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In re Corporation.

July 23, 1941

IN RE PRUDENCE BONDS CORPORATION.


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

Author: Swan

Before SWAN and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

This case embraces a large number of consolidated appeals from orders granting or refusing allowances in a corporate reorganization initiated under section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, on June 29, 1934. In passing upon the applications for allowances the district judge ruled that the provisions of the Chandler Act 11 U.S.C.A. § 1 et seq., were applicable. The appeals came to this court in two groups. The first group, which included appeals from orders entered in February 1939, was argued in May of that year, but decision was held in abeyance until the district court should pass upon additional pending applications for compensation in order that we might know the aggregate of the administration costs. In re Prudence-Bonds Corporation, 2 Cir., 106 F.2d 44. By order entered November 6, 1939, the additional allowances were fixed. They were brought to this court by a supplemental record and constitute the second group of appeals. Argument as to this group was heard in February, 1940. Before decision was rendered motions to dismiss both groups of appeals for lack of jurisdiction were made and granted. In re Prudence-Bonds Corporation, 2 Cir., 111 F.2d 37. This order was reversed on January 6, 1941. Reconstruction Finance Corp. et al. v. Prudence Securities Advisory Group et al., 311 U.S. 579, 61 S. Ct. 33,85 L. Ed. . After the mandate of the Supreme Court came down, certain of the appealed allowances were reduced by compromise or accepted as correct by the parties appellant; the appeals with respect to all such allowances have been severed and discontinued by orders of this court. The remaining appeals have been again argued and are now before us for decisionon the merits.

When Prudence-Bonds Corporation, hereafter called the debtor, filed its petition for reorganization, there were outstanding eighteen issues or series of its bonds, of the aggregate principal amount of some $56,000,000. The bonds had been sold to the investing public and were held by some 30,000 different owners. Payment of the bonds and interest thereon was guaranteed by The Prudence Company, Inc., hereafter called the guarantor. Each series of bonds was secured by a pledge of collateral deposited with a corporate trustee under a trust agreement. The pledged collateral consisted mainly of real estate mortgages, which were being "serviced" by the guarantor, although it was in default under its guaranty. Much of the delay and much of the expense incident to the debtor's reorganization was due to litigation caused by the guarantor's unwillingness to give up such "servicing." The debtor and the guarantor were affiliated corporations, the stock of each being owned by New York Investors, Inc., hereafter called the stockholder.The stockholder filed reorganization proceedings on January 7, 1935, and the guarantor did likewise on February 1, 1935. The same individuals who had been appointed reorganization trustees for the debtor, were also appointed trustees for the stockholder and the guarantor.

In addition to its eighteen series of bonds the debtor had also put out some $53,000,000 of mortgage participation certificates, but these certificates did not represent debts of the debtor and were not reorganized in this proceeding.*fn1 In re Prudence-Bonds Corporation, 2 Cir., 79 F.2d 212. The purpose of seeking reorganization of the debtor's eighteen series of bonds was to prevent forced liquidation and to effect a modification of the indebtedness by an extension of the maturity date and a reduction of the interest rate of each issue of bonds. After much litigation this purpose was accomplished. All that the debtor brought into the bankruptcy court for reorganization was about $11,000 in each and its potential equity in the pledged collateral. It should have been obvious from the start that the debtor was insolvent and that no equity remained for its stockholder; but the plans proposed on behalf of the debtor did not recognize this and no finding of insolvency was made until March, 1937. Although several bondholders' committees were formed and intervened in the proceeding, the committees never enlisted enough proxies to speak with authority for the general body of bondholders. Not only these committees but also the reorganization trustees of the debtor's stockholder and some of the corporate trustees circularized the bondholders regarding the proposed plans. The result was delay, duplication of effort and additional expense. Finally, after the finding of insolvency, the plans were amended to provide for a reorganization solely in the interest of the bondholders, and thereafter progress was more rapid. On January 18, 1938, the district court confirmed the composite plan of reorganization which consists of a "General Plan" and eighteen "Series Plans", substantially uniform, one for each issue of bonds. A new corporation of the same name as the debtor, whose stock was issued to the bondholders of all series, was set up to manage, conserve and liquidate the pledged collateral. The same corporate trustee, City Bank Farmers Trust Company, was provided for all the series and this trustee is to handle distributions of principal and retirement of bonds. Should the collateral of any issue produce a surplus it will go pro rata to other issues. The effective date of the composite plan of reorganization was March 1, 1938.

