Leiman v. Guttman/Dissent Jackson

Mr. Justice JACKSON, dissenting in part.

I agree with the opinion of the Court insofar as it holds that a committee of stockholders constituted under the Bankruptcy Act may not disburse or commit fiduciary funds in its own hands under general deposit agreement, nor funds of the estate, to pay attorneys' fees except as allowed by the federal court, and a contract to pay more from such funds would not be enforceable. But the opinion goes beyond that. As to agreements between stockholders and counsel which do not affect funds of the estate or of the committee, I see no reason to say that such contracts are subject to control by the Bankruptcy Court, or indeed, that in such a case as this, that there is any practical way in which the Bankruptcy Court can effectively assert such a jurisdiction as the opinion bestows upon It.

It seems to me that the Court is converting a provision of the Bankruptcy Act designed to prevent lawyers from overreaching stockholders into an authority for stockholders to swindle lawyers. It may appear like an instance of man biting dog, but the case before us is actually one of client snaring lawyer. The Court's opinion is a rather abstract declaration and my difficulty with it can be understood only from fuller recital of the facts.

This case has not been tried nor even been at issue. It was decided on motion to dismiss in the trial and intermediate appellate courts of New York State. All that was before the New York Court of Appeals was a certified abstract question to which I think it returned a correct abstract answer. But that question was not the only or the basic question presented by the case.

From a record that is unsatisfactory for decision of issues so important to the bar and to those interested in reorganizations, the following facts appear.

Pittsburgh Terminal Coal Corporation, as debtor, was in reorganization under Chapter X of the Bankruptcy Act. Three of these defendants, in a manner and with powers and duties not disclosed, became a 'Committee for Preferred Stockholders.' Whether any stock was deposited with them as suc does not appear and the Committee seems to have represented only the interests of a family group, heavily interested in preferred stock, which comprised and dominated the Committee. The Committee originally retained these lawyers.

The situation appears to have been one of those in which existence of any estate, and hence of any value to the preferred stock, depended upon the outcome of a lawsuit for 'uncovering mismanagement and malfeasance.' Remuneration for the lawyers who were to press the suit was contingent upon their creating an estate; but in such cases courts are properly reluctant after the event to include in allowances, compensation for the risk of doing much work for nothing.

These lawyers faced to slim a chance of fair compensation that they proposed to withdraw. To induce them to continue, four individual stockholders put 20% of their preferred stock in escrow with the defendant Committee under a separate written contract. This stock does not appear to have been previously deposited with the Committee, nor was it deposited at this time under the general stockholders' agreement but only under the special escrow agreement. The agreement with the lawyers recited, 'This Committee has secured these shares from the stockholders listed above for the purpose of affording to you additional compensation for your services in the above matter. They have been obtained and are held in escrow on the condition that they be delivered to you only at such time as the reorganization proceedings' are terminated and final settlement of claims made, and delivery was conditioned on faithful and satisfactory service by the lawyers.

After an estate was created by the efforts of the lawyers, the stockholders repudiated the agreement and contended that counsel's services were only compensable from the estate without resort to the escrow contract. The attorneys thereupon sought compensation by an allowance from the estate. Judge Gibson's final opinion on the application recites facts among which are the following:

The chairman of the Committee for Preferred Stockholders, 'while not denying that claimants had rendered services which could not be charged against the Debtor, and which were rendered at a time when any such compensation from the debtor's estate seemed improbable, asserted that the deposit of stock in escrow was to be effective only in case no considerable award should be made from the debtor's estate.' He indicates that the mismanagement litigation was 'the source of the ultimate fortunate recovery of the fund for distribution.' But he finds 'that claimants rendered services to the preferred stockholders named in the escrow agreement which were not compensable from the fund distributed by order of the Court. Among such services were those rendered in connection with the sinking fund claims, Guttman's criticism of the Trustee's sales of machinery and his management of the real estate, his rent collections and the repair of the debtor's houses and other property.'

The Debtor, the Committee and the Securities and Exchange Commission joined and 'contended that in a Chapter X proceeding the court has the duty of determining the reasonableness of all fees, whether compensable fees chargeable to the estate or for those which are non-compensable and which cannot be so charged.' But Judge Gibson held otherwise and I think very properly, concluded, 'In the instant case no sufficient fund has been credited to the depositing stockholders against which any allowance to claimants could be charged. The judgment, if any were entered, would be directly against the stockholders.' (All emphasis supplied.) This he thought 'seems to stretch the interpretative powers of this court too far.'

Thus denied compensation on a quantum meruit basis for services admittedly rendered for and of value to these stockholders, and the Bankruptcy Court holding itself without jurisdiction to enforce their contract, these lawyers then went into the courts of the State of New Y rk to enforce it. They named members of the Committee as such as defendants. This was quite proper, for it was the 'Committee' which, as escrow agent, held the stock in question. The complaint asked judgment that the Committee deliver up the property of which it was stakeholder but asked no judgment against the Committee that would be payable from any other fund or property in its hands. The suit also made parties defendant the individual preferred stockholders in whose behalf the agreement was made and who became parties to it individually by putting up their stocks and against whom Judge Gibson held he had no power in the bankruptcy proceeding to enter judgment. This action is thus against both individuals and the Committee.

However, the question which was certified to the Court of Appeals, and which is all that we took for review on certiorari to that court, ignores any question of individual liability and only asks (297 N.Y. 201, 78 N.E.2d 473), 'Has the Supreme Court of the State of New York jurisdiction over the subject matter of this action to recover for legal services rendered to the stockholders committee which are not compensable out of the assets of the Debtor's estate, in a Chapter X reorganization proceeding under the United States Bankruptcy Act.'

