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In re Imperial 400 National Inc.

decided: April 23, 1973.



Lumbard,*fn* Aldrich*fn** and Smith,*fn* Senior Circuit Judges. Lumbard, Circuit Judge (dissenting). On Rehearing: Seitz, Chief Judge, Van Dusen, Aldisert Adams, Rosenn and Weis, Circuit Judges.

Author: Aldrich


ALDRICH, Senior Circuit Judge.

These consolidated appeals from two proceedings in the New Jersey District Court present a single issue, the propriety, viewed in the circumstances under which it was adopted, of a resolution of the Judicial Council of the Third Circuit (Council), dated February 10, 1972, which provides as follows:

"RESOLVED that in all bankruptcy proceedings this Council holds as incompatible the continued representation as attorney for the trustee by any lawyer or his firm who represents a third party who submits a plan for reorganization in the bankruptcy; and that recusal by the attorney only from commenting on proposed reorganization plans is not an adequate immunization from the appearance of a conflict of interest."

On May 2, 1972 the district court, pursuant to this resolution, removed appellant, Joseph M. Nolan, Esq., as counsel for the trustee in reorganization of Imperial "400" National, Inc. Nolan appealed that order and also brought a petition of mandamus, or declaratory judgment, against the Council. The district court*fn1 dismissed the mandamus action, July 29, 1972, agreeing with the Council that Nolan had an adequate remedy by way of appeal to this court, and that the district court was without jurisdiction. 346 F. Supp. 500. We, too, agree, and Nolan's appeal from that dismissal must fail. We must, however, address ourselves to our dissenting brother LUMBARD's claim that we lack jurisdiction of the appeal from the original removal order. Since jurisdiction is always open it is, of course, not determinative that in the mandamus proceeding the Council itself took the position that we would have jurisdiction. We believe, however, that the Council -- and the district court -- were correct.

On this we see no real issue. We are not reviewing the action of the Court of Appeals, but, directly, of the district court. Admittedly we are reviewing indirectly the action of the Council, but the dissent's assertion that we have no power to do this is just that. The circuit council, while composed of judges, is an administrative body, and not a court. Chandler v. Judicial Council, 1970, 398 U.S. 74, 86 n. 7, 26 L. Ed. 2d 100, 90 S. Ct. 1648. Reviewing the district court's May 2 order, which drew its substance from the Council's resolution, seems in no material respect different from reviewing a similar district court order which drew its substance from statutory provisions such as 11 U.S.C. §§ 557, 558. The latter task is our statutory duty under 11 U.S.C. § 47. At least in a situation where there is a district court order capable of being reviewed, we see no reason, in the absence of any statutory provision, why the Council's actions are untouchable except by the Supreme Court, and we greatly doubt that that Court so thought when it declined to permit the filing of a petition for mandamus. Nolan v. Judicial Council of the Third Circuit of the United States, 1972, 409 U.S. 822, 34 L. Ed. 2d 154, 93 S. Ct. 111. On this assumption we pass to the merits after, necessarily, a complex statement of the facts.*fn2


Appellant, Joseph M. Nolan, Esq., an experienced member of the bankruptcy bar, was appointed in February, 1966, as counsel for the trustee in reorganization of Imperial "400" National, Inc., a chain of motels doing business in thirty-five states. The trustee successfully continued the operation of the business, but acceptable plans for reorganization did not materialize. Two plans, although allegedly favored by many creditors, were opposed by the trustee through Nolan as his counsel.*fn3 On April 14, 1971, orally, and April 19 in writing, Nolan advised the district judge in charge of the reorganization, Hon. Robert Shaw, now deceased, that a client of his law firm, Schiavone Construction Company, was interested in filing a plan. Judge Shaw replied on April 21 by a letter, with copies to all creditors:

"If a good plan of reorganization which is more fair, equitable and feasible than any heretofore submitted may be available by participation of Schiavone Construction Co., I do not think stockholders, creditors and other parties in interest should be deprived of the benefit of such plan by reason of the fact that Mr. Nolan represents that corporation in other matters."

He went on to state that the trustee himself had no conflict of interest, and was a well-qualified attorney capable of representing himself with respect to reorganization plans, and that accordingly he was ordering Nolan to "refrain completely from any participation therein," but to continue to represent the trustee in all other matters.

