Cross-appeals from so much of a judgment entered June 30, 1976 in the United States District Court for the District of Connecticut, Robert P. Anderson, Circuit Judge, sitting by designation,
Moore, Oakes and Timbers, Circuit Judges.
This is the case of the wise and comprehending chancellor.
The case comes to us on cross-appeals by two successor indenture trustees from so much of a judgment of June 30, 1976, entered upon an opinion and order of the same date in the United States District Court for the District of Connecticut (the New Haven reorganization court), Robert P. Anderson, Circuit Judge, sitting by designation, 421 F. Supp. 249 (D. Conn. 1976), as allowed to a former indenture trustee, Manufacturers Hanover Trust Company, compensation in amount of $304,416.67 and expenses in amount of $103,018.34, and to its counsel, Simpson Thacher & Bartlett, attorneys fees in amount of $808,000 and expenses in amount of $15,234.81.
The essential questions presented are (1) whether the New Haven reorganization court as a court of equity had the authority, absent a specific statutory directive to the contrary, in the exercise of its discretion to allow or to deny compensation and expenses, including attorneys' fees, to an indenture trustee which concededly represented conflicting interests under very unusual circumstances; and (2) if so, whether the reorganization court exercised sound discretion in allowing the compensation and expenses in question.
We hold that the reorganization court did have such authority; that on the unique facts of this case it did exercise its discretion soundly; and that it reached a fair and equitable result in allowing the compensation and expenses in question. We affirm.
The conflict of interest that lies at the heart of this case arose out of the complexities of two mergers and two reorganizations. The companies involved, as now known, are the Manufacturers Hanover Trust Company (Manufacturers); the New York, New Haven and Hartford Railroad Company (New Haven); and the Penn Central Transportation Company (Penn Central). A brief narrative of how these companies reached their present status is necessary to an understanding of the instant controversy.
On July 7, 1961 the New Haven filed its petition for reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205 (1970), in the United States District Court for the District of Connecticut. Since 1947 the Manufacturers Trust Company (Trust Company), a predecessor of the present Manufacturers, had been the corporate indenture trustee of the New Haven's first and refunding mortgage.*fn1 The Trust Company intervened in the New Haven reorganization through its general counsel, Simpson Thacher & Bartlett (Simpson Thacher), which had represented the Trust Company in its capacity as corporate indenture trustee since 1947. Judge Anderson, who in 1961 was Chief Judge of the District Court for the District of Connecticut, has presided over all proceedings in the New Haven reorganization continuously from their inception to date - a period of nearly 16 years.
On March 9, 1962 the Pennsylvania Railroad Company and the New York Central Railroad Company first proposed the merger that ultimately led to the organization of the Penn Central in February 1968. The New Haven reorganization trustees sought inclusion of the New Haven in the merged railroad, primarily under § 5(2) of the Interstate Commerce Act, 49 U.S.C. § 5(2) (1970), both by private negotiations with the merging railroads and by a petition filed with the Commission on June 26, 1962. The Commission approved the Penn Central merger on April 6, 1966 on the condition that the merged railroad would purchase the New Haven's assets. An agreement (inclusion agreement) was reached on April 21, 1966, between the New Haven trustees and the Pennsylvania and New York Central railroads, to include the New Haven in the Pennsylvania/New York Central merger. The agreement provided that the Penn Central would acquire the major part of the New Haven's assets for a consideration consisting of cash, bonds, Penn Central stock, and the assumption of certain of the New Haven's obligations. See generally New Haven Inclusion Cases, 399 U.S. 392, 408-410, 26 L. Ed. 2d 691, 90 S. Ct. 2054 (1970). The New Haven trustees bound themselves to support the agreement and the fairness of the proposed purchase price of approximately $125,000,000 for the New Haven's assets. Unlike the New Haven trustees, however, representatives of the New Haven's bondholders remained free to seek a higher price.
