Warren v. Palmer

• Decision Date: 11 December 1942
• Docket Number: No. 94.,94.
• Citation: 132 F.2d 665
• Parties: WARREN et al. v. PALMER et al.
• Court: U.S. Court of Appeals — Second Circuit

132 F.2d 665 (1942)

WARREN et al. v. PALMER et al.

No. 94.

Circuit Court of Appeals, Second Circuit.

December 11, 1942.

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

John Noble, Jr., of Boston, Mass., for appellants.

Hermon J. Wells, of New Haven, Conn. (J. H. Gardner, Jr., of New Haven, Conn., on the brief), for appellees.

CLARK, Circuit Judge.

Appellants, trustees in reorganization of the Boston and Providence Railroad Corporation, have appealed from the refusal of the district court to grant their petition for an allowance from the estate of the New York, New Haven and Hartford Railroad Company, also in reorganization, for certain expenses, including attorneys' fees, incurred by them in connection with the New Haven proceedings. These expenses arose out of petitioners' attempt to establish a claim for damages for breach of the long-term lease of the main line from Boston to Providence by the Boston and Providence to the Old Colony Railroad Company and the sublease from the Old Colony to the New Haven — matters often before this court — and concern not merely (1) the attempted proof of that claim, but also (2) opposition to the claim of respondents, the New Haven trustees, for losses incurred in respondents' operation of the leased properties for the account of the lessor,¹ and (3) participation in the various proceedings for the development of a plan of reorganization for the New Haven. The issue turns upon the interpretation of the Bankruptcy Act, § 77, sub. c (12), 11 U.S.C.A. § 205, sub. c (12), which provides that "within such maximum limits as are fixed by the Interstate Commerce Commission, the judge may make an allowance, to be paid out of the debtor's estate, for the actual and reasonable expenses (including reasonable attorney's fees) incurred in connection with the proceedings and plan by parties in interest." The district court held, as a matter of discretion and because petitioners' activities were not beneficial to the New Haven estate, that no reimbursement should be granted petitioners. We upheld appeal as of right in Warren v. Palmer, 2 Cir., 130 F.2d 887.

When the New Haven proceedings were initiated in 1935 in the District Court for the District of Connecticut, that court authorized the New Haven trustees to operate the leased properties, subject to a stop-loss provision that their operation should be deemed to have been for the account of their lessor in the event of a subsequent rejection of the sublease. In 1936, the trustees rejected the Old Colony lease, and the Old Colony was immediately admitted as a secondary debtor for reorganization in the New Haven proceeding, with the New Haven trustees as also its trustees. In 1938, the respondent trustees rejected the Boston and Providence lease to the Old Colony, whereupon the Boston and Providence went into reorganization in the District Court for the District of Massachusetts, with petitioners as its trustees. Petitioners promptly set about establishing a claim against the New Haven estate for the rejection of their lease and also, as part of the pending reorganization, intervened in a proceeding whereby the trustees of the New Haven-Old Colony estates sought to charge the Boston and Providence properties with a lien for the losses sustained in their operation of these properties prior to the rejection of the lease. Petitioners doggedly opposed the assertion of this lien, both on the merits and on jurisdictional grounds, twice appealing to this court and once to the Supreme Court of the United States. Palmer v. Palmer, 2 Cir., 104 F.2d 161, certiorari denied 308 U.S. 590, 60 S.Ct. 120, 84 L.Ed. 494; Palmer v. Warren, 2 Cir., 108 F.2d 164, affirmed as to jurisdiction 310 U.S. 132, 60 S.Ct. 865, 84 L.Ed. 1118. Neither claim has as yet been finally settled. In 1941, the parties agreed to a temporary cessation of hostilities and, by stipulation, fixed the lien claim at $7,000,000, and the damages claim at $10,000,000 — for the sole purpose of evaluating and voting these claims in connection with pending plans for reorganization of the New Haven.

