Full opinion text
ANDERSON, Circuit Judge. Wiltsee is an adjudicated, unpaid, creditor of the respondent corporation for $176,000. 3 F.(2d) 424. He brings this proceeding in behalf of himself and all other creditors who may hereafter join, challenging the'validity of a reorganization of an oil enterprise effected through a receivership of the respondent corporation in this court by a committee consisting of Francis R. Hart (chairman), Alfred L. Aiken, Frank Finsthwait, Allan Forbes, Thomas H. West, Jr., and Daniel G. Wing, who on their own petition had been made parties as representatives and assignees of creditors of the receivership estate, in order to effect a reorganization. He has filed also a stockholder petition, for similar or analogous purposes, in behalf of himself and other stockholders of the New England Oil Refining Company who may hereafter join; but this petition, with the assent of counsel on both sides, rests in abeyance, without prejudice. The gist of Ms creditor petition is that the committee, as fiduciaries, so maladministered a solvent estate, given into their control, on their own petition, by the court, as to render themselves personally liable to Wiltsee, and to other creditors who may hereafter put themselves in like position, for the amount of their unpaid claims against the receivership estate, pins also Ms reasonable expenditures incurred in disclosing to the court the maladministration. This proceeding is a logical and legal development of the ruling made by this court in an opinion dated July 18, 1924 (4 F.[2d] 392), in which, on a brief review of the papers in the clerk’s office, the court held that this committee were fiduciaries, like the promoters of a corporation, citing Old Dominion Copper Co. v. Bigelow, 188 Mass. 315, 320, 74 N. E. 653, 108 Am. St. Rep. 479; s. c. 203 Mass. 159, 89 N. E. 193, 40 L. R. A. (N. S.) 314; Erlanger v. New Sombrero Co., 3 App. Cas. 1218; Haywood v. Leeson, 176 Mass. 310, 57 N. E. 656, 49 L. R. A. 725 — and that “they had the general rights and powers and were subject to the general obligations and limitations of trustees.” From this ruling, no appeal was taken; it was accepted as the law of the case; under it the committee have filed two reports of their administration, one dated August 27, 1924, and one dated May 19, 1925. The trial has consumed nearly 40 days, with a resultant record of about 3,500 pages, besides about 175 exhibits, several of which are books of records in large part material to the issues. There are no adverse witnesses. It is, in a very real sense, an ex parte showing by trustees of thoir administration of a trust estate. But the essential and controlling facts were elicited only by long and searching cross-examinations, and from letters, documents, and records called for by Wiltsee’s counsel and used in cross-examination. Some of the direct testimony was highly misleading, to use uo harsher term; it required long cross-examination, and the production of many documents, to correct it. It should be added that much of the evidence has no hearing on the real issues. This is due — partly to the fact that Wiltsee’s counsel necessarily proceeded more or less in the dark; partly to the fact that, in the early stages of the trial, Wiltsee’s counsel was seeking to show that the reorganization was directed towards creating an illegal control of the oil market, an issue which the court, in a memorandum of decision dated June 26, 1925, ruled should not be tried as a part of this proceeding; and partly to the confusing and misleading character of much of the direct testimony. The facts of controlling importance became, therefore, ascertainable only by analyzing and combining records, letters, telegrams, memoranda of conferences, admissions, frequently belated and reluctant, as to the subject and substance of such conferences. With such a record, the task of elimination, analysis, and reasonably brief and succinct statement of the significant facts has involved many days of study and labor. But, in spite of the difficulties, the dominant facts are established beyond reasonable doubt. Under the reorganization as planned and carried out by the committee, creditors of the receivership estate received for their claims preferred stock of the New England Oil Refining Company (the chief subsidiary of the corporation in receivership) equal at par to the amount of thoir claims, plus a like number of shares of no-par common stock. All creditors except Wiltsee assigned their claims to this committee or its nominee, the Old Colony Trust Company, and received such stocks in prima fade settlement of their claims. The committee, or the Refining Company in their behalf, have offered, and apparently still offer, a like settlement to Wilt-see, and claim that, under the doctrine of Phipps v. Railroad (C. C. A.) 284 F. 945, 28 A. L. R. 1184, he has 'no other rights. Wiltsee, on the other hand, claims that, on the facts now disclosed, he is entitled to full payment of his claim, with interest, from the committee, plus exoneration from the expenditures incurred in these proceedings, and that other creditors are entitled to- rescind their settlements and have like relief. The chief questions therefore, are: (1) Was the reorganization invalid? This is the gist. (2) If invalid, what affirmative present duty is owed by the eourt to creditors now presumably uninformed as to its invalidity? (3) If invalid, may the other creditors return their stocks, rescind their settlements, and thus be remitted to rights against the committee ? In approaching the problems presented on this record, it is necessary to bear in mind, the practice and procedure of this court in administering receivership estates. Generally, these “conservation receiverships” involve conflicting interests among various groups. The natural and necessary course of the eourt has therefore been to promote the organization of these groups and the selection by them of committees, frequently appearing in court by counsel, in order that these representatives may work out and present to the court a plan of reorganization, agreed upon so far as possible. The eourt has neither time, capacity, nor disposition to instruct the scattered owners of a receivership estate as to how they may best reorganize their property in order to end the court’s control of it. The present practice tends to remit the eourt to its ordinary and proper function of dealing merely with controversial questions or of settling rights between conflicting interests. But this natural and necessary method obviously rests upon the fundamental assumption that committees or counsel appearing thus in eourt as representing various groups in interest are exactly what they appear to be —real, bona fide, representatives of those groups, and without any concealed, adverse, or disqualifying interests. If this assumption proves in fact ill-grounded, if committees and their counsel are not what they purport to be, but represent, secretly, interests adverse to those of their group, their presence and conduct in eourt are a fraud upon the court and upon the beneficial owners of the receivership estate. Counsel active in this case were entirely familiar with this practice; they understood that committees, and counsel therefor, were commonly relied upon by this eourt to guide it in administering this sort of court trusts. Moreover, in these receiverships the court itself is the trustee for the parties in interest; the