On October 24, 1966 the New Haven reorganization court authorized presentation of the agreement to the Commission which approved the agreement on November 16, 1967. Id. at 411-12. A final price had not been determined at that time, but on December 24, 1968, as we later noted, "because of the precarious financial condition of the New Haven and the imminent termination of its rail service, the [New Haven reorganization court] approved the transfer of New Haven's assets to Penn Central, leaving the exact amount and form of consideration to be paid by Penn Central to be settled finally at a later date." In re New York, N.H. & H.R.R., 457 F.2d 683, 685 (2 Cir.), cert. denied, 409 U.S. 890, 93 S. Ct. 111, 34 L. Ed. 2d 147 (1972). The Commission ultimately set the purchase price for the New Haven's assets at about $140 million, having previously concluded that the $125 million purchase price agreed to by the Penn Central and the New Haven trustees was "fair and equitable."*fn2 In the New Haven Inclusion Cases, supra, the Supreme Court held that the $140 million purchase price approved by the Commission was grossly inadequate and itself set the price at $174.6 million.*fn3
On June 21, 1970, just eight days before the Supreme Court's decision in the New Haven Inclusion Cases, the Penn Central filed a petition for reorganization in the Eastern District of Pennsylvania. Penn Central securities became virtually worthless overnight. As we later observed, since Penn Central securities "were to [have] comprise[d] a significant portion of the payment to the New Haven estate, the Supreme Court remanded the case for 'further proceedings before the Commission and the appropriate federal courts . . . to determine the form that Penn Central's consideration to New Haven should properly take and the status of the New Haven estate as a shareholder or creditor of Penn Central.' 399 U.S. at 489 . . . ." In re New York, N.H. & H.R.R., 479 F.2d 8, 11-12 (2 Cir. 1973).
The inclusion of the New Haven's assets in the merged and later bankrupt Penn Central would not have resulted in the conflict of interest with which we are here concerned had there not been still another merger - a nonrailroad one. Backing up for a moment, in September 1961, two months after the New Haven filed for reorganization but before any of the other developments described above, Manufacturers Trust Company merged with The Hanover Bank (Hanover), to form the present Manufacturers Hanover Trust Company. Hanover had served as trustee under mortgages of the New York Central since 1897. When Hanover merged with the Trust Company, the merged bank's trust department inherited those mortgages. The law firm then known as Kelley, Drye, Newhall, Maginnes & Warren (Kelley, Drye), Hanover's counsel, continued to handle the legal work of the merged bank's corporate trust department. Since Simpson Thacher had represented the Trust Company as corporate indenture trustee of the New Haven's first and refunding mortgage since 1947, the firm continued to represent Manufacturers in that capacity.
Manufacturer's position as trustee under mortgages of the New Haven and of the New York Central presented no conflicts problems prior to June 21, 1970. On that day, however, when the Penn Central filed for reorganization, Manufacturers found itself representing conflicting interests. On the one hand, it was the indenture trustee under the first and refunding mortgage of the New Haven; and, on the other hand, it was a creditor of the Penn Central*fn4 and trustee under mortgages of the New York Central.*fn5
In July 1970 Manufacturers undertook to extricate itself from this conflict of interests. It informed both the New Haven and the Penn Central reorganization courts, as well as the various trustees and their counsel, of the situation.*fn6 It then began a comprehensive effort to find successor corporate trustees for the New Haven mortgage and the eighteen New York Central mortgages. Between July 1970 and June 1971 Manufacturers contacted at least sixty-two banks. Its search included every commercial bank east of the Mississippi that had a substantial trust department and did not have a conflict of interest (such as being a creditor of the Penn Central). On July 29, 1971, the New Haven reorganization court appointed the first of the present individual successor trustees, for the reason that, "although the underlying mortgage itself specified that a successor trustee must be a qualified bank, the court . . . could not permit a valid trust to fail for lack of a trustee . . . ."*fn7 421 F. Supp. at 264. Manufacturers had not included individuals in its search because of the terms of the mortgage.
Meanwhile, the potential conflict recognized by Manufacturers as of June 21, 1970 became an actual one very quickly. Following the Supreme Court's remand, the New Haven reorganization court entered an order with broad notice provisions to determine what should be done to protect the New Haven's creditors. This resulted in due course in the entry of an order on June 22, 1971 pursuant to which the court sought to give the New Haven estate secured-creditor status by declaring "an equitable lien . . . on all of the former assets transferred by the New Haven to Penn Central, exclusive of (a) rolling stock and (b) the New Haven's one-half interest in the excess income from the Grand Central [Terminal] properties" and, as to "the latter item of property . . . [by declaring] a constructive trust in favor of the New Haven estate." In re New York, N.H. & H.R.R., 330 F. Supp. 131, 142 (D. Conn. 1971).
