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In re Imperial 400 National Inc.

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


decided: August 18, 1970; As Amended September 4, 1970.

IN RE IMPERIAL "400" NATIONAL, INC., A DELAWARE CORPORATION, ET AL. CHEMICAL BANK OF NEW YORK TRUST COMPANY, AS TRUSTEE UNDER BANK AGREEMENT, DATED AUGUST 11, 1950, AS AMENDED, WITH THE GENERAL TIRE & RUBBER COMPANY, RELATING TO THE GENERAL TIRE & RUBBER COMPANY NON-CONTRIBUTORY PENSION PLAN; FIRST NATIONAL BANK OF AKRON, TRUSTEE OF THE PENSION PLAN FOR SALARIED EMPLOYEES OF THE GENERAL TIRE & RUBBER COMPANY; BANK OF AMERICA, NATIONAL TRUST AND SAVINGS ASSOCIATION, AS TRUSTEE FOR AEROJET-GENERAL CORPORATION NONCONTRIBUTORY PENSION PLAN TRUST PWP-12829; BANK OF AMERICA, NATIONAL TRUST AND SAVINGS ASSOCIATION, AS TRUSTEE FOR AEROJET-GENERAL CORPORATION SALARIED EMPLOYEES RETIREMENT PLAN TRUST PNP-13840; UNION BANK AND UNSECURED CREDITORS' COMMITTEE; THOMAS J. O'NEILL AND JOSEPH M. NOLAN, RESPONDENTS. APPEAL OF CHEMICAL BANK OF NEW YORK TRUST COMPANY, AS TRUSTEE UNDER BANK AGREEMENT, DATED AUGUST 11, 1950, AS AMENDED, WITH THE GENERAL TIRE & RUBBER COMPANY, RELATING TO THE GENERAL TIRE & RUBBER COMPANY NONCONTRIBUTORY PENSION PLAN, IN 18,804. APPEAL OF FIRST NATIONAL BANK OF AKRON, TRUSTEE OF THE PENSION PLAN FOR SALARIED EMPLOYEES OF THE GENERAL TIRE & RUBBER COMPANY, IN 18,805. APPEAL OF BANK OF AMERICA, NATIONAL TRUST AND SAVINGS ASSOCIATION, AS TRUSTEE FOR AEROJET-GENERAL CORPORATION NONCONTRIBUTORY PENSION PLAN TRUST PWP-12829, IN 18,806. APPEAL OF BANK OF AMERICA, NATIONAL TRUST AND SAVINGS ASSOCIATION, AS TRUSTEE FOR AEROJET-GENERAL CORPORATION SALARIED EMPLOYEES RETIREMENT PLAN TRUST PNP-13840, IN 18,807. APPEAL OF UNION BANK, IN 18,808. APPEAL OF UNSECURED CREDITORS' COMMITTEE, IN 18,809

Freedman,*fn* Van Dusen and Adams, Circuit Judges. On Rehearing: Van Dusen and Adams, Circuit Judges.

Author: Van Dusen

Opinion OF THE COURT

VAN DUSEN, Circuit Judge.

This is an appeal from the December 22, 1969, District Court order granting ad interim allowances of $90,000. to the trustee in reorganization and of $125,000. to his attorney. Appellants Union Bank, a creditor, and the Unsecured Creditors' Committee contend that the order should be reversed; the Securities and Exchange Commission, nominally an appellee because of its designation as a party to the reorganization under 11 U.S.C. ยง 608, also urges reversal.

The challenged awards are the third interim allowances applied for and granted to the trustee and his counsel. Previously, at the conclusion of each 14-month period of service, the trustee had requested $30,000. His attorney has asked for $45,000. at the close of the first 14-month period and $60,000. at the close of the second period.*fn1 Although the creditors objected to neither request, the SEC recommended awards approximately 25% lower than those requested*fn2 on the basis of its study of the relevant time records and on the theory that interim allowances should only be awarded "to meet severe economic hardship of Trustees and their attorneys." The court noted that the SEC recommendations only "trimmed a fraction" off the requested allowances, commented on the diligence and success with which the trustee and his attorney had pursued their difficult task, and in each case awarded the requested amounts in full as "reasonably" related to the value of the services rendered. No appeal was taken from either award.

In their petitions for third interim allowances, filed to cover the 14-month period from July 1, 1968, to September 1, 1969, the trustee requested $90,000. and his attorney $125,000. The trustee later amended his petition to cover the entire 42-month period of his trusteeship, and his attorney filed a supplemental petition to make clear that his original petition was also intended to cover his entire period of service. The various creditors of the debtor and the SEC originally opposed any further allowance of interim fees whatsoever. However, after the court stated that it had "no intention of asking the Trustee and his counsel to work for a couple of years without any interim compensation," the SEC recommended allowances of $27,500. to the trustee and $45,000. to his attorney, calculated solely on the basis of work performed during the third 14-month period. The creditors also changed their position to ask the court to consider only the third period, and to employ the same criteria it had applied in arriving at its first two awards. The court, considering all three periods, awarded the requested allowances in full.