receiver is nothing but “the hand of the court,” holding and administering for the eourt the estate for the benefit of all parties in interest. A probate court — -frequently a coprt of equity- — on proceedings brought, controls other trustees; in receiverships, the eourt is the trustee. Its duties are primary, affirmative; they must be recognized and fulfilled. The present issues may perhaps be best dealt with by first outlining the case as it was presented to and acted upon by the eourt, and then, by way of contrast, setting forth the realities of the situation — the actual relation of the Committee to the chief beneficial owners of the estate and to the Tanker Syndicate, and the plan of reorganization which they really devised and in fact, and not merely in appearance, effected. Of the paper's filed in the clerk’s office, the documents of controlling importance on the present issues, are (1) the bill; (2) the receivers’ first report; (3) the printed plan of reorganization; (4) the petition of the committee to be made parties; (5) the committee’s petition for approval of the plan; (6) the report of the receivers upon the plan of readjustment, filed February 17, 1923. A few other documents have a minor bearing. The bill was filed on July 14,1922, and describes in considerable detail an oil enterprise in which the respondent (the New England Oil Corporation, a Virginia corporation) was a holding company, and will hereafter be so named. The two subsidiaries were the New England Oil Refining Company, hereafter called the Refining Company, a Massachusetts corporation, owning and operating an alleged large and highly profitable refining plant in Fall River, Mass., earning about $2,500,000 a year. The other subsidiary was the New England Oil Corporation, Limited, a Canadian corporation, and hereafter so called, owning rights in valuable oil fields in Venezuela, on which over $900,000 was alleged to have been expended. The Canadian company’s stock was pledged. The Refining Company’s stock, 75,000 shares ($7,500,000 par), was alleged to be owned, free and clear, by the Holding Company. The liabilities of the Holding Company are set out as follows: “Five-year 8 per cent, notes, $5,762,000; amounts due subsidiaries and other accounts payable, $3,235,000; overdue notes, $1,250,-327.90; deferred liabilities, $200,000 — in addition to which there are various contingent and possible liabilities. A statement of such contingent and possible liabilities known to your complainant being annexed hereto and marked ‘Exhibit 2.’ ” In this Exhibit 2, the item of most present significance is: “4. For guaranty of the commitments of the New England Oil Refining Company under contract with the Tanker Syndicate, Ine., dated November 29,1921, which provides for repayment in monthly installments, from January 1, 1922, over a period of 10 and 12 years, of $1,300,000, which includes $520,000 serial 7 per cent, gold notes, and also the interest and principal on account of the purchase of seven tankers, the aggregate amount of which is undetermined ” The application for the receivership does not go on the basis of insolvency, or on the usual ground of embarrassment for lack of working capital; it goes on the ground of , , , • -10 , « an emergency created by a -judgment for 1 , ai aaa aaa « i -u j¡ j , . about $1,000,000 for breach of contract m favor of the Island Oil Marketing Company, obtained m the District Court of the Lnited States for the Eastern District of Virginia. In order to perfect an appeal from this judgment, a supersedeas bond for about $1.200,000 (which the corporation was in no condition to furnish) was alleged to be necessary, unless a receiver should be appointed. Moreover, if the suit resulted in a final judgment and forced sale of the stock of- the Refining Company, the result might, as alleged, create a preference of the judgment creditor over other creditors of the Holding Company. The solvency of the Holding Company, the great prosperity of tlie Refining Company, and the large prospective value of the oil fields are emphasized in the bill Attached to the bill is a trial balance of the Refining Company as of December 31, 1921, showing assets and liabilities of a little over $19,000,000. In the column of liabilities is the following- liability under contract with Tanker Syndi- ___ Eive-year 7 per cent, serial coupon gold notes, dated January 1, 1922, beginning April 1, 1922..........$520,000.00 Payments due monthly over a period of years, bearing interest at 8 per $1,300,000.00 There is also a footnote, as follows: “Note. — Monthly payments commencing January 33, 1922, to Tanker Syndicate, Inc., under contract with them dated November 29, 1921, on account of payment of interest and principal of the purchase price of seven tankers over a period of 10 and 12 years from January 1, 1922, not included in this balance sheet as the amounts are not finally determined.” It thus appears that the bill discloses no substantial asset in ships, but describes an oil enterprise, with a refining plant at Fall River and undeveloped oil fields in Venezuela as its chief assets. The next document of present importance was the receivers’ first report, filed on December 22, 1923. This report, some eight PaSes ™ length, besides exhibits, describes lhe oil enterprise very much as does the bill, including the relations of the respondent corP0'ration to the enterprise as a holding company controlling the capital stock of the Refinin& Company and of the Canadian eoWPany- This report describes the debts of the re- , * .spondent corporation as consisting mainly ^ ^ üvo ¿ g eent. notes-$5,762,000. No other large liaMity is get forül in terals. jn ^ ¡jg^t 0f £he evidence, the following quotation is of much significance: «In addition to the claims referred to above, the defendant corporation, as guarantor of the Refining Company, is obligated under the terms of a contract with the Tanker Syndicate, Ine., a Massachusetts eorporation, for the purchase of seven large oil tankers by the terms of which the defendant corporation is now obligated for a large sum of money, and as guarantor may be obligated to pay very large sums in the future. Pursuant to this contract, moreover, the defendant ^corporation has guaranteed an iss11® °£ $520,000 debenture notes of the Refiuiug Company. A committee representing the holders of said 8 Per cont notes has beon formed and represents, your receivers are advised, more than a majority of the outstanding notes. Semiannual interest upon said 8 per cent, notes was defaulted December 1, 1922, hut the principal thereof cannot be declared due untii 60 days after such default. “Your receivers have not felt, aecording- ,, ,, . „ f ty, that the proper time has arrived for asking an order from yojir honorable court for presentation and proof of the claims outstanding against the defendant corporation. “Shortly after the appointment of your receivers they were advised that negotiations had been instituted between representatives of the noteholders and the executive committee of the Refining Company, looking toward a reorganization of the defendant corporation and its subsidiaries. Your receivers have kept in close touch with these negotiations, and have been advised of all developments.” This last sentence involved a very grave, though inadvertent, error, for Mr. Garfield knew very little of the real situation. “No committee of the stockholders has been formed, but a large majority • of the stock is held by persons who have been cooperating in the negotiations for reorganization. Moreover, it is proposed, prior to taking any final steps towards such reorganization, to call a meeting of all the stockholders of the defendant corporation, so that all interests may be informed and represented.” The whole of this report is important. Attached to it is a consolidated balance sheet (Exhibit B, set forth in the margin) of the Holding Company, of its subsidiaries and of the receivership, as of October 31, 1922. This consolidated balance sheet of the whole enterprise, made more than three months after the appointment of the receivers, obviously should disclose completely every substantial item of assets and liabilities. It actually shows the chief assets as follows: “Nixed assets” (mainly the refining plant) and a “contract for provisional purchase of marine equipment, $1,107,778.00, aggregating $11,537,794.76; the Venezuelan properties, $3,712,500; current assets, $3,237,064.