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July 29, 1972

Joseph M. NOLAN, Plaintiff,

The opinion of the court was delivered by: THOMSEN

Plaintiff challenges on various grounds the validity of the following resolution adopted by the Judicial Council of the Third Circuit on February 10 and reaffirmed on April 12, 1972:

"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 the recusal by the attorney only from commenting on proposed reorganization plans is not an adequate immunization from the appearance of a conflict of interest."

 The resolution was adopted with the immediate objective of causing the resignation or removal of plaintiff as attorney for the trustee in a Chapter X reorganization proceeding in this court.

 The late Judge Robert Shaw had been handling the bankruptcy proceeding and had been communicating with Chief Judge Seitz of the Court of Appeals for the Third Circuit with respect thereto. Chief Judge Seitz sent Judge Shaw a copy of the resolution, which Judge Shaw showed to plaintiff and gave him an opportunity to resign. Plaintiff refused, and filed the original complaint in the instant case on May 2, seeking relief by way of declaratory judgment, injunction, mandamus, or prohibition against enforcement of the resolution. Later that day Judge Shaw entered an order terminating the services of plaintiff as attorney for the trustee, without any formal notice or hearing, because Judge Shaw considered the resolution to be an order which he was bound to "carry into effect". 28 U.S.C.A. § 332(d).

 On May 24 plaintiff filed in the Supreme Court a motion for leave to file a petition for writ of prohibition and/or mandamus and a petition for writ of prohibition and/or mandamus, raising similar questions.

 On May 31 plaintiff entered an appeal to the Court of Appeals for the Third Circuit from the May 2 order of Judge Shaw terminating plaintiff's services as attorney for the trustee.

 On June 9 the Chief Justice of the United States designated me to hold a district court in the District of New Jersey to handle the instant case.

 The Judicial Council, represented by attorneys in the Department of Justice, has moved to dismiss the action in this court for lack of jurisdiction to grant the relief prayed and because the complaint does not state a claim on which relief can be granted, or, in the alternative, for summary judgment. The Judicial Council attached several exhibits to its motion, which will be treated as a motion for summary judgment.

 At a hearing on the jurisdiction of this court to grant any of the relief sought by plaintiff, the parties stipulated that the following material may be considered a part of the record in this case so far as the several items or any portions thereof may be relevant to any issue herein: (1) the present record on the motion and petition filed by plaintiff in the Supreme Court; *fn1" (2) a report of the Securities and Exchange Commission; *fn2" (3) a letter from the attorney for the Judicial Council, stating that the Council does not operate under any formal rules, and that no material which is not currently in the record of this action was before the Council when it discussed and dealt with the matter at issue in this case; (4) the entire record in the Court of Appeals for the Third Circuit on the appeals numbered 18804-18809 and 71-1550-71-1556, *fn3" insofar as said records or any part thereof may be relevant and material to any issue in the instant case or in the appeal which has been taken to the Court of Appeals for the Third Circuit from the May 2 order of Judge Shaw in the bankruptcy proceedings. *fn4"

 Plaintiff has filed an affidavit, setting forth certain facts which he wishes the court to consider on the question of jurisdiction raised by defendant's motion. It has been considered, along with the other material submitted by the parties, from all of which the following facts appear.


 On June 3, 1965, Imperial "400" National, Inc. (Imperial), a chain of motels, filed a petition in this court for an arrangement under Chapter XI of the Bankruptcy Act; the petition was later amended to comply with Chapter X. Thomas J. O'Neill, Esq., was appointed trustee for Imperial on February 21, 1966, and three days later plaintiff was appointed attorney for the trustee.

 Some of the problems in the reorganization proceeding are discussed in two Third Circuit opinions, both titled "In re Imperial '400' National, Inc.", and reported in 429 F.2d 671 (1970) and 432 F.2d 232 (1970), respectively. The Third Circuit was impressed, as was Judge Shaw, with the apparent success of the reorganization, 432 F.2d at 237, 242, but felt that the cost of administration had been great, and reduced the interim fees to the trustee and to plaintiff. Id. at 238, 240 et seq. The Third Circuit stated that approval of a plan of reorganization was "not immediately foreseen", that the trustee had submitted no plan of his own, and that he and his attorney had opposed prompt consideration of plans submitted by various creditors. *fn5" Id. at 238, n. 15. "We suggest that the trustee and his counsel make a greater effort to work with the creditors and other interested parties in an effort to terminate this lengthy reorganization proceeding with dispatch." Id. at 240.

 In April 1971 plaintiff advised Judge Shaw that Schiavone Construction Co., Inc., a client of plaintiff's law firm, was interested in exploring the possibilities of filing a plan of reorganization in the Chapter X proceeding; that his firm had represented Schiavone for some years; that he had arranged an initial meeting between officers of Schiavone and counsel for the creditors' committee; that he had attended that meeting, a subsequent meeting with the attorney for the creditors' committee and a meeting with the co-owners' committee and their attorney; that Schiavone had been furnished all the financial information it had requested, which was of the same nature as that previously furnished to all other proponents; and that Schiavone would like to enter into serious negotiations with the trustee, the creditors' committee and the co-owners' committee.

