Lloyd, Carr and Co., In re

• Decision Date: 01 February 1980
• Docket Number: Nos. 79-1511,80-1045,s. 79-1511
• Citation: 617 F.2d 882
• Parties: , Bankr. L. Rep. P 67,331 In re LLOYD, CARR AND COMPANY, Bankrupt (two cases). Appeal of Alan H. ABRAHAMS. Appeal of UNITED STATES of America.
• Court: U.S. Court of Appeals — First Circuit

Page 882

617 F.2d 882

6 Bankr.Ct.Dec. 106, Bankr. L. Rep. P 67,331

In re LLOYD, CARR AND COMPANY, Bankrupt (two cases) Appeal of Alan H. ABRAHAMS Appeal of UNITED STATES of America.

Nos. 79-1511, 80-1045.

United States Court of Appeals First Circuit.

Argued Jan. 22, 1980.

Decided Feb. 1, 1980.

Terry Philip Segal, Boston, Mass., for Alan Abrahams et al. in case No. 80-1045.

Jacob Rabinowitz, New York City, with whom Daniel D. Abramtsov, New York City, was on brief, for Alan Abrahams, etc., in case No. 79-1511.

Charles W. Morse, Jr., Boston, Mass., with whom Sullivan & Worcester, Boston, Mass., was on brief, for appellee, New England Tel. and Tel. Co.

Robert E. McLaughlin, Boston, Mass., with whom Sandra C. Steele and Gilman, McLaughlin & Hanrahan, Boston, Mass., were on brief, for appellee, Walter H. McLaughlin, Sr., Boston, Mass., Receiver.

Joan I. Oppenheimer, Atty., U. S. Dept. of Justice, Washington, D. C., with whom M. Carr Ferguson, Asst. Atty. Gen., Washington, D. C., Edward F. Harrington, U. S. Atty., Boston, Mass., Gilbert E. Andrews, Gerald C. Miller, and Crombie J. D. Garrett, Attys., U. S. Dept. of Justice, Washington, D. C., were on briefs, for United States.

Before LEVIN H. CAMPBELL, Circuit Judge, JULIAN, ^* Senior District Judge, and SKINNER,* District Judge.

LEVIN H. CAMPBELL, Circuit Judge.

The following two opinions concern separate actions taken by the district court in a bankruptcy receivership proceeding. While we fully recognize that each must rise or fall on its own distinct facts, we find it convenient to announce both opinions together since they share a common background and are, to some degree at least, interrelated.

No. 79-1511.

The question in this appeal is whether the district court abused its discretion in denying applications by the alleged bankrupt, Alan H. Abrahams, to use for his personal benefit certain funds held by the bankruptcy receiver. As we believe the district court was neither obliged to entertain, nor authorized to grant, such applications, we affirm the order of the district court.

The order under appeal was entered June 26, 1979 by the district court, sitting as a court of bankruptcy, reconfirming the court's earlier decision to deny Abrahams' requests for legal fees in his pending criminal prosecution and for subsistence payments to his family. ¹ The matter arose on an unusual set of facts. In February 1978, an involuntary bankruptcy proceeding was instituted against appellant Abrahams and Lloyd, Carr & Co., a Boston-- based commodities option firm that had allegedly engaged in fraudulent options sales on a massive scale. A receiver in bankruptcy was appointed pursuant to Bankruptcy Rule 201, and charged with responsibility to marshal the assets of the alleged bankrupts. ² Learning that Abrahams and Lloyd, Carr maintained two large bank accounts in Bermuda, the receiver brought legal proceedings there seeking to have the money about $1.75 million transferred to the receiver's control. This effort met considerable resistance in the Bermudian legal system sparked by Abrahams' personal refusal to authorize the transfer or cooperate in bringing it about.

On April 5, 1978, the receiver sought to have Abrahams held in contempt for failing to cooperate in having the Bermuda funds repatriated to the United States, as required by the Bankruptcy Act and by the district court's injunctive order of February 3, 1978. An April 28, 1978 hearing on the contempt motion was adjourned to a lobby conference at which the district court judge, the receiver, Abrahams, and the United States attorney, among others, were present. No creditors, other than the United States, were represented at this conference. Abrahams and the receiver arrived at an agreement during the conference that Abrahams would authorize transfer of $1.5 million from Bermuda to the receiver, to be held in a segregated account in Boston. In exchange, the contempt motion would be dropped; the United States attorney promised not to use the settlement as evidence against Abrahams in criminal proceedings relating to his commodities option transactions; and the district judge indicated that he would be willing to "entertain" motions from Abrahams seeking to use part of the $1.5 million fund to maintain Abrahams' family in their residence in Marblehead, Massachusetts, and to pay the counsel fees arising from Abrahams' numerous legal difficulties.

