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In re Chicago Rapid Transit Co.

November 10, 1937

IN RE CHICAGO RAPID TRANSIT CO.; MALLOY ET AL.
v.
CHICAGO RAPID TRANSIT CO. ET AL.



Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; James H. Wilkerson, Judge.

Author: Evans

Before EVANS, SPARKS, and MAJOR, Circuit Judges.

EVANS, Circuit Judge.

The precise question before us may be stated thus -- Was the employment of Schuyler, Weinfeld & Hennessy by Commonwealth Edison (a large creditor and the owner of over half of debtor's common stock) such as to require a court to veto Trustee Sprague's request to employ them as his counsel?

In determining this question we agree with the District Court that employment of counsel by trustee, in view of General order 44, as amended in 1933, 11 U.S.C.A. following section 53, is a responsibility of the trustee in the first instance. The court may exercise merely a veto power.

General Order 44 reads as follows:

"No attorney for a receiver or a trustee shall be appointed except upon the order of the court, which shall be granted only upon the verified petition of the receiver or trustee, stating the name of the counsel whom he wishes to employ, the reasons for his selection, the professional services he is to render, the necessity for employing counsel at all, and to the best of the petitioner's knowledge all of the attorney's connections with the bankrupt or debtor, the creditors or any other parties to the proceedings, and their respective attorneys. If satisfied that the attorney represents no interest adverse to the receiver, trustee, or any creditor in the matters upon which he is to be engaged, and that his employment would be to the best interests of the estate, the court may authorize his employment, and such employment shall be for specific purposes unless the court is satisfied that the case is one justifying a general retainer. If without disclosure any attorney acting for a receiver or trustee shall have represented any interest adverse to the receiver, trustee, or any creditor in any matter upon which he is employed for such receiver or trustee, the court may deny the allowance of any fee to such attorney, or the reimbursement of his expenses, or both, and may also deny any allowance to the receiver or trustee if it shall appear that he failed to make diligent inquiry into the connections of said attorney.

"Nothing herein contained shall prevent the court, in proceedings under section 77 or section 77B of the Act (11 U.S.C.A. §§ 205 and 207) from authorizing the employment of attorneys who are attorneys of the corporation, or associated with its legal department, in connection with the operation of the business of the corporation by a trustee or trustees under subsection (c) of section 77 and subsection (c) of section 77B, (11 U.S.C.A. §§ 205 and 207) when such employment is found by the court to be in the public interest in relation to such operation and is not adverse to the interests of the trustee or trustees or of the creditors of the corporation."

The court would therefore ordinarily, on the verified petition of the trustee accompanied by the affidavit of counsel showing an absence of disqualification, approve the request of the trustee. In other words, the court does not name counsel for the trustee. This may or may not be entirely wise, but it is the fair implication of Order 44.

Was the firm named by trustee to serve as counsel for trustee qualified to so act? Perhaps it would be better to say our inquiry is directed to whether Schuyler, Weinfeld & Hennessy are disqualified because of their previous employment by Commonwealth Edison to act as counsel for the trustee of debtor.

The District Court has promulgated rules defining the qualifications of counsel who may represent the trustee.

Pertinent provisions of Rule 8 of the District Court are herewith set forth:

"No attorney shall be retained by the Receiver or Trustee unless his affidavit, annexed to the petition of the Receiver or Trustee, shall show, to the best of his knowledge, in addition to the matters required by General Order XLIV, his business, professional or other connection, during one year prior and up to the date of the affidavit, with the bankrupt, the bankrupt's attorney, any creditor or any other person interested in the estate.

"No attorney shall be so retained if in the proceeding he has appeared for or acts for or holds proxies for the petitioning or other creditors or for any other person interested in the estate; nor shall his retention continue or he be paid for services out of the estate if during the proceeding he therein act for or hold proxies for, or if for services therein he accept compensation from, any such creditor or person. The petition of the Receiver or Trustee for the retention of an attorney shall state at whose instance, if any, such retention is suggested and the reasons for acting thereon.

"This rule shall not prohibit the Receiver or Trustee from retaining as special counsel any attorney who at the time of the filing of the petition in bankruptcy was the attorney for the bankrupt in litigations or other matters then pending on behalf of the bankrupt. No such counsel shall be so retained except on order of the Court setting forth the terms and conditions of such retainer.

"At the end of each quarterly calendar period all receivers shall submit to the Court written reports showing in detail how this rule is being applied."

To carry out its purpose we must give this rule a liberal construction. We therefore reject as too narrow appellees' position that the adverse interests must, in all instances, be in the same proceedings.

Deleting the unimportant portions of the first two paragraphs, they would read:

"No attorney shall be retained by the* * * trustee unless his affidavit shall show * * * his professional connection during one year prior and up to the date of the ...


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