 Judge Shaw suggested that plaintiff refrain from further participation in any such negotiations and that the trustee himself handle this phase of the Chapter X proceeding. Schiavone was represented in the negotiations by a firm other than plaintiff's law firm. Plaintiff asked Judge Shaw to review the matter and suggested that Judge Shaw call a hearing at which any interested party might voice objections on the record to any procedure decided upon by the court.

 On April 21, 1971, Judge Shaw wrote a letter to the trustee and to plaintiff, sending copies to counsel for all interested parties, summarizing his conference with plaintiff and stating:

"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. * * *
"Since the Trustee, Mr. O'Neill, is a competent and well qualified attorney and has no conflict of interest with respect to Schiavone Construction Co., I direct that Mr. O'Neill handle all negotiations and offer all assistance in the preparation of the proposed plan that it is appropriate to offer and in keeping with what has been done with respect to other proponents and that Mr. Nolan refrain completely from any participation therein.
"* * *
"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."

 No objection to this arrangement was raised by any interested party. Judge Shaw received letters from the SEC and from Lawrence W. Levine, Esq., counsel for Union Bank of Los Angeles, agreeing with Judge Shaw's approach, but recommending that plaintiff not be allowed to participate in any plan of reorganization. Shortly thereafter, Judge Shaw directed plaintiff not to participate in any plan of reorganization.

 On June 30, 1971, Schiavone filed a proposed plan of reorganization.

 Meanwhile, a dispute had arisen with respect to interest on the amounts which the Third Circuit had required the trustee and plaintiff to return to the debtors' estate. *fn6" An appeal from Judge Shaw's ruling on this matter was heard on January 27, 1972, by a panel composed of Judges McLaughlin, Van Dusen and Adams. On January 31, 1972, Judges Van Dusen and Adams, who had also been members of the panels which had decided the previous appeals, cited above, wrote a letter to Chief Judge Seitz of the Third Circuit, in which they stated:

"After reviewing the voluminous number of applications in the above case which were filed since last summer and deferred at your direction for consideration by the panel hearing the merits of the appeals, as well as the briefs filed on the merits, and considering the oral argument last Thursday, we write to express our concern on those two points:
"A. The importance of prompt determination of which is the best available plan of reorganization.
"* * *
"B. We believe that appearance of impropriety to laymen and the friction between counsel for the trustee (Mr. Nolan) and various of the creditors is such that you should at least suggest to the assigned district judge or Chief Judge Augelli that such counsel should withdraw as counsel for the trustee.
"* * *"

 Footnote 5, above, applies to the statements in this letter.

 A meeting of the Judicial Council of the Third Circuit to consider the matter was convened on February 10. The minutes of that meeting are set out in full as Appendix A to this opinion. The Council discussed problems growing out of the reorganization of Imperial, a letter Chief Judge Seitz had received from Judge Shaw, and the letter from Judges Van Dusen and Adams. The Council unanimously adopted the resolution set out in the first paragraph of this opinion. On March 10 Chief Judge Seitz wrote Judge Shaw a letter, the material parts of which are set out as Appendix B, summarizing the discussion at the meeting of the Judicial Council on February 10, paraphrasing the resolution and suggesting that the matter be called to plaintiff's attention and that he be given the opportunity to resign.

 On March 22 Judge Shaw wrote a long letter to Chief Judge Seitz, stating that plaintiff "does not think he should respond to a request for a resignation because no matter how it may be handled, it would still be a resignation under pressure and a tacit confession of wrongdoing". Judge Shaw reviewed the material he had previously sent to the Third Circuit, which showed that the SEC and Levine, whom Judge Shaw referred to as "the sole and leading critic of the conduct of the trustee and the counsel of the trustee", had approved the action Judge Shaw had taken in April 1971. He added: "Anticipating the possibility of an order of the Court discharging him, Mr. Nolan insists that if there were to be any such removal for cause, he is entitled to an evidentiary hearing." Judge Shaw summarized Nolan's background, his position in and services to the community, and stated:

"It is my opinion that with an unblemished career behind him, he has a right to a hearing which will afford him the opportunity to dispel any cloud which would be cast upon his reputation by resignation submitted under pressure. Frankly, I think fundamental fairness demands this course of action if he is to be removed from his office as Counsel to the Trustee."

 After discussing recent developments in the Chapter X proceeding, Judge Shaw referred to the statutory authority, 11 U.S.C.A. § 11(a)(17), providing for removal for cause of receivers or trustees "upon hearing after notice". Judge Shaw added:

"* * * It seems to me that while Mr. Nolan may not fall within the classification above mentioned, it is nevertheless, my opinion that the spirit of the Act and fundamental fairness dictate that he is entitled to a hearing upon notice before he can be removed for cause. Despite the fact that it may not have been the intent of Congress that the above cited statutory provision would be applicable to counsel for a trustee, nevertheless, a removal by order of the court is in the nature of disciplinary action against an officer of the court. In this area I believe it has been generally recognized that before disciplinary action is taken against an officer of the court, he is entitled to a hearing upon notice. If this aspect of the matter were left in my hands, I would be inclined to disqualify myself from presiding at such hearing because I have very strong feelings in the matter. It ...

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