In re Reiswig

• Decision Date: 10 October 1918
• Citation: 253 F. 390
• Parties: In re REISWIG. v. GALBRAITH. VALLELY
• Court: U.S. District Court — District of North Dakota

253 F. 390

In re REISWIG.

VALLELY v. GALBRAITH.

United States District Court, D. North Dakota.

October 10, 1918

Fisk &amp Murphy, of Minot, N.D., for petitioner.

Todd Fosnes, Sterling & Nelson, of St. Paul, Minn., for respondent.

AMIDON District Judge.

Respondent John P. Galbraith, was assignee under a common-law deed of assignment of the bankrupt's estate, dated August 18 1917. He immediately took possession and sold the stock and fixtures for $12,340.09. From collections and other minor items, he brought the total of the estate up to $13,289.78. Within four months after the assignment, to wit, December 3, 1917, an involuntary petition in bankruptcy was filed, and on December 22d adjudication was made. The petitioner, John Vallely, was elected trustee, and qualified on January 21, 1918. On February 4, 1918, respondent, Galbraith, filed with the referee in bankruptcy his report and account as assignee, which showed receipts as above, and set forth a detailed statement of disbursements, amounting to $1,631.53, leaving a balance of $11,658.25, which he turned over to petitioner as trustee in bankruptcy. The residue, to wit, $1,631.53, Galbraith retained as legitimate disbursements and fees under the common-law assignment. The report closed with a prayer for an order 'approving and allowing said account, and approving all acts of your petitioner as such common-law trustee.'

Upon this report and a brief petition by the trustee in bankruptcy, the referee, under date of April 18, 1918, made an order upon respondent to show cause why he should not pay over to the trustee $1,474.10 of the sum withheld by him as common-law assignee, embracing such items as his fees, $430.33, and expenses for taking the inventory and investigating the business condition of the bankrupt. In response to this order respondent entered a special appearance, and objected to the jurisdiction of the court on two grounds, to wit: (1) That respondent is a resident and citizen of the state of Minnesota, and not within the territorial jurisdiction of the court. This objection was not pressed, and was plainly untenable, in view of the fact that respondent by his report had submitted himself to the jurisdiction of the court. (2) That respondent is an adverse claimant to all moneys referred to in the order to show cause, and cannot be held to show cause in this summary proceeding. The referee withheld his ruling upon this objection, and thereupon, without waiving the objection, respondent produced his evidence, going fully into his administration of the estate as common-law assignee, and attempting to show that the sums charged were all reasonable and beneficial to the estate. At the conclusion of the hearing the referee dismissed the order to show cause, upon the objection to the jurisdiction of the court to proceed otherwise than by plenary suit. This ruling is certified to the court for review on petition of the trustee.

Respondent presented to the referee a cost bill for expenses and attorney's fees in connection with the order to show cause, amounting to $377.80, and asked that the same be taxed and that the trustee be ordered to pay the amount out of funds of the estate, as part of the expenses of administration. The referee denied this petition, and that ruling has also been certified to the court for review on petition of respondent.

The case is of greater importance than the pecuniary interest indicates. It involves the power of courts of bankruptcy to deal by summary order with a practice that has become general of passing estates of insolvent retail merchants through both common-law assignment and bankruptcy. A brief summary of the facts disclosed by the record will be necessary to present this practice.

Respondent, Galbraith, is general manager, treasurer, and secretary of a corporation known as the Northwestern Jobbers' Credit Bureau, organized under the laws of Minnesota. Its stock is mainly held by jobbers located at Minneapolis and St. Paul. The objects of the Bureau are:

'First, the exchange of ledger information between subscribing members; second, the investigation of the estates of failing debtors and the liquidation of their affairs; third, the obtaining of evidence in order to assist in the efficient prosecution of fraudulent failures.'

