Court Opinion

ID: 6912949
Source: CourtListenerOpinion
Date Created: 2022-07-23 22:30:24.434992+00
Date Added: 2024-06-11T16:06:30.517277
License: Public Domain

FRANK, Circuit Judge
(dissenting in part).
I concur in the reversal as to the third cause of action. I dissent as to the two others.

I. The first cause of action

1. By exercising the stock options, the officers received large profits, in excess, as to each, of $25,000 a year. The aggregate of such profits was more than a million dollars. In other words, these officers together received that large sum which the company could have obtained and retained for itself as capital, if it had issued the stock at the market price prevailing when the optionees exercised these options. My colleagues hold that, nevertheless, there was no violation of section 805(c) which forbids the receipt of annual compensation by a director or an officer, “directly or indirectly,” and “in any form”, exceeding “in amount or value” $25,000.
The trial judge rested his decision dismissing the first cause of action, and the defendants justify this decision, on the basis that the stock under option had been previously unissued. My colleagues and I agree that this basis is wholly unsound. Judge SWAN rests affirmance on a basis not suggested by the trial judge or the defendants, namely, that the stock options were granted as incentive bonuses.1 I think this basis equally unsound.
Suppose, the company, in a particular year, had paid one of its officers, with an annual salary of $25,000, an additional cash bonus of $5,000, as an incentive. No one could doubt that such a payment would violate the statute: Since Congress plainly prohibited any annual salary in excess of $25,000, it is not arguable that Congress intended to except an incentive cash bonus merely because it was customary for other corporations to *252use what Judge SWAN calls this “method of developing efficient management.”
Judge SWAN, however, says that Congress must have intended to except such an incentive bonus if paid, not in money, but in money’s worth, in the form of a stock option. I cannot agree. Surely there would have been a violation if the company had paid a $5,000 bonus by deeding the officer land worth (i. e., readily saleable for) $5,000. The result would be the same if it gave the officer an option (which he exercised) to buy for $10,000 some land worth (i. e., readily saleable for) $15,000, or if the officer’s bonus consisted of an option (which he exercised) to purchase from the company for $10,000 some stock of another company with a market value of $15,000. I cannot understand why it should make a difference that here the options were to “purchase” some of the company’s own stock at a price far below its market value. For obviously, it would be a violation of the Act, if the company “sold” some of its own unissued stock and used some of the cash proceeds to pay the officers a cash bonus.2
In short, I think Congress, by prohibiting the receipt, “in amount or value”, of more than $25,000 a year “in any form”, whether “directly or indirectly,” did intend that an officer should receive no more than that amount whether the excess be given as an incentive bonus or otherwise, and no matter whether the bonus be in money or in money’s worth. Judge SWAN, I think, disregards the Congressional purpose. The very fact that grants of incentive bonuses were well known to Congress, when the statute was enacted, renders it most significant that Congress did not create any exception for such bonuses when it set a $25,000 limit on an officer’s annual compensation.
In truth, the legislative history reveals that Congress meant section 805(c) to prohibit bonuses: That subsection received its final form through an amendment introduced on the Senate floor by Senator Black. Explaining the amendment, he said that it was “absolutely essential that the amount of salary or bonus drawn by any officials of the subsidized companies should be limited” and that the “limitation should be absolute and not capable of evasion.” 3
2. I think the prohibition in section 805(c) and the criminal provision of the statute — section 805(f) — created a civil right in the company to recover from the wrong-doing officers. It has often been held that such a provision does, by implication, create such a civil right, for the vindication of which a civil action may be maintained by a person harmed by the violation. See, e. g., Reitmeister v. Reitmeister, 2 Cir., 162 F.2d 691, 694; Fischman v. Raytheon Manufacturing Co., 2 Cir., 188 F.2d 783, 787; Goldstein v. Groesbeck, 2 Cir., 142 F.2d 422, 154 A.L.R. 1285; Fitzgerald v. Pan American World Airways, Inc., 2 Cir., 229 F.2d 499; Restatement of Torts, Section 286; Morris, The Relation of Criminal Statutes to Tort Liability, 46 Harv.L.Rev. (1933) 453; Lowndes, Civil Liability Created by Criminal Legislation, 16 Minn.L.Rev. (1932) 361.
Judge LUMBARD attempts to distinguish the cited cases as follows: In each-of them, he says, the criminal provision in question was intended exclusively, or “in part,” to protect a class of which' the-plaintiff was a member, and (says JudgeLUMBARD) that is not true here: He reasons that the purpose of the criminal section here was to protect the federal treasury. That argument assumes that, this Congressional purpose could be effectively achieved • solely by a criminal! prosecution of the offended company officers and/or the Commission’s cancellation of the company’s charter. This assumption ignores the lack of any authority in the Commission to sue the wrongdoing officers to compel them to repay the *253unlawful excess compensation. Because of that lack, obviously a civil action on the company’s behalf to compel such repayment adds a most effective sanction; we stressed a similar factor when, implying a civil right, we sustained a civil action in Goldstein v. Groesbeck, 2 Cir., 142 F.2d 422, 427; See also Fitzgerald v. Pan American World Airways, Inc., supra. I find it difficult