Abrahams did in fact take the steps necessary to effect transfer of the $1.5 million from his Bermuda banks to the receiver in Massachusetts. The creditors, however, objected strenuously when their legal representatives were first apprised of the nature of the purported compromise entered into by the receiver and the district court. After much discussion, a new and considerably narrower compromise was reached in July 1978 whereby the creditors agreed to permit $20,000 of the $1.5 million to be used as a retainer for Abrahams' bankruptcy counsel and also to permit Abrahams to transfer an additional $40,000 from Bermuda to be used for his criminal defense and for support of his family. This compromise, unlike the earlier arrangement, was carefully spelled out in writing. It was approved by all principal creditors except the United States, which appealed to this court from the district court's approval of the compromise over its objection. After a single judge of this court had refused to issue a stay pending appeal, the United States withdrew the appeal. This court thus never had occasion to pass on any issues concerning the compromise. ³

During the months that followed, Abrahams made repeated requests for further allocations of money from the $1.5 million fund, in line with his asserted understanding of the agreement of April 28. None were granted. On May 7, 1979, Abrahams' new counsel moved for a release of funds for legal fees and family support, claiming that his client was entitled, at the least, to have such a motion "entertained" by the district court. After a hearing, this motion was denied by order dated May 29. A reapplication by way of a memorandum of law was unsuccessful, and the district court reconfirmed its order on June 26.

Appellant's first argument, simply stated, is that the district court entered into a contract with him at the April 28 lobby conference whereby the court agreed to grant appellant's reasonable requests for funds in consideration for appellant's cooperation in having the $1.5 million brought up from Bermuda. There is no merit to this contention. The objects for which use of the funds was sought do not fall within any category expressly sanctioned in the Bankruptcy Act. A bankruptcy court ordinarily has no power to authorize payment of funds from the bankruptcy estate for the personal use of the alleged bankrupt. See Randolph v. Scruggs, 190 U.S. 533, 539, 23 S.Ct. 710, 712, 47 L.Ed.2d 1165 (1903) (Holmes, J.); In re Orbit Liquor Store, 439 F.2d 1351, 1354 (5th Cir. 1971); compare 11 U.S.C. § 102(a)(1). ⁴ Even if the facts here would support a construction of the April 28 agreement as a contract between appellant and the district court, a matter we do not decide, any such contract would be void to the extent it purported to authorize judicial acts beyond the scope of the court's power.

If not as an enforceable contract, appellant urges us to uphold the April 28 understanding as a species of compromise of the receiver's pending claim to the funds in Bermuda. Section 27 of the former Bankruptcy Act, 11 U.S.C. § 50, provides that:

"The receiver or trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interest of the estate."

The April 28 understanding, however, is not enforceable as a Section 27 compromise. Among other reasons for nonenforceability is the fact that the notice requirements of the Bankruptcy Rules were not met. Rule 919(a) provides:

"On application by the trustee or receiver and after hearing on notice to the creditors as provided in Rule 203(a) . . . the court may approve a compromise or settlement."

Although Rule 203(a) provides that the court may, "for cause shown," dispense with the required ten-day notice in the case of a hearing on approval of a compromise, the court here made no such order, nor was cause shown to dispense with the notice requirements, and other formalities, contemplated by Rule 919(a). See also 11 U.S.C. § 94(a)(6). Particularly where principal creditors had been given no opportunity to consider or respond to it, the April 28 agreement, whatever it may have been, was not a valid compromise pursuant to Section 27. When brought to the creditors' attention, they not only did not ratify the undertaking but instead objected vigorously, with the result that a different and far narrower arrangement was entered into.

Finally, appellant argues that the July 14, 1978 written stipulation, pursuant to which $60,000 was made available to Abrahams' family and attorneys, constituted an open-ended commitment by the creditors to permit Abrahams to have access to the remainder of the $1.5 million. This argument is frivolous. The July 14 stipulation was painstakingly drafted, as the record makes clear. By its terms, it was limited to authorizing payment of $60,000, two-thirds of which was to be brought in from Bermuda. The parties specifically stated that

"it is understood by all parties to this transaction that the willingness of Petitioning Creditors to allow funds of Abrahams in this amount to be disbursed in this manner . . . is not precedent which will govern future applications of this type, all of which Petitioning Creditors shall be free to oppose if they see fit."

Abrahams' counsel signed this document on his behalf. Nowhere does it indicate that the district court is authorized or empowered to make further payments to Abrahams, nor is there any indication that the creditors waived...