author: DAVID W. AMRAM, Referee. DICKINSON, District Judge.

text:
    In re FASHION SHOP, Inc.
    No. 13812.
    District Court, E. D. Pennsylvania.
    Feb. 1, 1933.
    Reargument Denied March 13, 1934.

      Jacob I. Weinstein, of Philadelphia, Pa., for trustee.
   DAVID W. AMRAM, Referee.

A petition for a counsel fee of $2,500 was filed by the attorney for creditors who had successfully objected to confirmation of composition.

At a meeting of creditors called for the purpose of considering this petition, among other things, objection was made on behalf of one of the creditors that the estate enjoyed no benefit from this motion, but on the contrary suffered a loss, and in a brief filed the further objection wasi made that the claim should have been made by the creditors and not by the attorney. Thereupon a petition was filed by the Bethlehem Textiles Company, one of the objecting creditors, to which an answer was filed by the North City Trust Company and testimony was taken thereon.

The question for decision is whether the attorney is entitled to the counsel fee under the provisions of section 64b (4) of the Bankruptcy Law as amended (11 USCA § 104 (b) (4), which provides that among debts entitled to priority of payment shall be the following: “Where the confirmation of composition terms has been refused or set aside upon the objection and through the efforts and at the expense of one or more creditors, in the discretion of the court, the reasonable expenses of such creditors in opposing such composition.”

Although this section was adopted by amendment to the Bankruptcy Law in 1&26, it has not been judicially interpreted except in one case, ruling that when the bankrupt withdraws his offer of composition this section of the act gave no authority for the allowance of expenses to the objecting creditors. The terms of the act provide that it becomes effective if—

(1) Confirmation of composition terms has been refused or set aside

(2) Upon the objection and

(3) Through the efforts and

(4) At the expense

(5) Of one or more creditors

(6) In the discretion of the court

(7) The reasonable, expenses of such creditors in opposing such composition.

1. In order to be entitled to reimbursement of expenses the confirmation of composition terms must have been refused or set aside. If the bankrupt having made an offer of -composition withdraws it, the act does not apply. In re Benjamin Herman & Co., 4 Am. Bankr. Rev. 242. If the referee has reported in favor of the composition and thereupon creditors file objections and prosecute them with effect whereby the court finally refuses confirmation, the section applies. Where the composition has been confirmed, but for reasons set forth in section 13 of the Act (11 USCA § 31) has thereafter been set aside, the section applies.

2. It is the objecting creditor or creditors who are entitled to the benefit of this section, not any other creditor who may have participated in the examination of the bankrupts or any other witnesses, or any attorney acting for such creditor.

3. Per contra if the objecting creditor does not make the necessary effort to prosecute the objections and, this is done by another creditor or through an attorney for such other creditor, the objecting creditor is not entitled to the benefit of the section. The defeat of the composition must have been through the efforts of the objecting creditor.

4. The objecting creditor must have been put to expense in his successful prosecution of his objections and these expenses may be the subject of a request for reimbursement. If the creditor is put to no expense, then even though the composition is defeated upon his objection 'and through his efforts, he is, of course, not entitled to payment. • Expense incurred by any other person than the objecting creditor is not the subject of consideration under this section. Expense means money laid out, disbursed, or spent. It relates to moneys spent and not to moneys to be spent, but it may include absolute obligations which have been properly assumed by third persons.

5. The expense thus incurred, i. e. the money spent, becomes a debt due to the creditor for which he is entitled to payment in full in the order of priority fixed by this section (64) of the act. It is the objection efforts and expense of the creditor that entitle the latter to reimbursement. No other person than one falling within this category is entitled to the benefit of this section.

6. The right to reimbursement is not absolute, but it is in the discretion of the court. Presumably such discretion must, as in other eases, be reasonably and not arbitrarily exercised. What shall be the guiding principle to govern the action of the court in the exercise of this discretion ? The court having ascertained the fact that the objecting creditor’s efforts and expense have accomplished the result may exercise its discretion in making allowance by considering whether under the circumstances of the case the action of the successful objecting creditor has been of benefit to the estate of the bankrupt. Here the analogy of section 64b (2) as amended (11 USCA § 104 (b) (2) is invoked. This provides that: “Where property of the bankrupt, transferred or concealed by him either before or after the filing of the petition, shall have been recovered for the benefit of the estate of the bankrupt by the efforts and at the expense of one or more creditors, the reasonable expense of such recovery.” The recovery must be, not for his own or some other person’s benefit, but for the benefit of the estate, i. e. all the creditors. So here, where the court in the exercise of the discretion vested in it finds that the estate has benefited by the act of the objecting creditor, it may make an allowance for reimbursement of expenses, but if, in the opinion of the court, the successful prosecution of the objection to the composition was not of benefit to the estate it may refuse to make such allowance. This it seems is what was contemplated by the use of the words, “In the discretion of the court.” It may be asked how the defeat of a composition can be anything but a benefit to the estate. The composition cannot be defeated except for grounds set forth in section 12d, as follows: “(d) The judge shall confirm a composition if satisfied that (1) it is for the best interests of the creditors; (2) the bankrupt has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to his discharge; and (3) the offer and its acceptance are in good faith and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden.” 11 USCA § 30 (d).

The first of the reasons given in this section is obviously based upon a consideration by the court of what is to the best interests of creditors, to wit, what is for the benefit of the estate, and is distinguished from the other reasons given under subsections 2 and 3. The other reasons mentioned are not synonymous with the first. It follows therefore that the refusal of the composition because the bankrupt was guilty of an act which was a bar to his discharge is not necessarily for the benefit of the estate. As the word “benefit” to the estate is used in section 64b (2), it cannot mean anything other than financial benefit or advantage; the benefit is measured in cash and not in any other mode of satisfaction. It is analogous to the words “best interests of the creditors,” used in section 12d (1), which has been interpreted to mean best financial interests. The fact that in section 12d (1) of the act the financial benefit to the creditor is meant, and not any other public or' private “benefit” based upon so-called moral considerations or considerations of public policy, is shown by the next two clauses of that section, which specifically provide for such eases. The estate is a legal entity which has no moral or ethical character or interest. It exists merely as a means of collecting and distributing the bankrupt’s assets. It has no other function. Punishment of the) bankrupt for legal offenses is no business of the bankrupt estate. That may be undertaken by any one of his creditors or by the United States Attorney at the instance of the referee, receiver, or trustee as provided in section 29 (e) (1) and (2) of the act as amended (11 USCA § 52 (e) (1, 2). The Bankruptcy Act itself impliedly defines the word “estates” by setting it as a caption before section 61 of the act (11 USCA § 101). All the sections following relate to the property rights of the creditors.

A “benefit” means a financial benefit and nothing else, and if the court is of the opinion that under the circumstances of the composition and its defeat the financial interests of the creditors have not benefited, then the estate has not benefited and the court in the exercise of its discretion may refuse reimbursement of expenses to the successful creditors. They have done something which may give them satisfaction and which may or may not be a public service, but it may not be of benefit to the estate, i. e. to the only interest for which the estate exists, to wit, its financial interest. For example, if a composition is offered by a bankrupt who has given a false statement. His composition may be defeated and his discharge may be refused. Let us suppose that the administration of his estate in bankruptcy will not pay the creditors as much as his offer of composition would have paid. Can it be said that the creditor who defeated the composition has benefited the estate of the bankrupt?

7. Assuming that the benefit of this section may be properly invoked, to what is the creditor entitled? The act states the “reasonable expenses.” Here again the phrase used in section 64b (2) is used. The reasonable expenses are thoáe properly and fairly incurred in the acts which were required to bring the matter tp the attention of the court and for its decision. This would include all reasonable expenses of witnesses, talcing testimony, special investigation, accountants’ services, and attorneys’ fees. Any proper expense incurred by the creditor would fall under this category provided it was reasonably necessary to accomplish the result. The reasonableness is a matter for judicial determination.

The question now arises whether the assumption of a legal obligation by the creditor in defeating the composition which the creditor has not paid, but for which he is liable, is an “expense” for which the estate may be taxed. For example, the creditor has engaged the services of an accountant or an attorney and has bound himself to pay a reasonable sum for his services. The composition having been defeated and the accountant’s or attorney’s services having contributed thereto, may the creditor ask that the accountant and attorney be paid out of the estate? Strictly and literally the obligation to pay is not an expense, yet, if honestly and fairly contracted and legally due, the claim of the third person against the creditor ought to stand in the same category as an actual outlay of money by the latter. It is true that he may not pay the accountant or attorney either because he will not or cannot, and therefore he would never have a claim against the estate for-reimbursement. Yet it seems that this is no complete answer to the problem, for the estate has enjoyed the benefit of the service of the accountant or attorney, and if oh all other grounds the ease is one in which the creditor would be entitled to reimbursement, the claim on behalf of the creditor’s creditor should be' allowed as an expense if reasonably incurred in opposing the composition.

