Document: 338 U.S. 304 70 S.Ct. 127 94 L.Ed. 107 MANUFACTURERS TRUST CO.v.BECKER et al. No. 55. Argued Oct. 20, 1949. Decided Nov. 21, Mr. Edward K. Hanlon, New York City, for petitioner. David W. Kahn, respondent. Justice CLARK delivered the opinion of Court. 1 This proceeding in bankruptcy is on objections to allowance claims equal principal amount bonds debtor acquired at a discount during its insolvency by close relatives and an office associate directors debtor. Petitioner's objection that equitable considerations require limitation was dismissed referee, District Court affirmed. 80 F.Supp. 822. Following affirmance divided Appeals Second Circuit, 173 F.2d 944, we granted certiorari because issue presented has importance administration arrangement corporate reorganization provisions Bankruptcy Act. 337 923, 69 1170. 2 On January 8, 1946, Calton Crescent, Inc., sold only property, apartment house located Rochelle, York, $300,000 pursuant contract entered into October 1945. Being unable discharge full obligations under debenture maturing 1953, outstanding $254,450, filed May petition Ch. XI Act, 11 U.S.C. § 701 seq., U.S.C.A. seq. Under plan arrangement, authorizing dividend 43.61% bonds, respondents Regine Becker, Emily Walter A. Fribourg were receive aggregate of.$64,237.53 based respective individual holdings debentures which total $147,300 sum but cost $10,195.43.1 Petitioner, Manufacturers Trust Company, appearing individually as creditor fees disbursements due it indenture trustee also original said indenture, objected respondents' filed, ground circumstances acquisitions their plus interest. 3 The pertinent our consideration petitioner's are follows: organized 1933 take title property reorganization. By 1942 had defaulted terms first mortgage operating with deficit; no time previous several years been selling market more than 8% face value. 4 While then considering sale $220,000, suit enjoin brought Sanford son respondent Becker husband Becker.2 Thereafter he proposed arrange loan second $15,000 pay off arrearages mortgage, all share holders being invited participate. In April accepted offer, none or elected participate other Fribourg, who desk room offices his brother Norman long-time friend former. made Fribourg. thus created default end 1942, 1943 took assignment rents did not foreclose; nor there change management property. interest paid upon 1946. addition sums aggregating $7,921.63 advanced taxes; this repaid without 1944 Pursuant agreement debtor, when remaining three resigned 1944, vacancies filled nominees brothers. 5 referee found from early value insufficient debts. However, record shows tax valuation period slightly less indebtedness.3 And although debtor's account frequently ran arrears, revealed surplus Prior disposing times going concern.4 6 claim acquired, prices varying 3% 14% value, after brothers became 1942.5 buy additional becoming director. never owned any whatever Although neither interested purchase respondents, purchased through agency latter's judgment. over-the-counter securities broker. Those part same dealer, estate whose attorneys fully informed financial affairs, Christian Association represented member investment committee advised condition 7 Some Fribourg's bought dealers market; others agent president vice they withdrew retiring insisted offer him be extended accompanied statement president's intention accept. speculative 'gamble,' influenced building. 8 All debentures, exception $2,000 advance filing arrangement.6 9 It referee's finding, left undisturbed both courts below, purchases overreaching failure disclose material fact bondholders. Petitioner does here contend should limited conduct amounting bad faith abuse fiduciary advantage. Nor petitioner bondholdings affairs injury corporation creditors. Indeed, unfair field settle indebtedness assistance rendered materially aided grave situation. Moreover, findings indicate most generous suggestion building Beckers prior figure substantially price. 10 urges broadly precluded profiting against insolvent corporation. And, contends, if may debt insolvency, those related permitted do more. Thus view initially directors. repeatedly good fair dealing fiduciaries. especially clear, accrue benefit officer director, court must reject would Pepper v. Litton, 1939, 308 295, 308—309, 60 238, 246, 84 281.7 12 Claims director arising out transactions have enforced fairness found. Fork & Tool Co. Howe, Brown Co., 1895, 157 312, 15 621, 39 713; cf. Manufacturing Bradley, 1892, 105 175, 26 1034; see Richardson's Ex'r Green, 1890, 133 30, 43, 280, 284, 33 516; Twin-Lick Oil Marbury, 1876, 91 587, 589—591, 23 323. Likewise standard applicable, where superseded differing legislative administrative rule, shares, market, book conversion public utility Securities Exchange Commission Chenery Corporation, 1943, 318 80, 63 454, 87 626; id., 1947, 332 194, 67 1575, 1995. decision declared equity imposed 'upon officers duty stockholders precludes them, merely directors, buying corporation's stock.' page 88, 459, 626. 