Straus v. Baker Co.

• Decision Date: 06 January 1937
• Docket Number: No. 8152.,8152.
• Citation: 87 F.2d 401
• Parties: STRAUS et al. v. BAKER CO. et al.
• Court: U.S. Court of Appeals — Fifth Circuit

87 F.2d 401 (1937)

STRAUS et al. v. BAKER CO. et al.^*

No. 8152.

Circuit Court of Appeals, Fifth Circuit.

January 6, 1937.

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Allen Wight and Robert Allan Ritchie, both of Dallas, Tex., and Ulysses S. Schwartz and Claude A. Roth, both of Chicago, Ill., for appellants.

Alfred McKnight, of Fort Worth, Tex., Carl B. Callaway, of Dallas, Tex., and Sylvan Lang, of San Antonio, Tex., for appellees.

Before SIBLEY and HUTCHESON, Circuit Judges, and STRUM, District Judge.

HUTCHESON, Circuit Judge.

After judgment of foreclosure had been obtained on its first mortgage bonds, Baker Company, the debtor, filed a petition for reorganization under section 77B, Bankr.Act (11 U.S.C.A. § 207). This appeal is from an order entered in that proceeding under the authority of paragraph 9, subdivision (c), of section 207, Title 11 U.S.C.A.¹ allowing and disallowing compensation for claimed services.

The allowances complained of were made to Dee et al. as representatives of the stockholders who had acquired their stock by foreclosure of collateral pledged by the Baker interests to Fenton J. Baker as reorganization trustee, to Callaway & Reed as attorneys for Baker Hotel Company, and Fenton J. Baker, as trustee, and to Sylvan Lang et al., attorneys for the debtor. The disallowance complained of was as to Straus, as trustee in the bond mortgage and as trustee in the reorganization proceeding.

The appeal presents the same division of interests with its frictional tendencies to generate more heat than light, which in its final stages attended the proceedings below. It ranges, as was the case below, the bondholders, their trustee, their representatives and attorneys on one side, and on the other the debtor, its attorneys and stockholders, the latter divided into the Dee and the Baker interests. The order complained of made allowances to all of those making request on the bondholder side except Straus. These allowances, though less than asked for, were substantial in amount, and since no one complains of them here, either as excessive or as inadequate, they must be taken as having been accepted by both sides of the controversy as proper and adequate.

Straus complains of the order as to him, because it denied his request for compensation, on the ground that his participation in what was referred to throughout the proceedings as the National Hotel Company's cash proposal, disentitled him to claim any. All of the allowances made to those on the debtor's side are challenged, some in part, and on the ground of excessiveness, others in whole, and on the ground that there was no warrant in law for any allowance.

The allowance to Callaway & Reed as counsel for the Hotel Company and Baker, trustee, is contested mainly on the ground that rule 44 of the General Orders in Bankruptcy (11 U.S.C.A. following section 53) promulgated by the Supreme Court required a formal appointment as attorneys for the trustee upon a verified petition, showing that they represented no adverse interest, whereas here they had not been appointed at all, and could not be for they represented an interest, that of Fenton J. Baker, adverse to the estate, and further, were really acting for him personally, and should therefore look to him for their compensation.

The allowance to Dee et al. as the committee for the noteholders, which, by foreclosing notes secured by Baker Hotel stock, claimed to have gotten the Baker stock interests, is contested on the ground that the services they rendered were not in the interest of the estate, but of their group, which should have compensated them, and that in any event they were excessive.

As to Baker, trustee, the ground of opposition is that in view of his interested position as a contender for an equity, and the very satisfactory recognition accorded him in the reorganization plan, he should have had no additional compensation.

As to the counsel for the debtor, the claim is made that the allowance is erroneous, in that the greater part of their time and work was of a business nature, not compensable as legal services under the invoked section, and that considering their legal services alone, the greater part of them were rendered not to the estate, but for, and they inured to, the benefit of Dee and the noteholders' committee, and the personal interest of the debtor; that they therefore should be compensated only in part out of the funds dedicated by the plan to the bondholders, looking to the Dee committee and the debtor for the major part of their compensation.

