Opinion
No. 9577.
May 4, 1927.
George J. Edwards, Jr., of Philadelphia, Pa., for trustee.
D. Arthur Magaziner, of Philadelphia, Pa., for claimant.
In Bankruptcy. In the matter of Howard A. Lang, bankrupt. On review of order of referee requiring bankrupt's attorney to repay to bankruptcy trustee a sum received from bankrupt prior to bankruptcy for services to be rendered in contemplation of bankruptcy. Order affirmed, as modified.
See, also, 20 F.2d 236.
This was a petition by the trustee for the re-examination of a payment of $1,000 made by the bankrupt to his attorney three weeks prior to the filing of the petition against him. The following quotation from the opinion of the referee states the material facts:
"Mr. Magaziner was counsel for the bankrupt for some time prior to the transaction which is the subject of this proceeding. Prior to July 1, 1925, the financial affairs of the bankrupt had been the subject of consideration between himself and his counsel. At that time he knew that he was insolvent, and it was determined that he should make an assignment for the benefit of creditors. He believed his liabilities to be in the neighborhood of $175,000, and in the event of his one large asset, namely Triplok stock, being worth what he supposed it to be worth, his assets would have been $125,000 or $130,000, so that even then he would have been insolvent. On July 1, 1925, Mr. Magaziner prepared an assignment for the benefit of creditors, which was executed by Mr. Lang, the bankrupt. On the same day, Mr. Magaziner acknowledged receipt from the bankrupt of the sum of $1,000, as follows: `Received July 1, 1925, of Howard A. Lang, one thousand dollars as a retainer for professional services to be rendered in re financial difficulties.'"
Upon these facts, the referee based the following finding of fact:
"I therefore come to the conclusion, and so find, that Howard A. Lang made the payment of $1,000 to D. Arthur Magaziner on July 1, 1925, in contemplation of the filing of a petition in bankruptcy against him, and that therefore the transaction is subject to re-examination in this proceeding."
The referee further held that, in view of the foregoing finding of fact, the testimony as to the value of services, which was taken before him, was all irrelevant, for the reason that the payment was not for services directly arising out of the bankruptcy proceedings. The referee made the following order:
"* * * It is ordered that the said D. Arthur Magaziner shall repay to the trustee in bankruptcy of the estate of Howard A. Lang the said sum of $1,000, less such reasonable amount as shall hereafter be determined to be the attorney's fee to which the said D. Arthur Magaziner is entitled by virtue of services rendered by him in accordance with provisions of section 64b (3) of the Bankruptcy Act."
The referee's finding that the payment was made in contemplation of the filing of a petition against the bankrupt is clearly correct, but it does not follow from this fact that it may be recovered by the trustee in its entirety, nor that the attorney will be allowed to retain only such part of it as represents services directly connected with the bankruptcy proceedings, under the provisions of section 64b (3), being Comp. St. § 9648. The facts of this case are almost exactly like those in Furth v. Stahl, 205 Pa. 439, 55 A. 29. In that case, the Supreme Court of Pennsylvania said:
"It was urged before the auditor that the services were not of the kind mentioned in section 64 of the act, and therefore could not be allowed. But the two sections have no necessary connection. * * * Section 64 defines the debts which are to have priority and be paid in full by virtue of the statute itself, without regard to any act or agreement of the parties. The services of an attorney included in this class are those `actually rendered * * * while performing the duties herein prescribed.' The services referred to in section 60 [U.S. Comp. St. § 9644], on the contrary, are those `to be rendered,' which are paid for in advance `in contemplation of the filing of a petition by or against' the bankrupt. Such fees are not determined by the statute and allowed in full out of the bankrupt estate, as the other class are, but depend both as to payment and amount on the acts of the parties, and what the statute does is to recognize the validity of their payment, but subject the reasonableness of the amount to the supervision of the court. The services of the plaintiff belong to this class. They were none the less rendered in contemplation of the filing of a petition in bankruptcy, because directed primarily and principally to the prevention of such petition. A man is usually very much in contemplation of a result which he employs counsel to avoid."
We agree with the reasoning and conclusion of the case just cited. The rule contended for by the trustee would make extremely difficult the position of a person whose business affairs become involved, and might conceivably, in some cases, result in depriving him altogether of the advice and assistance of counsel. There will almost always be a period in the history of any insolvent during which he realizes his difficulties and faces the possibility, or even probability, of ultimate bankruptcy. At such a time, he will require the services and advice of counsel, frequently with the hope of avoiding bankruptcy proceedings altogether. There is no doubt that, in a sense, both attorney and client are acting "in contemplation of the filing of a petition." In such cases, as was said by the court in Re Wood and Henderson, 210 U.S. 253, 28 S. Ct. 624 ( 52 L. Ed. 1046), the law "recognizes the temptation of a failing debtor to deal too liberally with his property in employing counsel to protect him in view of financial reverses and probable failure. It recognizes the right of such a debtor to have the aid and advice of counsel, and, in contemplation of bankruptcy proceedings which shall strip him of his property, to make provisions for reasonable compensation to his counsel. And in view of the circumstances the act makes provision that the bankruptcy court administering the state may, if the trustee or any creditor question the transaction, re-examine it with a view to a determination of its reasonableness."
We believe the correct rule is as stated in Re Stolp (D.C.) 199 F. 488, and as developed in Tripp v. Mistchrich (C.C.A.) 211 F. 424. The findings of fact of the referee entitle the trustee to a re-examination of the transaction. Upon such re-examination, the referee should take into consideration the fair value of services rendered after July 1, 1925, which were relevant to the contemplated bankruptcy and germane to the general aims of the Bankruptcy Act. It seems to the court that advice in connection with bankrupt's financial difficulties and insolvency and the preparation of an assignment for the benefit of creditors would be properly considered. Services directly arising out of the bankruptcy proper may be allowed, under section 64b (3) of the act, and are not to be considered in this proceeding. In re Stolp, supra.
The order of the referee is therefore affirmed, but modified in accordance with the foregoing opinion.