Court Opinion

ID: 6902824
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:56:43.596782+00
Date Added: 2024-06-11T16:06:13.915717
License: Public Domain

L. HAND, Circuit Judge
(dissenting).
I agree with my brothers that the decisive question is not one of New York law, but — so far as I can understand — what federal judges think a “fair” distribution between the bankrupt’s creditors would be of the salvage from his estate. I can see an apparent anomaly in distributing the profits on a director’s purchase among the creditors at large, when they cannot be returned to the seller. However, it appears to me an excuse for doing so that, if equity regards the bonds as improperly acquired, it is more nearly just to distribute any profits among the other creditors, who have not been paid in full, than to leave them in the director’s hands; for they are a part of the bankrupt’s assets and the creditors have a better claim to them than the director himself. The fact that the former creditor has not intervened to assert his right to them against the director, is not to be taken as the equivalent of an assignment or release.
Whether any of the bonds here in suit were- in fact acquired by means which equity regards as improper is another matter. I agree that the trustee’s case broke down, so far as it rested upon the suppression of any specific information that the property was going to increase in value; and, if the directors’ dividends are to be confined to what they paid for the bonds, it must be because, as directors, they were not free to deal with the creditors at arms’ length. The books are full of declarations that an insolvent holds his property in trust for his creditors; and, when the insolvent is a corporation, whose directors were concededly fiduciaries as to shareholders, they become doubly fiduciaries of the creditors upon insolvency. The shareholders have then lost any interest *952in the assets, and the directors must he fiduciaries of the creditors, if they are to be fiduciaries at all. We can start therefore with the principle universally recognized that, prima facie, no fiduciary deals with his beneficiary on terms of equal advantage; and that, if he is to avoid that restriction, he must be able to point to some special circumstance which will excuse him. The claimants in the case at bar argue that, since directors may freely buy shares in the market, they must be equally free to buy debts from creditors after insolvency, when, as I have just said, creditors step into the place of shareholders. That there is at least a prevailing belief in the (federal courts to the contrary, the decisions discussed in my brothers’ opinion make clear; they form a substantial body of opinion, which Securities and Exchange Commission v. Chenery Corporation 1 did not disturb.
It seems to me that there are solid grounds for distinguishing between such purchases and purchases of shares. I conceive that the law allows a director to increase his stake in the company, because it adds to his incentive to make it succeed; the greater the prize, the greater the effort; it will dampen his zeal, if his holdings must be frozen at what he has when he is elected. Yet he cannot increase them without buying of the shareholders. The common-law was unable to effect any compromise between these opposing considerations, and chose the second; on the other hand, the Securities Exchange Act2 succeeded better by forbidding “quick turns” in shares by a director, yet circumscribing his freedom no further. When the company is in process of liquidation, I can see no excuse for allowing the purchase of debts, because, although the director acquires an interest, or an added interest, in the success of the liquidation, he has little or no control over the event, for it is in the hands of the court. Any added incentive which his purchase may contribute is negligible; and the excuse does not exist.. Indeed, it is significant that the decisions are clearer against such a purchase than against one made while the company continues as a “going concern.” When it does so continue, I doubt if the answer can be put in general terms. The insolvent company may have a good chance of effecting a composition: that is, it may be able to scale down its debts and go on. When that is so, I do not see why the same reasoning which permits a director to buy shares should not allow him to buy up debts. Nevertheless, I should make a distinction between the two situations. Before accepting the excuse in the case of debts, I would put the burden on the director of proving, not only that he genuinely expected by a composition to continue the business, but that his expectation was well founded; and nothing short of both would serve as an excuse. In the case at bar neither was proved, and on this record some at any rate of the purchases appear to me to have been unjustified. Perhaps, if my views had prevailed, it would have been necessary to send the case back for a trial on the issue I have indicated, but I need not decide that.
It will not be necessary for me to go much into the details. I should not include any bonds bought by a director from a director; surely they stand on an equality. The case is not so plain as to the ladies for whom directors bought bonds. They relied altogether upon the directors’ advice and exercised no judgment of their own in deciding to buy. In so doing I think that they became charged with the same equities that would have charged the directors, had they bought on their own behalf. In short, the directors could not pass on to their principals profits which they could not have retained for themselves. The principals were charged with notice of what the agents knew, and therefore the principals were not bona fide purchasers. Finally, it is not important to decide whether Judge Goddard was right in finding that Fribourg’s claim should be treated as though it were a director’s; or whether the referee was right in deciding otherwise. The correct answer is not altogether clear, and it would be necessary to find it only in ease my brothers agreed with my disposition of the chief issue.

 318 U.S. 80, 63 S.Ot. 454, 87 L.Ed. 626.

 § 78p (b), Title 15 U.S.C.A.