The attorneys for the debtor countering appellants' claim urge that the allowance to them was neither unreasonable nor excessive, for it was through their services, all of which they say inured to the benefit of the estate, that the estate was saved from being destroyed by the activities of the bondholder interests, all of which they say were inimical to it. They urge especially that their activities in preventing the bondholders' committee from selling the property, in consummation of the National Hotel's cash plan, and their services in formulating and finally in bringing all parties into agreement with, the final plan, fully justifies the fee they were awarded, because those activities, if the plan works out, and they say it will, will have saved the bondholders themselves nearly one million dollars on their bonds, in addition to saving the debtor about a million dollars on its equity.

Dee et al. insist that their activities in regard to their own interests did not in any manner prejudice the estate, but on the contrary were of the greatest value in unifying and bringing opposing interests into accord, and in finally bringing about a reorganization plan which has inured greatly to the benefit of the estate, that is, to the benefit of all persons having interests in it.

Baker denies that he made any agreement which would prevent his claiming or receiving additional compensation for his services as trustee. He insists that the allowance to him is reasonable, and that his efforts as trustee over and above those as manager have redounded to the interest and benefit of the estate, and should be compensated.

Callaway & Reed insist that the invoked bankruptcy rule requiring a formal appointment on a written petition, with a showing that the attorneys for the trustee do not represent any adverse interest, do not apply to a reorganization proceeding, and that it was proper for the court to allow them the challenged fee. They insist that the amount allowed is only reasonable pay for the numbers of things they did in advising the trustee as his attorneys during his management and conduct of the estate made greatly difficult by the obstructive tactics and conduct of the bondholder interests.

Thus in the windup, as in the beginning of this proceeding the diversity of interests between bondholders and debtor, and between the Baker and Dee interests, opposing groups in the debtor's own household, have been emphasized and aggravated, with the result that everything that each has done in the progress of the proceedings has appeared to the other as action looking to the protection of that special interest, rather than to the protection of the estate as a whole. The bondholders' committee from the beginning of the foreclosure proceedings which preceded the reorganization took the position that the property would not pay off the bonds, that there was therefore no equity for the debtor, but the bondholders, with bonds aggregating the principal sum of $2,825,000, which when reduced to judgment, principal, and interest aggregated $3,136,977.85, with interest from February 27, 1934, at the rate of 7 per cent., were the real owners of the estate.

On their part the debtor and debtor interests insisted from the beginning that the property was a very valuable one, that given time, it would pay out, and that with a fair plan of reorganization there was a substantial equity in it for the stockholders.

Further complicating the situation in the beginning was the fact of internal controversy between Dee, Bitting & Hargrove on the one side, and the Baker interests on the other. From the beginning the Baker interests, represented by Fenton J. Baker, were insisting that notwithstanding the foreclosure, they must be recognized in any reorganization proceeding as beneficial owners of the major stock interest. As the result of these controversies and the spirit and feeling they engendered, the plan of reorganization was making small progress when the bondholders' committee, finding a purchaser for the property at a figure which, with the cash in hand, would net them over $2,000,000 or between 70 and 75 cents on the dollar in cash for the bonds, made a tentative contract, subject to the approval of the court, to dispose of the proceedings by the acceptance of that cash offer. Confronted by this peril to their claims of, and upon, the equity, the bondholders being in a position by solidarity of interest to prevent the adoption of any plan which did not properly protect them, and having by the actual offer made it clear that they could get over two millions in cash for their $2,800,000 of bonds, the debtor interests immediately joined their forces and made a common front. This consisted in part of applying to the District Judge for and obtaining an injunction against the bondholders' committee, restraining them from submitting the cash offer to the bondholders, and from taking any further steps to go through with the proposed cash offer plan, and in part of the formulation and presentation by the debtor interests of a plan which, in contrast with the original plan they presented, gave frank and liberal, instead of niggardly and covert, recognition to the predominance of the bondholder interests. Sobered, and brought by these real blows to a recognition of the common interest of all in the estate, the properties and business of the hotel, and under the influence of the...