LITTLETON v. KINCAID et al.
No. 5962.
United States Court of Appeals Fourth Circuit.
Decided Jan. 12, 1950.
Argued Oct. 12, 1949. See also 166 F.2d 1007.
The Commissioner argues nonetheless that KQV was dissolved de facto when it transferred its assets to the taxpayer on February 28, 1945 and that a dissolution of this sort was sufficient to terminate its existence within the meaning of Section 711(a) (3) (A). We do not so read the statute which, as we have pointed out, does not apply to a corporation whose legal existence continued throughout the year. We do not have here a case in which the corporate existence was continued sоlely for the purpose of avoiding taxation for the Tax Court has found that the dissolution of KQV was deferred for adequate reasons. Accordingly we are not called upon to consider the case upon the theory that it discloses an attempt to evade the intent of the act.
The Commissioner also urges that the construction which we have placed upon the act produces an inequitable result for the government in that if the taxpayer‘s 1945 income is not annualized its excess profits credit (computed, as it is, from figures of prior years) will be unjustly large and its excess profits tax unjustly small. The answer is that the plain language of the statute and regulations requires this result. It may well be that if this particular problem had been in contemplation Congress would have drawn the statute in different terms. But the fact remains that it did not do so. It is not within our province to supply what Congress has so far not enacted; to do so would be judicial legislation in which we do not propose to indulge even though invited to do so by the Commissioner.
The decision of the Tax Court will be affirmed.
Clarence R. Ahalt, Arlington, Va., and Elijah B. White, Leesburg, Va., for appellees Mary W. Rust, and others, holders of first trust notes, Estate of William A. Metzger and Clarence R. Ahalt.
Stilson H. Hall, Leesburg, Va., and T. Bruce Fuller, Washington, D. C., for appellees R. H. McNeill and Coleman C. Gore.
Armistead L. Boothe, Alexandria, Va., for appellee John F. Kincaid.
Before SOPER and DOBIE, Circuit Judges, and BARKSDALE, District Judge.
The appeal in this case is taken from an order of the District Judge which approved, with minor modifications, the distribution of the proсeeds of the sale of the property of the farmer-debtor proposed in the report of the conciliation commissioner under the Frazier-Lemke Act,
Frank Campbell Littleton, the owner of Oak Hill, the historic place of James Monroe in Loudon County, Virginia, filed a petition under the statute June 18, 1941 stating that he was engaged in producing products of the soil and live stock, and that he was unable to meet his debts as they matured and desired to effect a composition or extension of time to pay his debts under Section 75 of the Bankruptcy Act. At that time there was pending in the Circuit Court of Loudon County, Virginia, a suit by Littleton to enjoin the sale of the property which had been advertised by William A. Metzger and David N. Rust, Jr., trustees under a deed of trust of August 29, 1939, to whom Littleton had conveyed the property tо secure the payment of certain promissory notes in the aggregate sum of $110,000.
