Before GOODRICH and O'CONNELL, Circuit Judges, and KALODNER, District Judge.*fn**
KALODNER, Circuit Judge.*fn**
The issue here is whether an attorney for a protective committee for a senior security of a debtor in reorganization is disqualified from compensation for his services to the debtor estate, and reimbursement of his expenses, by reason of purchases by him and his wife of the securities of subsidiaries of the debtor, during the course of the reorganization.
The Court below ruled that there was a disqualification and this appeal is the result of its disallowance of compensation and expenses to the attorney. In doing so it held that an attorney for a protective committee for the security holders of a debtor in reorganization is a fiduciary and that regardless whether fraud or unfairness resulted, a fiduciary is barred from compensation (a) by the law of trusts and (b) by the Chandler Act, 52 Stat. 840, where he or a member of his immediate family group deals in securities of subsidiaries or affiliates of a corporate debtor in reorganization. The District Court also held it possessed the power and should exercise its discretion to deny compensation to the fiduciary under the existing circumstances.
It is unnecessary to detail the facts in view of the industrious manner in which they were recited by the Court below in its opinion - 64 F. Supp. 399. The following summary outline will suffice for the purpose of this review:
The Midland Utilities Company (Utilities), a Delaware corporation and registered holding company, filed a petition for reorganization under the provisions of Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, on June 9, 1934.
Of primary significance is the fact that among the principal assets of Utilities were its holdings of substantially all of the common stock of the Northern Indiana Public Service Company (NIPSCO) and 75% of the common stock of Gary Electric and Gas Company (Gary Electric).
Utilities itself had outstanding in the hands of the public $6,000,000 of debentures and $36,000,000 of preferred stock.
NIPSCO had outstanding in the hands of the public, approximately $49,750,000 of bonds and $22,000,000 of preferred stock of various classes.
Gary Electric had outstanding in the hands of the public, $7,343,000 of its bonds. Of its $5,000,000 outstanding common stock, 75% was owned by Utilities, as already mentioned, and 25% was held by the public.
From this statement, it will be noted that Utilities' underlying assets were thus subject to prior claims of the public owners of the bonds and preferred stock of NIPSCO and the bonds and 25% of the common stock of Gary Electric.
The appellant, Mr. Harold Evans, was the attorney for the Protective Committee of Utilities' Debentures known as the "Magill Committee." The Committee represented almost one-third of the $6,000,000 publicly-owned debentures of Utilities*fn1 Mr. Evans became counsel for the Magill Committee November 1, 1934, and represented it for a period of about 11 years.
The appellant's petition below for compensation disclosed that in 1936 and 1937 he purchased 100 shares of the preferred stock of NIPSCO and held them until they were redeemed in October 1944. It also revealed that his wife owned some debentures of Utilities and preferred stock of NIPSCO prior to the reorganization proceeding and that she engaged in five separate transactions in the securities of NIPSCO and Gary Electric during the pendency of the reorganization proceeding. The full details of these transactions are recited in the opinion of the Court below. At the time the appeal was heard Mr. Evans stated that while Mrs. Evans made the purchases entirely with her own funds, she engaged in the various transactions with his "entire approval and knowledge."
That brings us down to the questions which must be resolved in this review:
First, the appellant vigorously contends that neither the Bankruptcy Act (whether under Section 77B or Chapter X, 11 U.S.C.A. §§ 207, 501 et seq., nor the cases decided thereunder, nor the law of trusts, bars compensation to a fiduciary who deals in securities of a solvent operating subsidiary of a debtor in reorganization.
Second, the appellant asserts that there was no actual conflict of interest between the debtor in reorganization and the subsidiaries in whose securities he and his wife dealt during the course of the reorganization.
On the first point the appellant particularly urges that Section 249 of the Bankruptcy Act, Sec. 649, 11 U.S.C.A.*fn2, does not bar him from recovery of compensation and that the District Court erred in ruling to the contrary.
At the time the reorganization petition was filed on June 9, 1934, the proceeding was governed by the provisions of the Bankruptcy Act of July 1, 1898, c. 541, Section 77B, as amended by the Act of June 7, ...