In Re Manhattan Music Hall, 14 F. Supp. 48 (S.D.N.Y. 1936)

*49 *50 *51 *52 *53 *54 O'Neil & Collins, of New York City, for trustee.

Joseph Dannenberg and Goldman, Malter & Goldman, all of New York City (Julius M. Arnstein, of New York City, of counsel), for creditors' committee.

Lawrence Berenson, of New York City, for temporary trustee.

CAFFEY, District Judge.

I heard oral argument in this case January 3. I have not had opportunity until now to examine the papers.

For reasons which will appear, in their nature the matters involved divide themselves into two classes: (1) Those in which allowances were denied; (2) those in which allowances were awarded. These will be separately discussed in order.

The proceeding was initiated by an involuntary petition for reorganization, in conformity with subdivision (a), under section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207 (a). An answer, containing the admissions prescribed by the same subdivision in such cases, was filed. The filing of the petition was thereupon approved. Subsequently, no plan of reorganization having been forthcoming, a liquidation of the estate was directed. In form the order on the decision to that effect, dated March 9, 1935, (1) directed that the 77B petition be dismissed; (2) directed that the estate be liquidated; (3) appointed a trustee, as provided for in section 77B, subd. (c) (8), of the act, 11 U.S.C.A. § 207 (c) (8); and (4) referred the case to a referee, as provided for in subdivision (k), 11 U.S.C.A. § 207 (k). There is apparent inconsistency between clause 1 and clauses 2, 3, and 4. Nevertheless, considering the order in its entirety, I agree with the referee in feeling that it should be treated, and can only be construed, as an order directing liquidation, made pursuant to subdivision (c) (8).

In due course a trustee (different from the liquidating trustee, and in fact being one who had been chairman of a creditors' committee up to the date of the liquidation order), was appointed in conformity with section 77B, subd. (k) (3), of the act, 11 U.S.C.A. § 207 (k) (3). He has in hand an estate of $1,790, though the referee says that it is not yet ready to be closed and that more assets may be discovered. The applicants ask present payment by the permanent *55 trustee, appointed at the first meeting of creditors.

The total sought for compensation and disbursements was $2,888.55. The referee wholly disallowed pay on either account to (1) the chairman of the creditors' committee, (2) the secretary of the committee, (3) counsel for the committee, and (4) a custodian of the liquidating trustee. The first three items, aggregating $1,198.40, were denied because, as the referee held, there was no power to grant them. The fourth item, for $60, was not seasonably applied for, but leave was granted to renew application for it. It will therefore be disregarded. What is of consequence, and raises a question important as well as novel, is the disallowance of anything to members of, and counsel for, the committee. That I shall discuss at some length.

The committee and its counsel functioned as such only during the 77B proceeding and up to the date when the court refused to extend the period further for proposing a plan of reorganization. They do not base their claims, even in part, on anything done by them after the liquidation order.

The defeated applicants argue that they were sincere; also that fairness and equity demand that they be paid.

Without disputing the quality of the behavior of, or the justice of remuneration from some source to, the applicants, still I am impressed that their contentions are wholly irrelevant. The sole issue is one of statutory interpretation. The only problem is to discover what Congress meant. Plainly that is to be ascertained by examination and analysis of the language which Congress employed.

I concur with the conclusion reached by the referee; also with his grounds for it. In my view, he has put the matter so well that I shall rest on his opinion and I refrain from attempting a restatement. I shall add to it and shall consider some arguments which I infer were not addressed to him.

As I see it, there is no escape from treating the word "shall," used in section 77B, subd. (k) (5) of the act, 11 U.S.C.A. § 207 (k) (5), as mandatory.

In urging the contrary, the defeated applicants assign no convincing reason. They say that, unless the court possess power to award them pay, they may render much service without being compensated out of the estate. I see nothing startling about a result such as that, however. It is common practice in general litigation, as well as in bankruptcy litigation, for creditors, individually or in co-operation or through counsel, to do much, and much which enhances the estate involved, and yet bear their own expenses. It is only in the instances specified by statute that compensation can properly be claimed out of the estate. The contention that because, in the circumstances, they would get no pay out of the estate, as I see it, fails, therefore, to afford basis for presuming that Congress intended that they should get pay in that way.

Moreover, it must not be overlooked that we are dealing with a case where reorganization failed. It is not irrational to suppose that Congress intended the power of the court defined in section 77B, subd. (c) (9), of the act, 11 U.S.C.A. § 207 (c) (9), to apply, so far as concerns compensation of creditors and their counsel, only where the effort at reorganization succeeded. It is not irrational to suppose that it was the deliberate purpose, where liquidation ensued, to remit creditors and their counsel to the general provisions of the Bankruptcy Act for determination of whether they were entitled to pay out of the estate, including pay for what preceded the liquidation order.