8. Finally, the creditor opposing the composition is the only one entitled to the benefit of the section. This is set forth in the last words of the section and is also clearly the intent of the preceding parts of the same section.

These seem to the referee the principles that should govern in the interpretation off this section. The analogy of the practice in the case of objections to discharge section 14b, as amended, 11 USCA § 32 (b), proviso, may now be invoked. Where a trustee has been appointed before the offer of composition is made or pending its consideration, it should be the right and duty of the trustee in a proper case when authorized by the creditors to object to the composition. This would be done by the vote of a majority in number and amount of the creditors at a meeting called for this purpose. But where there is no trustee, as in eases where the composition is offered immediately after the filing of the petition in bankruptcy, there is no one to 'act for the creditors. In such cases the section now under consideration gives the individual creditor the right to act, but his action must be a benefit to the estate. In the ease of the trustee desiring to act in opposing a discharge, the majority vote of the creditors determines his right to do so. In the ease of the individual creditor desiring to act, a similar rule should prevail. How is this majority vote in the latter ease to be obtained ? It seems that the original vote of the creditors on the composition is in itself the determining factor, for if the majority of the creditors accept the composition ipso facto, they may be presumed to be opposed to any attempt to prevent its confirmation. The fair interpretation of the section now under consideration requires the court in the exercise of its discretion to determine what was the view of the creditors as expressed by their vote in composition offer. If the majority favored the composition, can it be said that its defeat was for the benefit of the estate ? And should not in that case the court, without more, refuse to reimburse the objecting creditor for his expense ?

Without considering this and further aspects of the law under this section, a review of the facts in the present controversy is now in order.

The testimony may be considered under the separate heads above outlined in an analysis of the section of the act:

(1) Was the confirmation of composition terms refused or set aside? A majority of the creditors in number and amount voted in favor of the composition. After the preliminary hearing the referee was of the opinion that the composition was for the best interest of creditors and reported in favor of its confirmation. Thereupon the attorney now asking for compensation, on behalf of a number of creditors, entered his appearance against the confirmation of the composition and on behalf of one creditor, Coons & Co., filed specifications of objection. While these specifications of objection were pending, Coons & Co. went into bankruptcy, and two other creditors, to wit, Bethlehem Textiles Company, Inc., and Bower & Kaufmann, were substituted to prosecute the specifications of objection. Ultimately certain of these objections were sustained and the referee reported against confirmation of the composition, but no formal order of court refusing to confirm the composition has been entered.

(2) Was the referee’s report recommending refusal of confirmation basec( upon the objection of the creditors? The record shows that this must be answered in the affirmative.

(3) Was the referee’s report recommending refusal of confirmation based upon the efforts of the objecting creditors? The testimony relating to this phase of the matter is ■as follows:

The opposition to the composition was directed by Mr. Frederick G. Epp, vice president of the Philadelphia Branch of the Credit Clearing House Corporation, which had received a number of claims against the bankrupts and had been instructed that they be voted against the composition. Among these were the claims of the objecting creditors. After the referee had reported in favor of the composition, Mr. Epp consulted with the attorney to determine what should be done to prevent confirmation of the composition. Mr. Epp acted herein on behalf of the present objecting creditors, among others. These creditors authorized him to engage the services of an attorney to prosecute the objections. It was through the attorney’s efforts acting for the creditors that the confirmation of the composition was refused. It is proper therefore to answer the third •question in the affirmative.

(4) Was the referee’s report recommending refusal of confirmation of the composition made at the expense of the objecting ■creditors ?

The only expense incurred by the objecting creditors was the following: Coons & Co., Inc., $45.09, being 5 per cent, of their claim of $901.75; Bower & Kaufman, $28.-61, being 5 per cent, of their claim of $572.-26; and Bethlehem Textiles Company, $77.-03, being 5 per cent, of their claim of $1,540.-63. These three items amount to $150.72, and they constitute the entire expense present and prospective to which the objecting creditors were put. Other creditors, not objecting on the record to the confirmation of composition but objecting to it in fact, also contributed to the expense of the proceeding. Their claims aggregated $9,330.92, and 5 per cent, of this sum, to wit, $466.54, was the amount that they contributed. These contributions were received under the following circumstances: Mr. Epp notified all of the creditors whom his corporation represented that the confirmation of the composition should be defeated; that expense would be incurred to which they would be expected to contribute; that counsel fees would have to be paid in such amount as the work of counsel would justify. In order to secure the sum necessary, a form of assignment of claim was prepared to be signed by the creditors. The Credit Clearing House did not bind itself in any way for expenses of any kind. It merely acted as agent for the creditors. The creditors bound themselves as follows:

“In re: Fashion Shop, Inc., Philadelphia, Pennsylvania, Bankrupt

“In consideration of services rendered and to be rendered in connection with the investigation and examination made and to be liiade into the affairs of the said bankrupt and also in connection with the contest to be made against the confirmation of the composition settlement in the above matter, the undersigned does hereby assign to Jacob I. Weinstein, Esq., a sum equal to 5% of the undersigned’s claim against the above named bankrupt out of dividend or dividends to be paid on the said claim in bankruptcy or payment in composition on the said claim.

“The said claim in the amount of $- has been duly filed and allowed in the aforesaid proceedings.

“In witness whereof, the undersigned has hereunto set his hand and seal this-day of-, 1931.

“(Name of Creditor.)”

These forms were signed by 22 creditors whose claims amounted altogether to $12,-345.56. Among the signers were the three creditors above named.

The hearings on the specifications of objection began before the referee on May 4, 1931. At that time, the attorney had in hand an assignment of 5 per cent, of $10,024.83 of the claims, or $501.20. The balance of assignments of 5 per cent, of $2,320.73 came in after the hearings had commenced.

When Mr. Epp was asked whether the creditors had agreed to.pay the counsel fee of $2,500 asked for by the attorney, he replied that he did not know; that they did not agree to pay it through him.

Harry Weinreieh, president of Coons & Co., the first objecting creditor, said that he knew that Mr. Epp had retained Mr. Weinstein; that he (Weinreieh) had no talks with Mir. Weinstein personally; that he personally felt obligated to pay up to the 5 per cent.; that he did not ask any creditors to pay more; that he had gone among the creditors to obtain assistance in the fight against the composition; that he participated in securing the assignment of 5 per cent.; that he did not know whether any creditor agreed to pay more than the 5 per cent, of the claims under the assignment; and that he made no other agreement to pay except the 5 per cent, under the assignment, but he “understood” that he “might be obligated” to pay a counsel fee.

Mr. Colin Fenton, credit manager of the Bethlehem Textile Company, one of the objecting creditors, said that he discussed the matter with Mr. Epp; that he knew that Mr. Weinstein would be retained; that he knew counsel would have to be compensated and his corporation would have to pay its share. Mr. Fenton then said that his corporation agreed verbally to share in the cost of the fight in addition to the 5 per cent., but there was no definite understanding as to how many were to share and that if none were to share his corporation was to pay the entire amount. Witness stated that he was not an officer of the corporation and not able to bind it, but that he obtained the consent of the president and secretary to tell Mr. Epp he might count on the corporation to share part of the cost. The president of the corporation did not tell the witness that he might bind the corporation to pay all the expenses.

Counsel cross-examining put the matter to the witness in this form: “Is your com-, puny's position that if a fee is to be paid and is paid out of the'bankruptcy estate, that is one thing and, therefore, for that matter you were not concerned, but assuming it is paid out of your own pocket, have you ever taken that up with your president as to whether this particular fee he would pay?” To which the witness replied: “No, I have not.” The witness further stated that they had not assumed to pay it all, but that the president thought that the amount asked by Mr. Weinstein was “not out of proportion.”

Eugene M. Kaufman, of the firm of Bower & Kaufman, another of the objecting creditors, said that he had placed the matter entirely in the hands of Mr. Epp; that he would just as leave lose the whole amount as to accept the settlement. Mr. Epp stated he would get an attorney, and later Kaufman found out it was Mr. Weinstein. He knew that he would have to bear his share of fees.. His firm signed the 5 per cent, assignment and he was willing to sacrifice the whole claim, of $572.26. He never was asked or agreed to pay anything more. He did not understand that he was to assume the obligation alone, but he “would say” that he was obligated beyond the 5 per cent, though he had not definitely bound himself, and had not definitely bound himself to any sum.

Jacob I. Weinstein, Esq., who is asking-for the counsel fee, stated that he conferred with Mr. Epp and had some talk with Mr. Weinreieh but not with the other creditors. His conversation was exclusively with Mr.. Epp. When the 5 per cent, was fixed, he-expected a total participation of $50,000 or $60,000 and that the 5 per cent, would produce about $2,500; but he was disappointed that only about $12,000 of claims signed the assignment. When this was discovered at about the very commencement of the proceedings, Mr. Weinstein raised the question of proceeding because the sum subscribed was-inadequate.