The Bureau is one of 65 similar organizations located in important wholesale districts throughout the United States, all of which operate under the general supervision of the National Association of Credit Men of New York City. These bureaus co-operate with one another in liquidating estates of insolvent merchants, and in mercantile cantile cases almost invariably represent a majority in number and amount of creditors. The Northwestern Jobbers' Bureau, although a corporation, having capital stock, does not pay dividends. Its earnings are first used to pay salaries of employes and the overhead charges. The surplus earnings are used in assisting in the prosecution of fraudulent bankruptcies. Mr. Galbraith is paid a salary of $6,300, and the numerous other employes are paid salaries ranging from $1,500 to $3,000 annually. The Bureau also has at its command a corps of experts upon whom it may call to take inventories, investigate business transactions of merchants, and dispose of stocks that come within the control of the Bureau. It also has a force of clerks, and such other assistants as experience has shown to be necessary in transacting its large business. In districts other than Minnesota it has one or more men whom it regularly elects as trustee in bankruptcy. Mr. Vallely usually acts for it in that capacity in North Dakota. The Bureau extends over the states of Minnesota and North and South Dakota, and parts of Wisconsin, Michigan, Iowa, and Montana, and handles about 300 estates per year. It collects a fee of 5 per cent. upon the amount distributed to creditors, or, in case a common-law assignment is succeeded by bankruptcy, 5 per cent. of the amount turned over to the trustee in bankruptcy. In addition to this fee it charges for the wages paid to special employes for conducting investigations, taking inventories, etc.; also for attorney's fees paid out by it, and numerous smaller sums for postage, stationery, stenographic work, etc.

In about one-third of the estates the practice has grown up of first taking a common-law assignment. Under this the estate is converted into cash, and the affairs of the merchant carefully investigated. Sometimes the estate is distributed under the assignment, but more frequently a petition in bankruptcy is later filed, and the estate finally distributed under the Bankruptcy Act. In these deeds of assignment, and in bankruptcy cases in Minnesota, Mr. Galbraith is named as assignee and trustee. He acts throughout as the agent and officer of the Bureau. All funds received by him are paid into a trust account of the Bureau. Against this Mr. Galbraith draws checks on behalf of the Bureau for the payment of dividends to creditors, or for turning over funds to a trustee in bankruptcy. Sums deducted for expenses, and the 5 per cent. fee of the Bureau are passed to an 'expense account.' The fee and all sums charged for by the Bureau belong to it, though they are presented in the accounts of the assignee and trustee as his fees and expenses. Out of the fund created in the so-called 'expense account' the salaries of Mr. Galbraith and the other regular employes are paid. Thus it is clear that, while he acts as trustee under the deed of assignment, he in fact is acting simply as the agent of the Bureau, and all funds coming into his hands as assignee are held by him as its agent and officer.

It was stipulated upon the hearing that Mr. Galbraith and the Bureau are amply able to respond to any order made by the referee or the court for the restoration of any part of the sum withheld under the common-law assignment.

From this statement it is plain that the power of the Bureau over the estates of insolvent retail merchants ought to be subject to the careful scrutiny of courts. It is a permanent organization and continuous in its activities. It thus acquires a skill and power such as other creditors do not possess. It is efficient, and I do not in this opinion make any reflection upon the integrity of its policies; but such agencies representing a single class, so long as human nature is what it is, are likely to develop practices such as are almost inseparable from a permanent bureau, and also such as press their rights beyond the limits of what is just and fair. While it is true in mercantile failures that wholesalers, constituting as they do a majority in number and value of creditors, are entitled to the influence which the law gives to those having such majority, it ought never to be forgotten that the power thus exercised is in the nature of a trust, and can never properly be used to secure to the wholesale merchants, or the agents of the bureau acting in their behalf, any unjust advantage. Their position is the same as that of a majority of stockholders with respect to the minority, as explained in the memorable opinion of Judge Sanborn in the case of Jones v. Missouri-Electric Co., 144 F. 765, 75 C.C.A. 631. It is also true that the Bankruptcy Law (Act July 1, 1898, c. 541, 30 Stat. 544) speaks in unmistakable terms against exorbitant or duplicate expenses. This feature of the act was emphasized by section 72, which was added by the amendment of 1903 (Act Feb. 5 1903, c. 487, Sec. 18, 32 Stat. 800 (Comp. St. 1916, Sec. 9656)). Courts, whenever their attention has been called to unreasonable or illegal charges, have been prompt and firm in applying the remedy. They have also declared with equal emphasis that services rendered under a common-law assignment can only...