Wolf v. Weinstein

PETITIONER: Irving J. Wolf et al.
RESPONDENT:Arnold A. Weinstein et al.
LOCATION:Beaumont Mills

DOCKET NO.: 70
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 372 US 633 (1963)
ARGUED: Feb 20, 1963
DECIDED: Apr 15, 1963

ADVOCATES:
Alex L. Rosen – for respondent Nazareth Fairgrounds & Farmers’ Market, Inc.
Harold Harper – for respondent Jerome Fried
Melvin Lloyd Robbins – for the petitioners

Facts of the case

Question

Audio Transcription for Oral Argument – February 20, 1963 in Wolf v. Weinstein

Earl Warren:

No. 70, Irving J. Wolf et al., petitioners, versus Arnold A. Weinstein.

Mr. Robbins.

Melvin Lloyd Robbins:

Chief Justice and may it please the Court.

This case is here on certiorari to the Second Circuit Court of Appeals to review two companion cases, which were argued below and decided together in November 1961.

Now both cases arise out of proceedings for the reorganization of the corporation under Chapter 10 of the Bankruptcy Act.

The Veteran reorganization is Nazareth Fairgrounds and Farmers’ Market, Inc, a Pennsylvania Corporation.

The proceedings began in September 1953, when the debtor filed a voluntary petition for reorganization in the Southern District of New York.

The petition was approved.

No trustee was appointed.

The debtor was continued in possession under his former management and the proceedings were referred to Judge Sugarman of the District Court and Judge Sugarman has tried all the matters that are before the Court here.

Now the first case designated No. 27000 in the Court of Appeal, presents an Erie v. Tompkins question to the Court.

In this case, the Court has non-diversity jurisdiction and this is the wrinkle in the Erie situation.

The Rules of Decision Act provides that a Federal Court in any civil action apply state rules of decision, except where a Federal Statute or a Federal Policy supervenes.

We submit that in this case on the substantive questions in No. 27000, there is no Federal Statute and no Federal Policy that even touches those substantive matters.

That case involved [Inaudible]

Melvin Lloyd Robbins:

Yes sir, who owns the stock in this debtor.

Now there is no plan of reorganization pending, there is no creditor problem.

In this case, the debtor is solvent in the bankruptcy sense; its assets have exceeded his liabilities from the day this petition was filed.

There is no question of priority among the stockholders; there is a single class of common stock.

The problem really is that there was an over issue of stock in 1953, before the reorganization began.

The articles of incorporation authorize an issuance of 200 shares and the man who ran this show before the reorganization, issued 316 at least.

[Inaudible]

Melvin Lloyd Robbins:

Oh!

Yes sir, certainly.

[Inaudible]

Melvin Lloyd Robbins:

Yes sir.

There is no question of jurisdiction Your Honor.

The question is, what rules of decision does the Bankruptcy Court, this Federal Court, regardless of jurisdiction use to decide who those stockholders are.

In effect, it’s my contention, the petitioners submit, that it’s a matter of pure accident of fortuity that the case is in the Bankruptcy Court.

It’s a matter of convenience.

Melvin Lloyd Robbins:

It was a happy accident that the debtor filed a petition, which stated in paragraph one, your petitioner is insolvent.

This was voluntary.

On ex parte orders, the petition was approved and the debtor was continued in possession.

The great advantage was at that point that under Section 196 of Chapter 10, Judge Sugarman issued these bar orders, which said, “All stockholders are to file proofs of claim.”

At this point, there was no problem of getting all the stockholders in New York, New Jersey and Pennsylvania into a single forum.

This was the great convenience.

So, everybody came into the one forum in New York, the Southern District in a reorganization proceeding and then, we had a single lawsuit to determine this, but none of this has anything to do with the substantive law to be applied for all the difference it made for all these people had been residents of New York or one state.

It would have wound up in a State Court, because you could have got personal service and jurisdiction of the subject matter.

Now petitioner submits it shouldn’t make a bit of difference whether you are in a Federal Court on diversity grounds or on non-diversity grounds or in a State Court, New York or Pennsylvania as to what law governs to decide who these stockholders are.

Potter Stewart:

Well, this wouldn’t have been a bankruptcy proceeding in a State Court?

Melvin Lloyd Robbins:

Well Your Honor let me bring — that’s true, but the fact that it’s in bankruptcy again has nothing to do with this question.

The bankruptcy law essentially and this goes to the reorganization too, it’s a matter of protecting unsecured creditors who have no interest in the estate.

The property is still owned by the bankrupt, we have to use the —

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Your Honor Chapter 10 permits an adjustment of the interest of secured creditors and —

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Sir?

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

That’s right Your Honor.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Yes sir.

Byron R. White:

Including stockholders.

Melvin Lloyd Robbins:

Including stockholders.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

That’s right sir.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Your Honor there is no question.

Let me withdraw my former statement, which is an overstatement.

There is no question that the Court has power to adjust or for that matter to wipe out the rights of stockholders or any class of creditors under Chapter 10.

I’m not disputing the power of the Court or certainly the jurisdiction of the Court, but the focus on this, let me put it to You Honors this way.

Melvin Lloyd Robbins:

Suppose you have one share of valid stock and from my point of view, it makes no difference how many shares a valid stock are outstanding.

What’s happened here is that, let’s say two persons or 36 as in this case have gone into this Court and they are competing for the ownership of this one valid share.

Now you have to distinguish between the corporation’s interest, direct interest of the corporation and the derivative interest of any person through the corporation, that’s one matter as against the rights of third parties between themselves.

If one person is contesting something with the corporation as to whether the stock is valid or invalid then the corporation has an interest and maybe the Bankruptcy Act would have some application to it.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Your Honor, I’m not sure I quite understand your question.

What comes over to me is the question of whether the Court and this is a subordinate question, is whether the Bankruptcy Court with non-diversity federal jurisdiction sits as an Erie Court and first applies a conflict of laws rule of the forum state.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Your Honor, I submit that Weinstein reserves this question as to what substantive law would be applied.

What happened in the Weinstein case to begin with is that you had a compound interest question that where secured creditors were concerned, it affected of the unsecured creditors and there were two opinions.

The majority opinion by Mr. Justice Black found that this was a question of substantive federal interest that under the Bankruptcy Act, the Federal Court would not permit compound interest to be applied in favor of a secured creditor and in that way deprive unsecured creditors a part of the estate.

Now if in this case anyone can show any federal interest under the Bankruptcy Act or any other statute or any other policy that bears on this question of stock ownership that’s the end of the case.

The rules of Decision Act with the exception or the proviso says, you know except where the federal constitution treaties or statutes so provide.

Now if someone can point to some substantive federal interest on this question of stock ownership, then that’s the end of it, then Federal Law applies, but what I’m saying is the bare fact that it’s in a Bankruptcy Court does not in itself determine where Federal Law applies.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

I would say no Your Honor.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

No, no, it’s much beyond that.

They both started by looking to the Pennsylvania Constitution and that’s where they stopped.

They read this Article 16, Section 7 of the Pennsylvania Constitution, which says in effect, “Any stock issued by a Pennsylvania Corporation without consideration is void.”

And then they stopped there and what you’ll find in Judge Moore’s opinion in the Court of Appeals is no reference to the underlying statutes and no reference to the Pennsylvania Case Law.

Now this I say is in the very teeth of Erie, that under the Erie decision and perhaps even under Swift versus Tyson.

The whole point was that State Laws differ and that if you have to make an interpretation of State Law, you look to what the Local Court, in this case, the Pennsylvania Supreme Court says this law means.

Now what Judge Moore did was to disregard completely the statutes and the case law in Pennsylvania and then he went far beyond that not simply — he disregarded the State Law as to voiding all of this stock.

And then, in establishing a remedy, which he called the matter of equity and this is all he called it, he said, “We’ll do equity” in the broadest terms with no reference to any law, he then established a pattern of stock ownership, which had no reference whatever to Pennsylvania Law or New York Law, it’s wrong and it’s arbitrary we submit even as a matter of general equity under all Federal cases, but certainly you can’t possibly justify it under Pennsylvania or New York Law.

And my point is that if the Rules of Decision Act says what it means, it means what it says.

In all civil actions the grounds of jurisdiction don’t matter and this Court is not there just to do equity in the same old Swift versus Tyson sense of applying a general equity or a sort of Federal Common Law.

There is no federal interest here and they should have applied State Law.

It’s not simply error in the interpretation and application of State Law, it’s a total disregard of State Law.

Can you relate what you are saying to the facts, what — can you state what it was that Judge Moore did with respect to the allocation of these stocks in question.

Where do you claim he went wrong?

Melvin Lloyd Robbins:

Well, first of all Your Honor, Judge Moore began, and this is the foundation of his decision by saying, “Every single share of stock of this corporation is void for lack of consideration.”

And to begin with, he has ignored the over issue, but let that pass, because nobody –-

[Inaudible]

Melvin Lloyd Robbins:

This over issue of stock, Your Honor.

What he says is the Corporation did not receive any consideration for these shares that were outstanding, any of them.

Now here he had to break it down into two pieces.

There have been 20 shares issued in 1951 capitalized at only $1500.

This I’ll come to in a moment, but the point is, that even Judge More conceded that these 20 shares were valid and that there was consideration received for them.

Now all Judge Moore could say about the first 20 was this.

That the man is John Malakoff who sold everybody the stock in this Corporation, this man John Malakoff had never transferred the physical certificates, these two certificates for 10 shares each that were originally issued in August of 1951, endorsed over to him in blank in October of 1951.

He never transferred those certificates until June of 1953, when he re-endorsed them and assigned them to the Corporation.

So Judge Moore said, first of all, that none of these 20 “Shares” came into the possession or into the hands of any of the stock claimants or stockholders, therefore, we can ignore them.

Now this is just wrong under the Uniform Stock Transfer Act of New York and Pennsylvania.

It’s the share certificates that didn’t come into anybody’s hand, not the shares and there is a difference.

