253 F. 390 | D.N.D. | 1918
Respondent, John P. Galbraith, was assignee under a common-law deed of assignment of the bankrupt’s estate, dated August 18, 1917. He immediately took possession and sold the stock and fixtures for $12,340.09. From collections and other minor items, he brought the total of the estate up to $13,289.78. Within four months after the assignment, to wit, December 3, 1917, an involuntary petition in bankruptcy was filed, and on December 22d adjudication was made. The petitioner, John Vallely, was elected trustee, and qualified on January 21, 1918. On February 4, 1918, respondent, Galbraith, filed with the referee in bankruptcy his report and account as assignee, which showed receipts as above, and set forth a detailed statement of disbursements, amounting to $1,-631.53, leaving a balance of $11,658.25, which he turned over to petitioner as trustee in bankruptcy. The residue, to wit, $1,631.53, Galbraith retained as legitimate disbursements and fees under the common-law assignment. The report closed with a prayer for an
Upon this report and a brief petition by the trustee in bankruptcy, the referee, under date of April 18, 1918, made an order upon respondent to show cause why he should not po.y over to the trustee $1,474.-IQ of file sum withheld by him as common-law assignee, embracing such hems as his fees, $430.33, and expenses for taking the inventory and investigating the, business condition of the bankrupt. In response'to this order respondent entered a special appearance, and objected to the jurisdiction of the court on two grounds, to wit: (1) That respondent is ta resident and citizen of the state of Minnesota, and not within the territorial jurisdiction of the court. This objection was not pressed, and was plainly untenable, in view of the fact that respondent by his report had submitted himself to the jurisdiction of the court (2) Thai respondent is an adverse claimant to all moneys referred to in the order tq show cause, and cannot be held to show cause in this summary proceeding. The referee withheld his ruling upon this objection, and thereupon, without waiving the objection, respondent produced his evidence, going fully into his administration of the estate, as common-law assignee, and attempting to show that the sums charged were all reasonable and beneficial to the estate. At the conclusion of the hearing the referee dismissed the order to show cause, upon the objection to the jurisdiction of the court to proceed otherwise than by plenary suit. This ruling is certified to the court for review on petition of the trustee.
Respondent presented to the referee a cost bill for expenses and attorney’s fees in connection with the order to show cause, amounting to $377.80, and asked, that the same be taxed and that the trustee be ordered to pay the amount out of funds of the estate, as part of the expenses of administration. The referee denied this petition, and ill at ruling has also been certified to the court for review on petition of respondent.
Respondent, Galbraith, is genera! manager, treasurer, and secretary of a corporation known as the Northwestern jobbers’ Credit Bureau, organized under the laws of Minnesota. Its stock is mainly held by jobbers located at Minneapolis and St. Paul. The objects of the Bureau are:
“First, the exchange of ledger information between subscribing members; second, the investigation of the estates of failing debtors and the liquidation o? their affairs; third, the obtaining of evidence in order to assist in the eiiicioni; prosecution of fraudulent failures.”
The Bureau is one of 65 similar organizations located in important wholesale districts throughout the United States, all of which operate under the general supervision of the National Association oí
In about one-third of the estates the practice has grown up of first taking a common-law assignment. Under this the estate is converted into cash, and the affairs of the merchant carefully investigated. Sometimes the estate is distributed under the assignment, but more frequently a petition in bankruptcy is later filed, and the estate finally distributed under the Bankruptcy Act. In these deeds of assignment, and in bankruptcy cases in Minnesota, Mr. Galbraith is named as assignee and trustee. He acts throughout as the agent and officer of the Bureau. All funds received by him are paid into a trust account of the Bureau. Against this Mr. Galbraith draws checks on behalf of the Bureau for the payment of dividends to creditors, or for turning over funds to a trustee in bankruptcy. Sums 'deducted for expenses, and the 5 per cent, fee of‘the Bureau are passed to an “expense account.” The fee and all sums charged for by the Bureau belong to it, though they are presented in the accounts of the assignee and trustee as his fees and expenses. Out of the fund created in the so-called “expense account" the salaries of Mr. Galbraith and the other regular employés are paid. Thus it is clear that, while he- acts as trustee under the deed of assignment, he in fact is acting simply as' the agent of the Bureau, and all funds coming into his hands as assignee are held by him as its agent and officer.
