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IN RE REALTY ASSOCS. SECS. CORP.

May 1, 1945

In re REALTY ASSOCIATES SECURITIES CORPORATION


The opinion of the court was delivered by: MOSCOWITZ

A motion was heretofore made herein by certain bondholders (creditors) of the debtor to disqualify the Bondholders' Protective Committee consisting of Messrs. Edwin B. Meredith, Chairman, a business man and financial executive, Jacob R. Schiff, an attorney-at-law, and Milton C. Zaidenberg, associated with an investment and security firm. In connection with such application specifications of charges were filed. These charges were referred to Hon. Edward R. Finch, as Special Master, to report thereon with his opinion.

On March 26, 1945, the Special Master filed an opinion in which he recommended that the application to disqualify the Bondholders' Protective Committee or any members thereof should be denied. On March 29, 1945, the Special Master filed a supplemental report in which he recommended that the cost of the proceeding should be borne by the debtor. A motion has been made to confirm the report of the Special Master recommending that the motion to disqualify the committee be denied.

 In view of the fact that the subject matter in the Special Master's opinion is of such vital importance to the members of the bar, the pertinent portions thereof will be set forth in this opinion, as follows:

 'Among the grounds urged for disqualification is that:

 "The Bondholders' Protective Committee and its members fall far below the rigid uncompromising standards required of fiduciary and should be disqualified from serving as a committee from this proceeding.'

 'There is no dispute over the well-settled principle that:

 "A bondholders (creditors) committee is a fiduciary for all bondholders and as such owes undivided loyalty and allegiance to the bondholders and to them alone.' Moscowitz, J., In re Realty Security Associates, 56 F.Supp. 1008.

 'The dispute in the case at bar is whether the facts shown are sufficient to disqualify the Committee or any member of the Committee.

 'The Bondholders' Protective Committee was formed July 30, 1943, at the instance of an attorney who is a member of the Committee but not its Chairman and who has been a bondholder since 1933. (Respondent's Exhibit B-11.) It is urged by petitioner that this Bondholder's Committee amounts to a strictly one-man Committee organized, financed and dominated by the lawyer member at whose instance it was formed to make fees for the Committee Members and defeat reorganization of the Debtor.

 'It is further urged that this member of the Committee selected his nephew by marriage as counsel to the Committee, and an employee of a company controlled by him as Chairman. In addition, that this same member financed the operations of the Committee by advancing funds in an amount of $ 3,800.00 which was wholly out of proportion to his investment in the bonds of the Debtor. These funds were to pay for advertising, circularization and the services of an agent for nine weeks at Fifty Dollars ($ 50.00) a week, and to explain to the bondholders the criticism of the bondholders' Protective Committee to the Debtor's voluntary plan, and to obtain authorization from the bondholders to join with the Bondholders' Protective Committee.

 'Even assuming the above facts, they are insufficient to show a conflict of interest or divided loyalty. They are also insufficient to show disqualification of the Committee or any of its members.

 'The fact that the Chairman of the Committee has business loyalties or obligations to a corporation in which the dominating member of the Committee is a controlling stockholder, or even that the Chairman has business loyalties to a member of the Committee does not create as such an interest conflicting with or divided loyalty to the interest of bondholders within the purview of the authorities. Such a conflict of interest or division of loyalty could only arise if the Chairman of the Committee while acting for the bondholders, had established an interest or an obligation opposed to those of the bondholders so that he could not act impartially as between such interest and the bondholders.

 'Every person has loyalties and obligations to others but objectionable interests and obligations must be within an orbit where the interest conflicts with and is opposed to those of the bondholders. For example, ties to the Debtor or any of its affiliates would be within the prohibited orbit. It was because the Bondholders Directors Committee had such ties to the Debtor that it was disqualified on application made by the Bondholders' Protective Committee, in Re Realty Associates Securities Corporation, D.C., 56 F.Supp. 1008. A similar situation was considered in Woods v. City Nat. Bank & Trust Co., 312 U.S. 262, 61 S. Ct. 493, 85 L. Ed. 820.

 'The fact that the member of the Committee at whose instance it was formed has advanced monies for the necessary and effective functioning of the Committee provides no grounds for removal. An attorney may advance money necessary for the conduct of the proceeding upon the credit of the cause to be repaid. (Thornton 'Attorneys at Law,' Vol. 2, p. 671, Sec. 389. Wood on 'Fee Contracts of Lawyers,' p. 38.) The Bankruptcy Act, 11 U.S.C.A.Sec. 102, contemplates such expenditures and makes provisions for reimbursement from the Debtor's estate where the court finds such expenditures necessary and for the benefit of the bondholders. In the case at ...


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