When the injunction suit was filed in the state court, the trustees under the deed of trust retained Clarence R. Ahalt as their attorney to defend the suit. It transpired that Rust, one of the trustees, was disqualified to act as such since he was in an inconsistent position, being not only trustee but the owner of the indebtedness represented by the promissory notes, and consequently he resigned as trustee. The court then referred the case to a commissioner and upon his report, decreed the advertisement and sale of the property and designated Metzger as the trustee to accomplish this purpose. The filing of the petition in the federal court put a stop to the proceedings in the state court, as providеd by Section 75, sub. o,
After the sale, the debtor moved that the case be referred to the regular referee in bankruptcy to make a report as to the transactions of the conciliation commissioner, but the court denied this petition and ordered that the conciliation commissioner, acting as referee, convene the creditors and ascertain the amounts due them and report to the court a scheme of distribution of the funds on deposit to the credit of the cause. Accordingly, the conciliation commissioner on April 13, 1949 reported a scheme of distribution of the funds to the creditors which after certain modifications, was approved by the District Judge. The final order directed that the claims against the bankrupt estate should bear interest to May 1, 1949; that the trustee appointed by the state court in the foreclosure proceedings should be allowed the sum of $1,000, that the attorney for the said trustee should be allowed a fee of $500 for serviсes rendered therein; that the conciliation commissioner should be allowed the sum of $1,877.13, being 1 per cent. of the amount to be paid to creditors, for his services as referee in
The first question relates to the allowance of interest to May 1, 1949 on mortgage notes given by the debtor on August 29, 1939 in the sum of $110,000 which at the time of the report of the conciliation commissioner were held by D. N. Rust, Jr., and others under a deed of trust of that date; and also the allowance of interest to May 1, 1949 on the note of the debtor in the sum of $27,300.92 of February 4, 1941, payable to Frank Campbell Littleton, Jr. and secured by a second deed of trust, and assigned by the holder to Robert H. McNeill and Coleman C. Gоre on February 5, 1948. Ordinarily interest on claims against a bankrupt estate runs to the filing of the petition in bankruptcy, which in this case was filed on December 19, 1941.
It is held under certain circumstances that interest is not payable on funds in custodia legis, and hence the debtor contends that interest in the pending case should not be allowed after December 14, 1948, when the purchase price of the property was paid into court. This rule is applied when the debt is secured by mortgage on real estate or collateral which yields interest or dividends during the pendency of the proceedings, in which case the income is applied to the payment of the interest until the day of the sale. Coder v. Arts, 8 Cir., 152 F. 943, affirmed 213 U.S. 223, 29 S.Ct. 436, 53 L.Ed. 772; Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 55, 256 L.Ed. 244; Collier on Bankruptcy, supra, page 1840. The reason for the allowance of interest subsequent to the beginning of
The debtor makes the alternative contention that interest in this case should not run beyond February 14, 1949, because on that date he moved the court to pay out the funds in the registry the full amount of the first trust lien notes with interest to that date, amounting in the aggregate to $136,788.14. This motion was opposed by the noteholders because the debtor would not also agree to the payment in full of the claims of the trustee and his attorney for compensation for services rendered in the foreclosure proceedings in the state court, and the District Judge denied the motion on this account. We find no error in this action. It is true that there was at the time in the registry of the court sufficient funds to pay all the debts and claims against the estate, but the accounting had not been finished and the Commissioner had not made the report determining the amounts due the estate in accordance with the order passed on February 4, 1949. The scheme of distribution of the commissioner was not filed until April 13, 1949. It was within the discretion of the court to retain within the registry the proceeds of the sale until an account had been stated and the amount of the entire indebtedness and costs had been ascertained.
The next question is whether the trustees under the first deed of trust and their attorney are entitled to compensation for services rendered in the suit in the state court. Metzger and Rust, Jr., as we have seen, were trustees under a deed of trust of the property to secure notes in the aggregate sum of $110,000. As such trustees they advertised the land to be sold at public auction on March 6, 1941, and took other steps to promote the sale. The sale was halted when the debtor brought suit to enjoin them in the state court, alleging numerous reasons why the sale should not be made. In this action they were defended by C. A. Ahalt, an attorney. Before the suit was disposed of, Rust resigned by reason of disqualification as shown above, and the petition in bankruptcy was filed on June 18, 1941. The conciliation commissioner in the bankruptcy case, acting as referee, allowed the trustees under the deed of trust $2,000 and the attorney $500 for services rendered in the state proceeding. The District Judge rejected the allowance to Rust of the sum of $1,000 but allowed $1,000 to Metzger and $500 to Ahalt, to which allowances the debtor objects on this appeal.
As to Metzger, it is contended that compensation for services rendered by him under the deed of trust is governed by
It is also well settled that a trustee who engages the services of an attorney in good faith to aid him in the ex-
The debtor also objects on this appeal to the allowance of $1,877.13 to the conciliation commissioner for the services rendered as referee, that is to say, 1% on the amount of money to be distributed to creditors, and the additional sum of $1,850 for services in the inspection of the property and consultation and correspondence with numerous attorneys during the pendency of the bankruptcy proceeding between 1941 and 1949.
