Comstock v. Group of Institutional Investors 454

• Decision Date: 21 June 1948
• Docket Number: Nos. 451,s. 451
• Parties: COMSTOCK v. GROUP OF INSTITUTIONAL INVESTORS, etc., et al., and three other cases. to 454
• Court: U.S. Supreme Court

335 U.S. 211

68 S.Ct. 1454

92 L.Ed. 1911

COMSTOCK

v.

GROUP OF INSTITUTIONAL INVESTORS, etc., et al., and three other cases.

Nos. 451 to 454.

Argued March 9, 10, 1948.

Decided June 21, 1948.

Rehearing Denied Oct. 11, 1948.

See 69 S.Ct. 12.

Mr. Maxwell Brandwen, of New York City, for petitioners.

Mr. Charles W. McConaughy, of New York City, for respondents, Group of Institutional Investors, etc., and others.

[Argument of Counsel from page 212 intentionally omitted] Mr. Harry Kirshbaum, of New York City, for respondents, Bondholders group.

Mr. Leonard P. Moore, of New York City, for respondents, Manufacturers Trust Co., trustee.

Mr. Justice JACKSON delivered the opinion of the Court.

Since 1933 the Missouri Pacific, the New Orleans, Texas and Mexico Railway Co. and a number of affiliated railroad corporations have been in reorganization under the Bankruptcy Act, 11 U.S.C. § 205, 11 U.S.C.A. § 205. A second plan of reorganization, approved by the Interstate Commerce Commission, was before the District Court for the Eastern District of Missouri. Comstock then, in 1944, made objection to allowance of a claim of approximately 10 million dollars by the Missouri Pacific, one debtor corporation, against another, the New Orleans, which, during the 10 years of proceedings, had been unchallenged. The issues raised by his objection were severed from other problems of reorganization which do not concern us here. After full hearing the District Court made findings and wrote an opinion, In re Missouri Pacific R. Co., D.C., 64 F.Supp. 64, overruling his objections. The Circuit Court of Appeals for the Eighth Circuit affirmed. Comstock v. Group of Institutional Investors, 8 Cir., 163 F.2d 350.

The issues of fact, contested in a long hearing, are not before us for review. Petitioner assured us, in support of the petition for certiorari here, that 'there is no factual controversy before this Court' and 'we assume the findings of the District Court. Our challenge is directed only to the legal import of these unchallenged facts.'

Much of petitioner's argument seems to depart from these assumptions and to invite us to reach conclusions from the voluminous record in the case, contrary to those reached by the two courts below. This we cannot do. A seasoned and wise rule of this Court makes concurrent findings of two courts below final here in the absence of very exceptional showing of error. Stuart v. Hayden, 169 U.S. 1, 18 S.Ct. 274, 42 L.Ed. 639; Brainard v. Buck, 184 U.S. 99, 22 S.Ct. 458, 46 L.Ed. 449; First National Bank v. Littlefield, 226 U.S. 110, 33 S.Ct. 78, 57 L.Ed. 145; Baker v. Schofield, 243 U.S. 114, 37 S.Ct. 333, 61 L.Ed. 626; Second Russian Insurance Co. v. Miller, 268 U.S. 552, 45 S.Ct. 593, 69 L.Ed. 1088; Texas & N.O.R. Co. v. Brotherhood of R. & S. S. Clerks, 281 U.S. 548, 50 S.Ct. 427, 74 L.Ed. 1034; Page v. Arkana § Natural Gas Corp., 286 U.S. 269, 52 S.Ct. 507, 76 L.Ed. 1096; Pick Mfg. Co. v. General Motors Corp., 299 U.S. 3, 57 S.Ct. 1, 81 L.Ed. 4; Virginian R. Co. v. System Federation No. 40, 300 U.S. 515, 57 S.Ct. 592, 81 L.Ed. 789; United States v. O'Donnell, 303 U.S. 501, 58 S.Ct. 708, 82 L.Ed. 980; Anderson v. Abbott, 321 U.S. 349, 64 S.Ct. 531, 88 L.Ed. 793, 151 A.L.R. 1146; Allen v. Trust Co., 326 U.S. 630, 66 S.Ct. 389, 90 L.Ed. 367; United States v. Dickinson, 331 U.S. 745, 67 S.Ct. 1382, 91 L.Ed. 1789. No. such error is claimed by petitioner.