to comprehend why Judge LUMBARD assumes that Congress did not have in mind the fact that violations would harm the company as well as the federal treasury, and that recovery by the company would, protect not only the federal treasury but also the company and its innocent stockholders. Since Congress must have had that fact in mind, I think we must conclude that it intended, in part, to protect the company and such stockholders. “In part” is enough: it is not necessary that the protection of the company be the primary or chief purpose. See Fairport, P. & E. R. Co. v. Meredith, 292 U.S. 589, 596-597, 54 S.Ct. 826, 78 L.Ed. 1446; Remar v. Clayton Securities Corp., D.C., 81 F.Supp. 1014, 1017. If the primary purpose was protection of the federal treasury from squandering the assets of a subsidized company through excessive salaries, will not that purpose be admirably served if, when the squandering has occurred, it can be undone by a suit on the company’s behalf to compel the return of the excessive salary payments ?
So I note again that, as the Commission has no authority to take steps to compel restoration of the illegal compensation, the result would be, if Judge LUMBARD were correct, i. e. if the company (directly or derivatively) could not sue to recover, that the illegal compensation — here more than $1,000,000 — would remain in the hands of the wrong-doing corporate officers. Criminal punishment could not force them to disgorge.4 The Commission, if it should learn of the violation, might well, as in the instant ease, be reluctant to cancel the company s charter, since a cancellation would most seriously damage the innocent stockholders.
3. Judge LUMBARD asserts that Congress could not have intended to permit a civil action on the company’s behalf (for the recovery of the illegal compensation) because the resultant disclosure might lead the Commission, under sec. 805(f) to rescind the charter, thus doing the innocent stockholders far more harm than that done by the wrongdoing corporate officers. That is a curious suggestion: it amounts to saying that the statute coerces the stockholders into submitting in silence to the violations, that the stockholders must join in a conspiracy to conceal the violations from the Commission. Moreover, the Commission is not required to rescind; for Section 805(f) provides that the Commission “may” — not “must” or “shall”— rescind on account of a violation.
4. I think there is even more justification for interpreting the criminal provision here to allow a civil action than in many of the other cases I cited above. For consider the history of Section 805 (c): The enactment of the Merchant Marine Act of 1936 was initiated by a message from the President, on March 4, 1935, accompanied by a report of the Postmaster General.5 These documents disclosed that, before this new legislation, the government had granted Merchant Marine operators disguised subsidies in the form of low-interest loans and ocean-mail contracts yielding large profits to the operators; this system had resulted in “practices and abuses which should and must be ended. Some of these have to do with * * * the payment of excess salaries * * * and other abuses which have made for poor management, improper use of profits and scattered efforts.” Investigation had shown that comparatively little of the enormous grants had gone into the building of a permanent Merchant Marine on *254a sound basis. Many .of the "companies were in a very unsound condition; they were “organized with insufficient paid-in capital”; “startling undercapitalization” had precluded “even ah appreciable replacement program.” The Reports of the Congressional Committees stated that the new Act was being enacted to' meet the President’s recommendation and to eliminate the abuses to which he had called attention. I note once more the remarks of Senator Black, quoted above, concerning “evasion” of Section 805(c).
In the light of this history, I think Congress intended, by every means, to prevent the depletion of the assets of these heavily subsidized companies through payments of excessive salaries. I see no reason for differentiating the interpretation of Section 805(c) and (f) from the interpretation of other statutes, in the cases cited above, so as to treat violators of Section 805(c) with unusual tenderness. To read this statute as denying a subsidized company a right of action against the violating officers would contribute to the dissipation of the federal subsidies and thus, in considerable measure, frustrate the Congressional aim. I cannot believe Congress meant that persons like the defendants here, in control of such a company, can illegally pay themselves compensation in violation of the statute and yet be able to retain it. But that is Judge LUMBARD’s position.
5. Judge LUMBARD advances an additional argument for exculpating these defendants: He says (correctly) that-Section 805(f) renders the forbidden receipt of excess compensation a crime, only if the violation is “wilful”; and he reasons that the officers were not guilty of “wilful” violations, because of a letter, dated November 19, 1945, from Skinner, the Commission’s General Counsel, to Harris, the president of the company, saying that the receipt of the profits derived from exercising the options was lawful merely because the stock was unissued. But aside from the fact that such a letter could not bind the Commission — Colby v. Klune, 2 Cir., 178 F.2d 872, 875 note 15 — there is no evidence whatever that any of the defendants— except two defendants, Harris and Gibbons — knew of that letter before he exercised his options. Indeed, the evidence shows the contrary. Absent knowledge of the letter, patently there could be no reliance on it.
Judge LUMBARD concedes that, except as to Harris and Gibbons, there is no proof of reliance by any of the optionees on that letter of November 19, 1945, from Skinner, the Commission’s General Counsel, to Harris. But Judge LUMBARD endeavors to show lack of wilfulness in this way: (a) On June 13, 1944, Gibbons, the company’s treasurer, sent a letter to each of the optionees reading in part as follows:
