Woodmar Realty Co. v. McLean

SCHNACKENBERG, Circuit Judge. On January 13, 1941, reorganization proceedings were started in the district court, under chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., against Woodmar Realty Company, an Indiana corporation. Pursuant to an amended plan of reorganization, all of the real estate owned by Woodmar was disposed of by sale and there remained the matter of proper distribution of the funds, inter alia. On February 16, 1953, with the approval of Woodmar, it was adjudged a bankrupt and it was provided by the court that subsequent proceedings be in accord with the Bankruptcy Act. 11 U.S.C.A. § 636. Woodmar was engaged in buying, subdividing and selling real estate. It subdivided a tract in Hammond, Indiana, and made extensive improvements thereon by means of city of Hammond special assessment proceedings in which bonds were sold to the public, which bonds — 816 — constituted liens on the property improved.1 The reorganization petition against Woodmar had been filed by three owners of such bonds. Over 300 lien claims were filed in the district court by holders of improvement bonds and coupons, and are known as “Class 2” claims.2 No objections thereto were filed by the then trustee, Charles L. Surprise, or his successor, Walter A. McLean, appellee herein, although the court’s order of November 22, 1941, authorized such action. Prior to January 30, 1951, trustee Surprise, under court orders, had sold all of Woodmar’s real estate, free of the improvement bond and coupon -liens. In September 1955, trustee McLean filed a petition recommending the allowance of 310 claims based on said bonds, together with a “Trustee’s Final Report”. The bankrupt filed objections to 274 of these lien claims, and the district court’s ruling that the bankrupt had no right to object was reversed by us in the case of “In the Matter of The Woodmar Realty Company,” 7 Cir., 241 F.2d 768, 64 A.L.R.2d 883. Upon our remandment the questions then awaiting resolution by Judge W. Lynn Parkinson3 were the validity of the bankrupt’s objections to Class 2 claims and the approval of the Trustee’s Final Report. At a pretrial conference on June 28, 1957 on all claims and objections thereto, Judge Parkinson decided that, in order to establish the law of the case as to Woodmar’s objections to Class 2 claims, he would select claim No. 441 and he thereupon scheduled it for trial on July 15, 1957. The court invited all Class 2 claimants, to whose claims objections had been filed by Wood-mar, to be present at the trial, but the trustee and his counsel were informed by the court that they were not to participate. The trial was held on claim No. 441 on July 15, 1957 and the following day, and briefs were ordered filed. Judge Parkinson requested Woodmar to undertake the responsibility of negotiating with the Class 2 claimants for a compromise of their claims. On July 22, 1957, the bankrupt formally filed a petition for such authority and Judge Parkinson entered an order accordingly, which provided that any compromise agreement was to be subject to the approval of the court.4 It is undisputed that it was the desire and judgment of Judge Parkinson that the trustee and his counsel were to remain passive with respect to the efforts of Woodmar and its counsel to negotiate settlements. Woodmar, acting through its counsel, Mr. Crumpaeker, thereupon proceeded in an attempt to effect a compromise of these claims. Before we discuss the means used, it becomes necessary to consider Woodmar’s relation to the Class 2 claimants. Appellee contends that the authorization of Judge Parkinson to — 817 — Woodmar and its counsel to negotiate compromise settlements with the lien holders had the effect of making Wood-mar and its counsel fiduciaries in those negotiations. On the other hand, Wood-mar argues that in these negotiations it occupied no fiduciary relationship ,and that the parties dealt as adversaries and at arms’ length. These conflicting contentions require that we note the situation existing in the bankruptcy estate at the time the negotiations \ook place. It is evident that the court had confidence in Mr. Crumpaeker, but that has no bearing upon the question raised by the contention of appellee that Woodmar in the succeeding negotiations was acting in a fiduciary relationship with the lien holders. As a result of the court proceedings from their inception, the entire property of Woodmar had passed into the possession of a trustee of the court, who had in turn been succeeded by another trustee. These assets, which consisted of real estate, had been by court sale converted into cash and the rights of the lien holders had been thereby transferred to the proceeds of sale. It is the law of bankruptcy that, upon the satisfaction of all prior claims and charges, any