Nolan v. Judicial Council

OPINION OF THE COURT

ALDRICH, Senior Circuit Judge.

These consolidated appeals from two proceedings in the New Jersey District Court present a single issue, the propriety, viewed in the circumstances under which it was adopted, of a resolution of the Judicial Council of the Third Circuit (Council), dated February 10, 1972, which provides as follows:

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

On May 2, 1972 the district court, pursuant to this resolution, removed appellant, Joseph M. Nolan, Esq., as counsel for the trustee in reorganization of Imperial “400” National, Inc. Nolan appealed that order and also brought a petition of mandamus, or declaratory judgment, against the Council. The district court¹ dismissed the mandamus action, July 29, 1972, agreeing with the Council that Nolan had an adequate remedy by way of appeal to this court, and that the district court was without jurisdiction. D. C., 346 F.Supp. 500. We, too, agree, and Nolan’s appeal from that dismissal must fail. We must, however, address ourselves to our dissenting brother Lumbard’s claim that we lack jurisdiction of the appeal from the original removal order. Since jurisdiction is always open it is, of course, not determinative that in the mandamus proceeding the Council itself took the position that we would have jurisdiction. We believe, however, that the Council — and the district court ■ — were correct.

On this we see no real issue. We are not reviewing the action of the Court of Appeals, but, directly, of the district court. Admittedly we are reviewing indirectly the action of the Council, but the dissent’s assertion that we have no power to do this is just that. The circuit council, while composed of judges, is an administrative body, and not a court. Chandler v. Judicial Council, 1970, 398 U.S. 74, 86 n. 7, 90 S.Ct. 1648, 26 L.Ed.2d 100. Reviewing the district court’s May 2 order, which drew its substance from the Council’s resolution, seems in no material respect different from reviewing a similar district court order which drew its substance from statutory provisions such as 11 U. S.C. §§ 557, 558. The latter task is our statutory duty under 11 U.S.C. § 47. At least in a situation where there is a district court order capable of being reviewed, we see no reason, in the absence of any statutory provision, why the Council’s actions are untouchable except by the Supreme Court, and we greatly doubt that that Court so thought when it declined to permit the filing of a petition for mandamus. Nolan v. Judicial Council of the Third Circuit of the United States, 1972, 409 U.S. 822, 93 S.Ct. 111, 34 L.Ed.2d 154. On this assumption we pass to the merits after, necessarily, a complex statement of the facts.²

THE APPEARANCE OF CONFLICT OF INTEREST

Appellant, Joseph M. Nolan, Esq., an experienced member of the bankruptcy bar, was appointed in February, 1966, as counsel for the trustee in reorganization of Imperial “400” National, Inc., a chain of motels doing business in thirty-five states. The trustee successfully continued the operation of the business, but acceptable plans for reorganization did not materialize. Two plans, although allegedly favored by many creditors, were opposed by the trustee through Nolan as his counsel.³ On April 14, 1971, orally, and April 19 in writing, Nolan advised the district judge in charge of the reorganization, Hon. Robert Shaw, now deceased, that a client of his law firm, Schiavone Construction Company, was interested in filing a plan. Judge Shaw replied on April 21 by a letter, with copies to all creditors:

“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.”

He went on to state that the trustee himself had no conflict of interest, and was a well-qualified attorney capable of representing himself with respect to reorganization plans, and that accordingly he was ordering Nolan to “refrain completely from any participation therein,” but to continue to represent the trustee in all other matters.

“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.”

We will not pause to consider the oversolicitude, if any, the court exhibited towards the trustee’s counsel vis-a-vis the estate. In any event, no one objected, and two affirmatively assented — Union Bank of Los Angeles, a large creditor, hereinafter Union Bank, and the SEC. The SEC wrote that because it felt “the estate should not be deprived of the possible benefits arising from Schiavone’s participation” it had no objection to the proposed procedure; the bank concurred, with a similar statement. Thereafter New York counsel appeared for Schiavone, and Nolan continued to represent the trustee in a substantial amount of day-to-day legal work unconnected with reorganization plans.

