Manufacturers Trust Co v. Becker

• Decision Date: 21 November 1949
• Docket Number: No. 55,55
• Citation: 338 U.S. 304,94 L.Ed. 107,70 S.Ct. 127
• Parties: MANUFACTURERS TRUST CO. v. BECKER et al
• Court: U.S. Supreme Court

338 U.S. 304

70 S.Ct. 127

94 L.Ed. 107

MANUFACTURERS TRUST CO.

v BECKER et al.

No. 55.

Argued Oct. 20, 1949.

Decided Nov. 21, 1949.

Mr. Edward K. Hanlon, New York City, for petitioner.

Mr. David W. Kahn, New York City, for respondent.

Mr. Justice CLARK delivered the opinion of the Court.

This proceeding in bankruptcy is on objections to the allowance of claims equal to the principal amount of bonds of the debtor acquired at a discount during its insolvency by close relatives and an office associate of directors of debtor. Petitioner's objection that equitable considerations require limitation of the claims was dismissed by the referee, and the District Court affirmed. 80 F.Supp. 822. Following affirmance by a divided Court of Appeals for the Second Circuit, 173 F.2d 944, we granted certiorari because the issue presented has importance in the administration of the arrangement and corporate reorganization provisions of the Bankruptcy Act. 337 U.S. 923, 69 S.Ct. 1170.

On January 8, 1946, Calton Crescent, Inc., sold its only property, an apartment house located in New Rochelle, New York, for $300,000 pursuant to a contract entered into in October 1945. Being unable to discharge in full its obligations under debenture bonds maturing in 1953, outstanding in principal amount of $254,450, debtor filed in May 1946, a petition under Ch. XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., 11 U.S.C.A. § 701 et seq. Under the plan of arrangement, authorizing a dividend of 43.61% of the principal amount of the bonds, respondents Regine Becker, Emily K. Becker, and Walter A. Fribourg were to receive an aggregate dividend of.$64,237.53 on allowance of claims based on respective individual holdings of debentures which total $147,300 in principal sum but were acquired at a total cost of $10,195.43.¹ Petitioner, Manufacturers Trust Company, appearing individually as creditor for fees and disbursements due it as indenture trustee and also as original trustee under said indenture, objected to allowance of respondents' claims as filed, on the ground that the circumstances of respondents' acquisitions require limitation of their claims to the cost of the debentures plus interest.

The circumstances pertinent to our consideration of petitioner's objections are as follows: The debtor was organized in 1933 to take title to the apartment property pursuant to a plan of reorganization. By January 1942 debtor had defaulted under the terms of the first mortgage and was operating with a deficit; at no time in the previous several years had its debentures been selling on the market at more than 8% of face value.

While debtor was then considering a sale of the property for $220,000, a suit to enjoin the sale was brought by Sanford Becker, son of respondent Regine Becker and husband of respondent Emily Becker.² Thereafter he proposed to arrange a loan on second mortgage to debtor of $15,000 to pay off the arrearages on the first mortgage all share and debenture holders being invited to participate. In April 1942 debtor accepted the offer, but none of its share or debenture holders elected to participate other than respondent Fribourg, who had desk room in the offices of Sanford Becker and his brother Norman Becker and was a long-time friend of the former. The loan was made by respondents Regine Becker, Emily Becker, and Fribourg. The second mortgage thus created was in default by the end of 1942, and in 1943 respondents took an assignment of rents but did not foreclose; nor was there change in management of the property. The second mortgage and interest were paid upon sale of the property in 1946. In addition to the second mortgage, sums aggregating $7,921.63 were advanced by respondents to pay taxes; this amount was repaid without interest in 1944 and 1945. Pursuant to provisions of the loan agreement in 1942, Sanford and Norman Becker were made directors of debtor, and when the remaining three directors resigned in 1944, the vacancies were filled by nominees of the Becker brothers.

The referee found that from early 1942 the market value of the property of debtor was insufficient to pay its debts. However, the record shows a tax valuation during the period of only slightly less than the outstanding indebtedness.³ And although the debtor's operating account frequently ran in arrears, it revealed a surplus in 1945. Prior to disposing of its property debtor was at all times a going concern.⁴

The debentures on which respondents claim were acquired, at prices varying from 3% to 14% of face value, after the Becker brothers became directors in 1942.⁵ Sanford Becker did not buy additional debentures after becoming a director. Norman Becker never owned any interest whatever in the debtor. Although neither of the Becker directors was interested in any purchase of the respondents, the debentures of Regine and Emily Becker were purchased through the agency of the Becker brothers and in the latter's judgment. The debentures of Regine Becker were purchased from an over-the-counter securities broker. Those of Emily Becker were acquired in part from the same dealer, in part from an estate whose attorneys were fully informed as to debtor's financial affairs, and in part from a Christian Association represented by a member of its investment committee who was fully advised as to the condition of debtor.

