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IN RE GARRETT RD. CORP.

July 21, 1966

In the Matter of GARRETT ROAD CORPORATION, In Bankruptcy


The opinion of the court was delivered by: WOOD

 WOOD, District Judge.

 This case involves the question whether the Bankruptcy Referee improperly awarded compensation to a Receiver for a corporation and his attorney appointed by a state court who continued to act as such for almost two years after an involuntary petition in bankruptcy had been filed. The orders in question are presently before us on the Referee's certificate for review of December 15, 1965.

 In this case R. Winfield Baile was appointed Receiver for Garrett Road Corporation on April 24, 1963, in an equity proceeding in the Court of Common Pleas of Delaware, Pennsylvania. The action was brought pursuant to the provisions of Section 1107 of the Business Corporation Law of 1933. 15 Pa.Stat.tit. § 2852-1107, authorizing liquidation when there is a deadlocked board of directors. Mr. Baile then took possession of the assets and property of the bankrupt and proceeded to liquidate. Within four months of the appointment, on August 19, 1963, an involuntary petition in bankruptcy was properly filed. Hearings were held by the Referee on six different occasions, the last being on January 11, 1964. The Referee finally made an adjudication of bankruptcy on June 25, 1965. He directed the Receiver to turn over all of the assets of the estate to the trustee in bankruptcy and to make a final accounting.

 When this was completed the Receiver and his attorney petitioned the court for allowances for their services. The Referee allowed the Receiver $18,000 and his attorney $5,000, about half of what the attorney had requested. Food Fair, a creditor, filed objections to the allowances and requested a certificate. The attorney for the Receiver also objected to the reduction of his request.

 In the petition of the state court Receiver submitted to the Referee are included the various services which Mr. Baile rendered to the bankrupt estate. Mr. I. B. Sinclair, the attorney for Baile, submitted his own petition for compensation and allowance of expenses directly to the Referee, in which he outlined his services. The expenses per se of neither official were ultimately challenged before the Referee and were accordingly affirmed by him.

 Mr. Baile in his first and final accounting to the Referee charged himself with inventory and receipts of $896,615.96. This figure consisted largely of three item numbers, 21.15 acres of vacant land inventoried at $615,000, seven duplex apartment houses inventoried at $161,930, and a contingent contractual asset valued at $50,000. The cash on hand turned over to the federal receiver was $93,378.65 while the entire assets approximated $155,000 although it is now agreed that the contingent asset of $50,000 is probably worthless.

 The Referee in determining the amount of compensation for the Receiver said that "it is the duty of the Referee to determine the fair value of their services to the estate and allow compensation accordingly." He concluded that an allowance of $18,000 was not excessive on the basis of "my knowledge of the meticulous and careful handling of the assets in this estate over the two year period that the matter was before me on the issue of the adjudication and when, from time to time, I was called upon to approve the sale or disposition of certain assets." The valuation was based "simply upon the valuation of services rendered." In compensating the Receiver's attorney, the Referee used as a test "what is fair and reasonable under all of the circumstances" and awarded him $5,000.

 The Referee indicated several times in the course of the hearing on October 20, 1965, that he did not think $18,000 was an excessive fee and in fact stated that he might have given the Receiver more (N.T. p. 39 hearing 10/20/65) if he had so requested.

 After the Bankruptcy Court has assumed jurisdiction, § 2a(21) of the Bankruptcy Act requires equity receivers, trustees, assignees and agents to deliver the property in their possession and under their control and "to account to the court for the disposition by them of the property of such bankrupt." And § 69d requires them to account "for any action taken * * * subsequent to the filing of such bankruptcy petition."

 Under § 2a(21) and § 70a(8) the summary jurisdiction of the bankruptcy court has been held to extend not only to the review of amounts withheld by the assignee for expenses and compensation, Shor v. McGregor, 108 F.2d 421 (5th Cir. 1939), but also to a determination that the assignee should be denied any compensation because he acted for the benefit of the debtor and to the injury of creditors. In re Lucille's, Inc., 26 F. Supp. 943 (D.Me.1939). However, it has been held that § 2a(21) does not support the conclusion that a referee has jurisdiction to make allowances for a state court official for services to the estate, although § 2a(21) is not inconsistent with that conclusion. In re Marks, 267 F.2d 108 (7th Cir.1959).

 The Bankruptcy Act does not expressly provide for a maximum fee or a standard for the determination of compensation of state court receivers. However, the task is not left to the state court whose jurisdiction is superseded once the petition is filed. In re Cohen, 64 F.2d 103 (2d Cir.1933). There seems to be little doubt, though, that under some theory the state court official, whether he is assignee for the benefit of creditors or equity receiver, is entitled to compensation for his services. See generally 3 Collier on Bankruptcy (14th Ed.) § 62.32 et seq. P. 1615. Section 18 of the Bankruptcy Act would be applicable if the Receiver herein had been appointed in the bankruptcy proceeding.

 Randolph v. Scruggs, 190 U.S. 533, 23 S. Ct. 710, 47 L. Ed. 1165 (1903) is the leading case in the area of pre-bankruptcy expenditures and has influenced allowances far beyond its narrow bounds. There the Supreme Court announced the principle that costs of a superseded assignment for the benefit of creditors, including the attorney's fees for representing the assignee were entitled to first payment out of the bankrupt estate as a lien, to the extent they were beneficial and tended to the preservation of the assets. Counsel fees in connection with resisting the involuntary petition, however, could not qualify as services beneficial to the estate. The Court reasoned that reimbursement or allowances are due not as provable claims or even as costs of administration, but on the theory that the assignee would be entitled to deduct his allowable expenses from the property that he is required to surrender to the bankruptcy court.

 The Supreme Court reasoning has been called into question because of the Chandler amendments in 1938 which make the right of an assignee to withhold an asset still in his possession at bankruptcy doubtful. See §§ 2a(21) and 69d. Treister, The Effect of Bankruptcy on the Administration Expenses of a Superseded General Assignment, 17 Bus.Law 332, 335 (1962). In this case there does not appear to be any conflict with any priorities, however, and the criticism is irrelevant. Moreover, the state receiver of Garrett Road did most of his work under the auspices of the Bankruptcy Court and would be entitled to a priority under § 64 to ...


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