In re Bombino

138 P. 1155, 44 Utah 141, 1914 Utah LEXIS 12

• Court: Utah Supreme Court
• Decided: February 2, 1914
• Docket: No. 2514
• Status: Published

Opinion

FRICK, J.

Tbis is an appeal by certain creditors of said Bombinos, doing business as Bombino Bros., from an order or judgment of tbe district court of Salt Labe County in wbicb certain allowances were made to one Raymond Ray, as tbe as-signee of said Bombino Brothers, and for fees paid to an accountant, and for attorneys’ fees for services rendered for said assignee by said accountant and by bis attorneys, Messrs. King & King.

Tbe facts, in brief, are as follows:

On tbe 6tb day of February, 1912, tbe said V. and Go. Bombino, as Bombino Bros., made a general assignment of all of tbeir property, under our statute, to said Raymond Ray, for tbe benefit of tbeir creditors. Tbe assignee immediately took possession of tbe business and property of said assignors, consisting of a saloon, á rooming bouse, and a grocery store, including tbe furniture, mercbandise, and other property connected therewith. Tbe assignee filed an inventory on tbe 10th day of February, 1912, showing tbe entire assets of tbe assignors to be of tbe value of $15,293.10, wbicb value, through errors and corrections, was subsequently reduced to $11,628.42; and liabilities were shown to be $7316.45. On tbe 15th day of February, 1912, tbe as-signee filed an affidavit from wbicb it was made to appear that it was for tbe best interests of all concerned that tbe business theretofore carried on by tbe assignors be continued, and, in order to do so, be asked permission from said district court to purchase tbe necessary goods from day to day for tbe purpose of contimiing said business. The court granted such permission, and the business was conducted by the assignee. On the 24th day of February, 1912, or eighteen days after the assignment was made, and within fourteen days after the assignment proceedings had been filed in the district court of Salt Lake County under our statute, a petition in bankruptcy was duly filed against said Bombino Bros., the assignors, in the District Court of the United States in and for the District of Utah, and said assignors were duly adjudged bankrupts and a trustee in bankruptcy was duly appointed. The precise date on which the order or judgment adjudging them bankrupts was entered is not disclosed by the record. It seems that the assignee conducted the business until some time in May following, when he filed his report and application for discharge in the district court aforesaid. In the report he, among other things, showed that his assignors had been adjudged bankrupts, and that he had realized from the sale of merchandise the sum of $2191.95; that he had collected upon the outstanding accounts the sum of $402.56, and from property sold in bulk he had realized the sum of $530, all of which aggregated $3124.51. He also reported that he had paid the accountant the sum of $125 and to himself the sum of $368, and had otherwise expended the sum of $2156.55, leaving in his hands an unexpended balance of $1014.96, out of which sum he asked for further allowances as follows: An additional allowance for the ac-. countant of $242.19, for himself, $205.28, and for attorneys’ fees the sum of $350, making the whole amount asked for extra allowances the sum of $797.41, which would leave a balance of $277.49 in his hands. On the 25th day of May, 1912, said district court, without any notice to the creditors of any kind, made an order approving all of the acts and doings of the as-signee, and also made a further order in which he was allowed to retain the amount he had paid to the accountant, also what he had paid to himself, and he was further allowed to pay to the accountant, to himself, and to his attorneys the amount of $797.47, apportioned as aforesaid out of said $1074.96 wbicb be bad on band. Tbe creditors, wbo are appellants here, subsequently appeared in said court and moved to set aside tbe order and judgment aforesaid upon tbe ground tbat no notice of any bind bad been given to any one, and for tbat reason tbey could not and did' not appear at tbe time tbe order was made to enter tbeir objections to tbe allowances aforesaid. Tbe district court set aside tbe order making tbe allowances and granted tbe objecting creditors a bearing. After tbe order bad been set aside, tbe creditors, tbrougb tbeir counsel, in effect entered an objection to tbe jurisdiction or power of tbe district court of Salt Lake County to bear and determine tbe .question of allowing further compensation to tbe assignee and bis attorneys and to tbe accountant, for tbe reason tbat tbe assignors bad been adjudged bankrupts in tbe District Court of tbe United States in and for tbe District of Utah, and tbat tbe bankrupt estate could only be administered in tbe latter court. Tbe district court of Salt Lake County promptly overruled tbe objection, and then reaffirmed and re-entered bis former order making tbe allowances aforesaid.

Tbe only question we can pass on is whether tbe district court exceeded its power in making tbe allowances.

