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In re Buildings Development Co.

July 27, 1938


Appeal from the District Court of the United States for the Eastern District of Wisconsin; Ferdinand A. Geiger, Judge.

Author: Treanor

Before SPARKS, MAJOR, and TREANOR, Circuit Judges.

TREANOR, Circuit Judge.

This is an appeal from the District Court's decree, made in the course of a reorganization proceeding, disallowing a claim for services which were rendered prior to the filing of the petition for reoroganization.

The claimant-appellant is successortrustee under a deed of trust which the debtor herein executed on March 28, 1927, for the purpose of securing an issue of $1,425,000 first mortgage bonds. As such trustee, and pursuant to the terms of the trust deed, the claimant performed numerous services intended to enforce and protect the bondholders' lien and to preserve the value of the property which was security for the bonds. It is not disputed that the claimant and his attorney rendered services of substantial value.

On June 11, 1934, the debtor filed a petition for reorganization under Section 77B of the Bankruptcy Act,*fn1 and on December 27, 1934, claimant-appellant filed proof of claim for services as trustee prior to June 11, 1934, the date on which the petition for reoroganization was filed.*fn2 Thereafter the Empire Building Bondholders Protective Committee submitted a plan of reorganization which provided for the following allowances, subject to a stated order of priority: "(c) all allowances for costs and expenses in the foregoing proceedings (referring to appellant's action for mortgage foreclosure) * * * (e) all allowances for fees to * * * the trustee." The plan proposed was confirmed by the court with certain modifications, of no materiality here.

By the terms of the trust deed*fn3 the mortgagor, debtor in the instant proceeding, agreed to pay to the trustee for the benefit of the holders of the bonds reasonable compensation for the trustee and his attorneys; and the mortgagor also agreed to pay fees to the trustee for services in all suits to which the trustee should be a party, which related to or affected the mortgaged property.

The District Court disallowed the claim apparently on two grounds: (1) One who assists a creditor in prosecution of a claim is not rendering services for the debtor, and therefore he is not a creditor of the debtor, but of the creditor. (2) Trustee's services were not rendered in the bankruptcy reorganization proceedings.

It is not necessary to consider the second ground since the trustee-claimant is not seeking compensation for any services rendered in the administration of the reorganization proceeding. The claim relates solely to services prior to these proceedings by the trustee and his counsel, and the "right of recovery is based upon the written covenant appearing in the deed of trust."

In the case of Straus v. Baker Co.*fn4 one Straus made claim for fees in the dual capacities of trustee for the bondholders under the mortgage, and of reorganization trustee. The District Court had disallowed the claim of Straus on the ground that his activities as trustee for the bondholders were in the interest of the bondholders and contrary to the interest of the estate as a whole. The reviewing court pointed out that the claimant's activities on behalf of the bondholders might justify the denial of his claim as reorganization trustee; but the court in its opinion further stated that "as trustee for the bondholders he was in any event entitled under the mortgage contract, to an allowance out of the fund." (Page 408.)

This court in its decision in the appeal of In re Central Shorewood Building Corporation*fn5 recognized that in corporate reorganization proceedings a court of bankruptcy is under a duty to determine, and allow, the value of the services rendered by the mortgage trustee's attorney in prior state foreclosure proceedings; and this court also declared that if the state court had only determined the sum, without direction for its payment, the bankruptcy court might reduce the amount allowed for such services, or, if the facts warranted, increase the amount.

In the recent case of In re Shorewater Corporation,*fn6 a proposed plan for reorganization had been approved which included a provision for paying "the costs and expenses of and the allowances made in the foreclosure proceeding involving the said property as allowed by the Court." In that case, as in the present case, the District Court denied in toto the claim of the plaintiff-trustees, although provision was made in the plan of reorganization for the payment of their claim and no objection on the part of any interested party was made. It was held in the Shorewater Corporation Case that it was the duty of the District Court to appraise the services rendered in the state court and allow the claim for such an amount as would reasonably compensate the claimants for their services.

The plan of reorganization in the instant proceeding recognizes the validity of the claim and makes provision for the payment of whatever sum the court should allow. Under "Costs, Expenses and Allowances" the plan provided that all cash remaining in the hands of the debtor on the confirmation of the plan should be applied to the interest then due and payable upon first mortgage bonds under the plan, and to costs, expenses and allowances as set forth in the plan; but there was a further provision establishing priorities of payments, the allowance of fees to the trustee-claimant being placed in class 5 which was the last one in order of payment.

The plan also provided that upon its confirmation the mortgage-trustee (claimant herein) should resign and that the court should appoint a new successortrustee; and the plan further recited taht all provisions of the trust indenture should remain in full force and effect except as the same may conflict with the provisions of the plan, and the confirmation of the plan should be deemed to have the effect of an amendment to the trust indenture. The foregoing recital in the plan recognizes the validity of the trust agreement under which the claimant-trustee rendered the services for which he is asking an allowance. There is no suggestion that the obligation which the debtor assumed to the claimant under the trust indenture was invalid, ...

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