-48.” The chief debt liabilities are stated as the five-year 8 per cent, gold notes of the holding company, $5,434,000; the bonds secured by first mortgage on the refining plant, $1,715,000; current liabilities, $2,776,494.-36. Current liabilities thus appear to be over $450,000 less than the current assets. The total of both assets and liabilities in this consolidated balance sheet is a little under $19,000,000. There is a footnote as follows: “Note. — Monthly payment from May 1, 1922, to Tanker Syndicate, Inc., under contract with them dated November 29, 1921, on account of payment of interest and principal of the purchase price of seven tankers over a period of eight and ten years-from January 1, 1922, not included in this balance sheet as the amounts are not finally determined.” By necessary implication, this report and' its attached balance sheets ■ negative any involvement of the oil enterprise in a contract to pay over $17,000,000 for a tanker fleet, 'whether worth $17,000,000, or one-half or one-sixth of that sum. The report sets forth that the business of the Refining Company has been rapidly increasing, but that it is handicapped “by lack of cash and working capital resulting in part, at least, your receivers believe, from the increase of its business.” The receivers therefore suggest new financing through a bond issue, and that in a separate petition they are seeking power to vote the stock of the Refining Company in their hands in favor of such reorganization as would involve such new bond issue. This petition also sets forth that a committee has been formed under an agreement dated November 15, 1922, whose members have for a long time been fully acquainted with the affairs of the oil companies; that this committee are impressed with the necessity of additional working capital, 'and that such bond issue will therefore be in aid of any contemplated plan of reorganization. After due order of notice, no one objecting, a decree was entered on January 10, 1923, authorizing the receivers to vote the stock of the Refining Company for an issue of second mortgage bonds for $5,000,000, and also to change the capital stock of the Refining Company, so that it would have preferred stock of a total par value of $10,-000,000 and 1,500,000 shares of common stock without par value — “the provisions of said shares and the terms and conditions upon which they, as well as the foregoing bonds, shall be issued, sold, or otherwise disposed of to be agreed upon between the board of directors of said company and the petitioners as receivers. Any agreement herein provided for, which the petitioners as receivers may make with said board of directors, is to be subject to the approval of the court.” Parenthetically, the court never approved of the agreements actually made for the disposition of these stocks and bonds. This alone might be enough to invalidate the reorganization. But there is much more. This decree also orders that the ease stand for further hearing, and that “a draft of such plan of reorganization of the defendant corporation and of its subsidiary, the New England Oil Refining Company, as may be under consideration by the parties in interest, shall be flled in court, to the end that all parties may have an opportunity to consider the same and be heard with reference thereto.” Such plan was filed on January 14, 1923. A full copy of it is attached to the opinion of July 18, 1924, supra. 4 F.(2d) 392. The plan was, in essentials, simple enough. It contemplated the abandonment of the Holding Company, and turning over all assets to, or for the benefit of the Refining Company, canceling intercompany obligations. The capitalization of the Refining Company was to be so changed as to give the Holding Company’s creditors preferred stock equal at par to their claims, plus a like number of shares of no-par common stock. Tied into this plan was a refinancing proposition for a second mortgage bond issue of $5,000,000 for working capital. To make possible the flotation of this bond issue, new common stock of 1,500,000 shares (no par) was provided, one-third of which was set aside to meet stock warrants, one to go with each $1,000 bond, giving the holder within ten years an option to buy at $10 per share 100 shares. This reduced the immediate issue to 1,000,000 shares. Obviously, if this option should be exercised by all the bondholders, $5,000,000 in cash (enough to pay off the bond issue at par) would thus be provided; great success in the oil fields might make the option valuable. A block of 560,000 shares of the new common stock was to go to the bond purchasers, as an additional inducement for them to buy these bonds at 85. Of the balance of about 440,000 shares, about 190,000 shares were for old creditors and stockholders, leaving 250,000 shares distributable, at the discretion of the committee, to officials, employees, etc. It thus appears that the plan destined more than one-half of this immediate common stock issue of 1,000,000 shares for the furnishers of new money, on the obvious theory that only thus could new money be obtained on a second mortgage by an oil concern with undeveloped oil fields. Only 250,000 shares —one-fourth of the immediate issue of 1,000,000 shares — was left for discretionary distribution by the reorganizers; everything else was definitely provided for. The plan continues: “Sale of General Mortgage Bonds and Common Stock. “The noteholders’ committee will endeavor to arrange for the sale of $5,000,000 principal amount of the general mortgage bonds, to-gel her with 560,000 shares of the common stock, for the sum of $4,250,000 together with accrued interest on the general mortgage bonds. Negotiations for this sale are now being conducted with Messrs. Malcolm G. Chace, Francis R. Hart, and Daniel G. Wing as syndicate managers under an agreement dated 13th of December, 1922, who are attempting for the purpose of making such purchase to complete the syndicate provided for in the said agreement.” Tlxe second sentence, “Negotiations for this sale,” etc., does not, fairly construed, mean that the reorganizers proposed to sell these bonds to Chace, Hart and Wing as managers; it does mean that two of the reorganizers, with a third outsider, were negotiating for tlxe sale to a syndicate of outsiders, to be conducted by them. In effect the three syndicate managers were only a subcommittee of the gexxeral reorganizing committee, and bound to the same fiduciary obligations. There