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October 11, 1973

In the Matter of YALE EXPRESS SYSTEM, INC., and subsidiaries, Debtors

Tyler, District Judge.

The opinion of the court was delivered by: TYLER

TYLER, District Judge.

Hearings on "final allowances" in these consolidated reorganization proceedings, 11 U.S.C. § 600 et seq., were held on April 25, May 17, May 24, and June 11, 1973. The trustee, his counsel and other parties to these proceedings have submitted applications for allowances of fees and expenses, together with post-hearing briefs in support thereof. On July 26, 1973, the Securities & Exchange Commission ("SEC") filed its memorandum analyzing and constructively criticizing the several applications. See 11 U.S.C. § 608. Total allowances sought aggregate $2,677,784.25, of which $633,479.66 have already been paid as interim allowances over the period commencing in May, 1965, when petitions for reorganization were filed in these cases. Finally, reimbursement for expenses is now sought in the total sum of $18,316.64.


 The history of these consolidated reorganization proceedings has been the subject of a number of reported judicial opinions, articles in national magazines and formal reports filed by the SEC. For purposes of background here, it simply need be recalled that Yale Express System, Inc., an integrated transportation firm and the parent corporation of the other companies involved in these proceedings, is regulated by the Interstate Commerce Commission. Yale Express became a publicly owned corporation in 1960. Shortly thereafter, it entered a program of acquisition, the most important fruit of which was the purchase of a freight forwarding firm then known as Republic Carloading and Distributing Co., Inc. ("Republic"). *fn1" Republic proved to be too large and difficult an entity to be swallowed by Yale Express; as a result, Yale Express suffered losses of approximately $1.5 million in 1963 and $4.5 million in 1964. On May 24, 1965, Yale Express petitioned for Chapter X relief in this court. Within a matter of days thereafter, the various subsidiary corporations of Yale Express, including Republic, filed similar petitions.

 Kenneth B. Keating was initially appointed trustee of the corporations in reorganization and served in that capacity until December 8, 1965, when he resigned to become a judge of the Court of Appeals of the State of New York. By order of this court, a professional transportation man, F. Ralph Nogg, was appointed successor trustee. Despite several difficult years engaged in rehabilitating and reorganizing the business, the trustee was ultimately successful *fn2" in reorganizing all phases of the Yale Express operations. One of the significant reorganization steps was that pertaining to Republic, which was effectively reorganized in 1968 by virtue of a sale to an outside group organized and controlled by Lazard Freres. Finally, in 1972, Yale Express, the parent company, and Yale Transport Co., a major operating subsidiary, were reorganized under an internal plan which provided for the satisfaction of all creditors' claims, including post-petition interest and for some participation by common shareholders.

 Sections 241 through 243 of Chapter X deal with the persons and firms who may apply for compensation and expenses and define at least in general terms the services that may be considered compensable. Section 241, of course, deals with allowances to the trustee and his counsel. According to the terms of that section, they, as officers of the court charged with specific statutory responsibilities, are entitled to "reasonable compensation." As has been argued by applicants here, success in reorganization, which happily was achieved in these cases, is recognized as a factor to be considered in passing upon final fees and allowances. Scribner & Miller v. Conway, 238 F.2d 905 (2d Cir. 1956).

 Of some relevance here is the circumstance that allowances for the attorneys for the debtor are also provided for in § 241 of Chapter X. As in the case of the trustee and his counsel, the applications of counsel for the debtor are to be considered in light of the principle that their activities must be of benefit to the estate in order to qualify for any compensation. In re Porto Rican American Tobacco Co., 117 F.2d 599 (2d Cir. 1941).

 All other applicants here, such as the bond holders committee, indenture trustees and their lawyers, fall within the embrace of §§ 242 and 243. Despite some differences in the language of these sections, both have been consistently construed to also require that the applicants have rendered services which are beneficial to the estates.

