Appeal from the District Court of the United States for the Southern District of New York.
Before MANTON, SWAN and AUGUSTUS N. HAND, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
This is an appeal from an order denying a petition by certain creditors of H. L. Stratton, Inc., a bankrupt, that the trustees in bankruptcy be enjoined from employing as attorneys Jonas & Neuburger and David Haar and from paying them any fees, and that Jonas & Neuburger be ordered to repay the estate of the bankrupt $15,000 received by them as fees for services as attorneys for the receivers. These fees were allowed by the court in 1927.
On December 29, 1926, schedules were prepared for H. L. Stratton, Inc., in which were set forth among its assets cash on deposit with Manufacturers' Trust Company of the approximate amount of $10,000. On December 30, 1926, a voluntary petition in bankruptcy was filed, and H. L. Stratton, Inc., was adjudicated a voluntary bankrupt. On the same day Manufacturers' Trust Company set off the moneys of the bankrupt that it had on deposit against a larger claim which it had. Jonas & Neuburger, as attorneys for the Manufacturers' Trust Company, thereafter prepared its claim against the bankrupt estate, amounting, less the offset, to $39,811.53, and filed it on January 25, 1927.
On December 30, 1926, Edwin H. Updike and J. Newton Gunn were appointed receivers of the estate of the bankrupt upon the petition of George L. McCoy, who was a stockholder, director, and secretary of the bankrupt, as well as a small creditor. The petition for this appointment was prepared by David Haar, who was requested by Jonas & Neuburger to prepare it in the absence of one of the partners.
On December 31, 1926, the receivers Updike and Gunn, Haar, Lyle Mahan, a lawyer associated with Jonas & Neuburger, and an attorney representing the Seaboard National Bank, which was a large creditor, went before Judge Bondy in chambers and discussed the appointment of attorneys for the receivers. Gunn recommended Jonas & Neuburger, and Updike said they would be satisfactory as general attorneys, but he would like independent advice from Mr. Bernard Hershkopf, without consultation with Jonas & Neuburger, or their associate Haar in respect to the claim of the Manufacturers' Trust Company which Jonas & Neuburger represented. Judge Bondy is said to have "thought well" of these suggestions, but, however that may be, no formal application for the appointment was made to him. On January 4, 1927, a petition by the receivers was presented to Judge Mack, who had succeeded Judge Bondy in the hearing of motions. It had been prepared by Haar. It contained the request for permission to employ Jonas & Neuburger as attorneys, and stated that "* * * these attorneys represent a very large creditor and are thoroly competent in our opinion to act as our attorneys. They are in no way connected with the bankrupt and have no interests adverse to those of the creditors herein in so far as we are informed and verily believe."
Accompanying this petition was an affidavit by Mahan, on behalf of Jonas & Neuburger, saying that "the * * * firm of Jonas & Neuburger represents a very large creditor of the * * * bankrupt and it has not become the attorney in any capacity in this proceeding at the suggestion or thru the influence direct or indirect exercised in any form or guise of the bankrupt or of any relative or officer, director or stockholder of the bankrupt except that the attorney for the bankrupt informed your petitioner's firm that a voluntary petition was about to be filed and your petitioner was present at the time of the application for the receiver. Your petitioner's firm has been requested by the receivers herein to act as their attorneys subject to the permission of this court and this affidavit is made under the Rules in connection with the said petition for an order appointing Messrs. Jonas & Neuburger as their attorneys. I know of no reason why the said firm of Jonas & Neuburger may not be appointed as attorneys for the receivers herein."
The foregoing is the substance of the affidavits filed to secure the appointment of the attorneys for the receivers. Hershkopf, upon data furnished by Jonas & Neuburger, at the request of Updike, advised the receivers that the set-off by the bank was proper. Nothing in the record before us indicates that his advice was not correct. Hershkopf valued his services at $500. That sum was paid to him by Jonas & Neuburger without any petition being filed on his behalf. Murray Jacobs, of that firm, says in his affidavit that the payment was made "out of the allowance made to the attorneys for the receivers."
The grievance of the creditors who have taken this appeal is (1) that Jonas & Neuburger did not set forth their relations with the Manufacturers' Trust Company in the affidavit upon which they procured employment as attorneys for the receivers (virtually that they did not repeat in writing what they had orally stated to Judge Bondy), and that in failing to do this they violated rule XLIV of the General Orders of the Supreme Court; (2) that because Jonas & Neuburger were attorneys for George L. McCoy, a creditor, director, officer, and stockholder of H. L. Stratton, Inc., and had applied on his behalf for the appointment of the receivers, by rule 4 of the Bankruptcy Rules of the District Court for the Southern District of New York, they were disqualified from appointment as attorneys for the receivers and barred from obtaining any compensation for professional services rendered to the receivers or trustees; (3) that, by paying Hershkopf $500 out of the $15,000 fee allowed them as attorneys for the receivers without a court order, they were barred from compensation.
General Orders of the Supreme Court XLII and XLIV (11 USCA § 53) and rules 4 and 11 of the United States District Court for the Southern District of New York, which were in effect at the time of the transactions under consideration, are as follows:
"XLII. Compensation of Attorneys, Receivers and Trustees.
1. Every attorney, receiver and trustee seeking an allowance of compensation from a bankrupt estate for services rendered shall file with the referee a petition under oath, setting forth a full and detailed statement of such services and the amount claimed therefor, and in the case of an attorney or receiver, the amount of the partial allowance, if any, theretofore made. And such petition shall be accompanied by an affidavit of the applicant stating that no agreement has been made, directly or indirectly, and that no understanding exists, for a division of fees between the applicant and the receiver, the trustee, the bankrupt, or the attorney of any of them. In the absence of such petition and affidavit no allowance of compensation shall be made.
2. Such petition shall be heard at a meeting of creditors; and the referee in sending the notice of such meeting, prescribed by section 58 of the Bankruptcy Act, shall state by whom and in what ...