When Malakoff surrendered these shares in June of 1953, he couldn’t cut off any prior rights in those 20 shares that the stockholders had acquired two years before or the fact that they didn’t get the certificates as inconclusive.

The only other person — the Corporation received the certificates, and the Corporation was in no position to cut off rights of prior stockholders, especially when it had notice.

This is on the 20 shares.

Then on the other 180 shares within the authorized issue, Judge Moore said, the Corporation didn’t receive consideration, because it didn’t get the consideration directly from these 36 people.

Every one of them paid John Malakoff, not a single check went to Nazareth Fairgrounds, to the Corporation.

But what the Corporation got as Judge Moore recognized was this piece of valuable real estate, which is what all these people are carrying on about.

Now they have the real estate, so Judge Moore said, the real estate was not paid for — he puts it in two ways, let me try to express it this way.

He says, “These people didn’t pay the Corporation therefore, the corporation didn’t receive consideration and therefore, all the stock is void.”

Then he says, “However, we are in a position to award stock to these people who are entitled to it.”

We have to do it under the Pennsylvania Law and there must be consideration for it.

There is consideration, because the corporation received the valuable piece of real estate.

This real estate was paid for by John Malakoff.

Therefore, we can give these people the stock backed by the real estate paid for by John Malakoff.

What Judge Moore has said is, that the real estate is consideration for new stock under a plan of reorganization, but the same real estate paid for by the same man is not consideration for the old stock that he issued.

Well to me, it makes no sense and he is wrong, but even assuming that and putting that aside that’s the factual premise that the stock is void for lack of consideration or fact of law, then we get to these questions of Pennsylvania Law.

Melvin Lloyd Robbins:

First of all, the Pennsylvania Law is different from New York and probably most other states, but certainly from New York in this respect.

There is a distinctive pattern set out by statute, which says “If a subscription is unpaid, if the Corporation hasn’t received stock, sure the stock is void ultimately.”

But the statutes and the Courts of Pennsylvania say, before you void the stock, you have to make a call or an assessment on these stockholders and give them, in this case, the opportunity to pay that price and until they have been given what amounts to a right of redemption, you don’t force it to stock.

Now in New York it’s different, you make a call there are 60 days, if you don’t pay in that time, the stock is forfeited; even if demand to pay 90% of the stock subscription price before that time, the Corporation could just forfeit this.

Pennsylvania is a lot more solicitous to these minority stockholders and in Pennsylvania; you must have the assessment first.

Moreover, under Pennsylvania Law, the burden of proof is on the debtor — is on the Corporation.

If they say the stock hasn’t been paid for, they’ve got to prove it.

They have to make an assessment and say, you owe or whatever it is a $100 or $1000 on this stock.

Now there are two alternative provisions that the Corporation can follow.

In this case, the Corporation elected to follow one and they used the Bankruptcy Court the same as the any other Court.

They sued for a money judgment.

They put it in the alternative backwards.

First, they asked for cancellation.

They said in the alternative give us the subscription price.

It doesn’t matter, they asked for the subscription price.

They had every opportunity to establish how much money was due on this stock and to get a money judgment that they asked for against these stockholders.

And what happened was, in the District Court Judge Sugarman said, “No dice.

I won’t cancel any of the stock and I also won’t assess any unpaid subscription against these people.”

At this point, the debtor abandoned anything further where the money judgment was concerned.

There was no proof that any of this money was unpaid and the market wouldn’t support whatever the numbers of shares was that was outstanding, this is the second error.

What Judge Moore said in the Court of Appeals was that “We will cancel the stock.”

He had to begin by saying “All the stock is void.”

There is no earmarking of a lack of consideration, no proof if there was any.

Now the most — to me, the most vivid testimony to the fact that it’s all wrong is that both my adversaries have conceded that the stock was valid.

They don’t know and they don’t even presume to care how many stock or shares of stock were valid and how many weren’t.

All they admit is that Judge Moore was wrong.

At least 20 shares of stock were valid, consideration was paid, their outstanding in somebody hands.

At this point, I say the debtor is out of it and the debtor Corporation has no remedy anymore.

They have got no right to a money judgment, they’ve disclaimed it, they never appealed, so the Res Judicata thing would bar them, there is no proof, let alone the burden of proof, there is just no proof of assessment, they are out of it.

Now we have a contest among 36 people as to who owns whatever the number of shares is.

Melvin Lloyd Robbins:

Whether it’s one, sorry —

Arthur J. Goldberg:

[Inaudible]

Melvin Lloyd Robbins:

Not quite, Your Honor.

I want all 36 people in.

Arthur J. Goldberg:

[Inaudible]

Melvin Lloyd Robbins:

My difference with Judge —

Arthur J. Goldberg:

[Inaudible]

Melvin Lloyd Robbins:

Yeah, right.

Arthur J. Goldberg:

[Inaudible] together or where there is a consideration [Inaudible] debt, you want all 36 [Inaudible]

Melvin Lloyd Robbins:

That’s right Your Honor.

Arthur J. Goldberg:

[Inaudible]

Melvin Lloyd Robbins:

Well, what Judge Sugarman did was to change this index of participation.

What I’m saying is, all these people, each one made a deal with John Malakoff to buy so many shares.

A man like Weinstein for example said, “I buy 7 shares for a $1000 each, 7 out of 200.”

Well the over issue doesn’t permit that, but I say that what should be done here is that each man has made his contract, they vary, the prices vary, the terms vary and these contracts should govern and the stock certificates.

What Judge Sugarman said was we’ll ignore the contracts; we’ll ignore the stock certificates.

What we’ll do is to use a money index what he called, I think the net fair value of the investment.

Now the major difference here — well there are two differences.

One is, the price varied over a period of two years and there were good reasons why the price varied.

In that sense, the people who came in early like one of our people Charles Kanter, at the very beginning, who paid $4000 for 12 shares, he got what may look like a bargain price.

I say this bargain is not unconscionable and he is entitled to the benefit of it.

He paid $333 a share, some of the others — most of the others paid a $1000 a share a year or two years later.

This man’s money was traced into the purchase price first one in and the second one in; he is entitled to the benefit of this bargain.

Judge Sugarman says no we’ll use the money index.

Secondly, you got the problem of the so-called dividends.

No money has been traced here, that’s what Judge Sugarman said.

The Court of Appeals set that finding aside and I submit that Judge Moore is wrong there, but that’s a matter of Federal Law, your procedure Rule 52(a).

God knows that there is overwhelming evidence in support of Judge Sugarman’s findings here.

At any rate, this man John Malakoff out of his own bank account was paying 20% “Dividend” every year.

A man like Weinstein for example who came in at September of 1951 received this 20% on his $7000 for about 20 months, he got back 31% of his money.

Melvin Lloyd Robbins:

Other people who came in later got no dividends.

The worst example to me, is the situation with Kanter, he was getting dividends not on his $4000, but on more, because Malakoff respected the bargain.

So, he got $3800 in dividend based on $12,000, although he had only paid in $8800.

Judge Sugarman would deduct this $3800 from Kanter’s interest.

So not only would he not get the benefit of his $4000 at the very beginning, but the dividends on more than his $8800 would all be deducted.

Now these dividends didn’t come out of Nazareth, they came out of Malakoff’s pocket.

This part of it –-

Arthur J. Goldberg:

[Inaudible]

Melvin Lloyd Robbins:

But Your Honor, all Malakoff paid was about $60,000 and what he collected was well over $100,000.

See, I’ll put it to you this way Your Honor, I think the difficulty is that once you start to upset the benefit of a bargain, what these people agreed to and what’s on the face of it is really not unconscionable, it is impossible to find any other rational basis, logical equitable basis as you can see from the difference between the Court of Appeals and the District Court.

What Judge Sugarman said was we will deduct the dividends from the principle amount leaving in Weinstein’s case, only about $4600 instead of $7,000.

So Judge Moore said, we’ll deduct the dividends, but not from the principle.

We will treat it as an obligation and attach a lien to the stock so that these people owe it in the future.

See, but in the meantime they get $7,000 — Weinstein gets $7,000 worth, whatever it means and he [Inaudible] $7000 instead of $4600.

Once you start this, with all these different patterns, I say it’s hopeless and there is nothing wrong with it.

Arthur J. Goldberg:

Are you arguing for the principle of law that it’s a proposal [Inaudible]

Melvin Lloyd Robbins:

Your honor —

Arthur J. Goldberg:

What’s your argument for it?

Melvin Lloyd Robbins:

Well I wouldn’t want to put it that way.

First of all Malakoff was not just the Ponzi.

Arthur J. Goldberg:

But isn’t that what happened?

Melvin Lloyd Robbins:

No, Your honor the difference is the Ponzi was selling nothing, and Malakoff was selling something.

These people got what they bargained for.

They bought a piece of Nazareth and they got a piece of Nazareth.

The price is varied over a period of time.

In effect I say that John Malakoff guaranteed dividends, of 20% a year.

He misrepresented that these dividends were being paid by Nazareth to him and by him over to these people.

This is no different from what’s going on in New York now with these syndicates where people are guaranteed dividends and they went on paying them although the back — the real estate behind it wasn’t there.

You can call it a misrepresentation, but the fact is that there are two pieces to it and the major piece is that the people got what they bargained for, they got the real estate.

That’s all that’s left and they have it and the Ponzi element of it is paying the dividends out of capital is a completely separate thing, and you have to distinguish this from Ponzi.

Melvin Lloyd Robbins:

Ponzi gave these people nothing.

There was nothing there except just the rotating capital and the profits on it.

That’s not this situation.

Secondly, the difference in price can be accounted for I think in two ways; you have to look at the different parties.

Where the cooperation is concerned, if there is anything unfair about issuing stock at different prices and there isn’t when you have a reasonable basis for it, certainly time alone explains it then assess these people the difference, but don’t interfere with their stock holdings.

Charge them for it, but don’t deprive them of their proportionate share.