 A cardinal principle to bear in mind in connection with the problems here presented is that Chapter X is an investor protection statute. SEC v. United States Realty & Improvement Co., 310 U.S. 434, at 448-499, 60 S. Ct. 1044, 84 L. Ed. 1293 (1940). Thus, in practical terms, it is the creditors and shareholders, principally of Yale Express and Republic, who will bear the costs of paying these allowances. Obviously, therefore, allowances cannot be paid at the prevailing rates of the private sector; they must be moderate in the interests of the debtors, shareholders and creditors. See Finn v. Childs Co., 181 F.2d 431 (2d Cir. 1950). Moreover, it is axiomatic that allowances must be in satisfactory proportion to services actually rendered and beneficial to the estates. In re Hudson & Manhattan Railroad Co., 224 F. Supp. 815 (S.D.N.Y. 1963). As has been consistently recognized, beneficial services to the estates embrace: (1) services contributing to the plans of reorganization approved by the court; (2) services leading to disapproval of plans rejected as being unfair or economically untenable; and (3) services which aided the administration of the estates. Each applicant before the court, of course, has the burden of proof to establish the beneficence and propriety of his services in terms of the allowances which he seeks. Woods v. City National Bank & Trust Co. of Chicago, 312 U.S. 262, at 268, 61 S. Ct. 493, 85 L. Ed. 820 (1941).

 Nevertheless, with due regard to and emphasis upon the first principles of compensation heretofore briefly summarized, it is also true that allowances, particularly in respect to successful proceedings of this kind, should not be niggardly; they should be generous enough to encourage competent lawyers, committees and other entities to render the highly important and useful labors incident to Chapter X proceedings. Delafield, Marsh & Hope v. Silbiger, 228 F.2d 838 at 841 (2d Cir. 1956). Finally, therefore, it is clear that a balance must be struck among the conflicting considerations and interest. Massachusetts Mutual Life Insurance Co. v. Brock, 405 F.2d 429, at 432-433 (5th Cir. 1968), cert. denied, 395 U.S. 906, 89 S. Ct. 1748, 23 L. Ed. 2d 220 (1968). Although something akin to Solomonic wisdom in this balancing operation is desired, this court, as a practical matter, must settle for something less which, nonetheless, factors in the principles heretofore discussed.

 Before turning to the underlying issues and the specific claims of each applicant, it is to be noted that this is not a case where there have been many applicants with inadequate time records presented to the court to back up their submissions. Indeed, the most important and sizeable applications have been supported by comparatively specific time and other records. The few exceptions to this will be treated hereinafter. Moreover, the undersigned has presided over these reorganization proceedings in their entirety and thus has the benefit of first-hand knowledge of the work and services rendered for the last seven years and five months.


 Two applicants before the court, former trustee Kenneth B. Keating and Royall, Koegel & Wells, Esqs., urge that they be awarded interest at the rate of 6 1/2% per annum on the unpaid portions of their respective allowances. So far as can be ascertained, the particular rate of interest requested is based on the fact that the same interest is being paid to creditors of Yale Express under the plan of reorganization.

 Without extended discussion, this court has been unable to find any legal precedent supporting this claim for the payment of interest on so much of the allowances which have not been paid to date. In the view of the undersigned, the absence of any decision supporting this kind of an application is not surprising. To award interest to the former trustee and the counsel for the trustee in a Chapter X proceeding would be anomalous. The two applicants in question were appointed with full recognition that they had no specific claim to any set fees or allowances, either interim or final. They do not stand in the shoes of shareholders or creditors. The estates have not been holding vested sums for them by way of allowances or fees. In short, I conclude that the requirements of §§ 241 through 243 of Chapter X, which contemplate the payment of reasonable compensation for services rendered, would be violated in spirit by the award of any interest for so much of the allowances which have not been paid to date.