The assignments were prepared by Mr. Weinstein and were mailed by Mr. Epp. When the inadequacy of the contributions-was realized, he did not take up the question after the first time when the 5 per cent, was decided on, but Messrs. Epp and Mossessohn (a New York lawyer) communicated with creditors. No creditor obligated himself to pay the entire amount. The objecting creditors were not communicated with directly by Mr. Weinstein, nor did they directly and expressly bind themselves to him and no other creditors were bound to him. The creditors who signed the assignments are not bound for more. The objecting creditors were “impliedly” bound to pay the counsel fee.

Mr. Weinstein did not think it necessary to get an additional agreement for counsel fee in writing because after the proceeding - started he had the objecting creditors to look to. The 5 per cent, was for all the creditors. He did not think that any one creditor was going to pay all the expenses and fee, but he was going to look to a particular creditor for his compensation.

From this summary of the evidence it is clear to the referee that the fourth question must be answered in the negative. The objecting creditors were at some expense, to wit, $150.72, and for this they would be entitled to reimbursement, if this sum has not already been refunded. They were helped by other creditors, who were in no way bound, by a voluntary contribution of $466.54. Both these sums were paid to Mr. Weinstein. They were not at any expense for counsel fee, because they did not pay a counsel fee nor were - they legally bound to Mr. Weinstein or to any one else to pay it. They had limited their obligation by.the assignment of 5 per cent, of their claims, and while the testimony of several of the witnesses showed that they were favorably inclined toward Mr. Weinstein’s request, they would not assume the position of admitting that they were legally bound to him for a fee. Mr. Weinstein admitted that he had no legal claim on any creditor for his fee, but he thought that the objecting creditors were “impliedly” bound to pay him. The referee is of the opinion that if they are bound in any way they must be legally bound, and if not legally bound they are not bound at all, so far as this proceeding is concerned. They may assume any generous position that they please toward Mr. Weinstein, but in order to be entitled to say that the proceeding was conducted at their expense they must be able to allege, either that they were put to the expense, or at least were legally bound to pay it. They can and do allege neither.

(5) The referee has considered at length the effect of the words “in the discretion of the Court,” and the manner in which this discretion should be exercised. In view of the findings herein that the proceedings were not conducted “at the expense” of the cred- ' itors and that therefore the petition for counsel fee must be dismissed, it is unnecessary for the referee to express any opinion based upon the exercise of his discretionary power, nor is it necessary for him to determine whether the counsel fee of $2,500 asked for is a “reasonable expense.”

And now, August 30, 1932, upon consideration of the petition of Jacob I. Weinstein filed August 4, 1931, and the petition of the Bethlehem Textile Company, Inc., filed September 23,1931, and the answer of the North City Trust Company filed October 22, 1931, and after hearing testimony and argument of counsel and in accordance with the foregoing opinion

It is ordered that the said petitions be, and the same are hereby, dismissed.

DICKINSON, District Judge.

The referee has returned with his certificate an opinion which includes a full and adequate discussion of the questions raised. With much of this opinion we are in full accord. It will serve, however, to clarify the situation if we briefly review it with a statement of the general principles of law applicable.

The Fact Situation.

A composition offer was made and accepted by a majority vote of creditors and received the sanctioning approval of the referee. Incidentally, it would appear that the share of creditors in the composition fund, if the composition had been confirmed, would have exceeded the dividend of creditors in the bankruptcy assets. The composition offer was, however, not acceptable to some of the creditors. It seems that there is a concern known as the Credit Clearing House Adjustment Corporation, which offers its services to creditors generally and to the creditors in bankruptcy cases especially. Among the so-called clients of this concern were some of the creditors here. In the judgment of the officers of this concern the offered composition was not acceptable. Counsel were accordingly engaged to oppose its confirmation in the name of creditors. As a practical provision for the expense of opposing confirmation creditors were invited to agree to contribute 5 per cent, of their respective claims. About $12,000 in claims so agreed. Counsel had in the meantime been retained and specifications of objections were filed in the name of a creditor and afterwards by intervention of two others. The aggregate of the claims of these creditors was about $3,000. The opposition was successful and the offered composition was not confirmed. Counsel for the objecting creditors then filed a petition asking that he be allowed “a counsel fee of $2,-500.00 as the ‘reasonable expense’ of opposing the confirmation.” A creditor, in whose name the objections to the confirmation had’ been urged, afterwards presented a like petition. To these an answer was filed by another creditor objecting to the allowance. The referee dismissed the petitions, thus refusing the allowance. It is this order of refusal whieh we are asked to review.

Discussion.

We may premise the discussion with some general propositions which will be accepted.

1. A creditor has the legal right to payment of the debt owing to him and the further right to refuse to compromise his claim by the acceptance of a less sum.

2. Out of consideration of the public interest, however, he may be required to surrender the exercise of the above rights to be exercised for him in the judgment of the whole body of creditors. The Bankruptcy Law does this by compelling him to accept of a composition offer which has the approval of the required majority of creditors and the sanction of the court.

3. Any creditor has the right to oppose any such composition just as he has the right, at his own expense, of defense in any litigation whieh concerns him.

This much is clear. No creditor, without a law empowering him so to do, could however impose the expense of any litigation in whieh he saw fit to engage upon another creditor who was unwilling and emphatically not upon one who was opposed to the litigation. There may be, however, a class of creditors, each member of which has a common share in a fund which may by effort be raised. If one of the class by his own efforts and at his own expense raises such a fund in whieh all share, there is room for the thought that he should contribute to the expense incurred for the common benefit in which he has part. This is somewhat akin to the principle on whieh salvage is allowed. In other words, he should not receive the fruit without sharing in the expense of raising it. This, however, would not impose upon him the expense of an effort whieh did not produce results. This thought underlies the provisions in the bankruptcy statute. All creditors have a proportional interest in a composition. Originally the trustee as the representative of creditors might act for them. This carried the consequence that the creditors bore the expense of opposing an offered composition. Willing or unwilling, they must pay it. This led to a change in the law withdrawing the power from the trustee unless authorized by the creditors to intervene. The incurring of the expense was thus committed to the judgment of the majority. Any creditor, however, was at liberty to- oppose a composition notwithstanding it was one of whieh the creditors as a body had approved. The expense of: such opposition he must, however, himself' bear. Then came the provision of the law with which we are now concerned. With the-wisdom of the policy thus introduced we have-nothing to do. The claim made must rest, upon this law. If the law allows it, the claim, must be recognized but not otherwise. The-law is found in section 64 of the amended act-of 1926-, section (b), cl. (4), 11 USCA § 104 (b) (4). The only condition imposed is that a composition offer must have been refused as a result of the opposition of individual creditors. Here this condition has been met. The right given is to have “in the discretion of the court, the reasonable expenses of such creditors in opposing such composition” allowed as an administration expense.

There is no need to make our own analysis of this act, because the learned referee has made one upon whieh he based the order now under review. This analysis is a complete and most admirable one. The inferences drawn in giving meaning to the act have in general our concurrence. There is, however, one whieh is basic and which was controlling of the order made, whieh we cannot accept. If the principle upon which the allowance is asked were that to whieh we have before alluded, that the objecting creditors had raised a common fund, the expense of raising whieh should be borne by all who shared in it, we think the conclusion reached by the referee would follow. This, however, is not the principle upon whieh the allowance must be made, if at all. The basis is the narrower one expressed in the Bankruptcy Act. The only condition there imposed is, as we have said, that the confirmation of the offered composition shall have been “refused or set aside.” This condition, as we have also further said,, has been met. We do not think we are at. liberty to add further conditions which the act does not impose. The right given, however, is, as the referee has sagely commented, not an absolute one, but is subject to the exercise of the “discretion of the Court” in its allowance. The allowance is, moreover,, limited to the “reasonable expense” incurred..

The original petition was by counsel for the allowance of a fee to him. Clearly he is given no such right by the act. The second petition is by a creditor who objected to the-confirmation of the petition. It is based,, however, upon no elaim to be reimbursed the-“reasonable expenses” whieh the creditor had incurred, but solely upon the claim of eounsel as if lie had represented and rendered services to the bankruptcy estate.

In making this comment we do not wish to be understood as distinguishing between an expense paid by the creditor and one incurred. Whatever question might thus arise is not before us. The petition does not ask for the allowance for “reasonable expenses” paid or incurred, but for counsel fees qua counsel fees for services, as we have said, as if rendered to the bankruptcy estate. Such claim we think was properly rejected.

The referee we think was further within his powers in exercising his discretion in allowing or refusing any allowance and in limiting any allowance made to the “reasonable expense” incurred. This “discretion” he has exercised.

We wish merely to disclaim the thought that to the condition that the opposition to confirmation of the composition must have been successful there may be added the further condition that the rejection of the composition offer has resulted in an increased dividend to creditors, before the opposing creditors may be reimbursed for the “reasonable expense” incurred. This does not mean, however, that the results of the rejection of the composition do not enter into the situation calling for the exercise of the “discretion of the Court.” All we mean is that this is not controlling.