Secondly, I think this comes closest as to what Your Honor was saying Mr. Justice Goldberg, if the amount of the money, the difference in price is disturbing, what you are talking about I think is a fraudulent transfer concept.

Let me put the extreme example, which I think is what you are getting at.

Suppose that Malakoff goes to one man in September of 1951 and says I’ll sell you share of stock for $1,000 a share, and then he turns around and the same day he says to somebody else, I’ll sell you a share of stock, same interest to Nazareth for $10.

I mean gross enough difference I — more gross difference couldn’t be imagined beyond just giving it away.

If Malakoff committed no wrong, if there had been no over issue when he owned the stock, he could probably have given it away.

If there is a wrong the sort of thing you are talking about is a fraudulent transfer concept, that people dealing with Malakoff when Malakoff was committing the fraud, should not get something that caused other stockholders something else.

Now, if you have a gross difference like that, I suppose you can say, and there is a question of fact involved here that any man who takes this share of stock for $10 when he knows that the market price is $1,000 and has reason to believe that Malakoff is committing a fraud, you ought to take that share of stock away from him.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yeah, sir.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yes sir.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yes in part, yes.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Six of these 36 — the shares are six of the 36 were canceled, yes sir.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Your Honor —

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Oh no, Your Honor I know this Court would never have granted the certiorari to review when an erroneous interpretation of Pennsylvania law by a Federal Court.

But it goes beyond that because you see this is the first step, the second step is what Judge Moore did affirmatively or what he said he was doing.

William J. Brennan, Jr.:

Well, I know, but that’s the whole thing [Inaudible]

Melvin Lloyd Robbins:

That’s right and the second point just so that we are clear is that what he did apply, this sort of purchase money resulting trust just can’t stand up either.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Oh well I –Your Honor I love you to do it, I don’t know.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Sir?

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yes the question presented to the Court is the proper choice of law, and if you agree with me that the —

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yes assuming that you find that it’s too much of a mess to decide yourself.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Alright.

Well let me turn to the other case then Your Honor.

The other one number 26362 involves the administration of the estate and the events here all occurred during the reorganization proceeding.

Now here what we’re talking about is a special body of federal law that governs fiduciary conduct in a Chapter X proceeding.

And ultimately what petitioners contend is that Judge Moore — Judge Friendly’s opinion in this case is in a sense to the adverse that here there was a federal interest and the special body of federal law that was ignored and again what Judge Friendly — what the Court did through Judge Friendly was to apply a sort of general equity or federal common law without paying proper attention to the special body of law in two sections of Chapter X and the case law of this Court, both in Chapter X cases and in other federal equity receivership cases.

Sir?

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yes sir.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Right and this is much closer to a matter a statutory interpretation, but certainly within this Court’s —

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

I understand.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Well, Your Honor, I understand that general principle, but let me put my understanding or misunderstanding to you that your find cases, for example in the tax lien case where you run into the problem of what the state law is as to who owns property and so on, which is part of what I relied on here.

And to pick two companion cases, when you have the Durham Lumber and the Aquilino case the Aquilino case you sent back to the Court of Appeals of New York so New York could tell you what their law was.

But in the Durham Lumber case you said we are willing to accept what the lower courts have said and —

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yes sir.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Right, that’s right sir.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

I don’t remember sir, I just don’t.

But —

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Oh no question about that, I just raised it and I went all the way on this, partly in the hope that it would be understood better and partly because of my hope that maybe the Court would decide it, because occasionally the Court has decided —

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Yes.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

It applied what I call the sort of general equity Your Honor, which to me to use a term I don’t mean to be disrespectful was no law.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Not that simply Your Honor, Judge Moore began as I say by quoting the Pennsylvania Constitution.

And then what he did was two-fold, first of all that part of it is error and what you have is a disregard and then he went on to award an affirmative remedy with no further reference to the state law as though the affirmative remedy or the decision of the Federal Court could be made with no reference to State Law.

Now what I’m saying is that half of what he did may involve by his own opinion a misinterpretation of State Law, but the other half, the decree, the affirmative remedy that the Court of Appeals ordered was done in terms of what Judge Moore said himself on two occasions was a matter of “Doing equity” and nothing else.

He didn’t even purport to look to any State Law as to who owned this stock.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Your Honor, if you can show me — if anyone can show me any federal ground for excluding these people, I’m through.

What I say is there isn’t any federal ground.

You don’t have an insolvency which is the usual reason for throwing out a stockholder with valid stock, that there is no equity left for them.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

That —

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

But Your Honor, that’s exactly what I’m objecting to.

I don’t mean any offense, I know that these three men have sat on the Court of Appeals are decent, fair, intelligent men, I don’t want their notions of fairness.

I want the law applied, if this were Diversity Court, these judges would have said, we look first to the law of so and so.

Sir?

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Well that’s the question presented to Your Honor, that shouldn’t this rules of decision —

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Sir?

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

That’s right.

But, Your Honor, I believe that Weinstein reserved the question and had to reserve the question because there was a federal interest there and that’s how the case was decided.

The majority disagreed with Mr. Justice Frankfurter who said, we don’t have to reach the question of Federal Law, because as I read the State Law, compound interest would not be permitted either in this case.

Melvin Lloyd Robbins:

But the majority said, no, we will treat this as a matter of Federal Law and the Federal Law bars compound interest in this situation.

Now you don’t have that question of Federal Law here and that’s why this is a case of first impression and that Weinstein doesn’t decide it.

You’ve got reservation throughout all of these cases.

In the McKenzie Case you get these reservations, because there you are dealing with Section 68 on preferences, where part of it is a matter of bankruptcy statutes and policy and part is a direct reference to State Law.

You don’t have that here either.

If I may, Your Honor, I want to turn back to this other case on compensation to fiduciaries and their removal from office.

Now in this case —

Hugo L. Black:

Which case is that one?

Melvin Lloyd Robbins:

The 26362 Your Honor, which involves the administration.

Now in this case unlike the other one, there doesn’t seem to be any substantial dispute about the facts.

There are two operative facts, which are important.

One is, I better go back for a moment, the Debtor was continued in possession as I noted under his former management and as Your Honors may note, at the very outset, which I have is an order, this ex parte order that was signed in September of 1953, which stated that the Debtor by Arnold A. Weinstein and Jerome Fried, be authorized, directed and empowered to operate the business and manage the property of the Debtor.

Now you have a situation where no trustee is appointed and these two people, the President and the General Manager are de facto trustees and even the order sets it up as two of them equally operating this business, managing the property.

Now two things happened, one is, in the course of this reorganization these people bought stock of Nazareth.

Weinstein bought stock not only for himself, but also for his sister and for Fried.

They both bought stock for their own accounts and for others during the reorganization.

Now, this triggers at least this specific statute Section 249 of Chapter X, which says, in sweeping and I submit quite clear terms, no compensation shall be allowed to any person acting in a fiduciary capacity during the reorganization and while so acting buys or sells any stock or claims that are being reorganized.

Now this is what Friendly’s opinion addressed itself to.

The District Judge had said, yes, it does apply.

These people are barred from compensation.

Judge Friendly reversed his opinion construe Section 249 and says, no, it doesn’t.

Now, here you have a question of statutory interpretation and I think that the crux of this problem is that before you even get to the strict reading of the statute, which is quite clear in terms, I think the problem is that Judge Friendly begins by assuming that a corporation in reorganization is the same as any other corporation.

And he says that normally there’s nothing wrong with the persons who are officers of any corporation, nothing wrong with them buying the stock.

So if they buy stock, or sell stock, or claims, you began with the assumption there’s nothing wrong and then wants a penal sort of interpretation of anything that interferes with that.

Now the major problem is I think we have to begin by recognizing that it’s normal for a corporation to be in a Chapter X proceeding.

This receivership is most abnormal and there’s a special body of law that applies to this, it’s partly statutory and partly decisional.

And I submit that it’s a fiction and not a norm to consider what would happen outside in a federal equity receivership court in terms of the obligations of these people.

Now, beyond – sir?

Arthur J. Goldberg:

[Inaudible]

Melvin Lloyd Robbins:

That’s quite true, Your Honor.

Melvin Lloyd Robbins:

I don’t think so at all, I hope not.

What I’m talking about, in the other case is the question of claims or whatever rights vested before the reorganization, that’s what was being adjudicated.

What these people did was to throw this corporation, they did it themselves.

They threw into reorganization and once it’s in court, the question of their conduct in court is a special federal matter.

Now that has nothing to do with the matters that are being adjudicated except to the extent that curiously the very stock and issue that they bought is the stock that is an issue in the other cases and which is clouded by their particular objections and appeals in this case.

Arthur J. Goldberg:

[Inaudible]

Melvin Lloyd Robbins:

Weinstein bought only a fraction of the share for himself.

Fried bought a substantial number of shares because Weinstein had bought some shares for his sister and for Fried.

The way Statute 249 reads and the way it’s been interpreted for over 20 years in every circuit that’s received the 249 case, the First, Second, Third, Fourth, Sixth and Seventh, without question, they’ve all interpreted the statute to mean that buying or selling any number or a fraction that makes no difference for your own account is sufficient.

That when Congress said it didn’t want any of this trading, Congress meant what it said, and there’s a history behind this.

There were lot of abuses before the Chandler Act that they were trying to put an end to.

And they put this in terms of a specific type of conduct.

Now, the other statute I relied on, that Judge Friendly didn’t even cite or pay or mention, and the other cases involved primarily it is Woods versus City National Bank is a broader thing.

And there, the statute has its history and has been interpreted.

There the statute prohibits, the statute denies compensation for any actual conflict of interests.

Hugo L. Black:

That’s 221.

Melvin Lloyd Robbins:

221 Sub 4, Your Honor and under that statute and I submit that the very same conduct would be prohibited and that the remedy would be this denial of compensation and with it removal from office, but in this case, probably you can begin with Section 249 because it’s easiest.

Potter Stewart:

Okay and I don’t quite see — perhaps I’m sufficiently sensitive, but I don’t see where the conflict of interest would be for an employee to buy stock in a corporation in which he is employed.

