## Facts

- Aldred Investment Trust, a Massachusetts business trust and registered closed-end investment company, had been insolvent since 1937 and was controlled by trustees and officers later found to have engaged in fraud, self-dealing, and “gross abuse of trust” under § 36 of the Investment Company Act of 1940.
- A prior federal decree removed those fiduciaries and directed appointment of a receiver empowered either to reorganize the trust’s capital structure or to liquidate and distribute assets.
- The trust’s capital structure included approximately $5.9 million in debentures (with nondetachable common shares attached) and additional “free” common shares, leaving voting control largely with common shareholders while debenture holders supplied most of the capital.
- After the receivership began, market increases in speculative portfolio holdings improved the trust’s balance-sheet condition, and a group of investors (including Bailey) acquired control of the common shares.
- Bailey and allied shareholders intervened and sought to end the receivership, call a special shareholders’ meeting, and pursue reorganization rather than liquidation.
- The district court denied the request for a shareholder meeting and termination of the receivership, rejected four proposed reorganization plans, and directed the receivers to proceed with liquidation.

## Issues

1. Whether the district court retained jurisdiction and authority to order liquidation in an equity receivership created after findings of “gross abuse of trust,” despite the trust’s later improvement in solvency.
2. Whether the district court abused its discretion by disapproving proposed reorganization plans, refusing to call a special shareholders’ meeting, and directing liquidation.

## Decision

- The First Circuit affirmed the district court’s order.
- The court held the district court retained continuing equitable jurisdiction to supervise the receivership and order liquidation notwithstanding later solvency.
- The court held there was no abuse of discretion in rejecting the proposed reorganization plans and directing liquidation where no fair and feasible plan adequately protected debenture holders and the statutory investor-protection aims.
- The court upheld the refusal to call a special shareholders’ meeting because the receivership proceeding displaced ordinary governance mechanisms and a meeting would not aid the court’s remedial decision.

## Legal Principles

- A federal equity court that appoints a receiver following statutory fiduciary violations and serious misconduct may retain jurisdiction to effectuate appropriate relief, including liquidation, even if the entity later becomes solvent.
- When an authorizing decree grants a receiver power to reorganize or liquidate, the district court has broad discretion to choose liquidation if proposed reorganizations are not fair and feasible for all security holders.
- In a misconduct-based receivership, shareholder voting rights and corporate governance processes may be subordinated to the court’s equitable control, particularly to protect creditors and debenture holders.
- Courts may consider the investor-protection purposes of the Investment Company Act and the risks posed by capital structures that permit equity controllers to pursue strategies that expose debenture holders to disproportionate downside risk.

## Conclusion

The court sustained the district court’s continuing control over an investment trust placed in receivership for gross fiduciary abuse, holding that later solvency did not require termination of the receivership or a shareholder meeting and that liquidation was within the court’s discretion where reorganization proposals were inadequate and debenture-holder protection required decisive remedial action.


Bailey v. Proctor, 160 F.2d 78 (1st Cir. 1947)