amount remaining in this fund would belong to Woodmar. After some small general claims,5 as well as some preferred claims, such as taxes, attorneys’ fees and other costs of administration of the bankrupt estate, there remained to be satisfied only the Class 2 claimants. The balance of this depleted fund would become the property of Woodmar. The more that was allowed the lien claimants, the less Woodmar would recover from its property. The less that the claimants would receive, the more Woodmar would recover. As we said, In re Woodmar Realty Company, 7 Cir., 241 F.2d 768, 771: “The bankrupt has been permitted to object to allowance of claims in cases where in the event of disallowance there would be a surplus left for the bankrupt. * * * The bankrupt’s interest in having claims in excess of $300,000 disallowed, in which event a substantial surplus would be available for the bankrupt, is obviously real, and the conclusion is inescapable that under these circumstances the bankrupt is a ‘party in interest.’ * * * ” Although the first trustee appointed had been authorized by the district court to file objections to the claims filed by the lien holders, both he and appellee, his successor, failed to do so and thereupon Woodmar itself filed such objections, after we held that it was entitled to do so. In re Woodmar Realty Company, supra. The pending litigation was in reality between Woodmar and the lien holders. Whether it was litigated to a finish or settled, they were the ones who would ultimately be affected thereby. Such litigation was really an ordinary civil controversy. The parties, whether in litigating in the courtroom or in settling outside the courtroom, were engaged in an adversary activity and dealing at arms’ length. The fact that Judge Parkinson warned the trustee to keep his hands off the negotiations is evidence that he believed that thereby the negotiations might be more smoothly conducted to a conclusion rather than that thereby he was changing the character of either Woodmar or its attorney into a fiduciary. We hold that no fiduciary relationship existed between the parties to the negotiations. In view of that holding, less importance attaches to the means used by Crumpaeker in settling those claims. However, we prefer to discuss them. He sent letters 6 to Class 2 claimants in an effort to settle these claims. We have read them and find that they are not properly subject to the — 818 — severe criticism leveled against them by appellee or the district court. Woodmar’s brief in this court asserts, and appellee’s brief does not deny, these facts: Of the 102 Class 2 lien claimants who entered into stipulations of dismissal with Woodmar, 75 were represented by counsel. Of the 27 not so represented, several were themselves attorneys-at-law. A few others were business firms, corporate or otherwise. Eight of the stipulations carried the approval of courts having custody of probate estates. The first letter, which was approved by Judge Parkinson, was sent out in Woodmar’s name by Mr. Crumpaclcer, its counsel. The second letter was sent on the letterhead of Crumpacker’s law firm. It referred to the protracted bankruptcy proceedings of Woodmar and stated that the assessment bonds were not Woodmar obligations, but represented lien rights against Woodmar real estate as well as other real estate. The letter stated that according to records the attorneys in statutory foreclosure suits on said bonds had collected money in these actions which should have been applied to the retirement of bonds, and, “Many additional reasons exist why the Woodmar Realty Company cannot approve the allowance of claims based on special improvements.” The letter referred to 11 interrogatories enclosed, which asked for information to expedite early disposition of the claims. The letter offered to give detailed information if the addressee desired it and suggested that, if the addressee had no attorney, he retain one. Appellee herein attacks this interrogatory : “Has claimant written off the bonds as a loss on any federal income tax return for the purpose of obtaining an income tax deduction ?” It seems to us that when Woodmar was attempting to compromise with a bondholder, it was reasonable that it learn whether the bondholder, after holding the bond for years without income, had written it off as a loss on his federal income tax return. If he had, this might affect his judgment as to the amount of settlement he would insist upon. The third letter was from the same law firm and contained a rather full report of the bankruptcy proceedings. While undoubtedly colored by Woodman’s characterization of the conduct of trustee Surprise, his attorney and his accountant, the letter did refer to facts which, in view of the district court’s ruling herein, are pertinent. For