principles of law, the Court finds that the Master was warranted in finding that a conspiracy to defraud did exist. Having found that the Master's findings are not clearly erroneous, under Rule 53(e)(2) of the Federal Rules of Civil Procedure, supra, the Court must accept the Master's findings of fact. Even though the Court is free to draw the ultimate inferences and conclusions which the evidentiary findings induce, the Court cannot say that the Master's conclusions are erroneous.
Respondent's contention that there is no evidence of conspiracy and that the Master's Report is founded on conjecture is without merit.
B. There Was No Motive For Corruption.
Bethlehem contends that it cannot be found that it engaged in a conspiracy to defraud because it had no motive for corruption. Bethlehem maintains that as mortgagee it had the absolute right of foreclosure, and therefore there was nothing Judge Johnson could do to prevent Bethlehem from acquiring the Williamsport properties. Furthermore, Bethlehem says it paid full value for the Williamsport properties.
It is to be noted that Bethlehem required the permission of the court to join the Receivers as defendants in the proposed foreclosure bill. Though a consent order was signed by the opposing interests agreeing to the filing of the bill, Judge Johnson still had it within his discretion to grant or refuse the request. Bethlehem, therefore, had no absolute right to file the bill of foreclosure.
Furthermore, under the circumstances and issues raised in the answers filed to the bill of foreclosure, it was within the discretion of the court to require the submission of a fair and equitable plan of reorganization before the entry of a decree of foreclosure. Bethlehem did not have an absolute right to foreclose.
As to the value of the Williamsport properties at the time of the sale, on the state of the record, the Court cannot say whether or not a fair value was received for the Williamsport properties. But even if we were to concede that Bethlehem purchased the Williamsport properties at the fair market value, it would not necessarily preclude fraud, because a sale may be void even though the buyer purchases the property at what appears to be the fair market value. Clements v. Moore, 1867, 6 Wall 299, 312, 73 U.S. 299, 312, 18 L. Ed. 786. It is conceivable that the plant was worth far more to Bethlehem than its apparent fair market value. This Court cannot agree that Bethlehem could not possible have hade a motive for engaging in the conspiracy.
C. The Master's Reliance Upon Hearsay Testimony Is Clearly Erroneous.
Bethlehem particularly objects to the admission of the testimony of Jacob Greenes, a liaison man between John Memolo and the Johnson family, which testimony was given to the Grand Jury investigating the conduct of Judge Johnson. Though admittedly hearsay, the Master admitted the testimony under the 'declaration against interest' exception to the hearsay rule. Respondent contends the Master was in error in admitting the testimony because the exception applies only to declarations against pecuniary or proprietary interests and not penal interests, as was the situation with Greenes. The Master relies mainly on Wigmore on Evidence 3rd Ed.) Vol. V, Sections 1476, 1477; Dissenting opinion of Justice Holmes in Donnelly v. United States, 1913, 228 U.S. 243, 277, 33 S. Ct. 449, 57 L. Ed. 820; and Sutter v. Easterly, 354 Mo. 282, 189 S.W.2d 284, 162 A.L.R. 437, wherein the board rule that the exception applies to penal as well as pecuniary and proprietary interests is espoused. This broad view apparently has not been adopted by a majority of the courts,
but as stated in Root Refining Co. v. Universal Products Co., 3 Cir., 1948, 169 F.2d 514, 538, 'it may well be that in a proceeding in which the integrity of the court itself is under investigation, technical niceties should be disregarded and that testimony which has been subjected to the usual tests and safeguards should be admitted in order that the truth may be ascertained'.
In any event the question is rendered academic by virtue of the fact that the Master on p. 111 of his report states, 'I have reviewed all of the evidence in these proceedings relating to matters covered by Greenes' testimony and have found that there is ample evidence, aside from his testimony, to establish, either directly or by circumstances, every fact essential to the decision of this case to which he testified'. A study of the record has satisfied the Court that the Master is correct.
D. Former Stockholders And Bondholders Have No Standing In This Suit.
Having agreed with the Master's finding that there was no fraud as to the bondholders, the Court need only consider the position of the former stockholders.
It is a fundamental principle that a court of equity in a single suit will investigate and determine all questions incidental to the determination of the main controversy. Greer Investment Co. v. Booth, 10 Cir., 1932, 62 F.2d 321. Since the Court agrees with the Master's finding that the conspiracy began in July, 1936, to allow Bethlehem to retain any of the stock which it purchased from that date, Bethlehem would to that extent benefit from its wrongdoing. Only by setting side all sales to Bethlehem can the Court be certain that all defrauded parties will have been restored to their rights. As recommended by the Master, Bethlehem will be adequately protected by a provision in the Court's order requiring former shareholders to return to Bethlehem the money received for their stock, and interest on such amount, as a condition precedent to recovery.
The foregoing represents a response to each general objection which has been raised by the respondent to the Master's Report. This opinion is by no means exhaustive of the many matters of law and fact raised by respondent, but the Court does not feel that a more exhaustive treatment is called for under the circumstances. The Court is in complete accord with the Master's findings and conclusions, and to go into any greater detail than the Court has already done would be, to a large extent, merely a repetition of what the Master has so ably set forth in his Report.
The objections raised by the petitioners and the respondent will be overruled; the Report of the Master confirmed; and his findings of fact, conclusions of law, and recommendations, will be adopted.
Recognizing the importance of this case to all parties concerned, and that either or both parties may appeal from the order of this Court affirming the Master's Report, this Court, for the present, will withhold further action on the ultimate remedies to be afforded petitioners, including the ascertainment and distribution of assets and profits derived from the transactions, and the determination of the interests of all parties concerned. For the present, the Court deems it sufficient to declare all findings, orders, judgments, and decrees entered by the Court after July, 1936, which affected the title to Williamsport's assets and the distribution of the proceeds of the sale thereof null and void; to declare Bethlehem constructive trustee of the assets and of such of the proceeds as were distributed to it, together with all improvements, replacements and additions thereto and of all rents, issues and profits therefrom.
As to the preferred and common stock which was purchased by Bethlehem after July, 1936, Bethlehem shall be declared constructive trustee thereof for the rightful owners, subject to liens in Bethlehem's favor for monies paid to sellers, with simple interest.
An appropriate order confirming the Special Master's Report will be filed herewith.