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press it otherwise, a laborer, who by order of the court is employed on property in the hands of the court, as to the existent values in hand, will be paid by the court for the value of his services rendered to that property to which the liens of the creditors attach, and for the benefit of which his services were rendered.
There is little more difficulty with regard to the claims of the attorneys. These have been ascertained and after consideration of much evidence placed upon an equitable basis by the report of a special master. By the provisions of the bankruptcy law, in cases of involuntary bankruptcy, the attorneys are entitled to the payment of a fee as a matter of right. The amount, however, is discretionary with the court. These claims have been allowed by virtue of section 64 of the act as part of the costs of administration. In re Burke, 6 Am. Bankr. Rep. 502; Collier on Bankr. 471. It has, however, been argued that this section is applicable only after the assets have been marshaled and the liens discharged, and it does not affect liens, which come within other provisions of the statute. The better opinion, in our judgment, is that stated in Brandenburg on Bankruptcy, p. 639, that the right of attorneys for fees in bringing the property into court, in protecting it, in providing for the distribution of the values in accordance with the act, relates to the entire fund which may come under the control of the court. It is true then that the professional services of attorneys are essential to the proper administration of a bankrupt's estate, and are second only in dignity to the wages of labor exerted in its creation. In re Tebo; In re Byrne, supra; In re Duncan, 2 Am. Bankr. Rep. 321; Brandenburg, §§ 1009, 1010. It is also true that in the case of Liddon & Bro. v. Smith, 14 Am. Bankr. Rep. 204, 135 Fed. 43, 67 C. C. A. 517, the Circuit Court of Appeals of the Fifth Circuit held that the claim of an attorney for services nominally rendered does not have priority, but in that case the evidence seemed to indicate that the services had no legitimate connection with the preservation of the estate.
Besides, the recent amendment by the act of February 5, 1903 of section 40, par. "a" (chapter 487, § 9, 32 Stat. 799 [U. S. Comp. St. Supp. 1905, p. 687]), seems to strengthen the claim of attorneys upon all the funds in the hands of the court. The provision relates directly to the compensation of referees and trustees. The commissions are no longer paid on dividends, but these officers receive "one per cent. commission on all moneys disbursed to creditors by the trustee." Again, the amendment to section 48, par. A (32 Stat. 799 [U. S. Comp. St. Supp. 1905, p. 688]), accords to trustees commissions on all claims. whether secured or entitled to priority under the laws of a state. It is true that before the enactment of these amendments it was held in Re Utt, 105 Fed. 758, 45 C. C. A. 32, that a mortgage lien is not taxable for costs in a bankruptcy proceeding, and that under sections 40 and 48 referees are not entitled to commissions paid to mortgagees from the proceeds of the mortgaged property, but the court in discussing the priorities observed:
"If the commissions allowed to the trustee and the referee are warranted by the law, the allowances to attorneys and others are probably equally justifiable."
If this conclusion is sound, it follows that since these commissions to the trustee and referee are now under the amendments warranted by law as against the whole fund by a parity of reasoning, the rights of the attorneys will be regarded as equally comprehensive. We are of the opinion, therefore, that doubts expressed in the earlier decisions as to the priority over the claims of lienholders of attorney's fees as a part of the costs of administration and holders of priorities created by the state laws should be removed by these amendments. Nor is this conclusion in itself unreasonable. This court in Re Alison Lumber Co., 14 Am. Bankr. Rep. 84, 137 Fed. 643, used the following language: "The expenses and costs of the bankruptcy court stand upon a superior footing; and, if there is not sufficient money arising from the sale of unpledged property to pay them, it seems that the secured creditors should contribute ratably to that purpose. They have appeared in the bankruptcy court, selected it as their forum, availed themselves of the services of its officers, and utilized its process to collect their claims. We have no doubt of their duty to contribute to pay all such costs and expenses."
This reasoning was adopted in Re Burke, 6 Am. Bankr. Rep. 502, where it is declared that "legal services are often quite as actual and necessary as are doors and locks and roofs." The attorneys are officers of the bankruptcy court-indispensable officers-and the fees allowed by the special master, just and reasonable as they are, in view of the large amount involved, the multiplicity of issues, the difficulty of the cause, and the skill and ability manifested, must be allowed as a part of the cost of administration, and second only to the wages of laborers.
