1. When, in a common law suit in a district court, the issues
have been referred to a referee in accord with the local practice
by consent of parties, and the referee's findings of fact and
conclusions of law have been approved and adopted by that court,
the appellate court may examine the findings and determine whether
they support the judgment. Rev.Stats. § 649. P. 278 U. S.
2. A bankruptcy rule of a district court forbidding trustees in
bankruptcy to retain as their attorney the attorney for creditors
of the bankrupt, is valid and has the force of law. Pp.
278 U. S.
3. A contract between an attorney for trustees in bankruptcy and
an attorney for creditors whereby the compensation to be allowed
the former by the court for his services for the trustees shall be
shared with the latter and such services shall be performed under
the latter's supervision, is contrary to public policy and
professional ethics, and is void, even though there was no actual
fraud and the results were beneficial to the estate. Pp.
278 U. S. 167
278 U. S.
4. Upon review of a judgment recovered on such a contract by the
attorney who had acted for creditors against the one who had acted
for the trustees in bankruptcy, this Court can only reverse the
judgment and direct a dismissal of the action, leaving the
successful party to restore the fees in controversy to the bankrupt
estate by appropriate steps in the bankruptcy court. P.
278 U. S.
22 F.2d 893 reversed.
Page 278 U. S. 161
Certiorari, 276 U.S. 613, to a judgment of the Circuit Court of
Appeals affirming a judgment recovered against Weil and Thorp on
their contract with Untermyer. The contract provided that the
compensation to be received by Weil and Thorp as attorneys for the
trustees in a bankruptcy proceeding should be enjoyed in part by
Untermyer, and that their services as such attorneys should be
performed under his supervision. The contract had been assigned by
Untermyer to Neary.
MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.
In May, 1921, Neary, a citizen of New York -- assignee of Samuel
Untermyer and acting for him -- brought suit in the supreme court
of that state for more than $70,000 against A. Leo Weil and Charles
M. Thorp, citizens of Pennsylvania. The defendants removed the
cause to the District Court for the Southern District of New York
on the ground of diverse citizenship. In oral argument, it was
conceded that Untermyer is the real party in interest as plaintiff,
so we shall hereinafter refer to him as such.
By his complaint, amended by leave of court to conform to the
evidence, Untermyer alleged that he had been retained as attorney
and counsel for many creditors of one Josiah V. Thompson, a
Pennsylvania banker and coal operator, to collect indebtedness
amounting to millions of dollars. To that end, Untermyer retained
the defendants, Weil & Thorp, of Pittsburgh, to conduct
bankruptcy proceedings under his supervision, upon an agreement
that they were to accept $5,000 in full payment for their services.
Such proceedings were accordingly instituted against
Page 278 U. S. 162
Thompson on the petition of three creditors in the District
Court of the United States for the Western District of
Pennsylvania, and he was adjudicated a bankrupt. Trustees were
chosen, and Weil & Thorp were selected as their counsel.
Plaintiff's complaint avers that because of complications which
arose, it was thereafter agreed that the compensation of the
defendants for services in the bankruptcy proceedings should not be
limited as stipulated, and that the plaintiff and his firm,
Guggenheim, Untermyer & Marshall, should collaborate with the
defendants under the supervision of the plaintiff in the
performance of services to the trustees. Also that the defendants
should retain, out of allowances eventually made by the bankruptcy
court in payment for their services, such sum as the plaintiff
considered just and equitable, the remainder to be paid to
Untermyer himself. Pursuant to this agreement, the defendants
continued to render services in the bankruptcy proceedings under
the general supervision of the plaintiff, for which seven
allowances were made and paid to them out of the bankrupt estate
from July 18, 1919, to May 10, 1924. The complaint further alleges
that, in pursuance of the contract, the plaintiff fixed a fair and
reasonable division between plaintiff and defendants, but that they
refused to pay the plaintiff the sums claimed under that
Weil & Thorp filed separate answers. They denied that there
was any agreement, express or implied, between the plaintiff and
them regarding the performance of services after appointment of the
trustees in bankruptcy, or regarding the compensation for services
performed by them thereafter. They admitted receipt of the
allowances made to them by the court, but alleged that the services
rendered after their designation and confirmation as general
counsel to the trustees were rendered in collaboration with other
counsel, and not in collaboration with or
Page 278 U. S. 163
under the direction of the plaintiff or his firm; also that any
services rendered by the plaintiff and his firm were rendered as
counsel to the creditors' committee, and not otherwise. They
further said that any such agreement or understanding as that
alleged by plaintiff would have been unprofessional, contrary to
public policy, illegal, and void.
