IN RE NAZARETH FAIRGROUNDS & FARMERS'MARKET, INC.

• Decision Date: 09 November 1961
• Docket Number: No. 403,Docket 26362.,403
• Citation: 296 F.2d 678
• Parties: In the Matter of NAZARETH FAIRGROUNDS & FARMERS' MARKET, INC., Debtor, Arnold A. Weinstein and Jerome Fried, Appellants, v. Irving J. WOLF, Robert H. Davidson, Richard S. Hull, Frederick Katzenell, and Nazareth Fairgrounds & Farmers' Market, Inc., Appellees.
• Court: U.S. Court of Appeals — Second Circuit

296 F.2d 678 (1961)

In the Matter of NAZARETH FAIRGROUNDS & FARMERS' MARKET, INC., Debtor Arnold A. Weinstein and Jerome Fried, Appellants, v. Irving J. WOLF, Robert H. Davidson, Richard S. Hull, Frederick Katzenell, and Nazareth Fairgrounds & Farmers' Market, Inc., Appellees.

No. 403, Docket 26362.

United States Court of Appeals Second Circuit.

Argued August 17, 1961.

Decided November 9, 1961.

Harold Harper, New York City (Harper & Matthews, New York City) (Harold Harper and Vincent P. Uihlein, New York City, on brief), for appellant Jerome Fried.

Arnold A. Weinstein, New York City, appellant, pro se.

Alex L. Rosen, New York City, for debtor.

Melvin L. Robbins, New York City, for appellees Wolf, Davidson, Hull and Katzenell.

Before MOORE, FRIENDLY and SMITH, Circuit Judges.

FRIENDLY, Circuit Judge.

The skeins from which Nazareth Fairgrounds & Farmers' Market, Inc. (hereafter Nazareth) began, and the lengthy efforts to unravel them, are recounted in my brother Moore's opinion in Nos. 27000 and 26962, 2 Cir., 296 F.2d 670. The instant appeals relate to a chapter in the Nazareth epic which, if scarcely modern, is at least more recent. The principal issue is the applicability to an officer and to a general manager of a debtor in possession, who have been receiving compensation pursuant to § 191 of the Bankruptcy Act, 11 U.S.C.A. § 591, of Section 249, 11 U.S.C.A. § 649, which provides:

"Any persons seeking compensation for services rendered or reimbursement for costs and expenses incurred in a proceeding under this chapter shall file with the court a statement under oath showing the claims against, or stock of, the debtor, if any, in which a beneficial interest, direct or indirect, has been acquired or transferred by him or for his account, after the commencement of such proceeding. No compensation or reimbursement shall be allowed to any committee or attorney, or other person acting in the proceedings in a representative or fiduciary capacity, who at any time after assuming to act in such capacity has purchased or sold such claims or stock, or by whom or for whose account such claims or stock have, without the prior consent or subsequent approval of the judge, been otherwise acquired or transferred."

We hold the section inapplicable.

Nazareth filed its petition for reorganization under Chapter X in September, 1953. Weinstein was then its president and Fried its general manager.¹ The petition prayed that the "petitioner by Arnold A. Weinstein and Jerome Fried be authorized, directed and empowered to operate the business and manage the property of your petitioner." The Court left the debtor in possession and authorized it to pay $100 a week to Fried, then described as secretary-treasurer, and nothing to Weinstein. Later the salary of Fried, then described as general manager, was increased, first to $150 and then to $200 a week, and Weinstein was awarded compensation of $50 a week. Fried, who is located at Nazareth, Pa., has been in active charge of the day-to-day operations of the debtor; Weinstein, a New York attorney, has made regular inspection trips and has passed on leases and other general policy matters. The administration has been successful, gross business having tripled from 1953 to 1959 and profits having arisen from zero to $41,269.

In the course of administration a bitter contest for control arose between the stockholders who had elected Weinstein and Fried and an opposition group with which appellees are identified, known as the Rehrig group, Rehrig being a tenant of the debtor. In August, 1958, an election of directors was held, at which Weinstein, Herbert Danciger (not in either group), and Philip (Rehrig's attorney) were elected; they thereupon chose Weinstein as President, one Laupheimer as Vice President, Danciger as Secretary, and Philip as Treasurer. All this was subject to the Court's approval, as required by § 191; among the welter of petitions in this proceeding was one, verified August 6, 1958, but not decided until June 14, 1960, asking for that.

