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IN RE FASHION SHOP

February 1, 1933

In re FASHION SHOP, Inc.


The opinion of the court was delivered by: AMRAM; DICKINSON

A petition for a counsel fee of $2,500 was filed by the attorney for creditors who had successfully objected to confirmation of composition.

At a meeting of creditors called for the purpose of considering this petition, among other things, objection was made on behalf of one of the creditors that the estate enjoyed no benefit from this motion, but on the contrary suffered a loss, and in a brief filed the further objection was made that the claim should have been made by the creditors and not by the attorney. Thereupon a petition was filed by the Bethlehem Textiles Company, one of the objecting creditors, to which an answer was filed by the North City Trust Company and testimony was taken thereon.

 The question for decision is whether the attorney is entitled to the counsel fee under the provisions of section 64b (4) of the Bankruptcy Law as amended (11 USCA § 104 (b) (4), which provides that among debts entitled to priority of payment shall be the following: "Where the confirmation of composition terms has been refused or set aside upon the objection and through the efforts and at the expense of one or more creditors, in the discretion of the court, the reasonable expenses of such creditors in opposing such composition."

 Although this section was adopted by amendment to the Bankruptcy Law in 1926, it has not been judicially interpreted except in one case, ruling that when the bankrupt withdraws his offer of composition this section of the act gave no authority for the allowance of expenses to the objecting creditors. The terms of the act provide that it becomes effective if --

 (1) Confirmation of composition terms has been refused or set aside

 (2) Upon the objection and

 (3) Through the efforts and

 (4) At the expense

 (5) Of one or more creditors

 (6) In the discretion of the court

 (7) The reasonable expenses of such creditors in opposing such composition.

 1. In order to be entitled to reimbursement of expenses the confirmation of composition terms must have been refused or set aside. If the bankrupt having made an offer of composition withdraws it, the act does not apply. In re Benjamin Herman & Co., 4 Am. Bankr. Rev. 242. If the referee has reported in favor of the composition and thereupon creditors file objections and prosecute them with effect whereby the court finally refuses confirmation, the section applies. Where the composition has been confirmed, but for reasons set forth in section 13 of the Act (11 USCA § 31) has thereafter been set aside, the section applies.

 2. It is the objecting creditor or creditors who are entitled to the benefit of this section, not any other creditor who may have participated in the examination of the bankrupts or any other witnesses, or any attorney acting for such creditor.

 3. Per contra if the objecting creditor does not make the necessary effort to prosecute the objections and this is done by another creditor or through an attorney for such other creditor, the objecting creditor is not entitled to the benefit of the section. The defeat of the composition must have been through the efforts of the objecting creditor.

 4.The objecting creditor must have been put to expense in his successful prosecution of his objections and these expenses may be the subject of a request for reimbursement. If the creditor is put to no expense, then even though the composition is defeated upon his objection and through his efforts, he is, of course, not entitled to payment. Expense incurred by any other person than the objecting creditor is not the subject of consideration under this section. Expense means money laid out, disbursed, or spent. It relates to moneys spent and not to moneys to be spent, but it may include absolute obligations which have been properly assumed by third persons.

 5. The expense thus incurred, i.e., the money spent, becomes a debt due to the creditor for which he is entitled to payment in full in the order of priority fixed by this section (64) of the act. It is the objection efforts and expense of the creditor that entitle the latter to reimbursement. No other person than one falling within this category is entitled to the benefit of this section.

 6. The right to reimbursement is not absolute, but it is in the discretion of the court. Presumably such discretion must, as in other cases, be reasonably and not arbitrarily exercised. What shall be the guiding principle to govern the action of the court in the exercise of this discretion? The court having ascertained the fact that the objection creditor's efforts and expense have accomplished the result may exercise its discretion in making allowance by considering whether under the circumstances of the case the action of the successful objecting creditor has been of benefit to the estate of the bankrupt. Here the analogy of section 64b (2) as amended (11 USCA § 104 (b) (2) is invoked. This provides that: "Where property of the bankrupt, transferred or concealed by him either before or after the filing of the petition, shall have been recovered for the benefit of the estate of the bankrupt by the efforts and at the expense of one or more creditors, the reasonable expense of such recovery." The recovery must be, not for his own or some other person's benefit, but for the benefit of the estate, i.e. all the creditors. So here, where the court in the exercise of the discretion vested in it finds that the estate has benefited by the act of the objecting creditor, it may make an allowance for reimbursement of expenses, but if, in the opinion of the court, the successful prosecution of the objection to the composition was not of benefit to the estate it may refuse to make such allowance. This it seems is what was contemplated by the use of the words, "In the discretion of the court." It may be asked how the defeat of a composition can be anything but a benefit to the estate. The composition cannot be defeated except for grounds set forth in section 12d, as follows: "(d) The judge shall confirm a composition if satisfied that (1) it is for the best interests of the creditors; (2) the bankrupt has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to his discharge; and (3) the offer and its acceptance are in good faith and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden." 11 USCA § 30 (d).

 The first of the reasons given in this section is obviously based upon a consideration by the court of what is to the best interests of creditors, to wit, what is for the benefit of the estate, and is distinguished from the other reasons given under subsections 2 and 3. The other reasons mentioned are not synonymous with the first. It follows therefore that the refusal of the composition because the bankrupt was guilty of an act which was a bar to his discharge is not necessarily for the benefit of the estate. As the word "benefit" to the estate is used in section 64b (2), it cannot mean anything other than financial benefit or advantage; the benefit is measured in cash and not in any other mode of satisfaction. It is analogous to the words "best interests of the creditors," used in section 12d (1), which has been interpreted to mean best financial interests. The fact that in section 12d (1) of the act the financial benefit to the creditor is meant, and not any other public or private "benefit" based upon socalled moral considerations or considerations of public policy, is shown by the next two clauses of that section, which specifically provide for such cases. The estate is a legal entity which has no moral or ethical character or interest. It exists merely as a means of collecting and distributing the bankrupt's assets. It has no other function. Punishment of the bankrupt for legal offenses is no business of the bankrupt estate. That may be undertaken by any one of his creditors or by the United States Attorney at the instance of the referee, receiver, or trustee as provided in section 29 (e) (1) and (2) of the act as amended (11 USCA § 52 (e) (1, 2). The Bankruptcy Act itself impliedly defines the word "estates" by setting it as a caption before section 61 of the act (11 USCA § 101). All the sections following relate to the property rights of the creditors.

 7. Assuming that the benefit of this section may be properly invoked, to what is the creditor entitled? The act states the "reasonable expenses." Here again the phrase used in section 64b (2) is used. The reasonable expenses are those properly and fairly incurred in the acts which were required to bring the matter to the attention of the court and for its decision. This would include all reasonable expenses of witnesses, taking testimony, special investigation, accountants' services, and attorneys' fees. Any proper expense incurred by the creditor would fall ...


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