IN RE UNITED STATES PRODUCTS CORPORATION, (N.D.Cal. 1944)

Citation Codes

Equivalent Citations

citation codes

Docket Number

No. 35681-G.

Attorney(S)

Victor A. Chargin, of San Jose, Cal., and Grant H. Wren and Ernest J. Torregano, both of San Francisco, Cal., for trustees. Jerome Politzer and Arthur Shapro, both of San Francisco, Cal., for debtor. Philip S. Ehrlich, of San Francisco, Cal., for creditors' committee.

Judges

Louis Earl Goodman

Acts

Bankruptcy — Creditors, The Debtor, And The Estate — The Estate — Contractual Right To Liquidate, Terminate, Or Accelerate A Commodities Contract Or Forward Contract

See more information ...

Smart Summary

Factual and Procedural Background

After adjudication in bankruptcy, Richard Jorgensen, John Doudell and Fred Neuroth were appointed trustees of the bankrupt estate on June 30, 1943. With court approval they appointed attorneys Ernest J. Torregano, Grant H. Wren and Victor A. Chargin. Lacking resources to operate the estate's large cannery in San Jose, the trustees obtained court approval and on July 8, 1943 leased the cannery and necessary appurtenances to Schuckl Co., Inc., which conducted the canning operations and paid a percentage of gross receipts and a share of net profits. The estate received $80,000 in the first year of the lease and was expected to receive substantially more in the second year. The trustees also made advantageous sales of other assets and performed customary trustee duties. The trustees were automatically removed on February 24, 1944 upon appointment and qualification of a trustee in reorganization (11 U.S.C.A. § 556).

The trustees and their attorneys filed petitions for trustees' and attorneys' fees. The court referred those petitions to Sidney L. Church, a referee of the court, to act as special master. The master issued a report recommending denial of additional compensation to the trustees under 11 U.S.C.A. § 76, sub. c (2) on the ground that the trustees did not "conduct the business of the bankrupt" as defined by statute and that recommendation reduced the attorneys' ordinary fee allowance. The trustees and attorneys filed exceptions to the master's report. The district judge heard those exceptions and issued the opinion affirming the master's principal findings and approving the master's report in toto.

Legal Issues Presented

Whether the trustees "conducted the business of the bankrupt" within the meaning of 11 U.S.C.A. § 11, sub. a (5), thereby entitling them to additional compensation under 11 U.S.C.A. § 76, sub. c (2).
Whether the master's prior court-authorizations permitting the trustees to conduct the bankrupt's business preclude a later finding that they did not, in fact, conduct the business for purposes of awarding additional compensation.
Whether the Ninth Circuit's decision in United States v. Metcalfe (131 F.2d 677) requires a different result in this bankruptcy-fee context.
The extent to which the attorneys are entitled to additional compensation when the allowance of such fees depends on whether the trustees conducted the bankrupt's business.

Arguments of the Parties

Trustees' Arguments

The trustees excepted to the master's recommendation denying additional compensation under § 76, sub. c (2) for allegedly "conducting the business of the bankrupt."
The trustees argued that the master was foreclosed from finding they did not conduct the business because, as a referee of the court, he initially authorized them when appointed to conduct the bankrupt's business and, in subsequent orders, reaffirmed and continued such authority.
The trustees contended the master erred by failing to follow United States v. Metcalfe, 131 F.2d 677, 678.
The trustees asserted exceptions (5, 6, 7 and others) challenging the master's factual and legal determinations; they also raised exceptions (8 and 9) asserting the master erroneously considered the size of the estate.

Attorneys' Arguments

The attorneys excepted because the master's recommendation denying additional compensation to the trustees resulted in their own claimed ordinary compensation being halved (they had requested $17,074.12 but were allowed $8,537.06 under Rule 11 of the Rules of this Court).
Counsel argued (at hearing) that the trustees were reputable businessmen who devoted substantial time to their duties and therefore should receive adequate compensation; the attorneys relied on the value and efficiency of services rendered.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
In re Duke, D.C., 15 F.2d 92	Illustration/distinction regarding the meaning of conducting the business of a going concern.	Cited as supporting authority for the proposition that "conduct of a going concern is something entirely different" from ordinary trustee duties; court relied on it to distinguish ordinary trustee tasks from operating a going concern.
United States v. Metcalfe, 131 F.2d 677, 678	Interpretation in a tax context concerning trustees who "operate the property or business" of corporations (operating trustee concept).	Distinguished and rejected as controlling here: the court noted Metcalfe was a tax case involving an operating trustee in real estate/oil transactions and concluded it was not analogous and, as a tax case, not authoritative in bankruptcy administration.

