In re Smith
| Decision Date | 30 July 1942 |
| Docket Number | No. 2560.,2560. |
| Court | U.S. District Court — Southern District of West Virginia |
| Parties | In re SMITH. |
Okey P. Keadle, of Huntington, W.Va., for trustee.
Walter H. Buck and Eben F. Perkins, both of Baltimore, Md., for Union Trust Co. of Maryland.
Three questions are involved in three petitions for review, filed by Union Trust Company, a lien creditor of R. R. Smith, bankrupt, as follows:
1. Should bankruptcy funds recovered from an insolvent bank, upon which the Trust Company had an equitable lien, be charged with any part of attorneys' fees and court costs necessarily incurred in such recovery? The Trust Company insists that such attorneys' fees and court costs should be paid out of the common or general fund.
2. Is the present trustee under any duty to take further action regarding the sale of fifty-five bonds of Columbia Gas and Electric Company, and the deposit of the proceeds of such sale by such trustee in a bank which later went into receivership, other than that which he has already taken to recover such funds?
3. The sum of $1,000 upon which the Trust Company had a lien did not earn any interest while in the trustee's hands. Should interest thereon be paid to such lien creditor out of the common fund?
This case has been before this court many times, and has been before the Circuit Court of Appeals of the Fourth Circuit on three previous occasions. Lamb, Receiver, v. Townshend, Trustee, 71 F.2d 590, certiorari denied 293 U.S. 602, 55 S.Ct. 118, 79 L.Ed. 694; Union Trust Company of Maryland v. Townshend, Trustee, 101 F.2d 903; Sehon-Stevenson & Co. v. Union Trust Company of Maryland, 113 F.2d 968.
A consideration of the matters arising upon these petitions for review require a summary of the proceedings had in this case. On November 30, 1931, the date of bankruptcy, Union Trust Company of Maryland was a creditor of the bankrupt, having a claim of $74,868, holding as security therefor, 1600 shares of the capital stock of the First Huntington National Bank, and what was, in 1939 after protracted litigation between the Trust Company and the trustee in bankruptcy, held to be an equitable lien on seventy-two bonds of Columbia Gas and Electric Company of the par value of $1,000 each. In Union Trust Company of Maryland v. Townshend, supra, it was finally determined that the Trust Company was not the owner of the bonds, but that by virtue of an assignment, it held an equitable lien thereon; and that the several liens against the bonds should be determined by this court, and the proceeds of the sale of such bonds distributed in accordance with such determination.
Immediately following the adjudication in bankruptcy, these seventy-two bonds were delivered to F. C. Leftwich, trustee, subject to the claim of the Trust Company and other lien claims thereon. On March 11, 1932, the trustee petitioned the referee for leave to sell the bonds. On March 15, 1932, the Trust Company filed a petition asking that the bonds and bank stock be sold and the proceeds applied on its claim. By order entered March 28, 1932, the referee directed the sale of the bonds by the trustee in bankruptcy, the order providing that the proceeds thereof be placed in a separate account and that no part thereof should be paid therefrom except upon order of the referee. The Trust Company entered objection to the entry of this order, but filed no petition asking for a review.
At various times thereafter the trustee made sale of fifty-five bonds at the market price in groups of four or five bonds at a time. The net proceeds thereof amounted to $48,489.96. Of this sum the trustee deposited $43,208.56 in the Huntington Banking and Trust Company, a regularly designated depository for bankruptcy funds. The then trustee, F. C. Leftwich, was at the time a stockholder, director, and member of the executive committee of such depository. Leftwich had no direct control of the operation of the bank for some time immediately preceding its closing, notwithstanding his official connections with the bank. Some time in the year 1931, it became apparent to the court that the bank had on deposit with it bankruptcy funds in excess of its $10,000 bond then in force, and directed that a new bond be given. Pursuant to this direction, a further bond in the sum of $40,000 was executed on April 1, 1931. Leftwich was of the opinion that the two bonds given by the bank were cumulative, and that the bank had provided a total of $50,000 security for bankruptcy funds. When the amount of his deposits as trustee had approximated that amount, he made no further deposits in that bank but made subsequent deposits, including a small part of the proceeds of the sale of the fifty-five bonds in another Huntington bank. The Huntington Banking and Trust Company was closed as insolvent on April 8, 1933, at which time there was on deposit therein to the credit of the trustee of this estate the sum of $49,616.45, of which amount $43,208.56 or 87.09 per cent thereof, represented the proceeds of the sale of these bonds, and the remainder, or 12.91 per cent thereof, belonged to the common fund of this estate.
On September 5, 1933, Leftwich, trustee, resigned and E. V. Townsend was elected trustee. At a meeting of the creditors held on that day, and pursuant to the direction of the Honorable George W. McClintic, district judge, the trustee, acting in conjunction with seven other trustees in bankruptcy having deposits in the closed depository, employed special counsel for the purpose of taking such action as should be deemed necessary to recover the funds of this estate, and to enforce bonds given to secure the same. From time to time thereafter suits were instituted and prosecuted by the trustee of every conceivable nature, through such special counsel, to recover these bankruptcy funds. A summary proceeding was instituted on the theory that the funds in the hands of the receiver in excess of the amount of the bonds, were trust funds and should be returned as such to the trustees. This contention was upheld by Judge McClintic1 but such decision was reversed by the Circuit Court of Appeals. Lamb v. Townshend, supra. Actions were instituted upon the two depository bonds. The sureties of the $10,000 bond contended that the giving of the second bond in 1931 was intended to be in lieu of the bond on which they were sureties and served to cancel the same. This contention was upheld by Judge McClintic,1 and...
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