was no disclosure of any possibility of the Committee’s dealing with themselves or with any interested directors of any of-the corporations involved. On its face it was a plan to get from the investing public new money for alleged needed working capital on terms that seemed very stiff for an enterprise already highly prosperous. Except for the advice of these financiers that new working capital, obtainable only on a second mortgage, was needed to improve the value of the preferred stock going mostly to the creditors of the receivership estate, the natural and simple method of administering' this receivership would have been to take proof of claims and then to distribute, the stock of the Refining Company ($7,500,000 at par) to the creditors (about $6,500,000), par for par, turning any balance not found duo the holding company’s stockholders, together with the stock of the Canadian company, over to the treasury of the Refining Company. This, however, would have given the real owners of this eixterprise control of their property, a result not desired by this Committee — for reasons which will appear below. As the plan showed that the Committee intended, in effect, to take over the administration of the receivership estate, assuming many of the functions which ordinarily devolve upon the receivers, the court required that they he1 made parties to the record, so that full legal responsibility for the use they might make of the powers they sought might appear as of record. As the event shows, this was a very important requirement; it put this Committee in a position closely analogous to that of duly appointed trastees, accountable through the court to tlxe beneficiaries for their administration of the trust estate. Accordingly, on January 9, 1923, the Committee filed a petition, allowed on the same day, to bo made parties to the suit. ’The petition alleges that they “are a committee representing the holders of 5-year 8 per cent, convertible gold notes of the defendant corporation; that there have been deposited with them as such committee nearly 70 per cent, of the total amount of said notes outstanding; that they desire to take all steps possible to protect the interests of the holders of said notes.” On January 23, 1923, the Committee filed a petition for approval of their plan of readjustment and reorganization. This petition was carefully drawn, so as to indicate that six bankers had worked out for scattered beneficial owners of the trust estate a wise, sound, and generally acceptable plan of reorganization. It is important; its body is quoted (without the exhibits attached) in the margin. On return of an order of notice, tlie petition came on for bearing before Judge Morton, during a short absence of the writer, who had previously had general charge of the receivership proceedings. On brief explanation of the plan, Judge Morton expressed douht as to whether it was sound, mainly because the amount of working capital for the^Refining Company seemed inadequate. ■ He also wisely directed that the receivers should, before action by the court, file a written report of their views; this was done on February 17, 1923. The reeeivers recommended the adoption of the plan, stating, nevertheless, objections to certain features, mainly, the lack of adequate working capital, and that “in the opinion of your receivers the Refining Company will, shortly after the plan is put in force, have ’ a floating debt of at least $2,000,000.*’ Other objections were as to the heavy current charges for the sinking funds on the first and second mortgages. As to the tankers, the report sets forth that “the Refining Company has a contract with the Tanker Syndicate, so called, for purchase Hinder conditional sale of seven oil tankers. The annual payments thereunder on account of principal, amounting to approximately ono-half million dollars per year, must be met from the earnings of the company. In the opinion of the management of the Refining Company these payments will be earned by the operation of the tankers themselves.” The opinion of the management of 'the Refining Company as then controlled and motivated was entitled to no weight on a matter involving the Tanker Syndicate, as will later appear. But, as the receivers reported that their objections had been considered and overruled by the committee, the gist of the report, so far as the court was concerned, is found in the following: “The proposed general mortgage bonds are being purchased almost exclusively by banks and bankers and the Tanker Syndicate, who at the present time are holders of the 8 per cent, notes of the respondent corporation. As the plan eliminates all claims of the Refining Company, these notes represent over 95 per cent, of the total direct indebtedness of the Refining Company and all known contingent claims have assented to the plan.” This amounted to informing the court that the new 8 per cent, bonds were substantially all to be taken by the present holders of the 8 per cent, notes of the respondent corporation. In other words, the court was told by this report that the parties who already substantially owned the receivership estate were almost all in accord in accepting the plan proposed by the Committee, and were themselves to take the new bonds and stocks, with all the resultant chances o f losses or of profits. It told the court that the then beneficial owners of the enterprise were putting in new money and readjusting their holdings according to the advice of the Committee. On the issues now presented, it is probably immaterial that Mr. Garfield, in the quotation above, erroneously represented the Tanker Syndicate as holders of the 8 per cent, notes of the respondent corporation. The important point is that the court’s approval was obtained on representations made, both by the receivers and by the Committee, to the effect that the plan of reorganization was in essence nothing but a rearrangement of the bonds and stocks, new and old, under which the parties then in interest desired in the future to hold and manage their property. It excluded every reasonable possibility of the plans being for tile benefit of any concealed, adverse, interest, or involving any fraud, in fact or in law, upon any one. Under such circumstances, no court could properly do other than approve the plan; it was promptly approved by Judge Morton on February 17, as of February 12, 1923. Counsel for the committee, in his final brief, concedes (as, of course, he must) that by this decree the committee became fiduciaries for “all the creditors and parties beneficially interested.” The burden is “on them to show that in the discharge of their duties they have exercised reasonable skill, prudence and judgment.” Ashley v. Winkley, 209 Mass. 509, 525, 95 N. E. 932, 933, and eases cited. Before the decree, they were certainly fiduciaries for all parties who assigned claims to them; whether also for noteholders who had not made such assignments is not of practical .importance. One contention of the committee may as well be disposed of at this point. It is urged that the typewritten documents annexed to the petition for approval of the plan showed that the Committee were, in form, contracting with Hart, Wing, and Chace, as syndicate managers, for the sale of the bonds and 560,000 shares of common stock, on terms that permitted the syndicate managers to retain for themselves all common stock not found necessary to market the bonds at 85; that