Court Opinion

ID: 6920299
Source: CourtListenerOpinion
Date Created: 2022-07-23 22:58:54.186596+00
Date Added: 2024-06-11T16:06:46.820428
License: Public Domain

DUFFY, Circuit Judge
(dissenting).
The majority opinion states that Wood-mar and the lienholders, in reaching settlement agreements, were dealing at arm’s length. I disagree.
Woodmar was authorized by the Court to conduct negotiations for the settlement of claims of lienholders. This function would, ordinarily, be carried on by the trustee. The sums in settlement of such claims were to be paid from a fund in the custody of the Court. The majority opinion holds that in conducting such negotiations, Woodmar and its attorney were not acting in a fiduciary relationship. Again I disagree.
The real basis for the majority opinion would seem to be the astounding statement, “ * * * we feel that Woodmar’s counsel, without abandoning his responsibility to his client, dealt fairly with the bondholders.” This is contrary to the findings of the experienced trial judge who decided this case. The trial court found the bankrupt’s attorney’s conduct to be “reprehensible.” The Judge stated he was appalled at the disclosure of how the authority given to Woodmar’s attorney was abused. There is an abundance of evidence in this record to sustain the finding of the Court.
The opinion ends with a criticism of the trustee. It incorrectly accuses him of prolonging this litigation. This is followed by some gratuitous advice as to the trustee’s further actions. I believe these criticisms and comments are unjust and wholly unwarranted, and should not appear in any opinion of this Court.
Perhaps it might be advisable if we first consider some legal fundamentals. This is a proceeding in bankruptcy. True, it started as a reorganization proceeding under Chapter X of the Bankruptcy Act. However, on February 16, 1953, after Judge Swygert had found the amended plan of reorganization had not been consummated and that the proposed amendments to the plan were not feasible, an order was entered adjudicating Woodmar Realty Company a bankrupt and provided that bankruptcy be proceeded with in accord with Section 236(2) of the Bankruptcy Act. 11 U.S.C.A. § 636(2).
*822One of the principal concerns of a Bankruptcy Court should be that the rights of creditors be protected. Many times their claims are small, and the amount involved does not warrant the hiring of an attorney. One reason for my dissent is that under the holding of the majority opinion, the many lienhold-ers in this case have not been protected. On the contrary, the attorney for the bankrupt, by methods and conduct characterized by the trial judge as “reprehensible” has obtained stipulations for compromise settlements whereby most of the lienholders will obtain one third or less of the amount they would be entitled to receive under the terms of the bond.
At the time the petition for reorganization herein was filed, Woodmar had been a dormant inactive corporation for more than ten years. Its sole assets were 1540% vacant lots and 12 undivided blocks in Hammond, Indiana. Holders of improvement bonds in forty-nine separate rolls1 affecting Woodmar property were pursuing their state-court remedy of foreclosure.
It appeared that Woodmar was about to lose most, if not all, of its interest in the vacant property. The continued prosecution of these foreclosure actions was then enjoined by the District Court insofar as they affected Woodmar’s property. All other legal proceedings against Woodmar’s property were likewise enjoined.
The right which each lienholder had to foreclose his lien was taken from him by action of the Bankruptcy Court. The trustee took possession of all of Wood-mar’s property. Thereafter the property was sold and the lien claimants’ rights were transferred to the funds which had been received upon the sale of the property.
The Class 2 claims are the claims of some three hundred holders of special improvement bonds issued pursuant to resolutions of the Board of Public Works of the City of Hammond, Indiana. These were adopted under statutory authority known as the Barrett law.
In September, 1955, the trustee, whom the majority says is delaying this litigation, filed his final account. The trustee-reported on the result of an audit study of the books and records of the City of Hammond which represented, in his judgment, special assessment lien indebtedness on the bankrupt’s property at the time such property was sold in these proceedings. This study had been made pursuant to Court authorization and at. an expense of $15,000. The trustee recommended an allocation of cash to 313. claims and the payment of some 270 claims where the bonds and coupons had' been produced and checked by him, his counsel and his staff. The bankrupt filed objections to the allowance of the claims.