There was no jury. The case was referred to a referee as under
the New York Practice Act, who concluded that Weil & Thorp were
jointly and severally indebted to the plaintiff in the sum of
$57,064, with interest from November 15, 1920. A judgment
accordingly was directed.
Pursuant to a written stipulation, signed and filed by the
parties, the court ordered:
"That the trial of the above entitled action be and the same
hereby is referred to Allan Wardwell, Esq., as Referee, to hear,
try and determine the same, with all the powers to act and rule
upon the said trial possessed by the Court."
Requests for findings were submitted to the referee by both
sides. He marked his rejection, modification, or approval of each,
and filed a report of his findings of fact and conclusions of law.
All were approved and adopted by the court. A bill of exceptions,
prepared by the defendants, was not allowed because tendered out of
time. In this situation, the defendants concede that they are bound
by the findings.
The plaintiff contends that this Court may not examine the
findings to determine whether they support the judgment, and he
relies on Campbell v. United States, 224 U. S.
. That was a common law case in a district court at a
time when no provision for waiver of a jury or for findings of fact
by such court had been made by statute. Since then, §§ 649 and 700
of the Revised Statutes have been extended to district courts. Now,
under § 649, if, in a common law suit in a district court, the
parties consent to refer the issues in accord with local
Page 278 U. S. 164
to a referee to make findings of fact and report conclusions of
law thereon which the court approves and adopts, the appellate
court may examine the findings and determine whether they support
the judgment. Shipman v. Straitsville Mining Co.,
158 U. S. 356
158 U. S. 361
Chicago, Milwaukee & St. Paul Ry. v. Clark,
178 U. S. 353
178 U. S. 364
Boogher v. New York L. Insurance Co., 103 U. S.
, 103 U. S. 97
Paine v. Central Vermont R. Co., 118 U.
, 118 U. S. 158
David Lupton's Sons v. Auto Club of America, 225 U.
, 225 U. S.
A summary of the findings follows:
In 1915, Untermyer was retained as attorney for from 90 to 95
percent of the creditors of Thompson to collect his indebtedness
out of his property, amounting to many million dollars. The affairs
were greatly involved, and it was agreed among the creditors that
the debtor's extensive properties should be conserved so that they
might be applied equitably to the payment of the claims. In
January, 1915, application was made to a state court in
Pennsylvania for receivers, and they were appointed, and this held
the estate together. But, when the case was carried to the supreme
court of the state on error, the receivership was set aside on the
ground that it had been erroneously created. The defendants, Weil
& Thorp, had no interest in or connection with Thompson, his
estate, or his creditors until after the close of the receivership,
when, in August, 1917, Untermyer employed Weil & Thorp to
secure the adjudication of Thompson as a bankrupt, and retained the
firm to initiate and carry through the proceedings under his
supervision, fixing their compensation at $5,000. This was
accepted, and accordingly, on the petition of three of the
creditors of Thompson, on Sepember 10, 1917, he was adjudicated a
bankrupt. Weil & Thorp, after their employment by Untermyer and
before the bankruptcy, had helped in the effort to sell the
properties under several plans, one of them called the Young plan,
with the hope that all the properties could
Page 278 U. S. 165
be sold; but the plans as such failed, except that there was
carved out of the Young plan the sale of what was called the Frick
At a meeting of the creditors, trustees were selected on October
17, 1917, and their appointment was duly confirmed on the 18th. The
defendants, Weil & Thorp, were, on October 18th, elected
general counsel for the trustees upon their individual
certifications in writing that they did not represent any interests
which would in any way be antagonistic or adverse in the event that
they were so employed. Untermyer, who had appeared previously in
the record as counsel for the committee of creditors, was not
elected counsel for the trustees, and did not so certify. The
certificate was filed by Weil & Thorp in accord with rule 5 of
the Rules of Bankruptcy of District Court of the United States for
the Western District of Pennsylvania:
"Attorney for the Estate and His Duties. Unless specially
authorized by the court, receivers and trustees in bankruptcy shall
not retain as their attorney the attorney of the bankrupt, of the
petitioning creditors, of the person applying for the appointment
of a receiver, or of any creditor, and trustees shall not retain as
their attorney any attorney who has obtained proxies or voted upon
the election of such trustees, or who is an attorney for persons
holding such proxies."
