In the Matter of Harry Smith Machine Company, a California Corporation, Debtor,samuel A. Miller and Mason & Wallace, Appellants, 232 F.2d 950 (9th Cir. 1956)

Samuel A. Miller, Los Angeles, Cal., Mason & Wallace, Long Beach, Cal., for appellants.

Craig, Weller & Laugharn, Los Angeles, Cal., for appellee.

Before HEALY and FEE, Circuit Judges, and WALSH, District Judge.

WALSH, District Judge.

This appeal arises out of proceedings initiated on March 10, 1954, by Harry Smith Machine Company, a California corporation, (hereinafter "the debtor"), when it filed its original petition for relief under Chapter XI¹  of the Bankruptcy Act of 1938, as amended.² 

On March 23, 1954, pursuant to petition of the debtor, the referee appointed Samuel A. Miller and Mason & Wallace (hereinafter "appellants"), attorneys for the debtor in possession, the order providing that the appointment of appellants was under a general retainer and that they should be compensated for their services out of the estate of the debtor. A few days after their appointment, appellants filed on behalf of the debtor a petition for an arrangement under Section 322³  of the Act. According to the plan set forth in this petition, all debts which have priority under Section 64, sub. a(1), (2), and (4)⁴  of the Act would be paid in cash in full upon the signing of an order confirming the plan or, in the case of tax claims, in such installments as might be agreed upon between the debtor and the various taxing agencies concerned. As to unsecured debts, the plan proposed that the unsecured creditors accept as full payment sixty per centum (60%) of the amounts proved and allowed by the court, when paid as follows: Five per centum (5%) of the amount due the unsecured creditors, in cash, ninety (90) days after the signing of the order confirming the plan and a like five per centum (5%) each thirty (30) days after the first payment, until the unsecured creditors should have been paid a total of sixty per centum (60%) of their claims as proved and allowed.

On April 13, 1954, appellants filed for the debtor an amendment to the petition for arrangement which provided that unsecured creditors would be paid one-hundred per centum (100%), rather than sixty per centum (60%) of the amounts due them, the payment to be accomplished by the debtor's continuing to make the five per centum (5%) payments every thirty (30) days, as set out in the original petition, until all unsecured creditors were paid in full. On June 9, 1954, appellants procured an order of the referee confirming the arrangement proposed by the debtor in its petition and the amendment thereto. The formal order contained a recital, as a finding by the referee, that the tax claims entitled to priority had been paid and that such other deposit as is required by the provisions of Chapter XI had been made.

Following the entry of the order confirming the arrangement, appellants filed a petition for allowance to them of attorneys' fees in the sum of $3500.00. In the petition, appellants stated that they were agreeable to accepting the note of the debtor for the fees allowed, to be paid in twelve (12) equal monthly installments, with interest at six per-centum (6%), but they claimed that any allowance made, being one of the costs and expenses of administration, should be a lien on all of the assets of the debtor until paid. After notice to all interested persons, the referee held a hearing on the petition, at which no objection was entered by the debtor or any creditor, and thereafter he entered his order allowing appellants attorneys' fees in the amount and payable upon the terms prayed for, but providing that the allowance should rank equally with the debts owing to unsecured creditors and covered by the order confirming the arrangement entered on June 9, 1954. Appellants, contending that the referee erred in failing to provide that the allowance should constitute a lien on the assets of the debtor, petitioned for review of the referee's order in the District Court and, after hearing, the district judge approved the order of the referee. This appeal from the order of the district judge followed.

The orders of the referee and the district judge were correct. While it may be assumed that the provisions of Sections 64, sub. a(1)⁵  and 302⁶  of the Act rendered any attorneys' fees allowed to appellants a "debt having priority", the means provided for insuring the actual prior payment of such debts are in Sections 337(2)⁷  and 362⁸  of the Act. These statutes require, as a condition precedent to confirmation of an arrangement, that the debtor deposit in such place as shall be designated by the court, the money necessary to pay all debts having priority.

But Section 362 makes specific provision for waiver of priority by creditors; and it is plain that the conduct of appellants here constituted such a waiver. Appellants caused the referee to find that any deposit required by Chapter XI had been made. They did so because such a finding was a condition precedent to the entry of any order confirming the arrangement which they sought for the benefit of their client, the debtor. Having chosen to waive the deposit and the priority in order to aid their client by obtaining confirmation of the desired plan with a minimum outlay of cash, they could not thereafter, in effect, reclaim the priority through the device of an alleged lien upon the debtor's assets. In re Frischknecht, 2 Cir., 1915, 223 F. 417, 420; In re Van Doren, 7 Cir., 1935, 79 F.2d 859.

Some of the language in In re Frischknecht, supra, is apt here:

"If counsel choose to waive payment of their fees in order to make the sum so small that deposit can be made under a composition, so that the composition can be put through, this court is strongly opposed to their thereafter resuscitating their claims and insisting that they should be paid out of the estate. The bed they made for themselves they should lie in. If the bankrupt benefited by their waiver, being thus enabled to effect a composition, we think he is the one who should pay them."

The judgment of the court below is affirmed.