In re Columbia Iron Works

• Court: U.S. District Court — Eastern District of Michigan
• Citation: In re Columbia Iron Works, 142 F. 234 (E.D. Mich. 1904)
• Decision Date: 18 April 1904
• Parties: In re COLUMBIA IRON WORKS.

142 F. 234

In re COLUMBIA IRON WORKS.

United States District Court, E.D. Michigan, Southern Division.

April 18, 1904

Bernard B. Selling, for trustee.

William B. Hatch, for excepting creditors.

Walker & Spaulding, for other creditors.

SWAN District Judge.

On February 11, 1904, an adjourned meeting of creditors of the bankrupt was held, at which the referee presided. To the proceedings of the meeting, eighteen exceptions are filed by the minority creditors, and the referee has certified them to the court for review, together with his report of the proceedings had at the meeting. These exceptions may be classified as follows: (1) To the actions of the referee in taking the votes of creditors: (a) On the choice of appraisers; (b) on the manner in which the sale of the assets of the bankrupt should be made, whether in bulk or in parcels; (c) on the choice of an attorney for the trustee. (2) To the rulings of the referee: (a) That the State Savings Bank was entitled to vote upon its claim; (b) that A. D Bennett, trustee, was entitled to vote; (c) that Alex. Moore was entitled to vote on sundry claims. (3) The appointment of A. C. Pessano as one of the appraisers. The first class may be considered collectively.

1. Section 70, subd. 'b,' of the bankrupt act of July 1 1898 (30 Stat. 565 (U.S. Comp. St. 1901, p. 3451)), provides:

'That all real and personal property of bankrupt estates shall be appraised by three disinterested appraisers; they shall be appointed by, and report to, the court.'

While there is nothing in the act which in terms prohibits either official from allowing creditors to express their preferences or taking their votes upon the persons proposed for the position, it is a proceeding not to be encouraged. The appointments were made by the referee, and if his appointees possess the proper qualifications his selections are not void by reason of permitting creditors to express their preferences, yet it is far better that he act upon his own unfettered judgment.

The act confers the power to choose a trustee primarily on the creditors. As explicitly it empowers the court to appoint the appraisers. The line between the powers of the creditors and those of the referee is clearly drawn. He may, if the creditors fail to do so, appoint a trustee. The creditors cannot, if the referee fails to do so, appoint appraisers. While it is necessary and proper that the referee should inform himself of the competency and disinterestedness of such persons as he may have in mind for appraisers, to permit the creditors to nominate such persons as they may think proper for the positions, is to subject the persons nominated to the suspicion that they are partisans of their supporters, and the referee to criticism that in appointing the nominees of the majority the choice is not his individual judgment, but a concession to numbers. Especially is this true when there is a sharp conflict of views and interests between the factions. The proceedings of the creditors' meeting under review, are not the first manifestations of the existence of cliques among creditors in this cause. In fact the case has been more prolific of heated controversies between those interested in the estate than any other case in bankruptcy-- voluntary or involuntary-- which has been brought in this district since the passage of the present bankrupt act. These differences seem to be due in part to a misconception of the powers of creditors and of trustees, and to conflicts of interests and judgment in regard to matters, the disposition of which belongs to the court. This first developed at the meeting of January 11th ult., when a majority of the creditors, in the face of the statute and general orders, attempted, by vote, the removal of the trustee chosen at the first meeting and the election of his successor. This action was, of course, held a nullity. Scarcely less illegal are some of the proceedings of the meeting of February 11th ult., which have given rise to these exceptions. The object of section 70b is to secure disinterested appraisers, and the means to that end is that appointment by the referee, because he alone is disinterested. There is great force in what is said by Judge Thomas, in Re Sumner, 4 Am.Bankr.Rep. 123, 101 F. 224, in relation to the choice of trustees by the creditors, and its truth has been exemplified in this case:

'Experience in this district under the present act illustrates that the provisions of the statute committing the selection of the trustee to the creditors, permits embarrassments which seriously tend to delay the speedy and proper distribution of the estate. It usually happens that, where there are assets, coteries of creditors are formed for the purpose of controlling the election of a trustee, either in the interest of particular creditors, or for the purpose of carrying to some particular lawyer the emoluments arising from the conduct of the business. As a result, the court has been compelled to appoint a receiver in almost every important proceeding pending the contest over the election of the trustee. Such receiver usually performs a considerable part of the duties that belong to the trustee, and the expense of the administration is largely increased. It is not within the power of the court to withdraw from the creditors their due right to select the trustee, but every effort should be made to put an end to the undue contention, and the consequent delay that accompanies the attempted exercise of that right.'

