Dabney v. Chase Nat. Bank of City of New York
196 F.2d 668
2d Cir.
1952
Check Treatment

*1 contrary, money trust existed. On Corporation have the let the effect the transaction paid legal back think exchange; it would be relationship. was to that were an- debtor-creditor her as soon as the checks create to ap- parted spoke legal She with the entire interest ticipated Saltiel to came in.” money exchange loaned pellant her “Mr. Crider told comply bankrupt’s promise any repay. to Like if she had assured [him] $1,500 creditor, it other request she had beneficial no with the advance would, money parted. terest in with which she not be considered a loan bankrupt’s exchange said The failure issue an exchange, and she be considered an $1,500, repay, check for the or to did not she would that under those circumstances appellant the nature issued of the transaction. do it.” At time alter bankrupt “Demand debtor which had failed check it carried the notation Paradise, pay loan,” these words its debt. McKee but she struck out See v. later “Exchange check.” 299 U.S. 57 S.Ct. 81 L.Ed. 75. and wrote in the words Compare Continental Illinois Nat. Bank Appellant knew of the that she testified & Trust Co. v. Continental Nat. Illinois bankrupt, that financial difficulties of Bank, Cir., 87 F.2d 934. corpora- she made out the checks for The order of the District Court is af- tion, to her “should have and that the check firmed. deposited my day I same been made out the check, exchange just did as an and I check

not make out.” was of the view that no

The referee held relationship existed. He rela- created a debtor-creditor

the facts bankrupt, appellant

tionship betwen and the claim, $1,- accordingly allowed the petition general DABNEY v. CHASE NAT. BANK OF 500 as a claim. On OF NEW CITY YORK. review, the District Court affirmed the referee, appeal followed. No. Docket 22129. appellant, her we understand conten- Appeals As States Court of United are such that Circuit. tion is the circumstances Second $1,500 bankrupt she advanced Argued Feb. fund, e., took on the character of a trust i. April 30, Decided as- established constructive trust. She Raff, decision in Reinhard that the serts Cir., F.2d settles the issue here presented. think not. We already stated, to the facts

In addition discloses Whitehall Stores

the record petition July adjudi- and was on

filed 31, 1950, bankrupt July

cated a on but the what,

proof any, show failed to cash deposit with its bank at

balance was July appear

time after does it nor promised

appellant could have cashed the had it been check delivered prove And there no evidence to

her. bankrupt and in to whom what manner $1,500.

