Brown v. Gerdes

321 U.S. 178, 64 S. Ct. 487, 88 L. Ed. 659, 1944 U.S. LEXIS 1325

• Court: Supreme Court of the United States
• Decided: February 7, 1944
• Docket: 183
• Status: Published

Opinions

Mr. Justice Douglas

delivered the opinion of the Court.

The question in this case is whether the New York court or the federal bankruptcy court has the power to fix the fees of petitioners who as attorneys represented the bankruptcy estate in litigation in the state courts. The New York Court of Appeals held that that jurisdiction rested exclusively in the bankruptcy court. 290 N. Y. 468, 49 N. E. 2d 718. The case is here on a petition for writ of certiorari which we granted because of the importance of the problem under the Bankruptcy Act.

In January, 1939, a petition for reorganization of Reynolds Investing Co., Inc. was approved under Ch. X of the Bankruptcy Act. 52 Stat. 883, 11 U. S. C. § 501. In August, 1938, while the petition was pending but before its approval, the bankruptcy court authorized the debtor to commence an action in the New York courts to enforce and collect certain claims which the debtor had against its former officers and directors. See 28 N. Y. S. 2d 622. It also authorized retention of petitioners as counsel in the suit. After the approval of the petition the respondent trustees were authorized to prosecute the action and to be substituted as plaintiffs. That was done; and other actions were instituted by the trustees under order of the bankruptcy court with petitioners as counsel. In 1941 before final judgments were obtained in any of the suits, the trustees discontinued petitioners’ services. Thereafter petitioners, pursuant to a stipulation¹ which reserved respondents’ right to question the jurisdiction of the state court, instituted this suit in that court to fix and enforce their liens on the actions under § 475 of the New York Judiciary Law.² Respondents’ objection to the jurisdiction of the state court was overruled, the value of petitioners’ services determined, and the liens fixed. Those orders were affirmed by the Appellate Division (264 App. Div. 852, 36 N. Y. S. 2d 420) but reversed by the Court of Appeals. And as we read the opinion of that court the basis of its decision was that “exclusive jurisdiction” to fix these fees was in the bankruptcy court (290 N. Y. 472, 473, 475), not that New York as a matter of local law or policy would not undertake to fix them because of the special circumstances of this case.

We agree with the Court of Appeals that the power to determine the amount of these fees rests exclusively in the bankruptcy court.

Sec. 77B, like § 77 of the Bankruptcy Act,³ had as one of its purposes the establishment of more effective control over reorganization fees and expenses (Dickinson Industrial Site v. Cowan, 309 U. S. 382, 388; Callaghan v. Reconstruction Finance Corp., 297 U. S. 464, 469) in recognition of the effect which a depletion of the cash resources of the estate may have on both the fairness and feasibility of the plan of reorganization. United States v. Chicago, M., St. P. & P. R. Co., 282 U. S. 311, 333-340 (dissenting opinion). And Ch. X of the Chandler Act which took the place of § 77B set up even more comprehensive supervision over compensation and allowances (H. Rep. No. 1409, 75th Cong., 1st Sess., pp. 45-46) and provided a centralized control over all administration expenses, of which lawyers’ fees are a part. Watkins v. Sedberry, 261 U. S. 571. Sec. 241 gives the judge authority to fix “reasonable compensation for services rendered” by various persons, including attorneys for the trustees. Allowances may be made only after hearing and upon notice to specified persons and groups of persons. § 247. Where the reorganization supersedes a prior proceeding in either the federal or state court the bankruptcy court is the one which is authorized to allow the “reasonable costs and expenses incurred” in the prior proceeding. § 258. In all cases persons who seek compensation for services or reimbursement for expenses are held to fiduciary standards. § 249; Woods v. City National Bank Co., 312 U. S. 262, 267-269. And § 250 contains special appeal provisions governing orders granting or denying allowances. Dickinson Industrial Site v. Cowan, supra. Moreover, a plan of reorganization must provide “for the payment of all costs and expenses of administration and other allowances which may be approved or made by the judge.” § 216 (3). In addition the plan must provide, in furtherance of the purpose of the Act to protect the security holders against previous acts of mismanagement and to preserve all assets of the estate (S. Rep. No. 1916, 75th Cong., 3d Sess., p. 22; H. Rep. No. 1409, supra, pp. 42-44), for retention and enforcement by the trustee of all claims of the debtor or the estate not settled or adjusted in the plan. § 216 (13). Finally, § 221 (4) provides that in approving any plan the judge must be satisfied that “all payments made or promised” by the debtor, the new company, or any other person, “for services and for costs and expenses” are not only fully disclosed but “are reasonable or, if to be fixed after confirmation of the plan, will be subject to the approval of the judge.”

