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May 19, 1945


The opinion of the court was delivered by: FORMAN

Petitions have been filed herein for the allowance of fees and disbursements pursuant to the authority contained in the provisions of the Bankruptcy Act, 11 U.S.C.A. §§ 641-650, inclusive. The Securities and Exchange Commission has presented an analysis of the applications and arguments have been heard thereon pro and con.

A plan of reorganization of the debtor has been submitted and approved by this court. The first mortgage bondholders alone will participate in the plan. Under the provisions of the plan the bonds presently outstanding in the amount of $ 3,523,000 will be exchanged for common stock in the new company (one share of stock for each $ 100 in principal amount of bonds).

 The first mortgage bond issue was created by the debtor on July 1, 1923, in the principal amount of $ 5,500,000. S. W. Straus & Co. underwrote the issue. The debtor, with the aid of this company, was able to make payments on principal and interest until 1931 by which time the bond issue was reduced to $ 3,523,000. Upon default under the terms of the mortgage the property was placed in the possession of an Indenture Trustee. Said trustee took possession in August of 1931 and commenced to operate the Ritz Carlton properties. Proceedings to foreclose the mortgage were instituted by the Indenture Trustee in February of 1932. The following month a bondholders committee, formed by S. W. Straus & Co. and consisting of its officers and appointees, resigned. The Real Estate Bondholders Protective Committee, known also as the Roosevelt Committee and hereinafter referred to as the 'Committee,' succeeded the Straus Committee. The Indenture Trustee Nicholas Roberts, the president of S. W. Straus & Co., also resigned and was replaced by Walter Nestel, an employee of George E. Roosevelt, the chairman of the Committee. The property was managed by the Reliance Property Management Company at this time. Later a management contract was entered into with the National Hotel Management Company which agreed to manage the hotel and to advance money necessary to maintain its credit.

 Tax arrears owed to the City of Atlantic City presented a problem in view of the passage of the Stout Act in New Jersey, N.J.S.A., App. A:4-1, which permitted a municipality to have a receiver appointed for the property. A lease was executed in 1934 with William Malamut for a period of five years, providing for a payment of $ 25,000 upon execution and a fixed rental in an amount equal in the aggregate of current taxes, insurance premiums, payment of $ 15,000 a year in advance to be paid to trade creditors and a percentage of the gross receipts for the four months of the summer season. As a result it was possible to reach an agreement with the City of Atlantic City whereby it waived its rights under the Stout Act for five years.

 The Bankers Securities Corporation, which owned or controlled approximately 38% of the first mortgage bonds outstanding, objected to the Malamut lease, among other reasons, because the rent was inadequate. It filed a bill in equity in this court seeking a cancellation of the lease and the removal of the Indenture Trustee. The suit went to trial and the lease was not ordered to be cancelled. However, as a result of this litigation the Indenture Trustee Nestel was removed. In directing such action the court commented:

 'No dishonesty of any character has been shown, but the trustee has not in any way exercised his own judgment with relation to the matters of the trusteeship. He has acted only as a rubber stamp to put into effect the decisions of the Committee, without questioning their judgment.'

 The court further stated:

 'This conclusion is not based upon any charge of dishonesty, but upon a failure to fully and competently execute the duties of his trust.' Opinion of Judge Avis filed in this court, in the case of Bankers Securities Corp. v. Nestel, Trustee, E-4984, on November 4, 1936. *fn1"

  Alexander L. Rogers, now deceased, was appointed Successor Indenture Trustee by the court.

 The Committee attempted to persuade the debtor to initiate reorganization proceedings under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, about this time but was unsuccessful. The Committee, working together with William Malamut, the lessee, devised a plan to reorganize the debtor, whereby the latter would acquire control of the voting stock of the debtor which he would then turn over to the Committee, which would then cause a petition for reorganization to be filed by the debtor. Under this plan, all of the stock of a new corporation to be formed would have been owned by Malamut and the claims of the first mortgage bondholders would have been cut approximately 50%, in return for Malamut's promise to provide funds for reorganization expenses and taxes. The petition was filed on September 16, 1937. It was attacked by the Bankers Securities Corporation as not presented in good faith because of the arrangement between the Committee and Malamut.

 Nevertheless, the petition was approved by this court and the Bankers Securities Corporation appealed to the Circuit Court of Appeals which reversed the order of this court and directed the dismissal of the petition.