THE CLIMATE

Pre-Schiavone

Thus no conflict of interest of a disqualifying nature was perceived, at least to the point of accepting the court’s open invitation to speak up. ' We lay particular emphasis upon this not only because of its general significance, but because well before that date matters had not been going to everyone’s satisfaction, and the parties had become engaged in recriminations on a markedly personal level. Union Bank was represented by one Laurence W. Levine, Esq., who was also chairman of the creditors’ committee. His vigorous attacks on the trustee and his counsel in connection with their requests for interim fees, of which there were several, were characterized by the district judge at one point as “allegations of lack of integrity and suggestions that there is deliberate mismanagement of the estate.” Nor did Nolan fail to respond in kind. The Court of Appeals had found one of the district court’s fee allowances substantially excessive,⁴ and doubtless the controversy was exacerbated when the district court, on receipt of the mandate, on March 10, 1971 excused the trustee from paying interest on the amount obliged to be refunded, but not Nolan. Nolan appealed, and the creditors cross-appealed.

Post-Schiavone

In April, 1971, Nolan’s new, in the sense of more limited, position was approved. Nothing occurred thereafter to cause the discovery that there was an impermissible appearance of a conflict of interest, except a continuation of personal differences. In the appeal taken from the district court’s failure to assess interest, which 'Levine used as a vehicle to suggest Nolan’s removal, ante, Levine filed an affidavit in 137 paragraphs attacking Nolan, and Nolan, in reply referred, inter alia, to “Levine’s flow of nonsensical and scandalous statements.” One of Levine’s charges totally irrelevant to the question of interest on the refund was that Nolan had sued Union Bank for eight million dollars in order to induce the bank to drop its support of another plan and to favor Schiavone’s. Ultimately the district court’s fee decision was reversed again.⁵

The Court of Appeals did not enter into these controversies between the parties more than it could help.⁶ However, in its 1970 opinion, the court spoke of “the friction which apparently exists,” and “suggest [ed] that the trustee and his counsel make a greater effort to work with the creditors and other interested persons in an effort to terminate this lengthy reorganization proceeding with dispatch. . . . The main business of the trustee and his attorney at this point should be to press forward to an acceptable plan of reorganization, not to concentrate on their ‘personal interests.’ ” 432 F.2d at 240-241 n. 28, 29. Again, in the 1972 opinion, the court referred to the “widespread dissatisfaction with the failure of the . . . fiduciaries to secure action by the court on a reorganization plan.” 456 F.2d at 931.

COUNCIL ACTION

On January 22, 1972, five days before the interest-on-fee-refund case was to be argued to a panel, Levine addressed a letter to the court, stating that while there was no motion filed to remove the trustee and his counsel, and while he did not wish time for oral argument on that subject, he felt the court “could exercise its equity power” to remove the trustee and his counsel, “which we hope it will and of its own volition.” It does not appear what transpired at the argument, but thereafter two members of the panel, who had also been members of the previous panel, wrote a letter to the Chief Judge of the circuit. This letter is substantially quoted in the opinion of the district court, 346 F.Supp. 504-505. In substance it suggested that the Chief Judge “should at least suggest to the assigned district judge or Chief Judge Augelli that such counsel should withdraw as counsel for the trustee.” The letter stated that even though Nolan was no longer advising with respect to reorganization plans, he did advise the trustee on all other matters, and that the public was unlikely to understand such action, particularly in view of the litigation over fees. “The fact that Schiavone Co. has New York counsel to represent them on the plan will not overcome, in the minds of laymen, the continuing representation of this company in all other matters by the Nolan . . . firm.”