instance, the following appeared: “If any lien rights exist in favor of claimants, at least similar lien rights exist against the proceeds of the so-called ‘John Doe Trust’. (Cause No. 51815, Lake Superior Court Room No. 5, Hammond.)” In view of the fact that Woodmar was attempting by these letters to settle with lien claimants, whose interests were hostile to its own, and that an effort to compromise between adversary interests was involved, we feel that Woodmar’s counsel, without abandoning his responsibility to his client, dealt fairly with the bondholders. What their rights, if any, may have been in the so-called “John Doe Trust” under Indiana state law, arising from real estate not involved in this proceeding, they were voluntarily alerted by the express language above quoted from the third letter. It is our conclusion that the holders of these liens were not deceived or imposed upon by any of the negotiating efforts of Woodmar. That conclusion is corroborated by the fact that neither before nor after the settlements were made has any one of those claimants appeared in court and made any protest or objection to the methods used in procuring their agreement to compromise their liens. In fact, attorney Leo Rieder, who represented bondholders D. D. Bow819 sher, Ferrie H. Fulton, Lawrence J. Har-wood,' Joseph W. Lauber and Emma Lau-ber, appeared before Judge Robert E. Tehan in the district court and testified that he saw the letters and interrogatories from V/oodmar and investigated the foreclosure aspects of certain of the rolls that affected the Woodmar real estate, whereupon he entered into the settlement agreements proposed. After the deaths of various owners, he had inventoried such Indiana bonds at a value of “five cents on the dollar”. A hearing before Judge Tehan began on May 20, 1958, on Woodmar’s petition for approval of 84 settlement agreements, and a similar petition filed June 27, 1958 covering 18 additional agreements. Although notice of the proposed settlements had been sent to all parties in interest, no objections were made and no one appeared in opposition to the petitions. The court heard evidence and took the matter under advisement on July 30, 1958. On January 19, 1960, Judge Teh-an entered an order denying approval of these 102 settlement agreements with lien claimants and 3 compromise agreements with creditors. From that order this appeal has been taken by Woodmar. Appellee now admits that there is no material dispute over the facts and that “ * * * the only thing which the trial court was called upon to decide was the propriety of the action of the bankrupt and its counsel affecting the proposed compromises.” In his post-order opinion of February 11, 1960, Judge Tehan “ordered” that the court’s orders of July 22, 1957 and August 30, 1957 be vacated and set aside,7 stating that this was by reason of certain conclusions which had been reached, including the following: “ * * * in that Woodmar, with the duty of fair treatment gave preferential treatment to some and penalized others in the variances extending from 18% to 200% * * * The record shows that Woodmar’s attorney had already informed the court that he was attempting to use about one-third of a claim as a basis for negotiation for compromise. Therefore, this statement of fact by the court is alarming and, if correct, tends to explain the court’s theory. Along the same line, the trustee, in his brief in this court, relies heavily upon this charge of alleged “preferential treatment”, saying: “* * * An examination of these petitions, particularly Petition No. 3 and Petition No. 4 will show the wide variance in the percentage of these settlements as compared to the amount found due by the Trustee. In the aggregate, the compromises are sought by the appellant for about 34.4% of the amount found due by the Trustee — yet, there is a wide spread in the amounts actually to be paid to the various claimants. For example, Claim No. 4, of one Minnie Hood, of Columbia City, Indiana, whose claim was recommended for allowance by the Trustee in the sum of $548.60, was offered $100.00, or about 17%. The heirs of Andrew Kenner are offered $350.00 on a claim on which the Trustee had recommended $2543.12, or a settlement of approximately 13.7%, and Walter McConnell is offered $135.00 on a claim on which the Trustee had recommended $981.