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In re Cybern Education Inc.

April 27, 1973

IN THE MATTER OF CYBERN EDUCATION, INC., DEBTOR. UNITED STATES OF AMERICA, APPELLANT,
v.
HARRY A. ASH ET AL., APPELLEES.



Before FAIRCHILD, STEVENS and SPRECHER, Circuit Judges.

Per Curiam.

In appealing the allowance of interim fees to a trustee in bankruptcy and his attorneys of $45,000 in a $45,000 estate, the United States and the Securities and Exchange Commission have urged that we enforce several standards and guidelines of compensation in order to retain "close judicial control" over bankruptcy costs.

I

On August 31, 1970, Cybern Education, Inc., petitioned for an arrangement under Chapter XI of the Bankruptcy Act. Ten days later the corporation amended its petition to transfer the proceedings to Chapter X. On September 15, 1970, the district judge appointed Harry A. Ash trustee for the debtor. On September 17, on Ash's petition, the court authorized him to employ Louis I. Kessler and Kevin J. Gillogly "in all matters pertaining to the above entitled estate under a general retainer, and to pay said attorneys a reasonable compensation for their services out of the funds of the within estate, the amount thereof subject to the determination of this Court."

On September 22, the trustee was authorized and directed to operate the debtor's business, open new books of account, file monthly reports, investigate the debtor's financial condition and report thereon in 60 days, and on or before November 27, 1970 to prepare and file a plan of reorganization or a report of his reasons why a plan could not be effected. On September 25, the debtor turned over to the trustee some $4,000 in cash. Within a short time thereafter over $10,000 in accounts receivable were collected in the debtor's estate.

On September 25, 1970, the Securities and Exchange Commission filed its appearance in accordance with Section 208 and requested notice of "all steps taken in this proceeding" pursuant to Section 265a of the Bankruptcy Act (11 U.S.C. ยงยง 608 and 665).

On October 13 on the application of the trustee, the district court authorized and directed the trustee to employ the president of the debtor corporation at an annual salary of $38,500 and the secretary at an annual salary of $15,000, both salaries being the same as those previously paid by the corporation. On October 20, the corporation borrowed $15,000 from one of its shareholders for operating expenses. The trustee collected over $50,000 additional accounts receivable, more than half of the total amount coming from the United States government and the University of Illinois.

The trustee ceased the day-to-day operation of the debtor's business on February 28, 1971.

On April 23, 1971, the trustee sold the assets and good will of a division of the debtor known as Cine-Probst, Inc. to Charles O. Probst, the manager of the division, for $4,500. On April 27, he sold the New York office furnishings of the debtor for $1,350. On June 17, he sold the debtor's Washington, D.C. office furniture and equipment to the sub-tenant of debtor's District of Columbia lease. On July 30, he sold certain of the debtor's intangibles (contracts, educational systems, copyrights) for $30,000 through the efforts of Dr. Joseph A. Tucker who was paid a $6,000 commission on the sale.

On October 15, 1971, the trustee filed his petition for interim fees of $22,500 for himself and $22,500 for his two attorneys. Copies were served on counsel for SEC on the previous day. Neither the petition for fees nor notice was served on the Internal Revenue Service, which had a claim against debtor of $56,566.48, nor otherwise upon the United States nor upon other creditors or shareholders of the debtor. The trustee represented in his fee petition that he was holding $61,000 subject to $16,000 in obligations or a net estate of $45,000. On October 15, the court heard arguments on the fees and on October 19, the court approved the fees and this appeal followed.

II

The Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States, in its note to the proposed new rule on compensation for services in Chapter X cases, stated:*fn1

"The premise for including in these rules provisions governing the allowance of compensation to officers, attorneys and accountants is that it is peculiarly a judicial responsibility to supervise the administration of estates and in particular to assure that allowances for compensation to those rendering services in connection therewith are fair but not excessive. 3A Collier 62.05 [3] (1961). The costs of bankruptcy administration have been a matter of continuing concern in the history of American bankruptcy law. Id. 62.02. This concern has led to an increasing recognition of the necessity for close judicial control of these costs."

What we have recited above constitutes a summary of the entire Chapter X proceedings. The debtor corporation was operated under the trustee's supervision for only five months. The wellpaid president and secretary of the corporation were kept on at their prior ...


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