"If it is felt by any interested party that this is not the appropriate way to proceed to gain the financing of Schiavone Construction Co., the Court will entertain and consider objections which, if any, should be promptly presented."

We will not pause to consider the oversolicitude, if any, the court exhibited towards the trustee's counsel vis-a-vis the estate. In any event, no one objected, and two affirmatively assented -- Union Bank of Los Angeles, a large creditor, hereinafter Union Bank, and the SEC. The SEC wrote that because it felt "the estate should not be deprived of the possible benefits arising from Schiavone's participation" it had no objection to the proposed procedure; the bank concurred, with a similar statement. Thereafter New York counsel appeared for Schiavone, and Nolan continued to represent the trustee in a substantial amount of day-to-day legal work unconnected with reorganization plans.



Thus no conflict of interest of a disqualifying nature was perceived, at least to the point of accepting the court's open invitation to speak up. We lay particular emphasis upon this not only because of its general significance, but because well before that date matters had not been going to everyone's satisfaction, and the parties had become engaged in recriminations on a markedly personal level. Union Bank was represented by one Lawrence W. Levine, Esq., who was also chairman of the creditors' committee. His vigorous attacks on the trustee and his counsel in connection with their requests for interim fees, of which there were several, were characterized by the district judge at one point as "allegations of lack of integrity and suggestions that there is deliberate mismanagement of the estate." Nor did Nolan fail to respond in kind. The Court of Appeals had found one of the district court's fee allowances substantially excessive,*fn4 and doubtless the controversy was exacerbated when the district court, on receipt of the mandate, on March 10, 1971 excused the payment of interest on the amount obliged to be refunded.


In April, 1971, Nolan's new, in the sense of more limited, position was approved. Nothing occurred thereafter to cause the discovery that there was an impermissible appearance of a conflict of interest, except a continuation of personal differences. In the appeal taken from the district court's failure to assess interest, which Levine used as a vehicle to suggest Nolan's removal, ante, Levine filed an affidavit in 137 paragraphs attacking Nolan, and Nolan, in reply referred, inter alia, to "Levine's flow of nonsensical and scandalous statements." One of Levine's charges totally irrelevant to the question of interest on the refund was that Nolan had sued Union Bank for eight million dollars in order to induce the bank to drop its support of another plan and to favor Schiavone's. Ultimately the district court's fee decision was reversed again.*fn5

The Court of Appeals did not enter into these controversies between the parties more than it could help.*fn6 However, in its 1970 opinion, the court spoke of "the friction which apparently exists," and "suggest[ed] that the trustee and his counsel make a greater effort to work with the creditors and other interested persons in an effort to terminate this lengthy reorganization proceeding with dispatch. . . . The main business of the trustee and his attorney at this point should be to press forward to an acceptable plan of reorganization, not to concentrate on their 'personal interests.'" 432 F.2d at 240-41 n. 28, 29. Again, in the 1972 opinion, the court referred to the "widespread dissatisfaction with the failure of the . . . fiduciaries to secure action by the court on a reorganization plan." 456 F.2d at 931.


On January 22, 1972, five days before the interest-on-fee-refund case was to be argued to a panel, Levine addressed a letter to the court, stating that while there was no motion filed to remove the trustee and his counsel, and while he did not wish time for oral argument on that subject, he felt the court "could exercise its equity power" to remove the trustee and his counsel, "which we hope it will and of its own volition." It does not appear what transpired at the argument, but thereafter two members of the panel, who had also been members of the previous panel, wrote a letter to the Chief Judge of the circuit. This letter is substantially quoted in the opinion of the district court, 346 F. Supp. at 504-05. In substance it suggested that the Chief Judge "should at least suggest to the assigned district judge or Chief Judge Augelli that such counsel should withdraw as counsel for the trustee." The letter stated that even though Nolan was no longer advising with respect to reorganization plans, he did advise the trustee on all other matters, and that the public was unlikely to understand such action, particularly in view of the litigation over fees. "The fact that Schiavone Co. has New York counsel to represent them on the plan will not overcome, in the minds of laymen, the continuing representation of this company in all other matters by the Nolan . . . firm."