There is a great diversity of opinion among tbe numerous federal District Courts and tbe state courts respecting tbe precise limit, of power of tbe state courts with regard to dealing with tbe assigned property in case a common-law or statutory assignment is made by an insolvent debtor for tbe benefit of bis creditors, where such insolvent subsequently, and within four months from tbe date of tbe assignment, is adjudged a bankrupt. Indeed, if one is not careful with regard to the facts and circumstances of tbe particular case referred to, and loses sight of tbe real purpose of Congress in passing tbe bankruptcy act, tbe many and apparently conflicting decisions may become really bewildering. As we view it, however, there should not be much difficulty in finding a limit beyond wbicb tbe state courts cannot go in attempting to administer upon a bankrupt estate, although an assignment was made for tbe benefit of creditors before bankruptcy proceedings were instituted. The very act of making an assignment in and of itself may constitute an act of bankruptcy under the bankruptcy act, and hence, if, within four months from the date of the assignment, bankruptcy proceedings are instituted and the insolvent is adjudged to be a bankrupt, it seems that the bankruptcy court, and no other, is given the power to administer upon and distribute the bankrupt estate If this be not so, then the bankruptcy act can be made nugatory by a state court by proceeding to administer and distribute the estate of the insolvent in accordance with the state insolvent laws which distribution may be in direct conflict with the provisions of the bankruptcy act. For instance: Under our assignment law a debtor may prefer one of his creditors, while such may not be done under the bankruptcy act. A state court might thus seriously invade the rights of some of the bankrupt’s creditors.

1 We are of the opinion, therefore, that, in case an assignment for the benefit of creditors is made, and thereafter, and within four months from the assignment, a petition in bankruptcy is filed upon which the assignor is adjudged a bankrupt, all the state court can do is to- preserve and protect the property to be administered upon by the bankruptcy court, and the state court thereafter is powerless to allow any claim for services in favor of any one except such as may in good faith have been rendered before proceedings in bankruptcy were commenced. All claims arising thereafter, of whatever kind or nature, should be presented to and passed on by the bankruptcy court and in accordance with the provisions of the bankruptcy act. We think such is the law as it is declared to be in the best considered cases. It- also is in accordance with both the letter and the spirit of the bankruptcy act.

In 1 Loveland on Bankruptcy (4th Ed.) section 38, the author in discussing the “Jurisdiction of Property Assigned for the Benefit of Creditors,” says:

“If proceedings in bankruptcy are instituted within four months after a general assignment and followed by an adjudication, the court of bankruptcy is entitled to administer the estate, and the jurisdiction of the state court must yield to the paramount authority of the bankruptcy court.”

It is also said in. tlie same section:

“If no bankruptcy proceedings are instituted within four months, the state court may proceed to administer the estate, and the proceeding cannot be assailed by a trustee in bankruptcy subsequently appointed, or by creditors.”

2 It is also true that, although, bankruptcy proceedings may hare been instituted within four months, yet if the creditors, without any objection, permit the state court to administer the estate, or if they consent that it may do so, they will ordinarily not be heard to complain respecting the allowances made by the state court, although, if timely objection had been made, the allowances made would not have been permitted to stand. It is in cases where the creditors have either expressly or by implication consented that the state court may proceed with the administration of the bankrupt estate that the great diversity of opinion with respect to allowances arises, In the case at bar, as we have seen, the creditors, at the first opportunity, objected to the power of the state court to appropriate the assets of the bankrupt estate for the purposes for which it was done. We think the court should have heeded and sustained the objection; and that it exceeded its power when, against the consent of any creditor, it appropriated the funds of the bankrupt estate for the purposes stated in the order or judgment appealed from. This conclusion, we think, is in harmony with the holdings of the United States Supreme Court in the case of Randolph v. Scruggs, 190 U. S. 533, 23 Sup. Ct. 110, 47 L. Ed. 1165. In that case the following questions were certified to that court:

“(1) Is a claim for professional services rendered to a bankrupt corporation in preparation of a general assignment, valid under the law of Tennessee, entitled to he paid as a preferential claim out of the estate óf the corporation in the hands of a trustee in bankruptcy, when the corporation was adjudicated an involuntary bankrupt within four months after the mating of the assignment, and the assignment set aside as in contravention of the bankrupt law? (2) Is a •claim for professional advice and legal services rendered such an assignee, prior to an adjudication of bankruptcy against the assignor, the assignment providing that the costs and expenses of administering the trust should be first paid, ■entitled to be proven as a preferential claim against the bankrupt estate ? (3) Is a claim against such an assignee for legal services rendered at his employment in resisting an adjudication of involuntary bankruptcy against the assign- or allowable as a preferential claim when the necessary effect of the adjudication would be to set aside the assignment under which the assignee was acting ? (4) If not entitled to be allowed as preferential claims, may either of the items described in the foregoing questions be proven as unsecured debts of the bankrupt corporation ?” The first question was answered in the negative. The second was answered thus: “Not under the deed, but so far as the assignee would be allowed for payment of the claim, the claim may be preferred in the right of the assignee.” The answer to the third is, “not on the facts appearing in the certificateand the answer to the fourth question is as follows: “The charge for the preparation of the deed may be proved as an unsecured claim.”