13 When underlying drawn alongside obligation, appear unobjectionable. There component faith.8 negative misrepresentation deception, utilization inside knowledge strategic position, rivalry corporation.9 During reference substantial advantage holders. nothing suggest unjustly enriched. Cf. supra, 86, 458, 14 contention petitioner, amicus curiae, inadequate here. Relying particularly Magruder Drury, 1914, 235 106, 35 77, 59 151, invoke principle can make profit trust. But Drury involved express trust, even assets 'are not, true complete sense, trusts.' Hollins Brierfield Coal Iron 1893, 150 371, 381—382, 127, 129, 37 1113.10 asserts, also, free acquire later enforce them full, will subject possible conflict interests inconsistent role creditors Specifically argued seek postpone adjustment institution proceedings relief, such action serve creditors, order continue own price lower information. 16 recognized apply doctrines unjust enrichment fiduciaries yielded temptation self-interest loyalty prevent arising. See Weil Neary, 1929, 278 160, 173, 49 144, 149, 73 243; Woods City Nat. Bank 1941, 312 262, 268, 61 493, 497, 85 820. case whether what extent arise director's opportunity unmatured which, though technically insolvent, remains nevertheless concern. That 'there ordinary obligations', Seymour Spring Forest Cemetery Ass'n, 144 N.Y. 333, 344, N.E. 365, 367, L.R.A. 859, seem solvent corporations.11 Certainly present tend establish deprive sound judgment officer. event potentiality weighed desirability permitting reinforcement insolvent's position insofar acquisition help.12 probability actual loyalties arose claims, while concern, great enough justify exercise jurisdiction urges.13 17 Undoubtedly possibilities purchasing intensified becomes concern prospective judicial relief. clear ordinarily solvency corporation,14 federal equally agreed cannot relief expected begun.15 case, lies between, unnecessary determine precisely point requires declare ended profitable trading. could hardly latest Becker.16 18 nature relation between makes immaterial some ceased potency expectation bankruptcy. Neither indirect served purchase. moreover, begun months before negotiations leading election and, according uncontradicted testimony, began looking over following Becker's mention advice them. Accordingly, precluded. 19 A word caution scope desirable Judge Learned Hand's below. He suggested liquidation imminent fairly demonstrable, matter experience, potential likely initiate effect settlement one wholly disinterested, explore issues dismiss hand. meant relevance these raised proper record. We matters questions well X, 501 Commission, acting statutory advisor court, within rightful function submitting light experience dealings general kind disclosed case. Here proven facts particular body evidence submitted presumably expert understanding. 20 21 Affirmed. 22 DOUGLAS BURTON, whom BLACK joins, dissenting. 24 classed trustees, corporations character. precarious corporation, needs undivided Conflicts resolved favor. An example need doing so arises whenever, prospect liquidation, invest notes discount. inherent thereby created. necessary choose policy might best yield certain profits noteholding obligation personal noteholders. Their access confidential information emphasizes solution making accountable investment, much beneficiaries result spring proof breach trust one.1 25 As long enjoys healthy status generally freely accountability resulting profits. directorships purchasers directors.2 mere excess liabilities accountability. Nevertheless, instability obligates overcome presumption presents. instant finding question, sufficient bring If established, extent, any, associates identified 27 I agree reasoning dissent 951. reverse remand cause further accordance opinion. to, Principal Amount Cost Becker....... $44,500. $3060.63 Becker..... 52,800. 5010.00 Fribourg.. 50,000. 2124.80 September 1941. Soon thereafter each purchased, independently, $5,000. No contest purchases. appears included transfer capital shares apart debentures. major items consisted (1) $175,000, reduced 1946 $154,000, reduction $7,875 since 1943; (2) advances totalling $22,000, (3) however, payable earned. $421,630. Court's characterization upset February 10, continued August 24, 5, referred note June 4, clearly 30 preceding apparently $1,500 $500 petition. Since power disallowance conferred Stat. 545, 11, embraces rejection 'in whole part, equities case', 304—305, 244, 281, undoubtedly considerations. 212, 52 895, 612, 612. re Van Sweringen Cir., 119 231; Norcor Mfg. 1940, 109 407. Jersey Materials D.C.N.J.1943, 50 428; McCrory Stores Corp., D.C.S.D.N.Y.1935, 267. Other relies, 7, 820, considered 89, 460, 626, distinguished grounds dispositive Courts equity, defining responsibility yet assigned greater vitality insolvency. E.g., White, Potter Paige Henry B. Petters Importing C.C.E.D.Mo.1887, F. 864. resulted securing control arguably factor preventing deterioration 62 Harv.L.Rev. 1391, 1392 (1949): Insolvency 'is very credit improved known securities; forestall improves position.' Matter Wade Park Manor Report Special Master: Macklin (N.D.Ohio, 1949); Collier, (14th ed.), p. 1784, 1948 Supp. 124. Philadelphia Western R. D.C.E.D.Pa.1946, 64 738, 739; Ripperger Allyn, D.C.S.D.N.Y.1938, 554, 555; 269. Monroe Scofield, 135 725; supra; 14, 9, Los Angeles Lumber Products D.C.S.D.Cal.1941, 46 77. disallowed Expression given many cases occurred breaches serious final reliance principle. See, e.g., 407; D.C.E.D.Pa., 738; D.C.N.J., D.C.S.D.Cal., 77; D.C.S.D.N.Y., 267, Fletcher, Cyclopedia Corporations 869.1 (1947); Remington 975.01 (Supp.1947). Directors sell stock accountability, except special unfairness transaction. §§ 1171, 1174 Ballantine (Rev. ed. 1946). increases stake ultimate serve.

Category: 7