Opinion
I. Jonas Speciner, of New York City, for trustee.
Meyer Marlow, of New York City (Archibald Palmer, of New York City, of counsel), for assignees.
GALSTON, District Judge.
The report of Theodore Stitt, referee in bankruptcy, is as follows:
To the Honorable Judges of the United States District Court for the Eastern District of New York:
The annexed report, supplemental report and two affidavits of assignees for the benefit of creditors, receiver's report and the following allowance applications, have been filed with me as referee in charge of this proceeding: Abner C. Surpless, Receiver's commissions . . . $158.61 I. Jonas Speciner, Receiver's attorney, Services . . . 1,000.00 Goodman & Mabel, Bankrupt's attorney, Services . . . 350.00 Haas, Haas & Greenstein, Accountants for Receiver . . . 780.00
Total . . . $2,288.61
The assignees have made the following payments for services as to which they assert that this court is without summary jurisdiction on the ground that they are adverse claimants in the matter of all expenditures as assignees: Sidney N. Sands, Assignee's compensation . . . $250.00 Montey P. Strome, Assignee's compensation . . . 250.00 Meyer Marlow, Assignee's attorney, Services . . .750.00 S. H. Kraft, Assignee's accountant, . . . 100.00
Total . . . $1,350.00
Receiver reports a balance of $4,702,82 which he has turned over to himself as trustee. The present balance of the trustee is $3,555.19, which is deposited in the Chase National Bank, Hamilton Trust Branch, a duly designated depository of this court.
Creditors' claims filed in this estate total $83,975.35.
Hearing was held on these reports and allowance applications on June 23, 1931, on notice to creditors as shown by the annexed certificate of mailing. Various adjournments were taken until, on July 23, 1931, testimony was taken to ascertain whether there was summary jurisdiction in the court to pass on the expenditures of the assignees. Their adverse claim was disputed by the trustee.
The history of the liquidation of the affairs of Affiliated Millinery Enterprises, Inc., is as follows: October 27, 1930 General assignment agreement executed, subject to creditors' approval.
October 28, 1930 Creditors' meeting held at which assignment was approved and committee selected to supervise and assist assignees.
October 31, 1930 Involuntary petition in bankruptcy filed by three members of creditors' committee, the assignees' attorney with another attorney with another attorney appearing as attorneys for petitioning creditors.
November 10, 1930 Receiver appointed on a creditor's application on the consent of petitioning creditors' attorneys.
November 11, 1930 Alleged bankrupt's assets transferred to Receiver by assignees.
November 17, 1930 Bankruptcy adjudication.
The bankrupt conducted 13 retail millinery and ladies' ready to wear stores. Seven of these stores were in New York City, two in Jersey City, one in Trenton, N.J., one in Philadelphia, and two in Connecticut.
The principal store was located at 514 and 516 Fulton street, Brooklyn. Here the assignees conducted the business of the bankrupt from October 28th to November 11th, when the bankruptcy receiver took possession. All of the other stores were closed and the merchandise removed to the Fulton street store, with the exception of the two stores in Connecticut, which were liquidated by an ancillary bankruptcy receivership.
The assignees state that they continued business at the Fulton street store because they believed that the store lease was most valuable, and, quite naturally, they stood a better chance of selling it while business was going on. The receiver's attorney points out in his allowance petition that the lease was valueless because of substantial arrears in rent, but possibly this situation was not known to the assignees at the time they assumed charge.
The reports of the assignees show that they realized $3,542.57 from the sale of merchandise. They paid out $2,575.95, and the balance of $966.62 was remitted to the receiver. Although all of the money paid out was not directly chargeable to continuation of the business, the major part of it was. The continuation of the business represents a substantial loss to the estate and a depletion of the assets which can only be justified on the ground that it was necessary in connection with efforts to sell the lease.
I am unable to find any justification for the continuation of the business after the filing of the petition in bankruptcy on October 31st. The lease at that time became valueless, according to the assignees themselves. In the letter which they sent to creditors on October 28th, which is attached to their first report and market Exhibit II, they state: 'The lease contains a bankruptcy clause and a petition in bankruptcy by any of the creditors will destroy one of the most valuable assets.'
Notwithstanding this, the assignees procured the filing of the bankruptcy petition and continued to conduct business for ten days thereafter without the authority or sanction of the bankruptcy court. Nor did they comply with any of the provisions of the Debtor and Creditor Law of the state of New York (Consol. Laws N.Y.C. 12) are disapproved by the New York Supreme Court. Columbia Department Store v. Lander Co., 142 Misc. 135, 253 N.Y.S. 150. The trustee points out in his brief that the assignees also failed to comply with the rules of the Supreme Court, New York, First Department, New York county.
