Wolf v. Weinstein

• Decision Date: 15 April 1963
• Docket Number: No. 70,70
• Citation: 10 L.Ed.2d 33,83 S.Ct. 969,372 U.S. 633
• Parties: Irving J. WOLF, Robert H. Davidson, Richard S. Hull and Frederick Katzenell, Petitioners, v. Arnold A. WEINSTEIN, Jerome Fried, Nazareth Fairgrounds & Farmers' Market, Inc., et al
• Court: U.S. Supreme Court

372 U.S. 633

83 S.Ct. 969

10 L.Ed.2d 33

Irving J. WOLF, Robert H. Davidson, Richard S. Hull and Frederick Katzenell, Petitioners,

v Arnold A. WEINSTEIN, Jerome Fried, Nazareth Fairgrounds & Farmers' Market, Inc., et al.

No. 70.

Argued Feb. 20, 1963.

Decided April 15, 1963.

[Syllabus from pages 633-634 intentionally omitted] Melvin Lloyd Robbins, New York City, for petitioners.

Alex L. Rosen and Harold Harper, New York City, for respondents.

Mr. Justice BRENNAN delivered the opinion of the Court.

This case concerns two orders of the District Court for the Southern District of New York made in a proceed- ing for the reorganization of respondent corporation, Nazareth Fairgrounds and Farmers' Market, Inc. (the Debtor), under Chapter X of the Bankruptcy Act, 11 U.S.C. §§ 501—676. One order determined a controversy over the rights of numerous claimants to stock interests in the Debtor. The other order—predicated on findings that respondent Weinstein, President of the Debtor, and respondent Fried, the Debtor's General Manager, had traded in the Debtor's stock during the proceeding in violation of § 249 of the Bankruptcy Act, 11 U.S.C. § 649¹—directed that Weinstein have nothing further to do with the operation of the Debtor's business, that Fried be discharged as General Manager and that the compensation of both be terminated forthwith. Neither respondent was, however, directed to return the compensation he had received before the date of the order. The Court of Appeals for the Second Circuit, in separate opinions, reversed both orders. We granted certiorari, 369 U.S. 837, 82 S.Ct. 868, 7 L.Ed.2d 841.

We decide only the issues presented by the Court of Appeals' reversal of the District Court's order applying § 249 to Weinstein and Fried, adjudicated sub nom. In re Nazareth Fairgrounds & Farmers' Market, Inc., Debtor, 2 Cir. 296 F.2d 678. Decision of those issues, which involve the reach of § 249, is important in the administration of the Bankruptcy Act. But our consideration of the issues underlying the order of the District Court reversed sub nom. Fried v. Margolis, 2 Cir., 296 F.2d 670, persuades us that the grant of certiorari to review these issues was improvident. Oral argument brought into sharper focus than was apparent at the time we granted the writ that the controversy over the stock interests primarily implicates questions of Pennsylvania law and presents no federal question of substance. In the circumstances, the writ of certiorari as to that judgment of the Court of Appeals is dismissed as improvidently granted. Cf. The Monrosa v. Carbon Black, Inc., 359 U.S. 180, 183 184, 79 S.Ct. 710, 712—713, 3 L.Ed.2d 723.

The pertinent provisions of § 249 disallow compensation or reimbursement to any person 'acting in the proceedings in a representative or fiduciary capacity, who at any time after assuming to act in such capacity has purchased or sold * * * stock (of the Debtor) * * * without the prior consent or subsequent approval of the judge * * *.' Both Weinstein and Fried traded in the Debtor's stock while serving respectively as President and General Manager. ² Both held their positions with the approval of the District Court which, after permitting the Debtor to remain in possession pursuant to § 156, 11 U.S.C. § 556, authorized Weinstein to continue to serve as President and Fried to continue as General Manager. The court also approved salaries for each. ³ Fried has actively managed the business, the principal asset of which is a farmers' market located in Eastern Pennsylvania. Weinstein, a New York attorney, has acted primarily in a consultative or advisory capacity. The Debtor's business has prospered under their management despite considerable friction and dissension between factions contending for stock and managerial control.

The District Court, after hearings upon the nature and extent of Weinstein's and Fried's duties and activities, concluded that each was a 'fiduciary' within the meaning of § 249.⁴ The District Court thereupon ordered that their compensation be terminated, that Fried be discharged as General Manager, and that Weinstein, whose removal as President the court believed was beyond its powers, have nothing further to do with the management of the business.⁵ The Court of Appeals reversed the order in its entirety on the ground that § 249 applied to neither Weinstein nor Fried. The Court of Appeals indicated that 'doubtless' a literal reading of the statute's terms would include both, but held that § 249 was to be construed as applicable not to every 'person acting in the proceedings in a representative or fiduciary capacity' but only to such persons in the particular capacities named in §§ 241, 242 and 243, 11 U.S.C. §§ 641, 642 and 643—petitioning creditors, court officers and their attorneys, indenture trustees, depositaries, reorganization managers, committees, creditors and stockholders, or their representatives, and the attorneys for them or for 'other parties in interest'—who under § 247 are entitled to a hearing upon applications for allowances after notice to certain interested groups and individuals. 296 F.2d, at 682—683. In reversing the District Court on this ground the Court of Appeals found no occasion to consider the question whether in addition to denial of compensation removal from office was authorized or required where § 249 was applicable, since in its view 'the order of removal cannot survive the fall of its underpinning.' 296 F.2d, at 683.