Thus, the total interim allowances for the 42-month period of service have been $150,000. to the trustee and $230,000. to his counsel.*fn3

Although neither the trustee nor his attorney devoted all his working time to the affairs of the reorganization debtor, it is clear that their services were rendered on an almost daily basis. In such circumstances, this court has held that interim allowances may be appropriate. In re Solar Mfg. Corp., 190 F.2d 273 (3rd Cir. 1951); see In re McGann Co., 188 F.2d 110, 112 (3rd Cir. 1951); In re Keystone Realty Holding Co., 117 F.2d 1003, 1006 (3rd Cir. 1941). Nevertheless, it is not every case where such awards are proper, In re McGann Co., supra, 188 F.2d at 112;*fn4 allowances should only be granted where they are necessary "in order that the administration of the debtor's estate may be carried on." In re Keystone Realty Holding Co. supra at 1006. In addition, even where hardship to the trustee or his attorney requires the award of interim fees, the allowances granted should be "well below any possible final allowances," both because "overly generous" awards might encourage procrastination and because it is only at the conclusion of a reorganization that the value of the services can be appropriately measured. In re McGann Co., supra 188 F.2d at 112.

Initially, then, we must examine the trial court's "presumption" that "considerable hardship" would exist absent the third award of interim fees.*fn5 Neither the trustee nor his attorney alleged at any time that such awards were necessary to carry on the administration of the estate. Indeed, at the time of the third applications for interim allowances, the record would indicate that such hardship did not exist. The trustee had already been awarded $60,000. for his services; his attorney had received $105,000. The trustee's overhead was minimal, since most of his work was done at the debtor's offices or on business trips; the majority of his expenses were currently paid from the estate of the debtor,*fn6 and his out-of-pocket disbursements were returned to him promptly upon application.*fn7 No offer was made by the trustee concerning the sufficiency of his non-reorganization employment or income. Similarly, the attorney for the trustee did not suggest that his economic hardship had not been adequately alleviated by the previous awards of fees and expenses. While we take notice that the trustee's attorney had overhead in running his five-man law firm, he did not intimate an inability to meet his payroll by other sources of income.*fn8 In fact, his statements at the hearing held on the third application for interim allowances suggest the contrary.*fn9

Specifically, the trustee and his attorney failed to demonstrate that the previous interim awards did not adequately relieve any burden arising out of their service during the first two periods. There is no indication, for example, that their previous requests were purposely understated out of a concern for the debtor's cash position*fn10 or that the requests were based on the assumption that the reorganization would shortly terminate so that final allowances could be awarded.*fn11 The court itself stated that its determination of the "reasonableness of previous awards" had been reevaluated only to the extent of services rendered since the effective date of those awards. We therefore hold that the District Court erred in considering the first two interim periods in its decision on the third interim allowances.

Viewing the allowances in the light of services performed during the third interim period, it is clear that they are excessive. Neither the trustee nor his attorney offered any evidence that the burden imposed upon them by rendering services during the third period was greater than the burden in previous periods.*fn12 The record indicates that expenditure of the trustee's time increased only 13 per cent. during the third period, while his interim award tripled. The attorney for the trustee actually spent less time during the third period than in either of the previous periods, but his award more than doubled. See note 3, supra. We can find nothing in the record to explain why the $25.00 per hour rate previously requested by and awarded to the trustee, or the average $27.00 per hour rate previously requested by and awarded to his attorney, ceased to be sufficient for the third period. Consequently we hold that the District Court abused its discretion in awarding interim compensation equivalent to $69.00 per hour to the trustee and $62.00 per hour to the trustee's attorney.*fn13

Because the record does not indicate what "allowances of compensation to [the] trustee and his counsel [are necessary] in order that the administration of the debtor's estate may be carried on" as of the termination of the third period, the trustee and his counsel did not sustain their burden of proof to support their requests in the District Court and the case will be remanded for definite findings and conclusions unless the creditors agree to the allowances recommended by the SEC for the third period. On remand, the District Court should not only consider what is necessary "in order that the administration of the debtor's estate may be carried on"*fn13a (In re Keystone Realty Holding Co., supra, 117 F.2d at 1006), but also the other criteria set forth in our cases cited on page 235, supra.

In estimating the final award, the District Court should consider economy of administration, the burden that the estate may safely be able to bear, the amount of time required, although not necessarily expended, and the overall value of the services to the estate. E.g., Surface Transit, Inc. v. Saxe, Bacon & O'Shea, 266 F.2d 862, 865 (2nd Cir. 1959); Levin v. Barker, 122 F.2d 969, 972 (8th Cir. 1941); see Meyers, Appellate Review of Attorney Allowances in Chapter X Reorganizations, 53 Colum.L.Rev. 1039, 1068-70 (1953).*fn14 We are impressed, as was the District Court, with the apparent success of the reorganization to date.*fn15 But the cost of administration has been great. In addition to the $380,000. awarded to the trustee and his attorney as interim fees during the first 42 months of administration, $50,376. was incurred as their expenses,*fn16 over $48,000. has been paid in retainers and interim fees to counsel specially appointed at the request of the trustee,*fn17 and $95,406. has been paid to accountants. These charges of $573,782., even though only of an interim nature, represent approximately 67 per cent. of the net profit (before deduction of administrative expenses paid) of the debtor during the same 42-month period. This is hardly in keeping with the principle of "strictest economy" contemplated by the Bankruptcy Act. London v. Snyder, 163 F.2d 621, 625 (8th Cir. 1947); see United States v. Larchwood Gardens, Inc., 404 F.2d 1108, 1110 (3rd Cir. 1968); Official Creditors' Committee of Fox Mkts., Inc., 337 F.2d 461, 465 (9th Cir. 1964).

