the attorney for the trustee, William E. Brown, show indubitably that some malign influence was at work. This will appear, for example, by a comparison of the action of the court in case No. 6260, All Continent Corp. v. Steelman, 3 Cir., 96 F.2d 20, and its action in All Continent Corp. v. Steelman, 3 Cir., 86 F.2d 913, case No. 6253. The first case had its origin in testimony offered by creditors of Fox at a hearing before the referee from which it seemed clear to the trustee that certain assets of Fox were in the hands of the All Continent Corp., a Fox corporation. There was a balance in the All Continent account in an Atlantic City Bank in excess of $60,000 on February 13, 1936 and thereafter more than $200,000 was deposited in the same account during 1936, most of it after Fox was adjudicated bankrupt on May 29, 1936. Accordingly, the trustee secured an order from the referee requiring the All Continent Corporation to turn over its books to the trustee for examination and audit. This order was affirmed by Judge Avis of the District Court of New Jersey on October 15, 1936, 16 F. Supp. 950, and an appeal was taken to this court. On November 13, 1936, the trustee moved this court, which was then hearing the appeal in the other case, to advance No. 6260 for hearing. On December 8, trustee's counsel was notified that case No. 6260 would be heard on December 11, although the printed record and the appellant's brief had not been filed at the time. The court, upon the motion of the trustee, postponed the hearing until December 22, 1936, on which day the case was argued. Nothing was heard from the court until October, 1937, when the trustee was notified that a reargument would be held on December 6, 1937. On that day the case was argued but it was not decided until March 31, 1938, after counsel for the trustee had petitioned the Supreme Court for writ of mandamus directed to this court and requiring it to decide the case. The decision was adverse to the trustee. The Supreme Court granted certiorari, 300 U.S. 648, 57 S.Ct. 492, 81 L.Ed. 860, and thereupon, counsel for the All Continent Corporation surrendered its books for examination. On the other hand, this court acted with the utmost expedition in case No. 6253, which was an appeal from an order of the District Court which restrained the prosecution in the Eastern District of Pennsylvania of a suit brought by the All Continent Corporation against the trustee and others to remove a cloud on the title to certain stock of Fox which was claimed by the trustee. This order was passed on October 7, 1936, and an appeal was allowed on October 20, 1936. On Friday, November 6, the trustee's attorney was notified that the case would be argued on Monday the 9th. The next day he was served with All Continent's brief and a copy of the record. He appeared in court on Monday and said he was not prepared to argue the case on such short notice. Judge Buffington told him that the appeal had been advanced pursuant to a policy of the court to accelerate hearings in bankruptcy cases. The Court, however, allowed him until Friday, November 13, to file a brief, and argument was set for that day. He was given leave to file a typewritten brief, which he did. At the argument on the 13th he was criticized by Davis for having submitted a typewritten brief and told that it was an imposition on the court, and especially on Judge Buffington. The decision of the court adverse to the trustee was filed on December 1, 1936, 3 Cir., 86 F.2d 913. The attorney for the trustee applied to Judge Buffington for a stay of the mandate and also for an order upon the opposing side to show cause why the stay should not be granted, but both orders were refused. Later a Justice of the Supreme Court issued a stay and when the case came before the Supreme Court, the decision of this court was reversed, 301 U.S. 278, 57 S.Ct. 705, 81 L.Ed. 1085, on the ground that there was probable cause to believe that the suit filed by the All Continent Corporation in the Eastern District of Pennsylvania was a step in a conspiracy between the bankrupt, his relatives and the All Continent Corporation to impede the administration of the bankrupt estate in New Jersey. In case No. 6605, Hirsh, Newman, Reass and Becker v. Capital Co., 100 F.2d 777, this court also reversed a decision of the District Court which refused to interfere with the examination by a creditor of Fox of certain attorneys of Fox in supplementary proceedings to a judgment obtained by the creditor against Fox. This court also reversed the action of the District Court in issuing contempt orders against Mrs. Fox and against an auditor in the employ of All Continent when they refused to answer questions put to them at hearings before the referee. The refusal of Mrs. Fox to appear and testify was based on her alleged illness, but this excuse was overruled by the District Judge upon the report of a physician appointed by him to examine the witness. When the case reached this court on appeal, it appointed its own physician who gave contrary testimony. The obstruction to prompt action by the trustee caused by the refusal of the witnesses to testify, and the long delay of this court in rendering adverse decisions to the trustee, are most significant. Mrs. Fox was summoned to testify in August and again in September, 1936. The order of the District Judge adjudging the witness guilty of contempt was made in May, 1937, in which month the appeal was taken. The case was not set down for argument until December 6, 1937, and was not decided until April 2, 1938. Fox v. Capital Co., 3 Cir., 96 F.2d 684. In the auditor's case, the appeal from the contempt order was taken in May, 1937, but the decision reversing the order was not rendered until April 2, 1938, although motions to advance the appeal were made. Leitstein v. Capital Co., 3 Cir., 96 F.2d 23. Our conclusions from these findings as to the issues formulated in this proceeding are that Judge Davis' action in the Root appeals was influenced improperly by Morgan S. Kaufman; that Kaufman was employed by Universal for this improper purpose; and that the Stokley transactions were the means by which Judge Davis was compensated at least in part for his decision. We conclude also that the Fox transactions were undertaken as part of the illicit combination between Davis and Kaufman to obstruct justice, and that these transactions may be considered as evidence to show the existence of the combination which was manifested both in the Root cases and in the Fox litigation. However, we have not considered the Fox episodes in reaching the conclusion that Universal was implicated in the illicit combination so far as the Root cases were concerned. While the actions of the parties in the transactions involved in the two sets of cases are evidence of a common plan between Davis and Kaufman, their subsequent conduct is not admissible to show that Universal was party to the conspiracy in the Root cases. The disposition now to be made of the Root cases admits of no doubt. The records of the courts must be purged and the judgments in Universal's favor, both in this court and in the District Court, must be vacated and the suits by Universal must be finally dismissed. No principle is better settled than the maxim that he who comes into equity must come with clean hands and keep them clean throughout the course of the litigation, and that if he violates this rule, he must be denied all relief whatever may have been the merits of his claim. Hazel-Atlas Co. v. Hartford Co., 322 U.S. 238, 64 S.Ct. 997, 88 L.Ed. 1250; Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 54 S.Ct. 146, 78 L.Ed. 293; Mas v. Coca-Cola Co., 4 Cir., 163 F.2d 505; American Insurance Co. v. Lucas, D.C.W.D.Mo., 38 F.Supp. 896, affirmed as American Insurance Co. v. Scheufler, 8 Cir., 129 F.2d 143. Consequently there can be no question as to the course to be taken with regard to Universal's suits against Root. In Hazel-Atlas Co. v. Hartford Co., supra, the fraud consisted in the publication of an article commendatory of the patent and purported to be written by a disinterested person, but actually prepared by officials of the Company which owned the patent, and in Mas v. Coca-Cola Company, the plaintiff was denied relief because he had forged certain letters indicating the priority of his invention. In both cases the courts did not merely exclude the tainted evidence, but denied the patentee all relief. How much more deserving of condemnation is the conduct of the patentee in the instant case which was directed against the integrity of the court itself. The judgment of the court is that the mandates in the Root cases be recalled, that the judgments of this court therein be vacated, and that the cases be remanded to the District Court with directions to vacate its judgments therein and dismiss the suits by reason of the fraud practiced upon this court.