Next in priority in the judgment of the court is the mortgage of Charles Schimmelfing. Under the views hereinbefore expressed, the fund which would otherwise be appropriated to discharge this mortgage in full should be made ratably to contribute to the wages of the laborers and to the fees of the attorneys. Its priority over all other liens is ascribable to the fact that the mortgagee had no actual notice of the bankruptcy proceeding. Section 58 of Bankr. Act July 1, 1898, c. 541, 30 Stat. 561 [U. S. Comp. St. 1901, p. 3444] provides for 10 days' notice by the referee to all creditors of the bankrupt, as to all examinations of the bankrupt, hearings, meetings of creditors, and proposed sales of property. The master finds that this mortgagee had notice of none of these proceedings nor of the trustee's application to sell, and that he never became party thereto until after the sale, when he filed an intervention asking the payment and discharge of the amount of his lien from the proceeds, without deduction of other costs than the reasonable expenses of the sale. Subject to the superior liens hereinbefore determined the master's finding is approved.
We next consider the claims of the holder of receivers' certificates and certain claims incurred in the operation of the property by the receivers. It is essential to bear in mind the manner in which these receivers were appointed. All of the parties to the litigation entered into a written agreement that it would be advantageous for all concerned if the corporation could be continued as a going concern. It was made to appear by the agreement and otherwise that this course was absolutely essential for the preservation of the property; that, if the business should be continued, the company would probably pay out in full, and
great loss would certainly ensue if the mills and business should remain idle during the pendency of the bankruptcy proceeding. The prospective venture was made to appear most hopeful, and since, in case of mill property of this character, its value so largely depends on the performance of its executory contracts, the increase, and sale of the manufactured product, in the interest of all the creditors, the court made the order sought. The receivers were required to give adequate bond, to file frequent reports "of all receipts and disbursements, and as accurately as may be, the profit or loss in the operation of said mills"; and, so that additional loss might be averted, the order was explicitly made that, should the operation of the plant not prove advantageous, the receivers should "report the fact to the court, to the end that proper steps may be taken to discontinue the operation of said business.' Pursuant to the terms of their original order of appointment, and subsequent applications all apparently meritorious, the receivers presented with unanimity, and supported by proof, their applications, and the court at various times authorized the issue of receivers' certificates on January 5, 1905, in the amount of $3,000, and on February 7th, of the same year, $2,000, to pay laborers and other necessary running expenses. At this time, as previously stated, the report of the receivers showed an aggregate of assets of $56,177.44, and estimated profits for the continuance of the business of $2,400 a month. The reports were regularly filed with the record. No exception was made to these reports by any of the parties, and the court had every reason to believe that they were true. There was no intimation that the business was being conducted at a loss. The court was misled into the belief that the operation was proving highly beneficial to the estate. The misconduct of the receivers having been finally reported to the court by the law firm at whose instance they were appointed, another receiver was appointed in their stead. Not only did it then appear that there had been a vast, and indeed, unexplained, loss in the value of the assets, but that the receivers had incurred an indebtedness of $6,700 in addition to the $5,000 of receivers' certificates which had been authorized. Now, section 2, par. 5, of Bankr. Act July 1, 1898, c. 541, 30 Stat. 516 [U. S. Comp. St. 1901, p. 3421], and its amendments expressly vest courts of bankruptcy with the power to "authorize the business of bankrupts to be conducted for limited periods by receivers, the marshals, or trustees, if necessary in the best interest of the estates.' "There was, therefore, no doubt of the power of the court to take the action it did. Authorized to operate the property through its receivers, it was equally competent for the court to raise on the credit of the values in hand the funds immediately necessary for its operation. Here was a large sawmill plant, with planing mill, veneering mill, large orders for its products, all belonging to a class of business which at the time and since then has been most notably prosperous. These considerations, with the agreement of the parties, and the necessity of preserving the assets, seemed to make it imperatively necessary to continue the operation in the best interests of the estate. The power to issue such certificates can no longer be doubted. In Wallace v. Loomis, 97 U. S. 146, 24 L. Ed. 895, Mr. Justice Bradley for the court declared:
"The power of a court of equity to appoint managing receivers of such property as a railroad, when taken under its charge as a trust fund for the payment of incumbrances, and to authorize such receivers to raise money necessary for the preservation and management of the property, and make the same chargeable as a lien thereon for its repayment, cannot, at this day, be seriously disputed. It is a part of the jurisdiction always exercised by the court by which it is its duty to protect and preserve the trust funds in its hands."
See, also, Miltenberger v. Logansport Ry. Co., 106 U. S. 286, 1 Sup. Ct. 140, 27 L. Ed. 117; Union Trust Co. v. Illinois Midland Co., 117 U. S. 435, 6 Sup. Ct. 809, 29 L. Ed. 963. In the latter case Mr. Justice Blatchford said:
"Its power to do this does not depend on consent, nor on prior notice. sent is desirable, but is seldom practicable, where the debts exceed the value of the property. Though prior notice to persons interested, by notifying them as parties, first requiring them to be made parties if they are not, is generally the better way, yet many circumstances may be judicially equivalent to prior notice. A full opportunity, as in this case, to be heard, on evidence, as to the priority of the expenditures and of making them a first lien, is judicially equivalent."
