In re Republic Gas Corporation

• Decision Date: 10 June 1936
• Citation: 35 F. Supp. 300
• Parties: In re REPUBLIC GAS CORPORATION.
• Court: U.S. District Court — Southern District of New York

35 F. Supp. 300

In re REPUBLIC GAS CORPORATION.

District Court, S. D. New York.

June 10, 1936.

W. Randolph Montgomery, Trustee.

Mudge, Stern, Williams & Tucker, of New York City (Joseph V. Kline, of New York City, of counsel), for American Nat. Bank, City Nat. Bank, and National Bank of Commerce, bondholders.

White & Case, of New York City (Joseph M. Hartfield and Ernest G. Fifield, both of New York City, of counsel), for Bondholders Protective Committee.

Cravath, deGersdorff, Swaine & Wood, of New York City (Donald C. Swatland, of New York City, of counsel), for Continental Supply Co.

Fred W. Moore, of Houston, Tex. (L. F. Huttenlocher, of New York City, of counsel), for R. Wayne Lawler, receiver of Moody Seagrave Co.

Chadbourne, Stanchfield & Levy, of New York City (C. B. Hughes and David S. Hecht, both of New York City, of counsel), for Manufacturers Trust Co., Trustee of Bonds of the Debtor Corporation.

Scudder, McCoun, Stockton & Kerfoot, of New York City (Branch P. Kerfoot, of New York City, of counsel), for debtor.

L. W. Lougee, of New York City, for Empire Power Corporation.

Vinson, Elkins, Sweeton & Weems, of Houston, Tex. (Lewis N. White, of Houston, Tex., of counsel), for Republic Natural Gas Co., successor in interest to the debtor herein.

Clarence E. Lott, of Phoenix, Ariz., for First Nat. Bank of Negaunee, Mich., a bondholder, and for several other banks in the Upper Peninsula of Michigan, and also for some bondholders in the Upper Peninsula of Michigan.

Ben A. Matthews, of New York City, Special Master.

CAFFEY, District Judge.

A bondholders protective committee asks compensation of $50,000 and a reorganization committee, compensation of $20,000. Approval of disbursements, heretofore made or remaining unpaid, is also requested. I shall deal first with the compensation applications.

A hearing on numerous applications, including those of the committees, was held in August, 1935 (Minutes, pp. 527-827). I disposed of most of those in eight memoranda. The last memorandum was dated November 29, 1935. By early December I was nearly ready to pass on the committee applications. I then became engrossed in other court work which had precedence. Work of that kind has occupied all my time ever since. On that account I have been unable until recently again to take up the committee applications. I regret the delay, but it has been unavoidable. I have not had opportunity earlier to complete the requisite investigation of the law or to give the matter the consideration which its importance deserved.

There are five members of the bondholders committee and three of the reorganization committee. Pursuant to the deposit agreement, the latter committee was selected by the former. The chairman and another applicant are members of both committees. In consequence, there are only six petitioners.

It will be convenient to refer to the petitioners by numbers. The chairman of both committees will be called No. 1; the other member of both committees, No. 2; the New York member of the bondholders committee, No. 3; one Philadelphia member of that committee, who will be further identified hereafter, No. 4; another Philadelphia member of the same committee, No. 5; and the member of the reorganization committee who did not belong to the bondholders committee, No. 6.

The bondholders committee was organized and the deposit agreement executed in January, 1932. In September, 1933, the debtor filed a bankruptcy petition in Delaware. Thereafter a suit was instituted in this court to foreclose a trust indenture under which substantially all property of the debtor (consisting of bonds and stock) was pledged. The two proceedings were steps in a single program and were commenced at the instance of or with the acquiescence of the committee. The purpose was to bring about a reorganization.

All members of the bondholders committee were the heads of or associated with houses which originally distributed to the public bonds and stock of the debtor involved in this proceeding (pp. 653, 654, 689, 693, 694, 705, 731, 732, 733, 750, 751, 752.) No. 6, who is on the reorganization committee alone, was the representative of a large unsecured supply creditor, who also held bonds of the debtor (pp. 655, 683, 687).

Upwards of 78% of the bonds were deposited with the bondholders committee. In connection with the reorganization plan additional bonds came into their hands. The committee filed in this court consents to the plan by holders of more than 92% of the bonds. The deposit agreement, which is lengthy and in the conventional form prevailing at the time, conferred on the committee comprehensive powers, including authority to take the various steps looking to a reorganization of the debtor and to fix their own compensation.

The forcelosure suit had approached the point of readiness to be submitted for a final decree when the passage of Section 77B of the Bankruptcy Act 11 U.S.C.A. § 207, seemed imminent. Accordingly, the foreclosure case was held in abeyance. About that time the reorganization committee was selected. Promptly after Section 77B went into effect the committees caused reorganization proceedings under the new statute to be begun in Delaware and procured their transfer to this court.