Since we are concluded by such concurrent findings, we can do no better than to adopt the statement of facts made in the opinion of the Court of Appeals, 163 F.2d 350, 352, on the basis of which petitioner's propositions of law are predicated and must be decided. The essential facts so recited are:

'It appears that the Missouri Pacific acquire the controlling interest in the capital stock of the New Orleans at the end of 1924 and at times relevant here owned from 58 to 93 percent of the total $15,000,000 par value of such stock, and from January, 1925, until simultaneous commencement of reorganization proceedings in bankruptcy of both corporations in 1933, it managed the affairs of the New Orleans through Missouri Pacific officers who were given corresponding positions in the New Orleans corporation. An expansion program for both companies was carried on and throughout the course of operations the Missouri Pacific made advancements for improvements and betterments to the New Orleans. Some were repaid, but in February 1933, the New Orleans filed its application with the Interstate Commerce Commission under Section 20a(2) of the Transportation Act, 49 U.S.C.A. § 20a(2), showing that it was indebted to the Missouri Pacific for an accumulation of such advances over a period of years remaining unpaid in the sum of $10,355,226.78, and that it had been requested by the Missouri Pacific to issue demand notes therefor in the amount of $9,955,226.78 to the Missouri Pacific. It had partially complied by issuing one such note for $400,000.00, and one for.$2,498,500, and after hearing the Commission made its finding as required by the statute,¹ 49 U.S.C.A. § 20a(2), and authorized New Orleans to issue to the Missouri Pacific a note for the remaining $7,456,726.78. So that at the time of the bankruptcy of the New Orleans on the same date as that of the Missouri Pacific the notes of the New Orleans to the Missouri Pacific in the sum of $10,355,226.78 were outstanding and unpaid. Under authorization of the Interstate Commerce Commission, granted after hearing, the Missouri Pacific had pledged two of the notes aggregating $9,955,226.78 as security for loans made to it by the Reconstruction Finance Corporation. An additional pledge was made to Railroad Finance Corporation.

'After appointment of the trustees for the railroads and on August 29, 1938, an officer of the Missouri Pacific filed claim for that company against the New Orleans for the amount of the notes, plus an item of advancement of $210,000.00, aggregating the amount of $10,565,226.78, describing the consideration as 'cash advances for operation, interest payments, etc., at various times from March 1929 to February 1933, both inclusive.' The items which made up the total $10,565,226.78 were clearly specified and evd ence of the validity of the debt as consideration for the notes was adduced before the Commission at an early stage of these Section 77 proceedings (11 U.S.C.A. § 205), and the obligation was deemed to be valid and ahead of New Orleans' stockholder interest in all of the accountings, computations and adjustments resulting in the plan of reorganization determined by the Commission and approved by the court in 1940. It has also been so considered by the Commission in the plan of reorganization before the court at the time of the hearing and order now appealed from.

'It appears that in 1926 the Missouri Pacific issued and caused to be sold to the public its 5 1/4% Secured Serial Bonds in the amount of $13,156,000, secured by the pledge of.$1000.00 par value of New Orleans capital stock for each.$1000.00 principal amount of outstanding bonds, so that the officers who were put in charge of the affairs of both corporations came under fiduciary obligation to the creditors and the stockholders of each company to handle honestly the affairs of each.

'Comstock owns some of said 5 1/4% Secured Serial Bonds so secured by the pledge of the New Orleans capital stock, and by virtue of his ownership of said bonds he has an interest as a creditor of the Missouri Pacific in the payment of his bonds and the interest thereon, and also an interest in the capital stock of the New Orleans pledged to secure the bonds. On November 22, 1944, he filed his objections to the plan of reorganization and plea for equitable treatment on the basis of those interests. Certain of his objections contained charges of mismanagement of the Missouri Pacific to his detriment as a bondholding creditor of that corporation, but the separately numbered objections here involved relate to wrongs which he alleges were done by the Missouri Pacific to the New Orleans to the detriment of his interest in the pledged stock of that company.

'By his objections 'Numbered 19 and related objections,' Comstock charged that during the period when the affairs of the New Orleans were controlled by its majority stockholder the Missouri Pacific, between the end of 1924 and the bankruptcy in 1933, the Missouri Pacific management caused the New Orleans to pay dividends illegally out of capital and to improvidently declare and pay dividends unjustified by the business and condition of the New Orleans; improperly loaned money to it for the purpose of enabling it to pay dividends; involved it (the New Orleans) in expansion and improperly made advancements to it and caused it to assume indebtedness growing out of expansion; caused it to be operated with unfair advantage to the Missouri Pacific and loss to itself, and generally mismanaged it and committed spoliation and waste of its property and interests to the financial detriment of the New Orleans and for the benefit of the Missouri Pacific. There is also a charge that the trustee for the New Orleans, who is also trustee for the Missouri Pacific, failed to perform his duties as trustee for the New Orleans, to the detriment of New Orleans stock interest. Although an Exhibit 'A' attached to the objections assumed to set forth details, the charges remained sweeping and general in form with few exceptions.²

'The objector prayed that the Missouri Pacific claim for $10,565,227 and interest against the New Orleans be disallowed; that it be determined that the New Orleans was not indebted to the Missouri Pacific, and in the alternative, that all claims of the Missouri Pacific against the New Orleans be subordinated in the reorganization to the New Orleans capital stock interest.

'The allegations of breaches of obligations on the part of the Missouri Pacific were traversed in pled ings of other parties in...