Young v. Potts

• Decision Date: 05 May 1947
• Docket Number: 10413.,No. 10412,10412
• Parties: YOUNG v. POTTS. POTTS v. YOUNG. In re HIGBEE CO.
• Court: U.S. Court of Appeals — Sixth Circuit

161 F.2d 597 (1947)

YOUNG v. POTTS.

POTTS v. YOUNG.

In re HIGBEE CO.

Nos. 10412, 10413.

Circuit Court of Appeals, Sixth Circuit.

May 5, 1947.

R. W. Purcell, of Cleveland, Ohio (R. W. Purcell, of Cleveland, Ohio, on the brief) for Robert R. Young.

C. Craig Spangenberg, of Cleveland, Ohio (C. Craig Spangenberg, of Cleveland, Ohio, on the brief) for J. Fred Potts.

Charles J. Odenweller, Jr., and John R. Young, both of Cleveland, Ohio and Roger S. Foster, David Ferber, and Aaron Levy, all of Philadelphia, Pa., for Securities and Exchange Commission.

Before SIMONS, ALLEN, and MARTIN, Circuit Judges.

SIMONS, Circuit Judge.

The issues presented in these appeals grow out of differences between the litigants in interpreting a mandate of the Supreme Court issued in pursuance of its opinion in Young v. The Higbee Co., 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890, reversing our decision in 6 Cir., 142 F.2d 1004, and directing a remand to the district court for an accounting of profits made by Potts and Boag in the sale of preferred stock in the Higbee Company, together with an appeal which they had perfected to review a plan of reorganization for that company, confirmed by the district court.

Prior to the transactions here involved the Higbee Company had filed a voluntary petition for reorganization. It operated a department store in Cleveland, with assets at the time of more than $6,000,000, and was a corporation with three types of stock, common and first and second preferred. Two of its directors, Bradley and Murphy, had acquired a junior debt against the company of nearly $2,000,000. The plan of reorganization provided that this junior debt was to be awarded $600,000 in new notes and a block of common stock. Potts and Boag who owned some of the first preferred shares, objected to confirmation on the ground that the plan gave the junior indebtedness too great a share in the debtor's assets. When the stockholders' committee, of which they were members, approved the plan, they resigned and announced the formation of a new committee to press objections to the junior debt allowance, and when, notwithstanding their objections, the district court confirmed the plan, they appealed from its decree and sought to have the confirmation set aside. On March 7, 1942, while their appeal was pending, they sold their stock together with the appeal to Bradley and Murphy, the claimants under the junior debt. The consideration was $115,000, of which Boag, who transferred 10 shares, received $20,000, and Potts, who sold 250 shares, $95,000. Upon motion of Bradley and Murphy the appeal was then dismissed.

Appellant Young, a preferred stockholder, had sought to intervene to prosecute the appeal, but his petition had been denied. Young then, on behalf of himself and all other preferred stockholders, petitioned the district court to compel Potts and Boag to account to the debtor for the difference between what they had received and the fair value of their stock, or in the alternative to pay over that difference to the preferred stockholders. Young's petition was dismissed. We, by per curiam, affirmed 142 F.2d 1004, but the Supreme Court granted certiorari and reversed, deciding that the sale of the appeal by Potts and Boag was unlawful and that they must account for the profits arising out of the transaction. When the Supreme Court mandate reached the district court the cause was referred to a Special Master for an accounting. He recommended that Potts, upon the $95,000 received by him from Bradley and Murphy, should be allowed a credit for $16,346.14, which was the agreed market price of the stock at the time of its sale in 1942, and $10,595.67 for expenses incurred during the reorganization proceedings. Boag had, in the meanwhile, paid the full $20,000 he had received and had disappeared from the litigation. Upon exceptions to the Master's report, the district judge allowed Potts a credit for his stock at its par value of $100 a share, reduced the credit allowed by the Master for attorney fees from $10,000 to $5,000, and allowed Potts a credit of $595.67 for out-of-pocket expenses. While the Master's report was silent as to interest the court directed Potts to pay 4% interest from 1942 on the amount for which he had been held to account.

From the decree Young appeals, contending that Potts should be allowed to deduct from the $95,000 he received, only the market value of the stock at the time of the sale, namely, $16,346.14, and should be allowed no credit for expenses. He contends also that on the balance the court should have allowed 6% interest rather than 4%. Potts cross-appeals claiming that the fair value of his shares at the time of the sale was $172 a share, or a total of $44,000, that he should have a credit for expenses of $13,000 and that no interest is legally collectible upon the accounting award.

The first question to be decided relates to the amount for which Potts should be held to account to the preferred stockholders for the sale to Bradley and Murphy of his rights in the appeal proceedings, which were expressly included in the written contract between him and Boag as vendors and Bradley and Murphy as vendees. This involves consideration of the grounds upon which Young v. Higbee Co., supra, was decided. There it was held that Potts and Boag, by appealing from a judgment which affected a whole class of stockholders, owed an obligation to them to act in good faith; that they cannot avail themselves of the statutory privilege of litigating for the interest of a class and then shake off their self-assumed responsibilities to others by trading in the rights of others for their own aggrandizement; that in the contemplation of the statute which authorized the appeal its fruit properly belonged to all the preferred stockholders; that one creditor cannot make that fruit his own by the simple appropriation of it; that the consideration for the sale was not merely their own interest in the bankrupt estate but the interest of all preferred stockholders; that the money they received in excess of their interest as stockholders, was not paid for anything they owned, — that it came to them in settlement of litigation which, if carried to a successful conclusion, would have added to the value of shares of other preferred stockholders of the common debtor, and that its fruit properly belongs to all the preferred stockholders. It is clear from this rationalization that Potts and Boag were fiduciaries and that they owed the utmost of good faith to other stockholders of the same class.

The standard of conduct applied by the court in the Higbee case is that we invoked in In re Van Sweringen Co., 6 Cir., 119 F.2d 231, where, with approval, we quoted the observation of Chief Judge Cardozo in Meinhard v. Salmon, 249 N.Y. 459, 164 N.E. 545, 546, 62 A.L.R. 1, "A trustee is held to something...