Lane v. Haytian Corporation of America

• Decision Date: 13 January 1941
• Docket Number: No. 126.,126.
• Parties: LANE et al. v. HAYTIAN CORPORATION OF AMERICA.
• Court: U.S. Court of Appeals — Second Circuit

117 F.2d 216 (1941)

LANE et al. v. HAYTIAN CORPORATION OF AMERICA.

No. 126.

Circuit Court of Appeals, Second Circuit.

January 13, 1941.

Wise, Shepard, Houghton & Lebett, of New York City (John W. Kelly and Frank J. Podesta, both of New York City, of counsel), for debtor-appellant.

Krause, Hirsch & Levin and Brown, Brenton & Watts, all of New York City (Sydney Krause, of New York City, of counsel), for appellees Erle R. Lane, C. A. Richmond, F. A. Goddard, and Ralph W. Thomas, constituting Creditors' Committee of Haytian Corporation of America.

Louis Boehm, of New York City, pro se (Louis Boehm and Samuel Zeiger, both of New York City, of counsel), for appellee Prince Committee.

Before L. HAND, SWAN, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

A petition for an arrangement of its unsecured debts was filed October 29, 1938, by Haytian Corporation of America; this was followed, December 8, 1938, by an amendment of the original plan and then by a "Second Modified Arrangement," May 12, 1939; and this last proposal was accepted by the debtor's creditors and confirmed by the referee, July 11, 1939. In the order of confirmation, the referee retained jurisdiction to pass on "the propriety and reasonableness of any and all applications for fees, allowances and disbursements hereafter filed herein" pursuant to Paragraph XI of the final plan, which provided:

"Subject in all respects to the approval of the Court as to the reasonable value and amount thereof, the Debtor proposes to pay compensation for, and expenses and disbursements of, (1) the Creditors' Committee duly appointed by the Court, the Hanson Committee, the Wales Committee and the Prince Committee, whose expenses and disbursements shall include the fees and disbursements of their respective attorneys and counsel, (2) the attorneys for the Debtor, and (3) the attorneys for the corporate Trustee under the Debenture Bond Agreement."

The Creditors' Committee had been elected at the first meeting of creditors, December 5, 1938, and had been composed of two nominees of the Hanson Committee, which was originally organized in July, 1936, and two of the Wales Committee, organized between the date of the petition and the meeting. The Prince Committee was a third unofficial representative of creditors, organized shortly after the first meeting of creditors.

After the filing of applications and hearings thereon subsequent to the confirmation of the plan, the referee entered an order denying in toto the petition of the Prince Committee for $2,500 fees and $88.38 expenses, that of Louis Boehm as its attorney, for a $10,000 fee, and that of the Official Creditors' Committee for $7,000 to be paid members of the Hanson Committee, $5,500 to be paid members of the Wales Committee, and $1,928.25 and $1,834.79 to be allowed each of these last-named committees respectively as expenses. The referee did, however, make certain allowances, including substantial fees to the attorneys for the debtor and to the attorneys for the Creditors' Committee; these are uncontested here. On petitions by the Prince Committee, Boehm, and the Creditors' Committee for review of the referee's adverse rulings, the district court reversed and referred the case back to the referee to ascertain the reasonable value of the services and disbursements for which allowances had been claimed, on the ground that the "firm engagement" of Paragraph XI made these allowances a "matter of contract," not a question of "a statutory right to an allowance." D.C.S.D.N.Y., 33 F. Supp. 171. From this order of the court, the debtor appeals, by way of notice of appeal, rather than petition for its allowance, under our ruling in Re Haytian Corp., 2 Cir., 112 F.2d 146, that such action falls under § 24, not § 250, of the Bankruptcy Act, 11 U.S.C.A. §§ 47, 650.

Had these proceedings occurred after the Supreme Court had clarified the procedure and explained the limitations of Chapter XI proceedings in Securities & Exchange Commission v. United States Realty & Improvement Co., 310 U.S. 434, 60 S.Ct. 1044, 84 L.Ed. 1293, it seems clear that this company in all probability would have been reorganized under Chapter X, 11 U.S.C.A. § 501 et seq., not "arranged" as here, and that these various committees would have been spared the disappointment which is now theirs. For this was essentially a reorganization of a great business enterprise; the debtor, as a holding company operating through subsidiaries, conducted what was said to be the largest business in the Republic of Haiti — producing sugar and by-products, such as rum, molasses, and alcohol. A bond issue of three million dollars was coming due on December 31, 1938; and since the company could not pay the principal or the accrued interest of $2,222,000, some form of reorganized capital structure was necessary. The proceedings herein developed a struggle between the management, supported by the unofficial Hanson and Wales Committees and then by the Creditors' Committee, to refund the bonds through issue of preferred and common stock, thus preserving its control of the business, and the bondholders — represented, though by no means exclusively, by the Prince Committee — to preserve their priority. The ultimate plan was a compromise between the two parties whereby the bondholders received in part secured bonds and in part income debenture bonds with voting rights, together with about 53 per cent of the distributed common stock. For the adjustment of such conflicting interests, the activities of several committees might well be helpful in a reorganization under Chapter X. But the simple arrangement procedure, still basically the old offer of composition by a debtor to his creditors, is hardly an appropriate vehicle for such adjustments.