Against the background of this brief outline we pass to a consideration of the present appeals. The allowances made by the orders of February, 1939, were nearly $480,000, those fixed by the order of November 6, 1939, come to about $626,000, and prior interim allowances add about $350,000 more, making a grand total of some $1,450,000. The new corporation and Reconstruction Finance Corporation appealed on the ground that the total cost of the reorganization was excessive and allowances to specified claimants too high. Appeals were also taken by numerous claimants who had received nothing or awards which they thought inadequate. In general we may say that we think the amounts awarded to attorneys for committees, to the debtor's trustees and their attorneys, and to the debtor's attorneys were much too high. Most of these allowances, however, are no longer before us, reductions having been arranged by settlement between the parties and the appeals involving them having been discontinued.*fn2

Of the appeals which survive we will take up first those of the appellants who were refused any award whatever.

1. Claim of Harry H. Oshrin. He represented several bondholders on whose behalf he brought suits in the state courts to compel the corporate trustees of the issues involved to settle their accounts and distribute the income then in their possession. These suits were stayed by order of the bankruptcy court, one of the stay orders being affirmed by this court. In re Prudence-Bonds Corporation, 75 F.2d 262. The appellant asserts that his fees for services in the state court suits are secured by an attorney's lien, but he does not say to what property the lien attaches. Certainly not to anything which the suits brought into the bankruptcy court, for they brought in nothing. In so far as the suits sought distribution of income, their object was to dissipate the reorganization estate. Denial of any allowance was plainly right. The order is affirmed.

2. Claims of London, Klupt, Herz and McKercher & Link. This is a joint appeal by attorneys who severally represented individual bondholders. Since the district court ruled that it was feasible to apply the provisions of the Chandler Act, the appellants claim that they are entitled to compensation by virtue of section 243, 11 U.S.C.A. § 643. But these provisions do not mean fees as of course; compensation is to be awarded only for services which contributed to the plan confirmed or were beneficial in the administration of the estate. We see no adequate reason to reverse the denials of compensation. They are affirmed.

3. Claim of Condon. This appellant has not even thought enough of his appeal to file a brief. The order is affirmed.

4. Claim of Alfred T. Davison. He requests an allowance of (a) $1600 for services in preparing a plan for readjustment under the Schackno Act, N.Y.Laws 1933, ch. 745, Unconsol. Laws, § 1796 et seq., of the Seneca issue of mortgage certificates, and (b) $350 (plus $7.25 disbursements) for services in preparing a proof of claim based on a lease of the property covered by the Seneca mortgage. The services covered by item (a) were performed under employment by the debtor and the guarantor and before the debtor's reorganization proceedings were instituted. These proceedings necessitated abandonment of the attempt to reorganize under the Schackno Act, but the appellant claims that his services were beneficial to the plan confirmed in the debtor's proceedings and that his right to compensation, if the services were beneficial, was recognized by the order of July 2, 1936, setting up a $15,000 reorganization expense fund. The master, however, found against him on the issue of benefit. While there are similar features in the two plans, that is something to be expected even between plans independently prepared. We see no adequate ground for reversing the master's finding. The services covered by item (b) relate to a proof of claim filed in the name of The Prudence Company, Inc. against Paramount Publix Corporation.The claim was subsequently expunged without notice to Mr. Davison, thereby destroying his attorney's lien. If entitled to redress, he should seek it from The Prudence Company rather than the debtor. Denial of the Davison claim is affirmed.

