Bailey v. Proctor
United States Court of Appeals for the First Circuit
160 F.2d 78 (1947)
Aldred Investment Trust was structured so that a small group of stockholders held voting control while most of the money came from debenture holders seeking safe, fixed returns; that structure gave the stockholders an outsized incentive to make speculative investments at the debenture holders' expense, a structure later banned (though not retroactively) by the Investment Company Act of 1940. After the Trust's original controller, Hanlon, was caught in fraud and self-dealing and the Trust became insolvent, a court-appointed receiver took control. Bailey (plaintiff) and other investors then bought the controlling interest, and a speculative investment's rise plus postwar market inflation made the Trust solvent again. The trial court nonetheless ordered the receiver to liquidate the Trust, and Bailey appealed.
Whether a court of equity retains the power to order liquidation of an investment trust for fraud, mismanagement, or abuse of trust, even after the trust has become solvent again and the wrongdoers have been removed.