Opinion
No. 16455.
December 1, 1931.
Gold, Quittner Kearsley, of Los Angeles, Cal. (A.S. Gold, of Los Angeles, Cal., of counsel), for petitioning creditors.
Bicksler, Smith, Parke Catlin, of Los Angeles, Cal. (Dale H. Parke, of Los Angeles, Cal., of counsel), for certain creditors.
In Bankruptcy. In the matter of the Western States Building-Loan Association, bankrupt. On application for election of R.E. Allen, trustee, and on objections thereto. The referee declined to approve the election, and certain creditors seek review.
Referee's decision confirmed with direction.
See, also, 50 F.2d 632.
The following is the order of Referee Moss:
Pursuant to notice regularly published and mailed to the creditors whose names and addresses were listed in the schedules filed by the bankrupt herein, the first meeting of the creditors of this estate, and the election of a trustee, came on for hearing on November 3, 1931. Dale H. Parke, Esq., representing certain creditors, filed claims of creditors amounting to a large majority both in number and amount of all claims filed, and nominated Mr. R.E. Allen as trustee. Objection was made to the qualifications of said nominee by A.S. Gold, Esq., representing the petitioning and other creditors. Oral and documentary evidence was introduced and the matter submitted, and the referee now finds as follows:
I. That the said R.E. Allen was, by the United States District Court of this district, sitting in equity, appointed as receiver of the assets of this bankrupt estate, and still is acting as such receiver, and that his account of such receivership had not been, on the date of the filing of the petition in bankruptcy herein, finally approved.
II. That said receiver in equity, while in possession of the books and records of the said bankrupt estate, selected the names of certain creditors of said estate to act as a committee, and caused notices to be mailed to said persons, and as a result of his efforts such committee was formed from the names so selected by said receiver, and said committee sent communications to said creditors for the filing of said creditors' claims in the said equity proceeding.
III. That the involuntary petition herein was filed on April 10, 1931. That the said committee mailed letters to all the creditors herein soliciting powers of attorney for the purpose of electing the said receiver as trustee of this estate, and that the form of said letter was prepared by Mr. Dale H. Parke, who is one of the counsel the said equity receiver has agreed to petition the court to be employed as his counsel as trustee in this matter, and that the form of said letter was not approved by the committee over whose names it was written. That said receiver expended in the formation of said committee and the mailing of said letters, and his other expenses, the sum of $425, which has not been repaid to him, and which he does not expect to collect and the repayment of which he is willing to waive.
IV. That said receiver agreed with said committee to act herein for a fee of $500, which would constitute a small fraction of the fee to which he would be entitled under the Bankruptcy Act based upon the value of the property of said bankrupt as set forth in its schedules in bankruptcy.
From the foregoing facts the conclusion follows that the said R.E. Allen is not the independent choice of the creditors of this estate as trustee, but that his attempted election was brought about by the efforts of the committee selected and financed by him, and that in so naming and financing said committee he violated both the letter and spirit of the Bankruptcy Act (11 USCA) and General Orders in Bankruptcy (11 USCA § 53), and his election should not receive the court's approval.
The objections to the approval of the election of R.E. Allen as trustee were based upon several grounds, viz.: That the proceeding in equity was with the consent of the bankrupt corporation, who selected the receiver, and as such he was in effect an assignee for the benefit of creditors; that he had agreed to accept less than the statutory amount as his fees as trustee, a practice against public policy; and that he was disqualified by reason of having formed and financed the committee which solicited the claims and powers of attorney to vote for his election as trustee.
There was some evidence to the effect that the petition for the appointment of a receiver in equity was signed by one Woody, as assistant secretary of the corporation, but the fact that the proceeding was by consent or that the receiver in equity was selected by the bankrupt corporation was not proved, and, while one text-writer, at least, expresses the opinion that an assignee for the benefit of creditors, by reason of the fact that his account should be scrutinized by the trustee, is therefore disqualified to act as trustee, I do not believe that the mere fact alone that the person nominated as trustee had previously been an assignee would constitute a disqualification.