The practical result is that we approve the order of disallowance, but are not in accord with one of the reasons given for dismissing the claim.

The petition for review is dismissed, and the order made by the referee affirmed and confirmed.

On Motion for Reargument.

A ruling in the cause was withheld awaiting paper books.

We see no need to rediscuss the question raised. The referee very fully discussed it. This court on review was in accord with the conclusions of the referee except in one particular. The referee based his refusal of the allowance of counsel fees in part upon the fact that the refusal of the compromise resulted in no increased dividend to creditors. This, as the court viewed it, was writing into the act a condition of allowance which is not there. This fact, however it might enter into the exercise of the “discretion of the Court,” is not a condition of allowance. The order of the referee was affirmed, and to this we adhere.

The motion for reargument is denied.


source: Caselaw Access Project

author: GEIGER, District Judge.

license: Public Domain

text:
    STERNBERG v. MERCHANTS’ FIRE ASSUR. CORPORATION et al.
    District Court, E. D. Wisconsin.
    March 13, 1934.
    Fischer & Brunner, of Shawano, Wis., for plaintiff.
    Wolfe & Hart, of Milwaukee, Wis., for defendants.
   GEIGER, District Judge.

At the conclusion of the testimony, each party unqualifiedly moved for a directed verdict. It is undisputed that the record title of the insured premises was in the plaintiff; that several policies were issued and were in force at the time of the fire; that the policies were written on the standard form prescribed by Wisconsin statutes; and that the premises were insured as a hotel and, at the time of the issuance of the policies, a hotel was being operated or conducted therein; that the amount of loss, if any, is not open to question on the testimony.

With the exception of a reference to be hereafter made respecting the perpetrator of an admitted incendiarism, I accept as the facts to be found the following as submitted on behalf of the defendants:

“That Julius Sternberg, the 47-year old son of the plaintiff owned the premises in question for a period of seven or eight years prior to the Spring of 1931, and that during such period of time, he and his wife, Norma, had operated a hotel in the premises which were constructed and adapted for that purpose; that during this period, the plaintiff, Theodore Sternberg, had furnished considerable sums of money to the son, Julius, as security for which he held a mortgage -on the hotel property; that in the Spring of 1931, the wife of the son, Julius, secured a divorce from him and an alimony allowance of Thirty Dollars ($30.00) per month. Coincident .with the commencement of the divorce proceedings, the plaintiff at the request of the son, Julius, instituted foreclosure proceedings, and upon the granting of the divorce, Julius quit claimed his interest in the property to the plaintiff who at the same time paid to the divorced wife, Norma, the sum of Five Hundred Dollars ($600.00).

“At the time of the divorce, the son, Julius, was removed from the premises and thereafter for a period of approximately a year up until the 15th of May, 1932, the divorced wife remained in the hotel property and continued to. conduct and operate the same as a hotel. Her tenancy in the hotel was based upon a monthly rental of Fifty Dollars ($50.00) of which sum she was to pay Twenty Dollars ($20.00) in cash and the balance, amounting to Thirty Dollars ($30.-00), was offset by the monthly alimony payment due her from Julius. The monthly rental was reduced after two or three months, so that during the last eight or nine months of her tenancy the rent was completely offset by the alimony, and during this period of her tenancy she paid nothing to the plaintiff.

“The plaintiff testified that Norma removed from the premises not less than a month before the fire. The defendants’ witnesses, Fox and Wolfinger, placed the time of her removal at not later than May 15, 1932. After the removal of Norma Stern-berg, no business of any kind was carried on in the hotel property.

“Upon the removal of Norma Sternberg from the premises, the plaintiff, Theodore Sternberg,, sent the son, Julius, to the place for the purpose of taking care of the property, and, if possible, to secure another tenant or a purchaser for thd place. It was not contemplated that Julius was to operate the hotel, although there was testimony that he wanted to but the plaintiff refused to permit it for the reason that he (Julius) could ■do nothing there without a ‘woman.’ Julius stayed in the place night times, occupying one of the rooms, and when he was not there, the doors were closed and locked. There is no proof that he prepared any of his meals there, or that he did anything in the way of using the premises except to sleep, there. The. testimony of the defendants’ witnesses, Fox and Wolfinger, as well as of the plaintiff himself, is uneontradieted and conclusive that from the time of the removal of Norma Sternberg the hotel was not operated, and that no business of any kind was conducted in the premises.

“On the night of June 7th, Julius was not in the premises, and on the morning of June 8th at about two o’clock, the place was discovered to be on fire. When the fire was brought under control, it was found that the fire had been wilfully set and that precautions had been taken against its early discovery by covering the window openings in the two rooms in which the fires had been kindled by nailing blankets and other bed) coverings over the openings. The fact that the fire was of incendiary origin is not disputed by the plaintiffs.”

Two questions arise upon the motions: (1) Whether, upon the removal of Norma Sternberg from the premises, the same ceased to be occupied in accordance with the terms of the policy and remained unoccupied for a period of more than ten days, wherefore, by reason of the cessation of occupancy under the terms of the several policies, they were rendered void; (2) whether the perpetration of incendiarism by plaintiff’s agent, under the circumstances detailed in the case, precludes recovery by the assured.

The answer to the first of these questions is readily made in the affirmative when, upon the facts which are quite undisputed, we apply the uniform rule of interpretation formulated in a great number of eases cited on behalf of defendants. That rule has been abstracted and illustratively stated by counsel, thus: “That a building, dwelling or otherwise, to be occupied must be put to the actual and practical use as contemplated by the parties. In a dwelling house this actual and practical use consists of the use of the dwelling (building) by persons as at their customary place of abode. This actual and practical use of a building other than a dwelling consists of a substantial use of the building for the purpose which was in the contemplation of the parties and for which it was insured. If a mercantile establishment, a mercantile business must be carried on therein; if a factory, it must be operated as a factory; if a 'bam, it must be used as bams are ordinarily and customarily used; if a hotel, it must be used and operated as a hotel.”

The facts that the tenancy, the hotel business, and its operation had completely ceased, that plaintiff’s son had been sent to secure another tenant, or a purchaser, that his, the son’s, desire to occupy the premises for hotel purposes and operation were refused by the plaintiff, and that the occupancy by the son was limited to a single room for lodging — -not including even preparation of his own meals, and accompanied by locked doors of the building — these facts wholly negative the notion of continued “hotel” occupancy. It cannot be that a complete suspension of use and occupancy of a residence, or a business, or a factory, can be adjudged to be contemplated beyond the policy limitation because of the hope or the expectation that, at some time, there may or might be a renewal of the real and the declared occupancy. It cannot be sensibly held in a ease like this that the parties contemplated in a dual sort of way (1) real occupancy and operation by a hotel business and. (3) storage occupancy by the furniture and equipment between tenancies, regardless of the policy limitation.

This answer to the first question is adequate to dispose of the motions. But the second question has been discussed and deserves an expression of opinion respecting its tenability. The industry of counsel has brought to the attention of the court a single ease supporting a negative answer to the question; whereas an affirmative answer is quite persuasively supported by rulings in closely analogous situations, viz., those of copartnerships, corporations, and marine insurance. It is agreed that, as between an insurer and an assured, the law as a matter of policy and of morals forbids right of recovery by the latter when the subject of insurance was burned by him or by his procurement. The exemption of the insurep is implicit; and I assume that, by express agreement, it could not be made otherwise. Whether we say that, because of the policy and the morals involved in the situation, an insured implicitly covenants for himself and for his insurer that he will not bum the subject of the contract, or whether we say that by implication he is under that negative duty, that is to say, not to bum, may make little difference. It is true that an insurer may be liable for an incendiary burning. But the difficulty in the present ease arises when we consider the source of the incendiarism. As illustrative of the principle of ascription or imputation, can the insured say to the insurer, “I did not bum the building, my agent and trusted representative did it; my duty, not to bum was not devolved upon him; you insured against his faithlessness toward me; you took that risk, I did not”f

If, therefore, we start with the notion that an insured owes a duty, as above indicated, it is difficult to find a justification for limiting the consequences of violation of such duty by himself personally, and refuse to impute or ascribe to him what ought to be implicit warranty that his delegate, his substitute, and alter ego, will likewise not violate it. It cannot be that, if the insured owes the duty, his agent or substitute has the privilege of not respecting it, and thus give the insured the benefit of the contract. In ascribing to an insured the responsibility of the tortious act of his servant, as a basis of defense by the insurer, the principle which is invoked strikes me as identical with that which is the basis of liability of a railroad company, upon imputation, for deliberate' “tort of its servant. Craker v. Chicago & Northwestern Ry. Co., 36 Wis. 657, 17 Am. Bep. 504. This, again, is upon the assumption that the insured owes the negative duty indicated; and that observance of such duty may be exacted not only from him personally, but also from those who are deputed to stand for him in respect of the subject of insurance.