Thus Ch. X not only contains detailed machinery governing all claims for allowances from the estate, It also requires the plan to contain provisions for the payment of all allowances and places on the judge the duty to pass on their reasonableness. The approval of the plan of reorganization has been entrusted to the bankruptcy court exclusively. Even reports on plans submitted by the Securities and Exchange Commission are “advisory only.” § 172. It could hardly be contended that the bankruptcy court might dispense with the finding required by § 221 (2) that the plan is “fair and equitable, and feasible” and confirm the plan on another basis or delegate the task to another court or agency. See Case v. Los Angeles Lumber Products Co., 308 U. S. 106, 114-115; Consolidated Rock Products Co. v. Du Bois, 312 U. S. 510. But if that cannot be done, it is difficult to see how a plan could be confirmed which left the approval of certain allowances to a state court. The finding as to allowances required by § 221 (4) is as explicit and as mandatory as the finding of “fair and equitable, and feasible” required by § 221 (2). On each Congress has asked for the informed judgment of the bankruptcy court, not another court or agency. In the present case the plan of reorganization which was approved in 1940 gave the trustees full power to retain or displace attorneys representing them; and it retained in the bankruptcy court continuing jurisdiction over all claims in favor of the debtor and the prosecution thereof. And in accordance with the express requirements of § 241 (3) it left to the bankruptcy court the power to fix the “reasonable compensation” to be paid the attorneys of the trustees. Those requirements, prescribed by the Act, cause any conflicting procedure in the state courts to give way.⁴ Kalb v. Feuerstein, 308 U. S. 433. The jurisdiction which Congress has conferred on the bankruptcy court is paramount and exclusive. Gross v. Irving Trust Co., 289 U. S. 342. Thus the supervention of bankruptcy deprives a state court, in which a receivership was pending, of power to fix the compensation of the receivers and their counsel who were appointed by the state court and who rendered service in the state proceedings. Gross v. Irving Trust Co., supra; Emil v. Hanley, 318 U. S. 515, 519.

Sherman v. Buckley, 119 F. 2d 280, which arose in ordinary bankruptcy, is relied upon for the contrary conclusion. In that case an action brought by the bankrupt had been pending in the state court for seven years before the adjudication in bankruptcy. The trustee obtained the consent of the bankruptcy court to allow the action to be prosecuted in the state court on behalf of the estate and to substitute attorneys other than those retained by the bankrupt. It was held that the state court could require as a condition upon the substitution the liquidation of the New York charging lien of the displaced attorneys. Whether that case was correctly decided on its facts we need not stop to inquire. It is sufficient to say that it does not state the correct rule of law under Ch. X of the Act.

It is said, however, that § 77B rather than Ch. X measures the jurisdiction of the bankruptcy court since the main suit was instituted in the state court prior to the effective date of Ch. X, September 22, 1938. See § 7. But the short answer is that the petition was approved after that date and the provisions of Ch. X were thus brought into play.⁵ It is suggested that since § 23 of the Act⁶ was applicable to reorganizations under § 77B but inapplicable⁷ to those under Ch. X (§ 102), there was a greater limitation on the jurisdiction of the bankruptcy court over plenary suits at the time the main suit was instituted than there was after Ch. X became effective.⁸ From that it is argued that since Congress left the enforcement of such claims to the state courts, it permitted them to control all incidents of the litigation including the fixing of attorneys’ liens. Sec. 23 deals with questions of the jurisdiction of federal district courts, e. g., whether in suits by trustees in bankruptcy against adverse claimants the jurisdiction of the district courts rests on consent of the parties regardless of diversity of citizenship. Schumacher v. Beeler, 293 U. S. 367. The fact that the suits against the former officers and directors of the debtor could have been brought in the state courts alone does not advance the solution of the present problem. A bankruptcy trustee who by choice or by necessity resorts to a state court for the prosecution of a claim is of course bound by the adjudication made in the state proceeding. Winchester v. Heiskell, 119 U. S. 450; Fischer v. Pauline Oil & Gas Co., 309 U. S. 294, 303. The state court has full control over the litigation. But even as an incident thereto, it may not take action which involves the performance of functions which Congress has entrusted to the bankruptcy court. See Eau Claire National Bank v. Jackman, 204 U. S. 522, 537-538.

The suggestion has been made that New York could open its courts to the prosecution of such suits as the trustees instituted on condition that New York control the legal fees incident to the litigation; and that so long as New York did not discriminate against those asserting rights under the federal act such condition would be valid. Cf. Douglas v. New York, N. H. & H. R. Co., 279 U. S. 377. It does not appear, however, that New York has followed that course. The fact that New York has adopted measures designed to protect attorneys practicing in its courts does not demonstrate that New York has made its control over the fees a condition to the use of its tribunals. There is no such indication in the opinion of the New York Court of Appeals. Thus we cannot say that New York has provided conditions for entry into its courts which collide with a Congressional enactment. We can only assume therefore that the case is no different in principle from the one where a state grants to creditors attachments in aid of the collection of their claims. There can be no doubt that such liens could be nullified by supervening bankruptcy whether the creditor be lawyer or merchant.