It would be to his interest to have the corporation have the stock go up, and the corporation to succeed?

Melvin Lloyd Robbins:

Your Honor that’s what Judge Friendly said and I’m willing to grant that’s normally the case outside reorganization.

I have two problems —

Potter Stewart:

In or out, I’m just wondering where the conflict of interest is?

Melvin Lloyd Robbins:

Why there are two conflicts, one involves their relationship to the corporation and the other involves their relationship to other stockholders.

These people are here suing for a class of stockholders, not the entire class.

This is a representative action on their part in trying to sustain what the Court of Appeals did earlier in trying to get the Court of Appeals to change what the District Court did.

Now under such cases as Young versus Higbee, which Mr. Justice Black — where Mr. Justice Black wrote the opinion, they are acting as representatives regardless of their being officers.

Here they are suing individually as stockholders.

So there’s your first question as to conflict of interest with these various people where they are buying and selling for themselves, are only part of the class.

Sir?

You said bought, where did they buy it?

Melvin Lloyd Robbins:

They only bought, or to the extent that you can buy and sell, Weinstein would buy — advance his own money and two weeks later return the stockholder over to Fried and get reimbursed.

Now whether you call this a purchase and sale —

Apparently they were purchases and sales.

Melvin Lloyd Robbins:

Yeah.

Now the other problem is a specific Pennsylvania statute, actually there are three.

There is a Pennsylvania statute that says, where you have an over issue of stock.

The corporation may have to — maybe required to buy stock in the market and to give it to the innocent parties holding the over issue in order to avoid their losing the stock.

In that sense here maybe this corporation had an interest.

Now the corporation of which they were President and General Manager, the corporation may have had an interest in buying this stock, to get rid of this over issue and to put an end to this lawsuit.

They didn’t do that.

Now it’s this kind of conflict of interest which is a problem.

Thirdly there is the fact that you’ve got a relationship where Weinstein and Fried are suing individually as stockholders and they bring the Debtor in and they are using the Debtor that they control to take a certain position in this case where the Debtor has no interest.

And this is your third problem that presents certain conflicts of interest, their use of Debtor where the only benefit accrues to them individually as to the number of shares or a proportion of shares they would hold, and where they disclaim the only remedy the corporation would have, a money judgment on the stock for the unpaid subscriptions.

Now it’s my position that they have these various conflicts of interest and that you have the special body of federal law that just denies compensation and would remove them, and should remove them.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

It doesn’t speak in those terms Your Honor.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Oh.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Not quite Your Honor, there is a history on that odd provision.

It’s a disjunctive thing.

It goes back to the legislative history.

That last clause which makes the reference to the Court approving a sale refers to an involuntary sale.

I shouldn’t use the word sale, it refers to an involuntary transfer, primarily the situation where a man dies and by operation of law his stock or his claims, bonds, securities, lined or passing through an estate, the decedent’s estate into somebody else’s hand.

You also have possibly the situation where a person pledges stock and then there is an involuntary foreclosure of the stock.

This problem was last presented in the Second Circuit, in the last opinion before Nazareth, the Surface Transportation case or the Third Avenue, where they’d have to draw the distinction between the situation of the broker foreclosing on a margin call and the stockholder individually just voluntarily selling it.

At any rate the only time that comes into play is when it’s involuntary, not when you have a voluntary purchase or a sale.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Oh no, no.

Actually the very first case, the Otis in 1940 in the First Circuit, let me see if I can find it, Otis & Company versus Insurance Building, it’s cited at the page 144 of Petitioners brief Your Honor.

Melvin Lloyd Robbins:

Otis —

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Yes and I think you’ll find in that case the quotation of the legislative history which shows why you have that odd wording.

In addition Your Honor the Second Circuit case in 1959 the surface — you find — Surface Transit which is cited at page 144 also, you’ll find that case discusses exactly the same problem of just what that last clause means in the limited area of Court approval of the sale.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

That’s right.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Quite true Your Honor.

Byron R. White:

[Inaudible]

Melvin Lloyd Robbins:

Well, with two qualifications.

First of all, you can see from the record, of course this would depend on what happens on the stock claims, you know what interest there is and what profit there is in the stock.

You have the two companion cases.

The other is that the other question that the Court never reached where the other grounds that were cited, this business about the rent diversions that were committed by Weinstein and Fried, you had a situation where Judge Sugarman said, all I’m going to consider is just the purchase of stock and I will consider that only under Section 249.

So he said, I don’t have to consider anything else except just these bare facts that trigger the section, they bought the stock while they were fiduciaries of the debtor.

And thereafter 249 comes into play.

Now —

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

I would say no Your Honor, but this was in answer to Mr. Justice White, that if you’re looking to get some idea of profit or motive, you can see some of it from the companion case.

I submit that the reason that the statue is absolute is that Congress and this Court in the past don’t want this sort of inquiry.

They want a certain sort of conduct and they don’t want to have to get involved in these questions of profit and motives and whatnot, but if you’re looking for it, I think it’s quite transparent and vivid in this case.

Now the other question is the race track matter; there Judge Sugarman said I’ll put this off this until we have the question of the accounting of the rents, which came much later and is still pending.

When it got to the Circuit, Judge Friendly didn’t even mention it.

I mean his approach to this apparently was since Judge Sugarman didn’t go any further than this, neither would he, but the difficulty is that not only didn’t the Circuit consider it, but there was a refusal of remand so that it never got considered.

Now this again remains to be decided to address myself, I think to what Your Honor was referring to as to the scope of this Court’s review, these facts are for the most part are undisputed as to what these people did.

It’s a question of the legal meaning of it.

I’m talking about the legal consequences only for purposes of compensation and continuing service, which is not the same as the accounting of the rents and for those purposes I submit if you had to and I hope you never have to get to it, if you had to get to that you could decide it on the merits.

But if you should agree with Judge Friendly, you still have the rest of this, this rent diversion problem, and I don’t think you can just drop it as Judge Friendly did.

Thank you.

Earl Warren:

Mr. Rosen.

Alex L. Rosen:

Chief Judge Warren, Honorable sirs.

Alex L. Rosen:

First Your Honors I would like to lay to rest a preliminary statement that was made to this Court perhaps unintentionally by the petitioner.

This debtor corporation was insolvent from its inception until its demise.

And all Your Honors will have to do, except that I have a shortage of time is to look at Volume 2, Folio 10561, page 540 and you will note that the liabilities exceeded the assets.

They were technically insolvent.

They were equitably insolvent in 1951.

The only surplus they had was $1500, their quick assets.

It was only one thousand some odd dollars and their quick liabilities was four thousand some odd dollars.

In 1953, they were equitably insolvent.

There were judgments by Mr. Margolis and Mr. Livings and that was the reason that Chapter X reorganization was filed.

In addition, I should bring to Your Honor’s attention —

Arthur J. Goldberg:

[Inaudible]

Alex L. Rosen:

Your Honor –-

Arthur J. Goldberg:

By the district court?

Alex L. Rosen:

There were no findings by anyone Your Honor, but they are in the very exhibits that are attached, part of this very record.

Could you give the reference again for the record?

Alex L. Rosen:

Folio 10561, 10563.

10561, 540 —

Alex L. Rosen:

That’s right.

And then, you have folio 10564, you have all these statements that are attached right to this part of this record, which show unequivocally technical and equitable insolvency.

I should also advise this Court that there was adjudication here to the extent of a petition in reorganization filed.

There has been no appeal from that and under Chapter X this corporation was bankrupt and in the reorganization.

Now, there was no appeal from that.

As a matter of fact that was contested by Mr. Margolis.

Again, I say the petitioner probably forgot about it.

I do think that even though I have short time I should tell this Court a little bit about the facts, which have not properly been explained to this Court.

Real estate syndication and promotion Your Honor has become big business and as a matter of fact, a great number of bankruptcy cases now are pending involving real estate promotion and syndication, bankruptcies.

This case will act as precedence in that particular field as far as modern times are concerned.

Unfortunately, the syndicators and promoters of today take the public’s money and they represent that capacity individually in escrow and for a specific investment in specific parcels of property.

In other words, a syndicator may have four or five parcels that he is selling to the public.

He will come to Mr. A and say to Mr. A here is parcel, it is a good parcel, buy it at interest.

Alex L. Rosen:

Mr. A, then gives the syndicator a check.

Unfortunately, Mr. A is the unsuspecting innocent public, he doesn’t make out a check to the promoter in his name as Escrow E or the specific parcel in some instances, he gives them the check to his own order.

In some instances, he even he makes it out as agent, in some instances he makes the check out as Escrow E.

The promoter in turn takes these checks; in some instances deposits it into a special account.

When he is a high class honest promoter, he keeps it intact for the specific purpose given to him to invest in a specific parcel.

When he is a crook or an embezzler as John Malakoff was, he takes the money, diverts much of it for his own use; uses part of it for one purpose, part of it for another purpose.

This is the saga of the Nazareth case.

It started off in 1951 of April.

Eddy Malakoff was a real estate operator.

He bought this Nazareth Market in Pennsylvania.

He had an uncle, John in New York.

John was a promoter and syndicator.

Eddy Malakoff had paid only $47,500 cash for the entire parcel, subject to certain adjustments.

John Malakoff, a fraudulent promoter in New York who was the uncle of Eddy is met by Eddy in New York.

Four people are present.

Eddy and John induce those four people to buy at one-fourth interest for $16,000.

Earl Warren:

We’ll recess for a bit.

Alex L. Rosen:

Yes, Your Honor.

Earl Warren:

Mr. Rosen, you may continue your argument.

Alex L. Rosen:

I believe, Your Honors we’ve reached New York where Eddy and his Philadelphia Group came with his uncle John; met his uncle John, four people were there and they sold them a one-fourth interest for $16,000.

The money was given by these people.

That’s also by an exhibit of John Malakoff’s record.

Anything I state Your Honor you will find in the brief represented by an exact exhibit or statement, not my statement.

