Chicago, Milwaukee, St. Paul and Pac. R. Co., Matter of, 86-2713

• Decision Date: 22 February 1988
• Docket Number: No. 86-2713,86-2713
• Citation: 840 F.2d 1308
• Parties: Bankr. L. Rep. P 72,210 In the Matter of CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD CO., Debtor. Appeal of STICKNEY CORPORATION and David D. Rosenstein, Applicants-Appellants, v. CHICAGO MILWAUKEE CORPORATION and the Debtor, Objectors-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1308

840 F.2d 1308

Bankr. L. Rep. P 72,210

In the Matter of CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD CO., Debtor Appeal of STICKNEY CORPORATION and David D. Rosenstein Applicants-Appellants, v. CHICAGO MILWAUKEE CORPORATION and the Debtor, Objectors-Appellees.

No. 86-2713.

United States Court of Appeals, Seventh Circuit.

Argued June 2, 1987.

Decided Feb. 8, 1988.

As Amended Feb. 22, 1988.

David D. Rosenstein, Law Office of David D. Rosenstein, Chicago, Ill., for applicants-appellants.

Barry Levenstam, Jenner & Block, Chicago, Ill., for objectors-appellees.

Before BAUER, Chief Judge, COFFEY, Circuit Judge, and ESCHBACH, Senior Circuit Judge.

COFFEY, Circuit Judge.

Attorney David D. Rosenstein appeals from a district court order denying his application for attorney's fees to compensate him for his work on the bankruptcy court supervised reorganization of the Chicago, Milwaukee, St. Paul and Pacific Railroad Company. We affirm.

I.

This case has its genesis in the reorganization of the Chicago, Milwaukee, St. Paul and Pacific Railroad Company (the "Milwaukee Road") commenced in the United States Bankruptcy Court for the Northern District of Illinois in 1977. Initially, attorney Rosenstein participated in litigation against the Milwaukee Road during 1968, representing the preferred shareholders of the Milwaukee Road before the Interstate Commerce Commission in two class action lawsuits challenging another corporation's (Northwest Industries) offer to exchange its preferred stock for Milwaukee Road's preferred stock. Among the shareholders he represented was Morton Weinress, a Chicago investment banker who individually had substantial holdings in the securities of the Milwaukee Road and at the same time acted as a financial advisor to other investors who held substantial interests in railroad securities.

In 1975, Weinress, who was acting as the class representative of debenture holders of the Milwaukee Road, in a federal class action lawsuit referred to as the McDonald litigation (named after one of the plaintiff/debenture holders) to force the railroad to pay interest on its income debentures, once again retained Rosenstein. The district court approved a settlement in the lawsuit (1977). McDonald and some of the other plaintiffs objected to and appealed the court-approved settlement on the ground that Weinress had a conflict of interest based upon his acting in the dual capacity as class representative of debenture holders and also as an individual owner of both stock and debenture securities of the railroad. We affirmed the settlement, McDonald v. Chicago Milwaukee Corporation, 565 F.2d 416 (7th Cir.1977), and approved an award of attorney's fees to Rosenstein of $225,000. Because the Milwaukee Road did not pay the attorneys fees before the railroad filed for bankruptcy on December 19, 1977, Rosenstein filed as a creditor of the estate. The proposed plan of reorganization, filed on March 31, 1983, included a provision for the payment of 5% interest on the claims of trade creditors.

In 1981, Rosenstein proposed to Basil Vasiliou, an investor associated with a company named Bronstein Factors, Inc., that Vasiliou purchase Rosenstein's McDonald claim at a discount. Vasiliou decided against purchasing the claim, but in June of 1981 he and one of his associates joined Rosenstein and Weinress in forming the Stickney Corporation for the express purpose of acquiring "trade creditor" claims against the debtor. ¹ At the time of the incorporation, each of the four investors initially purchased 25% of Stickney's stock for $5,000. Some time later, in December of 1981, the four investors were called upon at this time to loan money to the corporation, and each of them loaned the Stickney Corporation $20,000 for a total investment of $25,000 by each investor.

On May 1, 1982, the Stickney Corporation redeemed the interests held by Vasiliou and his associate, and cancelled their $20,000 notes in exchange for about half of the trade creditor claims Stickney had acquired. After May 1, 1982, Rosenstein and Weinress were the only remaining shareholders of the Stickney Corporation each holding a 50% interest. After Weinress suffered a stroke in January of 1983, he executed a general power of attorney in favor of his wife Jane Weinress. Mr. Weinress died a year later in January, 1984.

