190 F.2d 458 (2nd Cir. 1951), 185, In re International Match Corp.

Docket Nº:185, 186, 21923, 21924.
Citation:190 F.2d 458
Case Date:June 25, 1951
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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190 F.2d 458 (2nd Cir. 1951)





Nos. 185, 186, 21923, 21924.

United States Court of Appeals, Second Circuit.

June 25, 1951

Argued March 5, 1951.

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Oscar W. Ehrhorn, New York City, in proprio persona.

Cadwalader, Wickersham & Taft, Charles W. McConaughy and William D. Ford, New York City, of counsel, for petitioner-appellee.

Before AUGUSTUS N. HAND, CLARK and FRANK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

On April 19, 1932, the International Match Corporation, a Delaware company, (Match) was adjudicated a bankrupt and the proceedings were generally referred to the respondent, then a referee in bankruptcy in the Southern District of New York. He continued in charge thereof until June 24, 1947, when the estate was closed after payments of dividends to creditors totalling $33,919,024.75, respondent withdrawing as commissions 1% of the sum, or $339,190.25. The order appealed from directed him to return to the reopened estate $236,729.38 plus interest, the amount by which his commissions from the Match estate when added to commissions received in the years 1932 through 1947 inclusive from other estates referred to him exceeded an average of $20,000 for the years in question.

The order below was based upon repeated violations, which were held by the court below to have been fraudulently concealed, of a standing rule of the judges of the District Court for the Southern District of New York made by Judge Knox in May 1933, that the referees should so govern themselves that the earnings of each should not aggregate more than $20,000 in any calendar year in order that the then existing national depression should not create an opportunity for the court's own officers to enrich themselves.

The respondent challenges the existence and validity of such a standing rule.

The respondent also asserts that the District Court lacked jurisdiction in this proceeding to proceed summarily or to give judgment running to Match. We do not agree. In December, 1948, International Match Realization Company, Limited, a Bermuda corporation, (Realization) to which had been assigned approximately 90% in amount of the claims proved against the Match estate obtained an order to show cause why that estate should not be reopened and respondent directed to repay to it so much of his commissions as might be determined to have been in excess of the $20,000 yearly maximum. The matter was referred to a special master who, proceeding summarily, held hearings at which the respondent appeared and presented his case, though denying the master's jurisdiction. The master's report recommending

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the reopening of the Match estate and a judgment against the respondent and in favor of Match in the sum set forth above was confirmed by Goddard, J.

The respondent's objections to the nature of those proceedings so far as they have any substance can be summarized as follows:

The Bankruptcy Act, 11 U.S.C.A. § 1 et seq. provides that, upon cause being shown, an estate may be reopened, a trustee thereafter elected and a plenary action then instituted by the trustee to recover assets of the bankrupt estate. This procedure the respondent contrasts with that adopted in the instant case, which he characterizes as a summary proceeding by one creditor, dissolved during the action, which was to obtain judgment against him prior to the reopening of the estate- a judgment running to Match, the now long defunct bankrupt.

The respondent, however, misconceives the nature of the proceeding below. Accepting arguendo the respondent's description of the usual procedure for recovery of newly discovered assets of a bankrupt estate, that procedure is not exclusive where a court officer is charged, as respondent was here, with obtaining funds from a court by fraud or in violation of its orders. Any person, whether creditor of the estate involved or not, had the right if not the duty, to call to the court's attention the facts and the court thereafter proceeded summarily and sua sponte to investigate and decide the matter and order the recovery of the sums involved as was its duty. In re De Ran, 6 Cir., 260 F. 732; see Hazel-Atlas Glass Co. v. Hartford Empire Co., 322 U.S. 238, 246, 64 S.Ct. 997,88 L.Ed. 1250; Griffen v. Thompson, 2 How., U.S., 244, 256, 11 L.Ed. 253; Slocum v. Edwards, 2 Cir., 168 F.2d 627, 631; Governor Clinton Co. v. Knott, 2 Cir., 120 F.2d 149, 152, appeal dismissed, 314 U.S. 701, 62 S.Ct. 50, 86 L.Ed. 561; In re Stillwell, 6 Cir., 12 F.2d 205, 207; Varney v. Harlow, 4 Cir., 210 F. 824, 828. The court is not required merely to reopen the case and then to leave further proceedings to be brought by a new trustee. The wrong has been done primarily to the court. The creditors who would be represented by a trustee are only incidental beneficiaries if the sums recovered should ultimately be applied for their benefit. Evidence of fraud or violation of the court's orders being shown, the court could properly try the whole case on the merits in a summary proceeding particularly where as here the facts are not substantially in dispute. Nor was the respondent prejudiced by his alleged withdrawal from the case. Though he insisted throughout that the master had no jurisdiction to hear the case on the merits, he appeared and fully argued his position. See Gerber v. Fruchter, 2 Cir., 147 F.2d 120, 122; Slocum v. Edwards, 2 Cir., 168 F.2d 627, 628, 629, 632.