“Counsel has stated that before such options are exercised, it is advisable that the company obtain the approval of the Salary Stabilization Unit of the Bureau of Internal Revenue of the U. S. Treasury Department. Application for such approval has been made but approval has not yet been received. The company requests, therefore, that you refrain from exercising any part of your option to purchase this Common Stock until you are further advised by the company.”
(b) On November 26, 1945, Harris, the company’s then president (who is not a lawyer) wrote a letter to each of the optionees reading in part as follows:
“It gives me pleasure to inform you that the conditions, which led to the company’s request on June 13, 1944 that you refrain from exercising any part of your option to purchase Common Stock of the company, have now been cleared. Options may, therefore be exercised in accordance with the terms outlined in the resolution of the Board of Directors of the Company adopted November 30,1943.”
Judge LUMBARD seems to reason that, because this November 26, 1945 letter was sent to the optionees a week after Harris received the November 19 letter *255from the Commission’s General Counsel, the optionees should somehow be deemed to have relied on the November 19 letter. I cannot agree. The November 25, 1945 letter from Harris unmistakably referred back solely to Gibbons’ letter of June 13, 1944. It thus told the optionees no more than that there no longer existed the obstacle, created by the Stabilization regulations, to the exercise of the options. It did not mention the Merchant Marine Act and therefore did not tell the optionees that in exercising the options they would not violate Section 805(c) of that Act. It is in the light of these facts that we must decide whether those optionees acted “wilfully.”
The Supreme Court has said that the meaning of “wilful” in a criminal statute must be determined from its context. In cases relative to provisions of the Revenue Act, that Court has held that “wilful” denotes an “evil motive” or “bad intent.” So in United States v. Murdock, 290 U.S. 389, 394, 54 S.Ct. 223, 78 L.Ed. 381, the defendant was indicted for “wilfully” refusing to give information to a revenue agent concerning his income tax returns. He had refused on the ground that his answer would incriminate him under state law. Since it was not until it had passed on his case in a prior decision that the Supreme Court definitely established that this was not a sufficient reason for refusing to answer questions of the revenue agents, the Court held that defendant was entitled to have the jury instructed that, if defendant acted in good faith in refusing to answer, he could not be held to have “wilfully” violated the statute. In Spies v. United States, 317 U.S. 492, 497-498, 63 S.Ct. 864, 87 L.Ed. 418, defendant was charged with a wilful attempt to evade or defeat payment of income taxes. Defendant claimed that his failure to file a return and to pay his taxes was not wilful because illness prevented his doing so; the Supreme Court held that defendant was entitled to have the jury instructed that the government must show more than merely voluntary conduct on defendant’s part to establish that he wilfully attempted to evade payment.
' In the context of Section 805(f), I agree that “wilful” requires proof of more than mere voluntary acceptance of compensation in excess of $25,000. But I think that it does not require proof of an “evil motive” or “bad intent.” The considerations which demand such proof in the area of tax evasions are not, I think, present here.
The Supreme Court in Murdock specified four other possible meanings of “wilful,” i. e. (1) no justifiable excuse, (2) stubborn, obstinate and perverse conduct, (3) doing the act without ground for believing it lawful, (4) or conduct marked by careless disregard whether or not one has the right to so act. I think that, construing “wilful” as used in Section 805(f) to mean “without justifiable excuse” would best carry out the intent of Congress and, at the same time, give adequate protection to those accused of violating Section 805(c).
The defense of “justifiable excuse” is akin to the defense of a mistake of law due to reliance on the advice of counsel. Generally, such a defense is rejected.6 However, where, as here, specific intent or “wilful” intent is an element of the offense, the good faith reliance on the erroneous advice of counsel, to whom the defendant has revealed all the pertinent facts, does constitute a valid defense.7 It would be extending the “advice of coun*256sel” exception to an unprecedented degree to apply it to a situation like this, where these defendants neither consulted counsel, nor received any advice whatever, relating to the statute they are accused of violating.
The facts disclose no justifiable excuse. For these defendants were experienced business men, doubtless accustomed to consult counsel frequently. They did not do so before they exercised these options. Furthermore, as already noted, the advice they received from laymen did not relate to the statute which made their conduct unlawful.
The situation of Harris and Gibbons is different: They saw the letter from the Commission’s General Counsel. If, relying on that advice from such a government lawyer, they believed in good faith they were not violating Section 805(c), they would have had a “justifiable excuse,” and therefore plaintiff could not recover from them. However, the issue of their good faith presents a question of fact to be answered by the trial court.8 Accordingly, I would, but solely as to Harris and Gibbons, remand to the district court for a new trial on this one issue.
As to the other optionees, I would reverse the judgment dismissing the first cause of action and direct the entry of judgment for plaintiff.

