In re United Cigar Stores Co. of America

• Decision Date: 30 December 1937
• Parties: In re UNITED CIGAR STORES CO. OF AMERICA. In re CIGAR STORES REALTY HOLDINGS, Inc.
• Court: U.S. District Court — Southern District of New York

21 F. Supp. 869

In re UNITED CIGAR STORES CO. OF AMERICA In re CIGAR STORES REALTY HOLDINGS, Inc.

District Court, S. D. New York.

December 30, 1937.

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Cravath, deGersdorff, Swaine & Wood, of New York City, for Irving Trust Co., trustee.

Smyth & Tuttle, of New York City, for trustee of Cigar Stores Realty Holdings, Inc.

Denegre, Leovy & Chaffe, of New Orleans, La., for trustee in New Orleans.

William M. Young, of Harrisburg, Pa., for trustee in Pennsylvania.

Rosenberg, Goldmark & Colin, of New York City, for debtor.

Wright, Gordon, Zachry & Parlin, of New York City, for Reorganization Committee.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City, for Debenture Holders' Protective Committee, and for Guaranty Trust Co. of New York as trustee under indenture for debentures.

Mitchell, Taylor, Capron & Marsh, Gilbert, Diamond & Brandeis, and Ralph M. Arkush, all of New York City, for Landlords' Protective Committee.

M. Carl Levine, of New York City, for Jacob Ruppert Realty Corporation and other landlords.

Milbank, Tweed, Hope & Webb, of New York City, for Phœnix Securities Corporation.

Beekman, Bogue, Leake, Stephens & Black, of New York City, for creditors.

William M. Chadbourne, of New York City, for Common Stockholders' Committee.

Shearman & Sterling and Berle & Berle, all of New York City, for Preferred Stockholders' Protective Committee.

Archibald Palmer, of New York City, for Independant Common Stockholders' Committee.

White & Case, of New York City, for United Cigar-Whelan Stores Corporation.

COXE, District Judge.

These are applications for final allowances in the bankruptcy and reorganization proceedings of United Cigar Stores Company of America, which will hereafter be referred to as the "debtor." The two proceedings have extended over a period of about five years, and a number of the applications are for services and expenses in both proceedings. The total amount requested is $1,219,065.23, of which $1,181,989.97 is for services, and $37,075.26 for expenses.

The debtor filed a voluntary bankruptcy petition on August 29, 1932, and the Irving Trust Company was then appointed receiver. The adjudication took place on the same day, and a short time thereafter the Trust Company became the sole trustee. On June 9, 1934, while its affairs were still being administered in bankruptcy, the debtor filed a petition under section 77B, Bankr.Act, 11 U. S.C.A. § 207 and note, and the Trust Company was appointed temporary trustee. This appointment was made permanent on July 17, 1934, and thereafter the Trust Company continued in charge of the business until July 16, 1937, when the assets were turned over to the new company provided for in the plan of reorganization.

The debtor carried on many of its operations through wholly owned subsidiaries, the principal ones being United Stores Realty Corporation, Cigar Stores Realty Holdings, Inc., and Whelan Drug Company, Inc. There were separate bankruptcy proceedings in this district for these three subsidiaries, and in each case the Trust Company acted both as receiver and trustee. The proceedings relating to the United Stores Realty Corporation resulted in a liquidation, and the case has been closed. In the case of the Cigar Stores Realty Holdings, Inc., the proceedings were consolidated with the reorganization proceedings of the debtor and the remaining assets were included in the property turned over to the new company. The Whelan Drug Company, Inc., changed its name to Retail Chemists Corporation just prior to bankruptcy, and its assets were acquired at bankruptcy sale by the trustee of the debtor. These assets also have been transferred to the new company, and the proceeding has been closed.

Prior to bankruptcy the debtor operated a chain of nearly one thousand retail cigar stores; it had in addition sales agency arrangements with more than eleven hundred independently owned stores; and through the Whelan Company it also operated a chain of over one hundred and eighty drug stores. These stores were all scattered in various parts of the country, and the yearly business ran into large figures.

The company and its subsidiaries owned outright a considerable amount of real estate. It also held under lease more than a thousand other properties. These properties were located in various states and in the District of Columbia. Some were used wholly for the debtor's retail business; others were only partly so used and the unoccupied portion sublet; and still others were held in anticipation of a rise in realty values. Most of the real estate was owned or controlled through United Stores Realty Corporation and Cigar Stores Holdings, Inc.