In reporting a scheme of distribution to the court, the conciliation commissioner allowed himself $2,200, that is, 1% of the sales price of $220,000 for the first item above mentioned, and the sum of $2,400 for the second item. The judge reduced the first amount to $1,877.13, that is, 1% of the amount to be paid to creditors, following the terms оf
“While I realize that the Frazier-Lemke Act was passed primarily for the benefit of distressed farmers, I can not believe that Congress intended that a person should serve as conciliation commissioner over a period of years and subsequently as referee over an additional period of years and receive a fee of only $35.00 for this service.
“In the case now before the Court, the Conciliation Commissioner has found it necessary to deal with some eighteen different lawyers who at one time or another have served as counsel for the debtor in addition to counsel for the various creditors. He has found it necessary to attend court hearings on numerous days. He has had many hearings in his office. It has been necessary for him to inspect the property of the debtor periodically, that he keep insurance in effect and various other duties have devolved upon him. The record discloses that in few, if any, instances he has received co-operation from the debtor. On the contrary, the debtor has presented innumerable obstacles to various efforts exerted by the Commissioner for the benefit of creditors and for the benefit of debtor‘s estate. On a number of occasions the debtor has harassed the Commissioner unnecessarily and has occasioned him trips from Loudon County to Richmond to assert trivial objections to items of expense involving nominal amounts. The services rendered by the Commissioner have really been in the nature of those rendered by the supervising commissioner and while I have some doubt as to this portion of the Commissioner‘s claim, I do feel that fairness and equity demand that he, at the least, be compensated for time actually spent by him over a period of approximately seven years. It must be borne in mind that this is not a fee charged to the debtor but is chargeable to the debtor‘s estate which has benefited and profited by the services rendered by the Commissioner and Referee. I am therefore allowing a fee of $1,850.00 on this claim, being at the approximate rate of $250.00 per year during the term of his services.”
This just appraisal of the work of the conciliation commissioner demonstrates that he has fully earned the amounts allowed by the District Court, and it is with regret that we are obliged to set them aside, especially as the services were rendered to an estate of substantial size which has been so handled as to pay all the claims against it and leave a surplus of $20,000 for the debtor. Unfortunately the fees of the conciliation commissioner are so rigidly fixed by the statute as to leave little or no discretion to the courts.
General Order in Bankruptcy 50, par. 12,
The conciliation commissioner in this case was not appointed as a supervising conciliation commissioner and his fee must be therefore confined to the sum of $25 as provided by the statute, plus the allowance of $35 for acting as referee, the former sum to be paid out of the Treasury and the latter out of the assets of the estate. The question of the conciliation commissioner‘s fee has not been frequently considered by the courts, but such decisions have been rendered are in accordance with these conclusions. See Rancho San Carlos, Inc., v. Green, 9 Cir., 93 F.2d 338; In re Shindler, D.C.E.D.Wash., 38 F.Supp. 1021; In re Durst, D.C.S.D.Iowa, 44 F.Supp. 486; see also Adair v. Bank of America, 303 U.S. 350, 58 S.Ct. 594, 82 L.Ed. 889. In re Hargrove, 5 Cir., 96 F.2d 168.
We next consider the allowance of $100 each to three persons who appraised the real estate and $150 to each of three others who appraised the personal property of the debtor. The services rendered by the appraisers were thus described in the opinion of the District Court which indicates that the fees allowed were well earned. The court said:
“*** The Frazier-Lemke Act provides that upon the farmer-debtor filing his petition an appraisal shall be made of his property. This appraisal is made for the benefit of the debtor, the creditors and the court and the amount to be allowed for such appraisal is necessarily to be determined under the facts of each particular case. When the amount of real estate, considered in acreage, involved in this proceeding, the number of buildings thereon, the peculiar nature of the real estate, and the time consumed by the appraisers, are all considered, it strikes me that a fee of $100.00 for each appraiser is reasonable and should be allowed.