In thus answering the second question favorably to the defendants, it is deemed unnecessary to review the contention of the plaintiff that the court erred in admitting in evidence the record of conviction of the plaintiff’s son. When such record was first offered, objection thereto was sustained. But thereafter plaintiff’s counsel persisted in cross-examining defendants’ witness, the assistant fire marshal, who investigated the fire and made the formal accusation upon which plaintiff’s son was arrested and convicted. Whether the record was admissible,, or whether plaintiff’s counsel opened the door for its admission, are questions which have become more or less academic in view of the entire sufficiency of the evidence without this item to sustain a finding that the plaintiff’s son was the incendiary. The proof, without such record, easts upon the-plaintiff a burden which was not met, and amply sustains the finding that plaintiff’s son was the incendiary.

Upon these views, the defendants’ motion will be granted and judgment of dismissal entered.


author: ALFRED C. COKE, District Judge.

text:
    YORK ICE MACHINERY CORPORATION v. L. & K. ICE CORPORATION.
    District Court, S. D. New York.
    April 2, 1934.
    Clarence D. Kerr, of New York City, Parker Dodge, of Washington, D. C., and Charles Neave, of New York City, for plaintiff.
    Ernest W. Bradford, of Washington, D. C., and Ambrose L. O’Shea, of New York City, for defendant.
   ALFRED C. COKE, District Judge.

This is a suit for infringement of two Shipley patents, Nos. 1,718,310 and 1,718,313, for a method and apparatus for cooling liquids, and for an evaporator, both issued June 25, 1929. The defendant is the owner and operator of an ice making plant at Newark, N. J., alleged to infringe both patents. This .plant was designed and installed by the Frick Company, of Waynesboro, Pa., and that company is conducting the defense of the present suit.

The claims relied on in Patent No. 1,718,-310 are Nos. 1, 2, 4, 5, 8, 9, 10, 11, 14, and 15; and in Patent No. 1,718,313 Nos. 1, 2, and 3.

The defenses are invalidity and noninfringement.

The two patents relate essentially to ice manufacture on a large scale for commercial use; and the method normally employed for that purpose is to place the water to be frozen in tapered cans, and then circulate about the exterior faces of the cans brine which has been cooled by contact with evaporators containing a liquid refrigerant, such as ammonia.

Prior to Shipley, the two freezing systems most generally in use in can ice freezing were the continuous coil system and the shell and tube brine system. The former utilized a large number of continuous coils of pipe, between 200 and 1,200 feet in length, usually immersed in the brine tank between the cans; and in the latter the ammonia was introduced into a large boiler or shell containing horizontal pipes, through which the brine flowed. With the continuous coil system, it was impossible to keep the long coils flooded at all times with liquid refrigerant, particularly if the brine was circulated rapidly; and this necessarily kept the heat transfer rate low. Moreover, the system lent itself to pipe breakage, and was inconvenient for group handling of the cans. The shell and tube brine system also had serious limitations, inasmuch as the agitation of the ammonia within the shell was caused entirely by evaporation, and there was little opportunity for the liquid to circulate and recirculate so as to develop a maximum heat transfer rate. Furthermore, there was always a tendency of the brine to freeze in the pipes, causing them to burst.

Shipley’s efforts were directed towards improving the continuous coil system; and in the first patent, No. 1,718,310, he shows the evaporator coils confined in a closed duet or brine raceway, separate from and parallel to the brine tank, through which the brine is circulated at a rapid rate between and around the coils. The evaporator coils in the preferred form of Mg. 2, consist of a large number of short, vertically disposed risers, connected at top and bottom to a pair of large horizontal parallel pipes called headers. The liquid refrigerant is fed through the bottom headers, which are large enough to keep the short risers constantly replenished with liquid refrigerant; and the gas forming in the risers finds a quick and ready passage to the top headers, carrying with it entrained liquid, and in that way stimulating the heat transfer rate by keeping the interior surfaces of the risers continually in a wet condition. The gas thus generated, and the liquid carried along with it, passes through the top headers to an accumulator or suction trap, in which the liquid and gas are separated. The liquid is returned directly to the lower headers, and the gas flows back to the compressor, where it is compressed and condensed into liquid, and then brought back to the bottom headers.

The second patent, No. 1,718,313, is for an improved form of evaporator for use with the Shipley apparatus of the first patent; and in place of the short vertical risers shown in Mg. 2 of Patent No. 1,718,310, Y-shaped tubes have been substituted. The function of these Y-shaped tubes is identical with that of the risers of the first patent; but it is asserted that the Y-shaped tubes have manufacturing advantages not present in the vertical risers in that they may be more easily assembled and welded.

The Shipley system has met with considerable commercial success. The first installations were made in 1925, and in that year the plaintiff’s continuous coil sales absorbed 88.8 per cent, of its business, and its vertical trunk sales 7.9 per cent. By 1929, the vertical trunk percentage had risen to 94.4 per cent., and in 1930 to 99.7 per cent. During this same period, the continuous coil sales fell off correspondingly, so that in 1930 the continuous coil portion of the plaintiff’s-business was practically nonexistent. Undoubtedly, the plaintiff in its sales efforts featured the Shipley system; but that does not fully account for the complete domination of the vertical trunk installations in the plaintiff’s business by the end of 1930. Neither does the fact that some plants still prefer the shell and tube brine coolers detract from the merit of Shipley’s invention, for Shipley w.as the first to employ in large scale ice production very high brine velocities; and the efficiency of the shell and tube systems has, no doubt, been considerably improved since the advent of Shipley by increasing the brine velocity through those coolers.

The typical claims of the first patent, No. 1,718,310, are Nos. 2, 4, 8,11, and 15. Claim 2 is for “the combination of a brine tank; a flow enclosing duct communicating at its ends with opposite ends of said tank; an evaporator cooler in said duet including headers and risers, said cooler extending substantially the full height and width of the duct, and throughout substantially the entire length thereof; and means for drawing brine from said tank and forcing it under pressure head through said duct and back into said tank.”

Claim 4 is substantially the same as claim 2, except that each riser is stated to have a point of connection with one header “below the point of connection of such riser with the other header.” Claim 8 is also similar to claim 2, except that it specifies that the tubes connecting the header shall have a “rising gradient at all points from the inlet to the discharge header.” Claim 11 adds to the combination of claim 2 “a suction trap; a suction connection leading from said trap; a liquid connection leading from said trap to the first header; a connection for gas and entrained liquid leading from the second header to the trap, whereby a closed liquid circuit through the evaporator and trap is afforded; means for feeding liquid refrigerant to said circuit.”

Claim 15 is for a method of cooling liquids, “which consists in circulating the liquid to be cooled over one face of a surface heat exchanger, whose other face is in contact with a volatile liquid refrigerant, at such a rate that the conveyed heat will cause active vaporization of the refrigerant; developing an entraining action on the liquid refrigerant by causing such vaporization to occur in a restricted passage, having a rising gradient; and applying such entraining action to produce a rapid flow of liquid refrigerant over said heat exchanging surface.”

In the second patent, No. 1,718,313, claim 1 is fairly typical of the others, and reads:

“(1) In an. evaporator, the combination of an upper header; an approximately parallel lower header; and a plurality of bowed tubes connecting said headers and nested in and substantially confined to the interval between headers.”

The defendant has cited thirty-four pri- or art references in opposition to the first patent, No. 1,718,310, but I do not find in any one of them a complete anticipation of Shipley’s combination. Indeed, that was conceded by defendant’s expert, Brizzolara, when he stated that he “did not recall any specific instance of a reference to the whole patent.” And validity is not to be destroyed merely by selecting from the prior art a number of separate elements, and pieeing them together into a purely hypothetical construction. Badische Anilin & Soda Fabrik v. Kalle (C. C.) 94 F. 163; Imperial Bottle Cap & Mach. Co. v. Crown Cork & Seal Co. (C. C. A.) 139 F. 312.

It is unquestioned that most of the elements found in the patented combination were old prior to the Shipley invention. This is particularly true of the accumulator. It is also true of the radiator type of evaporator, which is plainly shown in the Pietet drawings appearing in the German publication of 1901. There was nothing new, either, in the general idea of placing the evaporator in a separate compartment adjacent to the brine tank; for that was disclosed in the two Pownall patents, Nos. 964,936 (1910) and 992,589 (1911), and in the De Fosset patent, No. 1,-041,973 (1912). It was old, also, to operate the evaporator coils flooded for the purpose of stimulating the ebullition and entrainment of the liquid refrigerant. This was not only disclosed in a number of the prior patents, but was also fully explained in the Baer article published in 1917. Baer further taught in this same 1917 article that rapid brine agitation resulted in a more rapid transfer of heat.

