In re Mountain States Power Co.

• Citation: 118 F.2d 405
• Decision Date: 05 March 1941
• Docket Number: No. 7619.,No. 7614-7617,7614-7617,7619.
• Parties: In re MOUNTAIN STATES POWER CO.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

118 F.2d 405 (1941)

In re MOUNTAIN STATES POWER CO.

Nos. 7614-7617, No. 7619.

Circuit Court of Appeals, Third Circuit.

March 5, 1941.

Wm. H. Foulk, of Wilmington, Del. (Reuben Satterthwaite, Jr., of Wilmington, Del., on the brief), for appellants Satterthwaite and Foulk.

George S. Munson, of Philadelphia, Pa. (Townsend, Elliott & Munson, of Philadelphia, Pa., on the brief), for appellants Soliday and Sparling.

J. B. Colahan, of Philadelphia, Pa., for appellants Townsend, Elliott & Munson.

Beverly B. Vedder, of Chicago, Ill. (Pope & Ballard, of Chicago, Ill., on the brief), for appellants Pope & Ballard.

Harris & Bryson, of Eugene, Or., and Marks & McMahan, of Albany, Or., for debtor Mountain States Power Co.

Christopher M. Jenks and Homer Kripke, both of Washington, D. C. (David K. Kadane, of Washington, D. C., on the brief), for Securities and Exchange Commission.

Before MARIS, JONES, and GOODRICH, Circuit Judges.

MARIS, Circuit Judge.

Following the successful reorganization of the Mountain States Power Company in a proceeding in the District Court for the District of Delaware under Section 77B and its successor Chapter X of the Bankruptcy Act, 11 U.S.C.A. §§ 207, 501 et seq., David S. Soliday, the chairman of the preferred stockholders' committee, John W. Sparling, a member of the committee who also served it as a certified public accountant, Townsend, Elliott & Munson, counsel for the committee, and Satterthwaite and Foulk of Wilmington, and Pope & Ballard of Chicago, counsel for the debtor, with others petitioned the district court to allow them compensation for their services rendered in the proceeding and reimbursement for their necessary expenses incurred in connection therewith. From the order of the district court disposing of their petitions Soliday, Sparling, Townsend, Elliott & Munson, Satterthwaite and Foulk, and Pope & Ballard have taken the separate appeals now before us.

Soliday's appeal will be first considered since it involves a different question from those raised by the other appellants. That question is whether Soliday is barred from receiving any compensation for his services in the reorganization proceeding as chairman of the preferred stockholders' committee because of the fact that a firm of security dealers of which he is a member purchased and sold securities involved in the reorganization for its own account while he was acting as a member of the committee and its chairman. The district court found that Soliday rendered substantial services throughout the period of reorganization and the evidence supports this finding. It is clear that Soliday's firm, Hopper, Soliday & Company, did not speculate in the debtor's securities to the extent disclosed in the case of In re Paramount-Publix Corp., D.C., 12 F.Supp. 823. It is equally clear that many of the transactions in question (all of which are tabulated in the District Court's opinion, 35 F.Supp. 307, 310) were entered into by Soliday's firm for its own account as principal with the expectation of a profit in excess of the normal brokerage commission, the amount of the profit being within its control. In the light of these facts the district court denied Soliday compensation and reimbursement of expenses. We are satisfied that in so doing the court acted rightly.

When Soliday became a member of the preferred stockholders' committee and its chairman he assumed a fiduciary relationship toward the preferred stockholders whom he and his associates on the committee represented. One who stands in such a relationship may not "become the purchaser of the property which he represents, or any portion of it, though he has done so for a fair price, without fraud, at a public sale." Michoud v. Girod, 4 How. 503, 557, 45 U.S. 503, 557, 11 L.Ed. 1076. See also Magruder v. Drury, 235 U.S. 106, 35 S.Ct. 77, 59 L.Ed. 151. The rule was well stated by Chief Judge Cardozo speaking for the Court of Appeals of New York, in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546, 62 A.L.R. 1, as follows: "Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the `disintegrating erosion' of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd."

This rule has been invoked, we think rightly, by the District Court for the Southern District of New York as ground for denying compensation to members of security-holders' committees who traded in securities involved in corporate reorganizations carried out under Section 77B of the Bankruptcy Act. In re Paramount-Publix Corp., supra; In re Republic Gas Corporation, D.C., 35 F.Supp. 300. That the district court has power to deny compensation under such circumstances is clear. American United Mutual Life Insurance Company v. City of Avon Park, Florida, 311 U.S. 138, 61 S.Ct. 157, 85 L.Ed. ___. The rule to which we have referred has been introduced by the Chandler Act of June 22, 1938, into Chapter X of the Bankruptcy Act (which has superseded Section 77B) as Section 249, 11 U.S.C.A. § 649. The effect of Section 249, however, was merely to make explicit under Chapter X what had been implicit under Section 77B, namely, that one who assumes a fiduciary relationship in connection with a corporate reorganization must conform to the standards of conduct which the law imposes upon fiduciaries. See Otis & Co. v. Insurance Bldg. Corporation, 1 Cir., 110 F.2d 333.

The four remaining appeals raise the question whether the allowances made by the district court to the appellants were so grossly inadequate as to constitute an abuse of discretion on the part of the court. After full consideration of the record we have reached the conclusion that the action of the district court upon these appellants' petitions was in such disregard of right and reason as to amount to an abuse of its discretion. The record discloses that the reorganization of this debtor was highly successful. When its petition for reorganization was filed December 31, 1937 the debtor had outstanding approximately $8,200,000 of First Mortgage Bonds which were...