 In view of this ruling, it is only necessary to briefly refer to an argument of these two applicants based upon a recent decision of the Court of Appeals of the Third Circuit, In re Imperial "400" National, Inc., 456 F.2d 926 (1972). The holding of that case is irrelevant to the problem at hand; there, the court held that applicants who have been overpaid by interim awards should pay interest on refunds of the overpayments. As stated, the estates here have not been holding any vested funds of the two applicants for interest; more precisely, though this court has always held open to applicants the right to claim final allowances, it does not follow therefrom that final allowances had been fixed and set aside as specific sums due and owing applicants. Thus, their claims for interest are rejected.


 It is evident that the major portion of the final allowances to be granted will be borne by Yale Express. Hence, its present financial condition should be considered.

 For the year ending December 31, 1972, Yale Express had consolidated revenues of approximately $13,052,000. Its operating profit for that year was $525,000. In June, 1973, it had cash or quick assets of approximately $1,044,000 with anticipation, however, of paying some $542,767 worth of claims under the plan of reorganization. At the same time, Yale Express projected additional administration costs of $220,000 and allocated about $325,000 for interest amortization and "working money". The projected cash flow of Yale Express System at this time is about $1,000,000. Yale anticipates spending about $500,000 for capital expenditures for new equipment; fortunately, this capital expenditure is off-set by depreciation expense of about the same amount.

 Accordingly, it can be said that Yale Express presently has a positive cash flow of about $500,000. Nonetheless, it is still true that Yale Express must continue to exercise caution in respect to its cash position for the foreseeable future. To some extent, the problem is eased by the fact that the trustee and his attorneys have agreed to accept 10 year, 7% installment mortgage notes. Yet, on balance, it is perfectly clear that this court cannot ignore the present fiscal position of Yale Express to the point of being unduly liberal in allowances here to be granted.

 Although the problem is theoretically less acute for it, Republic, as will be discussed in more detail hereinafter, will have to bear a proportion of the allowances to Mr. Nogg and counsel for the trustee. Thus, this court cannot be insensitive to the current fiscal condition of Republic. According to Republic's president and counsel, that corporation is in bad condition -- indeed, in need of further reorganization. The facts of record suggest that this conclusion may be more rhetorical than real. Nonetheless, it is true that Republic, from 1969 through 1972, has shown losses in three of those four years. Moreover, Republic has set aside only $150,000 against the contemplated award by this court of final allowances. Thus, though there are reasons to think Republic's business prospects are currently better than painted at the hearings and in its counsel's briefs, this court surely must weigh in the balance the fact that Republic so far is not in a strong cash position.


 Inevitably, there arose occasions in these proceedings when certain parties, particularly the trustee and his counsel, were called upon to and did make estimates of "outside amounts" of final allowances. In early 1969, for example, the trustee and representatives of Royall, Koegel had conversations with the officers and directors of Republic concerning the latter's desire to anticipate what Republic should set aside for its share of additional or final allowances which might be awarded by the court. Indeed, on April 10 of that year, the trustee wrote a letter to the directors of Republic and estimated that the final compensation to him and his counsel for services rendered to Republic up to December 31, 1968 would be approximately $150,000.

 In 1972, during the course of the hearings on the final plan of reorganization of Yale Express and Yale Transport, it was estimated by the trustee and his counsel that final awards to the trustee and his counsel probably would not exceed $500,000.

 Obviously, as was stressed by several parties in the hearings on the final allowances, the total applications for all applicants -- and indeed of the trustee and his counsel alone -- far exceed these figures. Even after adjustment for interim allowances and for fees to be paid by Republic, it is apparent that Yale will have to pay more than the $500,000 figure referred to above. Undeniably, this figure was built into the estimated valuation and allocation of securities under the plan of reorganization of Yale Express. Nonetheless, the trustee and his counsel did their best to qualify their estimates as "guessing figures". Further, it was always made abundantly clear that the court, rather than the trustee and his attorneys, would be the institution to make the decision about any final awards.

 In hindsight, it is regrettable that these estimates were made as they were. Granted that they are by no means binding upon this court as a legal matter, I have nevertheless used these estimates as a reminder in the balancing operation here necessary so that neither Yale nor ...

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