Brown v. Gerdes

Citation88 L.Ed. 659,64 S.Ct. 487,321 U.S. 178
Decision Date07 February 1944
Docket NumberNo. 183,183
PartiesBROWN et al. v. GERDES et al
CourtUnited States Supreme Court

Mr. William C. Scott, of New York City, for petitioners.

Mr. John Gerdes, of New York City, for respondents.

Mr. Justice DOUGLAS delivered the opinion of the Court.

The question in this case is whether the New York court or the federal bankruptcy court has the power to fix the fees of petitioners who as attorneys represented the bankruptcy estate in litigation in the state courts. The New York Court of Appeals held that that jurisdiction rested exclusively in the bankruptcy court. 290 N.Y. 468, 49 N.E.2d 718. The case is here on a petition for writ of certiorari which we granted because of the importance of the problem under the Bankruptcy Act.

In January, 1939, a petition for reorganization of Reynolds Investing Co., Inc. was approved under Ch. X of the Bankruptcy Act. 52 Stat. 883, 11 U.S.C. § 501 et seq., 11 U.S.C.A. § 501 et seq. In August, 1938, while the petition was pending but before its approval, the bankruptcy court authorized the debtor to commence an action in the New York courts to enforce and collect certain claims which the debtor had against its former officers and directors. See Gerdes v. Reynolds, Sup., 28 N.Y.S.2d 622. It also authorized retention of petitioners as counsel in the suit. After the approval of the petition the respondent trustees were authorized to prosecute the action and to be substituted as plaintiffs. That was done; and other actions were instituted by the trustees under order of the bankruptcy court with petitioners as counsel. In 1941 before final judgments were obtained in any of the suits, the trustees discontinued petitioners' services. Thereafter petitioners, pursuant to a stipulation1 which reserved respondents' right to question the jurisdiction of the state court, instituted this suit in that court to fix and enforce their liens on the actions under § 475 of the New York Judiciary Law, Consol.Laws N.Y. c. 30.2 Respondents' objection to the ju- risdiction of the state court was overruled, the value of petitioners' services determined and the liens fixed. Those orders were affirmed by the Appellate Division (264 App.Div. 852, 36 N.Y.S.2d 420) but reversed by the Court of Appeals. And as we read the opinion of that court the basis of its decision was that 'exclusive jurisdiction' to fix these fees was in the bankruptcy court (290 N.Y. pages 472, 473, 475, 49 N.E.2d pages 719, 720), not that New York as a matter of local law or policy would not undertake to fix them because of the special circumstances of this case.

We agree with the Court of Appeals that the power to determine the amount of these fees rests exclusively in the bankruptcy court.

Sec. 77B, like § 77 of the Bankruptcy Act, 11 U.S.C.A. §§ 207, 2053 had as one of its purposes the establishment of more effective control over reorganization fees and expenses (Dickinson Industrial Site, Inc. v. Cowan, 309 U.S. 382, 388, 60 S.Ct. 595, 599, 84 L.Ed. 819; Callaghan v. Reconstruction Finance Corp., 297 U.S. 464, 469, 56 S.Ct. 519, 521, 80 L.Ed. 804) in recognition of the effect which a depletion of the cash resources of the estate may have on both the fairness and feasibility of the plan of reorganization. United States v. Chicago, Milwaukee, St. P. & P.R. Co., 282 U.S. 311, 333-340, 51 S.Ct. 159, 165-168, 75 L.Ed. 359 (dissenting opinion). And Ch. X of the Chandler Act which took the place of § 77B set up even more comprehensive supervision over compensation and allowances (H. Rep. No 1409, 75th Cong., 1st Sess., pp. 45, 46) and provided a centralized control over all administration expenses, of which lawyers' fees are a part. Watkins v. Sedberry, 261 U.S. 571, 43 S.Ct. 411, 67 L.Ed. 802. Sec. 241, 11 U.S.C.A. § 641, gives the judge authoity to fix 'reasonable compensation for services rendered' by various persons, including attorneys for the trustees. Allowances may be made only after hearing and upon notice to specified persons and groups of persons. § 247, 11 U.S.C.A. § 647. Where the reorganization supersedes a prior proceeding in either the federal or state court the bankruptcy court is the one which is authorized to allow the 'reasonable costs and expenses incurred' in the prior proceeding. § 258, 11 U.S.C.A. § 658. In all cases persons who seek compensation for services or reimbursement for expenses are held to fiduciary standards. § 249, 11 U.S.C.A. § 649; Woods v. City National Bank & Trust Co., 312 U.S. 262, 267—269, 61 S.Ct. 493, 496, 497, 85 L.Ed. 820. And § 250, 11 U.S.C.A. § 650 contains special appeal provisions governing orders granting or denying allowances. Dickinson Industrial Site, Inc. v. Cowan, supra. Moreover, a plan of reorganization must provide 'for the payment of all costs and expenses of administration and other allowances which may be approved or made by the judge.' § 216(3), 11 U.S.C.A. § 616(3). In addition the plan must provide, in furtherance of the purpose of the Act to protect the security holders against previous acts of mismanagement and to preserve all assets of the estate (S. Rep. No. 1916, 75th Cong., 3d Sess., p. 22; H. Rep. No. 1409, supra, pp. 42-44), for retention and enforcement by the trustee of all claims of the debtor or the estate not settled or adjusted in the plan. § 216(13). Finally, § 221(4), 11 U.S.C.A. § 621(4) provides that in approving any plan the judge must be satisfied that 'all payments made or promised' by the debtor, the new company, or any other person 'for services and for costs and expenses' are not only fully disclosed but 'are reasonable or, if to be fixed after confirmation of the plan, will be subject to the approval of the judge.'

