The opinion of the court was delivered by: MISHLER
Memorandum of Decision and Order (July 28, 1970)
Parker, Chapin and Flattau moved for an order directing payment to them of attorneys' fees out of trust funds representing the proceeds of the sale by the trustees of vending machine routes of the debtor in Hammond, Indiana and St. Louis, Missouri.
On October 3, 1961, Rowe Service Corporation (Rowe) sold to Continental Lake Vendors Corp. (Lake), a wholly owned subsidiary of the debtor, Continental Vending Machine Corp. (Vending), the vending machine business operated by Rowe in Lake and Porter Counties, Indiana. The sale was made pursuant to an agreement dated October 3, 1961.
The sale included approximately 360 cigarette vending machines together with the contract rights of Rowe to place the vending machines in the locations indicated in the various contracts. The contract price for the vending machines was $104,400 and, for the contract and location rights, the sum of $107,300, or a total of $211,700.
Lake paid $100,000 in cash and the balance of $111,700 by executing and delivering a series of 35 notes in the principal amount of $3,100 each and the 36th note in the sum of $3,200, which notes were payable monthly, the first note maturing on November 1, 1961. The notes provided for acceleration at the option of the holder in the event of default on any single note. The notes were endorsed and guaranteed by Vending. The notes were unsecured.
The notes were paid monthly to and including the note due April 1, 1963. In the meantime, without knowledge to Rowe and on July 17, 1962, a joint special meeting of the stockholders and boards of directors of Lake and Vending resolved to dissolve Lake on September 30, 1962 and transfer all the remaining assets of Lake to Vending. On September 30, 1962, Lake was insolvent.
On March 29, 1963, an action was commenced by the Securities and Exchange Commission against Vending in which a conservator was appointed in the United States District Court for the Southern District of New York (No. 63-B-897).
There was a default in the note dated May 1, 1963, the 19th of the series.
Prior to May 22, 1963, Rowe transferred and assigned its right, title and interest in the notes due and to become due in the series to Automatic Canteen Company of America (Canteen). On that day, Canteen elected to accelerate payment of all the remaining notes.
In the interim and prior to September 30, 1962, James Talcott (Talcott) loaned $206,014.29 to Lake and, as security, accepted conditional sales contracts on all the cigarette vending machines owned by Lake, which included those conveyed by Rowe and others.
An involuntary petition pursuant to Chapter 10 of the Bankruptcy Act was filed against Vending and an order approving the petition was made on July 12, 1963. Canteen and Talcott filed claims in the proceeding based on the obligations referred to in addition to other claims. Two other creditors of Lake also filed claims in the proceeding against Vending; first, Morris Levy and Elizabeth Levy filed a claim in the sum of $43,708.32 representing the balance due on the purchase price for the sale of a vending machine route to Lake on September 1, 1959 and, second, the State of Illinois filed a claim for Retailers Occupancy Tax due from Lake for the period June 1, 1961 to September 25, 1961 in the sum of $3,006.
On October 8, 1963, the trustees of Vending sold the Hammond, Indiana route for the sum of $330,000. This sale included the vending machines and contract rights and locations which were sold by Rowe to Lake on October 3, 1961 in addition to other vending machines and contract rights. The value of the security of the Talcott obligation based on the value of the machines that were located was determined to be $85,405.72. Talcott, therefore, was an unsecured creditor to the extent of $120,608.
By petition dated December 4, 1963 and filed in the office of the Clerk of this court on December 23, 1963, Canteen claimed a prior lien on the proceeds of the sale of the Hammond, Indiana route on various grounds.
This court, in a decision dated August 18, 1964, dismissed the petition. The memorandum of decision dated that date held that the creditors of Lake had no lien in the assets fraudulently transferred or transferred in violation of Indiana's Bulk Sales Statute. On appeal, 358 F.2d 587 (2d Cir. 1966), it was held that Canteen, as a creditor of Lake, was the beneficiary of a constructive trust impressed upon the tranferred assets in the hands of the directors of Vending because the transfer was a distribution by Lake to its sole stockholder while Lake was insolvent. The court held:
"We hold them [directors of Vending] trustees of the corporation's property on behalf of the creditors [of Lake], so that as a class the creditors should be able to follow the property into the hands of the directors, here acting for the parent. There it remained when the trustee in bankruptcy was appointed, and he took subject to that trust." 358 F.2d at 590.