The consequence of the word "shall," being in its nature mandatory, is, as I feel, that in a case such as the present, which has come within subdivision (k) (5), the authority conferred by the word "may" in subdivision (c) (9) is inapplicable, or, to put it otherwise, was terminated.

One argument for the opposite interpretation, as I understand it, is that subdivision (c) (9) must be read in immediate conjunction with subdivision (c) (8), and therefore that the authority given to the judge by subdivision (c) (9) must be deemed to continue in existence after a liquidation direction pursuant to subdivision (c) (8). It does not seem to me, however, that the conclusion follows from the premise. If section 77B (c) (9), 11 U.S.C.A. § 207 (c) (9), continue after the case passes into charge of the referee, pursuant to subdivision (k) (1), 11 U.S.C.A. § 207 (k) (1), then do subdivisions (c) (10) and (c) (11), 11 U.S.C.A. § 207 (c) (10, 11), also continue in effect? Why not? Yet manifestly they do not. It would be inconsistent with the referee having charge of the case, *56 and exercising his usual powers in such a situation, if the judge, after a liquidation direction, were to interpose with the appointment of a master under subdivision (c) (11) or even with injunctions or stays under subdivision (c) (10).

Subdivision (c) contains a long list of powers with which the statute endows the judge. One may suggest that the order in which they are arranged is not thoroughly logical. However that may be, at least it seems to me that it would be attributing undue significance to sequence to treat the authority mentioned in subdivision (c) (9) as kept alive, subsequent to a liquidation direction under subdivision (c) (8), by the mere fact of its adjacency. At least we must go so far as to say that such adjacency is not enough to require that the "may" of subdivision (c) (9) be treated as nullifying or limiting the "shall" of subdivision (k) (5).

Again, for what is it that subdivision (c) (9) empowers the judge to make an allowance? What is said? It is "for the services rendered and * * * for the actual and necessary expenses incurred in connection with the proceeding and the plan." Accepting this as defining what is comprehended within what may be paid for out of the estate, do the facts of the case at bar bring the rejected petitions within the prescribed area? It seems to me not. Certainly there was never a plan; nor do I feel that any of the disbursements were expenses "necessarily" incurred "in connection with the proceeding." The committee and its counsel represented creditors. They acted in behalf of creditors. They did not act for the debtor. It may be conceded that they genuinely desired a reorganization, but what they did was, so far as concerns the estate, the work of volunteers; volunteers who, if the plan had been put through, might or might not have received some compensation out of the estate. The services of the committee were services in behalf of the creditors themselves. It seems to me that it would be a far cry to class such work as "services rendered * * * in connection with the proceeding" in the sense in which those words are used in subdivision (c) (9).

It is also contended that, because the court made an order permitting the committee to intervene, the position of themselves and their counsel, as candidates for pay out of the estate, was strengthened. I do not agree to this. As I see it, the maximum of any gain by intervention was to entitle themselves, with certainty, to notice and opportunity to be heard, in the phraseology of the latter part of subdivision (c) (11), on such questions as the judge might prescribe other than on "the permanent appointment of any trustee or trustees, and on the proposed confirmation of any reorganization plan."

It is further urged that what was done and expended by the committee and its counsel, preceding the liquidation order, was part of "the actual and necessary cost of preserving the estate" after the 77B petition was filed, and that hence, within these words quoted from subdivision (b) (1) of section 64 of the Bankruptcy Act, 11 U.S.C.A. § 104 (b) (1), the applicants are entitled to the allowances refused to them. I think there are two sufficient answers. (1) In my view, the facts would not support a finding such as is a necessary predicate for the legal position taken by the committee and its counsel. (2) My attention has not been drawn to, nor have I discovered, any court decision which would sustain the legal proposition advanced. In re Realty Associates Securities Corporation (C.C.A.) 69 F.(2d) 41, 42, 43. See, also, In re Rollin Motors Co. (D.C.) 23 F.(2d) 110; Mortgage Loan Co. v. Livingston (C. C.A.) 78 F.(2d) 517.

Another aspect of subdivision (k), § 77B, 11 U.S.C.A. § 207 (k), remains for consideration.

In the first place, it is there provided that "none of the sections enumerated in this subdivision (k)" (except specified portions of sections 57 and 70 of the act, 11 U.S.C.A. §§ 93, 110) "shall apply to proceedings instituted under this section [77B] unless and until an order has been entered directing the trustee or trustees to liquidate the estate." Section 64 of the act (11 U.S.C.A. § 104) is included in this clause. The effect, as to section 64, is to prohibit application of the section during the 77B proceeding, down to the point of the liquidation order. As it seems to me, there is an inescapable implication also, however, that section 64 does apply after the liquidation order.

