In re Muñoz

OdliN; Judge, delivered tbe following opinion':' On May 2, 1923, while tbis court was sitting at Ponce, there was filed a verified petition on behalf of certain creditors of tbe above-named bankrupt, setting forth that in tbis case there bad been held only one meeting of tbe creditors and that there has been no distribution of tbe assets of tbe bankrupt; also that it appears from tbe records of tbis case that tbe attorneys for the bankrupt, viz.: E. Elores Colon and Sergio Gelpi, performed no work herein except tbe preparation of tbe schedule and at — 122 — tendance with the bankrupt himself at the first and only meeting of the creditors; also that the said attorneys did not include in the schedules any specified sum for their own fees; also that on or about June 6, 1922, the said attorneys filed with the former referee in bankruptcy, Mr. Arturo Ortiz Toro, a petition for the payment of their fees, and the said former referee on that same date, without consulting the creditors, and without calling a meeting of the creditors, and without any hearing whatever, issued an order at the request of said attorneys granting to them the sum of $1,200 as their fees. It is also alleged that these creditors were not notified of this allowance until about four days prior to May 2, 1923, and it is claimed that the said allowance is prejudicial to the interest of the creditors and to the estate of the said bankrupt. It is further set forth that the assets of the bankrupt consist of stock in trade, already sold by the trustee for the sum of $3,925, and also certain tracts of real estate heavily burdened by mortgages, which mortgages exceed the sum of $8-,000, and that the value of said real estate over and above said mortgages is not over $4,000, which sum added to the $3,925 in cash produced by the sale of the stock in trade makes the value of the entire assets of the bankrupt $1,925, which sum will be reduced to about $7,000 after the expenses of administration are deducted. It is therefore claimed that the above allowance to said attorneys of $1,200, as granted by the former referee in bankruptcy, is equivalent to about 18 per cent of the actual assets of the bankrupt, that the sum is grossly excessive, and therefore the petitioners pray this court to review the order of the former referee in bankruptcy herein made in June of 1922, and that said order be set aside in its entirety, or. that it-he amended so — 123 — that said attorneys shall receive fees which are reasonable and proper, 'and that they be required to return to the trustee all such sum of $1,200 as is in excess of a reasonable and fair amount. On the 4th day of May, 1923, the said attorneys E.. Flores Colon and Sergio Gelpi filed a motion to dismiss the petition based upon the ground that the said petition was filed out of time. This court denied the motion to dismiss, and directed the said attorneys E. Flores Colon and Sergio Gelpi to answer the said petition on or before May 14, 1923. This time was afterwards extended until the 19th day of May, 1923, and on said last-mentioned date an answer- was filed, based upon the contention that the fees due to attorneys for the bankrupt are part of the costs of administration, that they are entitled to priority, and that the judge or the referee is the sole arbitrator to determine the amount and time of payment. It is also claimed in and by said answer that while it is good practice to hold meetings of the creditors before ordering any kind of a payment, the costs of administering priority claims can be ordered to be paid without hearing the creditors. Reliance is had upon the ease entitled Re Stotts, reported in 93 Fed. 438. It is true that Judge Woolson, sitting in the southern district of Iowa in the year 1899, did hold that the question of allowing counsel fees as part of the costs of administration of a bankrupt’s estate may be determined by the ref eree ex parte, and that notice to the creditors of the hearing thereon is not a prerequisite of the action taken by .the referee in such matter, but Judge Woolson also holds that fees.for legal services rendered to the bankrupt himself are not entitled to priority .of- payment out of the estate; he merely holds that — 124 — an allowance may be made to tbe .attorney of tbe bankrupt for services rendered in preserving tbe estate pending tbe appointment of a trustee. In tbe particular case decided by Judge