Immediately after the appointment of the trustees and their
counsel, they proceeded to conclude the Frick sale. Its substantial
terms had been negotiated by Untermyer as counsel for the
creditors' committee prior to the bankruptcy. On closing it, a
written application signed by Weil, Thorp, and Untermyer was made
to the bankruptcy court for the payment out of the proceeds of
separate and exact compensation to Weil & Thorp, to certain
associate counsel for the trustees, and to Untermyer. This was
subsequently approved by the court. The expected sale
Page 278 U. S. 166
of the rest of the Thompson property under the Young option was
never consummated, and the expected composition in the bankruptcy
did not take place.
The affairs of the Thompson estate were very complicated, and
Untermyer was the person most conversant with their legal aspect.
The trustees, when selecting defendants as their counsel, realized
that they had been counsel for the committee of creditors under
It had become apparent that the defendants had to perform
services in the settlement of the estate which exceeded those
originally thought to be necessary. Thereupon, the contract was
made between Weil & Thorp, on the one hand, and Untermyer, on
the other, which is set forth in the amended bill of complaint and
on which this suit was brought. The defendants continued to render
services under the general supervision and with the active
assistance and collaboration of Untermyer and his firm. The
trustees realized large sums for the benefit of creditors.
Allowances totaling more than $142,000 were made in the
bankruptcy proceedings and paid to the defendants as follows:
September 3, 1918, July 2, 1919, and July 1, 1919, $30,500; June 1,
1920, $45,466; October 27, 1920, $68,093.
On being informed of these payments, Untermyer, on November 15,
1920, pursuant to the agreement, decided that, of the total sum so
received, the defendants should retain 60 percent and pay the
remaining 40 percent to him. The defendants were duly notified of
this decision, but refused to pay Untermyer any part of such
On November 30, 1920, the firm of Weil & Thorp was
dissolved. Weil succeeded as counsel in the bankruptcy proceedings,
and further allowances were made to him, $21,000 on May 10, 1924,
and later $23,000. Although 40 percent of these were claimed by
Untermyer, the referee
Page 278 U. S. 167
did not allow them. Untermyer had made no determination as to
The referee held that the contract between Untermyer and the
defendants was limited to the preservation of the estate, and came
to an end with the final disposition of the properties by what was
called the Piedmont sales, and did not apply to fees allowed Weil
for services rendered in the general administration of the estate,
for which the allowances of $21,000 and $23,000 had been made; also
that the interests of the creditors represented by Untermyer were
identical with those of the general creditors.
Upon the facts so found, we are of opinion that the contract
sued on is clearly contrary to public policy, and does not sustain
the challenged judgment.
It is contended that, in cases where a contract is attacked
because contrary to public policy, the burden of proof is upon
those who claim illegality, and that, in such cases, the principle
res magis valeat quam pereat
applies. Hobbs v.
McLean, 117 U. S. 567
Valdes v. Larrinaga, 233 U. S. 705
233 U. S. 709
Baltimore & Ohio S.W. Ry. v. Voight, 176 U.
; Steele v. Drummond, 275 U.
, 275 U. S.
-206; Chesapeake & O. Canal Co.