Some of Fribourg's debentures were bought from dealers in the over-the-counter market; others were acquired through an agent from the president and vice president of debtor when they withdrew from its management in 1944, and from other holders after the retiring president insisted that the offer made to him by Fribourg's agent be extended to all holders and be accompanied by a statement of the president's intention to accept. Fribourg was in the market for speculative securities and purchased the debentures as a 'gamble,' being influenced by the tax valuation of the apartment building.

All of respondents' debentures, with the exception of $2,000 in face value purchased by Fribourg from a dealer, were acquired in advance of the contract for sale of the apartment property and the filing of debtor's petition for arrangement.⁶

It was the referee's finding, left undisturbed by both courts below, that respondents' purchases were without overreaching or failure to disclose any material fact to the selling bondholders. Petitioner does not here contend that respondents' claims should be limited because of conduct by the Becker directors or by respondents amounting to bad faith or abuse of fiduciary advantage. Nor does petitioner contend that respondents' bondholdings influenced the conduct of corporate affairs to the injury of the corporation or other creditors. Indeed, the referee found that the purchases were not unfair to debtor, that at the time of respondents' purchases debtor was not in the field to settle its indebtedness on the debentures, and that the assistance rendered to debtor by respondents materially aided in its grave financial situation. Moreover, the findings indicate that the most generous suggestion of an offer for the apartment building after the Beckers became directors and prior to the sale was at a figure substantially less than the sale price.

Petitioner urges broadly that directors are precluded from profiting by the purchase of claims against an in- solvent corporation. And, it contends, if directors may claim only the cost of debt securities acquired at a discount during a debtor's insolvency, those related as respondents are to the Becker directors should not be permitted to do more. Thus we view respondents' claims initially as if they were claims of directors.

This Court has repeatedly insisted on good faith and fair dealing on the part of corporate fiduciaries. It is especially clear, when claims in bankruptcy accrue to the benefit of a corporate officer or director, that the court must reject any claim that would not be fair and equitable to other creditors. Pepper v. Litton, 1939, 308 U.S. 295, 308—309, 60 S.Ct. 238, 246, 84 L.Ed. 281.⁷

Claims of a corporate officer or director arising out of transactions with the corporation have been enforced when good faith and fairness were found. Sanford Fork & Tool Co. v. Howe, Brown & Co., 1895, 157 U.S. 312, 15 S.Ct. 621, 39 L.Ed. 713; cf. Manufacturing Co. v. Bradley, 1892, 105 U.S. 175, 26 L.Ed. 1034; see Richardson's Ex'r v. Green, 1890, 133 U.S. 30, 43, 10 S.Ct. 280, 284, 33 L.Ed. 516; Twin-Lick Oil Co. v. Marbury, 1876, 91 U.S. 587, 589—591, 23 L.Ed. 323. Likewise a standard of good faith and fair dealing has been found applicable, where not superseded by a differing legislative or administrative rule, to purchases by directors of corporate shares, in the over-the-counter market, at less than book value on conversion under a plan of public utility reorganization. Securities and Exchange Commission v. Chenery Corporation, 1943, 318 U.S. 80, 63 S.Ct. 454, 87 L.Ed. 626; cf. id., 1947, 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995. In the first Chenery decision it was declared that equity has not imposed 'upon officers and directors of a corporation any fiduciary duty to its stockholders which precludes them, merely because they are officers and directors, from buying and selling the corporation's stock.' 318 U.S. at page 88, 63 S.Ct. at page 459, 87 L.Ed. 626.

When the transactions underlying respondents' claims here are drawn alongside a good faith standard of fiduciary obligation, they appear unobjectionable. There is no component of unfair dealing or bad faith.⁸ The findings negative any misrepresentation or deception, any utilization of inside knowledge or strategic position, or any rivalry with the corporation.⁹ During the period of the purchases the conduct of the Becker directors and of respondents with reference to the affairs of the debtor was to its substantial benefit and to the advantage of the other debenture holders. And there is nothing to suggest that had the...