These moneys that were paid for the purchase of this Nazareth Market was entered on the books of a partnership as a capital contribution, so that the purchase price of $47,500 cash was the capital contribution of a partnership although, they have titled in several corporate banks because they gyrated this property between two corporations and two partnerships.

I cannot have the time to go into that Your Honors, it’s within the brief.

Then, John Malakoff agreed to buy the entire market.

It must be borne in mind that the $16,000 that the original four people gave as their investment was entered in the books and records not in their credit, but for the credit of John Malakoff, the promoter.

It must also be borne in mind that — and according to the record of Malakoff, he was only to get one-third profit in the event of resale.

So, he owned nothing at that time in equity and in fact merely a technical entry in a book.

The peculiar thing is Your Honors that the petitioner in his main brief and throughout eight years or seven years has contended that John Malakoff owned this Nazareth equitably and owned the stock of the corporation.

Alex L. Rosen:

He has never submitted to this Court the basis of that ownership, because there is none, factually there isn’t any, none of John Malakoff’s money went into this transaction, not one cent.

As a matter of fact, he defrauded the public and took almost $100,000 and pocketed it, over and above the purchase price and this is how he and the Philadelphia group did it.

When John Malakoff agreed to buy sometime in July of 1951, the entire Nazareth deal, in fact he was acting for the general public, because he was going to get the money from them not his money.

[Inaudible]

Alex L. Rosen:

Same purchase price that the Philadelphia group paid for it plus $2,000 in adjustments and then even the District Court didn’t know the amount, an undisclosed amount, which Eddy Malakoff claimed was $30,000, but in essence it was the same purchase price that John Malakoff was supposed to pay the Philadelphia group, but that wasn’t what they were going to get Justice Goldberg, because what they were going to get was as much money as they could collect from the public.

[Inaudible]

Alex L. Rosen:

The same purchase —

[Inaudible]

Alex L. Rosen:

The same purchase price, $66,000 was the sale subject to two mortgages of $18,500 cash involved $47,500.

Unfortunately, I must say, neither the Examiner or the master or the District Court saw these particular facts, which were directly in evidence in statements and schedules, but they are there to be seen unquestionably.

Arthur J. Goldberg:

Where did that come from?

Alex L. Rosen:

Now that money came from the general public, because what happened as John Malakoff agreed to purchase this property, he kept collecting from the innocent investors, money.

As he got their money, he paid off the Philadelphia group.

Not only did he do that, but the Philadelphia group converted this capital contribution that I spoke of, the $47,500 cash from a contribution in the partnership books.

They converted it into a loan account, so here we have the purchase price, again an indebtedness of the partnership and they then formed the Debtor Corporation and transposed the ledger sheet into the corporate books of account.

So what happens at that stage of the game?

The Corporation owes the Philadelphia group and John Malakoff the $16,000, $17,000 that the people gave him originally on the books of the Debtor Corporation.

John Malakoff is collecting money from innocent investors and Bank of Philadelphia on top of it, almost $60,000.

And the Debtor Corporation is insolvent, because the only capital that they left was $1500, the rest were debts.

The property was covered by the debts of the purchase price sold to Philadelphia and owed to John Malakoff and that’s how they started.

In 1952, they lost money and they were technically insolvent and Malakoff was still collecting money.

Now the Corporation was technically insolvent, liabilities exceeded assets and John Malakoff was selling the innocent public waste pieces of paper.

Arthur J. Goldberg:

[Inaudible]

Alex L. Rosen:

It couldn’t have gotten in for this reason Judge Goldberg and there comes the distinction where the Court of Appeals was absolutely justified in what they did, because the true situation in the issue here is very simple.

Once you get away the clouds and all this nonsense that has been inside of in this case.

The fact is this.

John Malakoff had creditors, personal creditors and people that he owed obligations to.

Arthur J. Goldberg:

[Inaudible]

Alex L. Rosen:

Yes sir, other deals.

He couldn’t pay the antecedent indebtednesses, and he couldn’t pay these creditors.

Alex L. Rosen:

These creditors pressed him for money or they said the deal is no good, we want something else.

So, John went ahead and gave them interests in the Nazareth Property.

These are the people that the Court of Appeals said are not entitled to share, because they never contributed anything.

They never intended to contribute anything.

They never invested in the specific parcel of property of Nazareth and besides with Your Honors, if we consider that as a Corporation for the sake of argument, the money could never reach the Treasury of the Corporation for creditors.

When you sell stock of a Corporation, the purpose is to get the money into the Treasury as a trust fund for creditors.

Now that was impossible under the arrangement where he satisfied his own debt, because the money could never reach the Treasury.

Now these are the people whose claims were disallowed and these were the only people whose claims were disallowed.

And what did the Court of Appeals do Your Honors.

The Court of Appeals said the people that actually gave the money for a specific purpose, for a specific investment for this venture, their hard earned dollars, widows, they are the ones that are entitled to share, not people whose debts were satisfied by this fraudulent promoter’s acts.

Certainly this Court would not allow this fraudulent promoter to satisfy his own debts with interests in a venture, which would result in a depletion of the innocent people’s investment.

In other words, the property cost $66,000, $47,500 cash and that was the market value.

The petitioner gets up and says there was no value on this property, that’s an absolute untruth Your Honors.

The market value at the time of purchase and sale, it’s in the record, was $66,000, $47,500 cash only $9,000 in improvements that was the value.

Now people gave approximately $160,000, innocent investors, to allow Malakoff’s creditors satisfaction of their debt to come in.

The net result is this; the $160,000 never reached the Treasury.

The property is only worth, let’s say $60,000 with the improvements and you’ve got $160,000 against $60,000.

When I start hearing language like contracts, Mr. Weinstein or Mr. John’s interests were increased, it’s ridiculous.

Let’s say Mr. Weinstein gave $7,000.

The promoter was selling $200,000 worth, 200 shares generally at a $1,000 a share.

$200,000 should have reached the treasury.

Mr. Weinstein would have had $7,000 in proportion to $200,000 in the treasury, instead of what Mr. Weinstein had $7,000 or nothing, because the company was insolvent.

How anyone can come to this Court and say to this Court that by this decision, Mr. John’s or Mr. Weinstein or any other investor increases, gets more than he contracted for, is beyond belief, just doesn’t standup according to the facts.

Hugo L. Black:

I see you didn’t cite Section 249.

Alex L. Rosen:

No, Your Honor, I’ll come to that, only two sentences because I want to cover the stock clearing.

Hugo L. Black:

Well I have no objection to that.

Alex L. Rosen:

Thank you very much Your Honor.

Hugo L. Black:

I want you to mention it before you finish.

Alex L. Rosen:

All right, thank you very much Your Honor.

Thank you very much.

Alex L. Rosen:

Now, Your Honors would kindly understand what this Philadelphia group and John Malakoff did.

They converted those capital contributions into loan accounts and that’s the way they carried the thing right through into the corporation.

So they became creditors of the corporation for the purchase price which was paid for by the general public and they pocketed an additional $100,000 as far as John Malakoff is concerned.

Now, this is the man that these petitioners come in and say own this property, and this is the man they say could satisfy his debts by giving interest to his creditors.

I wouldn’t care whether it was State Law, whether it was Federal Law, International Law.

There is no law in this world that would sustain that kind of a claim.

Gentlemen, there is no issue that Malakoff was a promoter or a syndicator and a fiduciary.

He used to get receipts.

The investors received receipts from him showing, in many instances, that he held the money in escrow; he held the money as agent.

The checks were made out in many instances as agent and Escrow E.

There were cases cited where that type of a situation clearly creates a trustee and fiduciary.

He only was supposed to get a management fee, that’s in the record.

The key and the finish to this entire situation happened as follows.

On December of 1952, Malakoff was already in trouble with some of the innocent investors and he went down to Philadelphia to get the books and records and everything else.

And when he went down to Philadelphia to get the books and records in December of 1952, he brought his accountant along and he brought Mr. Haller’s attorney along.

And at that time, the accountant examined the records and he said what’s happened to the money that belonged — that the investors gave, the testimony is there.

Mr. Malakoff said I’ll put it in later.

Now, Malakoff, if he owned this thing, he didn’t have to put any money back.

Now, on top of that as additional proof of this terrible fraud that was committed here on which the petitioner relies that Malakoff’s creditors should share in this estate, comes May and June of 1953.

And again, Mr. Malakoff now is in very serious trouble.

Some one had gone to the District Attorney’s office, there were all kinds of trouble and that’s in the record.

And Mr. Malakoff goes ahead with his attorney Mr. How, who was a Director and Officer of the Corporation back in December 1952 as well as in May and June of 1953 and they pre-date and draw a fraudulent set of minutes.

And what do they do in these minutes?

They provide that Malakoff is to get the stock for $75 a share and he was selling it for a $1,000 and why did they do it, to cover up the fraud and he didn’t even pay the $75.

He went and credited against his phony loan account.

Now, this is the man from, through and under whom his creditors received interests, which diminished the interest of innocent investors whom this petitioner comes in and says the Court of Appeals did wrong in disallowing these interests.

William J. Brennan, Jr.:

On what ground, on what basis?

Alex L. Rosen:

Equitable, legal or otherwise.

I have asked this Honorable Court to disregard this corporation entirely.

Now, look at the realities, actually what this man was selling was interests in a venture.

Alex L. Rosen:

He used the corporation as his alter ego.

He defrauded.

His receipts that he gave and his contracts that he gave, he stated that if he wanted to change it to a corporation he could change to a limited partnership, so the intention of the parties was also, that this was merely a transitory vehicle, the corporation merely held title temporarily, what these people really were buying was shares and interests.

Under those circumstances, through true justice, technical corporate law is necessary here, what is the truth here?

They were buying shares in this Nazareth market.

This is a perfect case for setting aside the corporation and what was each man’s interest, what money did he pay, that’s what he’s entitled to, and that’s based on dollars and cents, that’s the fairest way.