15 Wall. 94; Curtis v. Gokey,
N.Y. 300; Dykers v. Townsend,
24 N.Y. 57; Ormes v.
82 N.Y. 433; Shedlinsky v. Budweiser Brewing
163 N.Y. 439; Lorillard v. Clyde,
86 N.Y. 384,
387. These cases state with force the necessity for maintaining the
right of freedom of contract and the objections to lightly
interfering therewith. But generally they turn on the construction
of words and on the rule that the presumption, where there is an
ambiguity, should be in favor of validity. They have little value
here. There is no doubt of the meaning of the contract.
Untermyer was counsel for many creditors. He was forbidden by
rule No. 5, before quoted, to become counsel for the trustees
unless specially authorized by the court. He represented 90 percent
or more of the general creditors.
Page 278 U. S. 168
There is no presumption or finding that the bankruptcy court
especially authorized Untermyer to serve as counsel for the
trustees or knew that the allowances to Weil were in part for
Untermyer, or that he was to divide them between Weil and himself.
Had there been evidence that the court had such knowledge,
certainly the referee would have found it. The point was crucial.
Nor is it strange that there was no such evidence. Untermyer's
relations to the bankruptcy and to the creditors were such that it
would have been difficult for the court to learn or infer that he
had changed his activities from work for the creditors to that of
the trustees without direct announcement of the change.
Many abuses have occurred in the bankruptcy practice, and none
is more frequent than that by which the attorney for petitioning
creditors becomes counsel for the trustees subsequently appointed.
This mingling of interests, frequently conflicting, is generally
regarded by courts as working to the detriment of one of the
parties and to the undue advantage of another. Experience has shown
the wisdom and necessity of separating the function and obligation
of counsel by forbiding the employment in different interests of
the same person. In this way only may the court be advised how
conflicting interests are represented. Rule No. 5 was adopted as an
obvious safeguard. The danger of giving entire freedom of selection
of counsel to the trustees lies in the temptation of the attorney
for some creditors, when he becomes counsel for the trustees, to
use his function as representative of all the creditors, unjustly
to favor or oppose particular creditors or to induce the trustees
to do so. Rule 5 leaves it to the court to waive the restriction
if, with knowledge of the particular circumstances, it appears safe
so to do, but, if the court does not know of a proposed departure,
it has no means of protecting creditors from the danger the rule is
intended to avoid.
Page 278 U. S. 169
The validity and effect of Rule 5 came before the Circuit Court
of Appeals of the Third Circuit in W. J. Robertson's Case,
4 F.2d 248. One Kaufman, as counsel for certain creditors, had
filed an involuntary petition for them. The receiver presented a
petition to the referee for the appointment of Kaufman as his
attorney. On the back of the petition there later appeared, written
in lead pencil, the word "Refused." Apparently in ignorance of the
refusal, Kaufman acted for the receiver without objection from
anyone. He filed several papers in behalf of the receiver and
obtained orders on some of them, and in all these it was recited
that Kaufman was the attorney of the receiver. When a fee of $300
was asked for Kaufman, it was disallowed by the referee. On appeal,
the district court affirmed the order. Of Rule 5, now under
consideration, the circuit court of appeals said [p. 249]:
"The court is vested with authority to make this rule. Section
2(15) of the Bankruptcy Act of 1898 (Comp. St. § 9586). It seems to
us both wise and reasonable. . . . While, on general principles,
the laborer is worthy of his hire, and counsel should be paid a
reasonable fee for services rendered, yet the apparent retention
here was a plain violation of the rule of court. It was the duty of
the receiver to comply with the rules of court. Both he and the
petitioner are attorneys. and knew the rule. Otherwise, a petition
for authority to retain Mr. Kaufman would not have been presented.
If the receiver and his counsel chose to act in disregard of, or in
opposition to, the rule or upon an unwarranted assumption that
authority had been or would be given, they are responsible for the
consequences of the refusal of authority."
It is clear that a rule of court thus authorized and made has
the force of law. Rio Grande Irrigation Co. v.
