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In re Paramount Publix Corp.

September 16, 1936

IN RE PARAMOUNT PUBLIX CORPORATION; PALMER
v.
PARAMOUNT PICTURES, INC.



Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The appellant, Archibald Palmer, has appealed from an order denying his application for compensation for legal services made in a proceeding under section 77B (11 U.S.C.A. § 207) to reorganize the debtor, Paramount Publix Corporation. He represented 3,220 shares of the common stock of the debtor and $50,000 of bonds of Allied Owners Corporation, one of the debtor's creditors. He also represented a committee of first mortgage bondholders of Allied Owners Corporation.

The only definite benefits that are said to have accrued to the debtor through appellant's activities were the reduction of the rate of interest to be charged by the banks from 6 per cent. to 5 per cent. and an amendment of the plan which provided for a board of directors for the successor corporation more representative of the different groups of creditors and stockholders than was originally provided. In addition to these advantages, the appellant claims that his examination of various witnesses developed facts affording all persons having any interest in the reorganization full information on which to act.

In our opinion the suggested modification of a rate of interest proposed in a plan, which had been prepared by others and had been accepted almost in toto, and the further services set forth, would hardly in themselves furnish sufficient basis to warrant an allowance out of the general estate, even if the appellant had represented a recogniaed committee of stockholders. But in addition to this, it should be observed that the only interests in the debtor represented by Mr. Palmer were relatively small holdings of its common stock and certain bonds of Allied Owners Corporation, a creditor, which was itself in reorganization. The claims of the latter against the debtor were vested in its trustees and could be fully asserted by them. There was already in existence a stockholders committee representing 2,154,000 shares of stock of Paramount Publix Corporation.

Before appellant could properly claim an allowance out of the general estate, he ought to have satisfied the court that the stockholders of the debtor, or the creditors of Allied Owners Corporation for whom he appeared, needed as members of a class further representation in connection with the reorganization than that already available to them, and that his services were rendered with the understanding that they were to be made the basis of a claim for compensation out of the general estate. This he failed to do.

Section 77B (c) (9) of the Bankruptcy Act (11 U.S.C.A. § 207 (c) (9) provides that:

"Upon approving the petition or answer or at any time thereafter, the judge, in addition to the jurisdiction and powers elsewhere in this section conferred upon him * * *

"(9) may allow a reasonable compensation for the services rendered and reimbursement for the actual and necessary expenses incurred in connection with the proceeding and the plan by officers, parties in interest, depositaries, reorganization managers and committees or other representatives of creditors or stockholders, and the attorneys or agents of any of the foregoing and of the debtor."

It is to be noticed that the statutory grant of power to award compensation makes its exercise permissive rather than mandatory, and while, under some circumstances, it might be an abuse of discretion to withhold compensation entirely, in our opinion, the making of any award should be guided by those considerations which have always affected courts of equity and bankruptcy in dealing with such matters.

Both in proceedings in equity and in bankruptcy simpliciter it is the ordinary rule that attorneys representing creditors, security holders, or stockholders must look for compensation to their clients rather than to the general estate. In re New York Investors (C.C.A.) 79 F.2d 182, 186, certiorari denied Endelman v. Reconstruction Finance Corp., 296 U.S. 649, 56 S. Ct. 308, 80 L. Ed. 462; In re Realty Associates Securities Corporation (C.C.A.) 69 F.2d 41, certiorari denied Bondholders' Committee v. Realty Associates Securities Corp., 292 U.S. 628, 54 S. Ct. 631, 78 L. Ed. 1482. This is because the estate is ordinarily represented by a receiver or trustee whose duty it is to take all steps necessary to protect it, and only when he neglects his duty and a suit by others is necessary in order to recover assets or prevent waste will compensation or recoupment of expenses be awarded as though proceedings had been at his instance. United States v. Equitable Trust Co., 283 U.S. 738, 51 S. Ct. 639, 75 L. Ed. 1379; Trustees of Internal Improv. Fund v. Greenough, 105 U.S. 527, 26 L. Ed. 1157.

The provisions of section 77B (c) (9) are broader than the provisions of the old Bankruptcy Act and the judge-made rules applicable to equity receiverships and clothe the courts with a wide discretion. Their purpose was to make the expenses necessarily incidental to a reorganization payable out of the estate at large. Such a purpose was reasonable, since a reorganization is a rehabilitation for which the debtor or those whom it in fact represents ought to pay. It cannot, however, be doubted that most large estates are besieged by persons claiming to have played some part in liquidating or rehabilitating them, and that if provision is not made to prevent duplication of work and compensation, their administration will be haphazard and largely dependent on the sporadic notions of the particular judge in charge as to what may vaguely be regarded as equitable. Without some standardization of practice, the broad and useful powers granted by section 77B (c) (9) are likely to produce serious evils of which the flood of applications for high fees in this very case gives warning -- a flood fortunately held back by the sound decision of the experienced district judge, though at the expense of much time and labor. Because of the danger of numerous and extravagant allowances, we shall attempt the task of indicating certain methods of administration likely to prove beneficial to estates, and, as we believe, capable of practical operation.

First of all, we would express our acquiescence in the statement of Judge Coxe that: "Any creditor or stockholder is entitled as of right to be heard on the question of the permanent appointment of any trustee or trustees, and on the proposed confirmation of any reorganization plan (section 77B (c) (11) [11 U.S.C.A. § 207 (c) (11)]. But mere participation in the hearings at which these questions are discussed, or offering advice, suggestions, or criticisms regarding the proposed plan, or on matters of procedure, does not give rise to any claim for compensation from the estate. ...


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