The factual accuracy of the letter is disputed by Nolan. The letter stated that the trustee was favoring the Schiavone plan, “even though a plan favored by many of the creditors had been submitted many months before the Schiavone plan and gives them cash, which is what they want.” While one of the alternative plans did provide cash, the cash element was apparently inserted by amendment after the Schiavone plan was filed.⁷ Further interstices in the Council's knowledge will be touched upon later. However, the thrust of the letter was not to attempt to resolve the issues between the parties, but to eliminate them by summarily removing counsel, thus avoiding the “danger of adverse publicity affecting the entire federal bankruptcy system.”

On February 10 the court, meeting as the Council, unanimously, except for two judges not voting, adopted the resolution in question. A month later the Chief Judge wrote to Judge Shaw, paraphrasing the resolution in general, rather than in its narrow terms, and suggesting that Nolan be given the opportunity to resign. The letter concluded,

“I realize that this will be of real concern to you but I know you realize that some of the appeals in this case have caused much concern to the judges hearing them.”⁸ 346 F.Supp. at 515.

Judge Shaw replied that Nolan was unwilling to resign because he, and the Judge, felt it would be acknowledging a fault which was not recognized, and that they both felt that if there were to be a removal it should be for cause, as to which “Mr. Nolan insists ... he is entitled to an evidentiary hearing.” In further correspondence, in which the resolution was explicitly set forth, the Chief Judge continued “to emphasize that [the] resolution is directed at the appearance of a conflict of interest.

. We are talking policy.” Since cause was not asserted, he repeated, there was nothing personal, and no hearing was called for.

Nolan continued to disagree. Ultimately this discussion was obliged to come to a halt, and with a detailed protest that he should not have been required to do so, Judge Shaw on May 2 terminated Nolan’s retainer. Attempts to obtain an interim stay pending appeal failed,⁹ and ultimately the present panel of senior circuit judges from outside the circuit¹⁰ was designated by the Chief Justice.

THE POWERS OF THE COUNCIL

28 U.S.C. § 332 provides as follows,

“Each judicial council shall make all necessary orders for the effective and expeditious administration of the business of the courts within its circuit. The district judges shall promptly carry into effect all orders of the judicial council.”

Appellant contends that “this statute, as written and as employed is unconstitutional.” As to the first, his brief is singularly unpersuasive. It cannot be unconstitutional to authorize the courts to manage their own business. It is doubtless true, as the Court pointed out in Chandler v. Judicial Council of the Tenth Circuit, 1970, 398 U.S. 74, 85 n. 6, 90 S.Ct. 1648, 1654, 26 L.Ed.2d 100, that the statute “is not a model of clarity in terms of the scope of judicial councils’ powers,” but we believe this lack merely raises issues of construction. As to this innumerable authorities with diverse qualifications have asserted that the phrase “effective and expeditious administration of the business of the courts” is to be broadly construed. See Brennan, The Continuing Education of the Judiciary in Improved Procedures, 28 F.R.D. 42, 43 (1962) ; Burger, The Courts on Trial, 22 F.R.D. 71, 74-77 (1958); Hearings on H.R. 2973, H.R. 5999 Before the House Comm, on the Judiciary, 76th Cong., 1st Sess., 22 (1939) (remarks of Judge John J. Parker) ; Fish, The Circuit Councils: Rusty Hinges of Federal Judicial Administration, 37 U.Chi.L.Rev. 203, 206 (1970). The reasons seem clear. The individual district judge has his own docket to consider, and his own problems. There must be a body with a broader horizon, and a broader responsibility, to oversee the district court as a whole, not just in regard to day-to-day operations and internal problems, but in the larger perspective of the court’s place in the body politic.

Nowhere has the present aspect of that duty been better expressed than in a Report of the Judicial Conference of the United States at its June, 1961 meeting on the Powers and Responsibilities of the Judicial Councils, presented to the House Committee on the Judiciary by the Honorable Emanuel Celler, Chairman, 87 Cong., 1st Sess., H.D. 201. Included in the Conference’s conclusions is the following,

“(2) The responsibility of the councils ‘for the effective and expeditious administration of the business of the courts within its circuit’ extends not merely to the business of the courts in its technical sense (judicial administration) , such as the handling and dispatching of eases, but also to the business of the judiciary in its institutional sense (administration of justice), such as the avoiding of any stigma, disrepute, or other element of loss of public esteem and confidence in respect to the court system, from the actions of a judge or other person attached to the courts.”