The factual accuracy of the letter is disputed by Nolan. The letter stated that the trustee was favoring the Schiavone plan, "even though a plan favored by many of the creditors had been submitted many months before the Schiavone plan and gives them cash, which is what they want." While one of the alternative plans did provide cash, the cash element was apparently inserted by amendment after the Schiavone plan was filed.*fn7 Further interstices in the Council's knowledge will be touched upon later. However, the thrust of the letter was not to attempt to resolve the issues between the parties, but to eliminate them by summarily removing counsel, thus avoiding the "danger of adverse publicity affecting the entire federal bankruptcy system."

On February 10 the court, meeting as the Council, unanimously, except for two judges not voting, adopted the resolution in question. A month later the Chief Judge wrote to Judge Shaw, paraphrasing the resolution in general, rather than in its narrow terms, and suggesting that Nolan be given the opportunity to resign. The letter concluded,

"I realize that this will be of real concern to you but I know you realize that some of the appeals in this case have caused much concern to the judges hearing them."*fn8 346 F. Supp. at 515.

Judge Shaw replied that Nolan was unwilling to resign because he, and the Judge, felt it would be acknowledging a fault which was not recognized, and that they both felt that if there were to be a removal it should be for cause, as to which "Mr. Nolan insists . . . he is entitled to an evidentiary hearing." In further correspondence, in which the resolution was explicitly set forth, the Chief Judge continued "to emphasize that [the] resolution is directed at the appearance of a conflict of interest. . . . We are talking policy." Since cause was not asserted, he repeated, there was nothing personal, and no hearing was called for.

Nolan continued to disagree. Ultimately this discussion was obliged to come to a halt, and with a detailed protest that he should not have been required to do so, Judge Shaw on May 2 terminated Nolan's retainer. Attempts to obtain an interim stay pending appeal failed,*fn9 and ultimately the present panel of senior circuit judges from outside the circuit*fn10 was designated by the Chief Justice.


28 U.S.C. § 332 provides as follows,

"Each judicial council shall make all necessary orders for the effective and expeditious administration of the business of the courts within its circuit. The district judges shall promptly carry into effect all orders of the judicial council."

Appellant contends that "this statute, as written and as employed is unconstitutional." As to the first, his brief is singularly unpersuasive. It cannot be unconstitutional to authorize the courts to manage their own business. It is doubtless true, as the Court pointed out in Chandler v. Judicial Council of the Tenth Circuit, 1970, 398 U.S. 74, 85 n. 6, 26 L. Ed. 2d 100, 90 S. Ct. 1648, that the statute "is not a model of clarity in terms of the scope of judicial councils' powers," but we believe this lack merely raises issues of construction. As to this innumerable authorities with diverse qualifications have asserted that the phrase "effective and expeditious administration of the business of the courts" is to be broadly construed. See Brennan, The Continuing Education of the Judiciary in Improved Procedures, 28 F.R.D. 42, 43 (1962); Burger, The Courts on Trial, 22 F.R.D. 71, 74-77 (1958); Hearings on H.R. 2973, H.R. 5999 Before the House Comm. on the Judiciary, 76th Cong., 1st Sess., 22 (1939) (remarks of Judge John J. Parker); Fish, The Circuit Councils: Rusty Hinges of Federal Judicial Administration, 37 U. Chi. L. Rev. 203, 206 (1970). The reasons seem clear. The individual district judge has his own docket to consider, and his own problems. There must be a body with a broader horizon, and a broader responsibility, to oversee the district court as a whole, not just in regard to day-to-day operations and internal problems, but in the larger perspective of the court's place in the body politic.

Nowhere has the present aspect of that duty been better expressed than in a Report of the Judicial Conference of the United States at its June, 1961 meeting on the Powers and Responsibilities of the Judicial Councils, presented to the House Committee on the Judiciary by the Honorable Emanuel Celler, Chairman, 87 Cong., 1st Sess., H.D. 201. Included in the Conference's conclusions is the following,

"(2) The responsibility of the councils 'for the effective and expeditious administration of the business of the courts within its circuit' extends not merely to the business of the courts in its technical sense (judicial administration), such as the handling and dispatching of cases, but also to the business of the judiciary in its institutional sense (administration of justice), such as the avoiding of any stigma, disrepute, or other element of loss of public ...

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