Case Name: In re LEHMAN. In re ANDERSON
Court: United States District Court for the District of Montana
Jurisdiction: United States
Decision Date: 1925-08-24
Citations: 7 F.2d 680
Docket Number: No. 4036
Parties: In re LEHMAN. In re ANDERSON.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 7
Pages: 680–682

Head Matter:
In re LEHMAN. In re ANDERSON.
District Court, D. Montana.
August 24, 1925.
No. 4036.

Opinion:
BOURQUIN, District Judge.
Before the judge, the referee cited the trustee to show cause why he should not be removed from office because he had failed to make to the referee, as the latter ordered, report of the estate's condition.
Appearing and waiving formalities, the trustee advances only and orally that he has used the trust funds for his own purposes; and he questions if there is any legal authority to presently remove him.
Briefly to answer, because of this aid and hand of the court's embezzlement of the estate in the custody and administration of the court (the principal thing), no; but, because of his failure to report (whether truly or falsely is immaterial) the estate's condition to the other aid or hand of the court (an incidental thing), yes, removal by the court if not by the judge.
It is admitted that this is another illustrar tion of the fatal propensity to postpone substance to form that so often defeats justice, and is an absurdity. Nevertheless it is law— in the Ninth Circuit — for the time being.
The relation between courts and trustees was considered by this court in Matter of the Billings Creditmen's Association (In re Judith Gap Commercial Co., 291 F. 792; Id. 1 F.[2d] 508), and the determination was that trustees, being mere aids or hands of the courts, are always subject to the latter's jurisdiction and plenary power of their own motion to remove delinquent trustees. The reasoning to that conclusion needs no repetition here.
On review, the appellate tribunal held otherwise and decided that the true rule or doctrine of the Bankruptcy Act (Comp. St. § 9585-9656) is that in no circumstances, whatever are the delinquencies of trustees, can the courts of their own motion remove them; that only if the trustees' wrongs he discovered by some creditor able and willing to assume the burden of litigation, and on his complaint, have the courts jurisdiction and power to remove unfaithful trustees. See In re Judith Gap Commercial Co. (C. C. A.) 298 F. 89; Id. (C. C. A.) 5 F.(2d) 307.
It is worthy of note that the first of the appellate tribunal's opinions proceeds upon the theory that a trustee is a publie officer, whereas he is an officer of only private employment and like to a bailiff, receiver, or master; and the second of said opinions in denial of the court's implied or inherent power to remove a delinquent trustee in order to protect conceded trust funds in the court's custody and administration counts somewhat upon Bardes' Case, 178 U. S. 524, 20 S. Ct. 1000, 44 L. Ed. 1175, which turns wholly upon the Bankruptcy Act's express mandate in respect to contested property at no time within the court's jurisdiction. '
Of the doctrine itself, it is not too* much to say it is inherently evil and abhorrent, and neither Congress nor courts, whichever begat it, can give it legitimacy or respectability. In plain words, it denies to the courts adequate power to perform duties imposed by statute, impairs equitable jurisdiction by the statute prescribed, subordinates courts to their mere aids or hands, encourages the latters' infidelity, virtually degrades the courts to fences for thieves, robs beneficiaries, and defeats a principal object of the Bankruptcy Act.
Worse than all else, the doctrine and its consequences, of whieh the Billings Credit-men's Association is a horrible example, detract from essential if not vital public confidence in the courts' ability if not willingness to do justice — that sometime weakened publie confidence whieh, impaired by judicial action or inaction, cannot be repaired by any judicial dignity or gown. The Billings Creditmen's Association Case is by no means unusual; and in any event the courts' jurisdiction and power should he as extensive as their duty to administer trusts, sufficient to cope with any chicanery of trastees, and adequate to do justice as well in unusual cases as in usual ones.
That the courts have other powers that may more or less successfully detect infidelity and possibly defeat it, is no argument in the doctrine's behalf. If entrenched in office, an unfaithful trustee has more than the usual advantages of the average criminal. And to a court whieh has been defeated in admin istration. and to beneficiaries robbed, there is little compensation or consolation in power of pursuit and some variety of prosecution that possibly may recover from or punish a delinquent trustee. However, the instant proceeding escapes the doctrine by justifiable resort to dictum in tho opinion oiled last aforesaid, which tentatively if narrowly recognizes the significance of General Order 17.