Woolson, while tbe case was pending before tbe referee, an allowance was made to an attorney of tbe sum of $150 for representing tbe bankrupt and also a sum of $125 as' a fee to tbe same attorney as representing tbe trustee. Tbe facts of tbe case reported in 93 P.ed. are very different from tbe facts in tbe present case, because these attorneys, E. Elores Colon and Sergio Gelpi, never acted as attorneys for the trustee. Tbe trustee employed as bis attorney a member of tbe bar at Ponce by tbe name of Pedro Albizu Campos, who received tbe sum of $520 as fees for bis sendees, this allowance being made by tbe same former referee in bankruptcy, kfr. Arturo Ortiz Toro. This matter of tbe allowance to Pedro Albizu Campos is also questioned, but has not yet been submitted to this court for consideration. Tbe only matter before this court for decision at tbe present time is tbe matter of tbe payment of tbe $1,200 above referred to. It is fair to say that tbe answer filed by these attorneys sets forth a claim that tbe amount involved in tbe bankrupt estate was over $30,000, and that there were held more than ten meetings of tbe creditors. But tbe answer is not verified, and I can well understand why it is not verified, because the record shows that tbe answer is not true. Beferring once more to tbe decision of Judge Woolso \, while it is true that be says that in bis opinion notice to cred tors is not required before tbe referee can settle proper attorney’s fees, it is clear to me that in tbe case now before me tbe action taken by tbe referee was to settle improper attorney’s 1 es. — 125 — Judge Woolson distinctly bolds that tbe judge doubtless bas power to take whatever steps are found necessary to correct any improper allowance and payment. He also says that tbe attorneys are on tbe roll of tbe court, subject to any proper order that tbe court may make. The conclusion to my mind is irresistible that an examination of this decision of Judge Woolson is really against tbe claims of these attorneys rather than in support thereof. In reaching tbe result of my study of the petition and tbe attempt made to defend against tbe same, I have been guided largely by tbe decisions of other Federal judges. First, I refer to the ease of He Durand Mercantile Co. reported in 199 Fed. 961. This case was decided by tbe late Judge William II. Pope, presiding in tbe United States district court of New Mexico. In that case the estate involved $4,500; tbe fee claimed by tbe attorney for tbe bankrupt was $250, which the court reduced to $100, bolding that $50 was ample compensation for preparing and filing tbe schedule and other papers necessary to tbe adjudication, and $25 was ample allowance for attending tbe bankrupt brought before tbe referee, and $25 more for securing a stay order against tbe prosecution of tbe case in tbe state court. This case was decided in 1912, and I recognize tbe fact that tbe cost of living in those days was much less than at present. Therefore, instead of limiting these attorneys to $100 I propose to allow them $200. I may say. here incidentally that if I were practising law in Porto Eico I would be immensely pleased in any case to do what these attorneys did and receive $200 therefor. Therefore, I am not treating these attorneys with any more harshness in tbe reduction of their fee from $1,200 to $200 than I would expect to receive — 126 — myself if T took $1,200 by the permission of a careless referee when I was only entitled to $200. It might be argued that the allowance should be larger because two attorneys were employed instead of one. This theory is exploded by another decision of Judge Pope, reported in 206 Fed. 835, the case being decided in 1913, and entitled Re Falkenberg. He specifically holds in this case that the number of attorneys employed by a bankrupt’s receiver is not an element to be considered in allowing fees, but the allowance should be made as though only one attorney were employed. The same rule must apply in the case of attorneys for the bankrupt himself. In that case the attorney for the receiver claimed $150 and the court reduced it to $100. There is also a very pertinent case reported in 146 Fed. 140. It is entitled Re Oppenheimer, decided in 1906 by Mr. District Judge Archbald in Pennsylvania. In that case the receiver asked that he be allowed credit for $400, fees paid to two attorneys. Two hundred dollars of this money went to