Appeal from an order of the District Court for the Southern District of New York, Morris E. Lasker, Judge, 346 F. Supp. 1252 (1972), overruling orders of a referee in bankruptcy which had refused to consider an application for compensation in a later bankruptcy proceeding by counsel for a debtor in possession in an aborted proceeding under Ch. XI of the Bankruptcy Act.
Waterman, Friendly and Timbers, Circuit Judges.
This appeal from an order of the District Court for the Southern District of New York was presented to us as raising the question whether attorneys for a debtor in possession in a proceeding under Ch. XI of the Bankruptcy Act, which has been superseded by an ordinary bankruptcy proceeding pursuant to § 376, may be awarded compensation out of the estate for legal services rendered during the aborted Ch. XI proceeding. The district judge answered the question in the affirmative and the trustee in bankruptcy has appealed.
Although the proceedings here at issue involved both Casco Fashions, Inc. and its affiliate Kuro Fashions, Ltd., it will generally be convenient to refer only to Casco. In July 1969 it filed a Ch. XI petition for an arrangement under § 322 and was authorized to continue as debtor in possession. Pursuant to General Order 44, it was authorized to retain as counsel Ballon, Stoll & Itzler (hereafter the Ballon firm), to whom it had paid a retainer of $15,000 before the filing of the petition. The Ballon firm rendered substantial legal services during the Ch. XI proceeding. These included the renegotiation of a factoring arrangement, apparently expanded in renegotiation to include considerable inventory financing, and preparation of applications for its approval and periodic renewal; preparation of the required schedules, statement of affairs and list of executory contracts; negotiation of the settlement of the claim of an equipment rental company against Casco, and preparing an application for approval; negotiating the sale of Casco's leasehold, which was no longer needed in view of the consolidation of its operations with Kuro's, and preparing the necessary papers; resisting and attempting to settle a claim for the imposition of a mechanic's lien on the proceeds of the sale; resisting and attempting to settle, prior to successful negotiation of the sale of the leasehold, a motion by the landlord of the leased premises to be permitted to commence summary eviction proceedings against the debtor, largely because of the filing of the mechanic's lien on the premises; negotiation of a sublease of premises in New Jersey and preparing an application for approval; negotiating with the creditors' committees and preparing papers for the consolidation of the proceedings of Casco and Kuro; and negotiating with the creditors' committee and preparing a plan of arrangement which was accepted by the committee. The plan aborted before formal acceptance under § 336 for reasons not appearing clearly of record but acknowledged not to be attributable to any fault of the Ballon firm. Ultimately on April 23, 1970, an order was made, pursuant to § 376, adjudging the debtor a bankrupt and directing that the bankruptcy be proceeded with under the other provisions of the Act.
New York Credit Men's Adjustment Bureau, Inc., the trustee in the bankruptcy proceeding, then applied to the referee under the first paragraph of § 60d*fn1 for a review of the $15,000 payment by Casco to the Ballon firm in contemplation of the filing of the petition. The firm cross-petitioned "for the dual purpose of opposing the motion of the Trustee herein pursuant to Section 60(d) of the Bankruptcy Act, and supporting your petitioner's application for an allowance for professional services rendered to the debtors-in-possession and the bankrupts*fn2 subsequent to the filing of the original petitions for an arrangement . . . ." It asked that the entire $15,000 be decreed fair and reasonable compensation for the sum of its services before and after the filing of the Ch. XI petition.