We note in this connection that Chairman Celler stated in his Foreword,

“Since I, at the time [that section 332 of Title 28 was enacted] was a member of the Committee on the Judiciary of the House, I know it was the intention of the Congress to charge the judicial councils of the circuits with the responsibility for doing all and whatever was necessary of an administrative character to maintain efficiency and public confidence in the administration of justice.”

We have no question but that there is included in this area the important matter of conflict of interests.

Nor do we accept appellant’s contention that a judicial council lacks rule-making power. His argument that this would destroy uniformity flies in the face of the fact that every court of appeals, not to mention many district courts, has its own local rules. The caveat is that such rules must not conflict with rules that have been made effective nationally. See In re Mandell, 2 Cir. 1934, 69 F.2d 830. If a court of appeals may make rules for itself, we see no reason why a judicial council, sitting as an administrative body, cannot, short of exercising traditional judicial functions, see post, enact appropriate rules, or resolutions, applicable to all courts within its circuit. See, e. g., United States ex rel. Frizer v. McMann, 2 Cir., 1971, 437 F.2d 1312, 1317 (issuance of rules covering prompt disposition of criminal cases) . This, however, does not answer the present question.

THE RESOLUTION IN CONTEXT

In spite of the foregoing, we are deeply troubled by what occurred in the present case. The fact that the resolution worked individual hardship to appellant is not determinative. Rules, and the maintaining of public relations, cf. Barr v. Mateo, 1959, 360 U.S. 564, 574, 79 S.Ct. 1335, 3 L.Ed.2d 1434 may often work individual hardship.¹¹ Nor is it necessarily determinative that the resolution was occasioned by a particular situation. General rules must often be made in response to some event that calls attention to their need. The difficulty here is that the Council was not alerted to any general need. Although not so couched, the resolution was not only triggered by, but tailored to, a case quite apparently unique. The SEC, which has statutory supervision of Chapter X reorganizations, 11 U.S.C. § 608, informs us through its Solicitor that it has never heard of a case other than the one at bar that would come within this resolution. Nor have we been able to discover one. The action accordingly comes uncomfortably close, perhaps too close, to a function denied to the Council, the exercise of “traditional judicial powers.” Chandler v. Judicial Council, 398 U.S. 86 n. 7, 90 S.Ct. 1648.

What particularly troubles us in these circumstances is that some members of the body adopting this, in effect, in personam resolution had been exposed to highly defamatory accusations against appellant, had been themselves “much concern[ed] by appeals”, and had expressed by no means insignificant criticisms. Moreover, the only information presented to the Council as a whole was, in its factual aspects, both inaccurate and incomplete. Viewed from the standpoint of appellant, it must be thought ironic that at, or at least following, the suggestion of his antagonist, he should be condemned unheard by a body whose very excuse for acting was the necessity of maintaining public confidence in the fairness of the courts. The explanation that he was not being discharged for cause, but only for the appearance of a conflict of interest, could be less than satisfying, especially so since in the year between Judge Shaw’s letter to the creditors and the Council’s action it was only the substantive attack on Nolan, and not the conflict of interest situation, that had changed. Even when the decision was unquestionably for appearances only, and the atmosphere was entirely devoid of personal criticism, a far cry from the present case, such assurances are not always found convincing. See dissenting opinions in Rapp v. Van Dusen, 3 Cir., 1965, 350 F.2d 806.