Arthur J. Goldberg:

[Inaudible] the Court of Appeals.

Alex L. Rosen:

The Court of Appeals in substance did that Your Honor, Judge Goldberg.

As a matter of fact, the Court of Appeals felt, let’s take these innocent people; they are the ones that are entitled a share of the creditors of Malakoff.

They didn’t change their position any.

This was an antecedent.

No estoppel of any kind can be held there against the innocent people, certainly an estoppel can be held, whether it’s a joint venture or whether it’s a corporation with a President and officer.

One more thing, bear in mind, that this President of this corporation John Malakoff, when he satisfied a debt of a personal credit, then that was a personal transaction, he wasn’t acting in a representative capacity.

This was a personal transaction.

In the instance of the innocent investors, there he was acting in a representative capacity as agent.

Now there were fundamental differences between the investors and non-investors, they are apparent on the face of it, and why the Court of Appeals held it the way they did.

The investors gave their actual dollars.

The non-investors gave nothing, because they merely got paid in satisfaction of a personal debt of John Malakoff to them.

They changed their position, nothing, they gave nothing, and antecedent debt is not a good faith purchase.

The investors relied on John Malakoff in a representative capacity, the non-investors could not rely on them in a representative capacity, because the non-investors satisfied merely a debt.

Now, this was in fraud of creditors incidentally.

There were existing creditors, and the statement showed there were existing creditors.

So what was done by John Malakoff to satisfy his own debt?

Would estoppel of corporation where the money should have gone into the treasury was of absolute fraud of existing and future creditors, that’s beside the point, beside the innocent stuff.

There’s been a question raised about applying State Law and about applying Federal Law.

There was no question that this is a bankruptcy proceeding and so been adjudicated, and that they were bankrupt.

Section 196 of the Bankruptcy Act, Chapter X proceeding, gives the Bankruptcy Court the power to determine the interests of stockholders.

Article 1 Section 8(4) of the Constitution provides for a uniform enactment in bankruptcy.

Section 2(a) of the Bankruptcy Act provides allowance, disallowance in subordination of claims.

Section 7 causes the estates of bankruptcy to be collected, reduce the money distributed and determine controversies in relation thereto, and to liquidating.

Alex L. Rosen:

Section 17 says, title to all property is in the bankrupt.

The cases decided by this Court have set down a definite pattern and a definite law that a Bankruptcy Court has the powers equitably to determine, to allow, disallow, subordinate the time and rights of parties claiming an interest in and to any property that comes into the possession and is owned by the bankrupt in a bankrupt state and then, by the trustee in bankruptcy of which the Court takes jurisdiction of.

[Inaudible]

Alex L. Rosen:

No Your Honor.

Circumstances with the state.

Alex L. Rosen:

No Your Honor.

Well, I am glad you raised that question.

Nowhere in the entire brief, now the petitioners come in here and cry blue murder and they say, state Law should be applied.

They haven’t given one case of New York State or Pennsylvania or any other state, which shows that in an insolvent state, people that haven’t paid for an interest, that are creditors of any promoter are entitled to share on an equal basis with innocent investors.

There isn’t a case they have given on it.

They merely cry that State Law should be applied, what State Law?

And I say Your Honors there can be no Court that under these circumstances would give creditors of a fraudulent promoter and interest in the lease of bankrupt estate, which results in diminution of the interest of innocent investors, it can’t be.

There has been much ado raised about the Rules of Decision Act Your Honors and the Rules of Decision Act was decided in Local Loan Company against Hunt, 292 U. S. 234.

In that case, the Court clearly surveyed it, it’s on Page 17 on my brief.

The Court clearly said, we find it unnecessary to consider whether this contention would in a different case find support in 34 of the Judiciary Act of 1789, now 725, titled so and so.

Since we are of the opinion that it is precluded here by the clear and unmistakable policy of the Bankruptcy Act that is important to bear in mind that the present case is one not within the jurisdiction of a State Court, but as the defendant suit to vindicate the decrease of the Federal Court of Bankruptcy anchored in the exercise of the jurisdiction essentially Federal and exclusive in character and in that situation, which we address ourselves until which our decision is confined.

Naturally, if the Bankruptcy Court has to weigh, sift the different rights of the different parties to the lease, they must depend on particular circumstances of the case and they must equitably apply their own principle, because it depends on each particular case.

In the case of Erie against Tomkins, which has raised such a big bubble by the petitioner and which for a while was troublesome to most of the Federal Courts, because previously the Federal Courts clearly had said, a Bankruptcy Court does not have to apply generally State Law, it can apply its own principles according to the circumstances of the case.

Erie against Tomkins came along and that was a tort case, a non-diversity tort case and the Court in that case properly held it’s a tort case, non-diversity case, happened in a particular state, we should apply the laws of that state, they were correct.

Unfortunately, students of the law and the lower Courts started to apply that case to bankruptcy.

What happened Your Honors?

On three occasions, this Court has held that Erie against Tomkins doesn’t apply in bankruptcy cases.

They held it in Pepper against Litton, now I haven’t got time to read the full decision.

They held it in Heiser against Woodruff and they held it again in the Vanston case that Your Honor Judge Black asked about.

I am sorry, I believe Judge Brennan asked about the Vanston case originally.

Now, in the Vanston case, it explicitly states in determining what claims at Vanston against Green 329 U.S. 156 clearly stated in determining what claims are allowable and how a debtor’s assets shall be distributed, the Bankruptcy Court does not apply the law of the state where it sits.

Erie against Tomkins had no such implication, but Bankruptcy Courts must administer and enforce the Bankruptcy Act as interpreted by this Court in accordance with authority granted by Congress to determine how and what claims shall be allowed and under what equitable principles.

In Gardner against New Jersey and this was a case where the state came in and said, we are entitled to certain taxes, our law says this is what we are entitled to get.

And you must recognize our State Law.

In that case and if we had to recognize State Law then, then presumably and this Court would so hold, we’d have to recognize it throughout.

Alex L. Rosen:

And in the Gardner case, the Court held, without that sifting process, unmeritorious or excessive claims might dilute the participation of the legitimate claimants.

It is the traditional Bankruptcy Law that he who invokes the aid of the Bankruptcy Court by offering a proof of claim and determining its allowance must abide the consequences of that procedure, [Inaudible] on bankruptcy clearly supports the contention that a Bankruptcy Court has to go through this sifting process.

What the petitioners would like a Bankruptcy Court to become is an administrative office.

Once a state says a claim theoretically is good, the Bankruptcy Court must acknowledge it and must allow it to share.

The Federal Court is not an administrative office and that was not intended by Congress.

They have a right to look behind a claim.

Even if it’s a judgment, where it hasn’t been tried and proved.

They can look behind the claim to see if it has any merit and this is exactly what the Court of Appeals did in this particular case and their ruling on that base should be approved.

Now a very unique and a very unusual theory were expounded by the petitioner.

He called it recapitalization and he said what these promoters did, what the Philadelphia group and John and Eddy Malakoff was business sophistication, the words sound beautiful.

[Inaudible]

Alex L. Rosen:

Yes, Your Honor.

[Inaudible]

Alex L. Rosen:

Alright Your Honor, how much time I have Your Honor.

I am sorry, under 249 just one thing, if you please, one very important thing if you please, thank you Your Honor.

The question of res judicata is very important to me Your Honors.

I’ve worked on this case for nine years, 10 years for this debtor unfortunately so, unfortunately so.

As an officer of this Court and as an Attorney for the debtor and debtor in position, I felt that it was my duty to find out who are the honest claimants and who are the dishonest claimants and put everybody to their proof, I didn’t pick any particular claimant.

When the claimants put in their proof, all the claimants put in their proof and I made every one of them put their proof through a trial.

I had asked that in the event the Court allows a claim and the money was not paid and no investment was made and the Court allows the claim, I said the least the Court can do is make him pay.

The District Court allowed all the claims investors, non-investors whoever it was and I felt that was an error, but then allowing all the claims control was timed over to a Mr. Danciger and to the petitioner’s group, control of the Board of the Directors of this debtor and the result was that they didn’t allow me to appeal.

They wouldn’t even pay for the brief, printing of the brief, I felt it was wrong.

Fortunately, they appealed and I interposed this entire case to the Court of Appeals and interposed this claim that we are entitled to receive money in the event stock is allowed.

The Court of Appeals fortunately granted the first alternative relief, they disallowed the claims.

Under those circumstances, I couldn’t ask for money.

I’ve gotten the relief I wanted in the alternative.

If by chance, this Court for any technical reason allows these claims, I say there is no res judicata.

I still should be entitled on behalf of this debtor to get the money into this Debtor Corporation that wasn’t paid for the purchase of stock by these non-investors.

I was only stopped by the petitioners who took control of this Debtor Corporation.

Now it’s with poor taste that they come before this Court and try to charge, res judicata against this debtor under those circumstances.

Alex L. Rosen:

And so far the 249, Your Honors, I took – the debtor had to take the following position.

There were some raiders in the course of the Debtors reorganization and I used that expression well advisedly.

Earl Warren:

There was some what?

Alex L. Rosen:

Raiders, R-A-I-D-E-R-S, Your Honor.

It isn’t the raiders that we see on television, Your Honor.

These raiders were represented by the petitioner and petitioner’s attorney.

They had a tenant of the Debtor by the name Eric.

This tenant by the name of Eric wanted to get a preferential lease.

He was only paying $9,000.

In the interest of the Debtor we tried to get the most money that we could.

We thought we could get $50,000, realtor refused to pay it.

He then went out together with his attorney and with the assistance of the petitioner’s attorney and started to raid this Debtor in the organization and they started to buy up stock.

Some —

[Inaudible]

Alex L. Rosen:

I believe there are some.

[Inaudible]

Alex L. Rosen:

Yes, Your Honor.

That’s right, right in the record he admitted it.

He admitted it, he got up on the stand and if Your Honor will give me time I will show you right in the record, the man got up on the stand and said, if I get control I am going to give myself an exclusive lease that I’m going to pay as much as I can.