Shipley, therefore, had at his disposal much of the ground work for an improved system of ice manufacture; but no one up to the time of his invention had appreciated the possibilities of a high velocity duct through which the brine might be driven at a high rate' of speed; neither had any one previously devised an apparatus capable of utilizing in commercial ice manufacture the high brine velocities indicated by the patent in suit. The Pownall construction, shown in Fig. 4 of Patent No. 964,936, was obviously not designed for such a purpose, as the duet appears open at the top, and the evaporator coils are structurally insufficient to produce the violent boiling of the liquid so necessary in the Shipley system. I do not think, either, that the Pictet machine, described in the German publication of 1901, is in any way capable of functioning with Shipley’s high brine velocities. This machine has no means to keep the evaporator flooded; nor is there any accumulator or suction trap to separate the entrained liquid from the gas. The machine also lacks a connection to return the entrained liquid to the bottom header; and it is at least extremely doubtful whether the evaporator compartment has a top cover. Moreover, the description is not sufficiently clear to show, with any real certainty, the method of operation.

I am satisfiéd, therefore, that the apparatus claims, Nos. 1, 2, 4, 5, 8, 9,10, and 11, show invention; and I think, also, that the method claims Nos. 14 and 15 are valid. Claim No. 15 is carefully limited to a rapid brine flow over one side of a heat exchanging surface constructed in such a way as to cause entrainment of the liquid with the gas in a restricted passage having a rising gradient, and a consequent rapid flow of the liquid over such heat exchanging surface; -and that is essentially what Shipley invented. A method is patentable, even though it involves mechanical steps; Expanded Metal Co. v. Bradford, 214 U. S. 366, 383, 29 S. Ct. 652, 53 L. Ed. 1034; U. S. ex rel. Steinmetz v. Allen, 192 U. S. 543, 559, 24 S. Ct. 416, 48 L. Ed. 555; and method and apparatus claims may properly be united in the same patent. Elyria Iron & Steel Co. v. Mohegan Tube Co. (C. C. A.) 7 F.(2d) 827, 830.

The secbnd patent, No. 1,718,313, requires little consideration, as it is perfectly apparent that the design of the Y-shaped coils involved only mechanical skill. Indeed, the prior art references show boiler and heating tubes in almost every conceivable shape and form; and it certainly did not constitute invention to adapt such tubes to SMpley’s construction. Claims 1, 2, and 3 of Patent No. 1,718,313 are, therefore, declared invalid for lack of invention.

On the issue of infringement with respect to Patent No. 1,718,310, the defendant first insists that in the Patent Office proceedings the claims were so limited in scope as to exclude the defendant’s apparatus. But it is well settled that mere arguments of an applicant for a patent have no bearing on that question; Spalding & Bros. v. John Wanamaker (C. C. A.) 256 F. 530, 534; and unless limitations are placed by the applicant on the claims for the purpose of meeting objections of the Examiners, or otherwise, there is no basis for an estoppel.. Watters v. KnySchecrer Corp. (C. C. A.) 68 F.(2d) 27. In the present case, Shipley pointed out before the Examiners various distinguishing features in the references cited against his application, but there was nothing in the nature of a limitation on the claims; and certainly the cancellation of original claim 8 did not operate as an estoppel with respect to the other claims which were allowed.

There is little difference between the Frick construction and the Shipley arrangement, except that in the Newark installation each of the two brine tanks has two brine flow inclosing ducts located at opposite sides of the tank, in each of which there is an evaporator. The top and bottom headers of the evaporators are, however, substantially identical with those shown in the Shipley patent, and the riser coils have a continuously rising gradient from the bottom to the top headers. These risers are in the form of a double V, and are somewhat longer than the plaintiff’s; but this is clearly insufficient to avoid infringement. The brine is forced through the ducts and around the evaporator coils at a high rate of speed, developing the same circulating and entraining action off the liquid refrigerant as found in the Shipley system; and the combination of means adopted is in all respects substantially the same as the plaintiff’s.

It is insisted, however, that the defendant’s apparatus operates on a different principle from the plaintiff’s inasmuch as the ammonia passes through two successive stages of expansion prior to its entry into the evaporator, instead of one stage, as in the Shipley system. This is what the defendant terms precooling; but it has nothing whatever to do with the claims of the patent, for they do not relate to the treatment of the refrigerant between the compressors and the expansion float valve of the evaporator.

The installation was made in the Newark plant prior to the issuance of the Shipley patent, No. 1,718,310, on June 25, 1929, but the defendant had full knowledge of the plaintiff’s rights before the contract was let to the Frick Company in December, 1928. The plaintiff had previously submitted to the promoters of the defendant company location drawings for its own system, and the fact that the installation actually made followed closely the general lines of these drawings is persuasive evidence that the Frick Company drew liberally on the plaintiff’s method and apparatus for. the design and arrangement of the plank

There may be a decree declaring claims 1, 2, 4, 5, 8, 9', 10, 11, 14, and 15 of Patent No. 1,718,310 valid and infringed; and holding claims 1, 2, and 3 of Patent No. 1,718,313 invalid for lack of invention; but without costs.


author: PATTERSON, District Judge.

text:
    In re S. W. STRAUS & CO., Inc.
    District Court, S. D. New York.
    Jan. 31, 1934.

      Archibald Palmer, of New York City, for petitioner.
    Samuel L. Chess, of New York City, for creditors.
   PATTERSON, District Judge.

An involuntary petition in bankruptcy was filed in this court against S. W. Straus & Co., Incorporated, on March 3, 1933. An answer controverting the allegations of the petition was filed in behalf of the alleged bankrupt, and the issues are now awaiting trial. On November 18, 1933, Gebaubr and others commenced a suit in equity in this court, naming the alleged bankrupt and many others as defendants. The present motion is by an alleged creditor of the alleged bankrupt, who has intervened in the bankruptcy cause, to stay proceedings in the equity suit until after the trial of the issues in the bankruptcy cause.

The bill by Gebauhr is long and discursive. In general it is averred that the plaintiffs and many others bought bonds from the alleged bankrupt, the bonds being those of corporations owning real estate; that they were led to believe that the alleged bankrupt guaranteed the bonds; that most of the bonds fell into default; that the alleged bankrupt then caused the formation of several committees, ostensibly to enforce the rights of the bondholders but in reality as part of a scheme to cover up alleged frauds in the sale of the bonds, to shield the alleged bankrupt from liability to purchasers of the bonds, and to reap further profits in the operation and reorganization of the properties for the benefit of concerns and persons formerly connected with the alleged bankrupt; that many bondholders have deposited bonds with the committees; and that the latter are not acting in the interests of the bondholders but in the interests of the alleged bankrupt or those connected with it. The relief prayed for ineludes an injunction against further action on the part of the committees, an accounting, a discovery of the lists of bondholders, the removal of the committees, and the appointment of a receiver or substituted trustee to take possession of the deposited bonds and other property held by the committees. No process has yet been served on the alleged bankrupt, nor have any proceedings for relief pending the suit been brought.

The power of the bankruptcy court to stay suits brought in other eourts, state or federal, relates to two types of eases. The first is the restraining of suits brought against the bankrupt on claims that in their nature are dischargeable in bankruptcy. This power is expressly conferred by section 11a of the Bankruptcy Act (11 USCA § 29 (a). The purpose is to relieve the bankrupt from being unnecessarily harassed by creditors pending his application for discharge. In re Nuttall (D. C.) 201 F. 557, 559. The exercise of this power is an everyday occurrence; as a general rule the bankrupt himself is the party who invokes it and the suit involved is generally a suit to establish a personal liability. The present application is obviously not of this sort, though both the moving party and the plaintiffs refer in their memoranda to the provisions of section 11.

The second is the restraining of suits that tend to impair or defeat the paramount jurisdiction of the bankruptcy court in administering the bankrupt estate. The source of this power is the inherent right and duty of the court to protect assets in its custody, together with the omnibus authority given in section 2 (15) to make such orders as may be necessary to enforce the provisions of the act (11 USCA § 11 (15). New River Coal Land Co. v. Ruffner (C. C. A.) 165 F. 881, 886; In re Hoey, Tilden & Co. (D. C.) 292 F. 280; In re Newman (C. C. A.) 17 P.(2d) 584. A familiar instance is the injunction granted, usually at the instance of the trustee, receiver, or a creditor, against the further maintenance of suits wherein the administration of assets or enforcement of liens otherwise than in bankruptcy is sought. See Isaacs v. Hobbs Tie & Timber Co. 282 U. S. 734, 737, 51 S. Ct. 270, 75 L. Ed. 645. This power may be exercised prior to adjudication. In re Mitchell (C. C. A.) 278 F. 707. In this connection it makes no difference whether the suit is pending in another court or in the law or equity side of the same court. But the bankruptcy court will not act in all eases where suit is brought against a bankrupt or an alleged bankrupt. Where there are other defendants against whom the plaintiff asks for substantial relief and where there is no likelihood of interference with the jurisdiction of the bankruptcy court, the suit is generally permitted to continue so that the plaintiff’s rights against strangers may be perfected; adequate safeguards being established if necessary to protect those interested in the bankrupt estate. In re United Wireless Telegraph Co. (D. C.) 196 F. 153; In re Rosenstein (C. C. A.) 276 F. 704; In re Kelley (D. C.) 297 F. 676; Park v. Stryker (C. C. A.) 6 F.(2d) 457.

