In Re Commonwealth Financial Corporation

• Decision Date: 11 July 1968
• Docket Number: No. 30108.,30108.
• Citation: 288 F. Supp. 786
• Parties: In the matter of COMMONWEALTH FINANCIAL CORPORATION and its subsidiaries, Neighborhood Finance Co., Inc. and Neighborhood Finance Co., Inc. of Pennsylvania, Debtors.
• Court: U.S. District Court — Eastern District of Pennsylvania

288 F. Supp. 786

In the matter of COMMONWEALTH FINANCIAL CORPORATION and its subsidiaries, Neighborhood Finance Co., Inc. and Neighborhood Finance Co., Inc. of Pennsylvania, Debtors.

No. 30108.

United States District Court E. D. Pennsylvania.

July 11, 1968.

Leon S. Forman, Wexler, Mulder & Weisman, Philadelphia, Pa., for trustees.

Alexander Adelman, Sidney Chait, Adelman & Lavine, Marcus Manoff, Dilworth, Paxson, Kalish, Kohn & Levy, Philadelphia, Pa., for Morise Thal.

Edwin H. Nordlinger, Richard V. Bandler, New York City, Securities & Exchange Commission.

I. Grant Irey, Jr., Pepper, Hamilton & Scheetz, Philadelphia, Pa., for Bank Lenders Committee.

In Proceedings for the Reorganization of a Corporation under Chapter X of the Bankruptcy Act.

OPINION

JOHN MORGAN DAVIS, District Judge.

Under authority of Section 167 of the Bankruptcy Act, 11 U.S.C. § 567, the trustees in this Chapter X proceeding were granted leave to investigate the "Acts, conduct, property, liabilities and financial condition of the debtors", to include an examination of the "directors and officers of the debtors."¹ Subsequently, the Securities and Exchange Commission (S.E.C.) was authorized to participate and assist in the aforementioned investigation.²

We have since been apprised by the petitioner that the S.E.C. has apparently been conducting a separate and independent investigation of the affairs of the debtors, under the provisions of Section 20(a) of the Securities Act of 1933,³ and Section 21(b) of the Securities Exchange Act of 1934.⁴ This investigation has included an examination of the petitioner (by his own assertion) pursuant to "continuing subpoena" by the S.E.C. We shall assume, arguendo, that the petitioner may be recalled by the S.E.C. either concurrent with, or subsequent to the trustees' Section 167 investigation. It is possible that the petitioner may be subjected to criminal prosecution if the S.E.C. investigation would indicate that such action is appropriate.⁵ At this time, however, there has been no criminal proceeding instituted against the petitioner; this opinion will be predicated upon that premise.

After receiving written notice of depositions by the Chapter X trustees (with participation by the S.E.C.)⁶, the petitioner, Morise Thal, president of the debtor corporations,⁷ filed the motion for a protective order presently before the Court,⁸ seeking a stay of any further attempts to depose or otherwise examine him by the trustees, during the pendency of the S.E.C. investigation.

I.

Preliminarily, the petitioner is contesting the authority of the S.E.C. to participate in an investigation ostensibly conducted under Section 167 of the Bankruptcy Act. It is true that the Act does not expressly authorize S.E.C. participation in the Section 167 investigation. However, this section clearly states that the trustees * * *

may, subject to the approval of the judge, employ such person or persons as the judge may deem necessary for the purpose of assisting the trustee in performing the duties imposed upon him under this chapter.

Having just obtained the requisite leave of court, In re Flamingo Hotel Co., 81 F.2d 749 (7th Cir. 1936), the only question remaining is whether this statute contemplates the "employment" (albeit without compensation) of the S.E.C. for the purpose, inter alia of assisting in a Section 167 investigation.

Under Section 208 the Bankruptcy Act, 11 U.S.C. § 608, the S.E.C. if approved by the Court, is given the right to proceed as a party in interest "with the right to be heard on all matters * * *." In In re Otis & Co., 104 F.Supp. 201, 203 (N.D.Ohio, 1952), it was observed that Congress, by authorizing participation by the S.E.C. in a Chapter X reorganization:

* * * intended mutual assistance between the court and the Commission and that to insure harmony the grants of power alluded to above Sections 172 and 208 participation were intended to subject the Securities and Exchange Commission to the orders of a reorganization court * * *.

If the court is statutorily vested with discretion 1), to authorize participation generally, under Section 208, and 2), to limit S.E.C. participation specifically when deemed necessary, In re Otis, supra, and cases cited therein, it follows that the Court has sufficient authority to permit S.E.C. participation for particular aspects of a Chapter X reorganization, such as the Section 167 investigation at issue. In so holding, however, we wish to reemphasize that participation is discretionary with the Court In re Morris White Properties Corp., 21 F.Supp. 635 (E.D.N.Y.1937). Since abuse of that discretion has not been established or even alleged, participation by the S.E.C. in the contemplated Section 167 investigation will be permitted.