Mr. Dando, who was employed by the receiver, and $200 went to Mr. Davis, an attorney employed by the petitioning creditors. The court disallowed entirely the item of $200 paid to Mr. Davis, and the item of $200 paid to Mr. Dando was reduced to $100. But there is a very late utterance of the Supreme Court of the United States on this subject of fees allowed to attorneys in bankruptcy proceedings. It is impossible for me to disregard the feeling which is so prevalent throughout many of the forty-eight states of the Union, as well as in the Island of Porto R’co, that the administration of the Bankruptcy Act of the Congress of the United States has caused great disgust and in some instances great distrust in commercial and banking127 circles by reason of excessive fees paid to lawyers; and tbis condition of affairs has in some instances been almost scandalous. If tbe former referee in bankruptcy in Ponce, Mr. Arturo Ortiz Toro, could turn over to tbe attorneys for tbe bankrupt tbe sum of. $1,200, I do not see wbat would prevent bim from turning over to those same attorneys $4,200, bad they asked it. To say that tbe creditors bad no relief from sucb proceedings is to cast discredit upon tbis court. Tbe late utterance of tbe Supreme Court of tbe United States to wbicb I refer is an interesting ease and is entitled Watkins v. Sedberry. The decision was rendered April 9, 1923, 261 U. S. 571, 67 L. ed. 802, 43 Sup. Ct. Rep. 411, tbe opinion being written by Mr. Justice Butler, all tbe other members of tbe court concurring. Tbe case itself is a very interesting one. It involved tbe question of proper fees and expenses to be allowed counsel for a trustee in an important bankruptcy proceeding. Tbe debts which existed at tbe time of tbe filing of tbe petition in bankruptcy, and wbicb were afterwards proved and allowed amounted, to $21,000 with interest. It seems, however, that there were concealed assets, and in order to bring these concealed assets into tbe fund an important suit was brought against tbe bankrupt himself and bis family, wbicb suit was successful, tbe value of tbe property being almost $100,000. There bad been a written contract between tbe trustee and bis counsel, tbe details of wbicb -contract are set out carefully in tbe opinion of Mr. Justice Butler, tbe substance of tbe contract being that tbe counsel employed were to bear tbe necessary expenses of tbe suit and to protect tbe trustee against all damages and expenses growing out of sucb employment, ■ and that in case the suit should be successful there should be, first, chárgeable — 128 — against tbe property recovered any amounts expended by tbe counsel in prosecuting tbe suit, and then tbe balance should be divided equally between tbe trustee and tbe counsel. On tbe basis of this contract, counsel claimed $49,000 for fees and $1,127 for expenses. Tbe district judge beld that tbis contract was illegal, but did allow tbe counsel tbe sum of $7,500 for bis fee. Tbe claim of $1,127 for expenses not being itemized, tbe district judge cut it down to $750 after tbe counsel bad declined to furnish items. Tbe case then went to tbe circuit court of appeals for the sixth circuit, the decision being reported in 275 Fed. 894. Tbe circuit court of appeals vacated the ruling of tbe district judge allowing only $7,500 as a fee, and sent tbe case back to tbe district judge, leaving tbe latter at liberty to úse bis own discretion in again fixing tbe amount. Tbe case then went, by means of tbe usual route of certiorari, to tbe highest court that we have, whereupon the decree of tbe circuit court of appeals was reversed and tbe decree of tbe district judge was affirmed. Tbis is tbe latest utterance on tbis subject that I have been able to find, and at tbe same time tbe most important. I therefore bold that tbe said attorneys, E. Elores Colon and Sergio Gelpi, must return to tbe trustee tbe sum of $500 each, provided that tbe said sum of $1,200 was divided between them equally, as is presumable. If, however, tbe division was unequal, E. Elores Colon will deliver all that be received in excess of $100, which be may retain, and Sergio Gelpi likewise must return to tbe trustee all that be received in excess of $100. These payments must be made on or before tbe 2d day of June, 1923. To tbis ruling E. Elores Colon and Sergio Gelpi except. — 129 — Done and ordered in open court at San Juan, Porto Rico, tbis 23d day of May, 1923.