Special note should also be made of the offered explanation of time spent by the trustee and his attorney. Although the SEC had access to at least the attorney's time sheets, only a total hourly listing was supplied to the court. Neither the District Court, nor this court in reviewing the record on appeal, can be expected to render an appropriate decision in the absence of adequate time records. In re Roustabout Co., 386 F.2d 354 (3rd Cir. 1967); In re Wal-Feld Co., 345 F.2d 676 (2nd Cir. 1965). While minute detail should not be required in an interim application, there is nothing in the record from which a court could estimate how much work was productive*fn18 or necessary,*fn19 how much work required treatment by experienced attorneys,*fn20 or to what extent the services rendered were duplicative.*fn21 It may also be possible that time not legally compensable, such as that spent in applying for or in defending interim fee awards*fn22 or in travelling to the offices of the debtor,*fn23 was included in the accounting. Furthermore, the assumption that the trustee or his attorney are entitled to fees normally charged private clients*fn24 is unwarranted. Surface Transit, Inc. v. Saxe, Bacon & O'Shea, supra, 266 F.2d at 865; London v. Snyder, supra, 163 F.2d at 625. Compare United States v. Larchwood Gardens, Inc., supra, 404 F.2d at 1114 (equity receivership).*fn25

As noted above, the SEC has taken part in this proceeding since its inception.*fn26 Only the SEC has examined the time sheets, and it was the only party to appear in opposition to each of the petitions. Because of its experience in such matters, its impartiality, and its sole familiarity with the relevant facts in this case, its recommendations should be given great weight. E.g., In re Solar Mfg. Corp., 215 F.2d 555, 562-563 (3rd Cir. 1954); In re General Economics Corp., 360 F.2d 762, 765 (2nd Cir. 1966); In re Philadelphia & Reading Coal & Iron Co., 61 F. Supp. 120, 124 (E.D.Pa.1945); In re Polycast Corp., supra note 16. Although the SEC position on the third interim awards is not clear,*fn27 it is clear that under no circumstances would it consider further awards in excess of $27,500. to the trustee and of $45,000. to his attorney to be proper.

Also, the record and the argument before us indicate that the trustee and his counsel treat the Creditors' Committee as an adversary, rather than as a partner, in the effort to secure a fair plan of reorganization as promptly as possible. We suggest that the trustee and his counsel make a greater effort to work with the creditors and other interested persons in an effort to terminate this lengthy reorganization proceeding with dispatch.*fn28

The District Court order of December 22, 1969, will be reversed and remanded for further proceedings consistent with this opinion.*fn29 In no event, however, shall awards of interim compensation for the third period exceed $27,500. to the trustee or $45,000. to his attorney. The costs of the Brief for Appellees and the docketing fees in this court shall be paid by the trustee and his attorney individually, without reimbursement from the debtor's estate. See United States v. Larchwood Gardens, Inc., supra note 22, 420 F.2d at 535. The charge for printing the appendix shall be borne by the debtor's estate. Other costs, including printing of briefs for all other parties, shall be paid by the parties incurring them.

SUPPLEMENTAL OPINION SUR PETITION OF REHEARING

VAN DUSEN, Circuit Judge.

Appellees have filed a Petition for Rehearing En Banc conceding that several items mentioned in our opinion were not accurately stated in the District Court record,*fn1a explaining their reasons for such incompleteness, and contending that their language during a Referee's hearing cited by appellant in No. 18,808 during the June 5th argument of these appeals was qualified by other language used in that hearing and by a letter added to the District Court record after argument but not forwarded to this court in any way.*fn2a These explanations of an incomplete District Court record re-emphasize that the record before the District Court on December 22, 1969, was not sufficient to sustain petitioners' burden of proving*fn3a that they were entitled, under the decisions of this court cited at page 235 of the slip opinion, to the third round of interim allowances which they were then claiming. Petitioners will have the opportunity to supplement the record before the District Court to sustain this burden as to interim compensation within the limits stated on page 239 of the slip opinion of August 18, 1970, but no good reason has been shown why they should be granted a second opportunity to show they are entitled to interim fees for the third period in excess of such limits.

We note, again, that "we are impressed * * * with the apparent success of the reorganization to date" (page 237 of August 18 opinion). Also we note that periodic awards of interim compensation in the future, as well as interim compensation for the period from September 1, 1969, to the present, may be granted in the discretion of the District Court if "necessary"*fn4a and after comment by the creditors and the Securities and Exchange Commission.


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