“In this same objection to appraisers’ fees the debtor has objected to the fees allowed the appraisers of the debtor‘s personal property. At the timе these appraisals were made it was not known whether the real estate or the personal property, or both, if it subsequently became necessary to sell them, would bring a sum sufficient to pay all claims against the debtor. It was therefore necessary that the personal property also be appraised.
“The personal property involved in this proceeding consists of several thousand items, some of which have large and peculiar values due to their history and manner of acquisition by former owners. Much of it is considered antique and therefore of unusual value. Other items are the usual household furnishings and farming equipment. Some of the items consisted of live stock and farming equipment and machinery. A casual glance at the inventory filed in this proceeding discloses the nature and extent of the personal property. Much time was necessarily consumed in appraising
this property, item by item. In view of these circumstances it is my opinion that the fee of $150.00 allowed each of the appraisers for appraising the personal property is reasonable and should be approved.”
The objection to the allowance is based on General Order 45 in Bankruptcy which provides: “No auctioneer or accountant shall be employed by a receiver, trustee * * * except upon an order of the court expressly fixing the amount of the compensation or the rate or measure thereof. The compensation of appraisers shall be provided for in like manner in the order appointing them.”
In the case of In re Benjamin Kaufman, Inc., D.C.S.D.N.Y., 21 F.2d 799, an allowance to appraisers was denied because the referee‘s order appointing them did not fix their compensation, as required by the General Order. We disagree with this view. We regard the rule as directory and not mandatory. It was passed to promote the interests of the debtor under a statute enacted in time of national emergency, and the court was directed to fix the fees in advance so that the estate would be protected from exorbitant allowances and the appraisers would know when they consented to serve the amount of compensation they might expect. The rule emphasizes the duty of the court in this case to scrutinize the allowance with care. This has been done, and it is clear that the amounts are just and reasonable, and they should not be disallowed in the absence of a mandatory provision prohibiting the payment or any allowance unless the fees are fixed in advance.
Finally, the objection to the allowance of $38,406.26 on the claim assigned to Robert H. McNeill and Coleman C. Gore by the debtor‘s son remains to be considered. The assignees paid $18,600 for this claim on February 5, 1948, so that the difference between this sum, plus interest thereon, and the amount represented a profit of the claimants. The debtor contends that the allowance should be restricted to the amount paid for the assignment, plus interest, because McNeill was his attorney and was actively engaged on his behalf in resisting the sale of the property when the claim was purchased. It is pointed out that the attorney, upon thе acquisition of the note, became a creditor of the estate and thereby assumed a position inconsistent with his duty to the debtor to prevent the sale as long as possible in the hope that the debtor might be able to borrow enough money to pay his debts and retain possession of the property. It is contended that under these circumstances the attorney now holds the claim for the benefit of his client just as a trustee who sells himself the property of his beneficiary must hold it for the latter‘s benefit and account to him if the property was sold for less than its fair value.
