The opinion of the court was delivered by: DIMOCK
Hiram S. Gans, counsel to the Lowell H. Brown Committee of Holders of Third Avenue Railway Company Adjustment Mortgage 5% Income Bonds, has petitioned, under Section 243 of the Bankruptcy Act, 11 U.S.C. § 643, for compensation in the amount of $ 325,000 for services in that capacity and has applied for approval, under section 249, 11 U.S.C. § 649, of a sale of $ 25,000 principal amount of those bonds for his account on October 23, 1951. The S.E.C. recommends denial of both applications.
'Any persons seeking compensation for services rendered or reimbursement for costs and expenses incurred in a proceeding under this chapter shall file with the court a statement under oath showing the claims against, or stock of, the debtor, if any, in which a beneficial interest, direct or indirect, has been acquired or transferred by him or for his account, after the commencement of such proceeding. No compensation or reimbursement shall be allowed to any committee or attorney, or other person acting in the proceedings in a representative or fiduciary capacity, who at any time after assuming to act in such capacity has purchased or sold such claims or stock, or by whom or for whose account such claims or stock have, without the prior consent or subsequent approval of the judge, been otherwise acquired or transferred.'
The claimant pledged the Third Avenue bonds in question as collateral for a bank loan in March, 1951. On October 23, 1951, the date of the sale, claimant's secured loans totaled $ 17,200 and his collateral totaled $ 22,941.49, an amount which failed in a slight degree to meet the requirement of the bank that the value of the collateral should be such that the loan should not exceed 70% or it. The bank demanded either a reduction of the loan or additional collateral. It expressed concern over the quality of the collateral, particularly the Third Avenue bonds which had declined in value from $ 7,343.75 on March 22, 1951 to $ 5,250 on October 19, 1951. The claimant thereupon requested the bank to forward the Third Avenue bonds to his broker for sale and requested his broker to forward the proceeds of the sale directly to the bank. Thereby the loan was reduced by the proceeds of sale, $ 5,250. The claimant could have avoided sale of the Third Avenue bonds if he had sold all of the other pledged securities, valued on the date of sale at $ 17,691.49. That sum would have paid the loan in full and left the claimant the owner of the bonds. Claimant has argued that a forced sale of the bonds would have been inevitable if he had not sold them; but that argument is not supported by facts.
The second sentence of section 249 disqualifies a claimant for compensation in two classes of transactions in securities of the debtor:
1. If the securities have been purchased or sold by the claimant.
2. If the securities have been otherwise acquired or transferred by the claimant or for his account.
In the second class of transactions the claimant is disqualified only if the acquisition or transfer is without the prior consent or approval of the judge.
The first class is the simplest case: a purchase or sale where the claimant acts. It is evident that if the statute is applied literally the transaction under consideration falls within the first class and Mr. Gans is disqualified. The bonds were sold on his order and therefore they were sold by him.
If the transaction was one within the first class, the prior consent or subsequent approval of the judge will not avert disqualification. Otis & Co. v. Insurance Bldg. Corp., 1 Cir., 110 F.2d 333. The court cannot disregard the prohibition merely because it finds that a sale by the claimant within the first class was made in good faith, Otis & Co. v. Insurance Bldg. Corp., supra, or that the sale was not fraudulent or made with intent to avoid the statute by subterfuge, In re Reynolds Investing Co. Inc., 3 Cir., 130 F.2d 60, or that hardship would result from a denial of compensation, In re Norwalk Tire & Rubber Co., D.C.D.Conn., 96 F.Supp. 274.
The transaction falls within the second class if the securities have been acquired or transferred by the claimant or for his account otherwise than where they have been purchased or sold by him. The description in the statute, 'otherwise acquired or transferred', refers back to the first class and therefore is to be construed as if it read 'acquired or transferred otherwise than where the securities have been purchased or sold by the claimant'. Thus a transaction will fall within this description (a) if it is not a purchase or a sale or (b) even though a purchase or a sale, if it is not a purchase or sale by the claimant but is merely for his account without any action by him.
Taking up group (a), an illustration of an acquisition by the claimant otherwise than a purchase would be furnished by a bequest to him. When the legislation was in Congress that was cited as a case where the judge was to be given the power to avert disqualification of the claimant.
An illustration of a transfer by the claimant otherwise than a sale would perhaps be furnished by a gift by him. The transfer in this case, however, was clearly a sale
Passing to group (b), can it be said that the Third Avenue bonds, though sold, were not sold by the claimant but were sold for his account by some one else? If so, I have the power to approve the transaction.
A sale, not by the claimant but made for his account by some one else, can best be exemplified by a sale by a pledgee for the account of the claimant but in which the claimant takes no part. I have no doubt that the statute, in permitting relaxation of its rigor where the transfer was for the account of the claimant but was not a sale by him, contemplated, among other situations, a sale by a pledgee. It would seem unfair to penalize the claimant if all that had happened was that he had been unable to pay a loan secured by a pledge of the securities and that the pledgee had ...