Court's Reasoning and Analysis

The court accepted and affirmed the special master's principal factual finding that the trustees did not "conduct the business" of the bankrupt within the meaning of 11 U.S.C.A. § 11, sub. a (5). The court explained that, under the statute and consistent with bankruptcy objectives (including speed and economy), additional compensation under § 76, sub. c (2) is authorized only when trustees substantially carry on the day-to-day normal activities of the bankrupt as a going concern.

Applying that standard to the present facts, the court observed that the operational functions of purchasing fruit and vegetables, canning and selling (and all intermediate activities essential to running the cannery) were performed by the lessee, Schuckl Co., Inc., which conducted the canning operations and paid rentals and profit shares. By contrast, the trustees performed customary trustee tasks—collections, sales of assets, insurance, taxes, inventories and investigations—which the court characterized as ordinary trustee duties (some of which can be complicated or burdensome in certain estates) but not equivalent to conducting a going concern.

The court rejected the trustees' contention that the master's prior authorization to "conduct the bankrupt's business" precluded a finding they had not actually done so, explaining that statutory compensation is tied to services actually rendered and that authority to act is not equivalent to performance. The court further considered and distinguished United States v. Metcalfe, noting Metcalfe arose in a tax context involving an operating trustee in real estate transactions and therefore was not analogous nor authoritative for bankruptcy-administration fee determinations.

The court acknowledged some merit to exceptions 8 and 9 (concerning the master's consideration of the size of the estate), but held that other independent reasons in the master's report were sufficient to support the recommendations. Because allowance of additional attorneys' fees depended on allowance of the trustees' additional compensation, the court found no basis to alter the master's recommendations for attorneys' ordinary fees.

Holding and Implications

The district court approved the master's report and recommendations in toto and affirmed the master’s finding that the trustees did not "conduct the business" of the bankrupt for purposes of 11 U.S.C.A. § 76, sub. c (2), and therefore are not entitled to additional compensation under that provision.

Direct effects on the parties (as stated in the opinion):

The trustees were allowed $4,268.53 under 11 U.S.C.A. § 76, sub. c (1) and their request for $8,537.06 under § 76, sub. c (2) was denied by the master and affirmed by the court.
The trustees were automatically removed on February 24, 1944 upon appointment and qualification of a trustee in reorganization (11 U.S.C.A. § 556).
The attorneys had requested $17,074.12 as ordinary compensation but were allowed $8,537.06 under Rule 11 of the Rules of this Court; they requested $9,000 for extraordinary services and were allowed $7,500 (this extraordinary allowance was not excepted to).
All payments recommended by the special master were ordered to be paid and disbursed as recommended.

No broader or novel bankruptcy precedent was announced beyond the court's application of the statutory standard that additional compensation for "conducting the business" requires actual substantial operation of the debtor's ordinary day-to-day business activities rather than performance of customary trustee functions.

Show full summary ...

In re UNITED STATES PRODUCTS CORPORATION, LIMITED.

GOODMAN, District Judge.

Richard Jorgensen, John Doudell and Fred Neuroth, trustees of the above-named bankrupt's estate, and their attorneys Ernest J. Torregano, Grant H. Wren and Victor A. Chargin, heretofore filed herein petitions for trustees' and attorneys' fees. The court referred the petitions to Sidney L. Church, a referee of this court as special master with directions to hear the same and make his recommendations thereon. In due time the special master filed his report. Both the trustees and their attorneys have filed, argued and submitted for decision their exceptions thereto.

The trustees except to the master's report because he recommended denial of additional compensation for their services in allegedly "conducting the business of the bankrupt."

The trustees were allowed $4,268.53 under 11 U.S.C.A. § 76, sub. c (1) and requested $8,537.06 under 11 U.S.C.A. § 76, sub. c (2).

The attorneys except because their claimed compensation for ordinary services was consequently halved due to the recommendation against additional compensation to the trustees.

The attorneys requested $17,074.12 as ordinary compensation but were allowed $8,537.06 under Rule 11 of the Rules of this Court. The attorneys requested $9000 compensation for extraordinary services and were allowed $7500 and have not excepted to this allowance.

It is not necessary to consider the exceptors' request for augmentation of the record inasmuch as true copies of the documents demanded to be included in the record have, with consent of all parties, been furnished to the court.

The bankrupt owned a large cannery at San Jose, California. After adjudication, and on June 30, 1943, Jorgensen, Doudell and Neuroth were appointed and qualified as trustees. They promptly, with the approval of the court, appointed Torregano, Wren and Chargin as their attorneys. Lacking the resources to operate the cannery, the trustees, with court approval, leased the cannery and its necessary appurtenances on July 8, 1943 to Schuckl Co., Inc. The lessee has ever since conducted canning operations therein, paying as rental a percentage of gross receipts and also a share of net profits. The arrangement has been profitable to the estate, which received $80,000 the first year. It is agreed it will receive substantially more during the second year of the lease.