Thus Ch. X not only contains detailed machinery governing all claims for allowances from the estate. It also requires the plan to contain provisions for the payment of all allowances and places on the judge the duty to pass on their reasonableness. The approval of the plan of reorganization has been entrusted to the bankruptcy court exclusively. Even reports on plans submitted by the Securities and Exchange Commission are 'advisory only'. § 172, 11 U.S.C.A. § 572. It could hardly be contended that the bankruptcy court might dispense with the finding required by § 221(2) that the plan is 'fair and equitable, and feasible' and confirm the plan on another basis or delegate the task to another court or agency. See Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 114, 115, 60 S.Ct. 1, 6, 7, 84 L.Ed. 110; Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982. But if that cannot be done, it is difficult to see how a plan could be confirmed which left the approval of certain allowances to a state court. The finding as to allowances required by § 221(4) is as explicit and as mandatory as the finding of 'fair and equitable, and feasible' required by § 221(2). On each Congress has asked for the informed judgment of the bankruptcy court, not another court or agency. In the present case the plan of reorganization which was approved in 1940 gave the trustees full power to retain or displace attorneys representing them; and it retained in the bankruptcy court continuing jurisdiction over all claims in favor of the debtor and the prosecution thereof. And in accordance with the express requirements of § 241(3) it left to the bankruptcy court the power to fix the 'reasonable compensation' to be paid the attorneys of the trustees. Those requirements, prescribed by the Act, cause any conflicting procedure in the state courts to give way.4 Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370. The jurisdiction which Congress has conferred on the bankruptcy court is paramount and exclusive. Gross v. Irving Trust Co., 289 U.S. 342, 53 S.Ct. 605, 77 L.Ed. 1243, 90 A.L.R. 1215. Thus the supervention of bankruptcy deprives a state court, in which a receivership was pending, of power to fix the compensation of the receivers and their counsel who were appointed by the state court and who rendered service in the state proceedings. Gross v. Irving Trust Co., supra; Emil v. Hanley, 318 U.S. 515, 519, 63 S.Ct. 687, 689.

Sherman v. Buckley, 2 Cir., 119 F.2d 280, which arose in ordinary bankruptcy, is relied upon for the contrary conclusion. In that case an action brought by the bankrupt had been pending in the state court for seven years before the adjudication in bankruptcy. The trustee obtained the consent of the bankruptcy court to allow the action to be prosecuted in the state court on behalf of the estate and to substitute attorneys other than those retained by the bankrupt. It was held that the state court could require as a condition upon the substitution the liquidation of the New York charging lien of the displaced attorneys. Whether that case was correctly decided on its facts we need not stop to inquire. It is sufficient to say that it does not state the correct rule of law under Ch. X of the Act.

It is said, however, that § 77B rather than Ch. X measures the jurisdiction of the bankruptcy court since the main suit was instituted in the state court prior to the effective date of Ch. X, September 22, 1938. See § 7, 11 U.S.C.A. § 25. But the short answer is that the petition was approved after that date and the provisions of Ch. X were thus brought into play.5 It is suggested that since § 23 of the Act6 was applicable to reorganizations under § 77B but inapplicable7 to those under Ch. X (§ 102, 11 U.S.C.A. § 502), there was a greater limitation on the jurisdiction of the bankruptcy court over plenary suits at the time the main suit was instituted than there was after Ch. X became effective.8 From that it is argued that since Congress left the enforcement of such claims to the state courts, it permitted them to control all incidents of the litigation including the fixing of attorneys' liens. Sec. 23 deals with questions of the jurisdiction of federal district...

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