Smith v. Central Trust Co.

Decision Date01 January 1944
Docket Number5164,No. 5112,5189.,5184,5112
PartiesSMITH et al. v. CENTRAL TRUST CO. et al. SMITH et al. v. CENTRAL TRUST CO.
CourtU.S. Court of Appeals — Fourth Circuit

J. Campbell Palmer, III, of Charleston, W. Va. (Ira J. Partlow, Acting Atty. Gen. of West Virginia, Ross B. Thomas, B. J. Pettigrew, and Koontz & Koontz, all of Charleston, W. Va., Thomas J. Herbert, Atty. Gen. of Ohio, and David M. Spriggs, Asst. Atty. Gen. of Ohio, on the brief), for appellants and cross-appellees in Nos. 5112 and 5164, and appellants in Nos. 5184 and 5189.

Hillis Townsend and Thomas B. Jackson, both of Charleston, W. Va. (Townsend & Townsend and Brown, Jackson & Knight, all of Charleston, W. Va., on the brief), for appellee and cross-appellant in Nos. 5112 and 5164, and appellee in Nos. 5184 and 5189.

Homer A. Holt, of Charleston, W. Va. (James R. Fleming, of Ft. Wayne, Ind., and John V. Ray, of Charleston, W. Va., on the brief), for appellees in Nos. 5112 and 5164.

Homer Kripke, Asst. Sol., of Philadelphia, Pa. (John F. Davis, Sol., of Philadelphia, Pa., and Ezra Weiss, of Indianapolis, Ind., on the brief), for Securities and Exchange Commission.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

Cases Nos. 5112-5164.

These appeals are taken from an order of the District Court in the reorganization of the Fidelity Assurance Corporation under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., whereby compensation was allowed for the services of the trustee, its attorneys and the attorneys for the debtor during the period between June 6, 1941 and May 22, 1943 in the aggregate sum of $123,800 as follows:

                  Central Trust Company, trustee
                   services less interim allowance of $18,000 ..................... $ 50,000
                  Townsend and Townsend, services
                   as attorney for trustee, less interim allowance of $12,000 .....   35,000
                  John B. Ray, services as attorney
                   for debtor .....................................................   21,000
                  James R. Fleming, services as attorney
                   to debtor ......................................................    5,000
                     and services as attorney to
                       trustee ....................................................      300
                  Homer A. Holt, services as attorney
                   to debtor in the Supreme
                   Court of the United States .....................................   12,500
                                                                                     _______
                                                                                    $123,800
                

By the decision of this court in Sims v. Fidelity Assurance Association, 129 F.2d 442, affirmed by the Supreme Court in Fidelity Assurance Association v. Sims, 318 U.S. 608, 63 S.Ct. 807, the District Court was directed to dismiss the petition for reorganization. Upon the dismissal the District Court directed the trustee to turn back the funds in its hands to the receivers appointed by the state court of West Virginia in a prior proceeding, less the sum of $10,000 to cover the expenses of closing the estate and the sum of $230,626.24 which the trustee, its attorneys and the attorneys for the debtor claimed as compensation for services rendered and expenses incurred. For the services rendered the court ordered the allowances hereinbefore set out. The state court receivers appealed on the ground that as the result of the dismissal of the reorganization petition the federal court was without power to direct the distribution of any of the funds in the trustee's hands and should have ordered the trustee to turn over the entire assets to the receivers, and that the trustee and the attorneys should be relegated to the state court for any reimbursement and compensation to which they may be entitled. The latter, on their part, appealed on the ground that the allowances were insufficient.

One of the grounds on which we held that the debtor's petition for reorganization should be dismissed was that it was an insurance company and was thereby excepted by § 4 from the benefits of the Act, 11 U.S. C.A. § 22. The Supreme Court found it unnecessary to consider or determine this question and affirmed the decision of this court on other grounds. The point is again raised on this appeal and the discussion of the parties has proceeded upon the assumption that the debtor was an insurance company and that the federal court was therefore without jurisdiction to entertain the petition for reorganization.