Hugo L. Black:

I believe you were telling me, I never heard by the other side or you in short and simple statement of the facts how the claim under 249 arises?

Alex L. Rosen:

All right, I will give it you, Your Honor.

Hugo L. Black:

Just as short as you can and make it clear.

Alex L. Rosen:

I will Your Honor.

The facts arise in this manner, Your Honor.

When these raiders started to buy up the stock, some of the stock claims notified Mr. Weinstein and Mr. Fried that they had been approached by these raiders to buy the stock.

Weinstein and Fried then said to them, don’t sell the stock would be all right after reorganization.

They said we have to sell because we want to get out of this thing, it’s nine, ten years going.

We haven’t received a penny, we are going to sell it.

Even though they were advised by Weinstein and Fried’s offices not to sell it, Weinstein was the officer, Fried the employee and that’s in the record so admitted and so testified to.

They under those circumstances sold the stock to Weinstein and Fried and the record explicitly says, that the District Court doesn’t say they did anything immoral or not in the interest of the Debtor, but the District Court says, technically because you did buy stock then I hold that you violated Section 249.

Hugo L. Black:

Who loses what [Inaudible] what is it?

Alex L. Rosen:

Nobody lost anything, Your Honor.

Hugo L. Black:

Who loses on this claim, who is claiming something that this 249 application was bad, takes something away from or gives?

Alex L. Rosen:

Nothing, except that the petitioners wanted to get rid of the —

Hugo L. Black:

I’m not talking about what they wanted.

Alex L. Rosen:

There was no money lost.

Hugo L. Black:

If he wins on his 249 claim what does he win and from whom?

Alex L. Rosen:

He gets control of the debtor.

Byron R. White:

[Inaudible]

Alex L. Rosen:

Yes sir, yes Your Honor.

Byron R. White:

[Inaudible]

Alex L. Rosen:

No Your Honor.

Nothing, they merely removed them from office and the District Court gave —

Byron R. White:

[Inaudible]

Alex L. Rosen:

Yes, stopped their compensation and said, they couldn’t do anything with the management of the debtor and turned the management over to the attorney for the raiders.

Byron R. White:

And the Court of Appeals did what?

Alex L. Rosen:

And the Court of Appeals reversed it.

Byron R. White:

[Inaudible]

Alex L. Rosen:

That is right, under 249.

Byron R. White:

[Inaudible]

Alex L. Rosen:

Compensation.

Yes, Your Honor.

Hugo L. Black:

How much is involved in that?

Alex L. Rosen:

It’s a weekly compensation, $200 a week for running the market for the manager and $50 a week for President who goes up there once a week.

Hugo L. Black:

I am not talking about that, what’s involved in there?

Alex L. Rosen:

That’s been for over eight to ten years, but what they did Judge Black.

Hugo L. Black:

I don’t care what they did, how much money is involved in that claim and as between whom?

Alex L. Rosen:

If the Court was to sustain that they did an immoral act, an equitable act then the District Court could have made them give back the $200 a week for the last, as far as Mr. Fried approximately for the last seven to eight years.

Hugo L. Black:

I’m asking whether the money would be refunded?

Alex L. Rosen:

Refunded and $50 a week for Mr. Weinstein for a number of years.

William J. Brennan, Jr.:

[Inaudible]

Alex L. Rosen:

Yes, that would have been —

William J. Brennan, Jr.:

[Inaudible]

Alex L. Rosen:

Definitely moved them, they moved their authority back.

William J. Brennan, Jr.:

[Inaudible]

Alex L. Rosen:

Yes, Your Honor.

William J. Brennan, Jr.:

[Inaudible]

Alex L. Rosen:

That is right Your Honor.

William J. Brennan, Jr.:

[Inaudible] But the district court did not hold to reimburse the compensation —

Alex L. Rosen:

That is right sir.

William J. Brennan, Jr.:

And what is before us [Inaudible]

Alex L. Rosen:

That is right sir.

William J. Brennan, Jr.:

No question before us [Inaudible]

Alex L. Rosen:

Not to my knowledge Your Honor.

Assuming you prevail on the first part of your case, who is complaining about the second action, who is left to complain?

Alex L. Rosen:

The petitioners.

But supposing you prevail on this part of the action, anybody else?

Alex L. Rosen:

No, Your Honor.

They’d be out of the case.

They would have no interest in it if you prevail.

Alex L. Rosen:

They would have an interest, because they’ve also bought good stock in the course of their raiding, they got bad stock Your Honor, and they bought good stock.

Now —

That answers it.

Alex L. Rosen:

In the course of this rating, not only did I attack the stock of Mr. Weinstein and Mr. Fried, which was purchased on behalf of the debtor, but I attack the stock which was purchased on behalf of the petitioners represented by Counsel.

William J. Brennan, Jr.:

[Inaudible]

Alex L. Rosen:

Yes, Your Honor.

William J. Brennan, Jr.:

[Inaudible]

Alex L. Rosen:

I believe they did Your Honor.

William J. Brennan, Jr.:

[Inaudible]

Alex L. Rosen:

Frankly Your Honor, I don’t know whether they appealed from that portion of the case to the Supreme Court of United States.

Alex L. Rosen:

However, Mr. Harper is going to cover this 249 exclusively and he’ll cover it fundamentally himself.

Hugo L. Black:

You will tell us the facts of those, will you?

Alex L. Rosen:

Yes.

In conclusion Your Honors, the decision of the Court of Appeals on the stock claims should be sustained.

The decision of the Court of Appeals on the 249 should be sustained, not only because there was nothing inequitable done, but because this Debtor Corporation from an insolvent condition presently according to the Court of Appeals decision was earning $45,000 to $50,000 a year and on behalf of the debtor, we were not interested in removing the management for not doing anything immoral under the technical provisions of 249.

I’m sorry Your Honors I have taken more time than I should and I hope you won’t take it away from Mr. Harper.

Thank you very much.

Earl Warren:

Mr. Harper?

Harold Harper:

May it please the Court.

I understood that I was to have half an hour and I’m prepared to use that half an hour.

Earl Warren:

You may use the rest of the hour.

We have an hour aside and you may have whatever is left of the hour, that’s all.

If you could that it would be appropriate —

Harold Harper:

Give me only 20 minutes of an expected 30 minutes and I —

Earl Warren:

You are wasting time now.

Harold Harper:

Well, I appreciate it.

My colleague continued because of the questioning of the Court.

I will still try to be as brief as I can.

I want to talk first about 249.

My client Jerome Fried on the 4th of January 1960 found himself fired.

The Court did that from the bench in the course of colloquy.

The only order that was made at that time was the Court’s simple direction that he was fired and Fried asked the Court —

Hugo L. Black:

Fired from what?

Harold Harper:

That he was fired from his job as Manager of the Nazareth Property at Nazareth Pennsylvania.

And he asked the Court, “Am I fired entirely, because of Section 249?”

And the Court said, “Yes”.

We don’t have to leave it to that colloquy.

If we go to the Court’s findings, which we got to a month or two later, the Court there said that he had severed free and Weinstein from their positions respectively as Manager and as President.

Hugo L. Black:

On what page it is?

Harold Harper:

That is on page 249 of the record if the Court pleases.

Harold Harper:

He says that he has granted this application and it is at the bottom of the page, solely and you’ll notice the Court underscores the word solely, solely because, they had violated Section 249 of the Bankruptcy Act by trading in the debtors stock and upon no other basis.

At another point in these same findings, he repeats that same language and again, he underlines the word solely.

So that there can be no question that the Court was not exercising any discretion or attempting to exercise any discretion or considering any other matter except whether conditions of Section 249 mandated Fried’s discharge and Weinstein’s removal from the active conduct of the business.

Now, I take it to be ordinary of public law that if a Court has decided to point a law below erroneously that the mere fact that he might have reached the same result in an exercise of discretion will not justify affirming him.

And of course, the Court of Appeals reversed because they found that that Section 249 did not apply to these two individuals.

Now, may I say that while —

Hugo L. Black:

Why?

Harold Harper:

I beg your pardon sir?

Hugo L. Black:

Why did they not find it in the matter of interest?

Harold Harper:

They did not find — they found that it did not apply, because they were not the persons who were intended by that statute.

In other words, that an officer of a debtor in possession or a Manager active in the field as my client Fried was, were not people who are contemplated by Section 249.

Hugo L. Black:

Why?

Harold Harper:

Well, sir why I should say is this. Section 249 — well, first Fried was — Fried’s duties as Manager out in the field are roughly to collect rents, to see to the joint advertising, look after the disposal of garbage, to negotiate the leases of stalls, although, he had no authority to conclude the leases and no authority to sign checks.

Weinstein, while he had more authority as President of the debtor in possession was there not as a matter of merely being employed as Fried was, but as being appointed under Section 191 of the Bankruptcy Act with his salary of $50 a week being fixed by the Court.

Now, Your Honor asks why the Court of Appeals said that Section 249 does not apply to them.

My answer involves almost all that I intended to say upon this argument.

Hugo L. Black:

Well, I suggest before you get to that, that’s first time I’ve known exactly what happened.

Now they were fired, way back then, was it?

Harold Harper:

They were fired in the January 4th 1960, yes.

Hugo L. Black:

January 4th 1960.

Were they ever put back on the payroll?

Harold Harper:

The Court of Appeals granted a stay.

The District Court purposely —

Hugo L. Black:

The Court of Appeals granted a stay and let them stay in their jobs, did they?

Harold Harper:

The District Court stay — let them stay in their jobs, but without compensation, it directed that the compensation be impounded and it was —

Hugo L. Black:

And it had been done.

Harold Harper:

And it was impounded upon the decision of the Court of Appeals why the money was refunded.

Hugo L. Black:

They continued the work up till the Court of Appeals passed on it?

Harold Harper:

And are still engaged —

Hugo L. Black:

And the money was impounded and the money is there and that what’s that stayed in this particular branch of the lawsuit?