This latter provides that, if the trustee fails to make any report it is his duty to make, tho referee shall order him to show cause before the judge why he should not be removed. It is submitted that General Order 17 is not an exception to the doctrine, but is a refutation of it-in its entirety. In the first place, in it the Supremo Court does not in terms or at all purport to endow tho courts with jurisdiction or power to remove trustees, but merely tacitly recognizes that they already have jurisdiction and power to that end, and prescribes procedure to set the courts in motion in particular circumstances. If the Supreme Court at any time assumes to confer jurisdiction and power, doubtless in matters so important it will speak in no uncertain, language, will do> so expressly and definitely, and leave nanght to implication. Furthermore, to confer jurisdiction and power upon thej courts is legislative, by tho Constitution is vested in Congress alone, and by Congress is not and cannot be delegated to the Supreme Court. To the latter, the; Bankruptcy Act gives power only to prescribe "rules, forms and orders as to procedure and for carrying this act into force and effect" ; that is, to enable the courts to exercise the jurisdiction and power that are theirs by virtue of the act, expressly and impliedly, and are theirs inherently.
In the second place, General Order 17 is to bring to the courts' attention certain delinquencies that otherwise might escape their notice; and it does not import that, if delinquencies are known to the courts, or if referees are dispensed with as they may be, or if referees are ignorant of delinquencies or fail to aet, the courts are powerless to themselves initiate proceedings in removal, and the trustees may escape removal. Nor therein is the Supreme Court creating in referees, the other aids or hands of the courts, greater power than have the courts, or predicating performance of the courts' duty on performance by referees, or elevating* the red tape of form above thel substance.
And in the third place, General Order 37, in sanctioning removal proceedings initiated by referees (a mero rule of procedure which courts in bankruptcy themselves might prescribe), affords conclusive evidence of the Supreme Court's construction that the act's specific authorization of removal on complaints of creditors is not a limitation upon the courts' jurisdiction and power to remove delinquent trustees, and is not exclusivo; oven as tho act immediately thereafter declares it is not. And if it be conceded, as it is, that removal of trustees may be initiated by other than creditors in one case, that of General Order 17, it must be conceded also that the doctrine is without foundation and is invalid in all eases.
All' this is too plain for argument. But to illustrate some absurdity otherwise, suppose that in the instant ease tho court dispensed with a referee, and in due time; by some accident, discovered the trasteóte embezzlement. Certainly, any effective investigation, accounting, conservation, collection, and distribution of the estate, generally requires removal of the delinquent and appointment of another trustee. But, according* to the doctrine, the court of its own motion cannot act to that end. Nevertheless its inescapable and paramount duty, as special guardian of the trust estate and to justly administer it, constrains that variety of action. Accordingly, it must move circuitously, belatedly refer the estate to a referee; advise him of the embezzlement, and — require Mm to forthwith initiate proceedings, in removal? No; to request the trustee to report, in hope he will fail to* report, and thus then and then only, the referee be authorized to initiate proceedings in removal and the court to aet; or the court must seek out creditors, inform them, and solicit complaint by thorn. Neither the- Bankruptcy Aet nor tho Supreme Court contemplates any such shabby "strategy."
The aforesaid interpreta,tion of General Order 17 finds support in General Order 13, wherein the Supreme Court provides that courts in bankruptcy may veto creditors' appointments of trustees. The object is to insure proper aids or hands to. assist the courts in administration of the estate. It, too; is not of jurisdiction or power created by the Supreme Court, but is only the latter's recognition that it is a power necessary to the courts to. enable them to perform their statutory duty, without which they would become reduced to the status of quasi special tribunals of nonjudieial duty and power; and that not denied by the statute (even if it could be), this veto is implied or of the courts' inherent powers.
Without more, the conclusion is that stated at the beginning, not for his embezzlement, hut for his poor strategy in failure to report, this trustee is removed from office, and all compensation is withheld from him.