257 F. Supp. 764 | E.D.N.Y | 1966
This is a petition to review an order of the Referee in Bankruptcy denying compensation to a law firm for services rendered by it as special counsel for the trustee in bankruptcy of Itemlab, Inc. in setting aside a chattel mortgage executed by the bankrupt in favor of 18th Avenue Land Company (18th Avenue).
I
In the Chapter XI proceeding of Item-lab, Inc. (Itemlab) the law firm of Mc-Lanahan, Merritt & Ingraham (McLanahan) first appeared as representing Dutch-American Mercantile Corporation (Dutch) and on November 15, 1960 filed a proof of claim in its behalf as an unsecured creditor in the amount of $52,-260.60 and thereafter attacked a chattel mortgage on Itemlab’s property in favor of 18th Avenue. This mortgage was upheld by the Referee on March 16, 1961, whereupon McLanahan filed a petition in this Court to review said order in which McLanahan appeared specially for the debtor-in-possession and generally for Dutch although one Louis Rosenberg also appeared for the debtor. In that proceeding the Court reversed the Referee on June 27, 1961, indicating that the mortage was invalid but recommitting the matter for further proceedings in accordance with the opinion.
On July 27, 1961, the debtor was adjudicated a bankrupt and on August 25, 1961 Dutch filed an amended proof of claim in the amount of $52,600.60 for monies loaned, asserting a lien against the assets of the estate through a chattel mortgage formerly held by Blanmill Realty Corp. (Blanmill) as security for a debt of $87,500 which had been subordinated to the claim of Dutch and which chattel mortgage was satisfied of record but not in fact at the time of the execution and delivery of the chattel mortgage to 18th Avenue. Thereafter, the trustee in bankruptcy petitioned the Referee for the appointment of McLana-han “as Special Counsel to the Trustee for the purposes of representing the Trustee in all proceedings in connection with the said appeal to the United States Circuit Court of Appeals [from the decision of this Court setting aside the 18th Avenue mortgage], and any subsequent proceedings before this Court, or any other Court with regard to the determination of the validity of the lien of the said mortgagee, for the reason that the said law firm, by reason of its active participation in the proceedings with regard to the said mortgage lien; is familiar with all of the facts and particilars with regard to the said mortgage claim and the said law firm has a great deal of experience and knowledge of the practice and procedure with regard to the proceedings both appellate and trial which will be involved in the obtaining of the final determination of the Trustee’s rights with regard to the claim of the mortgagee, more particularly described above.” Based upon this petition. and the affidavit of Emanuel Becker of the McLanahan firm to the effect that said firm did not represent any interest adverse to the trustee nor had any relationship with the bankrupt except that “we represent Dutch-American Mercantile Corporation, who is a creditor of the * * * Bankrupt”, the Referee on October 20, 1961 appointed McLanahan as such special counsel, “the compensation to be fixed by Court upon filing of proper application for allowance”.
McLanahan having completed its task ■of invalidating the mortgage, the firm applied on January 4, 1965 for compensation and reimbursement pursuant to the terms of its appointment by the Referee. To this application the Trustee responded by a motion returnable on March 14, 1966 for an order disallowing the compensation upon the ground that Mc-Lanahan had failed to disclose “an interest adverse to the trustee”. After a hearing, the Referee on May 12, 1966 granted the Trustee’s motion for dis-allowance except to the extent of $346.30, representing disbursements. In his opinion the Referee stated that although both the Trustee and he knew that Mc-Lanahan were attorneys for Dutch they had no knowledge that Dutch intended to make a claim as a preferred lien
creditor in the amount of $42,760 through its subordination agreement with Blanmill. He predicated his decision upon the failure of Becker to set forth in his affidavit in support of the application for MeLanahan’s appointment, the fact that McLanahan “represented an interest adverse to the trustee” which the Referee said was “violative of General Order 44”. McLanahan, on the other hand, contends that (a) it had no interest adverse to the Trustee at the time of its appointment and (b) if there was such-an adverse interest, it made all necessary disclosure in (i) Becker’s affidavit showing that he represented Dutch and (ii) in Dutch’s amended proof of claim dated August 25, 1961.
II
The result in this case depends
to a great extent upon the interpretation and application of the present General Order 44 which is a question of law to which the “clearly erroneous” standard does not apply.
The first and foremost question to be decided is whether McLanahan represented an interest adverse to the Trustee when it was employed by the Trustee
Since the Referee relies heavily on the contention that McLanahan failed to disclose the nature of Dutch’s preferred claim, some mention should be made of the actual facts. No claim is made by either the Referee or the Trustee that they did not know that McLanahan represented Dutch as a creditor. The complaint is that McLanahan failed to disclose that Dutch would make a preferred claim, predicated on the facts outlined in its amended proof of claim filed August 25, 1961. This claim was filed before McLanahan was employed but the Referee states that he cannot be charged with knowledge of the facts contained in all proofs of claim. While there may be some question about such disclaimer by the Referee, there is no doubt that the Trustee is not in the same position. As a person who is charged with the representation of all the creditors, it is his duty to “examine all proofs of claim and object to the allowance of such claims as may be improper.”
In denying McLanahan’s application, the Referee relied upon cases decided before 1933 when the wording of General Order 44 was changed.
In conclusion, it should be added that the Court is fully cognizant that the purpose of General Order 44 is to prevent a dilution or maladministration of the assets of the estate by reason of an attorney’s conflict of interest which might enable a creditor or creditors represented by him to secure an advantage or preference over other creditors of the estate. In this case it finds that the wording and spirit of General Order 44 have been observed and fairness and equity require that McLanahan, whose efforts produced most, if not all, of the assets distributable to the general creditors, should be rewarded by adequate compensation. Consequently, the ease is remanded to the Referee for the purpose of awarding a fair and just compensation.
This is an order.
. In re Itemlab, Inc., E.D.N.Y.1961, 197 F.Supp. 5.
. Cherno v. Dutch-American Mercantile Corporation, 2 Cir.1965, 353 F.2d 147.
. See e. g., Tepper v. Chichester, 9 Cir. 1960, 285 F.2d 309, 312; In re Dejay Stores Inc., S.D.N.Y.1963, 220 F.Supp. 497, 500; In re Stewart, D.C.Oregon 1964, 233 F.Supp. 89.
. 11 U.S.C.A. following § 53.
. Section 47a (8) of the Bankruptcy Act, 11 U.S.C.A. § 75a (8).
. In re Itemlab, Inc., E.D.N.T.1961, 197 E. Supp. 194.
. In re H. L. Stratton Inc., 2 Cir. 1931, 51 F. 2d 984, cert, denied sub. nom. Jones & Neuburger v. General Motors Acceptance Corp., 284 U.S. 682, 52 S.Ct. 199, 76 L.Ed. 576; In re Eureka Upholstering Co., Inc., 2 Cir. 1931, 48 F.2d 95; In re Rogers-Pyatt Shellac Co., 2 Cir. 1931, 51 F.2d 988.
. In re Woodruff, 9 Cir. 1941, 121 F.2d 152, cert, denied Lynch v. Jackson, 314 U.S. 652, 62 S.Ct. 99. 86 L.Ed. 522.