Gildersleeve, 174 U. S. 603
174 U. S. 608
Thompson v. Hatch,
3 Pick. (Mass.) 512; District of
Columbia v. Roth,
18 App.D.C. 547, 550; Murphy v.
39 App.D.C. 363, 367; Wilkinson
Page 278 U. S. 170
292 F. 402; State ex rel. Whitaker v.
158 Ind. 34; Advance Vencer & Lumber Co. v.
49 Ind.App. 83.
Early in the bankruptcy proceedings, on the conclusion of the
Frick sale, the court allowed specific compensation to the
defendants, to certain associate counsel for the trustees, and to
Untermyer. This, it is suggested, shows the court knew Untermyer
was receiving compensation for services to the trustees and
approved such action. But this incident has no such significance.
It merely indicates that the court approved an agreement between
counsel to pay the expenses of the trust incurred largely before
the bankruptcy, of which its indebtendness for Untermyer's services
in making the Frick sale, while he was acting as counsel for the
committee of creditors, was properly one. It is entirely consistent
with subsequent want of information by the court that Untermyer was
serving as counsel for the trustees.
The referee suggests that failure by Weil or Untermyer to advise
the court of the contract sued on ought not to invalidate it,
because, if either had called attention to the arrangement, there
would have been no objection by the court. We quote from his
"The only objection that I can see to the contract was one that
does not seem in terms to have been made known to the Court or to
the Referee. But there is no reason to suppose that, had the
plaintiff called the attention of the Court to the arrangement as
made, there would have been any objection to the plaintiff's
sharing in these fees. Certainly the Court's or the Referee's
ignorance of the agreement did not tend to increase the allowances
to counsel. Nor is there anything but commendation by the Referee
and the Court for the services rendered to the estate by counsel in
which the plaintiff bore a considerable part, whether or not that
fact was known to the Court. In any event, it does not seem to me
Page 278 U. S. 171
the defendants can contend that the failure to bring this matter
to the attention of the Court on subsequent allowances, as they did
on the Frick sale, can be put forward to defeat the plaintiff's
We cannot concur in this view. We find no reason for assuming
that the district court would not have made serious objection to
the contract had it known its terms. Such an assumption would be
unfair to the court. Certainly it was not for another court to
determine whether the situation justified a waiver of the rule. The
referee and the circuit court of appeals held that it was the duty
of Weil to advise the court of the contract. We think it was no
more the obligation of Weil than it was of Untermyer. Both were
engaging in the same violation of the rule.
There were two issues in the present case. One was whether the
contract sued on was made. Weil said it was not. Untermyer said it
was, and the referee has found with him. The other issue was
whether the agreement between Untermyer and Weil was contrary to
public policy. The referee found that both participated in the
breach of the rule. Neither can be relieved from the resulting
invalidity of the contract by charging that the other ought to have
told the court of it.
The controversy is not an ordinary one between the two parties.
The issue concerns the action of both Untermyer and Weil towards
the bankruptcy court. A question of public policy is presented, not
a mere adjudication of adversary rights between the two
Another feature of the contract that calls for condemnation is
the provision that Untermyer shall have power to supervise and
direct Weil in the rendition of service to the trustees. Of this,
the court certainly could know nothing. Weil's duty was to exercise
his independent judgment in respect of his duties. He could not
abdicate to Untermyer. The contract made the latter
Page 278 U. S. 172
and operated as an intolerable imposition on the
judge of the bankruptcy court. This was contrary to public policy;
it was in direct conflict with the professional and official duty
of Weil as an officer of the bankruptcy court and counsel for the
Still another reason for condemnation of this contract is the
provision under which the compensation allowed to Weil was to be
divided by Untermyer between the two. The court made allowances to
Weil without knowledge that a part of them was to be received and
enjoyed by Untermyer. It necessarily assumed that allowances were
being made to Weil, and no one else. Instead of this, they really
were made to Untermyer, the attorney for creditors, for such
division between Weil and himself as he might determine. The evils
to which such a practice might lead are manifest. It would, in
effect, take from the court the judicial function and vest it in an
Both the circuit court of appeals and the referee held that this
provision of the contract would not tend to increase the allowance
to counsel. We are unable to follow the argument. Certainly there
would be a temptation to both Untermyer and Weil to seek so to
increase the allowance as to secure a generous provision for both.