Read literally, I agree that the answer to that abstract question is 'No.' A committee organized under the Act is a fiduciary whose commitments are made subject to the supervision of the court. I do not think it can undertake, out of its trust funds or out of stocks deposited only under the general agreement provided for by the Act, to pay for services that are beyond the power of the court to supervise.

But this Court, if I read aright, holds that no contract between any person and a lawyer for services in a reorganization proceeding can fix the basis or amount of the fee even if such fees are not payable out of the estate or out of any funds in the court's control, because 'The statute was designed to police the return which all security holders obtain from reorganization plans. The net return cannot be kept under supervision if private arrangements expressed in escrow agreements are to control.'

I had not understood that the Bankruptcy Act in reorganization cases disables anybody, even if a stockholder, from employing his own lawyer on such terms as he sees fit to fix by contract or that it disables lawyers from accepting such retainers. To invalidate them, so far as compensation is concerned, is the effect, and, as I understand it, the intent of this decision. If one privately may retain a lawyer, I know of no reason why he may not fix his fee, contingent or otherwise, and secure the promised compensation by pledge of stock in the company being reorganized, or pay the fee in such stock.

I am unaware of any public interests protected by this denial of the right to hire one's own counsel for a fixed or determinable fee in such cases. The good served by court supervision in preventing lawyer raids on fiduciary funds is not advanced by this ruling. These shares were put up by individual stockholders, presumably mentally competent adults, in what proved to be a good bargain, even if they have to perform it, and a windfall if they do not. Are people situated as they were to be disabled from agreeing upon a fee that will induce counsel to expose mismanagement of the bankrupt or the trustee in cases where, as here, the chances of compensation otherwise are doubtful?

This Court seems to recognize unfairness in the situation it is creating and suggests that it may be remedied by a new application for larger fees to the Bankruptcy Court. But we do not tell the court what to do with the new application nor where it went wrong as to the former one. Indeed, we could not tell it of its mistake, if any, for we have only scattered bits of information about the evidence on which the previous order was made. If we would but put ourselves in the position of that court, I think it will at once appear how impractical § today's decision.

Judge Gibson apparently agreed that the services for which either the estate or the Committee, as such, should pay are adequately compensated by the allowance of $37,500. The reason he did not allow more was that services above that value were performed for neither the estate nor the Committee but for the individual stockholders who employed and agreed to pay the lawyers. Do we, without seeing the record, reverse this finding? If so, do we hold that the services Judge Gibson enumerated as not rendered for benefit of the estate or the Committee were rendered for one or the other instead of for the individuals? Or do we say that, even if such services were rendered to individuals, the estate should pay for them? From what fund is the additional compensation we are suggesting to be paid? Would not other parties in interest have a just grievance if the estate of the bankrupt is burdened with paying for extra-estate services? And what other fund is there in reach of the court's order?

What we seem to be saying is that an Act whose purpose is to give the Bankruptcy Court ample powers to see that no improper fees are charged on the estate really compels it to make the estate pay fees of lawyers for private parties in connection with reorganization. I cannot follow this.

But if we do not mean they shall be paid from the estate or the Committee, Judge Gibson has already pointed out that there is no other fund. Can this Court say he is wrong and that we know of one? It is suggested that the Bankruptcy Court may make an allowance to counsel for the individual services and charge them against the escrowed stock. I am not aware of anything which gives the Bankruptcy Court power to adjudicate the controversy, which is essentially a contract action between the individual stockholders and their lawyers, merely because the services involved appearing in the reorganization case. Clearly the Court is holding that the contract is not valid insofar as it fixed the fee. Is it then valid as basis for allowing some fee, but invalid as to the one agreed upon? If on quantum meruit basis the allowed fee exceeds the present value of the stock, may the Bankruptcy Court grant a personal judgment for the deficiency? If not, the contract is good to limit the lawyer's fee but not good to assure payment of it. And if valuable services have been rendered under the contract for which an allowance might otherwise be proper, should it be denied if other conditions of the contract are not fulfilled?

I am unable to find any basis in law for saying that the Bankruptcy Court has anything whatever to do with a private contract to employ and pay a lawyer to guard personal interests in a reorganization case, unless it is sought to charge the fee against the estate, or against stock deposited under a general agreement with the Committee formed under the Act. This situation involves neither, but only stock specially placed in a stakeholder's hands under the escrow contract with counsel.

An experienced and able District Judge knew all the facts and we do not. The lawyers involved made a complete disclosure, as should any lawyer who applies to the court for an allowance. Judge Gibson approved the fees so fixed that the estate paid its share and only its share, which seems to fulfill the purposes of the Federal Act.

But he set apart certain items of services for which he made no allowance because they were rendered for private parties. Those parties had a contract as to what, under the peculiar circumstances, should be paid for those services. Judge Gibson left the controversy as to that contract to the state courts to adjudicate. An action has been brought to require delivery of the stock put in escrow by the individuals to compensate their lawyers. The action seeks no money judgment and no relief that would affect or could accept the estate in the hands of the Bankruptcy Court.

I should remand the case of the courts of New York for such further proceedings as tate law provides for its adjudication and not inconsistent with our holding that fiduciary funds cannot be committed except by the Bankruptcy Court.

The CHIEF JUSTICE and Mr. Justice FRANKFURTER join in this opinion.