the syndicate managers in turn were selling to Peabody, Houghteling & Co. (bankers) on substantially the same terms; that the court was bound to discover from these documents this chance for a contingent profit by insiders, and must therefore be held to have approved it. The so-called contracts attached to the petition, as distinguished from the petition itself, were not read to or by Judge Morton. He had no occasion to read them, or otherwise to form any view that these documents indicated any disposition of the receivership estate inconsistent with the printed plan and the receivers’ report. On analysis, this contention amounts to arguing that the court was not warranted in relying on the disclosures made by counsel; that the court should approach such disclosures with suspicion and distrust. For the petition for approval of the plan described these papers merely as “contraéis * * for carrying out the plan,” not as inconsistent with it or modifications of it. As ruled in the opinion of July 18, 1924, “the printed plan controls.” The inconsistent so-called contracts were never brought to his attention, nor approved by the court. They were never read or considered by any judge of this court until the opinion of July 18,1924, was in' preparation. They were wholly unauthorized by the decrees of this court. The plan disclosed neither to the court nór to the mass of noteholders any attempted contracts of the committee of six,' with two of the same committee, plus Chace, for contingent profits in cash or stock out of marketing the new bond issue. The court was entitled to assume that counsel for the fiduciaries/who were seeking to advise the court as to the performance of its duty, would, in their pleadings, disclose all that the court ought to know as to the relations of the court’s fiduciaries to the trust estate and to the contemplated reorganization. Under such conditions, the pleadings must fully inform. It is not enough that, viewed suspiciously, they might have warned the court that it should institute an investigation. It is not the duty of a judge to' hunt for concealed fraud in the papers filed by counsel of this court. Counsel holding- and practicing such a theory, of professional ethics disregard the oath taken by all members of the Massachusetts bar (Gen. Laws Mass, e, 221, § 38), that they “will do no falsehood, nor consent to the doing of any in court.” Again, no amount of study of these blind and confusing documents annexed to the petition would have disclosed to the court the real evil of this scheme or the true relations of the Committee to the" enterprise, the details of which are later set forth. Studied or disregarded, these documents had little significance, except to show a disguise of the real scheme. But, to repeat, because of its importance, neither in pleadings, nor in any other- court papers, nor orally, was the substance of the real plan of reorganization, and the relations of the parties formulating the scheme, brought to the attention of the court responsible for the administration of this estate. On May 29, 1923, the receivers filed a report denominated their second report, as distinguished from various other “special reports” referred to therein. It shows that the plan had been declared operative by the noteholders’ committee on February 26,1923, had been accepted by nearly all the creditors, and that the common stock had gone substantially as contemplated in the printed plan; that is, 500,000 shares were reserved under the warrants for later purchase by the new bondholders at $10 per share, 560,-000 shares were “reserved for sale with the original issue of general mortgage bonds,” and the balance was distributed or reserved substantially as the plan contemplated. To summarize the case actually presented to and dealt with by the court: (1) The receivership involved, directly, the stock of two subsidiaries of a holding company, and thus, indirectly, but potentially, the fundamental policies and management of the subsidiaries; the Refining Company being the chief going concern. These subsidiaries were throughout the receivership left by the court in the control of their existing officers, on the natural assumption that these officers faithfully, and competently represented only the interests of the creditors and stockholders of those subsidiary corporations. Otherwise stated, the court left in' the directorate of the Refining Company the control and management of the chief assets of the receivership estate. (2) The receivers, both in their first report of December 22, 1922, and in their special report of February 17, 1923, on the submitted plan, in effect, advised the court that the chief beneficial owners of the receivership estate had intrusted their interests to -the direction and control,of leading bankers, and that the receivers recommended the adoption of such plan as should be devised and presented by these bankers. (3) The court thereupon, on the.committee’s own petition, put them into practical control of substantially the -entire trust estate, relegating the receivers to merely advisory or minor functions; All claims "of creditors except Wiltsee’s were finally assigned to the committee, or their nominee, the Old Colony Trust Company. (4) Thb committee presented a plan involving a new second mortgage bond issue on the refinery, represented that the'proceeds of these bonds were needed for working capital, and that the bonds were marketable only with the assistance of a bonus of over half of the proposed new common stock then to be issued, and informed the court that approval of this plan was desired by practically all the then owners of the receivership estate, who (as the receivers reported to the court) were themselves to take the new securities, with all the resultant chances of profit or of loss. Having thus obtained the approval of the court of a plan of reorganization of the receivership estate, which appeared fair enough, even if not clearly sound as á business proposition, this committee proceeded to dispose of this trust estate in a radically different fashion, according to a plan devised months before by Smith for the Tanker Syndicate and adopted by the committee, but never disclosed in its real essence to the court until after many days of bearing in the present proceedings. The new bonds, instead of being sold to ibe existing creditors of the receivership estate at 85, accompanied by stock warrants for 500,000 shares of common stock at $10 per share, and with a bonus of 560,000 shares of common stock, were in fact sold by Smith and/or Chace, two directors and members of the executive committee of the Refining Company, to the investing public (mostly Smith’s Scotch clients), at an average price of at least 95 flat, without any stock warrants, and without any bonus of common stock. Smith and Chace, directors of the Refining Company, one or both, realized from the transaction a cash profit of from $400,000 to $600,-000, and also obtained for themselves or their nominees 527,000 out of the 560,000 shares of bonus common stock, besides the warrants for 500,000 shares more, good for 10 years, at $10 per share. The proceeds of the bond issue ($4,250,-000) were not intended for or used as working capital of the oil enterprise. About 41 per cent, of it was forthwith paid to the Tanker Syndicate, made up of the Old Colony Trust Company, represented by Hart, and Smith and Chace, or their concerns, for alleged arrears under the