372 U.S. 633 (1963), 70, Wolf v. Weinstein

Docket Nº:No. 70
Citation:372 U.S. 633, 83 S.Ct. 969, 10 L.Ed.2d 33
Party Name:Wolf v. Weinstein
Case Date:April 15, 1963
Court:United States Supreme Court
 
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372 U.S. 633 (1963)

83 S.Ct. 969, 10 L.Ed.2d 33

Wolf

v.

Weinstein

No. 70

United States Supreme Court

April 15, 1963

Argued February 20, 1963

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

In a proceeding under Chapter X of the Bankruptcy Act for the reorganization of a debtor corporation, the Court permitted the debtor to remain in possession pursuant to § 156 of the Bankruptcy Act, authorized its President and General Manager to continue to serve in those capacities and approved salaries for each of them. The General Manager actively managed the business and the President acted primarily in a consultive or advisory capacity. After hearings, the District Court concluded that each of them was a "fiduciary" within the meaning of § 249 of the Bankruptcy Act and that they had traded in stock of the debtor corporation without the consent or approval of the judge, and it ordered that their compensation be terminated, that the General Manager be discharged and that the President have nothing more to do with the management of the business.

Held:

1. The purpose of § 249 was to give pervasive effect in Chapter X proceedings to the historic maxim of equity that a fiduciary may not receive compensation for services tainted by disloyalty or conflict of interest; and no congressional purpose to exclude insiders, such as a President or General Manager of a debtor corporation, can be perceived. Pp. 639-645.

2. On the record in this case, the District Court correctly found that the President and General Manager of this debtor corporation were fiduciaries, and that § 249 applies to them. Pp. 646-653.

(a) Section 249 was not intended to apply only to those persons specifically listed in §§241-243 who are required to apply to the Court for compensation or reimbursement under § 247. Pp. 646-647.

(b) Approval by the Court of the compensation of an officer or an employee under §191 does not immunize him from the sanctions of § 249. Pp. 647-649.

(c) Since officers of a debtor corporation left in possession under § 156 perform essentially the functions which otherwise would be performed by a disinterested trustee, they incur similar responsibilities and obligations to the creditors and shareholders,

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which may make them fiduciaries within the meaning of § 249. Pp. 649-652.

(d) Since the District Court took evidence concerning the activities and responsibilities of the President and General Manager here involved and concluded that each of them was a "fiduciary" for the purpose of § 249, and the record supports these findings, they were properly held subject to § 249. Pp. 652-653.

3. Although respondents' trading involved small amounts of the debtor's stock and apparently was carried on in good faith, the pervasive policies of § 249 require not only the denial of all future compensation but also the restitution of all compensation received since the start of the reorganization; but they do not necessarily require the removal of respondents from their corporate offices. Pp. 653-657.

4. Certiorari was also granted in this case to review a judgment of the Court of Appeals reversing an order of the District Court determining a controversy over the rights of numerous claimants to stock interests in the debtor corporation, but oral argument revealed that the controversy primarily involved questions of state law, and presented no federal question of substance. Therefore, the writ of certiorari as to the judgment of the Court of Appeals concerning that controversy is dismissed as improvidently granted. P. 636.

296 F.2d 678, reversed and remanded.

BRENNAN, J., lead opinion

MR. JUSTICE BRENNAN delivered the opinion of the Court.

This case concerns two orders of the District Court for the Southern District of New York made in a proceeding

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for the reorganization of respondent corporation, Nazareth Fairgrounds and Farmers' Market, Inc. (the Debtor), under Chapter X of the Bankruptcy Act, 11 U.S.C. §§ 501-676. One order determined a controversy over the rights of numerous claimants to stock interests in the Debtor. The other order -- predicated on findings that respondent Weinstein, President of the Debtor, and respondent Fried, the Debtor's General Manager, had traded in the Debtor's stock during the proceeding in violation of § 249 of the Bankruptcy Act, 11 U.S.C. § 6491 -- directed that Weinstein have nothing further to do with the operation of the Debtor's business, that Fried be discharged as General Manager, and that the compensation of both be terminated forthwith. Neither respondent was, however, directed to return the compensation he had received before the date of the order. The Court of Appeals for the Second Circuit, in separate opinions, reversed both orders. We granted certiorari, 369 U.S. 837.