It was stipulated upon the hearing that Mr. Galbraith and the Bureau are amply able to respond to any order made by the referee
From this statement it is plain that the power of the Bureau over the estates of insolvent retail merchants ought to .be subject to the careful scrutiny of courts. It is a permanent organization and continuous in its activities. It thus acquires a skill and power such as other creditors do not possess. It is efficient, and I do not in this opinion make any reflection upon the integrity of its policies; but such agencies representing a single class, so long as human nature is what it is, are likely to develop practices such as are almost inse<parable from a permanent bureau, and also such as press tlieir rights beyond the limits of what, is just and fair. While it is true in mercantile failures that wholesalers, constituting as they do a majority in number and value of creditors, are entitled to the influence which '¡he law gives to those having such majority, it ought never to be forgotten that the power thus exercised is in the nature of a trust, and can never properly he used to secure to the wholesale merchants, or the agents of the bureau acting in their behalf, any unjust advantage. Their position is the same as that of a majority of stockholders with respect to the minority, as explained in the memorable opinion of Judge Sanborn in the case of Jones v. Missouri-Electric Co., 144 Fed. 765, 75 C. C. A. 631. It is also true that the Bankruptcy Law (Act July 1, 1898, c. 541, 30 Stat. 544) speaks in unmistakable terms against exorbitant or duplicate expenses. This feature of the act was emphasized by section 72, which was added by the amendment of 1903 (Act Feb. 5, 1903, c. 487, § 18, 32 Stat. 800 [Comp. St. 1916, § 9656]). Courts, whenever their attention has been called to unreasonable or illegal charges, have been prompt and firm in applying the remedy. They have also declared with equal emphasis that services rendered under a common-law assignment can only he allowed in case a petition in bankruptcy is filed within four months after the assignment, when the services are shown to ha\e been beneficial to the estate, and then only to the extent to which they have been beneficial. Randolph v. Scruggs, 190 U. S. 533, 23 Sup. Ct. 710, 47 L. Ed. 1165, and the many cases in the lower federal courts which have followed that decision. It is manifest, therefore, that the practice of passing estates of insolvent merchants through both a common-law assignment and bankruptcy has the burden of justifying itself, unless the mere statement of account shows the practice to have beneficial as to a particular estate.
My attention has within the past few mouths been called to certain concrete cases by the clerk of court of this district, by some of the referees, and also by clerks of courts of other districts of the Eighth Circuit in which I have been sitting, which show clearly that these bureaus have already developed practices which need correction. Fortunately in this district the whole subject has been brought under examination by an able examiner of the Department of Justice, Air. Definas C. Stutler. He has submitted a detailed report to the Attorney General, a copy of which has been transmitted to me. I set forth in a note a quotation from this report, believing that it
None of these practices have ever been brought to my attention -by appeal or certificate. This is due to the fact that the interest of no individual creditor in any particular estate was sufficient to
It is the uniform holding of the federal courts that as to"the capital of the estate the common-law assignee is not an adverse holder, but a mere agent of the assignor for the distribution of the estate among creditors. Bryan v. Bernheimer, 181 U. S. 188, 192, 21 Sup. Ct. 557, 45 L. Ed. 814; Davis v. Bohle, 92 Fed. 325, 326, 327, 34 C. C. A. 372; In re Bininger, Fed. Cas. No. 1,420, 3 Fed. Cas. 412, 417; In re Stuyvesant Bank, Fed. Cas. No. 13,581, 23 Fed. Cas. 207, 209; Randolph v. Scruggs, 190 U. S. 533, 23 Sup. Ct. 710, 47 L. Ed. 1165. In the present case the assignee was not acting under the supervision of a state court charged with the jurisdiction of examining his accounts and fixing his compensation. All these matters lay simply in the personal judgment of Mr. Galbraith and the Jobbers’ Bureau, for which he was acting. May he, by his mere say-so, deduct from the estate such sums as seem to him just, and turn over the residue to the court of bankruptcy, and say that as to the sums deducted he is an adverse claimant, and can be called to account only by a plenary suit ? The referee held that he may. The decision was made reluctantly, and upon the expressed opinion that such a practice is not consistent with sound administration of estates of bankrupts. But the referee felt that he was compelled to reach that conclusion by the decision of the Supreme Court in the case of Louisville Trust Co. v. Comingor, 184 U. S. 18, 22 Sup. Ct. 293, 46 L. Ed. 413. In my judgment that decision does not require such a holding. To understand the decision of the Supreme Court it is necessary to examine with some care' the 'case, as more fully reported in Sinsheimer v. Simonson, 107 Fed. 898, 47 C. C. A. 51.
