In re Scott

• Decision Date: 02 October 1931
• Docket Number: No. 4421.,4421.
• Citation: 53 F.2d 89
• Parties: In re SCOTT.
• Court: U.S. District Court — Western District of Michigan

53 F.2d 89 (1931)

In re SCOTT.

No. 4421.

District Court, W. D. Michigan, S. D.

October 2, 1931.

William K. Clute, Rolland M. Shivel and Robert McAllister, all of Grand Rapids, Mich., for Committee of Grand Rapids Bar Ass'n.

Francis L. Williams, of Grand Rapids, Mich., for Edward De Groot.

Cornelius Hoffius, of Grand Rapids, Mich., for bankrupt.

RAYMOND, District Judge.

In the petition for review of the referee's order declining to ratify his nomination and election as trustee in bankruptcy, petitioner alleges that he was a candidate for the office and was supported therefor by a majority of the creditors in number and amount, that he was in no way legally disqualified, and that the order should be set aside.

It appears that at the first meeting of creditors none was present in person and only one creditor was represented. The proof of claim of this creditor authorized the Grand Rapids Credit Men's Association to attend all meetings of creditors and to vote in the election of trustee. It was presented by Shirley De Groot, the collection manager for said association, who named Edward De Groot, the secretary of the association, as trustee in bankruptcy. The only objection to the election was made by the referee.

The substantial grounds upon which refusal was based may be stated as follows:

First, that the Grand Rapids Credit Men's Association has an interest on behalf of such claims as it holds which gives rise to an influence in conflict with the interests of creditors generally, and with the interests of such creditors as are not members of the association.

Second, that one of the substantial purposes of the organization is to actively solicit and secure the representation of claims in order to vote them to secure the trusteeship for one of its officers or agents, and that the association and its employees are therefore directly participating in an effort to get claims in order to control or influence the election of a trustee, contrary to the rules of this court promulgated in September, 1930.

Third, that the practice of the association in procuring proofs of claims for representation in bankruptcy cases is in violation of Act 354 of the Public Acts of Michigan of 1917, the clear purpose being to enable the association to appear and practice as an attorney at law for persons having claims before the bankruptcy court.

Fourth, because the invariable practice of the Grand Rapids Credit Men's Association is contrary to the provisions of section 72 of the Bankruptcy Act (11 USCA § 112), which provides in substance that no trustee shall in any form or guise receive any other or further compensation for his services than that expressly authorized and prescribed by the act, and that the common practice of the association is to not only appropriate all trustees' fees for itself, but also to charge a collection fee approximating 15 per cent. on all claims upon which it or its employee as trustee receives dividends in bankruptcy proceedings.

Fifth, that as a matter of public policy the method and practice of the Grand Rapids Credit Men's Association affects the functioning of the bankruptcy court.

It may be stated that the qualifications, experience, character, and personal responsibility of the petitioner are not in question.

Some general considerations relative to the office of trustee in bankruptcy are important in the determination of the questions presented. It has long been recognized that he is an officer of the court; that he stands in a fiduciary relation to creditors; that he represents all creditors; and that he should have no interest to serve other than to conserve the estate. Judge Swan, in Re Columbia Iron Works (D. C.) 142 F. 234, 237, stated the relation of the trustee in bankruptcy to the court as follows: "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."

The Circuit Court of Appeals of the Sixth Circuit has recognized the fiduciary relation of the trustee in the following language: "The trustee is the hand of the court. He stands as its agent to liquidate the assets, to protect them, and bring them before the court for final distribution. He is not, in fact, more representative of one creditor or claimant than another. The trustee, in the procedure, because he has the legal title to the assets, and is charged with the duty of saving and protecting them, represents the general fund. He is not a purchaser, but as the title of his office imports, he is trustee for all who have interests, and according to those interests. He himself has no interest, and there is nothing in his representation which stands between the court and those who have interests, for the recognition and protection of which they appeal to its authority. We have thus explained our views upon this subject, founded, as they are, upon what we conceive to be fundamental and controlling principles. Other courts, for whose opinions we entertain great respect, have held, apparently, somewhat different views on this subject." In re Ducker, 134 F. 43, 47.

In the recent case of Garrison v. Pilliod Cabinet Co., 50 F.(2d) 1035, 1036, the Circuit Court of Appeals of the Tenth Circuit, in approving an order of the District Court which affirmed the action of the referee in bankruptcy in sustaining an objection to votes of creditors cast for one Mr. E. Garrison, the executive manager of the Wichita Association of Credit Men, as trustee, said:

"The selection of an assignee as trustee is presumably improper, as he is bound to account for his dealings with the bankrupt's property, from which conflicts with the creditors may result. Remington on Bankruptcy, § 1104, citing In re Clay (C. C. A.) 192 F. 830. He may be committed in favor of creditors whose claims are invalid or preferential in bankruptcy. Demands may have arisen under the assignment, which will provoke contests between claimants and creditors, and even plenary suits with the trustee may be requisite to determine them. See Randolph v. Scruggs, 190 U. S. 533, 23 S. Ct. 710, 47 L. Ed. 1165; May v. Henderson, 268 U. S. 111, 45 S. Ct. 456, 69 L. Ed. 870. Obviously, a trustee should not be selected when his position may be inconsistent with the rendition of his duties to creditors in bankruptcy. The presumption against the propriety of appellant's selection as trustee has not been overcome in this case.

"His disqualification sufficiently appears. He has no standing that entitles him to complain of the adverse rulings. There was no error, therefore, in refusing the votes offered in his favor and approving the selection of his opponent."

In the case of In re Leader Mercantile Co. (D. C.) 29 F.(2d) 570, 571, the referee had vetoed the election of one Vernor Hall to act as trustee in bankruptcy for the primary reason that he was the manager of the North Texas Adjustment and Credit Interchange Bureau, a voluntary association of local creditors specializing in liquidating insolvent estates. The District Court affirmed the action of the referee, and in so doing stated: "As Mr. Hall is shown by this certificate to be the manager of the North Texas Adjustment and Credit Interchange Bureau, and also sought to have this bankrupt make a general assignment for the benefit of its creditors and secured powers of attorney from the creditors of the estate, which were voted for him as trustee of the estate, I think that the referee was correct in his decision not to approve the selection of Mr. Hall as the trustee of the estate, feeling that he was not in a position to render that impartial service as trustee for all of the creditors of the estate that he would for certain of the creditors."

An appeal was taken to the Circuit Court of Appeals of the Fifth Circuit, where the decision of the District Court was affirmed. See 36 F.(2d) 745, 746. The court said:

"The referee is vested with authority by the act to preside over the election of a trustee and to say what creditors have the right to vote. It would be useless for him to do so if he lacked the further authority to set aside a...