Some time during May, 1983, in what the parties agree was an undocumented transaction, the Stickney Corporation repurchased Weinress's stock and Rosenstein became Stickney's president, sole director, and sole shareholder. Although Rosenstein is uncertain exactly when in May, 1983 this transaction occurred, the company's May 20, 1983 annual report listed him not only as Stickney's president but also as the sole director.

Rosenstein testified that in early 1983, the Stickney Corporation (Rosenstein owned a 50% interest), in an attempt to obtain an increased interest rate from the debtor on its trade creditor claims, retained Rosenstein. Jane Weinress, now acting on behalf of her husband pursuant to her general power of attorney, signed the written retainer agreement (drafted by Rosenstein in letter form). The retainer agreement provided that Rosenstein would not only work on behalf of the Stickney Corporation to obtain a higher rate of interest on its trade creditor claims, but "also on behalf of the entire class of trade creditor claimants...." Rosenstein's agreement also recited: (1) the provisions of the pending reorganization plan dealing with the payment of trade creditor claims, (2) that contesting the proposed rate of interest would be time consuming, and (3) that Stickney may attempt to seek reimbursement from the bankruptcy estate if its efforts to obtain a higher rate of interest for trade to creditors was deemed beneficial to the reorganization. The letter continued:

"While you (Rosenstein) should maintain records of your time, notwithstanding the time spent, you will be paid by Stickney: (a) not more than $15,000 during the balance of the calendar year 1983, (b) not more than $15,000 during 1984, and (c) in total, not more than the greater of either (i) $50,000, or (ii) one-half of the amount that Stickney actually collects on its claims less the amount that Stickney would have collected on such claims if the 5% simple interest rate proposed in the plan was approved."

In an obvious attempt to allow him to represent other trade creditor claimants, the letter also contained a provision authorizing him to do so, but stating that in such a situation, "it is expected that they (other trade creditors) will bear a pro-rata share of your fees and costs."

Pursuant to his retainer agreement, Rosenstein began to participate in the Milwaukee Road reorganization proceedings in May of 1983. Rosenstein testified before the special master that Stickney engaged his services for the purpose of "seek[ing] to obtain a higher rate of interest for the claims of trade creditors." At some time during 1985, another trade creditor, Bronstein Factors, retained Rosenstein for the same purpose as Stickney: to gain a higher rate of interest on its trade claims against the Milwaukee Road. Bronstein received $1,036,184 from the railroad when its claims and interest were paid in October 1985.

Between January and May, 1982, the Stickney Corporation went about soliciting and eventually purchasing approximately $370,000 worth of trade creditor claims against the Milwaukee Road from approximately sixty-five trade creditors at substantial discounts. Overall, the Stickney Corporation paid 23% of the face value, or approximately $86,000 for the claims purchased during this six-month period. Stickney continued to purchase discounted trade creditor claims through April 24, 1984. After signing the retainer agreement in May of 1983, Stickney purchased claims with a face value of more than $80,000 for approximately $25,000.

On February 19, 1985 the district court approved the sale of the Milwaukee Road to the Soo Line. In April, 1985 Rosenstein met with counsel for the trustee, the Chicago Milwaukee Corporation, and Pullman Leasing, another trade creditor, to discuss the possible settlement of the interest rate issue. In June, 1985, the parties reached a settlement providing for an interest rate of 7.5% until February 19, 1985, and 8.5% after that date. The district court confirmed the amended 1985 plan of reorganization which included these interest rate increases, and entered an order implementing the plan on July 29, 1985. In accordance with the terms of their retainer agreement, the Stickney Corporation paid Rosenstein (the lawyer) a total of $50,000 in attorney's fees and reimbursed him for $4,733.50 in expenses based upon his work in obtaining a higher rate of interest for the Stickney Corporation with respect to its claims against the railroad.

On October 10, 1985, the Milwaukee Road made final payments on trade creditors' claims. The Stickney Corporation received a total of $580,204.22. As the special master in bankruptcy found, Rosenstein's interest in the payment to the Stickney Corporation amounted to approximately $424,000; the remainder of the payment went to the Weinress estate pursuant to Rosenstein's earlier agreement with Mrs. Weinress (to finalize the purchase of her interest in Stickney).

The Stickney Corporation (Rosenstein controlled 100%) and Rosenstein (the lawyer) filed a joint application for attorney's fees on August 5, 1985, seeking compensation from the debtor's estate in the amount of $341,056.05 plus a multiplier of 2 or 3 for legal services rendered by Rosenstein and his law associate, attorney Robert Hurwitz, on behalf of Stickney. In the application, Rosenstein argued that because his legal services on the interest rate issue benefited other trade creditors as well as the bankruptcy estate, he was entitled to have the debtors estate (the bankruptcy estate) pay his legal fees. ²

In his affidavit in support of his ...