The facts with respect to the acquisition of the note are stated as follows in the opinion of the District Judge: “*** Several years ago the debtor executed a note secured by a second deed of trust оn the property sold in this proceeding and on personal property. This note was owned for several years by Frank Campbell Littleton, Jr., a son of the debtor. It was listed as a debt due by the debtor in this proceeding and all during this proceeding the son, by counsel, has made every reasonable effort to have the property of the debtor sold so that his claim, along with the debtor‘s other debts, might be paid. Counsel for the debtor‘s son has repeatedly insisted that the property be sold at the earliest opportunity. As a matter of fact, the holder of this note has been actually more insistent that his claim be paid that the holders of the first deed of trust notes. Some time before the son sold his note to Gore and McNeill, he became seriously involved financially and was being threatenеd with criminal prosecution for issuing certain checks which he did not have sufficient funds to pay. In his distress the son went to the debtor to see what financial arrangements the debtor could make to pay this note and the debtor was unable to pay. The son then, with the acquiescence, consent and approval of the debtor, requested McNeill and Gore to sell the note to any person interested in buying it. Gore solicited ten or twelve persons
The efforts of the attorney on behalf of the debtor did not slacken and the debtor‘s interest in the retention of the property was not jeopardized after the assignment. The contrary occurred. On this point the District Judge found:
“* * * Prior to the time McNeill and Gore acquired the note, the then holder, the debtor‘s son, had pressed for a sale of the property. After acquisition of the note by McNeill and Gore, McNeill, as attorney for the debtor, appeared before this court on numerous occasions over a period of approximately fourteen months solely for the purpose оf delaying a sale of the property so that the debtor might rehabilitate himself and pay his debts and retain the property. During this period the debtor was insisting that if allowed only a short extension, he would be able to discharge all his obligations. The records of this court and of the appellate court, Littleton v. Rust, 4 Cir., 166 F.2d 1007, will show that Mr. McNeill diligently sought to obtain the delay desired by his client and he actually succeeded in staving off the final day for about fourteen months. During this period, Mr. McNeill proposed to a lending institution that if such institution would lend the debtor a sufficient sum to pay all of the debtor‘s debts that the debtor would give such institution a first deed of trust for this entire amount and that for their claim McNeill and Gore would take a second deed of trust subordinate to whatever amount a lending institution might lend the debtor.
“* * * It is my opinion that the note wаs purchased by McNeill and Gore at a time and under such circumstances as an outside person or lending institution would not ordinarily have been interested in acquiring the note. McNeill and Gore took a chance on purchasing this note and if this chance now results in a profit to them I see no reason why a profit should not be realized where the transaction was in good faith and fair and was entered into with the full knowledge, consent, acquiescence and on the suggestion of the debtor. I find nothing to criticize in the conduct of Mr. McNeill. The claim here discussed will be allowed in full.”
The point under consideration must be decided in view of the universally recognized principle that the attorney occupies towards his client a high position of trust and confidence so that it is a lawyer‘s duty in dealing with his client to exercise the utmost good faith, integrity, fairness and fidelity. Consequently the measure of good faith which the attorney is required to exercise in dealing with his client is much higher than that required when the parties deal with each other at arms length; and all dealings between attorney and client will be closely scrutinized by the courts. These axioms are accepted and observed by all honorable attorneys, as a matter of course and they have been embodied in the canons of professional ethics promulgated by the American Bar Association and the
These maxims have the general endorsement of the bench and bar. Any dealings between attorney and client, looking to the acquisition by the attorney of an interest in the subject matter of the litigation cannot be approved, for however open and free from fraud it may be, it is likely to place the attorney in an inconsistent position and lead to difficulties and criticism, as the case here well illustrates. Nevertheless we are unable to set the transaction aside as illegal or impose upon the assignees the duty of a trustee to account for the profit that will be acquired. There was no fraud and no concealment in the business, but all the facts were well known to the debtor. Indeed the claim was purchased with the debtor‘s knowledge and at his request and the price paid was the best that could be obtained after considerable effort had been made to sell the claim that was secured only by a junior mortgage on the property. Moreover, it must be borne in mind that the sale of the entire property of the debtor at Oak Hill for $220,000 was not made until September 2, 1948.