In the present case it is manifest on the face of the bill that the chief purpose of the plaintiffs is to reach the bonds deposited with the committees. Removal of the committees and appointment of a receiver of the bonds and other property held by the committees form the principal relief sought. To allow such a suit to go forward will not prejudice the administration of the estate in bankruptcy in ease of a later adjudication. True, the alleged bankrupt is said in the bill to have been the cause of the plaintiffs’ losses and to have played the leading role in a scheme to injure them again, but what is looked for primarily is relief against the committees and those said to be now working in concert with them. The alleged bankrupt has not even been served. The moving party describes the suit as one to recover assets fraudulently transferred by the alleged bankrupt, hut it plainly is not a suit of that character.

I have not overlooked the fact that a discovery of lists in possession of the alleged bankrupt is a branch of the relief set forth, in the bill, as is an injunction against further activities by the alleged bankrupt. These matters aYe more or less incidental to the main object. Whether or not the maintenance of the suit in these respects will be a substantial interference with an administration in bankruptcy may well await further developments. Certainly the plaintiffs cannot get any such relief until the alleged bankrupt shall at least have been served with process, and until then the point is a moot one.

There are general references in the affidavits and memoranda to a prior suit in the state court said to involve the same matters as the suit in equity in this court.. Even if that suit involves a possible receivership as to bonds held by the committees, no cognisance can be taken of it on the present motion. The point now presented is simply the effect of the pendency of the bankruptcy cause upon the suit in equity. Any objection to the maintenance of the suit in this court on the score of a prior action in rem pending in another court must be taken by one of the parties to the two suits, and the moving party does not belong to that class.

The motion for a stay will accordingly be denied.


author: GALSTON, District Judge. >

text:
    In re REALTY ASSOCIATES SECURITIES CORPORATION.
    No. 24860.
    District Court, E. D. New York.
    April 3, 1934.

      Alfred T. Davison, of New York City (Orrin G. Judd and Robert P. Levis, both of New York City, of counsel), for bankrupt.
    James N. Rosenberg, of New York City, for Realty Associates, Inc.
    Krause, Hirsch & Levin, of New York City (George C. Levin, of New York City, .of counsel), for referee.
    Fred L. Gross, of Brooklyn, N. Y., in pro. per.
    Colby, Brown & Pollack, of New York City (Edward D. Brown and Edgar A. Pollack, both of New York City, of counsel), for Bondholders’ Committee.
    Cullen & Dykman, of Brooklyn, N. Y. (R. W. Crolly, of Brooklyn, N. Y., of counsel), for Brooklyn Trust Co.
   GALSTON, District Judge. >

This is an application to confirm the composition offered by the bankrupt following the afSimanee by the United States Circuit Court of Appeals, 69 B. (2d) 41, of the order of Judge Campbell entered January 5, 1934.

The offer in composition is similar to that which was submitted to Judge Campbell, with the exception that there was eliminated from the offer, following the entry of the mandate of the Circuit Court of Appeals, the provision which called upon the bankrupt to pay “such compensation and expenses of the three bondholders committees, of which William E. Kennedy, Jr., J. Lester Bierman, and Brederiek S. Robinson are respectfully chairmen, and such fees and disbursements of their respective counsel, including counsel for the Manufacturers Trust Company, in such amounts as the court may fix or approve.”

The modified offer of composition was presented to the creditors before the referee, to whom the ease was referred, and he has rendered his report. Creditors, in majority and amount, are in favor of this composition. Total claims are $13,008,038.30.

Specifications of objections to the composition were filed on behalf of one Homer E. Palmer of San Luis Obispo, Cal., by Samuel M. Brook, Esq., as his attorney. Exceptions to the sufficiency of these specifications were filed on behalf of the bankrupt, and by certain creditors of the bankrupt. The claim of the objecting creditor, Palmer, is $1,049.

The exception to the first specification is sustained on the ground that the specification does not set forth an act which would be a bar to the confirmation of the composition. It alleges, among other matters, that the bankrupt, prior to the date of the filing of the petitions, entered into a conspiracy with others to defraud creditors of the bankrupt and to conceal its assets and fraudulently to dispose of the same and to put through a composition not for the best interests of creditors. But there are no facts alleged which would fairly apprise the bankrupt of the charge made. The allegations are vague and indefinite.

The second specification alleges that a fair opportunity was not accorded to these creditors to examine the bankrupt, in that the meeting of creditors before the referee was disorderly; “that bedlam reigned, boos and catcalls, hand clapping, loud and angry discussions and an attempted assault were some of the constant interruptions of the attempt to examine the bankrupt.” Testimony taken at the hearing of the offer of composition in open court resulted in a dismissal of this specification for failure of proof.

The third and fourth specifications set forth that the composition is not in the best interests of the creditors. -This composition was twice accepted by a majority in number of all creditors whose claims have been allowed, representing also an overwhelming majority, in amount, of such claims. If the composition were against the best interests of creditors holding claims aggregating $13,-008,038.30, one would expect opposition from creditors holding more than an obligation of $1,049. But, aside from the insignificance of this claim, a fair consideration of the merits of the offer leads to the conclusion that it is in the best interests of the creditors. The bankrupt deals in first and second mortgages. The present economic condition of the country in general, and the market in real estate in particular, lead to the belief that, if its assets are to be liquidated on any fair expectation of a return to its creditors and stockholders, they should be liquidated over a period of years, rather than through a forced sale in the present market.

Accordingly, the exceptions to the third and fourth specifications are likewise sustained.

Since I find that the composition offer is for the best interests of creditors, that the bankrupt has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to its discharge, and since the offer and its acceptance appear to have been made in good faith, as provided for in section 12 of the Bankruptcy Act (title 11, U. S. C., § 30 [11 USCA § 30]), and not by means of any promises or acts therein forbidden, the composition is confirmed.

There remain for consideration the important questions of proposed allowances to the referee, the receivers, and some miscellaneous allowances.

The referee has calculated his commissions on the basis of $13,008,938.30. To this, both the bankrupt and creditors object. The question involved turns on an interpretation of section 40 of the Bankruptcy Act (title 11, § 68, U. S. C. [11 USCA § 68]). That section provides that the compensation of the referee is to be “one-half of 1 per centum on the amount to be paid to creditors upon the confirmation of a composition.”

It is contended, on the one hand, by the referee that the amount to be paid to creditors is 100 per cent, of their claims; and, since the amount of these claims is $13,008,-038.30, he asserts that he is entitled to $65,-040.19. Those in opposition say, on the other hand, that the only amount to be paid to creditors upon the confirmation is 15 per cent., not 100 per cent.

I am unable to agree with either of these positions. Under the terms of the composition, the creditors are to receive 15 per cent, in cash, and (with the exception of five Creditors holding claims aggregating $208,133.-90) are to retain their bonds under certain modifications thereof which are to be indorsed upon those bonds. The offer in composition says: “The remaining eighty-five per cent (85%) of the amount on which said fifteen per cent (15%) is computed shall be evidenced by the existing outstanding bonds as reduced and modified as hereinafter provided.”

The effect is to keep alive the old debt modified in the following major particulars:

(a) The maturity of the three issues involved is extended to October 1, 1943, as against respective maturities of July 1,1935, December 1, 1937, and October 1, 1938.

(b) The interest rate is 5 per cent, instead of 6 per cent.

(e) Bondholders are given a representation of four directors on a board of twelve.

However one may view the transaction, 85 per cent, of the old debt persists. It is not discharged. It survives in a modified form. To assert that acceptance of the offer of composition wipes out the old debt, because in terms it has been but modified, is to deal with verbal niceties, which in no respect appeals to the conscience of the Court.

On the other hand, to assert the extreme position that the amount paid on composition is but the 15 per cent, paid in cash, is equally unfair. Again, in all good conscience, the present ascertainable value of the securities should be regarded as part of the payment made upon composition.

Some proof in the form of affidavits has been submitted on this motion from which it appears that the market value, based on actual sales known to the affiants, brokers who deal in such securities, is 37. When 15 per cent, of the face’value of the bond is paid, these brokers believe that the present market value of the bond will be 22. I accept that figure despite the fact that the bond will bear interest no longer at 6 per cent, but only at 5 per cent.; but I feel that such loss will be at least offset by the sentimental value attached to the bond of a going, rather than of a defunct, corporation.