But if it is assumed that New York might have refused to entertain such suits as were brought against the old management (cf. Mondou v. New York, N. H. & H. R. Co., 223 U. S. 1, 56-59), it does not follow that it could take jurisdiction of them but fail to apply any federal law in which those claims might be rooted. Garrett v. MooreMcCormack Co., 317 U. S. 239. Where Congress has prescribed the rule to govern the compensation of those employed by the bankruptcy court, those claims are no less dependent on the federal rule because they are asserted as an incident to another suit. If the state court could disregard the federal rule in that situation, then any of the duties of administration which Congress has imposed on the bankruptcy court could be absorbed by the state tribunal. Eau Claire National Bank v. Jackman, supra. Congress has fixed the fees which various representatives or officers of the bankruptcy court may receive for their services. §§ 40, 48. Among these are the bankruptcy trustees. § 48 (c). As in the present case those trustees may at times choose to act as their own attorneys. But it would be novel doctrine indeed to hold that state courts could increase any maximum allowance which Congress might authorize bankruptcy trustees to receive from the estate merely because the trustees rendered some of their services in state tribunals. Yet if Congress can protect bankruptcy estates by itself prescribing maximum fees for those representing or rendering service to the estate, it is not apparent why it may not reach the same result by delegating that authority to the bankruptcy court. Whatever doubts may have once existed as to the functions of a reorganization court, it is clear under this recent bankruptcy legislation that the approval of all fees as part of the plan has been entrusted to the bankruptcy court exclusively. The case is therefore controlled by the principle of Hines v. Lowrey, 305 U. S. 85. In that case we held that where an Act of Congress limited to ten dollars the fees for services in connection with veterans’ War Risk Insurance claims, the New York court could not award a greater amount to an attorney representing a guardian of an insane veteran even where the guardian was appointed by the New York court. We reversed a judgment of the New York court granting the attorney $1,500 for his services. The purpose of Congress to place the control of petitioners’ fees in the bankruptcy court is no less clear than its purpose to limit the amount of fees in the Hines case. In each the federal rule is the supreme law of the land.

We only hold that the bankruptcy court has exclusive authority under Ch. X to fix the amount of allowances for fees. Whether the amount so fixed could be secured by a lien created by local law raises a question which we do not reach.

Affirmed.

Me. Justice Roberts concurs in the result.

1 Respondents sought an order from the bankruptcy court directing petitioners to turn over their papers and memoranda. That motion was resisted by petitioners who claimed that the New York court had exclusive jurisdiction. Thereupon a stipulation was entered into with the approval of the bankruptcy court whereby respondents withdrew their motion and petitioners agreed to institute a suit in the state court for fixation of their liens, if any. The parties reserved their right to question the jurisdiction of the state court or bankruptcy-court over the matter.

2 “From the commencement of an action, special or other proceeding jn any court or before any state or federal department, except a department of labor, or the service of an answer containing a counterclaim, the attorney who appears for a party has a lien upon his client’s cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client’s favor, and the proceeds thereof in whatever hands they may come; and the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination. The court upon the petition of the client or attorney may determine and enforce the lien.”

3 See Continental Bank v. Chicago, B. I. & P. Ry. Co., 294 U. S. 648, 685; Reconstruction Finance Corp. v. Bankers Trust Co., 318 U. S. 163.

4 The submission of the matter to the state court with objections to its jurisdiction was a procedure which gave that “due regard for comity” suggested by the Court in Gross v. Irving Trust Co., 289 U. S. 342, 345.

5 Even if the petition had been approved prior to the effective date of Ch. X its provisions would have applied in their entirety to the proceedings provided such approval was within three months prior to that date. §276 (c) (1).

6 Sec. 23 presently provides: “a. The United States district courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings under this Act, between receivers and trustees as such and adverse claimants, concerning the property acquired or claimed by the receivers or trustees, in the same manner and to the same extent as though such proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants, b. Suits by the receiver and the trustee shall be brought or prosecuted only in the courts where the bankrupt might have brought or prosecuted them if proceedings under this Act had not been instituted, unless by consent of the defendant, except as provided in sections 60, 67, and 70 of this Act.”

7 See Weinstein, The Bankruptcy Law of 1938 (1938), pp. 63-64; 2 Collier on Bankruptcy (14th ed.), pp. 435-436.

8 See In re Standard Gas & Electric Co., 119 F. 2d 658.