On June 28, 1957, Judge Parkinson decided to try a typical Class 2 claim, and Claim 441 was selected. For some reason the Court instructed the trustee and: his counsel not to participate in the-hearing. It is possible the Judge read' something into our opinion in In the-Matter of Woodmar Realty Company, 241 F.2d 768, which was not there. In that, case, we restated the general rule that, a bankrupt is not a party of interest, but. we held that case came within the exception permitting a bankrupt to object to the allowance of claims where a disallowance would result in a surplus for the-bankrupt. However, there was no suggestion in that opinion that the bankrupt, should supplant the trustee in the exercise of his proper or lawful functions.
On July 22, 1957, at a time when Claim 441 was under advisement by the Court, Woodmar obtained an ex parte order authorizing it to negotiate with Class 2. claimants for settlement of their claims-which would be paid out of funds in the-trustee’s possession. The order provided any compromise would be subject to the approval of the Court. Woodmar’s attorney submitted a letter which he pro*823posed sending out. After making some changes therein, Judge Parkinson gave his approval. The last paragraph of the letter was, “This letter has been submitted to the District Court and approved thereby as to both form and content.”
At two-week intervals thereafter, Woodmar’s attorney sent out second and third letters to the lienholders. These letters were not submitted to the Court. Like the first letter, they were written on the legal stationery of counsel for Wood-mar. The letters were belligerent in tone. They emphasized that the lien bonds were not the obligation of Wood-mar. Advice was given to hire an attorney “since the claims will ultimately have to be tried.” Eleven interrogatories were appended to the second letter. Questions 7 and 8 asked questions as to how the claimant treated the bonds on his income tax return. The trial court found the second and third letters “presented a distorted, incomplete and partisan view of the proceedings.”
■ But, more significant was what the letters did not contain. They did not inform claimants that the letters were sent without Court inspection or approval. They did not inform claimants that a case was under advisement by the Court which would determine the validity of various objections offered by Wood-mar. The letters failed to explain that in the State Court, under the so-called John Doe Trust, there was a fund of approximately $110,000 in which many of the lienholders of Woodmar’s property would be entitled to share.
The majority opinion states: “It is evident that the court [Judge Parkinson] had confidence in Mr. Crumpacker, * Maybe so. However, on the hearing held August 30, 1957, the Judge sharply rebuked Mr. Crumpacker for sending the second and third letters, saying: “The letter [s] should not have been written, Mr. Crumpacker, because the court authorized and approved that letter was to be written and that was the only letter to be written, and that letter should only have gone to counsel for the lien claimants or if not represented by counsel, then to the lien claimants themselves.” (Emphasis supplied)
The effect of these letters is obvious. The recipients could reasonably infer that as the first letter was approved by the Court as to contents, the same was true of the two letters which followed shortly thereafter. Claimants resided in many localities, some a long distance from Hammond. Many had claims of relatively small amounts. Of the 83 claims listed in the Court’s order of July 16, 1958, 49 of them were for less than $500.00 and 21 were for less than $300.00. Woodmar had threatened claimants with long and costly litigation on a case to case basis. The trial court observed “ * * * Woodmar arrogantly gave the calculated impression that there was no chance for the claimants to prevail in any trial; * * * ” The hiring of an attorney was obviously impractical for many of the lienholders. The interrogatories in the area of income taxes were, as the District Court stated, “calculated to frighten and discourage claimants from asserting their rights *
To avoid all the trouble and grief depicted by Woodmar’s attorney who gave the impression he spoke with the cloak of the Court wrapped around him, the claimants were willing to settle for just about anything that was offered. I think it of no significance that on the hearing below, lienholders had not filed formal objections repudiating the deals that they had made. I am also of the view that this case should not be decided on the basis of expediency.
Who, then, was protecting the rights of these claimants? Not the trustee, for he had been pushed aside. Surely it was not Mr. Crumpacker. I quote with approval from the opinion of the trial court: “In this case, however, we have a situation where the powers of a trustee to negotiate settlements were removed from him and entrusted to a bankrupt who is a party in interest and was represented by agents who likewise stood to gain or lose depending upon the amount *824of the settlements arrived at.2 In accepting the powers of the trustee, Wood-mar and its agents must be deemed to have accepted the same responsibility for their actions as a trustee would owe to the court and the parties.”