While serving on one or both committees four members had transactions in bonds of the debtor. No. 1, No. 2 and No. 3 bought and sold and No. 4 bought bonds. No. 5 and No. 6 neither bought nor sold.

No. 1 bought $100,000 of the bonds at prices ranging from 7 or 7½ to 38 and averaging about 15. He sold either $85,500 or $86,000 of these, at prices ranging from 23 to 37, at a profit of about $10,000. At the time of the hearing he still held either $14,000 or $14,500 of the bonds. These had been purchased at an average price of 15 and had a market price at the time of the hearing of about 70 (pp. 775, 776). As a consequence, there had been a rise in the market value of the retained bonds of approximately 55 or of between $7,500 and $8,000 (pp. 705, 706, 719-721, 733).

No. 2 bought about $35,000 of bonds at prices ranging between 39 and 42. He sold them at prices ranging between 42 and 46. The profit was about $1,500 (p. 753).

As shown by his affidavit, No. 3 bought $45,000 of bonds at prices of 32 and 32¼, or a total of $14,450. He sold them at prices ranging from 41½ to 45¼, or a total of $19,223.75, thus taking a profit of a little over $4,700.

No. 4 bought $7,000 of bonds at prices ranging from 19¾ to 38 or 39, averaging about 30 and costing about $2,100. At the time of the hearing these, at the market price, were worth about $4,900 (pp. 672, 740-743, 748). So the increase in value, or potential profit, was then approximately $2,800.

This court has squarely held that "a committee member who, during his period of service, purchases and sells, or purchases, for personal gain, securities of the company which he is engaged in trying to reorganize, is not entitled to an allowance for his services as a committee member." In re Paramount-Publix Corporation, D.C., 12 F.Supp. 823, 828. If this statement of the law be adhered to, then, on the facts, it is indisputable that compensation out of the trust estate must be denied to No. 1, No. 2, No. 3 and No. 4.

So long as the Paramount decision stands, as it now stands, unreversed on the point for which it is cited, I feel that it should be followed. Moreover, I think it is sustained by the best considered, and perhaps controlling, authorities.

The conclusion reached rests, or can be grounded, on three propositions as follows:

(1) Members of the committees at the times of their dealings in bonds of the debtor were trustees for the depositing bondholders. Bullard v. Cisco, 290 U.S. 179, 189, 54 S.Ct. 177, 78 L.Ed. 254, 93 A.L.R. 141; Habirshaw Elec. Cable Co. v. Habirshaw Elec. Cable Co. 2 Cir., 296 F. 875, 880, 881, 43 A.L.R. 1035.

(2) Because of the inconsistent positions which are an unavoidable incident, it is a fraud in law for a trustee to purchase property which is the subject matter of his trust and the making of such a purchase is misconduct. Michoud v. Girod, 4 How. 503, 553, 554, 555, 557, 559, 11 L.Ed. 1076. See, also, Wormley v. Wormley, 8 Wheat. 421, 441, 5 L.Ed. 651; Hoyt v. Latham, 143 U.S. 553, 566, 12 S. Ct. 568, 36 L.Ed. 259; Cowee v. Cornell, 75 N.Y. 91, 100, 31 Am.Rep. 428; Pyle v. Pyle, 137 App.Div. 568, 572, 122 N.Y.S. 256, affirmed 199 N.Y. 538, 92 N.E. 1099.

(3) The commission by a trustee of a fraud on his cestuis que trustent, of other misconduct by him equivalent to a fraud in the management of the trust estate, justifies his being deprived, and in some instances requires that he be deprived, of compensation. In re Polansky, D.C., 41 F.2d 547, and cases cited. See also Lewis v. Ingram, 10 Cir., 57 F.2d 463, 465. This is true even where the fraud is merely constructive. Flagg v. Mann, 9 Fed.Cas. 231, at page 235, No. 4848.

It may be suggested, and in effect is argued, that the committeemen were trustees only for depositors, that their purchases were from non-depositors and that hence there was no violation of any right of the depositors. Let it be assumed that the facts are as just recited. Nevertheless, I am impressed that the conclusion sought to be drawn is a non sequitur. I feel that the fact that the sellers were not depositors would not exempt committeemen-purchasers from the rule arising out of the three propositions above stated.

As I see it, the evil from purchasing non-deposited bonds impinges upon the reason for the rule precisely as would purchasing from a depositor. The prohibition against dealing in bonds of an issue of which a portion — perhaps more particularly when an overwhelmingly large proportion, enough to carry with it complete dominance of the situation — is being handled by a committee grows out of the requirement that a trustee have no interest, or even temptation, to act adversely to the beneficiaries of his trust. Trafficking in any...