tanker contract hereinafter described; the bulk of the balance was used for reorganization expenses (about $200,000), or so applied to debts owed the banks represented on the committee as to leave the Refining Company practically without cash working capital. Under the plan, the committee were given discretionary control over 250,000 shares of common stock for corporate purposes, “including for issue to officers and employees of the Refining Company.” While of minor importance, this requirement of the plan was not complied with. The committee issued to Cochrane or his nominee, 157,000 shares, to the committee and their secretary 25,000 shares, to Chace, Hart, and Wing as syndicate managers 15,000 shares, and to others, who, apparently, were “officers and employees of the Refining Company,” such an amount of shares that the aggregate thus disposed of by the committee was, as the committee’s second report shows, 298,152 shares. The large issue of 157,000 shares to Cochrane, 15.7 por cent, of the present-' ly authorized issue, was neither within the scope of the committee’s power nor made for the purpose of promoting the financial welfare of the oil enterprise. It was mostly a reward to Cochrane for assistance rendered in this reorganization. This was what the committee did. To comprehend the full legal significance of their acts, it is necessary to understand the makeup of the committee, its dominating purposes, and their relation to the plan actually devised, or adopted, by them, but not disclosed to the court, and in this connection to state and analyze the status of "the oil enterprise and of the Tanker Syndicate in November, 1921. At that time the oil enterprise was functioning through the three corporations already described. The capital for the enterprise to this point had been furnished mainly, if not entirely, by two groups of investors: First, about $4,340,000 derived from the purchasers of an issue of $5,000,000 bonds secured by a first mortgage on the Refining Company’s plant; second, about $4,836,000 derived from the purchaser’s of the $5,440,000 (eliminating an intercompany purchase) of the Holding Company’s 8 per cent, gold notes. This enterprise had been promoted by Cochrane, Harper & Co., who appear to have been bankers or promoters. Cochrane was the president or chief executive officer of the three corporations. Of the 8 per cent, notes issued by the holding company, about $1,500,-000 were apparently taken by Cochrane, Harper & Co., by bankers as collateral security for the brokers’ loans, and by others affiliated with the corporations; $500,000 had been taken by the United Fruit Company in connection with a trade, apparently deemed advantageous to the Fruit Company, for obtaining oil when produced in the Venezuela fields; the balance, about $3,500,000, had been sold to the scattered, investing public — about $1,500,000 in and about New York and Pennsylvania, others in Rhode Island, and, rather generally, in this locality. There were about 700 noteholders in all. The rights of the holders of the first mortgage bonds are apparently not Involved in these proceedings; the rights of the scattered noteholders are particularly involved. Through the reorganization, now attacked, these noteholders received stocks on which no dividends have been paid; they have had no return on their investment since June, 1922. Roughly, then, it appears that the investing public bad furnished about $8,000,000 to $9,000,000 for this enterprise. Viewed optimistically, the refining plant, with its alleged earnings in 1921 of $3,500,000, was worth about the amount of the capital furnished. The value of the oil fields in Venezuela was, of necessity, then unknown. Like other oil fields, they might prove a very great asset, or they might, because of expenditures in fruitless development work, prove a liability. There is nothing to indicate that they were not selected by competent engineers, and were not reasonably hopeful oil prospects. Of course, if this field turned out as productive as have some such fields, the enterprise would become very profitable; otherwise, . it would be only an ordinary manufacturing and mercantile concern, in a highly competitive field. This legal and financial structure obviously vested the control of the entire enterprise in the stockholders of the holding company. It is not contended that these stockholders had furnished any appreciable amount of capital for the enterprise. But their votes chose the directors who controlled it. We have, then, the not uncommon, but highly undesirable, corporate business structure, in which legal and financial control is almost, if not quite, divorced from any personal investment by the voting control of the enterprise. Such a structure lends itself easily to irresponsible, ill-considered, or fraudulent action by directors. This situation (of directors in control over what was beneficially almost entirely other people’s property) throws light upon the transactions hereafter sketched. Obviously the creditors of the holding company were financially and in essence stockholders of the Refining Company and of the Canadian company. It follows that any large loss or improper liability incurred by the Refining Company would fall directly upon the creditors of the Holding Company. Perhaps the most important single element in the financial situation of these oil companies was their relations with the Tanker Syndicate. The Tanker Syndicate was, in November, 1921, the Old Colony Trust Company, Peabody, Houghteling & Co., and M. G. Chace & Co. The Old Colony Trust Company is .a large, well-known bank in Boston. Little appears as to the general nature of the business of Peabody, Houghteling & Co. and M. G. Chace Company. Apparently they are bankers and brokers. The president of Peabody, Houghteling & Co. is Alexander Smith; the concern will hereafter be referred to as Smith. M. G. Chace Company will hereafter be referred to as Chace, its president. In December, 1921, the Tanker Syndicate, Inc., was incorporated; its stock was owned in equal shares by these three banking concerns. In April, 1920, a contract had been made by the Swiftsure Oil Transport, Inc., with the United States Shipping Board, the Old Colony Trust Company, and with some other concerns not now involved, for the construction of seven tankers, at an aggregate price, of $16,800,000. This undertaking was to be financed mainly on money furnished, partly by the United States on a first mortgage (ultimately for over $13,500,000), and partly derived from a second mortgage, in which the Tanker Syndicate was or became interested, apparently to the extent of owning or controlling about two-thirds of a second mortgage bond issue of $4,237,000. This contract was made shortly before the end of the so-called “post bellum boom.” It is common knowledge, and admitted by all, that during the next few months there occurred a tremendous drop in the value of all shipping, and that, for months prior to November, 1921, ships of all kinds were tied up, idle, nearly all over the world. The Swift-sure concern shortly became bankrupt and went out of existence. As it is not claimed that these seven tankers were worth the government’s first mortgage of about $13,500,-000, it is obvious that the Tanker Syndicate, as investors in the second mortgage bonds, had lost their entire investment. It was under these conditions that negotiations were entered into between the oil companies through