We had occasion in Goldman v. Caplan, 4 Cir., 170 F.2d 503, to refer to the strict accountability under the Virginia law of a trustee to his beneficiary in respect to transactions between them. We pointed out that where the trustee, with the consent of the beneficiary, sells trust property to himself it is not enough that the beneficiary had full knowledge of all the facts and of his legal rights, and that his consent was not impropеrly induced by the trustee. It is essential also that the sale should be at a price which is fair and reasonable. The same general principle is applicable in Virginia in respect to dealings between attorney and client. See Byars v. Stone, 186 Va. 518, 42 S.E.2d 847; Thomas v. Turner, 87 Va. 1, 12 S.E. 149, 668; Stiers v. Hall, 170 Va. 569, 197 S.E. 450; Branch v. Buckley, 109 Va. 784, 65 S.E. 652. In Thomas v. Turner, supra, it was said:
“According to that rule all dealings between attorney and client, for the benefit of the former, are not only regarded with jealousy and closely scrutinized, but they are presumptively invalid on the ground of constructive fraud, and that presumption can be overcome only by the clearest and most satisfactory evidence.
“* * * All transactions * * * in a court of equity must be uberrima fides, and the onus is on the attorney to show not only that no undue influence was used or advantage taken, but that he gave his client all the information and advice as against himself that was necessary to enable him to act understandingly. He must show, in other words, (1) that the transaction was perfectly fair; (2) that it was entered into by the client freely; and (3) that it was entered into with such a full understanding of the nature and extent of his rights as to enable the client to thoroughly comprehend the scope and effect of it. * * * ” 87 Va. at page 12, 12 S.E. at page 153.
and in Byars v. Stone, supra, it was said:
“An attorney occupies toward his client a high position of trust and confidence, and in his relations with his client it is his duty to exercise and maintain the utmost good faith, integrity, fairness and fidelity. This relationship precludes the attorney from having any personal interest antagonistic to those of his client, or from obtaining any personal advantage out of the relationship, without the knowledge or consent of his client. 7 C.J.S., Attorney and Client, § 125, p. 957.” 186 Va. at page 529, 42 S.E.2d аt page 852.
The facts in this case, as found by the District Judge, fall within these principles. The debtor was fully aware of all the pertinent facts. He was necessarily acquainted with the nature and value of the assigned claim and of the property by which it was secured. He well knew of
The judgment of the District Court is affirmed except as to the allowance to the conciliation commissioner, and as to this it is modified as hereinabove set out.
Affirmed in part, modified in part, and remanded for further proceedings.
BARKSDALE, District Judge (dissenting in part).
I concur in the majority opinion in all respects save one: I am constrained to dissent as to the conclusion of the majority to disallow any compensation to the conciliation commissioner except the nominal statutory fees. The District Judge appraised the value of the services of the conciliation commissioner and his appraisal is quoted in the majority opinion and characterized as a “just appraisal“. Admittedly, a strict interpretation of Sections 75, subs. b, s (4),
It was not within the original contemplation of Congress that a solvent estate would be settled in the bankruptcy court, and no provision was made in the statute for the disposition of a surplus. Nevertheless, in the rare cases in which a surplus remainеd after the payment of the claims that had been proved, it was distributed to the bankrupt. In re Silk, 2 Cir., 55 F.2d 917; Burton Coal Co. v. Franklin Coal Co., 8 Cir., 67 F.2d 796. It was not until 1938 that it was provided by an amendment to
Where a surplus exists, the reasons underlying the limitations on the amounts allowable to a conciliation commissioner lose their force. The sections dealing with the compensation of the commissioner are obviously designed to keep the cost of the proceeding to a minimum so as not to further burden the hard-pressed farmer or to diminish the assets which he does have at the expense of his creditors who normally receive less than the amount of their claims. Clearly, creditors who have been pаid in full are not in any way affected regardless of what disposition is made of the funds in excess of the amount of their claims. Nor can it be seriously argued that Congress in its desire to relieve harassed farmers intended to give to a farmer-debtor who subsequently is found to be solvent the benefit of the extensive services of a conciliation commissioner for seven years at no appreciable cost.
I do not think that in this case the statute should be so construed as to deprive this conciliation commissioner of compensation which he has so justly earned, nor do I believe that such a construction is required. I would affirm the District Court‘s award of compensation to the conciliation commissioner.