While it appeared that the receiver in equity had agreed to make no application as trustee in bankruptcy for fees in excess of $500 without the approval of the creditors' committee, I know of no rule that would bar the creditors from contracting with the proposed trustee or his counsel concerning a limit of the fees for which they would apply. The schedules of the bankrupt list assets of the value of $637,192.63, and the amount to which the receiver in equity agreed to limit his fee as trustee in bankruptcy, $500, would constitute a small fraction of $6,511.92, his estimated fees as trustees, if the estate produced the scheduled value. While the fact might be a cause for wonder as to the reason which induced the making of the agreement, yet there is nothing in such fact alone that would disqualify the nominee as trustee in bankruptcy.
It does appear quite clearly, however, that Mr. Allen, while in possession of the books and records of the bankrupt corporation as equity receiver, selected therefrom the names of certain persons to act as the committee, arranged for its formation, and in fact donated $425 for the expenses of the committee in sending communications to the creditors, among which was the letter inclosing a blank claim and requesting powers of attorney for his election as trustee, as shown by Petitioning Creditors' Exhibit 1. General Order XXXIX in bankruptcy prohibits a receiver or his attorney from soliciting proofs of debt, powers of attorney, or other authority to act for or represent any creditors for any purpose in connection with the administration of the estate in bankruptcy. The purpose of this rule is to prevent the accomplishment of the very result that occurred in this proceeding, that of the receiver using the opportunity created by the court's order placing him in possession of the records of the bankrupt in obtaining the names and addresses of the creditors and soliciting, either directly or indirectly, proofs of debt and powers of attorney for the purpose of bringing about his election as trustee. I know of no reason why a receiver in equity should be absolved from the same regulations as those controlling a receiver in bankruptcy, or should be immune from these requirements, which are wholesome and for the benefit of the administration of estates in bankruptcy. A receiver is an officer of the court, assumed to be disinterested, appointed for the purpose of preserving the assets, rather than to be given an opportunity to perpetuate himself in office. While it was contended that the committee was formed for the purpose of securing the co-operation of the creditors in the liquidation of the estate in equity, and not with any idea of continuing the receiver in office in the bankruptcy proceedings, yet I cannot blind myself to the fact that the very result of the committee's activity was foreseen long in advance by those inspiring its formation and stimulating its operations. Not only the receiver, but his proposed counsel as trustee in the bankruptcy proceedings, are experienced in bankruptcy matters and knew that the appointment of the equity receiver was an act of bankruptcy and that the bankrupt herein was insolvent, and also the bankruptcy proceedings against the Guaranty Building Loan Association were about that time a matter of common knowledge to the public and the bar, and the further fact that there was a possible, and in fact a great probability, that a petition in bankruptcy would be eventually filed against this bankrupt, in which event the control of the committee in touch with the creditors and able to procure their proofs of debt and powers of attorney would be of value in electing the trustee.
Upon examination and consideration of transcript of evidence at hearing before the referee for the election of a trustee in bankruptcy herein, it cannot be clearly determined under the facts shown by the record that the referee abused the discretion lodged in him under the Bankruptcy Act and General Orders pursuant thereto vesting him with supervisory power over selection of trustee, and his order dated November 3, 1931, declining to approve the election of R.E. Allen as trustee in bankruptcy herein is confirmed, with direction, however, to said referee, to permit to be voted at an election for trustee all of the valid and existing claims of creditors, including those that had been heretofore voted for the former receiver of the Western States Building Loan Association, to wit, R.E. Allen.
An exception to the aforesaid ruling is allowed and noted for California Title Company, a corporation. The restraining order heretofore issued herein restraining the referee in bankruptcy from conducting the first meeting of creditors called for the purpose of electing a trustee is now dissolved and discharged. An exception to the aforesaid ruling is hereby noted and allowed to said California Title Company, a corporation.