The Right to Reimbursement for Attorneys' Fees
At the time of the institution of the proceeding by Canteen by petition dated December 4, 1963, this court considered the unsecured creditors of Lake as general unsecured creditors of Vending. Canteen's prosecution of its claim to a prior right in the proceeds of the sale of the Hammond route ultimately established the creditors as cestui of a trust fund in the hands of the directors of Vending at the time of the filing of the petition pursuant to Chapter 10 against Vending.
In this country, as distinguished from the English practice, the general rule is that attorneys' fees are not recoverable as costs. In the conventional meaning of the term "costs", described as costs between "party and party", such fixed costs are taxable against the losing party. What is sometimes called "costs" as between "solicitor and client" is really a charge against a fund used to reimburse one of the parties benefited by the fund who has assumed the prosecution of the claim for the benefit of himself and other parties. Trustees v. Greenough, 105 U.S. 527, 26 L. Ed. 1157 (1882); Sprague v. Ticonic Nat. Bank, 307 U.S. 161, 59 S. Ct. 777, 83 L. Ed. 1184 (1939); 6 Moore, Federal Practice 1348 et seq. [2d ed.]; Mills v. Electric Auto-Lite Company, 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970).
In Greenough, one Vose brought an action on behalf of himself as a bondholder and others similarly situated to prevent wasting of assets. He succeeded in the litigation and filed a bill of complaint for his reasonable costs, counsel fees, and charges and expenses in the litigation. The Court noted, at 105 U.S. at 529, 26 L. Ed. at 1159, that "the litigation was carried on with great vigor and that much expense and, in fact, a large amount of the trust fund was secured and saved." The Court permitted reimbursement of his litigation expenses "incurred in the fair prosecution of the suit and rescuing the trust fund and causing it to be subjected to the purposes of a trust."
The right to recover litigation expenses is not confined to those cases where the plaintiff sues for a class. In Sprague, supra, the form of the litigation requested relief only for the plaintiff.
"But in view of the consequences of stare decisis, the petitioner by establishing her claim necessarily established the claims of fourteen other trusts pertaining to the same bonds. (307 U.S. at 166, 59 S. Ct. at 780)
Whether one professes to sue representatively, or formally makes a fund available for others may, of course, be a relevant circumstance in making the fund liable for one's costs in producing it. But when such a fund is for all practical purposes created for the benefit of others, the formalities of the litigation -- the absence of an avowed class suit or the creation of a fund, as it were, through stare decisis rather than through a decree -- hardly touch the power of equity in doing justice as between a party and the beneficiaries of his litigation. As in much else that pertains to equitable jurisdiction, individualization in the exercise of a discretionary power will alone retain equity as a living system and save it from sterility. In the actual exercise of the power to award costs "as between solicitor and client" all sorts of practical distinctions have been taken in distributing the costs of the burden of the litigation."
Though the right to reimbursement appears to be in the litigant, it was early recognized that counsel for the litigant had the right to make application for the value of the services to the other beneficiaries of the fund created through the efforts of counsel. Central R.R. & Banking Co. v. Pettus, 113 U.S. 116, at 124-125, 5 S. Ct. 387, 28 L. Ed. 915 (1885). Cf. Gibbs v. Blackwelder, 346 F.2d 943 (4th Cir. 1965).
We now turn to the claim of Canteen's attorney and their request to charge the trust fund, consisting of the proceeds of the sale of the St. Louis route, for services rendered Canteen in connection with the Hammond, Indiana route.
Continental St. Louis Corp. (St. Louis) was a wholly owned subsidiary of Vending. It operated vending machine routes in the City of St. Louis, Missouri. As in the case of Lake, it was resolved to dissolve St. Louis by resolution dated July 17, 1962, to become effective September 30, 1962. The resolution provided for the transfer of all remaining assets to Vending. It does not appear from the record before me in the instant proceeding when the transfer of the assets from St. Louis to Vending occurred or whether St. Louis was insolvent when the ...