In re Clark Coal & Coke Co.

• Decision Date: 13 October 1909
• Docket Number: 3,535.
• Citation: 173 F. 658
• Parties: In re CLARK COAL & COKE CO.
• Court: U.S. District Court — Western District of Pennsylvania

173 F. 658

In re CLARK COAL & COKE CO.

No. 3,535.

United States District Court, W.D. Pennsylvania.

October 13, 1909

G. C Bradshaw, for petitioner.

Wm. C Hall and S. G. Nolin, for receiver and trustee.

YOUNG District Judge.

This case comes before us upon a petition for review by the First National Bank of Pittsburg, a lien creditor. Upon the filing of this petition the referee certified the following questions as having arisen in the course of the proceedings before him:

'First. Whether, under the facts and circumstances set forth in the report and opinion of the referee on the account of the trustee and the exceptions thereto, the trustee should be allowed credits claimed aggregating the sum of $15,327.42.

'Second. Whether the claim of the bonds belonging to the First National Bank, or a certain mechanic's lien of the Freeport Planing Mill Company, is entitled to priority in distribution.

'Third. Whether certain taxes are a lien on the real estate of the bankrupt company, and entitled to priority of payment out of the funds now for distribution, being the proceeds of the sale of certain real estate.'

Inasmuch as the First National Bank alone asked for review, and that upon the first two questions certified, we cannot now consider the question raised by the third question certified. The bankrupt act (Act July 1, 1898 c. 541, 30 Stat. 544 (U.S.Comp.St. 1901, p. 3418)) provides for a review by the judge of orders or findings of the referee, and General Order 27 provides how this review shall be obtained, viz., by the aggrieved party filing with the referee his petition for review. This is the only method provided for obtaining a review. In re Russell (D.C.) 5 Am.Bankr.Rep. 566, 105 F. 501; In re Hawley (D.C.) 8 Am.Bankr.Rep. 632, 116 F. 428. As it does not appear by the record that any petition for review was filed with the referee, or that he was requested to certify the question to the court as to the taxes, the question raised by the third certified question will not be considered.

This leaves for our consideration two questions:

First. Whether, under the facts and circumstances set forth in the report and opinion of the referee on the account of the trustee and the exceptions thereto, the trustee should be allowed credits claimed, aggregating the sum of $15,327.42.

Second. Whether the claim of the bonds belonging to the First National Bank, or a certain mechanic's lien of the Freeport Planing Mill Company, is entitled to priority in distribution.

The facts necessary to an understanding of the first question are as follows: The First National Bank of Pittsburg is the owner of certain bonds secured by a mortgage deed of trust duly recorded on April 12 and 13, 1905, almost two years before the filing of the petition upon which the mortgagor was adjudged a bankrupt. McCracken, the receiver appointed by the court to take charge of the bankrupt's business, on April 17, 1907, was permitted by the court, under the provisions of the act of 1898, to conduct the business of the bankrupt until the appointment of the trustee. No notice of this application was given to the First National Bank, and under this authority the business was continued. Upon June 27, 1907, McCracken, the receiver, having been appointed trustee, presented his petition to the court, setting forth that, not counting the depreciation of the plant and the interest charges, the concern had made $194.73, and that he believed that the property would at least hold its own. No notice of this petition was given to the First National Bank, and upon an order being made the trustee proceeded to carry on the business until the plant was sold by order of court on July 14, 1908. Upon April 13, 1908, the trustee presented his petition to the referee, and was permitted to borrow $1,200 upon certificates, for the purpose of paying pressing obligations, these certificates to be a prior lien to the other liens upon the real estate of the bankrupt. Notice of this petition was given to the First National Bank, and no objection was made by that bank to the priority of these certificates. Upon July 14, 1908, the real estate of the bankrupt was sold discharged of all liens, for the sum of $20,668.64, after notice to all the lien creditors, including the First National Bank, upon application for leave to sell and without objection on the part of the First National Bank. It also appears from the record that Wm. M. Hall, Esq., was the counsel for the receiver, and was also counsel for the First National Bank, the lien creditor, during the time covered by the receivership and the trusteeship, and as counsel for the receiver and trustee represented him in the proceedings authorizing the operation of the bankrupt's business.