Motive for excessive allowance could hardly be more direct.
For the protection of the estate and itself, the bankruptcy
court must rely largely on counsel for the trustees, as also on
counsel for creditors, to keep watch against unjust charges. Under
this contract, there would be an obvious incentive for counsel to
Complaints of those interested in the honest and effective
administration of bankruptcy law led this Court, three years ago,
to adopt several new rules in respect to the compensation of
attorneys, receivers, and trustees. Rule 42 requires that, where an
attorney applies for compensation from a bankrupt estate, he shall
file a petition under
Page 278 U. S. 173
oath setting forth a full and detailed statement of his
services, and the amount claimed therefor, to be accompanied by an
affidavit of the applicant that no agreement has been made,
directly or indirectly, and that no understanding exists, for a
division of fees between the applicant, the receiver, the trustee,
the bankrupt, or the attorney of any of them, and the rule directs
that no allowance of compensation shall be made in the absence of
such petition and affidavit. These rules were adopted after the
contract in this case was made, and therefore have no direct
application here. But they clearly show the previous abuses which
it was hoped to avoid by their adoption, and explain the necessity
and reason for the earlier adoption of Rule 5, in the Western
district of Pennsylvania, which does apply to the contract here and
renders it illegal.
We have specially referred to Rule 5, under which the
illegalitly of the contract is clear, but we are not to be
understood as holding that, without the rule, the transaction under
consideration would not be contrary to public policy and void.
The chief argument that is pressed upon us to declare the
contract valid and to sustain the judgment based upon it is the
success with which the plaintiff is found to have worked out a
useful settlement of the estate for the benefit of the creditors,
and the absence of any finding or showing that there was actual
fraud. But this is not a sufficient answer to the charge of
illegality. The contract is contrary to public policy -- plainly
so. What is struck at in the refusal to enforce contracts of this
kind is not only actual evil results, but their tendency to evil in
other cases. Even if the ultimate results in the management of the
Thompson estate were good, that could be no excuse for a contract
plainly illegal, because tending to produce the recognized abuses
which follow fraud and disloyalty by agents and trustees.
Enforcement of such contracts when
Page 278 U. S. 174
actual evil does not follow would destroy the safeguards of the
law and lessen the prevention of abuses. Providence
Tool Co. v. Norris,
2 Wall. 45; Woodstock Iron
Co. v. Richmond Extension Co., 129 U.
; Oscanyan v. Winchester Arms Co.,
103 U. S. 261
Meguire v. Corwine, 101 U. S. 108
Connors v. Connolly,
86 Conn. 641; Richardson v.
48 N.Y. 348; Palmbaum v. Magulsky,
Mass. 306, 308. But we must not be understood as implying that no
harm resulted to the Thompson estate or its creditors.
We conclude that the contract set up by Untermyer in the amended
petition, framed to meet the evidence, is in violation of public
policy and professional ethics. Such a transaction between counsel
calls for judicial condemnation. This requires a reversal of the
judgment of the court below.
Where a party seeks to enforce a contract and it is found to be
invalid because contrary to public policy, the usual result is that
the court dismisses the action and leaves the parties as it finds
them. Weil, the defendant appearing pro se,
us in open court that he would be entirely content with any
disposition of the amount sued for, provided it was not
appropriated to the satisfaction of a contract deemed plainly
illegal and void, and the making of which he denied. He tendered
his consent to any disposition of the funds in controversy which
this Court might regard as proper. The difficulty with that
proposal is the want of power in this case to make a disposition of
the funds with due regard to the bankruptcy proceeding, which is
not now before this Court. We therefore must reverse the judgment
below and direct a dismissal of the action, leaving Weil to take
such steps as may be appropriate to enable the bankruptcy court to
pass the funds in controversy to the creditors.