Ashbach v. Kirtley

• Decision Date: 10 April 1961
• Docket Number: No. 16622,16623.,16622
• Citation: Ashbach v. Kirtley, 289 F.2d 159 (8th Cir. 1961)
• Parties: Leonard ASHBACH et al., Appellants, v. C. M. KIRTLEY, Trustee of Automatic Washer Company, Debtor, Joseph Abrams and Richland Securities, Inc., and Securities and Exchange Commission, Appellees. CREDITORS' COMMITTEE FOR the UNSECURED CREDITORS OF the AUTOMATIC WASHER COMPANY, Debtor, consisting of Harvey Gill of Sun Steel Company of Chicago, Illinois, Chairman; J. L. Wellinger of Electronic Timers Corp. of Warsaw, New York; C. H. Cuny of United Air Lines of Chicago, Illinois; R. Sowinski of Star Machine Products Co. of Milwaukee, Wisconsin; H. J. Luke of Servel Incorporated of Evansville, Indiana; C. E. Davis of Croname, Inc. of Chicago, Illinois, Appellants, v. C. M. KIRTLEY, Trustee of Automatic Washer Company, Debtor, Joseph Abrams and Richland Securities, Inc., and Securities and Exchange Commission, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

289 F.2d 159 (1961)

Leonard ASHBACH et al., Appellants, v.C. M. KIRTLEY, Trustee of Automatic Washer Company, Debtor, Joseph Abrams and Richland Securities, Inc., and Securities and Exchange Commission, Appellees.

CREDITORS' COMMITTEE FOR the UNSECURED CREDITORS OF the AUTOMATIC WASHER COMPANY, Debtor, consisting of Harvey Gill of Sun Steel Company of Chicago, Illinois, Chairman; J. L. Wellinger of Electronic Timers Corp. of Warsaw, New York; C. H. Cuny of United Air Lines of Chicago, Illinois; R. Sowinski of Star Machine Products Co. of Milwaukee, Wisconsin; H. J. Luke of Servel Incorporated of Evansville, Indiana; C. E. Davis of Croname, Inc. of Chicago, Illinois, Appellants, v.C. M. KIRTLEY, Trustee of Automatic Washer Company, Debtor, Joseph Abrams and Richland Securities, Inc., and Securities and Exchange Commission, Appellees.

Nos. 16622, 16623.

United States Court of Appeals Eighth Circuit.

April 10, 1961.

Leonard Gesas and I. Harvey Levinson, Chicago Ill., for appellants.Harold S. Lansing, and Melvin E. Levinson, Chicago, Ill., on the brief.

David Ferber, Asst. Gen. Counsel, Securities & Exchange Commission, Washington, D. C., for Securities & Exchange Commission, appellee.Walter P. North, Gen. Counsel, and Paul J. Kemp, Atty., Securities & Exchange Commission, Washington, D. C., and J. Kirk Windle and William D. Scheid, Attys., Securities & Exchange Commission, Chicago, Ill., on the brief.

Howard A. Steele, Des Moines, Iowa, for appellee, C. M. Kirtley, Trustee of Automatic Washer Co., debtor.W. Z. Proctor and Harris M. Coggeshall, Des Moines, Iowa, on the brief.

Before VOGEL and BLACKMUN, Circuit Judges, and BECK, District Judge.

VOGEL, Circuit Judge.

These two appeals, No. 16,622 by a stockholders' committee and No. 16,623 by an unsecured creditors' committee, seek to have reversed an order of the District Court made September 2, 1960, in a proceeding for reorganization of the debtor, Automatic Washer Company, under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq.The order complained of directed the trustee to settle, upon receipt of $95,000 plus an additional amount approximating $10,000 already in the trustee's hands, a judgment in the amount of $520,911.85 recovered against one Joseph Abrams and Richland Securities, Inc., a corporation owned by him, and based upon fraud, conversion and unjust enrichment.The order also directed that the trustee, in further consideration of the $105,000, give a covenant not to sue Abrams and Richland Securities, Inc., and to dismiss, insofar as they were concerned, an action pending against them and others brought pursuant to § 16(b) of the Securities Exchange Act of 1934,15 U.S.C.A. § 78p (b).

The debtor, a Delaware corporation with its principal place of business at Newton, Iowa, had for many years been engaged in the manufacture and sale of washing machines and more recently of ammunition containers for the United States government.Financial difficulties led to the filing of a petition for reorganization under Chapter X of the Bankruptcy Act.The petition was approved on November 2, 1956.Reorganization of the debtor was not successful and the trustee filed a plan for liquidation of assets and distribution of the proceeds.Such plan as amended was approved on December 17, 1957, properly accepted by the creditors and stockholders and confirmed by the court on February 22, 1958.

All of the physical assets of the debtor have now been sold and in the main distributed.Secured creditors have been paid in full.Unsecured creditors have been paid approximately $480,000, representing 80% of their total claims.An additional amount of approximately $120,000 would be required to pay the balance.The stockholders have received nothing.