paid the state of the record

In this the facts af- adequate no basis for a

ford conclusion

669 HAND, Judge. Circuit L. opinion in the extended The careful and F.Supp. reported in 98 court district Judges, Swan, dissented Circuit Clark and upon the and, when read with our part. Nat. appeal, Chase earlier Clarke v. conflicting Cir., states F.2d facts parties and the positions of the enough developed with the trial were proceed without to allow to detail us questions involved. to a discussion cor controlling how far the The issue is of unsecured porate trustee of series two from transactions bonds is bound to abstain give ad with the debtor which it may bondholders, vantage its bene over the particularly, ficiaries. More what solvency of the doubts continued a debtor should bar such collecting personal against claim adopted judge The the same debtor. charges creditor standard preference insolvent under debtor with Act; Bankruptcy ques the first findings tion is must stand ex whether his cept “clearly far so as they are erroneous.” We first shall address ourselves “Second Cause of Action”: i. e. $4,000,000, collection in loan of reserving being time the “Fourth Cause of i. e. Action”: August, finding securities in debtor, “Ageco,” that the was insolvent in fact, certainly 1932 is one of “clearly erroneous,” although, ap as will irrelevant, pear, been that turns to have out (Incidentally, we view the law. finding insolvency in 1934 was a fortiori “clearly erroneous.”) The information the bank in fact when loan paid dispute, is not in and we shall judge for argument assume that the Dabney, Jr., Lewis M. New City, York right in concluding enough it was Anderson, A. City, bankruptcy New York charge creditor in with a John counsel, preference appellant. Act, under sub. of § a, although U.S.C.A. too sub. we § Milbank, Tweed, Hope Hadley, & New ques deem irrelevant. There two remain City, York MacKinnon, A. Donald New (1), degree tions: whether a lesser of no City, Eugene York Nickerson, H. A. S. charge tice will serve the bank than Lourie, City, counsel, ap- New York creditor; charge (2), whether,, pellee. so, enough if notice to charge SWAN, finding it in Before Chief this case. The on the Judge, and L. first CLARK, reverse, question disagree HAND Judges. Circuit we we ex- decision —whether it, do, though disagree trustee’s even our as we ercise, exercise, power positive or not to think is not so ment —shall personal motives. conflicting be free from “clearly erroneous.” 1 Will, 64, 74 297 N.Y. aliquot Matter of Durston’s to take no more than his creditor *3 far 310, 313, example how of N.E.2d is an of an insolvent debtor share of assets the trustee, gone to search law; New York have imposed by duty of a courts of is The testator possible conflict. profit expense for such a possible of his to at the hold, power care given “to the had the trustees beneficiary, of is the most fundamental property for, manage control” accepts and when he becomes duties which he “to bequeathed, he or to which devised part obligation It his a trustee. is a of * * * any part all thereof sell * * * give loyalty, his his unidvided beneficiary interest; same reinvest to any conflicting personal free invest from * * * bearing or interest in such obligation an has been nowhere more thought they producing come securities” as jealously rigidly than in enforced been best. of the assets had shares Part were New York where indentures these trustees, duty the bank which he made one of “The most fundamental executed.2 held by of shares the bank until owed to the beneficiaries and these the trustee * * * The bank was duty loyalty greatly fallen in value. is the of to re- fiduciary loss its decision In some element held for the because relations others; been influenced peculiarly might tain the shares have more intense than it is 3 put upon the by its have them We should desire not to intense case of a trust.” market; disposed even the individual say be even without indeed to held, merely although trustee he had duty there could be no trust all. at approved the shares. the bank’s retention of distinguish York The defendant seeks Co., Cir., 503, 159 Guaranty 2 v. Chase National v. Trust 143 F.2d Hazzard 541; Id., App.Div. Cir., 57, 257 Mealey, 2 Misc. N.Y.S. Dudley 514 147 F.2d 287 v. 652, 950, 147; Id., 268, 272, 282 N.Y. 26 the failure 14 where we decided that N.Y.S.2d 801, corporate power contrary. N.E.2d With of a to use a is not to trustee exception liable, one it went no than to if his were in further make him decision interest; “gross decide that the bank not been any degree by self duced ly” principle negligent retaining in not of the precisely in those cases was and, far, security; circum it is not as here: i. whether the so relevant here. same e. bank, exception exercises a claim stances under which being creditor, security, power may be in itself a released the are such that his decision possible so that it the debtor by own interest to the could be could fluenced his sold and proceeds on its pay use the the interest detriment of his beneficiaries. bonds, general and thus avoid default to difference between cases cited and that here, prejudice of although the trustee the bank’s loan. This at bar is that money judge disposed by saying, express power: claim 159 lend i. e. to 66, 551, page page at at (a power im Misc. 287 N.Y.S. “Ageco” which did indeed loan), purpose power “the ply exer withdrawal to collect it, securities, also these so far as the bank’s knowl cised while there the trustees who express edge proven, powers them. has been furtherance of ‘had did not exercise expansion geographical policy and of a unimportant; that counts is That all 378; Inc., 483, 489, 490, Sidney Co., 121 Atlan- N.E. Mein- & v. Y. Blumenthal v. 458, Salmon, 468, Line, Co., Cir., F.2d N.Y. 164 2 139 hard tic Coast It. 249 v. 1; 290; 545, 288, Tea Marcellus First & Pacific N.E. A.L.R. Great Atlantic 62 Deposit 661, Co., Brasileiro, Cir., 372, 52 & 291 2 F.2d Trust N.Y. Co. v. 159 Ryan’s 907; Will, 665; v. United N.E.2d Matter Continental Insurance Co. 