 Following the mandate of the Circuit Court of Appeals, issued in May of 1938, a new petition of reorganization was filed in this court on June 20, 1938. The court approved the petition and appointed the Successor Indenture Trustee Rogers as temporary trustee in the proceedings. Various objections to this petition were made by the Bankers Securities Corporation, and questions were raised as to whether the then recently enacted Chandler Act, 11 U.S.C.A. § 1 et seq., was applicable and whether the appointment of the Successor Indenture Trustee Rogers as temporary trustee was that of a disinterested trustee. The district court, 24 F.Supp. 78, declined to sustain the objections and the Bankers Securities Corporation again appealed. The Circuit Court of Appeals, 99 F.2d 51, reversed the district court and directed proceedings in accordance with the provisions of Chapter X of the Chandler Act, 11 U.S.C.A. § 501 et seq. On January 17, 1939, the Committee procured Successor Indenture Rogers to file a petition for reorganization under Chapter X. The order of the court approving this petition included the appointment of Alfred E. Driscoll as trustee of the debtor. This petition was likewise attacked by the Bankers Securities Corporation, but the objections were cured by an agreement of the parties and the petition upon which the present proceedings are based was amended by the order of this court on March 10, 1939.

 A claim was filed in the present reorganization proceedings for $ 1,856,052.60 on behalf of the receiver of S. W. Straus & Co., the house of issue of the first mortgage bonds, which was alleged to represent cash advanced by this company for the account of the debtor and used to acquire first mortgage bonds at their maturities. The receiver claimed a right to the security of the first mortgage on a parity with the other outstanding first mortgage bonds amounting to $ 3,523,000. The Committee and the Bankers Securities Corporation filed objections to the claim and hearings were had on it before this court, which later referred the matter to Referee Thomas L. Gaskill, appointed as special master for these proceedings. A trial was had before the special master who rendered an opinion in favor of the objectors and against the receiver of S. W. Straus & Co. Before the report of the special master could be approved by the court, negotiations looking toward a settlement were commenced and the claim was finally compromised, with the approval of the court, for the sum of $ 2,000.

 The property was operated by Malamut under the lease until October of 1939, several months after the filing of the present petition for reorganization. Negotiations were commenced about that time for a renewal of the lease with Malamut. It was agreed that the lease should be for a short term in order that a reorganization might be consummated about the time when a new lease would begin.

 Malamut made an offer to the Trustee Driscoll to conclude a lease for three years, which guaranteed a new rental of $ 25,000 for the entire term, in addition to the payment of taxes, insurance and other charges, totaling approximately $ 73,000 a year, plus rent for the summer months at 20% of the gross hotel business during that period.

 The Bankers Securities Corporation appeared in opposition to the Malamut offer, which, it claimed, was inadequate, and presented an offer of Albert M. Greenfield, of that corporation, which would have netted the trustee $ 20,000 per year for the rental of the hotel, plus taxes, insurance and like charges, and, in addition, 20% of the gross business during the summer months, with a guaranteed minimum gross rent of $ 90,000.

 The offer submitted by the Bankers Securities Corporation was met by Malamut who raised his earlier offer substantially. This resulted in his final agreement to pay approximately $ 17,000 per year more than the offer first approved and submitted to the court by the trustee.

 In June of 1942 the government took possession of the hotel property in its program of using this area in Atlantic City as a training center for the Army Air Forces.

 The hotel property was operated under the second Malamut renewal lease until approximately four months before its date of expiration. The lease with the government was not approved until June of 1943. During the government's occupancy of the premises various problems arose, the more important of which follow: the claim of Malamut who felt that he had certain rights because of dispossession prior to the end of his term, sundry questions concerning the government's occupancy, a disposition on the part of the government to withdraw from the premises, tax difficulties with the City of Atlantic City, and claims and problems with respect to insurance. These problems were eventually settled satisfactorily.

 A plan of reorganization has been presented by Trustee Driscoll and was approved by the court on November 24, 1944.

 We will deal with each petition for allowance individually:

 1. Real Estate Bondholders Protective Committee.

 This Committee was organized by the first mortgage bondholders and commenced its activities in March of 1932. A petition has been filed on its behalf for services from that time to date in the sum of $ 26,000 and for reimbursement of its expenses in the sum of $ 52,621.28.

