Continental Vending Mach. Corp., In re

• Decision Date: 22 September 1976
• Docket Number: 1419,Nos. 1015,D,s. 1015
• Citation: 543 F.2d 986
• Parties: In re CONTINENTAL VENDING MACHINE CORP. and Continental Apco, Inc., Debtors. JAMES TALCOTT, INC., Appellant, v. Irving L. WHARTON, Trustee, Appellee. ockets 75-5025, 75-5026.
• Court: U.S. Court of Appeals — Second Circuit

Page 986

543 F.2d 986

In re CONTINENTAL VENDING MACHINE CORP. and Continental Apco, Inc., Debtors JAMES TALCOTT, INC., Appellant, v. Irving L. WHARTON, Trustee, Appellee.

Nos. 1015, 1419, Dockets 75-5025, 75-5026.

United States Court of Appeals, Second Circuit.

Argued May 10, 1976.

Decided Sept. 22, 1976.

J. Jacob Hahn, New York City (Hahn, Hessen, Margolis & Ryan, Julius J. Abeson, New York City, of counsel), for appellant.

Joseph J. Marcheso, New York City (Morton J. Schlossberg, New York City, of counsel), for appellee.

Before KAUFMAN, Chief Judge, and MANSFIELD and SMITH, Circuit Judges.

MANSFIELD, Circuit Judge:

This appeal raises more issues in the seemingly interminable Chapter X bankruptcy reorganization of Continental Vending Machine Co. (Continental) and its subsidiary Continental Apco, Inc. (Apco) (herein collectively referred to as "debtors"), which has spawned a series of controversies between the reorganization trustee and James Talcott, Inc. (Talcott), a secured creditor, resulting in several earlier decisions here and in the Eastern District of New York. ¹ The present controversy arises Talcott here appeals that order, claiming that the standards to determine the compensability of legal services and other expenses incurred by Talcott were erroneous, that the district court committed reversible error in disregarding factual findings of the special master, and that because Judge Mishler had served as witness in another phase of the bankruptcy proceeding he should have disqualified himself under 28 U.S.C. § 455. We agree that erroneous standards were applied and accordingly reverse and remand for a recomputation of allowable attorneys' fees. We reject Talcott's other contentions except to suggest that, while § 455 does not mandate Judge Mishler's disqualification, he might nevertheless consider whether the appearance of justice would not be better served if another judge were to undertake the recomputation.

out of Talcott's filing of a proof of claim in the bankruptcy proceedings for reimbursement of legal and accounting fees pursuant to security agreements entered into between Talcott and the debtors prior to bankruptcy. After referring the issue to Magistrate Vincent A. Catoggio as a special master and receiving his report, Chief Judge Jacob Mishler entered an order substantially reducing the fees that had been approved by the master.

Since much of the background of the controversy is detailed in our earlier decisions (see 491 F.2d 813, 814-18; 517 F.2d 997) we here limit ourselves to a brief summary. Until institution of the current Chapter X bankruptcy proceedings in 1963 Continental and its subsidiary Apco were in the business of manufacturing and operating vending machines. Financing for their operations was provided principally by Talcott under loan agreements of the "dragnet" type commonly used by factors, which specified that all sums which were or might become owing under the agreements would be secured by liens on assets of the respective debtors and that in the event of default Talcott would be entitled to collect, in addition to principal and interest owing, all costs and expenses, including reasonable attorneys' fees, incurred to enforce payment of the obligations or in the prosecution or defense of any litigation growing out of the agreements or obligations. Upon the present appeal Talcott relies upon these agreements as the basis for its claim for reimbursement for legal services and other expenses incurred in proceedings related to the ensuing bankruptcy, which we briefly summarize.

In 1963 investigations by the Internal Revenue Service and the Securities and Exchange Commission led to appointment of a conservator for Continental. At that point Talcott, which was owed approximately $3.5 million by Continental and $2 million by Apco, began liquidating the security behind its loans to Continental. At the same time it advanced working funds to Continental, secured by conservator's certificates, as a means of enabling the latter to continue in operation as a going concern. Funds secured under the original loan agreements were also advanced to Apco for working capital. An involuntary petition for the reorganization of Continental under Chapter X of the Bankruptcy Act was filed in the United States District Court for the Eastern District of New York on July 10, 1963, and approved by Judge Mishler on July 12, 1963.

