In re Prudence Co.

• Decision Date: 11 April 1938
• Docket Number: No. 247.,247.
• Citation: 96 F.2d 157
• Parties: In re PRUDENCE CO., Inc.
• Court: U.S. Court of Appeals — Second Circuit

96 F.2d 157 (1938)

In re PRUDENCE CO., Inc.

No. 247.

Circuit Court of Appeals, Second Circuit.

April 11, 1938.

Alfred T. Davison, of New York City (Martin A. Schenck, Orrin G. Judd, and Alfred T. Davison, all of New York City, of counsel), for appellant.

Thomas Cradock Hughes and Emanuel Celler, both of New York City (Milton C. Weisman, Irving Rozen, and Hubert Margolies, all of New York City, of counsel), for trustees.

Before MANTON, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

In 1931, the Prudence Company retained Alfred T. Davison as its attorney to enforce its rights under a surety bond guaranteeing completion of an apartment hotel, for the construction of which the Prudence Company had made large advances. Litigation conducted by Mr. Davison resulted in a judgment for some $780,000, from which the defendants appealed. While the appeal was pending, the Prudence Company filed its petition for reorganization under section 77B, 11 U.S.C.A. § 207, and trustees were appointed for the debtor on February 1, 1935. They proposed to Mr. Davison that he become their attorney and continue the litigation upon terms which would give the bankruptcy court power to determine his compensation; but he stood upon his original retainer, under which he was to receive 25 per cent. of any recovery, and the trustees, without either affirming or disaffirming his contract of retainer, permitted him to continue prosecution of the action. After a second trial,^* judgment for $261,377.06 was entered in the name of the debtor. On July 21, 1936, the judgment was paid by check drawn to the order of the debtor's trustees and Mr. Davison, and this sum was deposited in a bank account in their joint names. Shortly thereafter, Mr. Davison moved in the reorganization proceedings for an order permitting him to receive 25 per cent. of the deposit, namely, $65,344.26, in satisfaction of his lien for fees. The matter was referred to a special master, who reported that Mr. Davison was entitled to $50,000, with interest from July 20, 1936, for services performed prior to the filing of the debtor's reorganization petition and to no compensation whatever for services rendered thereafter. The district court ordered payment of the $50,000 without interest. From this order both Mr. Davison and the debtor's trustees have appealed.

Where an attorney has brought suit on behalf of a bankrupt, the filing of a petition in bankruptcy does not terminate his employment nor stay the pending suit. Section 11c of the Act, 11 U.S.C.A. § 29(c), permits the bankrupt's trustee, with the approval of the court, to prosecute as trustee any such suit with like force and effect as though it had been commenced by him. If the trustee takes over the prosecution, he may employ his own attorney; or, electing not to take over the prosecution, he may allow the suit to be continued by the bankrupt and later claim the fruits of any recovery. Johnson v. Collier, 222 U.S. 538, 540, 32 S. Ct. 104, 56 L.Ed. 306; In re Olsen, 2 Cir., 70 F.2d 253, 254. In the case at bar the debtor's trustees chose the latter course. They did not intervene in the pending suit, nor employ Mr. Davison as their attorney; they merely allowed him to perform his contract of retainer with the debtor. By so doing they would be able to obtain the benefit of such judgment as the debtor might finally obtain without subjecting the estate to liability for past or future services of the attorney or for costs, in case the suit should fail. See Kessler v. Herklotz, 132 App. Div. 278, 117 N.Y.S. 45. It is true, the trustees did not abandon the cause of action as an asset of the estate. They kept themselves informed of the progress of the litigation, and after allowance of the writ of certiorari by the Supreme Court, Prudence Co. v. Fidelity & Deposit Co., 296 U.S. 566, 56 S.Ct. 123, 80 L.Ed. 399, they repaid to Mr. Davison the costs advanced by him, and after final judgment repaid his other advances. But this did not make him their attorney. He had refused their offer of employment and was not subject to their direction. As we have said, they allowed him to continue as the debtor's attorney with the intention, as both parties understood, of taking the benefit of any recovery which the debtor might make.

The District Court held that Mr. Davison was forbidden to act as attorney for the debtor by the order of February 1, 1935; and for this reason denied him compensation for services rendered thereafter. Paragraph 15 of the order authorized the trustees "to institute or prosecute * * * all such suits and proceedings as may be necessary in their judgment for the recovery or protection of the properties or rights of the debtor." This gave the court's approval, required by section 11(c), to intervention by the trustees if they deemed it necessary, but certainly it did not require them to intervene if in their judgment it was advantageous to the estate to have the debtor continue prosecution of a pending action. Paragraph 17 of the order restrained "the debtor, its * * * attorneys * * * and all persons * * * whether creditors or claiming to be creditors or having or claiming to have any right, title or interest * * * from interfering with, attaching, garnisheeing, levying upon, or enforcing liens upon, or in any manner whatsoever disturbing any portion of the assets * * * belonging to or in the possession of the debtor or of the trustees, * * * or from instituting or prosecuting * * * any action * * * against the debtor or the trustees." The primary purpose of this paragraph was to prevent claimants from suing the debtor or interfering with assets which the trustees wished to administer. It should not be construed to forbid the debtor and its attorney from continuing litigation which the...