During the proceedings which resulted in the order of June 22, 1971, the New Haven's interests were supported by, among others, the New Haven's trustee and Manufacturers as the indenture trustee, Manufacturers being represented by Simpson Thacher. Interests which opposed imposition of an equitable lien or constructive trust included the Penn Central, represented by the Washington, D.C. law firm of Covington & Burling; and Manufacturers, as indenture trustee under the Gold Bond mortgage, represented by Kelley, Drye. Covington & Burling assumed the lead role in opposing imposition of the equitable lien and constructive trust. The incongruity of the situation nevertheless was apparent. As the court put it,
"The startling result was that, on opening court one morning, the New Haven reorganization court was handed a brief by the Simpson, Thacher firm from Manufacturers Hanover Trust Company for the New Haven side of the case, and it was then handed another brief by the Kelley, Drye firm from the Manufacturers Hanover Trust Company for the other side of the same case." 421 F. Supp. at 265.
Through Simpson Thacher, Manufacturers supported the New Haven trustee's position in favor of imposing an equitable lien and constructive trust. Through Kelley, Drye, Manufacturers took the position that the New Haven reorganization court lacked jurisdiction over the New Haven assets that had been conveyed to the Penn Central.
Shortly after the New Haven reorganization court's decision, referred to above, which imposed an equitable lien and a constructive trust in favor of the New Haven estate on the transferred assets, Manufacturers and Mr. Keuthen on June 22, 1971 filed their applications to resign from the New Haven's first and refunding mortgage trusteeship. On July 29 the court approved the resignations and appointed Mr. Iannotti as successor trustee.
Penn Central appealed to our Court from the order entered on June 22, 1971. This appeal resulted in our decision of March 17, 1972 that the New Haven reorganization court lacked jurisdiction over the New Haven's assets which had been transferred to Penn Central. In re New York, N.H. & H.R.R., 457 F.2d 683 (2 Cir.), cert. denied, 409 U.S. 890, 93 S. Ct. 111, 34 L. Ed. 2d 147 (1972). As in the proceedings before the reorganization court, Manufacturers and Kelley, Drye, in challenging the order under review, participated in a subordinate role on the appeal and on the certiorari proceedings; Covington & Burling took the lead as counsel to Penn Central. Manufacturers nevertheless did participate as it had to (and as it will continue to do if necessary) in its capacity as trustee under the remaining New York Central mortgages.
The upshot is that the New Haven interests still have not been paid by the Penn Central estate.*fn8
It was against this background that applications were filed on June 16, 1975 in the New Haven reorganization court by Manufacturers and several other bondholder representatives seeking compensation for services rendered and reimbursement of expenses, including attorneys' fees. The applications were filed pursuant to § 77(c)(12) of the Bankruptcy Act, 11 U.S.C. § 205(c)(12) (1970).*fn9 After a hearing on May 18, 1976 the court filed its opinion, order, and judgment on June 30, 1976. To the extent here relevant,*fn10 the court allowed compensation to Manufacturers in amount of $103,018.34 as reimbursement for expenses and in amount of $304,416.67 as compensation for services. The court directed, however, that payment of the latter amount be contingent on the New Haven's recovery of the purchase price of its assets owed by the Penn Central. This was done by limiting Manufacturers' compensation for services to 1/4 of 1% of the amount to be recovered by the New Haven from the Penn Central, such payment in no event to exceed $304,416.67. The contingent basis of the allowance to Manufacturers in this respect was grounded on the court's findings that Manufacturers had pursued interests adverse to the New Haven estate by representing the interests of the eighteen New York Central mortgages (which interests, except for the Gold Bond mortgage, it still is obliged to pursue); that such conduct constituted a breach of fiduciary duty under Woods v. City National Bank & Trust Co., 312 U.S. 262, 85 L. Ed. 820, 61 S. Ct. 493 (1941); and that such breach "impeded, and therefore damaged, the New Haven reorganization trustee's collection of the sums owed the New Haven estate . . . and has frustrated the further development of a plan of reorganization for the New Haven. . . ." 421 F. Supp. at 266.
In addition to the allowance to Manufacturers itself referred to above, the court also allowed to Manufacturers the sum of $808,000.00 as compensation for its attorneys, Simpson Thacher & Bartlett, plus ...