As of the time of the hearing, which resulted in the order complained of, the trustee had but $28,000 in cash.At this hearing the trustee's New York counsel stated that approximately 3300 hours had been expended on the trustee's litigation and that he had received, on account only, $30,100 for services estimated to be worth $100,000.In addition thereto, the trustee owed fees to other counsel plus administrative costs incurred subsequent to April 1, 1959.

The only remaining business of the trustee is the prosecution of pending and prospective lawsuits and the collection of judgments already obtained.Among the latter are (1) the $520,911.85 judgment against Abrams and Richland Securities with which the appealed-from order is mainly concerned, and (2) a judgment in the amount of $1,140,000, obtained subsequent to the date of the order, against Bankers Life and Casualty Company of Chicago, Illinois.There are substantial additional amounts involving pending or proposed litigation.

In the judgment against Abrams and Richland Securities $154,000 thereof represented proceeds from the sale of stock obtained by Abrams through the breach of a fiduciary obligation, thereby establishing a constructive trust.Abrams appealed from the judgment to the United States Court of Appeals for the Second Circuit, where the case is now pending.The appeal was without supersedeas bond.Efforts on behalf of the trustee and his counsel to collect on the judgment have resulted in obtaining approximately $10,000 mainly through attachment of Abrams' checking account.Other than that, efforts to collect the judgment have availed the trustee nothing.

Abrams is presently confined in prison, serving concurrent sentences for conversion of government property and income tax evasion.In this state of affairs, Abrams, through his counsel, has offered to pay $95,000 in cash, in addition to the approximately $10,000 the trustee has already seized, as full settlement of the judgment against him in the amount of $520,911.85 and also of all other claims of the debtor's trustee against him and Richland Securities, Inc., including the "short swing profits" action pending against him, his wife, Richland Securities and one David Schindler and the latter's wife.In such action, it is alleged that Abrams, Schindler and their wives acquired 330,000 shares of the debtor's stock for cash; that they sold the stock within a 6-months period at a profit in the neighborhood of $1,000,000.Jurisdiction of such action is dependent upon ownership of 10% of the debtor's stock by an association or syndicate made up of Abrams, Schindler and their wives.

The order directing the settlement was entered upon the filing of an "Application of Trustee for Instructions and/or Authority to Settle" and after a hearing held on September 2, 1960, upon notice to the parties of record but not on general notice to the debtor's creditors and stockholders.

Other than the trustee and his attorneys, appearances at the hearing included representatives of the Securities and Exchange Commission, the Creditors' Committee, Servel Company(the largest general creditor), general creditors and Bankers Life and Casualty Company.The Stockholders' Committee, appellants in No. 16,622, was not represented although its counsel received notice.

In his application for instructions with reference to the Abrams offer of settlement (which included a report to the court), the trustee stated that he"has not come to any conclusion as to whether the proffered settlement should be accepted; * * * but collection of the judgment appears to be an uncertainty and the trustee appears to lack adequate funds to pay for services already rendered and has no right to command the attorneys to expend their time and efforts hereafter without any certain prospect of payment."Neither the trustee nor any of his counsel affirmatively recommended the proposed settlement.The trustee's written application asked, inter alia:

"3.Shall the trustee accept Abrams\' offer of settlement, and if not, how shall he compensate his attorney for future services in defending and collecting the judgments?

"4.Speaking generally, what shall be the course to be taken in the estate of the future in view of the limited funds available with certainty to the trustee?"

The trustee also requested the court to fix a date for a hearing thereof, direct that notice of such hearing be given to the parties of record, and that at the hearing the views of those interested should be solicited and the trustee instructed how to proceed with respect to the matters therein raised.

At the hearing, no testimony was introduced but the trustee's verified application and report was considered and his local counsel, as well as his New York counsel, made statements.Counsel for some creditors expressed themselves as being in favor of accepting the Abrams offer of settlement but counsel for the appellantCreditors' Committee thought that "it should be further explored, * * as to the assets of Mr. Abrams, if they are available to the trustee of this estate."The Securities and Exchange Commission objected to the Abrams settlement, suggested examining Abrams and making further investigations in an effort to locate his assets.The Commission further objected to the settlement on the ground that it was not clear whether the covenant not to sue Abrams on the short swing profits action might not be raised as a defense by the other defendants therein who were allegedly financially able to respond to a substantial judgment if one were obtained against them.It was further suggested, in answer to the trustee's query as to how he could compensate his attorney for future services in defending and collecting the judgment, that an effort be made to arrange for the continuance of such work on a contingent fee basis.After hearing counsel, the court stated:

"It is the view of the Court that because of the uncertainty of the whole situation, that the Abrams\' settlement should be accepted, provided it can be without prejudice to the claim of Mr. Purcell."Undoubtedly the court there meant Mr. Schindler.

The court also stated:

"* * * We have distributed so much that we now

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