In re Alcap Mfg. Co.

Decision Date29 September 1978
Docket NumberCiv. No. H-77-658.
Citation457 F. Supp. 1247
CourtU.S. District Court — District of Connecticut

Edward B. Scott, New Britain, Conn., for appellant.

Abraham S. Albrecht, Hartford, Conn., Schatz & Schatz, Hartford, Conn., for Debtor.

Timothy Sheehan, Rosenzweig, Fagan & Sheehan, New Britain, Conn., for Ahlco Mfg. Co., Inc.

Paul R. Salvage, Bacon, Cohen, Salvage & Fialky, Springfield, Mass., for Creditors' Committee.

Barbara Allen Babcock, Asst. Atty. Gen., Civil Division Dept. of Justice, Washington, D. C., Christine Macaluso, Commercial Litigation Section, Civil Division, Dept. of Justice, Washington, D. C., Richard Blumenthal, U. S. Atty., New Haven, Conn., Carl R. Ajello, Atty. Gen., State of Connecticut, Hartford, Conn., for intervening appellee.


BLUMENFELD, District Judge.

This is an appeal by the New Britain National Bank the Bank, as mortgagee, from an order of the Bankruptcy Judge, dated November 3, 1977, directing the attorney for the debtor in possession under a Chapter XI petition to withhold $19,128.16 from the amount realized on the sale of a parcel of mortgaged real estate as a contribution to the Referees' Salary and Expense Fund established by § 40(c)(4) of the Bankruptcy Act, 11 U.S.C. § 68(c)(4). The appeal is opposed only by the United States Attorney General who has intervened on behalf of the Administrative Office of the United States Courts.

The order in issue arose out of a petition under Chapter XI filed by Alcap Manufacturing Company the debtor on September 13, 1976. The filing of the petition operated automatically "as a stay of the commencement or the continuation of any court . . . proceeding against the debtor . . . to enforce any lien against his property." Bankr.Proc. Rule 11-44(a), 11 U.S.C. App. It does not appear in the record whether the Bank had received notice of this filing and the stay order included therein when, two days later, it instituted proceedings in the state court to foreclose three mortgages it held on the debtor's real property. These state proceedings, however, were halted by the Bank. Three months thereafter, on December 23, 1976, the Bank filed a complaint in the Bankruptcy Court to have the stay lifted.1

A time within which to answer the complaint was set, and trial on the Bank's complaint was scheduled for January 12, 1977. A hearing was held, but no decision was rendered because the Bank and the debtor had arrived at a stipulation. This was reduced to writing, executed, and approved by the Bankruptcy Judge on February 10, 1977. It was filed on February 11. The stipulation provided that the debtor was to make four monthly payments of $4,500 each to apply against his overdue indebtedness, and $1,000 to the Town of Cromwell toward past due taxes on the property to remedy a then-existing default under the mortgages. In the event of the debtor's failure to make the stipulated payments, the agreement provided that "judgment may enter as of course on the Complaint herein filed lifting the stay of any proceeding against the Debtor for the enforcement of the plaintiff's liens and permitting the plaintiff to foreclose its mortgages. . . . (Emphasis added.)"2

When the debtor failed to make the first payment as required by the stipulation, the Bank, on February 28, 1977, filed a motion for judgment pursuant to the stipulation. The general creditors asked to be heard, and a date for a hearing was set.

What happened thereafter is not fully reflected by the record. The Bank's brief on this appeal states that the Bankruptcy Judge suggested that a sale of the mortgaged premises seemed to be desired by all parties, and that the Bankruptcy Court could carry it out. A memorandum in the file, in the handwriting of the Bankruptcy Judge, states cryptically, "Appl. for public sale to be filed and Ordered," and the Bank's motion for judgment was marked "off."

The Bank then filed a complaint for an order designating a proper person to sell the real property securing its mortgages free and clear of all liens except taxes and sewer charges due the town. An appropriate order was issued, and one Nathan B. Sweedler was designated as the auctioneer to sell the property. A public auction was held on May 25, 1977. The highest bid submitted was $630,000. After appropriate adjustments the cash payment amounted to $629,272.00. On May 26, the sale was confirmed. The following expenses were taken as deductions: $13,250.00 as a fee to the auctioneer, $2,704.77 for advertising, $1,000 to the appraiser, for a total of $16,954.77. The debt to the Bank was $612,588.88. What remained from the amount realized after those deductions was $612,317.23. The order being appealed here sought to deduct an additional $19,128.16 as a contribution to the Referees' Salary and Expense Fund. Neither the original plan of arrangement proposed by the debtor, nor any later amended plans, were ever confirmed by the Bankruptcy Judge. Instead, the Chapter XI proceeding was ultimately dismissed, and, on December 1, 1977, the debtor, upon consent, was adjudicated a bankrupt. See 11 U.S.C. § 776(2).3

The order is challenged on the grounds that it is contrary to the law, an abuse of discretion, and inequitable. Each of these contentions will be separately considered.