The controlling features of the Comingor Case' are these: The bankrupts made a general assignment for the benefit of creditors in December, 1898. Comingor_ was the assignee. The administration upon the assignment was under the jurisdiction and control of the state court. By the local practice a suit had to be instituted immediately upon the execution of the assignment, by means of which parties concerned were brought before the court, and from that time forward the assignee acted under the court’s supervision. The petition in bankruptcy was filed on February 14, 1899, two months after the assignment, but the case was pending in the District Court, and the Court of Appeals, until February 12, 1900, before the adjudication was actually made. In the meantime the estate had been converted into cash, amounting to $92,865.77. The assignee had paid out to attorneys representing him $3,200, and had credited himself and paid out as fees belonging to himself $3,300; that amount being such a sum as would have been due him under the established practice
This brings us to the gist of the Comingor Case. Conceding the return of Comingor to be true, had the referee and District Court power to make the rule absolute and commit Comingor to jail for failure to return the money? 'The Circuit Court of Appeals and the Supreme Court held that no such power existed, but that Comingor, if he was liable at all, was only liable for debt, and could only be proceeded against by a plenary suit and a common-law judgment. The Circuit Court of Appeals bases its decision upon the ground that the return was a complete defense upon the facts, and reversed the case upon that, ground, and directed that the order making the rule absolute should be set aside. The ■ Supreme Court bases its decision
In the attempt to distinguish the Comingor Case there has been much refinement as to whether the payments were made by the common-law assignee before the petition in bankruptcy was filed, or after the petition, or, again, whether it was made before adjudication or after adjudication. These distinctions do not rest upon differences which go to the jurisdiction. The assignee at all times holds all funds that come into his hands as the agent of the bankrupt. He may be called upon by summary process to account for those funds. If he shows that he has acted in good faith, and parted with the funds, he cannot be committed to jail for failure to turn them over. If he is legally liable, either because his acts have not in the judgment of the bankruptcy court been beneficial to the creditors of the estate, or for any other reason, he is simply liable for a debt, and the trustee must resort to a plenary suit, in which the liability may be enforced by execution.
The assignee here, when cited lo show cause, had not parted with the funds in any real sense. The transfer to a different account on the books of the Northwestern Credit Bureau was a mere matter of bookkeeping. It is conceded that he and. the Bureau are amply able to respond to any order made in the summary proceeding for the return of any part of the fund involved in the order to show cause. The deductions were made as a part of the accounting at the time the balance of the estate was turned over by Galbraith as assignee. Such being the case, the referee was vested with jurisdiction to deal with the. subject under the order to show cause, and to determine whether, under the facts and the law, an order ought to be made requiring respondent to turn over any part of the $1,474.10 withheld from the estate. The order of the referee, therefore, dismissing the order to show-cause for want of jurisdiction, is reversed, and the cause is remanded for such further action as the facts justify.
The order of the referee on this certificate is therefore affirmed.
Begarding the Northwestern Jobbers’ Credit Bureau, it is deemed proper at this point to call attention to certain of their methods and practices in the control and management of estates in this district that appear to be somewhat questionable. This appears to be an organization, co-roperative in its nature, composed of the jobbers in various lines of business in the northwest section of the country, who as stockholders pay into the association certain dues or assessments to defray expenses, etc., of the association in protecting their various interests, by keeping in touch with business conditions, collecting claims of creditors, furnishing legal counsel and adviqe, and protecting their interests in all bankruptcy and other matters generally. No doubt it is a perfectly legitimate and beneficial establishment, composed of members who are well-meaning and at all times aiming, as regards the conduct and management of bankruptcy matters, to strictly comply with the requirements of the Bankruptcy Act, and in addition thereto lend every assistance of their association to the strict enforcement of the law.
