Mosser v. Darrow 10 8212 11, 1951

• Citation: 71 S.Ct. 680,95 L.Ed. 927,341 U.S. 267
• Decision Date: 07 May 1951
• Docket Number: No. 461,461
• Parties: MOSSER et al. v. DARROW et al. Argued April 10—11, 1951
• Court: United States Supreme Court

341 U.S. 267

71 S.Ct. 680

95 L.Ed. 927

MOSSER et al.

v DARROW et al.

No. 461.

Argued April 10—11, 1951.

Decided May 7, 1951.

Messrs. Roger S. Foster, Washington, D.C., Stanley A. Kaplan, Chicago, Ill., for petitioners.

Messrs. Irving Herriott, Urban A. Lavery, Chicago, Ill., for respondents.

Mr. Justice JACKSON delivered the opinion of the Court.

The principal question here concerns personal liability of a reorganization trustee who, although making no personal profit, permitted key employees to profit from trading in securities of the debtors' subsidiaries. Upon a long record, controlling facts have been found with little disagreement.

In 1935, the United States District Court appointed respondent Darrow as reorganization trustee for two common-law trusts. These had functioned as holding companies and their principal assets were the securities of twenty-seven underlying companies, each of which owned improved real estate and had its own debt and capital structure. Both the subsidiary companies and the two trusts had been promoted by Jacob Kulp and Myrtle Johnson, who thoroughly knew the inside of the business and were acquainted with many of the investors. The tangled financial history leading to the reorganization is not important to our issue.

Darrow employed Kulp and Miss Johnson to assist in his trusteeship. That they were competent and useful is undenied. Kulp managed the physicial properties while Miss Johnson supervised the office, had complete charge of all records of income, expenditures and properties of both debtors and all underlying companies. Darrow decided upon a policy of buying in bonds of the subsidiaries for retirement, where they were available at a discount, and during his trusteeship reduced the outstanding bonds of subsidiaries by this method by about two and one-half million dollars. Darrow depended upon Miss Johnson's judgment and advice in allocating funds for sinking fund operations, in his purchase of securities and in fixing prices to be offered.

Kulp and Miss Johnson were employed by Darrow with the express agreement that they could continue to trade in securities of the debtors' subsidiaries personally and through Colonial Securities Corporation, which they owned. Without such consent they stated they would not have remained. Darrow and Colonial for a considerable period shared office facilities and personnel, with Miss Johnson in charge both of the trustee's office, which was interested in the purchase of bonds, and her own Colonial, interested in the same thing.

Miss Johnson and Kulp, during their employment by the trustee, traded extensively in bonds of the subsidiary companies. On many occasions they acquired bonds for themselves and on the same day, or within a few days, transferred them to Darrow at a profit. Darrow paid for some securities in advance of their delivery to him and for some even before Miss Johnson had made her own purchase of them. Johnson and Kulp sometimes bought for themselves bonds offered by bondholders who had come to the trustee's office to dispose of them to the trustee. They made substantial profits through these transactions.

In his eight years of trusteeship, Darrow filed but one account for one of the debtor-corporations and none for the other. The Securities and Exchange Commission intervened and demanded investigation of his conduct of the trust and thereafter he resigned and filed his accounts, which were met with objections by his successor trustee. These issues were referred to a special master, who heard a long contest over the foregoing and many other items unimportant here. The master recommended a surcharge on account of the foregoing conduct. The master's report was reviewed by the District Court, which concluded that the evidence supported the findings and recommendations and surcharged the trustee in the amount of $43,447.46, reserving some questions for later consideration. Darrow appealed and the Court of Appeals reversed the decision of the District Court, for reasons that we will later consider. 184 F.2d 1. We conclude that the District Court was correct and the decision of the Court of Appeals cannot stand.

At the outset we are met with a jurisdictional objection. Respondent contends that we are powerless to grant a motion to substitute parties because the petition for the writ of certiorari is jurisdictionally defective in that it is filed in the name of Stacy Mosser, a resigned trustee. It is further contended that John W. Guild, the other named petitioner, is without standing to seek review because he is only an indenture trustee. Both contentions are erroneous.

An indenture trustee's standing is expressly authorized by 52 Stat. 894, 11 U.S.C. § 606, 11 U.S.C.A. § 606, which provides, 'The debtor, the indenture trustees, and any creditor or stock- holder of the debtor shall have the right to be heard on all matters arising in a proceeding under this chapter.' (Italics added.) And respondent, in opposing the motion to substitute, erroneously relies on cases involving government officers. Davis v. Preston, 280 U.S. 406, 50 S.Ct. 171, 74 L.Ed. 514; Snyder v. Buck, 340 U.S. 15, 21, 71 S.Ct. 93, 96. Successor trustees, unlike successors of public officers, are regarded as transferees or assignees of all the interests of their predecessor, and removal of a trustee does not cause abatement. 52 Stat. 840, 860, 11 U.S.C. § 74, 11 U.S.C.A. § 74. We hold, in accord with Bowden v. Johnson, 107 U.S. 251, 264, 2 S.Ct. 246, 256, 27 L.Ed. 386, that substitution is fully authorized and proper in these circumstances and accordingly turn to the merits.

This was a strict trusteeship, not one of those quasi-trusteeships in which self-interest and representative interests are combined. A reorganization trustee is the representative of the court and it is not contended and would not be arguable that if he had engaged for his own advantage in the same transactions that he authorized on the part of his subordinates he should not be surcharged. Equity tolerates in bankruptcy trustees no interest adverse to the trust. This is not because such interests are always corrupt but because they are always corrupting. By its exclusion of the trustee from any personal interest, it seeks to avoid such delicate inquiries as we have here into the conduct of its own appointees by exacting from them forbearance of all opportunities to advance self-interest that might bring the disinterestedness of their administration into question.

These strict prohibitions would serve little purpose if the trustee were free to authorize others to do what he is forbidden. While there is no charge of it here, it is obvious that this would open up opportunities for devious dealings in the name of others that the trustee could not conduct in his own. The motives of man are too complex for equity to separate in the case of its trustees the motive of acquiring efficient help from motives of favoring help, for any reason at all or from anticipation of counterfavors later to come. We think that which the trustee had no right to do he had no right to authorize, and that the transactions were as forbidden for benefit of others as they would have been on behalf of the trustee himself.

It is argued here, and appears to have been the view of the Court of Appeals, that principles of negligence applied and that a trustee could not be surcharged under many decisions unless...