Of these difficulties, however, the parties were apprised. Counsel for the Prince Committee says he repeatedly urged the referee to hold these proceedings inappropriate. But, so far as the record shows, he employed this suggestion as a club to expedite action, rather than as an asserted defense in bar. At any rate, every one consented to the order of confirmation and no one has appealed from it. Moreover, as counsel's time sheets attached to his claim show, much time was spent in study of the two important decisions below discussed hereinafter, In re Max Fishman, Inc., D.C.S.D.N.Y., 27 F.Supp. 33, and In re Fisher Dress Corp., D.C.S.D.N.Y., 33 F. Supp. 157; as counsel say frankly, the "firm engagement" of Paragraph XI was prepared in the light of those cases and with the purpose of avoiding the result of the first one.¹ Indeed, appellees urge us to view their claims more favorably than otherwise because they were under Chapter XI, in circumstances which will probably not recur. But, however much we may sympathize with them in a situation which seems to have developed because of the law's uncertainties, clearly we must treat the proceeding as legally under Chapter XI, and controlled by the provisions of that chapter.

Turning first to the effect of the "firm engagement," we do not think that a debtor in Chapter XI proceedings may bind itself in its plan of arrangement to make payments in consideration of the services of creditors' committees other than the official committee chosen at the first meeting of creditors. That such allowances are not payable merely as expenses of administration is entirely clear from the Bankruptcy Act itself. By § 338, it is provided that at the first meeting creditors "may appoint a committee, if none has previously been appointed under this Act title," and by § 337(2), that the court shall fix a time when the debtor shall deposit "the actual and necessary expenses incurred in connection with the proceedings and the arrangement by the committee of creditors and the attorneys or agents of such committee." These references are to a single committee. It is well settled that the bankruptcy court lacks power to grant, and the policy of the Act is against, compensation not expressly provided for by the Act. In re Realty Associates Securities Corp., 2 Cir., 69 F.2d 41, certiorari denied 292 U.S. 628, 54 S.Ct. 631, 78 L.Ed. 1482; In re First Bond & Mortgage Co., 5 Cir., 74 F.2d 930; cf. In re General Carpet Corp., 3 Cir., 116 F.2d 426, December 13, 1940. The expression of this policy to limit allowances here to merely the expenses of a single committee becomes even clearer by a contrast of the allowance section of Chapter XI, cited above, with the provisions of § 77, sub. c(8), 11 U.S.C.A. § 205, sub. c(8); of Chapter X — §§ 242-249, 216(3), 11 U.S.C.A. §§ 642-649, 616(3); of Chapter XII — §§ 492(1), 461(8), 437(2), 11 U.S.C.A. §§ 892(1), 861 (8), 837(2); and of former § 77B, sub. c (9), 11 U.S.C.A. § 207, sub. c(9), in which allowances to more than one committee are clearly permitted.

Such considerations as these have brought about a refusal of allowances to attorneys for creditors in ordinary bankruptcy (In re Eureka Upholstering Co., 2 Cir., 48 F.2d 95), to creditors' committees in proceedings for composition both under former § 12, 11 U.S.C.A. § 30 (In re Realty Associates Securities Corp., supra), and former § 74, 11 U.S.C.A. § 202 (In re Faour, 2 Cir., 78 F.2d 1015, affirming D.C. S.D.N.Y., 11 F.Supp. 462), as well as to unofficial committees under Chapter XI itself (In re Max Fishman, Inc., supra).

Appellees contend, however, that the allowances covered by Paragraph XI are payable as ordinary contract claims, under § 357(6), 11 U.S.C.A. § 757(6), which specifies as a permissible part of an arrangement "provisions for payment of debts incurred after the filing of the petition and during the pendency of the arrangement, in priority over the debts affected by such arrangement." The referee held against them on the ground that none had complied with the prescribed procedure for submitting proof of claim, such as was had in Re Fisher Dress Corp., supra, and would have entitled them to recognition under § 357(...