The opinion of the court was delivered by: GURFEIN
The United States Trust Company of New York ("U.S. Trust"), indenture trustee for $16,500,000 of 5% subordinated convertible debentures of the Debtor, and its counsel, Whitman & Ransom, appeal from an order of Referee (now Bankruptcy Judge) Roy Babitt denying them allowances upon the confirmation of an arrangement under Chapter XI of the Bankruptcy Act (11 U.S.C. § 701 et seq.). Judge Babitt in a memorandum opinion denied the allowances upon the ground that the Bankruptcy Act made no statutory provision for such allowances in a Chapter XI proceeding and that the Bankruptcy Court could not, under its equity power, enlarge upon the statute. The appellants contend that the question is one of first impression.
The facts are somewhat unusual. U.S. Trust was the Successor Indenture Trustee of the subordinated debenture issue described above. The Debtor filed a petition for an arrangement under Chapter XI on February 8, 1972. In addition to the unsecured subordinated debenture holders there were also unsecured bank creditors and unsecured trade creditors.
Shortly before filing the petition and immediately thereafter the Debtor negotiated with the consortium of bank creditors and with the trade creditors but not with the Indenture Trustee. The Debtor and the other creditors apparently took the position that since the debentures were "subordinated" debt, their holders could have no voice in the negotiation of a settlement.
Appellant nevertheless sought proofs of claim from the debenture holders and attempted to vote the election of an official creditors' committee which would include debenture holders, and for the election of an officer of appellant as tentative trustee. In the meantime it had retained the services of Whitman & Ransom, the other appellant, as its attorney on behalf of the debenture holders.
The first meeting of creditors was held on March 14, 1972. The attempt of appellant to vote its proofs of claim was resisted. The question of the right to vote the proofs of claim under Section 338 of the Act, 11 U.S.C. § 738, was submitted to the Referee who held that the debenture holders in the aggregate could vote only one claim. This, in effect, disenfranchised the public debt from separate representation on the official committee. An appeal from this ruling was not perfected.
Counsel for the Indenture Trustee was not without resources, however. Although the indenture provided for the assignment of the subordinated debt to the senior indebtedness in the event of insolvency of the debtor, he came up with the contention that, because of certain ambiguities of language in the indenture, the "subordinated" debentures might not be subordinate in an arrangement that contemplated the acceptance of common stock by the bank creditors. Suffice it to say that the argument of the Indenture Trustee prevailed to the extent that the "subordinated" debenture holders were recognized as a class which had not been wiped out because of the failure to make whole the creditors with priority.
Normally, subordinate debt is deemed worthless if the primary debt is not satisfied in full. See In re Itemlab, Inc., 197 F. Supp. 194 (E.D.N.Y.1961). By virtue of their argument that they were not in fact "subordinate," the debenture holders were taken into the negotiations and emerged with a part of the rehabilitated company for their own. The negotiations had taken place before the time to file a petition for review of the Referee's rule had expired, and were conducted under threat by the debenture holders that they would pursue the appeal. An agreement was reached that the appellant would withdraw its petition for review and that the Plan would provide that the debenture holders would receive in the aggregate 196,092 shares of the common stock of the Debtor, representing about 20% of the stock of the Debtor to be outstanding after confirmation.
All unsecured creditors received stock and no cash. The Plan also provided for the election of an officer of the appellant as one of five directors.
Appellant further asserts that the legal fees incurred by the appellant were to be paid by the Debtor subject to the approval of the Bankruptcy Court. Counsel for the Debtor denies that any such agreement "oral or written" was ever made. No writing has been tendered in support of the alleged agreement.
In the fixing of allowances the Referee denied the applications of the Indenture Trustee and of its counsel for lack of statutory authority or equitable power. Both the Trustee and counsel brought this petition for review. The order of the Referee is confirmed.
The Court of Appeals for this circuit has enunciated the rule that "the bankruptcy court lacks power to grant, and the policy of the Act is against, compensation not expressly provided for by the Act." Lane v. Haytian Corp., 2 Cir., 117 F.2d 216, 219, cert. denied, 313 U.S. 580, 61 S. Ct. 1101, 85 L. Ed. 1537 (1941); see also Guerin v. Weil, Gotshal & Manges, 205 F.2d 302 (2 Cir. 1953). This rule was expressed in a proceeding for an arrangement in a Chapter XI proceeding. Unless Haytian has been eroded in this respect, the search must be limited to whether compensation is expressly granted under the Act.
Appellants concede it is not, but they argue that the Bankruptcy Court may, nevertheless, award compensation upon principles of equity. This requires a brief review of the provisions of Chapter XI and an inquiry into whether Congress intended to foreclose allowances to all except the official committee.
Section 338 of the Act provides for the election of an official committee of creditors to represent the interests of all unsecured creditors. Under Section 337(2) the Court fixes a time when the debtor is required to deposit "the actual and necessary expenses incurred . . . by the committee of creditors and the attorneys or agents of such committee." As Judge Clark noted in Haytian, supra, these references are to a single committee. 117 F.2d at 219.
Section 339(2) of the Act provides for the payment of expenses of such a committee and the fees of its counsel. The Act does not provide for the reimbursement of expenses or the payment of legal fees to any other person or body representing creditors in Chapter XI proceedings.
Appellants recognize that an Indenture Trustee was denied an allowance in a Chapter XI proceeding by our late brother McLean in Matter of Straus-Duparquet, Inc., (unreported), No. 65 B 181 (S.D.N.Y. May 10, 1966), but they contend that the case is not analogous for the reason that the Indenture Trustee in Straus represented debenture holders who were not subordinated and hence ranked pari passu with other unsecured creditors. The inference is that the Indenture Trustee in Straus duplicated the work of the official committee because there was no conflict of interest between the debenture holders and the other unsecured creditors. Per contra it is suggested that, in view of the position of the debenture holders here as adverse to the ...