American Surety Co. v. Freed
| Decision Date | 24 July 1915 |
| Docket Number | 1933. |
| Citation | 224 F. 333 |
| Court | U.S. Court of Appeals — Third Circuit |
| Parties | AMERICAN SURETY CO. v. FREED et al. In re BREAKWATER CO.'S ESTATE. |
William H. Hotchkiss, of New York City, for appellant.
Owen J Roberts, of Philadelphia, Pa., for appellees.
Before BUFFINGTON, McPHERSON, and WOOLLEY, Circuit Judges.
The petitioner asks a revision of an order of the District Court for the Eastern District of Pennsylvania, dismissing its petition for a review of an order of a referee in bankruptcy. The referee's order was made in the bankrupt estate of the Breakwater Company, and allowed commissions to the referee and trustee each in the sum of $6,500.
The Breakwater Company was a corporation engaged chiefly in constructing breakwaters for the United States government in its home ports and in the ports of its colonial possessions. An involuntary petition in bankruptcy was filed against it adjudication followed, and in due course the administration of its estate devolved upon the respondents as trustee and referee respectively. The assets of the bankrupt consisted of stone quarries and their equipment, owned and leased in various states of the United States, in Canada and the Hawaiian Islands, together with a great quantity of floating equipment, such as tugs, derrick barges, pocket barges, etc well distributed over the waters of the northern half of the Western Hemisphere. The assets were appraised at something over $1,000,000, a part of which was retained by the government upon incompleted contracts.
A considerable part, if not all, of the physical property of the bankrupt was covered by a mortgage for $1,000,000, issued to secure bonds for a like amount. As the mortgage was not filed in certain jurisdictions in which property of the bankrupt was located, there arose a question whether the mortgage was a lien upon a portion of the bankrupt's property, worth about $200,000.
Property of the character indicated, its distribution over a wide area, and the bankrupt's liability upon its incompleted contracts with the government, made the estate difficult of administration. The trustee of the mortgage threatened, and in fact instituted, proceedings of foreclosure. The trustee of the estate was unable to interest outside parties in the purchase of the property as a going concern. Sold otherwise, it was obvious that the property would produce little more than its value as junk. The situation was further complicated by the floating property of the bankrupt being libelled for maritime liens. The cost of litigation and conservation was making rapid and substantial inroads upon the estate's limited quantity of ready funds.
In this condition of affairs, a bondholders' protective committee proposed to the trustee a plan for the purchase of all the property purported to be covered by the mortgage, including the portion in dispute. The plan involved a private sale of the property by the trustee, approved by the referee, for the purchase price of $75,000, of which $35,000 was to be paid upon the acceptance of the offer, and $40,000 to be paid when required for distribution. The proposed sale of the bankrupt's assets was to be made subject to the mortgage of $1,000,000, and accrued interest, and also subject to maritime liens, aggregating about $75,000.
The creditors of the bankrupt were, as usual, of two classes, secured and unsecured. The holders of the bonds under the mortgage were secured creditors to the amount of $1,000,000, and interest. They did not file claims against the estate. The claims of unsecured creditors filed against the estate amounted approximately to the sum of $1,300,000.
The plan contemplated, first, the purchase, for the consideration stated, of the physical assets of the Breakwater Company, encumbered with all liens; then a re-capitalization of those assets by the formation of a new corporation to be known as the Coast & Lakes Contracting Company, with stock sufficient to care for and discharge the entire indebtedness of the Breakwater Company by the exchange of preferred stock for the bonds of secured creditors and common stock for the assigned claims of unsecured creditors. By this means, the property purchased was to be disencumbered and the bankrupt's indebtedness to its secured creditors, cancelled. The scheme, however, did not include the discharge of the bankrupt's indebtedness to its unsecured creditors. Creditors of this class were required to transfer and assign to the new corporation their proven claims, so that it might receive all dividends declared thereupon. Into this arrangement all creditors, both secured and unsecured, entered, except the American Surety Company, the petitioner.
As the bondholders' committee was to furnish the $75,000 cash consideration for the proposed purchase, and as the new corporation would become the holder by assignment of the claims of the unsecured creditors, and therefore would become the principal, if not the sole, creditor entitled to dividends, the committee was naturally anxious to preserve to it in dividends as much of the cash advanced as possible, and was therefore interested in seeing that that sum was not, absorbed by administration charges and costs. The bondholders' committee, therefore, drove a bargain with the referee and the trustee, who, while maintaining that they were entitled to commissions computed on the entire amount of the bankrupt's indebtedness discharged by the capital stock of the new corporation, agreed to a deduction, and stipulated that they would each be content with and would charge as commission no more than the sum of $6,500.
These matters were very generally discussed and agreed to at informal meetings between the bondholders' protective committee, the referee and the trustee, and resulted in the trustee presenting a petition to the referee praying for an order to sell the assets of the bankrupt at private sale. This petition did not recite the scheme of reorganization contemplated by the parties, but presented, in the usual way, the character of the bankrupt's property, the fact that it was incumbered with a mortgage for $1,000,000 and other liens, the advantage of selling its assets as a going concern, the receipt of an offer to purchase the same at private sale, subject to the lien of the mortgage and all other liens, for the sum of $75,000; that the trustee believed the offer to be a fair one, and 'that the price mentioned in said offer is more than 75 per cent. of the appraised value of the said property, amounting as it does in the total to at least $1,125,000, for the reason that the said sale is made subject to the lien of the mortgage and all other valid liens and thus relieves the bankrupt's estate of any claim or charge, by reason of said mortgage or any other claims which are represented by liens, whether maritime or otherwise. ' Pursuant to the prayer of the petition, an order was entered for the sale of the property. The sale was afterward made and confirmed, and the referee and trustee each allowed commissions to the extent of $6,500.
The American Surety Company presented to the District Court a petition for a review of the order allowing the commissions stated. The District Court dismissed the petition and affirmed the allowance of commissions, in an opinion appearing in 220 F. 226. The American Surety Company now asks a revision of that order.
The provisions of the statute, authorizing and prescribing the commissions to be allowed referees and trustees in bankruptcy, are section 40a and section 48a of the Bankruptcy Law, as amended by the acts of 1903 and 1910, and are as follows:
The commission legally payable to the referee or trustee being thus controlled and measured by the 'moneys disbursed,' or 'moneys disbursed or turned over,' the learned judge found, in accordance with the fact, that only $75,000 had...
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