407, 909; States, Cir., Mat- N.Y. 52 N.E.2d 195 F.2d 527. Will, 246, 259, ter of Hubbell’s 302 N.Y. 419; Eyck Craig, 62 2. Ten N.Y. 97 N.E.2d 888. Co., Syracuse, & Munson v. G. C. R. R. Trusts, 355; § Globe Woolen 3. Scott 103 N.Y. 8 N.E. Co., 224 Utica Gas & Electric N. Co. v. consideration Thus come to the realignment holding com operating far, all, the loan panies.” how if at the collection question Hence no conflict spring conflicted forget interest We do not arose. plaintiff’s bondholders. opinion, later in his page at 159 Misc. should conflict, power If collect it did page judge N.Y.S. that: said for all yielded duty of loyalty, “The corporate trustee under a indenture * * * powers interpreted conditional are to defined, rights has his duties Although duty. observance of fiduciary relationship, ex knew the judge clusively by found agreement. the terms of the “bad,” “Ageco” to be financial condition of His status is stakeholder * * * opinion did findings nor in his neither in than one of a trustee. *4 Far meant, except adj he define what ective that refraining po occupying inconsistent by his may in be inferred sitions, so far as corporate that trustees have affirmative “Ageco’s” saying it not know that that did ly deliberately and them to an in assumed * * * enough to was “condition ‘bad’ creasing Corporate degree. trustees danger of in- be or imminent insolvent in underwriters, come promoters, to act as solvency.” it “had He indeed hold that (cid:127)bankers, did advisers, bondholders, financial a man of notice facts lead which would of companies and creditors whose of deben prudence ordinary bank at least —to ture holders to have been selected —a inquiry,” it make he also found that but protect.” only as language That we read so, obligated done for it “was not to practices grown up, criticism of that had in- reasonably diligent more a make than asserting and not as courts of New the that inquiry quiry,” a would thorough-going given York had any to no countenance the expensive have been more laborious that, tion corporation so far as a to sees fit “reasonably” than could be demanded. So trustee, the assume duties of an indenture hand, we shall the assume. On other loyalty it can shake off the of demanded spring is full every trustee, corporate record of evidence that individual. We of and, most the bank’s officials were un- can find no warrant for supposing; so “System” be indeed, certain whether the able a a for the benefit of numerous long to refund its term debts and loans body appears and changing of bondholders which were to become due. Its very us be soon preeminently to an occasion for a pro- scruple lawyers had it that the first greater ordinary; advised even than posed expedient issue new “Age- such beneficiaries often have too small —an series, co” guaranteed by “Agecorp” to follow the fate of their investment stake —was proposal— protect rights. do read unlawful and about second their We not “Agecorp lawyers were 8s”—the in Deposit N.Y. Benton Safe doubt; that, must some it be so owned sense; opposite in it N.E. an “Ageco’s” far covenants as concerned exculpatory held no more than that “Age- of its control of view absolute liability limiting the covenant trustee’s corp,” very why it is hard to it understand contrary to negligence” was not “gross any was in better substance than first. policy” New York as well “public repeatedly After examined the True, Pennsylvania. course of the “System” financial condition of at said, Crane, page at J., 225 N.Y. length, by was means certain that it it no duty “the page N.E. survive the crisis which in 1932 was by agree and limited is measured trustee thought so true ominous. It is it it ; agree within of course and we ment” likely than not may limits a ill defined trustee somewhat but future was most survive question neces his duties. That is confine secure. deed; by the trust determined it sarily duty insecurity certainly with the trustee’s was what do This nothing to has he he obligations does as meant when found that bank discharge judge whatever “bad”; “Ageco’s” singleness purpose. condition was with knew that absolute sume very appraisal company any measured of its subsidiaries.” Such indeed report example, security signifi- bank’s For demand for is not the less doubts. made in because November 1932 Place to cant the bank at the same time president, Aldrich, changed demanding its policy contained the fol- and was loans; lowing passage: security overstating “It is not on all does indicate precarious say given fact to that a loan early year many in this less competent precarious. people that all knowledge loans have become A requirements System from his view absolved interest, security conditions, beneficiary’s existing then re- defer his own to his bad; garded got precise- because meeting the task these -timeshave that is maturities extremely difficult, ly the occasion most calls for the ex- in the event that strong Love, vice-presi- banking support fully forth- ercise of forbearance. was not coming, impossible bank, “criticism almost one.” Place testified dent itself, company important as much as concluded with a “list of the more criticisms, “no commonly management.” There was which are directed at System,” question” in his that the “main trouble Associated he mind and which said * * * itself, company fell general into four was not the thought classes. He * * * head,” Hopson. (cid:127)that these “in He “no certain cases said *5 fact,” “Ageco,” might doubt” that it have some foundation “while in but tough sledding, an excellent chance company “must in all to fairness and storm”; coming through “there management, of be looked at from point was a chance” also that it “would not come (1) of of view whether real dam- through.” support” he “no age minority was done to and “With bank stockholders difficulty” doubt” that there “no (2) would be understanding problem with an to mature refunding in the bonds that were problems, occurring particularly those Nevertheless, in 1932. he “realized in the first six months of 1932 with which task; but” he “wouldn’t it was a difficult company was to deal. It forced is say impossible it task.” The that was an obvious company fighting that a its life price “Ageco” of fell from unprecedented debentures may, under conditions 1, January 10 in must, 39 on 1932to of that probably procedures to resort June that, year; and it must be remembered would not company be undertaken if the maturing bonds of the whole unless of millions dollars the bank and no financed, it col- problem could be pressing company to A meet.” lapse. “fighting which is for its life” so hard which, it procedures” must “resort to agree with such We cannot shows, thought context writer to be “Age- knowledge and such forecast of a questionable propriety, certainly was a jus bank was immediate future the co’s” company solvency whose was continued say collecting loan. We “col tified in 1932, April, most In uncertain. over advisedly, forgetting lected” correspondent wrote a that “the unsettled paid before i-tbecame one fourth of it * * * together conditions re- “Ageco” would Nobody questions due. position mote which these debentures occu- an extension asked have welcomed py earnings in relation to the source of in- one; nobody every needed that it doubts way troduce considerable (sic) squeeze it out. of credit that could dollar elements, speculative ques- and the issue in accepts payment of creditor who A tion, be considered a desirable hold- cannot due, a before it is from a debtor loan * * * present predic- ing time. life,” its, “fighting and who known to be payments hardly to are tions as future upon security balance when insists for the Furthermore, the bank possible.” refused due, receptive by, merely has not sat it days loan even for 90 unless renew the advances; voluntary the debtor’s he has secured, only then in case of a compelled payment; compel pay it special agreement allowing its due date to was as ment when the debtor’s survival advanced, doubtful, top own “covering be defaults of as the bank’s declarations be, a has forfeited of no case in which court “Ageco’s” survival knew that it show a breach preexisting rights because of his depletion of as- itself was to secure penalty, pure and duty, be in- that would “Ageco’s” which, event of sets simple. analogy that of a The nearest rata- obliged to share solvency it would preference, voidable creditors, creditor receives a includ- who “Ageco’s” bly with all of bankruptcy, good after a deal Collection plaintiff’s bondholders. ing the however, only to the (owing, confusion pref- manifestly result in the bank’s finally settled statute) it was terms of the a indubitably be breach erence and not forfeit that such creditor did breach a equally a It was as trustee. Bank, 197 Keppel Savings Tiffin claim. v. to assure itself duty presently of that 443, That 49 L.Ed. 790. U.S. S.Ct. chance that preference against the Page Rogers, decision was followed was a might This occur.4 insolvency L.Ed. U.S. S.Ct. breach, “Ageco’s” actual regardless of recognized recently ; has been solvency a breach because trus- i-twas Champion, 294 advantage as 1935. Adams v. U.S. put position tee itself 231, 235, 55 S.Ct. 79 L.Ed. 880. We True, might beneficiary. vis-a-vis its say express need not that the conduct of an which neither turn out to be a breach trustee can profited the never be such as constitute beneficiary, nor harmed the trustee; bene- deliberate fraud the estate -and means -that the make maleficio; him a trustee ex remedy; ficiaries would need no arguendo the will assume that such a trustee violation none the less an act in preexisting duty. forfeit even claim. any- bank’s conduct was far removed from beneficiary’s is hornbook It law justify thing which such a char- could remedies for breach of are the re- acterization; *6 hold that utmost we result, covery any damages may of which damages plaintiff’s the bondholders any profit which have of -the have could the difference be- suffered gained. 205, Restatement of Trusts §§ $4,000,000 tween and what would be the In the the case at bar amount of the dam- $4,000,000 value the of bánk’s claim for in ages profits same, and of the is the unless reorganization. the If we assume that the hold, plaintiff hold, we as the wishes us to outstanding loan would have remained still damages the include whole sum the assumption in 1940—the most favorable to collected, $4,000,000. That result would plaintiff’s the bondholders —this sum would plaintiff’s receiving, bondholders’ exactly have been the same the alone the which away assets the bank took profit in the transaction. We shall there- them, but in pay- addition an added question disregard damages fore the of ment of whatever should turn out be the that, confine ourselves to of the bank’s rights value of the bank’s in the reorganiza- profits any in which it was event bound to tion, for -the bank was entitled to that always restore. Since i-t is irrelevant how anyway. amount Adopting phrase in our long profit after the breach the trustee’s appeal, on plaintiff the former the realized, may disregard in this we case calls this the bank’s “right subrogation”; of profit— that the amount fact of the bank’s asks us to forfeit it because of the and, indeed, whether it ever have would bank’s misconduct. It is true that courts profit until “Ageco” determined —was any compensation have denied trus- became insolvent. services, tee’s if he has been guilty of a trust; However, breach of and have we have even hitherto refused to assumed that expenses, allow plaintiff may him his except profit recover the in so entire far as they made, have benefited which the bank the estate. is not a Restate- ment 243, consequence of Trusts necessary 245. But of the breach. Two we §§ know Ray, Pick., 862; Mass., 360, 366; Scott v. 18 Wis. 250 N.W. Reichert v. 213 Guaranty Ricketts, Co., First Trust Co. of Lincoln Trust 261 Mich. Cir., 309, 312; 132; Hicks, D.C., 8 75 F.2d Caldwell v. Marshall 246 & N.W. Ilsley F.Supp. Guaranty 40; Scott, Trusts, Co., Bank v. on § Investment 170.23. upon exchange of profit, any, if securi- involved, the briefs do not