Cochrane and the Tanker Syndicate. As a result, a contract was authorized by the boards of directors of the Refining Company and of the Holding Company, dated November 29, 1921, under which the Refining Company undertook to buy, provided the Tanker Syndicate should get title, these tankers at an aggregate price of about $17,300,000. Title to the tankers was to be taken by the Refining Company or its nominee; but the contract was to be guaranteed by the Holding Company, which was also to turn over to the Tanker ■ Syndicate $100,000 at par of its stock. As a part of the transaction, the Tanker Syndicate agreed to loan the Refining Company $1,300,000, with interest at 7 per cent., of which, however, $520,000 was shortly thereafter to be repaid out of the proceeds of notes issued by the Refining Company and sold to the investing public. The real advance of the Tanker Syndicate for any considerable time was, therefore, less than $800,000. , It is in this extraordinary transaction that we find the genesis of most of the equally extraordinary subsequent happenings in connection with this receivership. At the time of this contract, the Refining Company had no real need of owning a transportation system. It is not even claimed that tankers were not then in large numbers easily available for charter at highly competitive rates. Furthermore, the financial status of the Refining Company was not then such as to warrant it in making any investment in a transportation system, or in any other facilities not reasonably needed for the equipment and operation of its refining plant and the development of its oil fields. For these purposes, its indicated operating earnings (if its bookkeeping was on a sound and reliable basis, which is not free from doubt), at the rate of about $3,500,000 a year, furnished adequate means for wholesome and safe growth. Why, under such conditions, its directors should even consider committing their corporations to any substantial liability for transportation facilities has not been satisfactorily explained. The directors present on November 28, 1921, at the meeting of the Refining Company, which dealt with this proposition, were F. Douglas Cochrane, George W. Treat, Rudolphe L. Agassiz, Llewellyn How-land, Allan Forbes, John F. Perkins, John W. Farley, Hugh D. Scott, Bradley W. Palmer, R. M. H. Harper, and Gaspar G. Bacon. Treat represented the banking house that had marketed the first mortgage bonds, and “requested to be recorded as not voting in respect to all questions to be submitted to this meeting.” The other directors appear to have voted in favor of authorizing the transaction. The vote was not taken without warning of its significance. Ten days before, Farley, one of the directors, had written a long letter, in which in 12 paragraphs he pointed out some, though not all, of the controlling reasons against committing’ the corporations to this undertaking. This letter shows, what has otherwise appeared in evidence, that there was then some expectation that the government might be persuaded to reduce its first mortgage of over $13,500,000, for the reason that the ships the government thus practically owned were known to be worth only a fraction of that sum, and that in case of such reduction the proposed purchasers might perhaps get a reduction in the purchase price. But it may as well he said here that the evidence utterly fails to show any legal commitment by the Tanker Syndicate, or even the claimed “gentleman’s! agreement,” to the effect that any reduction thus obtained from the government should accrue to the benefit of the oil companies. On the contrary, the contract for the full amount of the purchase price was claimed throughout the receivership proceedings to be valid; and as late as January, 1923, a claim under oath for about $18,000,000 against the respondent was filed by the Tanker Syndicate in these receivership proceedings. Unless the contract was voidable, on this record, it was valid for the full amount of the contract price. Paragraphs 6, 7 and 8 of Farley’s letter are quoted in the margin. This letter informs the parties to this transaction that they could expect no reduction in the first mortgage, except by perpetrating a fraud on the federal government, by concealing the fact that oil companies, financially responsible, had obligated themselves to pay the full original cost of these ships. This transaction was the subject of k report by the Shipping Board to the Senate of the United States, dated January 10,1923, and put in evidence by agreement (Exhibit 83). This report shows, among other things that the total cost to the government of these tankers was $17,565,733.59; that the government realized from the Swiftsure Oil Transport, Inc., $3,840,000; and by a sale of the first mortgage of about $13,500,000 on March 20, 1922, to M. G-. Chace Company, $2,940,-000 — a total of $6,780,000, with a resultant loss of nearly $10,800,000 on the entire transaction. The general policy of the Shipping Board was stated to be that of seeking purchasers fdr ships in or affiliated with the concerns originally interested in their building, many of which had become insolvent; that the • only available collateral was the ships themselves, for which there was no market, especially in view of the enormous stock of idle ships already held by the board and of which it was able to dispose of substantially none. The report proceeds: “One of the important eases was the Swift-sure Oil Transport, Inc. Using the same methods of determining values, the notes of this company were sold to the only bidder, M. Q-. Chacé Company, for $2,940,000 cash, which equals $35 per ton. This amount was much higher than the original bid of M. G-. Chace Company, and was only secured after long negotiations. There was then, and has been since, no real market for tankers, as evidenced by the sale, during 18 months of earnest effort, of only 6 tankers at $45 per ton, most of which were sold long after the settlement was made of the Swiftsure Oil Transport, Inc., case, involving 7 tankers in one transaction. By this settlement the.United States has received a total of $85 per ton, and now has left 84 tankers, which it cannot sell at $45 per ton. “Subsequent to this settlement, which was made, owing to the precarious financial condition of the 'Swiftsure Oil Transport, Inc., the company went into bankruptcy, indicating that either the conditions of settlement were too severe, or that some subsequent event precipitated the position which was threatened previously. In either event, the board’s action resulted in the payment to the United States of $2,940,000 cash, which could then have been obtained in no other manner, and, at best, failing this settlement, the United States would have received 7 tankers to add to its large idle stock of 84 unmarketable tankers, and then only after lengthy and expensive litigation in bankruptcy courts and other courts.” This statement that the government realized from the Swiftsure Oil Transport, Inc., $3,340,000, cannot be reconciled with the Tanker Syndicate claim of a second mortgage bond issue of $4,237,000; for, if the proceeds of this second mortgage bond issue, had (apart from any possible capital contribution by the Swiftsure Oil Transport, Inc.) reached the government, the payment on the tankers should have substantially exceeded $3,840,000. But this and many other mysterious discrepancies in the financial maneuverings concerning the tankers