It was represented to me by the assignees and their attorney that everything they did was with the approval of the creditors. It seems to me that, if approval by the creditors could be made a part of this record, it should be given consideration by this court, even though the assignees had ignored both the New York state statute on assignments and the Bankruptcy Act, Sec. 2, subdivision 5, and 70b (11 USCA §§ 11(5) and 110(b), General Order 18, paragraphs 1 and 2 (11 USCA § 53), and rules 6 and 8 of this court, effective after the filing of the bankruptcy petition, and even though their administration was detrimental to the estate.
With this in view, I addressed a letter to all of the creditors on August 29, 1931, asking them whether they approved of the fees paid by the assignees to themselves and their attorney. These fees appeared to me to exceed what should reasonably be allowed as fair compensation for services performed with relation to the size of the estate. The fees of the assignees are in excess of the maximum provided by section 21 of the Debtor and Creditor Law of the state of New York (Consol. Laws N.Y.C. 12).
I received a reply to my letter from 48 creditors, of which 46 protest the fees assert that the assignees agreed to serve without compensation at the meeting held on October 28th, when the deed of assignment was approved. A copy of my letter and the replies received are annexed to this report. I also annex hereto a letter from Samuel Rapport Dress Company, a creditor, dated June 20, 1931, objecting to allowances asked by bankrupt's attorneys, receiver's attorney, accountants, and to the fee paid to the assignees' attorney.
I then advised the assignees of the attitude of the creditors as shown by their letters, and invited their comment, particularly as to the claim that they had agreed to serve without compensation. I also annex their replies. Apparently they do not deny that they offered to serve without compensation, but point out that, subsequent to the creditors' meeting, the committee selected at that meeting voted that they should be compensated. It will be noted that three of the protest letters received are from members of that committee, one of the declaring himself to be chairman of the committee.
Attention is called to statements contained in the replies of the assignees which seem to sum up their attitude toward the trustee's endeavor to administer the estate in the best interests of the creditors.
Montey P. Strome says: 'As far as I am concerned I am prepared to co-operate and relinquish my fees provided all other interested parties such as the attorneys, Receiver and Trustee etc. do likewise so that all assets in the estate may be available for dividend to creditors.'
Sidney N. Sands says: 'I cannot quite understand the necessity for all this excitement. The liabilities in this case are approximately $75,000. Whether the fees are $500.00 or $1,000.00 more or less, would make no material difference to any one creditor.'
The assignees ask for an order approving and settling their report and account. I assume they ask this merely as a matter of form and do not expect the relief asked in view of their assertion of rights as adverse claimants as to all moneys expended by them. However, I could not recommend approval of their report and account, if they had submitted to jurisdiction, for the reason that they have failed to comply with the provisions of the Debtor and Creditor Law of the state of New York (In the Matter of Edward M. Miller, Bankrupt, 1 F.Supp. 415, Memorandum by Inch, J., decided January 16, 1931, Eastern District of New York, No. 19044; In re Polansky (D.C.) 41 F. (2d) 547, 15 A.B.R. (N.S.) 474), and for the further reason that they have no fully or satisfactorily accounted for expenditures made after the filing of the petition in bankruptcy, as I shall presently point out.
I therefore recommend that the prayer of the assignees for an order approving and settling their report and account be denied.
As to the adverse claim of the assignees as to expenditures, their claim should be sustained as to all moneys expended prior to the filing of the petition in bankruptcy and as to all moneys expended subsequent thereto for obligations incurred by the assignees prior to the filing of the petition in bankruptcy which includes fees paid to themselves and their attorney. Louisville Trust Co. v. Comingor, 184 U.S. 18, 22 S.Ct. 293, 46 L.Ed. 413, 7 A.B.R. 421; Galbraith v. Vallely, 256 U.S. 46, 41 S.Ct. 415, 65 L.Ed. 823, 46 A.B.R. 553.
The trustee should proceed by plenary action to recover from the assignees all expenditures relating to the assignment administration between October 27, 1930, and October 31, 1930, the date of the filing of the petition in bankruptcy, which are not authorized or allowable under the Debtor and Creditor Law of the state of New York, or which in his opinion are excessive for the services rendered and the size of the estate.