At the outset, it is desirable to review the circumstances under which the debtor's petition for reorganization was filed. We found in the earlier decision that it was not filed in good faith in the sense in which that term is used in § 146 of the statute, 11 U.S.C.A. § 546, because the interests of creditors and stockholders would be best subserved in the prior state court proceeding in which receivers had already been appointed. Nevertheless, the petition was filed with the authority of the directors of the corporation and it is clear that it was filed in good faith in the common acceptation of that term. The determination of the question whether the corporation was an investment company issuing annuity contracts, or an insurance company, presented legal and factual questions of some difficulty. Furthermore, the question was raised as to whether a reorganization under Chapter X comprehended an orderly liquidation of its assets; for although it speedily became apparent that reorganization of the company as a going concern was out of the question, it was contended, with some support in the decisions in other circuits, that a slow and orderly liquidation of corporate assets in a way beneficial to the creditors might properly be considered a reorganization under Chapter X of the statute. It was not until the decision of the Supreme Court in this case that this notion was finally dissipated. The grant of the writ of certiorari by that court indicates the difficulty and the novelty of the questions involved.

The primary question on these appeals is whether in the absence of jurisdiction the court had power to allow compensation for services rendered during the period of nearly two years while the debtor's petition was before it. The nature of the question may be illustrated by the decision of the Supreme Court in Lion Bonding Co. v. Karatz, 262 U.S. 77, 43 S.Ct. 480, 67 L.Ed. 871; Id., 262 U.S. 640, 43 S.Ct. 641, 67 L.Ed. 1151, upon which the receivers chiefly rely. In that case the lower federal court assumed jurisdiction and appointed a receiver for an insolvent corporation in an equity proceeding on the petition of a creditor possessed of a claim of $2,100 who alleged that the suit was brought also on behalf of other creditors similarly situated. The Supreme Court reversed, holding that the facts specifically stated in the bill showed that the amount in controversy was less than $3,000, since the claims of other creditors, each less than $3,000, could not be aggregated to confer jurisdiction. Before the mandate of the Supreme Court issued, the receivers applied for modification of the decree and asked approval of the disbursement for expenses of the receivership paid by them out of the corporation's assets and approval of charges made by attorneys for services rendered during the two years of the receivership. The court denied the motion, saying (262 U.S. 641, 642, 643, 43 S.Ct. 642, 67 L.Ed. 1151): "This court is without power to grant any part of the relief sought. The District Court was without jurisdiction as a federal court to appoint receivers in, or otherwise to entertain, the Karatz suit. * * * As the lower federal courts lacked jurisdiction, they are necessarily without power to make any charge upon, or disposition of the assets within their respective districts. Even where the court which appoints a receiver had jurisdiction at the time, but loses it, as upon supervening bankruptcy, the first court cannot thereafter make an allowance for his expenses and compensation. He must apply to the bankruptcy court. Where a case is dismissed for want of jurisdiction as a federal court, there is not even power to award costs against the defeated party. * * * The only course open to the creditors, as to the receivers and their counsel, is to apply to the state court."

This decision, as the cases cited therein show, did not introduce a new limitation on the power of the federal courts, although the limitation was somewhat extended1 by the statement that where the federal court dismisses a case for lack of jurisdiction, it has not even the power to award costs against the defeated party. Similar conclusions to that of Lion Bonding Co. v. Karatz were reached in the equity receivership in Finneran v. Burton, 8 Cir., 291 F. 37, decided about the same time, and in the cases therein cited. The court held that a receiver appointed by a state court without jurisdiction could not be allowed compensation by the bankruptcy court by which the debtor was subsequently adjudged a bankrupt, although the receivers' services were of benefit to the estate. Lion Bonding Co. v. Karatz has been cited with approval in many cases on the point under discussion as well as other points. See Burnrite Coal Co. v. Riggs, 274 U.S. 208, 211, 47 S.Ct. 578, 71 L.Ed. 1002; Gross v. Irving Trust Co., 289 U.S. 342, 345, 53 S.Ct. 605, 77 L.Ed. 1243, 90 A.L.R. 1215; First National Bank v. Flershem, 290 U.S. 505, 510. In Gross v. Irving Trust Co., 289 U.S. 342, at page 345, 53 S.Ct. 605, at page 607, 77 L.Ed. 1243, 90 A.L.R. 1215, the court in laying down the rule that a state court is deprived of power to fix the compensation of its receiver when bankruptcy supervenes, said: "We adopt, as stating the correct rule, the language used in Lion Bonding Co. v. Karatz, 262 U.S. 640, 642, 43 S.Ct. 641, 642, 67 L.Ed. 1151, although it was not strictly necessary to that decision: `Even where the court which appoints a receiver had jurisdiction at the time, but loses it, as upon supervening...

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