II.

Turning to the merits of petitioner's motion, we agree that it is quite possible that the scope of the S.E.C. investigation may, to some extent, encompass the same subject matter as the Section 167 investigation conducted under the auspices of the trustees. Both statutes essentially contemplate to some extent, the devolution of fraudulent practices by persons in control and operation of the debtor corporation.⁹ Parenthetically, we observe that the S.E.C. apparently shares this view, since the petitioner was recently warned by its counsel that:

* * * as a witness * * * the facts developed in these proceedings conducted by the trustees * * * may constitute violations of the Federal Securities laws including but not limited to the Securities Act of 1933 and Exchange Act of 1934 * * *. Since any evidence you give could be used against you, you may refuse to give any testimony * * *¹⁰

III.

Unless the contemplated Section 167 deposition is stayed, the petitioner asserts that his privilege against self-incrimination under the 5th Amendment to the Constitution will be infringed. This assertion is further developed by hypothesizing that the S.E.C. is empowered to grant "full constitutional immunity" from the imposition of any penalty in connection with the S.E.C. investigation,¹¹ but that no such arrangement is available under Chapter X of the Bankruptcy Act. Thus, it is asserted that the S.E.C. could conceivably play one investigation against the other, eliciting (and utilizing in a criminal proceeding) information which would otherwise be immune pursuant to the statutes cited in footnote 11, below. We do not agree. While it is true that no comparable statutory immunity may be offered by the trustees during the Section 167 investigation, the petitioner is always free to assert his 5th Amendment right against self-incrimination at any time. The privilege may be asserted in any proceeding, "* * * be it criminal or civil, administrative or judicial, investigatory or adjudicatory." United States v. Goldsmith, 272 F.Supp. 924, 926 (E.D.N.Y. 1967), citing Murphy v. Waterfront Commission, 378 U.S. 52, 94, 84 S.Ct. 1594, 12 L.Ed.2d 678 (1964).

Nor would the privilege against self-incrimination extend only to matters which are directly related to the ultimate objective of the trustees' investigation, namely, to effect an equitable reorganization. The petitioner may assert his 5th Amendment rights to protect himself from "* * * any disclosures which * * * he may reasonably apprehend could be used in a criminal prosecution or which could lead to other evidence that might be so used." Murphy, supra, recently cited with approval in Matter of Gault, 387 U.S. 1, 87 S.Ct. 1428, 18 L.Ed. 2d 527 (1967). Armed with such protection, the petitioner neither needs, nor is constitutionally, statutorily or equitably entitled to the protective order which he now seeks.

IV.

The fact that a contemplated area of inquiry may be potentially incriminatory does not authorize or indeed require a blanket invocation of the privilege against self incrimination:

* * * it is not and has never been the law that the privilege disallows the asking of potentially incriminatory questions or authorizes the person of whom they are asked to evade them without expressly asserting that his answers may tend to incriminate him (emphasis added).

Communist Party of the United States v. Subversive Activities Control Board, 367 U.S. 1, 108, 81 S.Ct. 1357, 1416, 6 L.Ed. 2d 625 (1961).

Recently, in In re Hoffman Can Corp., 373 F.2d 622 (1967), the Third Circuit rejected a rather siimlar effort to invoke a blanket privilege against self-incrimination. In Hoffman, the officers of a bankrupt corporation refused to file a statement of affairs,¹² together with supporting schedules, claiming that certain responses contained therein may tend to be incriminating. In so deciding, the Third Circuit substantially relied upon United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037 (1927), a leading decision in the area of income tax law, where it was emphasized that:

* * * a claim of self-incrimination against every question * * * would be `virtually frivolous.'

Although it is theoretically conceivable that the petitioner Thal may find every question objectionable when propounded, it is anticipated and indeed hoped that he has not become so deeply embroiled in questionable practices, that the need assert his 5th Amendment privilege to each and every question of the trustees.¹³

V.

Both sides have placed forceful reliance upon some facet of United States v. Simon, 262 F.Supp. 64 (S.D.N.Y.1966), reversed, 373 F.2d 649 (2nd Cir. 1967).¹⁴

In Simon, a judge of the Southern District of New York, before whom a criminal proceeding for mail fraud was pending, enjoined for a period of 90 days, the further deposing of defendants who had also been sued in a civil proceeding pending in the Eastern District of New York. The latter action was being prosecuted by Chapter X trustees, alleging that the common defendants had conspired to despoil assets of the debtor corporation, by inter alia, preparing and certifying false financial statements.¹⁵

Although Simon presented a factually...