The trustees made advantageous sales of other assets of the estate and have generally rendered diligent and valuable services to the estate. The same may be said with respect to the attorneys' services, although, as noted by the master, much of the service rendered by the attorneys properly should have been performed by the trustees.

The trustees were automatically removed on February 24, 1944, upon the appointment by the court and qualification of a trustee in reorganization. 11 U.S.C.A. § 556.

The master reports and finds that the trustees did not in fact "conduct the business" of the bankrupt as provided by 11 U.S.C.A. § 11, sub. a (5) and therefore are not entitled to additional compensation as provided in 11 U.S.C.A. § 76, sub. c (2). With this finding, I am in accord.

By the Statute, 11 U.S.C.A. § 11, sub. a (5), receivers, trustees, and marshals are authorized to conduct the business of bankrupts if necessary in the interests of the estates and by § 76, sub. c (2) additional compensation may be allowed for services so rendered. Such additional compensation may be in such amount as may be allowed by the court, but in no event to exceed twice the maximum allowance permitted by § 76, sub. c (1).

While there is a paucity of published authority as to the legal standards, by which the term "conduct of the bankrupt's business," may be measured, yet experience and the objectives of the Bankruptcy Act furnish adequate criteria.

It is well recognized that speed and economy are prime considerations in bankruptcy administration. Fees may only be allowed when specifically authorized by statute or rule. A trustee in one estate may labor extensively while another trustee may find his work comparatively simple, yet the ordinary compensation of both is fixed by the sliding scale of § 76, sub. c (1).

However, to conduct the business of the bankrupt, in my opinion, means that the trustee must substantially carry on the day by day, normal activities, which the bankrupt, as a going concern, pursued. The bankrupt here purchased fruit and vegetables, canned and sold them and performed all the intermediate and corollary functions incidental and necessary thereto. This the trustees did not do, neither substantially nor even in minor part. True, the trustees performed some functions of a like character to those making up the normal activities of the bankrupt as a going concern, but what ordinary trustee does not do so? Collection of accounts, sales of assets, matters of insurance, taxes, inventories, investigations, etc., all these are activities required of ordinary trustees. In some estates the services so required are complicated and burdensome. In others, the task is light. But conduct of a going concern is something entirely different. See In re Duke, D.C., 15 F.2d 92.

The master fairly and justly appraised the nature of the trustees' services and I affirm his finding that the trustees did not conduct the business of the bankrupt as purposed in the statute.

The trustees contend (exceptions 5, 6, 7) that the master is foreclosed from finding that they did not conduct the business of the bankrupt, because, he as a referee of the court, authorized them, when appointed to conduct the bankrupt's business, and from time to time in subsequent orders, reaffirmed and continued such authority on their part. But authority to perform an act is not equivalent to performance. The statute provides for compensation only for services rendered.

The trustees also claim (exception 4) that the master's recommendation is erroneous in that he fails to heed the decision of the Ninth Circuit Court of Appeals, United States v. Metcalfe, 131 F.2d 677, 678. This contention is not meritorious. United States v. Metcalfe was a tax case which arose under a statute affecting tax returns in cases where bankruptcy receivers or trustees "operate the property or business of corporations." 26 U.S.C.A.Int.Rev. Code, § 52 (italics supplied). As disclosed in the record on file in the office of the clerk of the Circuit Court of Appeals, it appears that the bankrupt corporation, F.P. Newport Corporation, Limited, was in the real estate business. It was engaged in buying, selling and leasing real property including oil properties. The trustee of the bankrupt corporation continued to deal in the estate's property and, among other transactions, made oil leases. Judge Denman's opinion, reversing the District Court, held that the trustee operated the property of the bankrupt and thus was obligated to pay taxes, which he would not have been required to pay, if he were an ordinary instead of an "operating trustee". Not only is the case not analogous on the facts, but, also as pertinently remarked by the master, tax cases (because of the diversity of statutory objectives) are not authority in bankruptcy administration.

Inasmuch as allowance of the additional attorneys' fees requested depends upon the allowance of the additional trustees' compensation, no further comment need be made on that subject.

There is merit to exceptions 8 and 9 (the size of the estate was erroneously considered by the master). However the other reasons supporting the master's recommendations and findings are sufficient.

The attorneys, as shown in the master's report, rendered efficient and able services, but they can only be compensated as authorized by the statute. It is also appropriate to observe, in response to counsel's comment at the hearing that the trustees are business men of repute who gave much of their time to their duties and hence should be adequately compensated, that we are guided by law. Absent satisfactory evidence of conduct of the bankrupt's business, the court has no authority to award one cent more than the statutory ordinary fees.

The report and recommendations of the master are approved in toto and all payments recommended by him to be paid are hereby ordered so paid and disbursed.