The court's action in not reopening the bankrupt estate until the order was made directing the respondent to repay Match was proper for the bankrupt estate need not be reopened until the court had not only decided that the respondent had improperly obtained moneys from the court for which he should account, but also that the creditors of the bankrupt were properly entitled to such moneys.

Nor is there merit in the contention that as Match had been long since dissolved by action of the State of Delaware, the order directing payment to the Clerk of the Court to hold the fund for Match's benefit was a nullity. The order also directed that a new trustee should be elected and should proceed to enforce the judgment. Regardless of the dissolution of Match, the Match estate was still within the jurisdiction of the court below. As a trust will not fail for want of a trustee the Clerk as the order provides may act as trustee of the fund should the respondent pay the judgment prior to the election of the new trustee.

The respondent also argues that he should not be ordered to pay over the fund in question until it is determined that it is now in his possession. We need not now decide if such a rule applies to 'turn over' orders addressed to a bankrupt for it has no application to an order directed to an officer of the court who has violated

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its orders, whether or not the matter arises out of a bankruptcy. The respondent's asserted inability to pay is a matter which may be considered in enforcement proceedings.

Passing to the merits, it is necessary first to describe the history of the dividends and commissions in question (set forth in tabular form in the margin). 1

Prior to September 22, 1938, the effective date of the amendment of the Bankruptcy Act discussed below, four dividends totalling $26,848,898.13 were paid to creditors from the Match estate. The respondent did not seek full payment of his statutory commissions totalling $268,488.97 (1% of $26,848,898.13) on payment of these dividends. Indeed, upon his own motion, two orders were issued, one by Judge Bondy in January 1937 covering dividends 1 and 2, and one by Judge Mandelbaum in November 1937 covering dividends 3 and 4, directing the trustee in bankruptcy to 'earmark and set apart in escrow the statutory commissions of the Referee in Bankruptcy heretofore earned subject to the order of the court or referee.' As the second order also directed the immediate payment of $8500 to respondent the escrow fund originally totalled $259,988.97.

Further dividends paid in 1939 and 1940 totalled $4,897,592.34. The respondent withdrew $48,975.92 as commissions on these dividends on no other authority than his own signature. The final dividend of $2,142,598.05 was declared in 1947 as

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to which the respondent by concealing the above facts had obtained an order from Judge Rifkind in December 1946 directing the payment to him of a commission of 1% ($21,425.98). The sum plus the $8500 ordered paid by Judge Mandelbaum were the only payments specifically ordered to be made to the respondent from the Match estate, but actual withdrawals by the respondent from the estate in the years 1937-1946 inclusive totalled $114,650, and in 1947 when he knew he was not to be reappointed a referee withdrawals totalled $224,540.25. By these 1947 withdrawals he completely exhausted the escrow fund although only the above $21,425.98 was specifically ordered paid in that year.

The court below set aside the 1947 order of Judge Rifkind as obtained by fraud, directed the repayment of commissions on the 1939 and 1940 dividends as completely unauthorized, and concluded that withdrawals from the escrows were also unauthorized absent some formal order of the court or referee. The court found that these unlawful withdrawals totalled $330,690.25 out of total withdrawals of $339,190.25. However, the respondent was given an equitable credit of $93,960.87, which represented during the period of his administration of the Match estate the cumulative difference between his income after eliminating the illegal withdrawals and the $20,000 annual limit. Judgment was therefore for $236,729.38, plus interest.

Prior to September 22, 1938, the Bankruptcy Act, 32 Stat. 799 so far as it applied to fees of referees read as follows: ' * * * Referees shall receive as full compensation for their...

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