1. Payments made by the debtor in contemplation of bankruptcy
"to an attorney and counselor at law, solicitor in equity, or
proctor in admiralty," "for services to be rendered," are subject
to be summarily
Page 289 U. S. 473
reexamined by the referee as to their reasonableness, under §
60(d) of the Bankruptcy Act. P.
289 U. S.
475.
2. The payments covered by § 60(d) are to be distinguished from
the allowances contemplated by § 64(b)(3) which are made out of the
bankrupt estate for legal services in its administration. P.
289 U. S.
476.
3. The jurisdiction to reexamine under § 60(d) depends not on
the specific nature of the services to be rendered, but upon the
state of mind of the debtor -- upon whether his thought of
bankruptcy was the impelling cause of the transaction. P.
289 U. S.
477.
4. The test of jurisdiction under § 60(d) is not whether the
services to be rendered are "germane to the aims of the Bankruptcy
Act." P.
289 U. S.
478.
5. The payments may well be "in contemplation of bankruptcy"
though the purpose was to bring about an arrangement with creditors
that would prevent bankruptcy. P.
289 U. S.
478.
61 F.2d 771 affirmed.
Certiorari to review an order of a court of bankruptcy requiring
the present petitioners to turn over to the trustee part of a sum
that had been paid to them by the debtor for future legal services
shortly before the filing of a bankruptcy petition against him.
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
By an order made by a referee in bankruptcy under § 60(d) of the
Bankruptcy Act (11 U.S.C. § 96(d)), appellants were directed to
turn over to the trustee in bankruptcy the sum of $2,000, which was
part of an amount paid to them by the bankrupt corporation for
legal services
Page 289 U. S. 474
rendered shortly before the filing of an involuntary petition.
The order was sustained by the District Court (
In re David Bell
Scarves, Inc., 52 F.2d 755) and by the Circuit Court of
Appeals. 61 F.2d 771. This Court granted certiorari.
The only question presented is raised by the appellants'
challenge of the jurisdiction of the referee to reexamine the
payment under § 60(d). The payment was made on November 5, 1930,
and the petition in bankruptcy was filed twelve days later. There
is no room for controversy as to the facts, which are thus stated
by the Court of Appeals: the corporation was in financial
difficulties and unable to meet its maturing obligations. Prior to
retaining the appellants, it had engaged another attorney to
negotiate a settlement with its creditors, and a meeting with some
of its creditors had been held. Apparently the appellants were
retained to supplement the efforts of that attorney, to whom $750
had already been paid upon a promised fee of $2,000. The testimony
of one of the appellants, given at an examination under § 21(a),
was to the effect that he was to negotiate with creditors for a 50
percent cash settlement and was to assist the corporation in
hypothecating its accounts receivable in order to obtain the
necessary money to carry out such a settlement. His affidavit,
submitted in opposition to the referee's jurisdiction, stated that
the most extreme course which was within the contemplation of
himself and David Bell, bankrupt's president, was continuance of
the business under an equity receivership, although that course was
not contemplated if the business could be continued under the
supervision of a a committee of creditors or of a representative of
the New York Creditors' Adjustment Bureau, Inc. It also appeared
that, within two weeks prior to November 5th, when the appellants'
retainer was paid, David Bell had withdrawn
Page 289 U. S. 475
$1,500 from the corporation, and his brother, an employee, had
withdrawn $750. The cash resources of the corporation were so low
that appellants' retainer could not be paid until a sale of
merchandise was made, and the purchaser's check for $2,500 was then
indorsed to appellants.
The District Court concluded that the thought of bankruptcy was
the impelling motive of the debtor corporation when its president
retained appellants. And the Court of Appeals was of the opinion
that, in these circumstances, the payment was made "in
contemplation" of bankruptcy within the meaning of § 60(d).
[
Footnote 1]
That provision has been held to be
sui generis. It does
not contemplate a plenary suit, but a summary proceeding.
In re
Wood & Henderson, 210 U. S. 246,
210 U. S.
251-253. The class of cases to which it refers is not
that of preferences or of fraudulent conveyances.
Id. The
provision authorizes reexamination of payments or transfers when
made by a debtor (1) "in contemplation of the filing of a petition
by or against him," (2) "to an attorney and counselor at law,
solicitor in equity, or proctor in admiralty," and (3) "for
services to be rendered." Such payments or transfers are only
to
"be held valid to the extent of a reasonable amount to be
determined by the court, and the excess may be recovered by the
trustee for the benefit of the estate."
The language of the provision, and the indicated scope of the
legal services embraced within it, distinguish it
Page 289 U. S. 476
from the provision of § 64(b)(3), 11 U.S.C. 104(b)(3), [
Footnote 2] with respect to the
priority of a reasonable attorney's fee in the distribution of an
estate in bankruptcy. [
Footnote
3]
See Furth v. Stahl, 205 Pa. 439, 442, 55 A. 29, 30;
Pratt v. Bothe, 130 F. 670, 673. Section 60(d) relates to
payments and transfers made by the bankrupt prior to bankruptcy
from his own property for services to be rendered to him, §
64(b)(3) to an allowance to be made for legal services out of the
estate under administration.
See In re Rolnick, 294 F.
817, 819. The services within the latter provision are those
rendered in aid of the administration of the estate and the
carrying out of the provisions of the Act.
See Randolph v.