It seems to me that it was the unquestioned duty of a court of equity to act promptly in setting aside the agreements for settlement which were obtained in the manner hereinbefore described.
After Judge Parkinson became a member of this Court and had not decided the contest as to Claim 441, Chief Judge Tehan was assigned to the arduous task of taking charge of this bankruptcy matter. He faced many complicated and difficult problems. The records and files were voluminous. At different times four judges had preceded him in this matter. Judge Tehan had no previous contact with the bitter litigation that had taken place in this proceeding over the years.
Chief Judge Tehan is an able and experienced judge. He, unlike us, has become acquainted with many other facets of this proceeding. He gave four days to the hearing on the matter now before us. He was shocked at the manner in which the settlement stipulations were obtained. He decided that settlements obtained in the manner described, and to be paid out of funds in the custody of the Court were, indeed, a matter of concern to the Court. His action in setting aside those stipulations for settlement should have the enthusiastic approval of this Court. The conduct and manner in which the settlement agreements were obtained can not be glossed over by saying it involved only an arm’s length transaction.
Why should the lien claimants receive less than the amounts which were allocated by the trustee based on the accountant’s study? We know by taking judicial notice of our record's, that Judge Tehan, in deciding the issues in Claim 441 overruled many objections made by Woodmar. The present posture is that' there is no validity to most of the objections which have been filed by Wood-mar. Whether Judge Tehan’s decision in this respect may be sustained or reversed on appeal we, of course, cannot say, but in the meantime, there is no basis for cutting down the claims of the lien claimants by approximately 66%% of the amount allocated by the trustee, simply because bankrupt’s counsel obtained stipulations by the method hereinbefore described.
The majority opinion contains a table which I do not understand. These figures are, apparently, the basis for the criticism leveled at the trustee. The opinion states the figures furnished by the trustee were grossly inaccurate. Four illustrations were given. Column 2 of the table lists the supposedly incorrect amount which Woodmar offered in settlement. Referring to the Minnie Hood bond, the opinion states $100 is an incorrect figure, yet, page 31 of the appendix shows $100 is the correct figure. Referring to the Walter McConnell claim, the' majority opinion says that the figure of $135 should be $350, yet the table on page 44 of the appendix which is over the signature of Woodmar’s attorney, shows the correct figure is $135.
In the Cressa Stellar claim, the opinion states the figure $350 should be $85, yet again, the table on page 44 of the appendix shows that $350 is the correct figure.
There does seem to be one error' out of the four cited. In the claim of the heirs of Andrew Kenner, someone transposed the figures 3 and 8, and the correct amount offered by Woodmar in compromise was $850.
I must again protest at the unjust charges leveled by the majority opinion at Mr. McLean, the trustee. He is a respected and highly competent business man. He acted as trustee for almost four years under Judge Swygert, and *825that Judge apparently approved the manner in which he carried out the responsibilities of his office. In spite of Wood-mar’s attorney filling the air with ■charges of fraud and demands that the trustee be removed, Judge Swygert retained him as trustee. Then Mr. Crum-packer demanded that Judge Parkinson remove the trustee, but the Judge did not do so. Mr. Crumpaeker renewed his vendetta before Judge Tehan, but after more than two years’ observation of the trustee, it is evident that Judge Tehan -thinks highly of his services and his ■competency. I suggest this Court does not have sufficient information to pass judgment on the competency of the trustee who has been carrying out the duties ■of his office for almost eight years under a. constant barrage of charges and condemnations all emanating from one attorney.

. Woodmar’s property had originally been affected by 60 improvement resolutions, some of which also affected property own.ed by others.

. The Court was referring to the contingent fee arrangement whereby Mr. Crumpacker expects to receive a third of any money received by Woodmar. Of course, the more the claims could be reduced, the more Woodmar would receive.