In the second place, subdivision (k) says that, irrespective of whether or not a liquidation order has been entered, all other provisions of the general Bankruptcy Act (save those which are inconsistent with section 77B) shall apply to proceedings instituted under section 77B, and that *57 "for the purposes of such application," among other things, the date of the order approving the petition (under section 77B) "shall be taken to be the date of adjudication, and such order shall have the same consequences and effect as an order of adjudication." The part of the subdivision just quoted, it is to be observed, does not relate to section 64.

It seems to me worthy of note that the portion of subdivision (k) extracted in the first of the last two paragraphs expressly deals with section 64, and that the portion extracted in the second of those paragraphs explicitly does not deal with section 64. This impresses me as having significance. If so, what is it?

Both portions have to do with the extent of applicability of sections of the general bankruptcy law outside of section 77B. Both fix dates for the commencement of applicability. The beginning date of applicability of the group of sections including section 64 is the date of the liquidation order. The beginning date of applicability of the group of sections excluding section 64 is the date of approval of the 77B petition. There is no ambiguity about this. It is perfectly definite. The design is clear. Incontrovertibly the purpose is to prescribe different effective dates for the coming into operation of the two groups of sections in the class of cases in which the filing of 77B petitions is approved. The duty to preserve and enforce the line of demarcation, so drawn, is manifest.

It follows that the date of the liquidation order governs in applying section 64. It would do violence to the language of the statute to treat section 64 as relating back to the date the petition was filed. If that view be accepted, it seems with equal certainty to follow that, after a liquidation order, section (c) (9) ceases to be operative. If it were otherwise, two conflicting provisions of the statute would operate in the identical field at the same time.

I believe it is indisputable that the word "debt" is used in the same sense in subdivision (k) (5) and in section 64. If so, then the context in section 64 demonstrates that it covers all items for which applications were made in the case at bar; both those disallowed and those allowed. The question of whether the applications of the committee and its counsel are allowable under section 64 has already been sufficiently dwelt on.

Accordingly, I confirm the report in so far as it recommends disallowances.

Turning to the allowances recommended, additional facts must be considered.

(1) The available gross estate is $1,790 in cash. The referee's certificate recites that the estate is not ready to be closed. He also says, though he does not explain why he thinks, that additional assets may be discovered. The present applications cover services and disbursements only to the date the permanent trustee was appointed at the first meeting of creditors. There will necessarily be further administration expenses in connection with what has occurred since that date and shall occur in future. Neither the permanent trustee nor his counsel has yet made an application. The claim of a custodian for the liquidating trustee remains to be dealt with. The referee will have a claim. There may be other claims.

(2) Confining ourselves to the applications so far filed, the amounts asked for (taking the item for petitioning creditors' attorneys at the sum recommended to be allowed) total $1,630.15; the sums recommended to be allowed aggregate $1,006.65, or upwards of 56 per cent. of the estate; the allowance of those sums would leave $783.35, or a little more than 43 per cent. of the estate.

(3) Unless assets of the estate be hereafter increased by discovery, for which the record contains nothing to substantiate a prospect, out of the balance of $783.35 (upon approval of the allowances recommended), there must be paid allowances to the permanent trustee and his counsel, as well as other as yet undisclosed administration expenses, and thus necessarily what would be left for creditors would be reduced, and probably materially reduced, below $783.35.

If the estate were now ready to be wound up, the allowances presently recommended covered all administration expenses, and the entire balance after their payment went to creditors, the distribution would be approximately 56 per cent. to administration expenses and approximately 43 per cent. to creditors. As outcome for creditors is a prime factor in fixing allowances, the ratio stated obviously challenges attention. For the moment I express no opinion about it. I refrain from making any statement because I feel compelled to leave the matter for determination by another judge. I should not now say anything on *58 the subject which he might deem to hamper him in reaching a decision on the merits when the case later comes before him.

Inasmuch as the applications on which allowances have been denied rest chiefly, if not wholly, on subdivision (c) (9), and it has been held by the referee, with the court's approval, that there is lack of power to grant the applications, it may be that under the last part of the clause, or under some other provision of law, the applicants are entitled to review the ruling before the estate is distributed. They should have opportunity to seek a review, if they act speedily.

As previously pointed out, other allowances, for which no applications have yet been presented, must be made.

In these circumstances, I feel that the applications on which the referee has recommended that allowances be made should be postponed, and they will be postponed, until the final meeting of creditors. In so far as I can see, that is the only way by which there can be fair treatment of all concerned.

Settle order accordingly on two days' notice.