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May 19, 1949


The opinion of the court was delivered by: RIFKIND

Here to be disposed of are the reorganization trustee's account and application for compensation; the application of his accountants for compensation; and the application of the successor trustee for compensation. The Securities and Exchange Commission (S.E.C.) objects to the trustee's account, urging that compensation be denied him and that he be surcharged for infidelity and waste. There is no objection to the accountants' application. Nor is there objection, except as to amount, to the successor trustee's application.

On May 21, 1942, the trustee was appointed in proceedings for the reorganization of the Pr-R Holding Corporation under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The debtor's principal asset was the Park Royal Hotel, a residential, apartment hotel, located at 23 West 73 rd Street, New York City. The trustee managed the Hotel from his appointment until May 16, 1945, when a successor trustee took charge. An acceptable plan of reorganization was effectuated during the trustee's regime.

 The S.E.C. alleges that the trustee was negligent or faithless in three respects:

 (1) he (a) had meals at the Hotel without paying therefor;

 (b) took food out of the Hotel without paying therefor,

 (c) occupied rooms at the Hotel without paying any rental,

 (d) bought liquor in bottles from the Hotel and paid therefor a price equal to its cost the Hotel, and

 (e) entertained a large party at the Hotel and paid a lesser price than that normally charged;

 (2) He negligently or deliberately authorized a great deal of unnecessary painting and decorating; and

 (3) he received 'kickbacks' from the painting contractor.

 All but one, (e), of the first group of allegations are substantiated. In extenuation, it was shown to be the custom at this and other similar hotels to permit the senior officials to eat free of charge and to buy liquor in bottles, at cost, for their personal use. The trustee did both. He should not have accepted meals without paying the price, because, unlike the senior employees, free meals were not part of his agreed compensation. As trustee, he was entitled to no compensation except by court order. Although there is no proof that the trustee bought liquor for profit making purposes, and although he subjected the estate to no loss, he did receive an unauthorized benefit thereby. The evidence of his use of Hotel accommodations shows that on a number of occasions during the summer weeks he returned to New York from the country to attend to the business of the Hotel and on those occasions slept in unrented rooms which were usually furnished with no more than a bed and a chair. However small the charge for such meager accommodations might have been, he should have paid for his room. The amount involved is trivial. It also appears that on occasion his wife would take home leftover cakes and meat scraps for her dog. Least substantial is the complaint regarding the party held by the trustee at the Hotel. Present were 136 persons, for whom the trustee paid the Hotel $ 2 per person, supplying his own beverages and music. He provided extra compensation for the waiters. The trustee notified the S.E.C. and all other parties to the reorganization of his intentions to hold the party at the Hotel, and none objected. The price charged the trustee was not proved to be too low. While the trustee must now be surcharged for his meals and the liquor purchases, his actions, taken together, display no faithlessness, no injury to the debtor, no material profiting at the debtor's expense. They do, however, suggest the absence in the trustee of that scrupulousness and punctilio in dealing with a cestui's property which should characterize the behavior of trustees. The lower standard observed by this trustee ought to be discouraged; if it stood alone, the form of discouragement might well be a reduction in the trustee's allowance as compensation.

 The S.E.C.'S second allegation, (2), is both substantial and, in good part, substantiated. It appears that at the beginning of his tenure, in 1942, his management of the Hotel with respect to painting and decorating was diligent. He abandoned the 'cost-plus' system under which painting had theretofore been contracted for by the Hotel and substituted fixed prices for various categories of work, for which he requested bids from several painting contractors. One Reisman, who had been the painting contractor for the Hotel since its erection, was awarded the contract after he agreed to a schedule of prices not appreciably higher than any other submitted. The trustee had had no prior acquaintance with Reisman, and retained him on the advice of the Hotel manager (who, too, had been with the Hotel since its erection, and whom the trustee had retained), because Reisman was familiar with the Hotel and all its workings, so much so, in fact, that he stored his materials there and made free with the office facilities.

 About a month after the painting contract with Reisman was made, the trustee began to pay an additional amount on each painting bill submitted, at the rate of 7 1/2% of the contract price. It appears that Reisman demanded an increase of 15% on account of claimed increased costs of labor and material and, after negotiation this was reduced to 7 1/2%. The trustee made no real investigation of Reisman's claims of increased costs, nor did he obtain bids from other painting contractors. The charitable explanation of these failures is that he trusted Reisman and thought the Hotel would benefit from a continuation of the services of a painting contractor who was thoroughly familiar with the premises and with many of the tenants. The trustee did check with apparent care the painting charges billed to the Hotel against the schedule of charges agreed to by Reisman and made numerous corrections to the advantage of the Hotel. His discovery of numerous discrepancies casts doubt upon his discretion in continuing to rely upon the good faith and honestly of Reisman.

 The trustee retained Reisman as painting contractor for the year 1943 and thereafter. He accepted Reisman's schedule of prices for 1943 (the same schedule remained in effect until 1945, when the trustee was replaced) without seeking competitive bids, although Reisman's prices for 1943 were considerably higher than for 1942; e.g., in 1942, a living room ceiling was $ 9, in 1943, $ 12; foyer woodwork was $ 7 in 1942, $ 11 in 1943; a one room apartment, painted with one coat of paint, was $ 36 in 1942 and $ 45 in 1943; a four room apartment was $ 154 in 1942 and $ 190 in 1943. In September of 1943, the trustee authorized a payment to Reisman of $ 662, which Reisman represented to be the amount of retroactive wage increases he had been required to pay by the wartime Wage Stabilization Board, with respect to which increases the trustee had ...

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