II. The second, cause of action

1. By causing the company to waive its claim to a tax deduction, Franklin and Hicks obtained for themselves, and for the other defendants, a considerable saving in taxes at a. cost to the company of the additional taxes it paid because it did not deduct some $1,200,000. I think that there was a direct conflict between
their duties as fiduciaries and this conduct, and that therefore Franklin and Hicks breached their fiduciary obligations. See, e. g. Judge Rifkind’s opinion in Trúncale v. Universal Pictures Co., Inc., D.C., 76 F.Supp. 465. I think my colleagues mistakenly distinguish that case on the ground that here these fiduciaries had the advice of the company’s counsel (who, be it noted, was a law partner of one of the defendants).
My colleagues cite an illustration of a trustee acting on advice of counsel, from Restatement of Trusts, Section 201, comment b. But that comment explicitly states that it relates solely to the liability of a trustee for negligence and does not apply when the trustee gains a personal advantage. On the other hand, the Restatement, Section 170, deals separately with the trustee’s duty of loyalty, when he acts for his own profit at the expense of the beneficiaries. My colleagues cite no cases (and I cannot believe there are any) in which a trustee, guilty of such a breach of his duty of loyalty, has been exculpated from civil liability because he relied on a lawyer’s advice, or in any other way acted believing erroneously that he had a right to do what he did.9 In such circumstances, his good faith is irrelevant. See Restatement of Trusts, Section 170, comment h. A lawyer’s advice, or any other manifestation of good faith, can no more protect the trustee from civil liability than it would one who converted another’s property.
2. Each of the other directors who were optionees also participated in giving away corporate assets for his own benefit. I think their misconduct cannot be characterized as merely negligent. Therefore, they too are liable for their *257breaches of the duty of loyalty. Again, their good faith has no relevance. Cf. Mosser v. Darrow, 341 U.S. 267, 275, 71 S.Ct. 680, 95 L.Ed. 927.10 Accordingly, I would reverse as to the second cause of action.