In March, 1959, appellees submitted a "Petition for Termination and Recoupment of Compensation (Pursuant to § 249 of the Bankruptcy Act)." The petition alleged that Weinstein's sister had purchased six shares of the debtor's stock in 1957; that in 1958 and 1959 Weinstein had purchased three shares, and sold a fraction of one; that in 1959 he or persons represented by him had exercised options to purchase six shares; that Fried had bought twenty shares in 1957 of which he had sold ten back to the vendor in 1958; and that these transactions violated § 249 and required the termination of appellants' compensation and the return of salary and expense moneys previously received. Weinstein filed an answering affidavit disclaiming responsibility for his sister's purchase and taking the position that his own purchases were made from stockholders who had tired of the long delays and insisted on selling to someone despite Weinstein's advice that they keep their stock — also that as to most of the stock, he was buying pursuant to options which had been arranged, in order to prevent a "raid" by Rehrig, on a basis that might result in others participating in the purchase nominally being made by him. He alleged also "that until now I was not aware of section 249 of the Bankruptcy Act," although conceding that he was "chargeable with knowledge of its provisions." This was followed, a month later, by an order requiring appellees to show cause why their petition should not be dismissed pursuant to F.R. Civ.Proc. rule 12(b), 28 U.S.C.A., with leave to appellants to answer in the event of denial.

The Court sent the matter to a referee for hearing and report; Referee Joyce recommended that the motion to dismiss be granted. When his report came before the District Judge in January, 1960, the judge filed a memorandum disapproving the Referee's ruling and setting a hearing for proof bearing on "recoupment" of past compensation and expense moneys. Such a hearing was held on June 14; at its conclusion, the judge directed from the bench that Fried be discharged as general manager, that Weinstein have nothing further to do with the operation of debtor's business, that the prayer for "recoupment" be denied, that the election of directors and officers be approved, that no funds should be disbursed save on Philip's countersignature, and that Philip should supervise the debtor's affairs pending the early appointment of a new general manager. Weinstein and Fried appealed from all of the order save for the denial of "recoupment" and so much of the approval of the election as did not relate to Philip; appellees cross-appealed from the former. On motion of Weinstein and Fried, offering to serve without compensation unless the order should be reversed, this Court, on July 12, 1960, stayed so much of the order as removed them from participation in the debtor's affairs and designated Philip in their stead, with leave to the District Judge to file more detailed findings of fact and conclusions of law. These make plain that "Weinstein's and Fried's dissociation from the management" of the debtor was directed "solely because they, as fiduciaries, violated section 249 of the Bankruptcy Act by dealing in the debtor's stock."² When granting the stay, we had supposed the appeals would be heard in the fall of 1960; however, they were not argued until a special sitting on August 17, 1961. On Weinstein's and Fried's appeal we reverse, save as to the approval of the election of directors and officers; this reversal leads to affirmance on the cross-appeal.

We assume that, under the wide powers conferred by § 188 of the Bankruptcy Act, 11 U.S.C.A. § 588, the District Court might permissibly conclude that an officer or employee of a debtor who had disentitled himself to receive compensation should no longer be allowed to serve even if his service was otherwise in the best interests of the estate. The question thus is whether appellants had done that.

Section 249 finds its source in two district court decisions, In re Paramount-Publix Corp., 12 F.Supp. 823 (S.D.N.Y. 1935), and In re Republic Gas Corp., 35 F.Supp. 300 (S.D.N.Y.1936), denying compensation to members of committees who had traded in securities of a debtor in reorganization under § 77B of the Bankruptcy Act, 48 Stat. 912 (1934), the predecessor of Chapter X, see also In re Mountain States Power Co., 118 F.2d 405, 407 (3 Cir. 1941). Referring to these cases, the draftsmen of the Chandler Act explained that § 249 was "a development of the idea that fiduciaries who trade in the securities should be penalized; that is, where they act contrary to the spirit, at least, of the common law and, in certain types of transactions, contrary to the letter of the common law" and constituted "a step toward the codification" of the rule laid down in the district court decisions, "an attempt to make it more uniform," and "broaden the base a little bit."³ Decision whether the base was broadened so as to include an officer and a supervisory employee of a debtor in possession demands some examination of the latter concept and of the structure of the statute. Here, as in Duparquet Huot & Moneuse Co. v. Evans, 297 U.S. 216, 218, 56 S.Ct. 412, 413, 80 L.Ed. 591 (1936), "there is need to keep in view also the structure of the statute, and the relation, physical and logical, between its several parts."

The concept of leaving a debtor in possession, "A receivership without a receiver,"⁴ was one of the many innovations introduced by § 77B to meet the insolvency problems of the great depression. The thought was that expense could be saved and perhaps efficiency gained by avoiding the universal appointment of trustees and continuing, in appropriate cases, the possession of corporate managements whose calamities, in many instances, had been due to national or even international economic forces quite beyond their control. After much debate,...