points are which 1934; the alterna- supple August on or in upon ties wish which we discuss compelled to rescind point tive that should be mentary is this. briefs. The first arguendo exchange. assume We shall “Ageco” other than the Since had creditors exchange finan- bondholders, “Age- time of the all that at the plaintiff’s and since as a whole priori cial condition of the stood se without co’s” creditors inter grown by worse than 1932—that ty, “Ageco’s” assets any sum ; and, “Ageco” along been would have increased others-— so, correspondingly increased the risk had paid, been have been the loan not plaintiff’s bondholders would the that among all proportionately divided an¿ paid. “Recap the end creditors, be Plan” did plaintiff’s bondholders years; five part. insolvency about aliquot stave off only have received -their August, how any “Age- duty to but it uncertain in The trustee owed no many plaintiff’s “Ageco” bondholders would except bond co’s” creditors options, accept any proposed holders, point and the is whether first “Plan” would be suc- to the -therefore whether the recovery should not limited however, not, just -That answer cessful. does aliquot share those bondholders profit made question any point whether to be discussed defined. second breach May January bank Between 1932 and is this. beneficiaries, we loyalty to its until many two of the bondholders of probability presumably their bonds what was transferred determined series profit -the dividend persons. any rights such reduce Did third pass plaintiff’s against the of the bondholders event bondholders transferees; insolvency. Owing “Ageco’s” remain the of did transferors, and, so, plaintiff intercorporate relations which labyrinth 'if' does contrived, is not represent Hopson the answer them? In Manufacturers Trust Cir., Except $52,000 of securities Kelby, easy. where F.2d Co. v. disregard, securi- against was for we shall claim the trustee a which security, exchange, wrongful release of the bank received ties tha-t any profit, make passed to of which it could the -trans out held the claim the “Associated In v. Chase of bonds of the bonds. Elkind consisted ferees *7 661, holding company, App.Div. Company,” 20 259 N.Y. Electric National most the 31 N.E.2d for the affirmed 284 N.Y. whose assets were S.2d stocks, holding of two against the notes and and case where the claim bonds companies, whose operating assets was for diversion of the debtor’s two trustee all substantially the their gave bondholders to trustee the bonds income the Robinson, report one, itself, held claim A the New York courts the value. transferees, exchange gave pass to but re the these not the at the time of did bank rating In far as in the transferors. Smith v. favorable so con- mained bonds a Company, income; plain- Bank and Trust the obligor’s Continental cerned Appeals 54 N.E.2d Court witness, Hartt, N.Y. them at 82 valued and tiff’s held his a bondholder who bonds held that only 35%, price in the market their might sue -the breach the time of at appears accepted. to have which Love trustee, though he had transferred on the bonds were a more than Even at apply here? In rule should bonds. What basis, their per cent -and basis six 35% point question whether this cluded cent; per probably were over their bonds who bondholders surrendered uncertain, at best market therefore options "Recap under one obviously -thought degree last them bank; any against claims Plan” retained parties from which speculative. so, represents whether, plaintiff exchange the bonds on bank received them. corporations, four three of were which companies, holding fourth were e. claim: i. There remains the second company, whatever “investment” for its an bank should be liable held mean; improbability. coefficient of Pushed with does not disclose the record these, logic, possible any relentless conflict financial condition of conjured up terest be sorts which know value can out of all without we cannot what persons of situations normal the bonds shares in which would have added to the scruple companies go feel of the four their in- no hesitation in case of would solvency. ought ahead. The law make Yet it is that which must trustee- know, ship responsible say so indi- if we are to how the ex- hazardous much shy away change plaintiff’s corporations viduals will could have affected the bondholders, Guaranty only from it. As we said in York v. because was as a share- Co., Cir., companies “Age- holder Trust 143 F.2d 514: “Of the four bonds, course, corp” any impose courts should not im- interest practical Merely only “Agecorp’s” “Age- obligations on a trustee. shareholder vague any possible co” at that “Age- advantages time interest in remote selfish corp” $19,000 (save prove to a of indebtedness are sufficient to negligible). bring an adverse interest as to which his conduct question.”5 into To hold that the bank profit Thus no made exchange should from the abstained on the could come out of because all -the circumstances men- we have plaintiff’s bondholders unless all fol conjoin, might tioned exact a would stand- lowing (1) circumstances coexisted. compunction. ard of unreasonable It would corporations, up whose securities made impede be likely legitimate business Compa assets of the “Associated Electric protect trustees far more than it would ny,” insolvent, did not themselves become plaintiff their beneficiaries. The answers pass or at least their did assets disregard that we should the cumulation of ‘substantial dividend to the “Associated corporation corporation, on because eco- Company.” corpora (2) Electric The four “System” nomically the was as a whole tions which owned bonds and delivered reservoir, single from which with- insolvent, them to the bank did not become drawals inevitably top lower the shareholder, “Agecorp,” so that their would level, plaintiff’s where were the bondhold- something receive their shares which ers, junior That creditors. (3) “Agecorp” it held. itself remained true, corporations if all the intermediate solvent, “Ageco” so that its shareholder solvent; remained it would be true something would receive “Agecorp’s” event. The (4) “Ageco” shares. itself became in up of groups, made an immense number of It possibility solvent. was indeed a priorities; their mutual particular chain of events would take withdrawals from the assets of one sub- place, did; though in fact it never more sidiary upon corpora- have no effect intimately acquainted over bank was higher hierarchy tions unless the *8 “System.” with all details of the How subsidiary paid creditors of were in ever, every possibility, it is not however full. remote, of a conflict of interest between a follows from what we It have said that beneficiary trustee and for which'will judgment on the “Fourth Cause Ac- entering into a transaction with bid his affirmed; judg- tion” must be but that the Although, seen, person. as we have third ment the “Second Cause of Action” trustee, disabilities vis-á-vis his reversed, subject disposi- must be to final beneficiary, degree are to the last exacting, supplementary tion after briefs have York, especially in New there come must plaintiff been filed. will file his brief point which he is not bound take thirty filed; days opinion within after this against events, himself a future chain of the defendant will file its answering brief twenty days each link which carries a substantial within thereafter. example, Bean, 41; v. Anderson See for