5. Claim of William T. Cowin, trustee of the guarantor. This is a claim for some $249,000 for the alleged cost of "servicing" sixteen of the series of bonds from February 1, 1935, to about July 1, 1936. Prior to the debtor's petition for reorganization one of the corporate trustees brought a suit to terminate "servicing" of the collateral by The Prudence Company, Inc., which was in default as guarantor. Decision for the plaintiff was rendered January 24, 1935. President & Directors of Manhattan Co. v. Prudence Company, Inc., 266 N.Y. 202, 194 N.E. 408. Forthwith the guarantor took shelter under section 77B and its trustees continued to hold on to the "servicing" business. That they were not entitled to do so was decided by this court on March 9, 1936. In re Prudence Co., 82 F.2d 755. A writ of certiorari was denied, Callaghan v. Marine Midland Trust Co., June 1, 1936, 298 U.S. 685, 56 S. Ct. 957, 80 L. Ed. 1405. They then applied in the debtor's proceeding for leave to service the collateral but this was denied by Judge Inch on July 14, 1936. Then at long last the guarantor's trustees gave up their struggle for future "servicing", but they retained the sum they had set aside as the cost of past servicing. Further litigation was necessary before the guarantor's trustees would give it up. In re Prudence Co., 2 Cir., 92 F.2d 419. At page 421 of 92 F.2d, we stated that any application for reimbursement for expenses in servicing the collateral would have to be made to the court having charge of the debtor's reorganization. The order on appeal is from a denial of such application. The appellant's claim lacks merit. The guarantor's trustees stubbornly hung on to the "servicing" business in the face of repeated decisions that they had no right to continue it. Their insistence upon doing it gives them no right to compensation or reimbursement of expense, as this court has previously intimated. In re Prudence Co., 2 Cir., 96 F.2d 161, 164; In re Prudence Co., 2 Cir., 98 F.2d 729, 732. The present contention that they were employed as agents by the debtor's trustees, pursuant to power conferred by the orders of June 29, 1934, and July 31, 1934, was found against them by the special master and is adequately supported by the record. We are not impressed by the fact that fees were allowed them in connetion with the Fifteenth Series Plan and the Seneca Plan. This does not estop the district court or this court from considering the present application on its merits. Nor are we faced with the supposed dilemma of having to recognize that, if the servicing was unauthorized, then all acts performed by the guarantor's trustees were done without authority and are subject to attack.Acts of a volunteer which were beneficial to the debtor's trustees may be validated by ratification. The stubborn insistence of the guarantor's trustees on maintaining their position as to servicing the collateral was not beneficial; it has substantially increased the cost of the oreorganization by protracted litigation. We see no equities in favor of the claimant; the equities all run the other way. The order is affirmed.

6. Claim of Charles H. Kelby, Trustee of New York Investors, Inc. This claimant seeks reimbursement of $50,954.64 expended by him as trustee of the debtor's sole stockholder in connection with promulgating plans of reorganization. The expenditures were for printing, mailing, advertising, soliciting bondholders' consents to the plans, and employing clerical help incident thereto. They were incurred at the request of the debtor's directors because the debtor itself had no money and its trustees were not authorized to propose plans under section 77B of the Bankruptcy Act. The special master treated the expenditures as a loan to the debtor to which no recognition could be given in view of the debtor's insolvency. The appellant's contention that the record does not support the theory of a loan must be sustained. The expenditures were expenses incurred by the stockholder in trying to put through a reorganization in the interest of the debtor, i.e. a plan which would preserve some value for the stock. That plan failed when the debtor's insolvency was found. Nevertheless, the stockholder's efforts were of some benefit to the plan ultimately confirmed because the consents of bondholders obtained as a result of them were turned over to the debtor and made up about half of the necessary percentage of acceptances. Under section 243 of the Chandler Act, 11 U.S.C.A. § 643, which the district court declared applicable, we think the stockholder's disbursements should have been allowed to the extent of the benefit conferred. This amount cannot be determined with mathematical certainty. When the debtor was found to be ...


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