We decide only the issues presented by the Court of Appeals' reversal of the District Court's order applying § 249 to Weinstein and Fried, adjudicated sub nom. In re Nazareth Fairgrounds & Farmers' Market, Inc., Debtor,

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296 F.2d 678. Decision of those issues, which involve the reach of § 249, is important in the administration of the Bankruptcy Act. But our consideration of the issues underlying the order of the District Court reversed sub nom. Fried v. Margolis, 296 F.2d 670, persuades us that the grant of certiorari to review these issues was improvident. Oral argument brought into sharper focus than was apparent at the time we granted the writ that the controversy over the stock interests primarily implicates questions of Pennsylvania law and presents no federal question of substance. In the circumstances, the writ of certiorari as to that judgment of the Court of Appeals is dismissed as improvidently granted. Cf. The Monrosa v. Carbon Black, Inc., 359 U.S. 180, 183-184.

The pertinent provisions of § 249 disallow compensation or reimbursement to any 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 . . . stock [of the Debtor] . . . without the prior consent or subsequent approval of the judge. . . .

Both Weinstein and Fried traded in the Debtor's stock while serving respectively as President and General Manager.2 Both held their positions with the approval of

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the District Court which, after permitting the Debtor to remain in possession pursuant to § 156, 11 U.S.C. § 556, authorized Weinstein to continue to serve as President and Fried to continue as General Manager. The court also approved salaries for each.3 Fried has actively managed the business, the principal asset of which is a farmers' market located in Eastern Pennsylvania. Weinstein, a New York attorney, has acted primarily in a consultative or advisory capacity. The Debtor's business has prospered under their management despite considerable friction and dissension between factions contending for stock and managerial control.

The District Court, after hearings upon the nature and extent of Weinstein's and Fried's duties and activities, concluded that each was a "fiduciary" within the meaning of § 249.4 The District Court thereupon ordered that

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their compensation be terminated, that Fried be discharged as General Manager, and that Weinstein, whose removal as President the court believed was beyond its powers, have nothing further to do with the management of the business.5 The Court of Appeals reversed the order in its [83 S.Ct. 974] entirety on the ground that § 249 applied to neither Weinstein nor Fried. The Court of Appeals indicated that "doubtless" a literal reading of the statute's terms would include both, but held that § 249 was to be construed as applicable not to every "person acting in the proceedings in a representative or fiduciary capacity," but only to such persons in the particular capacities named in §§ 241, 242 and 243, 11 U.S.C. §§ 641, 642 and 643 -- petitioning creditors, court officers and their attorneys, indenture trustees, depositaries, reorganization managers, committees, creditors and stockholders, or their representatives, and the attorneys for

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them or for "other parties in interest" -- who, under § 247, are entitled to a hearing upon applications for allowances after notice to certain interested groups and individuals. 296 F.2d at 682-683. In reversing the District Court on this ground, the Court of Appeals found no occasion to consider the question whether, in addition to denial of compensation, removal from office was authorized or required where § 249 was applicable, since, in its view, "the order of removal cannot survive the fall of its underpinning." ,296 F.2d at 683.

We disagree with the Court of Appeals. We hold that persons performing fiduciary functions such as those which the District Court found Weinstein and Fried had performed are subject to § 249.

I

The virtual immunity which active participants in corporate reorganizations enjoyed from judicial superintendence of abuses in the payment of compensation and allowances was one of the principal reasons for the enactment of § 77B of the Bankruptcy Act in 1934.6

There was the spectacle of fiduciaries fixing the worth of their own services and exacting fees which often had no relation to the value of services rendered,

Leiman v. Guttman, 336 U.S. 1, 7. Section 77B, among other significant reforms, created important new judicial powers to regulate

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the payment of compensation and the reimbursement of expenses. See Dickinson Industrial Site, Inc. v. Cowan, 309 U.S. 382, 388-389. Passage of the Chandler Act four years later measurably strengthened these powers of judicial superintendence, particularly with respect to corporate...

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