5. 141 N.E. Pike v. Camden Trust 959; N.J.Eq. 414, Co., 172 N.E. Mass. A.L.R. 16 A.2d 634. First Nat. 246 Mass. Bullivant that, years eight were the debt Cause on the “Second Judgment reversed paid, disposed not the debtor would have one cent Action”; finally appeal to reorgan- more assets for distribution in a as indicated. ization not then imminent. To this situa- on the “Fourth Cause Judgment affirmed apply principle I same tion would of Action.” judgment leads us to -affirm the on the action, namely, “mere- fourth cause of SWAN, in Judge (concurring Circuit ly vague advantages or remote selfish to a part dissenting part). in prove not an are sufficient to complete much in accord with so I am bring adverse interest as to his conduct into opinion judgment as affirms the of the question.” un- of Action.” I am the “Fourth Cause portion of the agree with that able to CLARK, Judge in (concurring Circuit liable opinion -the which holds defendant dissenting part). loa,n. The payment accepting of its opinion I holding concur in the defend- permitted the expressly indenture trust repayment ant liable for loan to of the “Ageco.” A six trustee to make loans leaving itself the amount to be settled security made loan months’ without parties filing by after of briefs payments 1931. Partial were October agree I developing the issues. do not But maturity, and before made March holding absolving defendant of agree I paid May the balance was respect liability with to the second trustee, though even that a complained transaction of. permits money him to lend strument latter transaction fiduciary This trust, is under settlor of agreement of securities —under an effected' reason loan if he has not to collect the by Ageco management de- im- collecting debt will to believe —between subholding fendant Chase and four com- receiving pair the likelihood of his cestuis panies system. Acting indi- payment settlor to owed debts capacity vidual trader in its them, I view this as such a case. cannot trustee, $4,249,000 proof Chase delivered some judge did not found that the The trial Ageco face amount debentures other Bank had reasonable establish notes; utility in turn received securities Ageco believe that was insolvent cause to hi- insolvency of certain lower constituents of the danger of in imminent erarchy. get court did not district May Judge Hand’s March or point setting values to the securities Bank’s facts which show recites probably not at- Ageco involved and we should whether the officials were uncertain tempt purposes But -the 1932 crisis and to do so here. survive legal liability discussion of defendant’s long our debts and be able refund term plaintiff’s due, claims-—based assume soon to become loans which were Hartt, expert testimony of on the likely than “thought more -accepted by. survive, generally the court which was ‘System’ the future received securities worth —that defendant My insecure.”. hold was most brothers gave up. than it require some two the Bank to ac- million enough opinion holds defendant “profits.” agree I if there The need count for give or otherwise .fiduciary duty replace the securities collect- a breach *9 pos- ground “profits” up advantage on should the Bank’s ing the debt sibility Ageco’s of loss to bondholders suggested Judge Hand’s as determined remote; received securities I not convinced -that there since the opinion. But am too compa- subholding came from duty. defendant fiduciary debtor a breach Ageco, the re- tiers down bankruptcy In nies some until 1940. go into did possible mitigated effects sulting insulation for the Bank to no reason 1932 there security holders to such ex- Ageco’s on accepting payment of its debt suppose complain. they could not But single day bank- tent by a accelerate would me, is based on er- this, it seems to debtor was able to avert which the ruptcy po- may be the loss save -that working of the different concept of the roneous up through ripples tentially greater holding-company capital structure companies. operating tiers of system. For the closer to occurs, the companies reduction of assets á part of I therefore remand this would explosive its effect. court proceedings to the district of the value findings to the relative principle holding-company The basic should exchanged Such remand pyramiding.1 securities. through leverage finance is that of branch the other probably decision on await earnings originate as revenues llA appropriate rule-of settling companies. each of case operating Since found. only damages if company generally benefit holding owns company be equity voting stock of the pass only can