Scruggs, 190 U. S. 533,
190 U. S. 539;
In re Kross, 96 F. 816;
In re Mayer, 101 F. 695;
In re Rosenthal & Lehman, 120 F. 848;
In re
Christianson, 175 F. 867. Section 60(d), authorizing a
reexamination of payments and transfers by the bankrupt for
services to be rendered, has a broader scope. It contains no
intimation of an intention to limit the jurisdiction to reexamine
to a particular sort of legal services for the payment of which the
debtor has disposed of his property. The point of the provision
conferring jurisdiction for a summary reexamination is not the
specific nature of the legal services to be rendered, but that
the
Page 289 U. S. 477
payment or transfer to provide for them is made "in
contemplation" of bankruptcy. The purpose is shown by the sweeping
description of payments or transfers "to an attorney and counselor
at law, solicitor in equity, or proctor in admiralty."
We agree with the Court of Appeals that the criteria of
jurisdiction to reexamine are distinct from the criteria of the
decision on the merits. As to the jurisdiction to reexamine, the
controlling question is with respect to the state of mind of the
debtor and whether the thought of bankruptcy was the impelling
cause of the transaction.
Compare United States v. Wells,
283 U. S. 102,
283 U. S.
117-118;
Tripp v. Mitschrich, 211 F. 424, 427.
If the payment or transfer was thus motivated, it may be reexamined
and its reasonableness be determined. Undoubtedly, while the
question thus relates to the debtor's motive, the nature of the
services which he seeks and for which he pays may be taken into
consideration as it may throw light upon his motive. It is not
impossible that the services may have been so wholly separate from
any exigency of bankruptcy as to indicate that the thought of
bankruptcy was in no sense controlling. But, given the fact that
the payment or transfer was in contemplation of bankruptcy, the
inducement of the transaction affords, from the standpoint of the
statute, sufficient ground for authorizing a summary inquiry into
its reasonableness. The manifest purpose of the provision is to
safeguard the assets of those who are acting in contemplation of
bankruptcy, so that these assets may be brought quickly and without
unnecessary expense into the hands of the trustee, and to provide a
restraint upon opportunities to make an unreasonable disposition of
property through arrangement for excessive payments for prospective
legal services.
In re Wood & Henderson, supra; Pratt v.
Bothe, supra. We said in the case of
Wood &
Henderson that the statute
"recognizes
Page 289 U. S. 478
the temptation of a failing debtor to deal too liberally with
his property in employing counsel to protect him in view of
financial reverses and probable failure. It recognizes the right of
such a debtor to have the aid and advice of counsel, and, in
contemplation of bankruptcy proceedings which shall strip him of
his property, to make provisions for reasonable compensation to his
counsel. And, in view of the circumstances, the act makes provision
that the bankruptcy court administering the estate may, if the
trustee or any creditor question the transaction, reexamine it with
a view to a determination of its reasonableness."
In this view, we are unable to conclude that the question
whether the services for which the payment or transfer is made are
"germane to the aims of the Bankruptcy Act," as suggested in some
of the decisions, [
Footnote 4]
furnishes the test of the jurisdiction to reexamine. The test of
jurisdiction, we repeat, is given by the express language of the
statute. In the exercise of jurisdiction, all questions bearing
upon the reasonableness of the transaction, including the purpose
and nature of the services, are open to consideration. But it is
insisted in the instant case that the payment to appellants could
not properly be regarded as made in contemplation of bankruptcy,
and hence within the jurisdiction to reexamine, because the payment
was for the purpose of engaging appellants to conduct negotiations
with creditors in order to arrange for an extension of time, and,
if necessary, for the operation of the business under the
creditors' supervision, and thus to avoid a forced liquidation and
ultimately to restore the business to a sound basis. We find no
ground for saying that the fact that such purposes were in view
establishes, as matter of law, that the payment was not in
contemplation
Page 289 U. S. 479
of bankruptcy. On the contrary, negotiations to prevent
bankruptcy may demonstrate that the thought of bankruptcy was the
impelling cause of the payment. "A man is usually very much in
contemplation of a result which he employs counsel to avoid."
Furth v. Stahl, supra. See also In re Klein-Moffett
Co., 27 F.2d
444;
Slattery v. Dillon, 17 F.2d 347;
In re
Lang, 20 F.2d 239.
We are of the opinion that the court had jurisdiction to make
the order under review.
Affirmed.
[
Footnote 1]
Section 60(d) provides as follows:
"(d) If a debtor shall, directly or indirectly, in contemplation
of the filing of a petition by or against him, pay money or
transfer property to an attorney and counselor at law, solicitor in
equity, or proctor in admiralty for services to be rendered, the
transaction shall be reexamined by the court on petition of the
trustee or any creditor and shall only be held valid to the extent
of a reasonable amount to be determined by the court, and the
excess may be recovered by the trustee for the benefit of the
estate."
[
Footnote 2]
Section 64(b)(3) provides:
"(b) The debts to have priority, except as herein provided, and
to be paid in full out of bankrupt estates, and the order of
payment shall be . . . (3) the cost of administration, . . . and
one reasonable attorney's fee, for the professional services
actually rendered, irrespective of the number of attorneys
employed, to the petitioning creditors in involuntary cases, to the
bankrupt in involuntary cases while performing the duties herein
prescribed, and to the bankrupt in voluntary cases, as the court
may allow."
[
Footnote 3]
Cf. In re Kross, 96 F. 816, 818, 819;
In re
Habegger, 139 F. 623, 627;
In re Christianson, 175 F.
867, 868;
In re Secord, 296 F. 231, 232.
[
Footnote 4]
See In re Habegger, 139 F. 623;
In re Stolp,
199 F. 488;
In re Rolnick, 294 F. 817;
In re
Lang, 20 F.2d 239;
Quinn v. Union National Bank, 32
F.2d 762.