However that may be, the examination of various accounts of trustees in closed cases on file, in the clerk’s office_at Fargo invariably showed that in those estates controlled by the Northwestern Jobbers’ Credit Bure'au, and managed by their professional trustees the cost of administration was far in excess of costs of estates of similar magnitude administered by local trustees. In fact, cases were found which had been managed by the Bureau through its trustee (elected by its stockholder creditors), where the fees and expenses claimed and allowed appear absolutely unreasonable and exorbitant. As an instance of this, the Hilman Mercantile case is cited (Bankruptcy No. 1987), wherein the law firm of Todd, Fosnes, Sterling & Nelson, of St. Paul, representing Arthur B. Smythe, trustee, who was appointed by the association’s majority control, filed a claim for professional services amounting to $2,006. A copy of said claim is attached hereto, marked Exhibit B and made a part of this report.
Beferring to said exhibit, under date of December 10, 1916, is a charge of—
Mr. Fosnes at Grand Forks, N. D., to go over files with referee and secure order for payment of second dividend...................$ 25.00
Of April, 1917, 292 letters written.............................. 146.00
Of April, 1917, 220 letters received and examined................ 110.00
General conference with trustee and other services which cannot be specifically enumerated, consuming at least twenty days....... 675.00
The total of which is..,.................................$956.00
Mr. Sveinbjorn Johnson, the referee in this case, disallowed the above amount for very good reasons, apparently so, at least, and notified said attorneys of this disallowance under letter dated April 21, 1917. A copy of said letter is attached hereto, marked Exhibit O, and made a part of this report. Mr. Johnson states in his letter that these claims appear to be exorbitant, etc.; but it was found that later the trustee and his attorney prevailed upon him to allow the claim, on the argument, as Mr. Johnson advised me, that the Credit Bureau represented the majority of the creditors, and were therefore in position to dictate the payment of the trustee’s attorney fee.
Not only are the fees and expenses of attorneys designated by the Jobbers’" Bureau apparently set out of proportion to the ordinary or average fees and expenses incurred by local attorneys, but the cost for travel on the part of trustees which they elect, and of so-called experts sent from St. Paul to
Mr. Elton, referee, who is now closing up his referee business, stated that he was of the opinion that the Northwestern Jobbers’ Credit Bureau was a detrimental figure in the economical administration of bankruptcy estates in North Dakota : that fees have been actually claimed by the association’s attorney for representing general creditors (not petitioning creditors), on the theory that the association, representing the majority of creditors, had, by experienced men and prompt administration, saved money for all creditors; that not only are («.penses of their official trustee, for travel back and forth, enormous, but other expenses are incurred in proportion; that attorney’s fees and expenses of travel to attend/meetings to declare dividends have been paid when such attendance on the part of attorney is considered unnecessary.
Referee Lewis, at Minot, who is believed to be an excellent, high-grade, and up-to-date referee, appears to have had some of this business to contend with himself, as is evidenced by a rule which he promulgated for his court regarding attorney’s feos, etc., and his letter of January 17, 1017, addressed to Bosard & Twiford, attorneys, regarding expenses incurred generally by the Northwestern Jobbers’ Credit Bureau. Copy of this rule and letter are attached hereto, marked Exhibits D and E, respectively, and made a part of this report.
As a further illustration of possible unnecessary expenses incurred and paid in estates administered through the supervision of the Northwestern Jobbers’ Credit Bureau, attached hereto, marked Exhibits F and G, are statements of account filed and allowed in the Kath Bros, case, for fees and expenses of Morphy, Bradford & Cummins,, and statement of John Vallely, trustee in tire same case, for expense of travel back and forth from Brand Forks. Ills residence, to Fargo, the official residence of the referee, and other places. This latter bill will give some idea of expenses usually incurred by ihe association’s trustee, who is appointed possibly without regard to the distance from his residence to the headquarters of the referee or the location of the assets to be administered. In this case (Kath Bros.) the Northwestern Jobbers’ Credit Bureau procured the service of Oswald Jones Detective Agency to investigate a shortage of stock of merchandise, paid for said service the sum of $493.-47, and filed claim for same against the estate. Previous authority was not asked of the court to incur the expense, and the claim was filed and allowed as a matter of course.
It seems apparent that the minority creditors in estates handled by the association have been imposed'upon, and it is very apparent that some of the referees have also been imposed upon somewhat, in permitting this association to take matters into their own hands and conduct the administration of estates according to their own ideas, regardless of the requirements of the law.