In July, 1933, a plan of reorganization was proposed by representatives of the then provable claims, amounting to over $10,000,000. This plan completely ignored the landlords, whose defaulted lease claims were not at the time provable. Manhattan Properties v. Irving Trust Co., 291 U.S. 320, 54 S. Ct. 385, 78 L.Ed. 824. It also failed to recognize to any appreciable extent the stockholders of the company. The landlords protested, and opposed any action leading to the consummation of the plan. In the meantime, three cash dividends totaling 50 per cent., and aggregating over $4,000,000, were declared by the referee; and in June, 1934, section 77B became law, making more than seven and a half million additional claims provable against the estate. This combination of circumstances made the plan thoroughly impracticable, and in September, 1934, it was abandoned.

The reorganization plan which has now been confirmed has been the result of protracted negotiations covering a considerable period of time. An earlier plan, which had the support of most of the then existing interests, became impossible after the decision of the Supreme Court on the qualified release claims. Schwartz v. Irving Trust Co., 299 U.S. 456, 57 S.Ct. 303, 81 L. Ed. 348. This decision very materially increased the allowable claims against the estate, and a recasting of the plan became necessary in order to provide for the enlarged indebtedness. The final plan was formally proposed on April 19, 1937, and confirmed on June 10, 1937. The properties were turned over to the new company on July 16, 1937.

In the Paramount Case, In re Paramount-Publix Corp., D.C., 12 F.Supp. 823, some of the general principles governing allowances in bankruptcy and 77B proceedings were stated. I consider these general principles applicable to this case. In some respects they have already been approved by the Circuit Court of Appeals for this circuit, in Re Paramount Publix Corp., Palmer v. Paramount Pictures, 85 F.2d 588; and I do not understand that they are seriously questioned by any of the present applicants.

It is urged with respect to some of the applications that there is authority to make allowances to attorneys for creditors or committees for services during the regular bankruptcy proceedings. It is well settled, however, that such services cannot be compensated for in bankruptcy. In Re Realty Associates Securities Corp., 2 Cir., 69 F.2d 41, certiorari denied Bondholders' Committee v. Realty Associates Securities Corp., 292 U.S. 628, 54 S.Ct. 631, 78 L.Ed. 1482; In re Allied Owners Corp., 2 Cir., 79 F.2d 187; In re Paramount Publix Corp., Zirn v. Paramount Pictures, 2 Cir., 85 F.2d 593. Neither can they be compensated for in the 77B proceedings unless they were "in connection with the proceeding and the plan." Section 77B, subd. (c) (9), of the act, 11 U.S.C.A. § 207(c) (9). The word "proceeding," as used in this subdivision, obviously refers to the 77B proceeding; it furnishes no warrant for any allowance to such attorneys for services in the bankruptcy proceedings unless they were "in connection with — the plan." This, I think, necessarily follows from the fact that services "in connection with — the plan" may be recognized even though they antedate the "proceeding." In re Paramount-Publix Corp., D.C., 12 F.Supp. 823; In re Paramount Publix Corp., Kuhn, Loeb & Co. v. Paramount Publix Corp., 2 Cir., 83 F.2d 406.

It is also insisted that attorneys for creditors or committees may be compensated for services in aid of the trustee and its attorneys during the 77B proceedings. The principal difficulty with this contention is that in a case where there is a trustee represented by competent counsel, there is ordinarily no room for independent participation in the administration of the estate; and anyone who without express authority performs services within the scope of the duty of the trustee, or the attorneys for the trustee, must look to his own clients for compensation. In re Paramount-Publix Corp., D.C., 12 F.Supp. 823; In re New York Investors, 2 Cir., 79 F.2d 182, 183; In re Eureka Upholstering Co., 2 Cir., 48 F.2d 95. With this limitation, attorneys for creditors or committees may be compensated for beneficial legal services in the 77B proceeding if they were "in connection with the proceeding and the plan."

It is further urged by some of the applicants that whatever was done to assist in the administration of the estate, whether before or after the institution of the 77B proceedings, inevitably tended to promote the rehabilitation of the company, and should, therefore, be deemed to have been performed "in connection with — the plan." That, however, is putting an undue strain on the language of subdivision (c) (9). What is meant by the words "in connection with — the plan" is something directly involved in the preparation, negotiation, and putting through of a plan of reorganization. There may be an allowance for services in opposing a discriminatory plan if these services resulted in the consummation of a better one, In re Consolidated Motor Parts, 2 Cir., 85 F.2d 579; but none for services in merely obtaining a dismissal of the reorganization proceedings, In re Nine North Church St.,...