We disagree with the Court of Appeals. We hold that persons performing fiduciary functions such as those which the District Court found Weinstein and Fried had performed are subject to § 249.

I.

The virtual immunity which active participants in corporate reorganizations enjoyed from judicial superintendence of abuses in the payment of compensation and allowances was one of the principal reasons for the enactment of § 77B of the Bankruptcy Act in 1934.⁶ 'There was the spectacle of fiduciaries fixing the worth of their own services and exacting fees which often had no relation to the value of services rendered,' Leiman v. Guttman, 336 U.S. 1, 7, 69 S.Ct. 371, 373, 93 L.Ed. 453. Section 77B, among other significant reforms, created important new judicial powers to regulate the payment of compensation and the reimbursement of expenses. See Dickinson Industrial Site, Inc. v. Cowan, 309 U.S. 382, 388-389, 60 S.Ct. 595, 598—599, 84 L.Ed. 819. Passage of the Chandler Act four years later measurably strengthened these powers of judicial superintendence, particularly with respect to corporate reorganizations, through the new provisions of c. X, 11 U.S.C. §§ 501—676, see Brown v. Gerdes, 321 U.S. 178, 181—182, 64 S.Ct. 487, 488—489, 88 L.Ed. 659. In curbing the pre-statutory abuses the general provisions of § 77B had proved inadequate.⁷ Chapter X sought also to broaden the participation of interested groups in the reorganization by ensuring compensation to several classes which theretofore often served the estate as volunteers.⁸

No statutory sanction against trading in the Debtor's securities during a reorganization was provided before the Chandler Act. However, § 77B's broad mandate that fees and allowances must be 'reasonable' to merit judicial approval had been held sufficient authority by two federal courts to sanction denial of compensation to persons holding fiduciary positions in reorganization proceedings who had traded in the Debtor's stock. In re Paramount-Publix Corp., D.C., 12 F.Supp. 823, 828, rev'd in part, 2 Cir., 83 F.2d 406; In re Republic Gas Corp., D.C., 35 F.Supp. 300. These decisions found even in the general terms of the statute the embodiment of 'ancient equity rules governing the conduct of trustees, including deprivation of compensation where there is a departure from those rules.' 35 F.Supp., at 305.

The relevant legislative materials leave no doubt that the purpose behind § 249 was to codify the rule of these decisions and to give pervasive effect in Chapter X proceedings to the historic maxim of equity that a fiduciary may not receive compensation for services tainted by disloyalty or conflict of interest.⁹ Cf. Michoud v. Girod 4 How. 503, 556—560, 11 L.Ed. 1076; Weil v. Neary, 278 U.S. 160, 49 S.Ct. 144, 73 L.Ed. 243; Magruder v. Drury, 235 U.S. 106, 119 120, 35 S.Ct. 77, 81—82, 59 L.Ed. 151. Indeed, we have several times declared that the general statutory authorization in the Bankruptcy Act for 'reasonable' compensation for services 'necessarily implies loyal and disinterested service in the interest of those for whom the claimant purported to act.' Woods v. City Nat. Bank & Trust Co., 312 U.S. 262, 268, 61 S.Ct. 493, 497, 85 L.Ed. 820; see also American United Mutual Life Ins. Co. v. Avon Park, 311 U.S. 138, 61 S.Ct. 157, 85 L.Ed. 91.

Access to inside information or strategic position in a corporate reorganization renders the temptation to profit by trading in the Debtor's stock particularly pernicious. The particular dangers may take two forms: On the one hand, an insider is in a position to conceal from other stockholders vital information concerning the Debtor's financial condition or prospects, which may affect the value of its securities, until after he has reaped a private profit from the use of that information. On the other hand, one who exercises control over a reorganization holds a post which might tempt him to affect or influence corporate policies—even the shaping of the very plan of reorganization—for the benefit of his own security holdings but to the detriment of the Debtor's interests and those of its creditors and other interested groups.¹⁰

Congress enacted two distinct types of sanctions to prevent these possible practices. One appears in § 16(b) of the Securities Exchange Act, 15 U.S.C. § 78p(b), which prohibits the realization by insiders of short-swing profits from trading in their corporation's stock, even when the corporation is solvent. Cf. Blau v. Lehman, 368...