I. The Law Applied

In support of its argument that as a secured creditor it cannot be charged with any contribution to the Referees' Salary and Expense Fund, the Bank cites In re Myers, 24 F.2d 349, 351 (2d Cir. 1928), where the court stated:

"Finally, the mortgagee's share of the lien is not chargeable with the general expenses of administration of the estate, but only with a ratable proportion of the expenses of sale and of so much else as actually helped to preserve the property or its proceeds. In re Williams' Estate, 156 F. 934 (C.C.A. 9); Seaboard Nat. Bank v. Rogers Milk Products Co., 21 F.2d 414, 417 (C.C.A. 2); Aetna Life Ins. Co. v. Leonard, 186 F. 148 (C.C.A. 5). The amendment of 1910 to section 48d of the Bankruptcy Act (11 U.S.C.A. § 76) did not affect this rule. Gugel v. New Orleans Nat. Bank, 239 F. 676 (C.C.A. 5); Virginia Securities Corp. v. Patrick Orchards, 20 F.2d 78 (C.C.A. 4)."

This rule was reaffirmed in In re Rapid Motor Lines, Inc., 223 F.Supp. 469, 470 (D.Conn.1963), where Judge Timbers (now Circuit Judge) stated:

"If the rule of thirty-five years' standing in this Circuit (In re Myers, supra) is to be changed, that will have to be done by a court in the federal system other than this federal court."

The view of the Second Circuit is not universal. Some courts have adopted an exception to the rule such that "where the lienholder expressly or impliedly consents to a sale free of liens and encumbrances," he should be charged with a proportion of the expenses of administration. This is urged as the preferable rule in 4B Collier on Bankruptcy ¶ 70.99 at 1227-32, and cases cited in n.39 at 1230-32 (14th ed. 1978), and it is apparently the one the Bankruptcy Judge followed. In discussing the problem of allocating costs and expenses incident to a sale of secured property, Collier states at 1224-25,

"Unfortunately, hardly any phase of the bankruptcy law has been plagued with so many inconsistent generalities, irreconcilable rules and principles, disagreements between circuits and even within circuits (apparently without any awareness thereof) and loose, indiscriminate statement of rules and citations of authority."

According to Collier, the root of the confusion among the cases can be traced to the 1910 amendments to § 48 of the Bankruptcy Act, 11 U.S.C. § 76, prior to which receivers and trustees were not entitled to commissions on property distributed to lienholders.

"Although it has been generally admitted that the 1910 amendments to § 48 (as well as earlier amendments to § 40) were intended to furnish only the basis for computing the bankruptcy officers' additional compensation, and not necessarily to determine the source of payment, the presence of such provisions unquestionably influenced some courts in thereafter considering the lienholder's rights with less rigidity."

4B Collier, supra, at 1225-26. See, e. g., Tawney v. Clemson, 81 F.2d 300, 304 (4th Cir. 1936). But the In re Myers court was not so influenced. There, Judge L. Hand relied upon a pre-amendment decision, In re Williams' Estate, 156 F. 934 (9th Cir. 1907). That early case deals with a lienholder who voluntarily came into the bankruptcy court and asked that the property covered by its liens be sold by that court. The court rejected the "voluntariness" distinction adopted by some courts, and relied instead on the importance of the policy of preserving the priority of secured creditors and their immunity from the general costs of administering a bankrupt estate:

"By coming into the bankruptcy court, therefore, the holder of a valid lien upon the estate of a bankrupt comes into an appropriate place and into a court amply able to enforce and protect his rights. By doing so the lienholder waives none of his rights. The enforcement of his lien in another court would entail, upon the proceeds of the property upon which the lien exists, the payment of the appropriate court costs; and so, in the enforcement of such lien in a court of bankruptcy, the proceeds of the property of the bankrupt upon which such lien exists is properly chargeable with the costs of such court appropriate to such enforcement, but with no other or further costs."

In re Williams' Estate, supra, 156 F. at 939.

To make it clear that the amendment to § 48(d) ought not be construed to permit exceptions to these fundamental policies of bankruptcy law, the Myers court cryptically stated:

"The amendment of 1910 to section 48d of the Bankruptcy Act (11 U.S.C.A. § 76) did not affect this rule. Gugel v. New Orleans Nat. Bank, 239 F. 676 (C.C.A. 5 1917) . .

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    ...which we found addressing the specific issue of compensation of auctioneers uniformly agree as well. See In re Alcap Mfg. Co., 457 F.Supp. 1247, 1253 n. 8 (D.Conn.1978); In re Sweet, 23 F.Cas. 543, 544 (E.D.Mich.1874) (No. 13,688); In re Yiesley, 64 B.R. 360, 362 (Bankr.S.D.Tex.1986); and I......

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