Understanding will be promoted if we here interrupt the narrative to set forth the Second Circuit precedents with regard to § 60d which establish the context within which the referee was working. In a line of cases of ordinary bankruptcy, this court had held that the services for which a "reasonable amount" may be retained in proceedings under § 60d, supra note 1 -- as distinguished from the possibility of collection under other sections of the Act -- include only those rendered while the debtor was contemplating bankruptcy and not those rendered after the proceedings had commenced. In re Rolnick, 294 F. 817 (2 Cir. 1923); In re Falk, 30 F.2d 607 (2 Cir. 1929); In re David Bell Scarves, Inc., 61 F.2d 771, 773 (2 Cir. 1932), aff'd sub nom. Conrad v. Pender, 289 U.S. 472, 77 L. Ed. 1327, 53 S. Ct. 703 (1933) (Supreme Court citing In re Rolnick, supra, with approval, 289 U.S. at 476); In re Buchanan, 66 F.2d 416, 419 (2 Cir.), cert. denied, 290 U.S. 682, 54 S. Ct. 120, 78 L. Ed. 588 (1933). The case of In re Knickerbocker Leather & Novelty Co., 158 F. Supp. 236 (S.D.N.Y. 1958), aff'd sub nom. Haar v. Oseland, 265 F.2d 218 (2 Cir. 1959) (per curiam), raised the question whether the same rule applied when the post-petition legal services were rendered to a debtor in possession under Ch. XI. Judge Sugarman there sustained an order of a referee directing the return of the bulk of a pre-petition payment, refusing by so doing to allow any amount for services rendered after filing of the Ch. XI petition, but added that this did not preclude a subsequent application for compensation for post-petition services under § 64a(1) upon notice under § 58a(8). Cf. In re Falk, supra. This court affirmed per curiam on the opinions below, saying:
The order, of course, did not purport to preclude an application for an allowance as an expense of the administration of the estate.
Relying on this and other authorities, the referee in the instant case found that $3,000 constituted a reasonable fee for pre-petition services and directed that $12,000 be returned. He said nothing about an allowance under § 64a(1); but his reference to the Knickerbocker case (at the Second Circuit level) could be taken as indicating that this subject remained open for later consideration. After a rehearing held at the Ballon firm's request, the referee adhered to his initial determination; his remarks during the argument on rehearing lend more support to the proposition that he was leaving open the subject of a possible allowance under § 64a(1) than to any suggestion that he was precluding such an allowance.
In their petition for review, the Ballon firm asserted, among other things, that it was error for the referee not to consider their application as under § 64a(1);*fn3 the referee certified this as one of the alleged errors to be reviewed; and the parties apparently argued at length before the district court whether, among other things, § 64a(1) permitted an allowance such as that sought by the firm. The court found that, in contrast to the situation in Knickerbocker, there had here been notice of the application conforming to § 58a(8), which is no longer disputed. Judge Lasker then ruled, relying on a passage in 3A Collier, Bankruptcy 1601 (14th ed. 1969), which we do not find particularly conclusive, that the referee was bound to consider the application on its merits then and there. 346 F. Supp. 1252, 1255 (1972). Although any fee to the Ballon firm for its services in the Ch. XI proceeding would be subordinated to administration expenses in the ensuing bankruptcy by virtue of the final sentence of § 64a(1),*fn4 the judge thought this unimportant in the instant case in view of the amount of the assets and of the probable administrative and legal expenses. Id. at 1255-56. Accordingly, he proceeded to the merits and held that attorneys for a debtor in possession under an aborted Ch. XI proceeding were entitled to a proper allowance under § 64a(1) in a subsequent bankruptcy. Id. at 1256. Judge Lasker issued an order remanding to the referee for determination of the amount of legal fees earned by the Ballon firm as counsel to the debtor in possession in addition to the $3,000 already awarded for pre-petition services to the debtor.
If the trustee had sought reversal here on the basis that the referee did not abuse his discretion in deferring consideration of the application under § 64a(1), we might well have agreed. Convenience may be served by considering all claims for administration expenses, and particularly for attorneys' fees, at one time. Optimistic prognostications of the sufficiency of assets to meet the administration expenses of the superseding bankruptcy may prove erroneous. Moreover, a single consideration enables the referee to take into account the totality of the claims for administration expenses as against the amount available for creditors. However, appellant has not asked us to reverse the district court on that ground; apparently both sides desire a determination on the merits of a question important in the administration of the Bankruptcy Act, as to which the decisional law does not establish a clear answer, at least in this circuit. In affirming, as we do, we are not to be taken as deciding ...