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In re Designaire Modular Home Corp.

as amended july 16 1975: June 5, 1975.

IN RE DESIGNAIRE MODULAR HOME CORPORATION, LEVI, MANDEL AND MILLER (NOW JENKINS, MILLER & JENKINS, P.C.), APPELLANTS


APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Bankruptcy No. 70-710)

Author: Gibbons

Before ALDISERT, GIBBONS and GARTH, Circuit Judges

Opinion OF THE COURT

GIBBONS, Circuit Judge

This appeal, from a district court order entered upon a petition for review of a decision of a bankruptcy judge, brings before us the question whether the bankruptcy court may award an attorneys fee out of the bankrupt's estate to an attorney representing a debtor out of possession in an unsuccessful proceeding for an arrangement under Chapter XI. In reliance on In re Hydrocarbon Chemicals, Inc., 411 F.2d 203 (3d Cir.) (en banc), cert. denied, 396 U.S. 823, 90 S. Ct. 66, 24 L. Ed. 2d 74 (1969), the bankruptcy court held that as a matter of law no compensation may be paid from the bankrupt's estate to a debtor's attorney in such a position. The district judge affirmed. We reverse, because the holdings of the bankruptcy judge and the district judge are inconsistent with the new Bankruptcy Rules relating to Chapter XI which became effective on July 1, 1974, and misinterpret the current effect of the Hydrocarbon case.

On November 18, 1970 the debtor, represented by the firm of Levi, Mandel and Miller (now Jenkins, Miller & Jenkins, P.C.) filed a Chapter XI petition for an arrangement with its creditors under § 322 of the Bankruptcy Act, 11 U.S.C. § 722. Two days later a receiver was appointed with full power to operate the debtor's business. § 332, 11 U.S.C. § 732. On March 16, 1972, pursuant to § 376, 11 U.S.C. § 776, the debtor was adjudicated a bankrupt, and liquidation in bankruptcy was proceeded with. In the bankruptcy proceeding the debtor's attorney filed an application for counsel fees in that capacity in the sum of $7,500. The Internal Revenue Service was granted leave to intervene in opposition to the fee request, and successfully opposed any award.

Prior to the effective date of the new bankruptcy rules relating to Chapter XI proceedings, the Second Circuit took the position that there was statutory authority for the payment of an attorneys fee out of a bankrupt estate to an attorney for the debtor in a superseded Chapter XI. In re Casco Fashions, Inc., 490 F.2d 1197 (2d Cir. 1973); In re Knickerbocker Leather & Novelty Co., 158 F. Supp. 236 (S.D. N.Y. 1958), aff'd sub nom. Haar v. Oseland, 265 F.2d 218 (2d Cir. 1959). The Ninth Circuit, on the other hand, held that if no arrangement was accepted by creditors and bankruptcy followed, no attorneys fees could be paid to the debtor's attorney from the estate. Robinson, Wolas & Hagen v. Gardner, 433 F.2d 1104 (9th Cir. 1970). The bankruptcy judge and the district judge in this case assumed, erroneously as we shall shortly suggest, that Hydrocarbon aligned this circuit with the view of the Ninth Circuit. But before proceeding to a discussion of the limitations of the Hydrocarbon holding, it is appropriate to consider Rule 11-31 which provides:

"Bankruptcy Rule 219 applies in Chapter XI cases. Reasonable compensation for services beneficial to the estate and reimbursement of necessary expenses may be allowed to the attorney for the debtor and debtor in possession whether or not a plan is confirmed." (emphasis supplied)

The Advisory Committee's note to Rule 11-31 states:

"Under this rule, the provisions of Bankruptcy Rule 219 would apply to compensation sought for services in the Chapter XI case and any case superseded thereby. The second sentence is to clarify the practice of permitting compensation, where a Chapter XI case is converted in bankruptcy, to the attorney for the debtor for services which had benefitted the estate. See In re Knickerbocker Leather & Novelty Co., 158 F. Supp. 236 (S.D. N.Y. 1958), aff'd sub nom. Haar v. Oseland, 265 F.2d 218 (2d Cir. 1959); Matter of Styles Express, Inc., No. 62B 922 (S.D. N.Y. 1971) (permitting compensation); Robinson, Wolas, & Hagen v. Gardner, 433 F.2d 1104 (9th Cir. 1970) (disallowing compensation)."

It was the draftsmens' clearly expressed intention that the Ninth Circuit holding be disapproved, that the Second Circuit holdings be approved, and that the availability of fee awards to the attorney for the debtor in superseded Chapter XI cases, whether or not the debtor remained in possession, be approved when the services benefited the estate. The reference in Rule 11-31 to Rule 219 is to the general rule on compensation out of the estate for services rendered and expenses incurred in proceedings under Chapters I-VII. Rule 219 is based upon the statutory authorization for such compensation under §§ 62a(1) & 64a(1) of the Act, 11 U.S.C. §§ 102a(1), 104a(1). These are the same statutory authorizations upon which Judge Friendly relied in holding, in the Casco case, that allowances to a debtor's attorney were proper. By virtue of § 302 of the Act, 11 U.S.C. § 702, both § 62 and § 64 apply to Chapter XI proceedings unless inconsistent. The Second Circuit saw no conflict, the Advisory Committee which drafted Rule 11-31 saw no conflict, and Congress, when it considered Rule 11-31, apparently saw no conflict. That, one would think, should have been enough to end the inquiry as to the bankruptcy court's power to make the award if the services of the debtor's attorney benefited the estate.

But the district judge and the bankruptcy judge found in our Hydrocarbon decision, what appeared to them as authority for the holding that the plain language of Rule 11-31 might be disregarded. Their theory was that the law in this circuit permitted payment out of the bankrupt estate only to attorneys or other officers whose appointment was made by order of the court. If this was so, they concluded, Rule 11-31 made no change. That conclusion was buttressed by reference to new Chapter XI Rule 11-22:

"Bankruptcy Rule 215 applies in Chapter XI cases to the employment of attorneys and accountants for a trustee, receiver, debtor in possession, or creditors' ...


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