. Literally, a company does not “sell” its own unissued stock. But all members of the court agree that, in this context, there exists no distinction between unissued and “treasury” stock.

. Cong.Rec. p. 9911, 74th Cong., 2d Sess.

. If the government does not discover the crime within the short three year period set by the statute of limitations, the corporate officers will be free of criminal liability. See 18 U.S.C. § 3282.

. H.Doc.No.118, 74th Cong., 1st Sess.

. Hall, General Principles of Criminal Law (1947), 358; United States v. Phillips, 7 Cir., 217 F.2d 435; C. I. T. Corp. v. United States, 9 Cir., 150 F.2d 85, 95; Miller v. United States, 4 Cir. 277 F. 721, 726; United States v. McMillan, D. C., 114 F.Supp. 638, 642; Shushan v. United States, 5 Cir., 117 F.2d 110, 133 A.L.R. 1055.

. Williamson v. United States, 207 U.S. 425, 453, 28 S.Ct. 163, 52 L.Ed. 278; Townsend v. United States, 68 App.D.C. 223, 95 F.2d 352, 358-359; United States v. Phillips, supra; C. I. T. Corp. v. United States, supra ; Miller v. United States, supra; United States v. McMillan, supra. Hall, The Substantive Law of Crimes — 1887-1936, 50 Harvard Law Review, 616, 642-647 (1937).

. Spies v. United States, 317 U.S. 492, 500, 63 S.Ct. 364, 87 L.Ed. 418; United States v. Murdock, 290 U.S. 389, 54 S.Ct. 223, 78 L.Ed. 381; C. I. T. Corp. v. United States, 9 Cir., 150 F.2d 85, 89.

. The cases cited by defendants, dealing with good faith as a defense available to directors, all relate to situations where the directors had not themselves benefited from their conduct. See, e. g., Lynch v. Sapiro, 117 N.J.Eq. 485, 176 A. 327; Smith v. Banister, 127 N.J.Eq. 385, 13 A.2d 485; Madsen v. Burns Bros., 108 N.J.Eq. 275, 155 A. 28; Ellerman v. Chicago Junction Railways & Union Stockyards Co., 49 N.J.Eq. 217, 23 A. 287; Simon v. Socony-Vacuum Oil Co., 179 Misc. 202, 38 N.Y.S.2d 270, affirmed 267 App.Div. 890, 47 N.Y.S.2d 589; Hayman v. Morris, Sup., 36 N.Y.S.2d 756.
Defendants strangely cite Medford Trust Co. v. McKnight, 292 Mass. 1, where at page 31, 197 N.E. 649, a director was held liable for self-dealing.

. Bogert says:
“ * * * acts by a fiduciary which are to his private advantage and are done during the administration of the trust without direct dealing with the cestui * * * are always breaches of the fiduciary’s duty of loyalty to the principal, and any advantages gained by the fiduciary may always be taken from him, by way of constructive trust or otherwise. Fullness of disclosure, honesty of intentions, the payment of adequate price, lack of damage to the cestui, are in no case excuses. The cestui may attack the transaction which was a breach of the duty of loyalty. Putting it another way, the presumption of its fraudulent character is irrebuttable.” 3 Bogert, Trusts and Trustees, p. 161 (1946).
“This duty * * * applies to * * * a corporate officer or promoter and corporation * * * ” Id., at 165-166.