The same view is expressed by Judge Nixon, 14 N.B.R. 152, Fed. Cas. No. 4,058. The like results flow from permitting the majority of creditors to control the minority, and equally from factious opposition of a minority. The summary of evidence sent up by the referee contains three letters, from which it appears that some, at least, of the majority of creditors are acquiring claims with a view to reorganization and a sale of the property as a whole, and presumably an appraisal is sought which will promote that scheme. On the other hand, it is charged that the minority desire that administration of the estate be prolonged and its property sold in parcels. These are matters which are for determination by the court upon a hearing. The act is equally adverse to any step, measure, or administration which will retard the realization and distribution of assets, or facilitate their acquisition by any part of the creditors at the expense of the rest. It is apparent from the vote that both factions of creditors deem the selection of appraisers a matter of importance, and it may reasonably be inferred that one party is seeking a low appraisal and the other a high one, for ulterior ends. This controversy, and that relative to the question whether the property should be sold in bulk or in parcels, are matters for determination by the court, and not by vote of creditors. The interests of the bankrupt and its creditors should not be impaired or imperiled by these bickerings, which engender discord, delay administration, and cause injury to the interests of all concerned.

2. Equally removed from the interference of the creditors is the action of the trustee, so long as that officer shall act with fidelity to his trust. He is chosen to represent all the creditors-- not a majority, however great. In re Lewensohn, 9 Am.Bankr.Rep. 368, 121 F. 539, 57 C.C.A 600. The purpose of vesting the estate of the bankrupt in him is to commit to an impartial administration its management for the benefit of each and all the creditors. The creditors are the cestuis que trustent. He gives a bond for the faithful performance of his duty to all the beneficiaries. His office is one of personal confidence and cannot be delegated. He has no right to impose his duty on others, and if he does he will be responsible to the cestuis que trustent. 1 Perry on Trusts, § 402; Turney v. Carney, 5 Beav. 517; Taylor v. Hopkins, 40 Ill. 442. Subject to the control of the court and statutory limitations, the entire administration of the trust estate is in his hands. He cannot, therefore, yield his judgment to that of a majority of the creditors, merely because they are a majority, without a breach of his trust. To thus abdicate his duties is to make himself a mere passive trustee. It is proper that he should consult with the creditors upon important matters and get the benefit of their knowledge and experience, but the responsibility of decision rests upon him. Finance Co. v. Warren, 82 F. 528, 27 C.C.A. 472. The forty-third section of the act of 1867 (14 Stat. 538, c. 176) made provision for superseding the ordinary bankruptcy proceedings by a vote of three-fourths of the creditors and the conveyance to trustees of the estate of the bankrupt to wind up and settle the same under the direction of a committee of the creditors. In Re Jay Cooke & Co., 11 N.B.R. 1-19, Fed. Cas. No. 3,169, this statute was construed as withdrawing control over the settlement and distribution of the bankrupt's estate from every other power than the creditors' committee, and it was held that in the absence of fraud the direction of such committee to the trustee was conclusive and would not be controlled by any meetings of creditors after their appointment. The present bankruptcy law has no corresponding provision. The strong inference from its absence is that the trustee must discharge his duties according to his best judgment, subject only to the control of the court. He has been held a quasi officer of the court. In re Ryan & Griffin Co., 6 N.B.R. 235, Fed. Cas. No. 12,182; McLean v. Mayo, 7 Am.Bankr.Rep. 115, 113 F. 106. 'By the clearest implication,' says Judge McCormick, 'he represents all the creditors, and as such representative has an interest in the just administration of the estate...