In reaching the foregoing conclusion, I have done so only after a careful reading of authorities submitted by both sides. The referee cites In re Batterman Co. (C. C. A.) 231 F. 699, 700. In this ease it appeared that the bankrupt offered a composition of 65 per cent, in cash, which offer was accepted. Later a body of creditors holding notes of the bankrupt to the order of H. B. Claflin Company, and indorsed by it, waived in writing the deposit of cash which the court required under section 12b of the Bankruptcy Act (11 USCA § 30 (b). On the same day they also waived payment of their claims upon confirmation of the composition. Subsequently, the referee reported to the court in favor of confirming the composition, and the court on confirmation directed the bankrupt to deposit cash with the clerk to cover the costs of the proceedings and the claims of creditors who had not waived the deposit ' of 65 per cent, in cash. The note creditors were parties to the plan of reorganization of the H. B. Clafiin Company, and under it exchanged their notes for 15 per cent, of the same in cash paid by the 3EL B. Clafiin Company, and the balance of 85 per cent, in notes of another corporation, the Mercantile Corporation. The question presented to the court was the determination of the question as to whether the referee was entitled to commissions on the claims of the note creditors. The court said:

“Now, without knowing the precise considerations which moved the parties respectively in the reorganization of this very large and complicated corporate system, it is not to be supposed that the H. B. Clafiin Corporation and the Mercantile Stores Corporation, the parties who took it over, gave cash or notes to the note creditors of the alleged bankrupt for their claims without some consideration moving to them from it, or that the creditors of the alleged bankrupt released it without some consideration moving to them from it or from some one on its behalf, whether for value or gratuitously makes no difference. In short, we think the 15 per cent, cash and the 85 per cent, in notes are to be regarded as equivalents of the 65 per cent, of the claims in cash which was to be paid under the composition agreement, and that the proceeding is to be treated throughout as 'if 65 per cent, of the claims in cash had been deposited with the court ‘to be paid’ to the note creditors.”

The most then that the Batterman Case shows is that the offer in composition contemplated the deposit of cash, that some creditors waived the cash provision, but that such waiver was immaterial in the calculation of the referee’s compensation. No such situation is presented in the present ease.

Kinkead v. J. Bacon & Sons et al. (C. C. A.) 230 F. 362, 366, is the other main reliance of the referee. This ease also dealt with the matter of waiver of deposit, and is of no greater relevancy than the Batterman Case. The opinion states: “On the contrary, the note holders’ committee’s acceptance of the composition offer (filed contemporaneously with the ‘waiver of deposit’) accepted in express terms ‘the offer of composition at 35 per cent, to be made herein by * * * the above named bankrupt * * * and payable in cash’; and the waiver itself was limited to ‘the deposit of money necessary to apply for the confirmation of said composition.’ Beyond doubt the creditors in question, not-' withstanding their waiver of deposit, could enforce such payment in cash by the bankrupt. The latter’s discharge by virtue of the composition proceedings would destroy the remedy in bankruptcy, but not the debt for the consideration to be paid under the composition. Bankr. Act, § 14c [11 USCA § 32 (e) ]; Zavelo v. Reeves, 227 U. S. 625, 33 S. Ct. 365, 57 L. Ed. 676, Ann. Cas. 1914D, 664.”

The present ease deals with no matter of waiver of deposit. It is a matter of cash and securities. The question presented is, What is the fair value of the securities?

In re Mills Tea & Butter Co. (D. C.) 235 F. 815, has a bearing in the present proceeding. In that ease it appeared that the offer of composition gave a choice of 25 per cent, cash or 100 per cent, in stock of a new corporation. The referee calculated his compensation on the basis of 100 per cent, par value of the stock. No evidence was offered as to what its value really was, and accordingly the court held that the compensation should have been measured on the basis of the 25 per cent. cash.

I conclude, therefore, that the referee’s commissions must be figured on the basis of, not 100 per cent, of $13,00S,038.30, but only 37 per cent, of such sum. Els commission of % per cent, on that sum is $24,064.87.

The next question involved is that of the compensation to be paid the receivers. The referee has recommended commissions to Fred L. Gross of one-half of 1 per cent, of the total sum of $13,008,038.30, that is, $65,-040.19; to Frank Fox, he recommends an allowance of $43,360.13. The receivers were appointed on July 10, 1933. Mr. Gross acted as the receiver from the time of his appointment; Mr. Fox, only from the date of his appointment to and including January 4, 1934.

Under court order the business of the bankrupt was continued by the receivers. Accordingly, the measure of their compensation is determined by section 48, subds. d, e, of the Bankruptcy Act (title 11, U. S. C., § 76, subds. (d) and (e), 11 USCA § 76 (d, e). These subdivisions contain the following passage: “In ease of the confirmation of a composition such commissions shall not exceed one-half of 1 per centum of the amount to be paid creditors on such composition.” See, also, In re Sol Gross & Co., Inc. (D. C.) 274 F. 741.

The allowances recommended by the referee are the subject of vigorous protest. The real question involved is whether the receivers’ compensation is to be based upon the entire amount of the composition or merely upon the cash payment. In this respect the receivers are in the same position as the referee, and should be compensated on the basis of the cash payment and the present market value of the securities retained. Accordingly, I find that the total amount to be allowed the receivers raider the provisions of section 76, subds. (d) and (e), is the sum of $48,-129.74, being 1 per cent, of the 15 per cent, paid in cash and the present value of the securities.

Mr. Gross served, roughly, nine months as receiver, as against six months’ service by Mr. Fox. It becomes the duty of the court to apportion the fees of the receivers. The referee in his recommendation followed a division of about 60 per cent, to Mr. Gross, and 40 per cent, to Mr. Fox, and I see no reason for departing from that apportionment. Accordingly, Mr. Gross is awarded the sum of $28,877.84, and Mr. Fox, $19,251.90.

The referee recommends the payment of $2,000 to Jacob A. Freedman, as attorney for Frank Fox, one of the receivers. Mr. Freedman was appointed under an ex parte order of this court on November 20, 3 933, for the purpose of defending the proceedings instituted against Fox for his removal as receiver. Those proceedings were instituted on October 4, 1933.

Though the order of retainer was dated November 20, 1933, it provided: “That this particular order be considered as nunc pro tunc as of the 4th day of October, 1933, the date when the order to show cause was duly served upon the aforesaid receiver.”

If this matter were presented to me de novo, I should be obliged to deny the application, for the reason that I do not find authority in the General Orders to warrant the granting of the relief sought. Such services were not rendered in conformity with General Order No. 44 (11 USCA § 53) of the United States Supreme Court, which reads: “No attorney for a receiver or a trustee shall be appointed except upon the order of the court, which shall be granted only upon the verified petition of the receiver or trustee, stating the name of the counsel whom he wishes to employ, the reasons for his selection, the professional services he is to render, the necessity for employing counsel at all, and to the best of the petitioner’s knowledge all of the attorney’s connections with the bankrupt or debtor, the creditors or any other parties to the proceedings, and their respective attorneys. If satisfied that the attorney represents no interest adverse to the receiver, trustee, or any creditor in the matters upon which he is to be engaged, and that his employment would be to the best interests of the estate, the court may authorize his employment, and such employment shall be for specific purposes unless the court is satisfied that the case is one justifying a general retainer. If without disclosure any attorney acting for a receiver or trustee shall have represented any interest adverse to the receiver, trustee, or any creditor in any matter upon which he is employed for such receiver or trustee, the court may deny the allowance of any fee to such attorney, or the reimbursement of his expenses, or both, and may also deny any allowance to the receiver or trustee if it shall appear that he failed to make diligent inquiry into the connections of said attorney.” See In re Eureka Upholstering Co., Inc. (C. C. A.) 48 F.(2d) 95; H. L. Stratton, Inc. (C. C. A.) 51 F.(2d) 984.

However, I am .constrained by the order in the ease, as the law of the case, and accordingly shall make some award to Mr. Freedman.

As to the amount of such allowance it must be measured by the services rendered for the particular purpose covered by the retainer. Fox’s petition for the appointment of Mr. Freedman sets forth services rendered even prior to October 4, 1933, and Mr. Freedman’s application for allowance cannot. be read consistently with the Fox petition, at least in that respect. Many of the matters set forth in Mr. Freedman’s application for services rendered subsequent to October 4, 1933 were, according to the Fox affidavit, performed by Mr. Freedman prior to October 4, 1933. That some meritorious service was rendered in the specific matter affecting Mir. Fox’s status as receiver is undoubted, and under the order in the case, Mr. Freedman should be compensated therefor.

I set the award at $1,000. If this is not adequate compensation for all the services rendered by Mr. Freedman to the receiver Fox, that is a matter that may be an obligation of Mr. Fox, but not of the bankrupt’s estate.

The application of Samuel M. Brook for an allowance for services rendered an objecting creditor was properly denied by the referee. Mr. Brook claims under section 64b of the Bankruptcy Act (U. S. C. title 11, § 104 (b), 11 USCA § 104 (b), asserting that he succeeded in having the confirmation of the previous composition refused or set aside. The previous composition was modified, but not as a result of his efforts. From Judge Campbell’s opinion, it appears that no specifications of such objections had been filed.

The report of the referee as to the other allowances is confirmed.'

Motion to confirm granted. The report of the referee is confirmed except as to those modifications set forth herein.

Settle order on notice.

       These creditors under the offer are to receive 15% cash and 85% in treasury bonds.

       15% cash, plus 22% as the cash value of the securities.