Finn v. Childs Co.

• Decision Date: 05 April 1950
• Docket Number: Docket 21521.,No. 147,147
• Citation: 181 F.2d 431
• Parties: FINN et al. v. CHILDS CO.
• Court: U.S. Court of Appeals — Second Circuit

181 F.2d 431 (1950)

FINN et al. v. CHILDS CO.

No. 147, Docket 21521.

United States Court of Appeals Second Circuit.

Argued February 27, 1950.

Decided April 5, 1950.

COPYRIGHT MATERIAL OMITTED

Ben A. Matthews, of New York City (Harper & Matthews, Vincent P. Uihlein, and Cornelius D. Crowley, Jr., all of New York City, on the brief), for respondent-appellant.

George Zolotar, Special Counsel, Securities and Exchange Commission, of New York City (Roger S. Foster, General Counsel, David Ferber, of Washington, D. C., and Lawrence M. Greene, Special Counsel, Securities and Exchange Commission, of Philadelphia, Pa., Richard V. Bandler, of New York City, and C. Eugene Webb, of Washington, D. C.), for Securities and Exchange Commission.

Joseph Lorenz, of New York City (Lorenz, Finn & Lorenz, of New York City, on the brief), for trustee-appellee John F. X. Finn and appellee Lorenz, Finn & Lorenz.

William P. Palmer, of New York City (Root, Ballantine, Harlan, Bushby & Palmer, L. Robert Driver, Jr., and Adam Yarmolinsky, all of New York City, on the brief), for appellees Everett Frank and William S. Hernon.

Samuel Masia, of New York City (Archibald Palmer, of New York City, appellee pro se), for appellee Archibald Palmer.

Harold P. Seligson, of New York City (Marshall, Bratter, Seligson & Klein, of New York City, on the brief), for appellees Protective Committee for Debentures and Marshall, Bratter, Seligson & Klein.

Hoch Reid, of New York City (Ehrich, Royall, Wheeler & Holland and Ralph Royall, all of New York City, on the brief), for appellee Ehrich, Royall, Wheeler & Holland.

Karelsen, Karelsen & Rubin, of New York City, for appellee Bernard Reis and Co.

Abraham K. Weber, of New York City, appellee pro se.

Holmes, Rogers & Carpenter, of New York City (Charles P. Rogers and Oliver C. Carpenter, both of New York City, of counsel), for appellees Thompson Preferred Stockholders' Committee.

Hetkin, Jervis & Hetkin, of New York City (Alfred H. Hetkin and Herman Jervis, both of New York City, of counsel), appellees pro se.

Levin & Weintraub, of New York City (Benjamin Weintraub, of New York City, of counsel), for appellees New York Credit Men's Association and pro se.

Bergerman & Hourwich and Samuel A. Mehlman, both of New York City (Milton M. Bergerman, of New York City, of counsel), for appellees McMeekan Committee and Bergerman & Hourwich and Samuel A. Mehlman pro se.

Karelsen, Karelsen & Rubin and Paul J. Kern, all of New York City (Morton G. Rosenberg, of New York City, of counsel), for appellees Durrell Preferred Stockholders Committee and Karelsen, Karelsen & Rubin and Paul J. Kern pro se.

Weinstein & Levinson, of New York City (Frank Weinstein and Samuel J. Levinson, both of New York City, of counsel), appellees pro se.

Murphy, Block, Sullivan & Sawyer, of New York City (John Dwight Sullivan, of New York City, of counsel), for appellees

Common Stockholders' Committee and Murphy, Block, Sullivan & Sawyer pro se.

Before CLARK, GOODRICH, and FRANK, Circuit Judges.

CLARK, Circuit Judge.

On petitions of various parties the district court granted final allowances for counsel fees and expenses of $964,439.36 in the proceedings for the reorganization of Childs Company under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. Acting upon leave granted by this court, Childs Company, the reorganized debtor, has appealed from awards amounting to $954,350; it asks no review of items allowed in reimbursement of expenses — $6,627.10 — or of two other minor awards to the Indenture Trustee and its attorneys amounting to $4,462.26. It urges as to the items appealed from that the awards should not exceed $600,000; while the Securities and Exchange Commission, appearing by virtue of § 208 of the Act, 11 U.S.C.A. § 608, and taking the same position it took below, urges that these awards should not exceed $750,000.

