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IN RE PRUDENCE CO.

November 6, 1937

In re PRUDENCE CO., Inc.; In re DAVISON


The opinion of the court was delivered by: MOSCOWITZ

MOSCOWITZ, District Judge.

This matter comes before this court on exceptions filed by the petitioner, Alfred T. Davison, Esq., and by the debtor's trustees in reorganization, to a report of the special master appointed by an order of this court dated March 10, 1937, to hear and report on Mr. Davison's petition for an order confirming and approving his retention of $65,344.26 in satisfaction of his claim of an attorney's lien for that amount. The circumstances giving rise to this alleged lien are as follows:

The petitioner, Alfred T. Davison, Esq., was retained in the latter part of 1931 by the Prudence Company, Inc., to institute in its behalf a suit for the enforcement of a surety bond in the sum of $3,000,000 executed by Fidelity & Deposit Company of Maryland and American Bonding Company of Baltimore, which guaranteed the completion on or before September 16, 1930, of a certain forty-story apartment hotel now known as the Essex House. On October 22, 1932, a retainer agreement was executed between petitioner and the Prudence Company, Inc., pursuant to which petitioner was to receive 25 per cent. in cash of the amount actually received by the Prudence Company, Inc., or its assignee on account of the claims made on such surety bond, either by way of settlement or as a result of judgment.

 The litigation was successfully conducted by the petitioner and resulted in the entry of judgment on June 14, 1934, in the sum of $781,694.56 (Prudence Co. v. Fidelity & Deposit Co. [D.C.] 7 F.Supp. 392). The defendants, however, appealed from this judgment, and on February 1, 1935, while briefs were being prepared for the appeal, the Prudence Company, Inc., filed a petition for reorganization in this court pursuant to the provisions of section 77B of the Bankruptcy Act (11 U.S.C.A. § 207). Trustees in reorganization were appointed, and, upon being informed by the petitioner of his retainer by the Prudence Company, Inc., requested him to become their attorney under the terms of a proposed petition and order which would make his entire compensation subject to fixation by the court. The petitioner refused to accept this arrangement and insisted that his retainer by the Prudence Company, Inc., was sufficient authority to enable him to continue to prosecute the action, and further contended that it afforded the sole basis for the determination of his compensation. He took the position that his retainer gave him an attorney's lien which was not affected by the reorganization proceedings. In the face of this position, the trustees neither affirmed nor disaffirmed the contract of retainer and the petitioner continued to prosecute the action.

 Subsequently, the original judgment was reversed by the Circuit Court of Appeals, Prudence Co. v. Fidelity & Deposit Co., 77 F.2d 834; this in turn was modified by the Supreme Court after granting of certiorari, 297 U.S. 198, 56 S. Ct. 387, 80 L. Ed. 581. After a second trial, judgment was entered for the Prudence Company, Inc., in the sum of $261,377.06 and collected on July 21, 1936. The judgment was paid by check drawn to the order of the trustees in reorganization and Alfred T. Davison, Esq., as attorney. This check was then deposited in a bank account in the joint name of the trustees and Mr. Davison.

 The trustees argue that the petitioner should be denied compensation for his services in the conduct of the case, because of the provisions of Orders 42 and 44 of the General Orders in Bankruptcy (11 U.S.C.A. following section 53) and rule 5 of the Eastern District Bankruptcy Rules with which the petitioner did not comply. These rules provide as follows:

 "Rule XLII. Compensation of Attorneys, Receivers, and Trustees.

 "1. Every attorney, receiver, and trustee seeking an allowance of compensation from an estate for services rendered, or reimbursement for expenses incurred in the proceedings, shall file with the court a petition under oath, setting forth a full and detailed statement of such services and expenses 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, the debtor, or the attorney of any of them. In the absence of such petition and affidavit no allowance of compensation shall be made; and no allowance shall be made to any attorney for a receiver or trustee except for professional services.

 "2. Except in reorganization proceedings under section 77 and section 77B of the Act (11 U.S.C.A. §§ 205, 207), 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 Act (11 U.S.C.A. § 94) shall state by whom and in what amount the allowance of the compensation or reimbursement for expenses is asked."

 "Rule XLIV. Appointment of Attorneys for Receivers or Trustees.

 "No attorney for a receiver or a trustee shall be appointed except upon the order of the court, which shall be granted only upon the verified petition of the receiver or trustee, stating the name of the counsel whom he wishes to employ, the reasons for his selection, the professional services he is to render, the necessity for employing counsel at all, and to the best of the petitioner's knowledge all of the attorney's connections with the bankrupt or debtor, the creditors or any other parties to the proceedings, and their respective attorneys. If satisfied that the attorney represents no interest adverse to the receiver, trustee, or any creditor in the matters upon which he is to be engaged, and that his employment would be to the best interests of the estate, the court may authorize his employment, and such employment shall be for specific purposes unless the court is satisfied that the case is one justifying a general retainer. If without disclosure any attorney acting for a receiver or trustee shall have represented any interest adverse to the receiver, trustee, or any creditor in any matter upon which he is employed for such receiver or trustee, the court may deny the allowance of any fee to such attorney, or the reimbursement of his expenses, or both, and may also deny any allowance to the receiver or trustee if it shall appear that he failed to make diligent inquiry into the connections of said attorney.

 "Nothing herein contained shall prevent the court, in proceedings under section 77 or section 77B of the Act (11 U.S.C.A. §§ 205, 207) from authorizing the employment of attorneys who are attorneys of the corporation, or associated with its legal department, in connection with the operation of the business of the corporation by a trustee or trustees under subsection (c) of section 77 and subsection (c) of section 77B (11 U.S.C.A. §§ 205, 207) when such employment is found by the court to be in the public interest in relation to such operation and is not adverse to the interests of the trustee or trustees or of the creditors of the corporation."

 "Rule 5. Attorneys for Receivers and Trustees, and Accountants.

 "No receiver or trustee in bankruptcy shall employ an attorney, accountant, or investigator, except upon the order of this Court, to be made by a Judge thereof, and not by a Referee; ordinarily the Court will not appoint an accountant at the instance of a receiver, and in exceptional cases only may this be done. Such order shall be granted only upon the petition of the receiver or trustee setting forth the name of the attorney, accountant or investigator whom he wishes to employ, the reasons for the ...


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