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In re Peerless Manufacturing Co.

decided: July 15, 1975.


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 68 B 1330 FRANK J. MCGARR, Judge.

Fairchild, Chief Judge, Thomas F. McAllister, Senior Circuit Judge,*fn* and Swygert, Circuit Judge.

Author: Swygert

SWYGERT, Circuit Judge.

These appeals raise issues concerning the appropriate fees that should be allowed when creditors of a bankrupt successfully attack the appointment of the trustee and a successor trustee is appointed.

Peerless Manufacturing Company, an Illinois corporation engaged in the manufacture and sale of women's sportswear, was adjudged a bankrupt on March 4, 1968, after the failure of a petition for arrangement under Chapter 11 of the Bankruptcy Act. Edward Limperis was appointed by the court as receiver and retained Louis I. Kessler as his counsel by order of court. Subsequently, on April 29, 1968, at the first meeting of creditors, thirteen creditors, whose total claims constituted a majority of the bankrupt's total general indebtedness, nominated Sherwyn L. Ehrlich as trustee, and one other creditor nominated Limperis. Without a vote on the nominations the bankruptcy judge rejected the nomination of Ehrlich based on objections to his qualifications and appointed Limperis as trustee. Limperis in turn again retained Kessler as his counsel pursuant to court order.

The thirteen creditors involved, represented by Attorney Joseph Stein, objected to the rejection of their nominee for trustee and took a review to the district court, but without success. They then prosecuted an appeal to this court and in an opinion dated August 5, 1969, 416 F.2d 57, we reversed the district court on the ground that the thirteen creditors had wrongfully been disenfranchised and remanded the matter with instructions to hold a new election for trustee. Pursuant to the remand a new election was held and Ehrlich was elected successor trustee, and he thereafter retained Joseph Stein as his counsel.

At the conclusion of the bankruptcy proceedings allowances were made by the bankruptcy judge to Limperis as receiver and to Kessler as his counsel. In addition allowances were granted to Limperis as trustee and Kessler as his counsel for their hours and accomplishments during the interim period of the first appointment by the bankruptcy judge which was ultimately reversed by this court. Allowances were additionally made to Ehrlich as successor trustee and to Stein as his counsel for the work accomplished and the time expended after Ehrlich's election by the creditors. No allowances were granted for Stein's efforts on behalf of the thirteen creditors that resulted in the new election and appointment.

On review the district court disallowed any fees to Limperis for his work as trustee and to Kessler as attorney for the trustee. The refusal to allow fees to Stein for any legal work done in order to secure the new election was upheld. Both these rulings by the district court are being appealed.

Appeal No. 74-1585

Limperis and Kessler appeal from the order denying them compensation for duties performed pursuant to appointments that were subsequently terminated. The district court held that they were not entitled to fees since they knew of the creditors' contention from the outset and thus were serving "in the presence of a viable challenge to the validity of their appointment and subject to the denial of fees for their efforts under that appointment . . . ." We do not agree.

This court's determination that the bankruptcy judge had acted improperly in summarily rejecting the Ehrlich nomination did not mean that Limperis' and Kessler's appointments were invalid in the sense that they should receive no compensation. They had been appointed by the referee who had jurisdiction to make such appointments; this court has never said that these appointments were void. Limperis and Kessler were properly acting as trustee and attorney respectively, until the time that this court entered its opinion. It was their duty to defend the decisions of the bankruptcy judge and the district court. We think it would be unwise to require that persons who accept positions as trustees and attorneys must evaluate the legality of their own appointments in order to determine whether they will even receive fair compensation for their work. There would be a great disincentive to accept such appointments in the face of any type of challenge. We have entrusted the function of approving the trustee to the bankruptcy judge. If that decision is found incorrect and is reversed on appeal it should not be at the financial expense of a trustee and attorney who had adequately performed their duties pursuant to an order valid on its face. This is not a situation in which there was a finding of negligence, abuse of trust, or unfaithfulness. We believe the equitable principles that govern bankruptcy proceedings dictate that reasonable fees be allowed both Limperis as trustee and Kessler as his attorney.

Appeal No. 74-1586

This is an appeal of the thirteen creditors from the denial of compensation to Stein for the legal services he rendered in successfully challenging the appointment of the original trustee.

The creditors concede that the general rule is that once a trustee is appointed no one other than the trustee or his duly authorized attorneys and agents should be awarded compensation unless the trustee refused to act, formal authorization to act in the trustee's stead was procured from the court, and the estate was benefitted by the action. Were this not the law then "courts of bankruptcy would be confronted in many instances with ...

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