The reorganization was commenced by voluntary petition on August 26, 1943, and completed by the consummation of a plan on March 31, 1948 — a period of four years and seven months. The filing of the voluntary petition followed immediately upon the dismissal by the court of an involuntary petition which had been filed against it. See In re Childs Co., D.C.S.D.N.Y., 52 F. Supp. 89. The court appointed as trustee Mr. John F. X. Finn, well-known lawyer, author, and teacher; and he selected as his counsel his law firm of Lorenz, Finn & Lorenz upon the understanding that allowances would not be shared. The debtor had operated a chain of medium-priced restaurants, numbering 77 in 1943, and had made some unfortunate real estate acquisitions. The trustee was immediately active in securing modification of many burdensome leases of real estate and in the readjustment of mortgages and sales of property. Several of these matters have been heard upon appeal. 415 Fifth Ave. Co. v. Finn, 2 Cir., 146 F.2d 592, certiorari denied Finn v. 415 Fifth Ave. Co., 325 U.S. 856, 65 S.Ct. 1185, 89 L.Ed. 1976; Meighan v. Finn, 2 Cir., 146 F.2d 594, affirmed Finn v. Meighan, 325 U.S. 300, 65 S.Ct. 1147, 89 L.Ed. 1624; Finn v. 415 Fifth Ave. Co., 2 Cir., 153 F.2d 501, certiorari denied 415 Fifth Ave. Co. v. Finn, 328 U.S. 838, 66 S.Ct. 1014, 90 L.Ed. 1614; In re Childs Co., 2 Cir., 163 F.2d 379. The trustee also took action against former officers of the company, obtaining a settlement of certain of his claims and pressing to a lengthy trial an action (not yet decided) involving other claims. So far as concerns conflicts among creditors and various classes of security holders, the reorganization seems to have been unusually free of controversy. Because of high wartime earnings and these activities of the trustee it soon became apparent that all creditors would be paid in full with a substantial equity for the stockholders. Developing a satisfactory plan of reorganization was somewhat more troublesome. The first plan approved by the district court, a capitalization entirely of common stock, divided 76.7% to holders of old preferred stock and 23.3% to holders of the old common stock, was defeated by vote of the common stockholders. A subsequent plan, involving issuance of both preferred and common stock, with voting power divided roughly 75% to the old preferred, and 25% to the old common, stockholders, was approved by both classes and eventually consummated.

The value of the new company, as found by the district judge for purposes of both plans, was $9,980,000; this estimate was based on predicted future earnings, and the history of the company since reorganization suggests that it may have been unduly optimistic. The equity value shown on the trustee's books on the day of consummation, reflecting revaluation of assets made by court-appointed appraisers, was $6,001,762. Even this figure was more liberal than the valuation made by traders on the stock exchanges.

The claims for allowance of the twenty-four parties now before us totaled $1,417,300. The allowances as made included $182,500 to the trustee and $535,000 to his counsel, $85,500 to eleven different representatives of creditors, $104,350 to seven different representatives of preferred stockholders, and $47,000 to four different representatives of common stockholders.¹ In addition to this total of $954,350 and the other small allowances noted above which are not under review there were other expenses incurred in the reorganization of $180,662.76, a grand total of $1,145,102.12 or more than 26% of the net income of $4,329,472 received during the reorganization. This was in addition to the salaries of the debtor's administrative and executive staff, retained in full by the trustee except for the one office of Chairman of the Board. The aggregate salaries of these officials ranged from $62,500 to $87,600 a year. In addition a special attorney handling labor problems was continued in the employ of the debtor at an annual retainer of $20,000. It may be noted that the amounts granted as allowances far exceed the trustee's estimate of the reorganization expenses in the two plans presented — $350,000 in the first plan and $400,000 in the plan finally confirmed — beyond interim allowances to him and his counsel which had reached $231,000 by the time of the latter plan.

The fixing of allowances has been called "the most thankless and delicate task in all of the problems of judicial reorganization," Frank, Epithetical Jurisprudence and the Work of the Securities and Exchange Commission in the Administration of Chapter X of the Bankruptcy Act, 18 N.Y.U.L.Q. Rev. 317, 349-50, 1941, and "one of the most disagreeable and perplexing tasks which falls to the lot of a District Judge," Silver v. Scullin Steel Co., 8 Cir., 98 F.2d 503, 506. Recognizing this, and recognizing, too, the peculiar advantage which the district judge has by virtue of his intimate knowledge of the whole history of the reorganization, appellate judges can come to the conclusion that the lower court has exceeded its discretion in granting allowances only with the greatest reluctance. That must be peculiarly so here where the reorganization was concededly successful. Nevertheless we cannot ignore the fact that the fees allowed amount to ten per cent of the estate upon the value originally set, and much more, even approaching twenty per cent, on the debtor's claims of value at the close of the reorganization. Even in a small estate such a division of capital would seem large; in an estate of millions we can view it only as princely. We have often been admonished by the Supreme Court that in allowances of this sort we must avoid "vicarious generosity," In re Gilbert, 276 U.S. 294, 48 S. Ct. 309, 72 L.Ed. 580, and that "the desire to reduce the cost of reorganization was one of the controlling reasons for the enactment" of the bankruptcy statutes. Callaghan v. Reconstruction Finance Corp., 297 U.S. 464, 469, 56 S.Ct. 519, 521, 80 L.Ed. 804; Realty Associates Securities Corp. v. O'Connor, 295 U.S. 295, 299, 55 S.Ct....