At the time that the stipulation was negotiated, the ICC had approved a plan whereby the New Haven was to acquire the Boston and Providence properties, which in fact had constituted an integral part of the New Haven system for more than forty-five years. The Boston and Providence trustees prompted the Commission to include in this plan a number of concessions to their interests which but for their efforts might have been omitted, such, for example, as a requirement that the reorganized New Haven assume most of the claims against the Boston and Providence which should be allowed up to the date of the confirmation of the plan. The plan, however, failed to secure the approval of the court, which referred it back to the Commission in December, 1941, and no plan has as yet been adopted. On December 20, 1940, the district court ordered the filing of all claims to allowances for expenses incident to the reorganization of the New Haven. Within the time allowed, petitioners filed the claim at issue, which the court referred to the ICC pursuant to § 77, sub. c (12), supra. The ICC fixed maxima of (1) $35,661.59 for expenses exclusive of attorneys' fees and expenses (instead of the $67,751.50 asked) and (2) $35,000 for attorneys' fees (instead of the $50,000 asked), plus $1,359.16 for attorneys' expenses as requested. Except as to certain matters — of limited importance on the present issue — bearing upon the development of a reorganization plan for the New Haven, we do not find that the district court abused its discretion in the premises. See In re Paramount Publix Corp., 2 Cir., 85 F.2d 588, 590, certiorari denied Palmer v. Paramount Pictures, 300 U.S. 655, 57 S.Ct. 432, 81 L. Ed. 865; In re A. Herz, Inc., 7 Cir., 81 F.2d 511.

Although judicial interpretation of § 77, sub. c (12), is conspicuously absent, it is so akin, both in its terms and in its context, to a provision applicable — before the recent amendments — in reorganization proceedings, § 77B, sub. c (9),² that cases decided under the latter statute may be adopted as ruling analogies. There is no substance to appellants' argument that the former is of a broader scope because it authorizes the court to make allowances for "reasonable" expenses, whereas the latter sanctions an allowance only for "necessary" expenses. Most of the decisions under § 77B, sub. c. (9), were concerned with compensation of attorneys, as to which the express statutory condition to an allowance was that the compensation be "reasonable."³ And in practice reasonableness was the test for all allowances under that statute. See In re Middle West Utilities Co., D.C.N.D.Ill., 17 F.Supp. 359, 372. See, also, § 77B, sub. f (5), 11 U.S.C.A. § 207, sub. f (5). The truth of the matter is that the statute here involved really provides a more limited — not a broader — basis than § 77B, sub. c (9), for the assertion of claims to allowances by parties in interest, for it authorizes no compensation for services rendered, but only reimbursement for actual and reasonable expenses.

The criterion of reasonableness under § 77B, sub. c (9), was benefit to the estate under administration or contribution in some substantial manner to the "working out" of a plan of reorganization. See In re Nine North Church St., 2 Cir., 89 F.2d 13, 14, certiorari denied Glass & Lynch v. Nine North Church St., 302 U. S. 709, 58 S.Ct. 29, 82 L.Ed. 547; Straus v. Baker Co., 5 Cir., 87 F.2d 401, 407, modified 89 F.2d 322; R. F. C. v. Herring, 9 Cir., 110 F.2d 320, 322; In re Memphis Street R. Co., 6 Cir., 86 F.2d 891, 894; Teasdale v. Sefton Nat. Fibre Can Co., 8 Cir., 85 F.2d 379, 382, 107 A.L.R. 531; In re United Cigar Stores Co. of America, D.C.S.D.N.Y., 21 F.Supp. 869, 875, 879. Differently stated, the services or expenses for which compensation or reimbursement was sought must have been of benefit to all the sets of interests in the estate. Activities which only increased the share of one class of creditors at the expense of other creditors have not been considered to benefit the estate or to contribute to the plan. See Straus v. Baker Co., supra, 87 F.2d at page 407; Teasdale v. Sefton Nat. Fibre Can Co., supra, 85 F.2d at page 383, 107 A.L.R. 531; In re New York Investors, 2 Cir., 79 F.2d 182, 189, certiorari denied Endelman v. R. F. C., 296 U.S. 649, 56 S.Ct. 308, 80 L.Ed. 462; cf. In re A. Herz, Inc., supra. See Medill, Fees and Expenses in a Corporate Reorganization under Section 77B, 34 Mich.L.Rev. 331, 347. Recoupment of the expenses so incurred by the representatives of the class has sometimes been allowed from the increased share made available to the class, under the general equitable principle applied in equity receiverships that those who enjoy benefits should share in the burdens incidental thereto. See Clark v. Goldman, 2 Cir., 124 F.2d 491, 493, supplemented 127 F.2d 852; Nolte v. Hudson...