 The Committee was instrumental in negotiations leading up to the leasing of the property at various times and participated in activities which dealt with many problems of the hotel, as for example, the tax situation with the City of Atlantic City, the claim of the receiver of the S. W. Straus & Co. and the Malamut claim. It also participated in the plans and conferences which led up to the filing of the various reorganization petitions in this court, two of which it unsuccessfully attempted to support in the Circuit Court of Appeals. In addition, it operated an office from which it relayed information to the bondholders, which information was in the form of approximately a score of published reports.

 The Securities and Exchange Commission made two principal objections against the application of the Committee: First, it submitted that the Committee was not entitled to any compensation for its activities up to 1937 for the reason that during such time Indenture Trustee Nestel, was acting for, and at the instance of, the Committee without exercising his own judgment. Secondly, that certain disbursements claimed by the Committee are not compensable.

 On the first point we turn to the case of Bankers Securities Corporation v. Walter Nestel, Trustee, supra, in which the late Judge Avis of this court considered allegations that the conduct of Indenture Trustee Nestel in handling the property involved was detrimental to the interest of the bondholders and that the Committee exercised an influence over the trustee in directing his policies so that the trustee only nominally managed the property while the Committee had the actual management in its hands, resulting in large losses due to mismanagement. In the opinion filed in that case Judge Avis held:

 'The more important question is whether the trustees should be removed. Without going into detail, I am satisfied that the trustee is too closely allied with the Roosevelt Committee to act independently. No dishonesty of any character has been shown, but the trustee has not in any way exercised his own judgment in relation to the matters of the trusteeship. He has acted only as a rubber stamp to put into effect the decisions of the Committee, without questioning their judgment. A trustee of this character should be entirely independent in action, for the benefit of all the bondholders, regardless of whether they have deposited their bonds with a committee or are still holding them in possession. The Committee's power or authority does not extend beyond the rights of the individual bondholders, and their collective rights and interests are represented by the trustee who stands in a fiduciary capacity as such representative. He cannot delegate his duties to a committee.

 'I am convinced that the trustee has so executed his duties as to require the Court to remove him or to permit him to resign. * * * '

 No question can be raised against the opinion of Judge Avis as expressed above. It amply demonstrated that a conflict of interests actually existed between the Committee and the Indenture Trustee.

 In such a situation the United States Supreme Court has held that compensation may not be awarded. In the case of Woods v. City Bank Co., 312 U.S. 262, 61 S. Ct. 493, 85 L. Ed. 820, that Court made the following cogent comments:

 'The indenture trustee represents all the bondholders; the committee those who have given it authorizations -- in this case about 50 per cent. Where the interests of majorities and minorities do not coincide, the interests of the indenture trustee and the committee will tend to be antagonistic. Beyond that is the fact that an indenture trustee closely affiliated with a committee shares the committee's conflicts of interest.' 312 pages 266, 267, 61 S. page 496, 85 L. Ed. 820.

 'Where a claimant, who represented members of the investing public, was serving more than one master or was subject to conflicting interests, he should be denied compensation. It is no answer to say that fraud or unfairness were not shown to have resulted. * * * Where an actual conflict of interest exists, no more need be shown in this type of case to support a denial of compensation.' 312 page 268, 61 S. page 497, 85 L. Ed. 820.

 'Protective committees, as well as indenture trustees, are fiduciaries. (Cases cited.) A fiduciary who represents security holders in a reorganization may not perfect his claim to compensation by insisting that, although he had conflicting interests, he served his several masters equally well or that his primary loyalty was not weakened by the pull of his secondary one. Only strict adherence to these equitable principles can keep the standard of conduct for fiduciaries 'at a level higher than that trodden by the crowd.' See Mr. Justice Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546, 62 A.L.R. 1.' 312 pages 268, 269, 61 S. page 497, 85 L. Ed. 820.

 Since the Committee was the controlling instrumentality that caused the conduct of Indenture Trustee Nestel to be considered incompatible with his fiduciary relationship and since the Committee itself was chargeable as a fiduciary, it follows that its claim for services up to the time of removal of Indenture Trustee Nestel must be denied. The other point upon which the Securities and Exchange Commission objects concerns disbursements made by the Committee in the aggregate sum of $ 11,685.49. Included in this amount were three items, namely: Payroll of clerical staff $ 7,406.88 Office Rent 2,581.07 Telephone 602.07 Total $ 10,590.02


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