The assignees cite In the Matter of Jack Stolkin, Inc., Bankrupt (C.C.A. 2d) 42 F. (2d) 829, 830, 16 A.B.R. (N.S.) 375, in support of their adverse claim. Not only do they rely largely on this case to remain without the summary jurisdiction of this court, but they appear to have patterned their whole assignment proceeding to enjoy its protection. The facts differ so widely between the two cases that it seems to me not appropriate to cite the Stolkin Case as authority for the conclusion reached here, although it is the same.
In the Stolkin Case the assignees caused a petition in bankruptcy to be filed and at the same time a receiver to be appointed. The petition was filed because irregularities were discovered in the affairs of the bankrupt requiring the processes of bankruptcy. All physical assets were promptly turned over to the bankruptcy receiver. Some accounts were collected by the assignees after the petition was filed, but the receiver acquiesced in this.
In the instant case, the assignees resorted to bankruptcy, but asked for no receiver. They continued to conduct business without knowledge or authority of this court. They state that their reason for filing a petition was that they were being impeded and interfered with by city marshals with levies on judgment executions issued by creditors. If they had complied with the Debtor and Creditor Law of the state of New York, the Supreme Court of that state would have afforded them ample protection from such levies.
In the Stolkin Case the assignees collected $8,703.68 and paid themselves $332.58 commissions, which is less than half the maximum provided under section 21 of the New York Debtor and Creditor Law. They continued the bankrupt's business for two weeks for the purpose of completing unfinished goods. Their total disbursements were $2,384.66.
In this proceeding, the assignees collected $3,542.57 and paid themselves $500, which exceeds the maximum allowed by state law. They continued business for fifteen days in order to sell it as a going concern. On their own statement, this was impossible to do advantageously after the first four days. All the circumstances indicate that business primarily was conducted to convert sufficient merchandise into cash to pay themselves and their attorney $1,250. Their total disbursements were $2,575.95.
In the statement of facts by Judge Augustus N. Hand in the Stolkin Case the following appears: 'The referee made no criticism of the good faith of the assignees, nor has any one. * * *'
Here, it seems to me, is the main variance in the facts between the two cases. Reluctantly I have reached the conclusion that the assignees in this proceeding have not acted in good faith with the creditors, the Supreme Court of the state of New York, or with this court. To me their conduct and that of their attorney evidence a desire for personal gain rather than to render service beneficial to the creditors.
As to expenditures made by the assignees subsequent to the filing of the petition in bankruptcy in payment of obligations incurred after the filing of the petition, the assignees are not adverse claimants, and this court has summary jurisdiction. Bryan v. Bernheimer, 181 U.S. 188, 21 S.Ct. 557, 45 L.Ed. 814, 5 A.B.R. 623; Mueller v. Nugent, 184 U.S. 1, 22 S.Ct. 269, 46 L.Ed. 405, 7 A.B.R. 224; Acme Harvester Co. v. Beekman Lumber Co., 222 U.S. 300, 32 S.Ct. 96, 56 L.Ed. 208, 27 A.B.R. 262; Apparently the assignees do not seriously deny summary jurisdiction to this extent. Although in their report they assert adverse claim as to all moneys expended by them, their attorney in his memorandum at the bottom of page 3 says: 'It is submitted that as to expenses incurred by the assignees after bankruptcy for salaries to persons employed in the continuance of the business that the same were necessary, proper, reasonable, and for the best interests of the estate and should be allowed; that as to all other administration expenses incurred prior and up to the filing of the petition in bankruptcy and which were paid by the said assignees from funds in their possession at the time of the bankruptcy the District Court has no jurisdiction to summarily order the assignees to pay over to the trustee the moneys so disbursed by them.'
The assignees failed to keep accurate records. It was only after the filing of a supplemental report and two affidavits by the assignees that a complete statement of receipts and disbursements was obtained. The assignees have no vouchers to support $190 in disbursements. Out of total receipts of $3,542.57, only $1,918.90 was deposited in their bank account.
An analysis of their account shows that receipts before bankruptcy were $1,157.03, and expenditures for that period, some of them made after bankruptcy, were $2,155.80.
Receipts after bankruptcy were $2,385.54, and the only expenditure was $420.15 November 8th, for employees' wages.
It is apparent from the foregoing that the assignees framed their account to remove almost all of it from the summary jurisdiction of this court.
Their own compensation and that of their attorney amounting to $1,250 is declared by them to be for services rendered in the four or five days that preceded the filing of the bankruptcy petition. This would mean that they rendered services for ten days after the petition was filed without charge.