The trustee having filed his account, which included the proceeds of the sale of the real estate, it appears that the fund in the hands of the trustee is the proceeds of the sale of the real estate upon which the First National Bank claims to have the first lien by reason of the mortgage above set out. The trustee in his account claims credit for the general expenses of administering the estate and all the expenses incurred by him in carrying on the business of the bankrupt. The referee allowed all the expenses, both those generally incurred in administering the estate and those incurred in carrying on the business, as a credit to the trustee, and thus wiped out all the lien of the First National Bank except about $1,500.

This is the error complained of in the first question certified to us. The referee based his findings that the exceptions of the First National Bank to the allowance of the expenses of running the business should be dismissed, upon the fact, as found by him, that because the bank knew of the bankrupt's financial condition, that the business was being carried on, and that because counsel for the receiver and trustee was also counsel for the lien creditor, although he did not appear as counsel for the lien creditor in any of the petitions or orders for leave to run the business, he must be presumed to have acted for the interest of all whom he represented. This appears from his record and opinion:

'It appears by the record, that William M. Hall, Esq., was the attorney for the Industrial National Bank, the original holder of the bonds of the bankrupt company, and, after the merger of the Industrial National Bank in the First National Bank, represented the First National Bank in the proceedings taken in the year 1906 by the bankrupt company to validate the bonds irregularly issued by the bankrupt company and held by the First National Bank. If further appears that Mr. Hall, up until the time of the filing of the exceptions, appeared in the bankruptcy proceedings as counsel for the First National Bank; that Mr. Hall presented the petition for the appointment of the receiver, and also for the order authorizing the operation of the business of the bankrupt by the receiver, and subsequently for the order authorizing the operation of the bankrupt's business by the trustee. Thus Mr. Hall represented, not only the receiver and the trustee during the period of his receivership and trusteeship, but also the bank. It further appears that the petition for the issuance of the receiver's certificate to the amount of $1,200 was Resented by Mr. Hall, and was duly served upon all lien creditors; the record showing that the service on the First National Bank was upon Mr. Richards, the cashier of said bank, and that no objection was made by the bank.

'It is argued by counsel for the exceptant, who appears to have succeeded Mr. Hall as counsel for the First National Bank, at the time the exceptions were filed, as already stated, that the bank is entitled to have its lien paid without diminution, except as to the sum of $1,200 represented by the loan made as if upon receivers' certificates, as being the only expenditure acquiesced in by the First National Bank. It is true that, with this exception, there is no evidence, either affirmatively or negatively, as to knowledge by the bank or its officers of the operation of the business, other than such as may be inferred from the fact that the counsel of the bank was, all through such operation, the counsel for the receiver and trustee. But it is clear from the evidence in the case that the bank officers were perfectly familiar with the bankrupt's financial condition and had full knowledge of the bankruptcy. There is no denial that they knew the bankrupt's business was being carried on; indeed, the account shows at least one note discounted by the trustee at the bank during such operation.

'The counsel of the receiver and trustee, who obtained the orders authorizing the operation of the business, was also counsel for the bank. He must be presumed to have acted for the interest of all whom he represents. It is not credible, in the absence of evidence, that he would act against his clients' wishes and consent. Both the bank and the trustee knew that Mr. Hall represented the other, and the record informed the referee, when the order for operation was made, that he represented both. The sale of the property was ordered not long after the order to operate, and notice thereof given to the bank. When the sale was adjourned repeatedly, the mortgage creditor was bound to know it, and to know that the business was being carried on. I am unwilling to hold that the bank could shut its eye to what its trustee was doing in its behalf, and take the chances of benefit therefrom, without obligation for losses. When, in April, 1908, it was necessary for the trustee to borrow money to pay the laboring men at the mines, no objection was made by the bank. If it were no party to the operation of the plant, it was bound to

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