It is, however, urged that the court may provide for the priority of receivers' certificates only in case of a railway or quasi public corporation. In view of the act of bankruptcy authorizing the continuance of a private corporation through a receiver, we do not think that this is true. The power to continue business implies the power to make debts, and to provide for their payment, which must include the power to borrow money for urgent necessities and for direct operating expenditures. These considerations, we think, are conclusive as to the validity of the receivers' certificates, nor has any other lienholder the right to complain of their priority. As stated in Union Trust Co. v. Illinois Midland Co., supra:
"The court always retains control of the matter, its records are accessible to lenders and subsequent holders, and the certificates are not negotiable instruments."
The issuance and existence of the certificates, as well as the terms of the order appointing the receivers, were matters of record, and were notice to all creditors and to all persons having dealings with the receivWe conclude, therefore, that these certificates stand next in order of priority to the mortgage of Schimmelfing. Their holders are, however, equally liable to contribute ratably to the wages of laborers and the fees of attorneys.
On the same footing with the receivers' certificates, stand all the claims for logs sold to the receivers under the order of the court. In one of these claims the title had been vested in the Citizens' Bank of McRae under a bill of sale given as security by the Erie Lumber Company before any of the proceedings in bankruptcy. The logs were sold to the receivers pursuant to the order of the court authorizing the latter to buy lumber and other things necessary for carrying on the business, This claim, and similar ones, represent, therefore, part of the authorized operating expenses, and are to be paid subject to their ratable contribution to wages and attorney's fees, together with the receivers' certificates.
The mortgage of the Citizens' Bank of McRae must be distinguished from that of Charles Schimmelfing, which has previously been considered, for the reason that the bank not only had notice of all the proceedings in bankruptcy, but actually participated in the transactions of the receivership. The master reports that they made no objection to any of the orders of the presiding judge, or to those of the referee. Now, it is clear that the right of a creditor to priority of payment may be waived by some act inconsistent with the continuance of such right. Brandenburg on Bankr. 669, citing Claflin v. Eason, 2 Am. Bankr. Rep. 263. A proceeding in bankruptcy is a proceeding in rem. The filing of the petition is a caveat to the whole world, and in effect an attachment and injunction. Mueller v. Nugent, 184 U. S. 14, 22 Sup. Ct. 269, 46 L. Ed. 405. Besides, these mills are located in the same county as this bank, and it was made a depository for the receivers. It took two notes from the receivers, and sold to them certain logs and lumber located at the mill, in conformity with the provisions of the order of appointment. The bank officers had actual, as well as constructive, notice that the Erie Lumber Company was being carried on by the receivers as a going concern. This, in our judgment, will preclude them from insisting upon the priority of their mortgage over the operating expenses or other obligations incurred for carrying on the business, which was intended to conserve their security. It is declared in Gluck and Becker on Receivers (section 97):
"Though a mortgagee has not had notice of the application, he cannot stand by and see the court and the receiver create indebtedness and prior liens upon the property, and content himself with merely protesting generally and disclaiming all interest under the receivership. He must act promptly, and in good faith intervene and present his objection to the court in season, or he cannot afterward be heard. The court will not visit upon innocent parties, dealing with a receiver within the authority of its orders, consequences which result from inequitable negligence and supineness of a party to the suit, or of those represented by him."
A fortiori is this principle applicable where the mortgagee so far approves the receivership as to seek and secure benefits thereunder. It is evident to all familiar with the record that, had the receivership been properly conducted, the plant would have worked out its indebtedness, and the hopeful purpose of the creditors would have been effected. No one was more interested in this result than the Citizens' Bank of McRae. Because, however, by reason of the misconduct or incapacity of the receivers chosen by the parties themselves, there was a failure of the project, innocent parties who within the restrictions of the court's orders trusted the receivers will not be made to suffer for the benefit of a mortgagee, who took all the chances and who comes into the bankruptcy court at the eleventh hour and asks the exclusion for its benefit of the claims of those who in good faith co-operated with the court and the other creditors to save the property. The lien of the Citizens' Bank of McRae is valid and effective, but is subordinate to wages, to attorney's fees, to the Schimmelfing mortgage, to the receivers' certificates, and to its own and other claims for logs sold to the receivers.
An attempt is made by one M. L. McCullough to establish a claim of his against the receivers. He alleges that he has sustained certain