For the reason that the continuation of the business after bankruptcy was unnecessary and resulted in a loss to the estate, and for the further reason that it was conducted without compliance with the Bankruptcy Act (11 USCA), the General Orders (11 USCA § 53), and the rules of this court, I recommend that the assignees be surcharged with the sum of $420.15 less the sum of $56.00 for custodian services at $7 a day, or the net sum of $364.15. The assignees include in the expenditure of $420.15 a custodian charge of $80 at the rate of $10 a day. But assignee Sands testified with positiveness at the hearing held before me July 23, 1931 (S.M.P. 34), that the custodian was paid $7 a day or $42 a week. This was later called to his attention, but no explanation has been offered. The custodian charge is allowed because such services would have been necessary whether the business was continued or not.
According to their own testimony and their reports, the assignees' services consisted in closing all stores except those in Connecticut, removing the merchandise in these stores to the Fulton street store and conducting business in that store. The trustee's letter of December 29, 1931, indicates that he and not the assignees collected the merchandise from five stores. The testimony of the assignees as to their efforts to sell the Fulton street store leaves me with the impression that it would have been an accident rather than an achievement if they had succeeded, assuming that the lease was of value. As previously pointed out, it would appear that the lease was not saleable from the time the assignees took possession because of arrears in rent.
I have examined the receiver's report and account, and find the same correct. An order of sale having enlarged his duties from those of custodian, I recommend commissions as receiver, which I compute as follows:
6%
on
$500.00
$ 30.00
4%
on
1,000.00
40.00
2%
on
4,443.18
88.86
---------
-------
$5,943.18
$158.86
Receiver's attorney rendered extensive services, including adjustment of rent claims to the great advantage of the estate. The size of the estate would seem to preclude anything like the allowance he asks.
The services rendered by bankrupt's attorneys were largely in behalf of officers of the bankrupt to whom they should look for compensation rather than to the bankrupt estate. An allowance may be made to them for the preparation and filing of schedules and the consent to adjudication.
The accountants ask for $780, although the order authorizing their appointment fixes the maximum of compensation at $350. They have addressed a personal letter to me supplementing their application and urging that they be allowed the full amount. Their bill is itemized as follows: 10 days, principal and associate at $40.00 . . . $400.00 6 days, senior accountant at $30.00 . . .180.00 10 days, two junior accountants at $20.00 . . . 200.00
It is to be regretted that these accountants have performed much work in this matter apparently without knowledge or comprehension of the limitations which surround bankruptcy allowances. It would seem that they did not even know that the order allowing their retention fixed a limit which could not be exceeded or, for that matter, not reached, unless the size of the estate permitted. The rates of compensation per day specified by them are far above what may be allowed in the average bankruptcy case, of which this is one. I accept at face value their statement that an allowance of $350 would be entirely inadequate according to their usual charges. The amount of assets, however, is the all-important factor in bankruptcy.
Recommendations.
In accordance with the foregoing, I respectfully recommend that:
(1) The application of the assignees that their report and account be approved be denied.
(2) The trustee institute plenary action against the assignees to recover moneys paid to themselves and their attorney for services in excess of the reasonable value thereof or unauthorized by the Debtor and Creditor Law of the state of New York and all other expenditures not so authorized.
(3) The assignees pay over to the trustee the sum of $364.15 paid by them to employees used in conducting the bankrupt's business after the filing of the petition in bankruptcy, which continuation of business was unnecessary, needlessly dissipated the assets, and was unauthorized by, and unknown to, this court.
(4) The report and account of the receiver be approved, he be discharged, the surety on his bond be released from further liability, and the following allowances be made and ordered paid by the trustee: Abner C. Surpless, Receiver's commissions . . . $158.86 I. Jonas Speciner, Receiver's attorney, Services . . . 300.00 Goodman & Mabel, Bankrupt's attorneys, Services . . . 50.00 Haas, Haas & Greenstein, Accountants for Receiver . . . 250.00
Total $758.86
(5) In view of the adverse claim set up by the assignees, notice of application for any order on this report should be given to the following: I. Jonas Speciner, Esq., trustee's attorney, 11 West Forty-Second street, New York City; Meyer Marlow, Esq., assignees' attorney, 225 West Thirty-Fourth street, New York City; Archibald Palmer, Esq., of counsel for assignees, 2 Lafayette street, New York City.
For the convenience of the trustee and the assignees, I am annexing hereto the law memoranda submitted by their respective attorneys.
The exceptions to the report of the referee are overruled, and the report is confirmed in all respects, and amounts recommended are ordered paid.