In referring to the effect that bankruptcy proceedings have upon a general assignment for the benefit of creditors, where such proceedings are instituted within four months after the assignment is made, Mr. Justice Holmes, in speaking for the court, says:

“It is admitted that a general assignment for the benefit of ■creditors, made within four months from the filing of a petition 'in bankruptcy, is void against the trustee in bankruptcy, so far as it interferes with his administering of the property assigned.”

This could not be denied. The court then proceeds to show that, although in instituting bankruptcy proceedings the legal -effect of a general assignment is destroyed, yet the assignee inay be entitled to compensation for services performed. He under certain circumstances, may also be allowed for services rendered by bis attorney. But, witb regard to tbe allowance for compensation, it is further-said in the opinion:

“We are not prepared to go further than to allow compensation for services which were beneficial to the estate. Beyond that point we must throw the risk of his conduct on the assignee, as he was chargeable with knowledge of what might happen.”

3 That is, when the assignee tabes charge of an assigned estate, he must be charged with the knowledge that he is acting under an instrument which in and of itself constitutes an act of bankruptcy and that, if bankruptcy proceedings are commenced within four months from the date of the assignment which result in adjudging his assignor a bankrupt, he, as the as-signee, merely holds the assigned estate for the use and benefit of the creditors of the bankrupt, and that the bankruptcy court is the court which has the sole right and power to administer the estaté. It is to that court, therefore, that he should apply for all allowances for compensation.

4 It has been held that the state court may make allowances for compensation for services rendered before the bankruptcy proceedings were instituted if a claim therefor is presented before there is an adjudication of bankruptcy. (Louisville Trust Co. v. Comingor, 184 U. S. 18, 22 Sup. Ct. 293, 46 L. Ed. 413.) But we think it is quite clear that the state court cannot, by making allowances for compensation to the assignee and to those claiming under him, allow for any services rendered after such proceedings are instituted, and by that indirect method administer upon at least a portion of the bankrupt estate. The case of Randolph v. Scruggs, supra, was carefully considered by the United States Circuit Court of Appeals of the First Circuit in Re Chase 124 Fed. 753, 59 C. C. A. 629, where it is held that, while an assignee for the benefit of creditors may be allowed compensation for services rendered “prior to the filing of the bankrupt’s petition,” yet be can recover for no services except sucb as were beneficial to tbe estate.

In view of wbat bas been said, tbe order or judgment making tbe allowances in tbis case cannot be permitted to stand. As appears from tbe decision of Randolph v. Scruggs, supra, tbe cláims for compensation in question, even tbougb they are proper, are nevertheless to be presented to, passed on, and allowed by tbe bankruptcy court, and that that court cannot declare at least some of them preferred claims. If, therefore, tbe court, which is given power to adjudicate sucb claims cannot declare at least some of them preferred claims, we cannot see bow a state court, without sucb power, can do so; It may well be that there are creditors of tbe bankrupt who have preferential rights, and, if so, tbe bankruptcy court is tbe proper place to determine that fact; and that court is also tbe forum in which to determine wbat claims, if gny, shall be preferred. Moreover, it is for tbe bankruptcy courts, in accordance with adjudications made by those courts, to determine wbat, in any given ease, constitute wbat are denominated as beneficial services for tbe estate. All those things should be adjudged by tbe court to which is given tbe power to administer tbe estate. It is palpable that only one court should administer upon tbe bankrupt estate. Where tbis is attempted by two courts, as is tbe case here, some one is most likely to suffer in bis legal rights. Tbis is well illustrated in tbis case. Here every claim for services presented by the assignee whether for himself, bis counsel, or bis accountant, say nothing about other expenses, is in effect declared to be a preferred claim, and tbe creditors of tbe bankrupt must take wbat is left of tbe estate, if anything. Tbe evidence with regard to whether the amount claimed for services rendered before bankruptcy proceedings were commenced is reasonable or otherwise is not before us, and as to that matter we express no opinion. With regard to the allowance of $242,19 to tbe accountant and tbe allowance of $205.28 to tbe assignee, and tbe other for $350 for attorneys’ fees, tbe case is different. These allowances were all made for services rendered after tbe bankruptcy proceedings Fad been instituted and out of money belonging to the assignor, and which the assignee had in his possession when he made his report to the district court.

As to those three items, therefore, the district court was without power to allow them, and as to them the judgment is reversed, and the cause is remanded to that court, with directions to vacate and set aside the judgment allowing those amounts, and to modify the same to that extent, and to direct the assignee to turn over all moneys and property in his hands to the trustee in bankruptcy, and to file his claim for services in the bankruptcy court. Appellant to recover costs ■■on this appeal.

McCARTY, C. J., and STRAUP, J., concur.