In re Brown

• Decision Date: 22 April 1943
• Citation: 49 N.E.2d 718,290 N.Y. 468
• Parties: In re BROWN et al.
• Court: New York Court of Appeals Court of Appeals

290 N.Y. 468

49 N.E.2d 718

In re BROWN et al.

Court of Appeals of New York.

April 22, 1943.

Appeal from Supreme Court, Appellate Division, First Department.

Proceeding in the matter of B. H. Inness Brown and others, individually and as copartners under the name of Kellogg, Emery & Inness Brown. From an order of the Appellate Division of the Supreme Court in the First Judicial Department affirming an order of the court at Special Term, Walter, Justice, overruling objections of John Gerdes and James D. Carpenter, Jr., as trustees of Reynolds Investing Company, Inc., to the jurisdiction of the court, and a further order of Special Term, Walter, Justice, fixing the amounts of attorney's liens, and an order of Special Term, Walter, Justice, denying motion of John Gerdes and James D. Carpenter, Jr., as trustees of Reynolds Investing Company, Inc., to resettle order fixing amount of attorney's liens, 264 App.Div. 852, 36 N.Y.S.2d 420, in which motion for leave to appeal was denied in 265 App.Div. 804,37 N.Y.S.2d 426, John Gerdes and James D. Carpenter, Jr., as trustees of Reynolds Investing Company, Inc., appeal.

Orders reversed and proceeding dismissed.

LEHMAN, C. J., and LOUGHRAN and CONWAY, JJ., dissenting. John Gerdes, of New York City, and James D. Carpenter, Jr., of Jersey City, N. J., for appellants.

John F. Davis, of Philadelphia, Pa., George Zolotar, of New York City, W. Grosby Roper, Jr., of Washington, D. C., and David Ferber, of Philadelphia, Pa., for Securities and Exchange Commission in support of appellant's position.

David Paine, Lawrence S. Greenbaum, Theodore S. Jaffin, and James F. Dwyer, all of New York City, for respondents.

FINCH, Judge.

The question raised by this appeal is whether a State court may fix the fees of attorneys appointed by a Federal court subsequent to the filing of the reorganization petition of a debtor under chapter 10 of the Bankruptcy Act (11 U.S.C.A. s 501 et seq.) to bring suit in a State court upon causes of action constituting assets of the estate of the debtor.

The controversy arose in the course of the administration of the assets of the Reynolds Investing Company, Inc., a debtor, in proceedings then pending under the National Bankruptcy Act in the United States District Court for the District of New Jersey. The reorganization proceeding was commenced under chapter 8 (s 77B) but was continued under chapter 10 after that chapter became effective. Petitioners-respondents, hereinafter called the attorneys, were appointed by the Federal court subsequent to the filing of the reorganization petition, to render services in the administration of the estate under the National Bankruptcy Act. The services rendered were in the collection of claims, and were undertaken subject to the provisions of the Bankruptcy Act. The issue is whether the State court in which the suits were brought has jurisdiction to fix the fees of the attorneys in reducing the claim to judgment, or whether exclusive jurisdiction is in the Federal court in bankruptcy which appointed these attorneys and which alone can have adequate knowledge of the assets of the estate on the one hand, and on the other the total of costs, expenses and fees with the resultant proportionate percentage for cost of administration, and which is subject to the elaborate machinery established by the Congress in the Bankruptcy Act for the fixing of allowances.

It is submitted that the Federal court in a reorganization proceeding has exclusive jurisdiction to award fees to attorneys appointed by it in payment of services to the bankrupt estate in the collection of claims in a State court. The Congress has power to make uniform laws upon the subject of bankruptcy. U.S.Const., art. I, s 8, clause IV. In the National Bankruptcy Act the Congress has set up a comprehensive system of bankruptcy administration and conferred exclusive jurisdiction upon the Federal courts. Chapter 10 of the Act (Bankruptcy Act, ss 111, 114), under which this reorganization is proceeding expressly confers upon the United States District Court ‘exclusive jurisdiction of the debtor and its property wherever located.’ This is re-enforced by the specific provision that State courts shall have no jurisdiction over bankruptcy matters. Federal Judicial Code, s 256, 28 U.S.C.A. s 371; see, also, Gross v. Irving Trust Co., 289 U.S. 342, 53 S.Ct. 605, 77 L.Ed. 1243, 90 A.L.R. 1215;Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 51 S.Ct. 270, 75 L.Ed. 645;Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 60 S.Ct. 628, 84 L.Ed. 876. Not only does chapter 10 specifically confer exclusive jurisdiction of the debtor and its property upon the Federal court, but in addition there is specifically given exclusive jurisdiction to determine costs, expenses and reasonable compensation for services rendered in reorganization proceedings (Bankruptcy Act, ss 62, 241-250), and there are set forth numerous meticulous provisions designed to make effective the control of the Federal court over fees and expenses. Allowances under chapter 10 may be made only after a hearing upon notice to the debtor, the creditors, stockholders, indenture trustees, the Securities and Exchange Commission, and such other persons as the judge may designate (s 247). No longer are allowances fixed in a hearing confined solely to the attorney's in interest, but under chapter 10 interested parties enjoy the statutory right to appear and be heard (s 206, 11 U.S.C.A. s 606). In addition, attorneys seeking compensation must file a statement under oath showing whether they have acquired or transferred claims against or stock of the debtor after the commencement of the proceeding, and no compensation can be allowed to any attorney who, after assuming to act in that capacity, has purchased or sold claims or stock of the debtor (s 249). Also an attorney seeking compensation must be affidavit inform the Federal court whether he has made any agreement with any person for a division of his compensation (s 62). If allowances and fees could be awarded in the State courts, all these elaborate provisions for a notice and hearing to all the parties interested, and prohibition against attorneys dealing in claims against the estate of the debtor could be evaded, and fees in as many State courts as there were assets of the debtor which should be collected therein, would be fixed without regard to the amount of the total expenses and assets as a whole, since the State court is dealing only with particular claims and cannot have adequate knowledge of what will comprise the entire estate as to assets and total costs, expenses and fees. Also, since these attorneys were appointed by the court in this reorganization proceeding and nothing was said as to fees, the services of the attorneys were undertaken subject to all the provisions of the Bankruptcy Act with respect to the compensation for such services. Any attempted surrender of jurisdiction by the United States Court, even if that were possible, would have to be implied. This court has ruled that there may be no implied surrender of the jurisdiction of the Federal court over a matter arising in the course of a bankruptcy proceeding. Palmer v. Larchmont Manor Co., 284 N.Y. 288, 30 N.E.2d 599. Under such circumstances, even if no exclusive jurisdiction had been given to the Federal court, the attorneys would in the normal course return to have their compensation fixed by the court by whom their appointment had been made. Where attorneys have been appointed in a reorganization proceeding to deal with an asset belonging to the debtor, it is difficult to see how a provision of the New York Judiciary Law, Consol.Laws, c. 30 (s 475) could constitutionally provide for a lien upon these assets. Kalb v. Feuerstein, 308 U.S. 433,...