Talcott meanwhile obtained an offer from Silco Automatic Vending Company (Silco) for the sale to it of three major vending machine routes owned by Continental, all elements of which were subject to Talcott's lien except for route inventory, which was held free and clear by Continental. At the same time, Continental's trustees requested a further loan from Talcott of $650,000, stating that otherwise they would be forced to shut down operations, which would reduce the value of the routes in which Talcott held security interests. Talcott refused, offering to advance only $100,000, and insisted that the sale of the three routes be brought before the court immediately. There followed on August 14, 1963, a meeting with Judge Mishler, which resulted in an agreement by the parties, approved by the court, to the effect that In October, 1963, a petition for the reorganization of Apco under Chapter X of the Bankruptcy Act was filed in the Eastern District of New York and approved by the court. The history thereafter is one of more loans by Talcott to the two companies in reorganization, secured by both the Silco reserve and the trustees' certificates and subject to the condition that the trustees would waive objections to certain of Talcott's liens which the trustees had threatened to raise.

the trustees would sell the six routes in which Talcott held security interests and would turn over the resulting funds to Talcott as its disbursing agent towards satisfaction of Continental's obligations to Talcott, in return for which Talcott would advance funds to Apco, secured both by the resulting funds and by certificates to be issued by Continental's trustees. On September 9, 1963, three of the routes were sold to Silco, producing a fund held by Talcott and known as the "Silco reserve."

On June 23, 1969, the remaining Continental trustee (one of the two trustees had resigned) filed a reorganization plan proposing in part that all unsecured claims of both Continental and Apco be treated on a consolidated basis so that the assets of each company could be used to satisfy the unsecured claims of the other. Talcott opposed the plan and appealed Judge Mishler's order approving a modified version of it on the ground that it discriminated against secured creditors by not including them in the consolidation. We upheld the plan. 517 F.2d 997 (1975).

We now come to Talcott's claims for reimbursement of legal fees and expenses, which are the subject of this appeal. In all of the above proceedings and in many other minor proceedings and transactions also related to the bankruptcy, Talcott participated and was represented by counsel. Talcott claims that all such attorneys' fees were covered by the terms of the original security agreements providing for reimbursement of enforcement and collection expenses. In a petition filed with the district court on September 25, 1972, Talcott requested repayment of all outstanding trustee's and conservator's certificates out of assets held by Continental's trustee, which would leave the Silco reserve in its possession free to be applied toward payment of Talcott's secured claims and enforcement expenses.

The trustee opposed the motion, claiming that under the August 14, 1963 agreement, the certificates must be satisfied out of the Silco reserve held by Talcott, and countermoved for an order directing Talcott to file an accounting of all of the moneys it had received on its security. In an order dated February 13, 1973, Judge Mishler denied Talcott's petition and granted that of the trustee. Talcott filed an accounting and appealed. We held that the August 14, 1963 agreement was ambiguous as to whether it required that the Silco reserve be used to satisfy Continental's obligations to Talcott (including reimbursement of legal expenses ), as distinguished from conservator's or trustee's certificates, and that an evidentiary hearing must be held to determine its meaning. Equally important for present purposes, we further held that Talcott would have to obtain the district court's approval for any reimbursement for legal fees. 491 F.2d 813 (1974).

Upon remand, Judge Mishler directed Talcott to file its proof of claim for such reimbursement, which was done. Judge Mishler disqualified himself from presiding over the hearing to determine the meaning of the August 14, 1963 agreement, however, on the ground that he had previously expressed an opinion regarding its proper outcome. He subsequently agreed to testify and did testify on behalf of Continental's trustee in the hearing before the late Judge Orrin G. Judd, who upheld Talcott's position, thus freeing the Silco reserve for application toward payment of Continental's obligations under its earlier security agreements with Talcott, including any obligation to reimburse Talcott for legal fees and expenses incurred by it to enforce payment under those agreements.

With respect to Talcott's claim for attorney's fees and other expenses, to which the At the hearing before the master, only Talcott offered evidence, including the testimony of Jacob Hahn, Esq., of the firm of Hahn, Hersen, Margolis and Ryan, which had been paid $267,490 by Talcott for services and disbursements, Frederick Ballon, Esq., an attorney specializing in bankruptcy practice, who testified as to the reasonable value of the services rendered by Mr. Hahn's firm, and voluminous exhibits, including records of the various proceedings and of the negotiations relating to Continental in which the Hahn firm had participated over the years back...