are of little importance. It is important to note that the essence of the scheme was to make the second mortgage bonds, plus a bonus, good, while the first mortgage (which was really the title to the ships), was sold by the government for less than 22 per cent, of what it cost the government. This report controls on all material questions as to the value of these ships. Although it has been argued that they were fairly worth at that time about' $8,541,000 (and that the contract price was subsequently reduced to that amount), there is no evidence entitled to any substantial weight supporting that valuation. The argument that the federal government was by the fraudulent concealment of this contract (which put the oil companies essentially in the position of mortgagors) induced to sell ships worth $8,-541,000 for $2,940,000 is not appropriate in a federal court. The Shipping Board must be assumed to have acted, not only honestly, but under the advice of the best experts, as to the real value of these 7 tankers, when they sold them (although in form a sale of the first mortgage) in March, 1922, for $2,-940,000. On all the evidence, the court is constrained to find, and does find, that the fair market value of these ships in November, 1921, and in March, 1922, did not exceed $3,000,000. What induced, or compelled, the directors of these oil corporations to enter upon this contract, does not clearly appear. No director voting for it, except Palmer and Cochrane, has been called to explain the transaction. It remains unexplained, and upon the present record does not appear susceptible of an honest explanation. Stripped of confusing disguises and passing exceptions of negligible present importance, this transaction amounted to an agreement to transfer the property of the creditors of the Holding Company to the Tanker Syndicate — a gift of millions of other people’s money to the Tanker Syndicate by boards of directors who represented little or no investment in the oil enterprise. Prom the standpoint of the Tanker Syndicate, a loss of several millions in second mortgage bonds was transmuted into a handsome profit at the expense of a lot of scattered note-holders of the oil corporation. The court is compelled to believe and to find that the accomplishment of this result was the controlling1 motive of the original tanker contract and that of the reorganization later planned and effected under the controlling influence of parties interested in that contract. As noted above, the receivership of the Holding Company involved, potentially, both the Refining Company and the Canadian company, so that, taking control of all the stock of both of these companies, the court became responsible for tlio fundamental policies and conduct of both of the subsidiaries. Plainly, if the court had known the destructive character of this contract, and that the board of directors then in control of the Refining Company (the chief asset of the receivership estate) had voted for it, the first step would have been to oust that hoard of directors from control of that chief asset of the court’s trust estate. No court would share responsibility for the administration of a trust estate with a board of directors who had evidenced their fidelity to their trust, and their business capacity, by passing those votes. The concealment of the tanker contract, and of the conduct of the directors of the Refining Company in voting for it, was an intentional fraud upon the court, and, through the court, upon the beneficiaries of the court’s trust. As a part of the tanker transaction, Smith and Chace became members of the boards of directors of the oil companies, and thereafter, with the Old Colony Trust Company, dominated them in all important business matters, as well as in the reorganization thereof. Holding over the oil corporations a contract for over $17,000,000 for the purchase of ships that were worth only $3,000,-000, it was immaterial whether or not they constituted or named a majority of the board of directors. The executive committee of the Refining Company became: Cochrane (with Parley as alternate), Palmer, Smith, Chace, and Treat. Smith and Chace were in the Tanker Syndicate; Cochrane, Parley, and Palmer had voted for the contract. The evidence shows in multiform fashion that the parties believed that the tanker contract would never bear examination. An illustration is found in the certified accountants’ reports. These reports, based on the" bookkeeping, show that the ships and the purchase price were never properly entered as assets and liabilities. When they were contracted to be bought by the oil companies they became to the extent of their real value ($3,000,060) an asset of the enterprise, and should have appeared in the balance sheet; and the purchase price of over $17,000,000, although payable in installments, was as definite a liability as a bill payable for oil. But not only in the reports of the certified accountants, but throughout the record subsequently made in this court, as well as in the records of the committee, runs a concerted attempt to disguise and conceal the realities of the situation. This concealment, however, is only one among a multitude of facts which force the mind to the same conclusion ■ — viz. the parties concerned understood that the transaction, if exposed and tested in court, might be found grounded in fraud, and therefore voidable. Whether voidable for fraud or not, it was a transaction that should have been fully disclosed to the court and to its intended victims, the chief beneficial owners of the receivership estate. The committee had no right to coneea.1 it and to use their powers, as trustees of the assigning beneficial owners and as appointees of the court, to affirm and effectuate it. While not, as a committee, responsible for making it, their later conduct fell little short of full adoption. This contract took effect as of January 1, 1922. Under it, all the earnings and profits that the oil enterprise could possibly have made were diverted, potentially, from the noteholders of the Holding Company, who were essentially the stockholders of the Refining Company, to the three banking concern's — the Tanker Syndicate. Moreover, the same forces that had sacrificed the investors in the oil enterprise for the benefit of the Tanker Syndicate remained in actual, and apparently in invincible, control of the enterprise. But in the summer of 1922 this control was put in jeopardy by a judgment against the Holding Company for nearly $1,200,000, subsequently reduced by the Circuit Court of Appeals to about $940,000 (288 F. 901), by the Island Oil Marketing Company. The chief asset of the Holding Company was the stock of the Refining Company. The Holding Company was in no financial condition to pay a judgment of $1,000,000, or even to put up a supersedeas bond in order to perfect a,n appeal. At an execution sale, the judgment creditor for $1,000,000, if the other creditors were not organized, would have had a great advantage in bidding, and would probably have become the owner of stock and taken control of the Refining Company. A new board of directors would have been certain to discover the situation and sue to set aside the tanker contract — a result that the forces then in control intended to avoid, if possible. The situation presented a dilemma to those interested in protecting the contract. If, on the one hand, the judgment creditor was permitted to enforce a judgment