low—which stock dividends prior charges in

after fixed are met —the up system through

come filters

top preferred only as claims excess over companies.

against Hence lower profit top company holding is in the repre highest degree speculative, since it v. GRANT. SELLARS sents host balance left after a 13575. No. prior calls income are satisfied.2 Appeals Court of United States escape I cannot from this conclusion Circuit. Fifth security top that the holding holders of the May 8, 1952. company suffer first assets —ei- whenever properties

ther operating securities— or system.

are within the reduced And the exchange

further down an unfavorable

occurs, highly magnified the more its effect upper security

is on the tier of holders. So

the occurrence four circumstances necessary

which the assumes be- Ageco

fore the debentures be in-

jured by this unfavorable —the insolvency Ageco solvency and the of -the undercompanies appear various —does

unlikely highly speculative. Ageco inevitably

almost be the first one unable to require-

meet its interest dividend

ments.3

I take it to be clear that had made Chase exchange directly Ageco, its re- sulting gain is one have to up

give fiduciary obligations view of its Ageco the bondholders of lat- insolvency.

ter’s But here the situation is p Barring 3. the use Bonbright Means, Holding dubious and & Com temporary high- less any, 1932; more or priced devices as Comment, 11(b) Section servicing contracts, asset Holding Company write- Act: Fifteen depreciation inadequate ups, reserves Retrospect, Years in 59 Yale L.J. 1088- pump top income into levels when inadequate. operating profits are See description 2. An excellent of this short Commission, Utility Federal Trade Cor *10 pyramiding is to be effect found Trach porations, 72-A, Sen. Doc. No. Part sel, Utility Regulation 385-393, Public Cong., 352-355, 440-448, 70th 1st Sess. 496, 847.