Harold Harper:

Well there’s a great deal of more at stake, that’s what I should say in this —

Hugo L. Black:

I mean the financial part of it.

The money part, is any money part involved?

Harold Harper:

One thing that the petitioners asked for and they didn’t get was a recoupment of all of the moneys that these men had earned in the — well it’s now nine years, seven years then, that this case had been going through the this reorganization proceeding.

Roughly if you took the salary at about $10,000 a year that means that about — somewhere between $6,000 and $7,000 would have been involved in that time, somewhere around $9,000 or $10,000, assuming that this Court should decree recoupment.

William J. Brennan, Jr.:

[Inaudible]

Harold Harper:

If the Court pleases, yes.

William J. Brennan, Jr.:

And there is no money impounded now?

Harold Harper:

So there is no money impounded now?

William J. Brennan, Jr.:

[Inaudible]

Harold Harper:

Pursuant to the result achieved in the Court of Appeals.

William J. Brennan, Jr.:

[Inaudible]

Harold Harper:

If you were to hold not only that the Court below was right in removing or severing them from the operation, but if you were to also hold that the Court should have granted a recoupment which it did not then you would have the —

William J. Brennan, Jr.:

[Inaudible]

Harold Harper:

Well I don’t think that was a law until Your Honor expressed it, I don’t think that was the law that they were required to be removed by 249 and that’s what I’m trying to argue sir.

William J. Brennan, Jr.:

[Inaudible]

Harold Harper:

I think so, and I think logically you should.

I think logically that goes along.

William J. Brennan, Jr.:

As the petitioners have [Inaudible] all along.

Harold Harper:

Now if the Court pleases —

Arthur J. Goldberg:

[Inaudible]

Harold Harper:

I say that because certainly Fried was not a representative of anybody, he didn’t represent anybody.

Arthur J. Goldberg:

[Inaudible]

Harold Harper:

[Inaudible]

Arthur J. Goldberg:

[Inaudible]

Harold Harper:

No the court didn’t report to continue.

Arthur J. Goldberg:

The Court could have, [Inaudible] is that correct?

Harold Harper:

The petitioner asked for that and the Court’s order was that if the petition was granted, my contention is that, that didn’t make Fried a de facto trustee, to use the language here, that Fried continued to be what he was before the petition for reorganization was filed.

That he continued to be a manager out there in the; field collecting the rents, removing the garbage, doing the other things which —

Arthur J. Goldberg:

Held accountable to [Inaudible]

Harold Harper:

And accountable to Weinstein as President of the cooperation, right.

Arthur J. Goldberg:

Accountable to the Court.

Harold Harper:

And in turn accountable of the Court.

Arthur J. Goldberg:

You a problem in Court, under the supervision of the Court and [Inaudible]

Harold Harper:

Well I assume that if Your Honor is reaching the word fiduciary, which is the only word that you can play with there.

Arthur J. Goldberg:

Wouldn’t you agree that the fact that you [Inaudible]

Harold Harper:

I should say so.

And I could also say perhaps that a person whose duty it was to sweep out these stalls was also working under the cost direction, the district court was in command of everything.

Arthur J. Goldberg:

[Inaudible]

Harold Harper:

I don’t hear Your Honor’s characterization but —

Arthur J. Goldberg:

[Inaudible]

Harold Harper:

I can see that Fried had a responsible position.

There is no doubt of that, but the question is, is he to be regarded as an applicant under Section 249.

Now if I may run over very quickly the reasons why 249 do not apply.

In the first place, it is a statue for strict construction, there can’t be any question about that.

It’s a severe penalty.

It’s a penalty because it doesn’t deprive a man of his profits on his shares as you do under Section 16(b) of the Securities Exchange Act.

You go to an entirely different field and you take from him the money that he has earned, the allowance to which he is entitled, I’m talking now to a person who does come under the act not about one who doesn’t, you are entitled a lawyer, you deprive the lawyer of his fees and not only of his fees, but of his disbursements.

But here in the case that is cited in my adversary’s reply brief decided only October by this Sixth Circuit, they took committee men there and they denied them recoupment of expenses of $20,000, they were fined $20,000.

Arthur J. Goldberg:

[Inaudible]

Harold Harper:

I take it that to correct me or was the purpose for the enactment of any penal statutes, but my point is that this is a penal statute and a very severe one and therefore, one that calls for strict constructions and applying strict instructions, if I may, you have these differentiations.

249 is found in Article 13 of the Bankruptcy Act.

Every one of those sections in Article 13 has to do with allowances, not one of them says anything about salary or wages.

Under Section — obviously, the compensation and the reimbursement that is not to be allowed under 249 must be.

The allowances that are permitted in the earlier sections and if you go to Section 247, you will find that the Court cannot grant an allowance without a hearing and without notice being given to the stockholders, everybody in interest, the Securities and Exchange Commission and so forth.

Now come to a man who is on a salary, be he a Manager or be he an Officer.

Hugo L. Black:

Was this one the President?

Harold Harper:

Pardon me?

Hugo L. Black:

Was one of them the President of the company –?

Harold Harper:

Yes, yes Mr. Weinstein was the President of the company, but take even the President on his salary.

Harold Harper:

Before he gets this $50 a week, is he required every week to file the statement that is required by 249 that he hasn’t traded and to file it not with his employer, but with the Court?

Hugo L. Black:

I must confess, I’m asking you these questions, because I had assumed [Inaudible] that’s why I won’t be arguing.

I had assumed that the President of the company would certainly be one of those who is an insider that the axe was aimed at.

Harold Harper:

Well —

Hugo L. Black:

I had assumed that up till now, up to this case.

Harold Harper:

The Court Of Appeals did not think so and since I see my time has expired and —

Earl Warren:

You may answer Justice Black’s question.

Hugo L. Black:

I wish you would.

You can take a minute or two to answer it.

Harold Harper:

Well, I say this, that Weinstein no more than Fried were included in any of these sections in Article XIII.

I say that Article — that Section 249 applies only to the persons to whom an allowance maybe granted under Article XIII.

I say it applies only to the people that we might characterize as the reorganization crew, the people who come there and here today and gone tomorrow.

It does not apply for the man who is — the people who are connected with the corporation all the way through.

And I say —

Hugo L. Black:

[Inaudible] found out, but I do want you to answer it?

Harold Harper:

And then the nature of —

Hugo L. Black:

Assume that United States Steel or one of those big companies put through a proceeding like this, do you mean that the President of the company would be free under this statute to deal in the stocks of the company while it was in process of reorganization?

Harold Harper:

Well, I hope I won’t offend if answer that question with a question.

Hugo L. Black:

Well I — you can ask – I pointed this to your associate [Inaudible] most important thing in the case?

Harold Harper:

I might answer the question with a question.

Do you suppose that in the case of United States Steel Corporation, that all of the managers of the various divisions, at the various plants, would have to file with the Court each week before they drew the pay, the statement required by Section 249?

Now it maybe that Congress ought to pass a law which would include the officers in — when you include the officers within the prohibition, the question here before this Court is, have they done it?

And I say they haven’t done it in view of the location of the section and in view of the differences between persons paid on a salary and the persons who have to look to the Court for allowance as a matter of grace to show that they’ve benefited the estate.

Thank you.

Earl Warren:

Mr. Robbins.

Melvin Lloyd Robbins:

Yes sir.

Let me address myself first, to Mr. Justice Black and apologize for failure to make — obviously a failure to make a fair opening in explaining the situation and then specifically to Mr. Justice Brennan.

We did take a cross appeal to the Court of Appeals on the District Court’s denial of that portion of our petition asking for recoupment and restitution.

Of course it was never reached by the Court of Appeals.

The question in the petition for certiorari to this Court on that aspect of the case was addressed to denial of compensation, and what was spelled out under that was it meant past and future and in that sense, the matter was before the Court of Appeals and is before Your Honors.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Yes.

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

In a word, yes.

Now, Your Honor, I should qualify one thing, Section 249 —

William J. Brennan, Jr.:

[Inaudible]

Melvin Lloyd Robbins:

Okay.

Your Honor let me — if the Court please let me say just one or two things about what Mr. Rosen had said on the stock claims.

First of all, Mr. Rosen said something about the widowers.

This is an interesting plea, because one of these widowers is Mr. Fried, his claim was allowed for $2,000, and as the record will show, this is one of the points that’s been raised about the arbitrary standard as a matter of Federal Law.

Fried’s $2,000 was a credit for a profit on another deal he had with Malakoff, for whom he had worked certainly since 1951.

His claim was allowed whereas other claims were disallowed.

You have both an arbitrariness in the application of this standard and a setting aside of facts by the District Court.

Now, what Mr. Rosen has been saying to Your Honors is that everything he has referred to is in the record, but what is in the record, in the sense that you’ve got a record of about 12,000 pages.

There is in utter disregard of the findings and if you’d pay – if you note this distinction between this massive evidence in the record and the findings, I think, Your Honors will find that many of Mr. Rosen’s statements are simply unsupported by findings.

Finally, this whole theory hangs on a concept of investors which is important I think in terms of this notion of fairness.

What it reduces to is Judge Morris saying pretty much, if a man wants to invest in a deal, a corporation or a venture, the only way he can do it is to make a direct investment say to the corporation like AT&T or U.S. Steel.

If he pays the money to the corporation, then he gets an interest, he intends to invest, but if he pays the money to a broker or an underwriter or another stockholder for that AT&T stock, then he does not intend to invest and I submit that there just isn’t any sense to this.

On top of which, what you have is the fact that everyone of these 36 paid his money to Malakoff, and the District Court found there’s an implicit finding of intention there, that everyone of these 36 without distinction intended to buy what Malakoff himself had to sell.

And that finding is based on the sort of evidence that I’ve copied at pages 23 and 24 of the brief.

Weinstein himself testified to on the road and what he put into a Proof of Claim, he drafted this key letter — letter received that most of the stockholders received and used in their relationship with Malakoff.

Finally – I’ll stop there.

Thank you.