-70, or about 13.7%. Cressa Stellar, on the other hand, is offered $350.00-on a claim on which the Trustee had offered $218.30. “ * * * The court in its decision denying approval to the compromises found as a fact that the amount offered to the claimants varied from 18% to 200%, as compared to the amount recommended by the Trustee.” It is not surprising, therefore, that the district court, faced with these repre — 820 — sentations, remarked that “it would appear that there is no uniformity in the type of settlement offered. * * * ” Unfortunately the figures, evidently furnished to him by the trustee, were grossly inaccurate and could not have failed to mislead the court. This will appear from the following tabulation: Claim Col. 1 Col. 2 Col. 3 Col. 4 Col. 5 No. Name Amount found due to lien claimant in Trustee’s Final Report of Sept. 7, 1955 Incorrect statement in trustee’s brief as to amounts of Wood-mar’s compromise settlements Percent of Col. 2 to Col. 1 Correct statement of items set forth in Col. 2 Percent of Col. 4 to Col. 1 4 Minnie Hood $ 548.64 $100.00 18.2% $190.00 34.6% 460 Heirs of Andrew Kenner 2543.12 350.00 13.7 850.00 33.4 467 Walter L. McConnell 981.70 135.00 13.7 350.00 35.6 470 Cressa Stellar 218.30 350.00 160.3 85.00 38.9 The italicized figures are erroneous, and they confused the district court.8 It will be noted that the correct report of percentages of the settlements was very close to % of the amounts which the trustee’s final report found due to the lien claimants on these four claims. They are consistent in amount with the uniform plan of Woodmar to attempt to secure settlements with all lien claimants on a basis of approximately 1/3 of the amount due on their bonds. In compromising with bondholders, the bankrupt took an assignment of their bonds and coupons. In the district court, when the court called attention to the fact that thereby the bankrupt might become entitled to realize some recovery out of the John Doe trust, as the holder of such bonds and coupons, the bankrupt’s counsel reassigned them to the trustee and stated that no irregularity was intended, since he felt confident Woodmar would prevail and be entitled to the bonds and coupons and other assets. In this court, the trustee has made no point with respect to the assignment of these bonds and coupons to the bankrupt and we, therefore, do not pass upon the propriety or effect thereof. The facts in this case are not in dispute. The evidence is largely documentary. The district judge erred in denying approval of the settlement and compromise agreements referred to in his order filed on January 19, 1960 and, for the reasons herein expressed, it is necessary that we reverse that order and remand this cause to the district court with instructions to enter an order approving said settlements and compromise agreements referred to in said order. — 821 — This litigation is being prolonged by a trustee in bankruptcy who is the second in a succession of trustees who have been administering this trust since the early part of 1941. It is hoped that the energy which the trustee evidences in this appeal may soon result in the winding up of one of the oldest bankruptcy estates in the Seventh Circuit. Order of January 19, 1960 reversed and cause remanded with instructions. Footnotes [1] This reference to the bonds as “liens” is sufficient for the purpose of this opinion, although Woodmar, in its brief, attempts to resort to a restrictive definition in applying the word to improvement bonds. [2] The court had made a claims classification placing tax claims in Class 1, claims on said bonds in Class 2, claims on first mortgage real estate bonds in Class 3, claims of judgment creditors in Class 4, claims of all unsecured general creditors in Class 5, and claims of common stockholders of Woodmar in Class 6. [3] After Judge Luther Swygert had conducted extensive hearings on the final re- . port, he disqualified himself and_ Judge Parkinson succeeded Mm in the hearing of the case. [4] A motion attacking the order of July 22, 1957 was filed on August 21, 1957 by attorneys Floyd It. Murray and Edmond J. Leeney, charging that the bankrupt had undertaken to usurp the duties and the powers of the trustee herein, by writing letters to the lien claimants “offering to enter into a compromise with said lien claimants * * * ”. An answer was filed by bankrupt, a hearing was held on August 30, 1957, and the motion was denied. At the same time the court modified its order of July 22, 1957 slightly. No appeal was taken from either order. [5] Amounting to about $1400. [6] Attorney Crumpaeker used as a basis for negotiating -with lien holders an offer of about one-third of the amount due upon their claims as set forth in the final report of the trustee of September 7, 1955, ante, 2. [7] However the record does not show that any order was entered by the court to this effect. [8] Although immaterial, it is but fair to state that the alleged errors reported by the trustee to the district judge were the results of separate mistakes by both the trustee and Woodmar in their respective reports and petitions. We are not here concerned with placing the blame for the mistakes. We are concerned only with their effect on the decision of the district court.