The circuit council is a valuable arm of the courts, and nothing we say in this opinion should be taken as denigrating its great importance. But like any administrator we believe its success may be measured by its lack of visibility. We suspect that some who have criticized councils for inactivity are unmindful of the saw that still waters run deep, and that the most effective actions are often the most inconspicuous. But, conversely, we think nothing would furnish potential critics of the circuit council with ammunition more than would over-action. As one member of the present panel has wisely stated, “Those who comprise the councils must do the work by example, leadership, and persuasion. The making of orders and their publication should be the last resort, rather than the first.” Lumbard, The Place of the Federal Judicial Councils in the Administration of Justice, 47 A.B.A.J. 169 (1961).

THE APPROPRIATE PROCEDURE

If an order was necessary, the circumstances demanded procedural protection for Nolan. As the Court stated in Goldberg v. Kelly, 1970, 397 U.S. 254, 262-263, 90 S.Ct. 1011, 1018, 25 L.Ed. 287, appropriate procedural protection depends on the nature of the injury to the grievant and whether the latter’s interest in avoiding the injury “outweighs the governmental interest in summary adjudication.” The consequences to appellant — not to mention the estate — were drastic, particularly in the light of the atmosphere of charges of misconduct. Moreover, summary action by the Council was manifestly unnecessary. There was no need of a rule; Nolan (or, quite possibly, Levine), was the problem. There was no reason, even timewise, as the chronology makes clear, why there could not have been a hearing. Indeed, we suggest that summary action in the circumstances of this case, rather than serving any important governmental interest, constituted an inadvertent disservice to the concept of circuit councils. While this was not as serious as a disbarment, cf. In re Ruffalo, 1968, 390 U.S. 544, 88 S.Ct. 1222, 20 L.Ed.2d 117, and Nolan did not have, perhaps, the equivalent of tenure, cf. Perry v. Sindermann, 1972, 408 U.S. 593, 92 S.Ct. 2694, 33 L.Ed.2d 570, we note Mr. Justice Harlan’s statement, concurring in Chandler v. Judicial Council, ante, 398 U.S. at 127, 90 S.Ct. at 1676.

“There is much in our tradition of due process of law that runs counter to the taking of serious action on the basis of ex parte assertions or suspicions of misbehavior.” ¹²

We would be more moved by the dissent’s assertion that the “Circuit Council was in the best position to determine what measures should be taken” if it had followed that advice.

We might also feel differently if the resolution was an inevitable truism, as the dissent apparently suggests. But while we agree with the dissent’s general discussion of conflict of interests, we feel that the issue as it relates to bankruptcy proceedings is a good deal more complex. There is no doubt but that the limitations imposed by Judge Shaw upon Nolan’s retainer did not, in fact, eliminate all appearances of a possible conflict of interest. Indeed, we regard Nolan himself as so conceding during oral argument. The SEC fully conceded it, but stated it had accepted the situation after a “balancing of several considerations.” In brief, the SEC believed that the conflict of interest problem was outweighed by the potential delay in the proceedings caused by removal of an officer who, over a period of five years, had accumulated substantial familiarity with the estate. The Council’s action was taken without knowledge of this position of the SEC.¹³

The SEC’s pragmatic stance was consistent with the bankruptcy law; complete disinterestedness is not required in all aspects of bankruptcy proceedings. Cf. In re Eloise Curtis, Inc., 2 Cir., 1964, 326 F.2d 698. For example, 11 U.S.C. § 557, which provides that the attorney for the trustee must ordinarily be disinterested, contains a proviso, “that for any specified purposes other than to represent a trustee in conducting the proceeding under this chapter the trustee may, with the approval of the judge, employ an attorney who is not disinterested.” ¹⁴ The present case could be thought to be an unusual, but nevertheless, permissible application of this statute: Nolan was employed for the special purpose of conducting the very complicated day-to-day operations of the estate, short of the plan of reorganization, with which he had become experienced and proficient.

We do not affirmatively adopt this position; we point it out merely to show that the Council’s resolution was not the only valid perception. Not only did the district court feel differently, but so, apparently, did every creditor when the issue was first presented. While we agree with Union Bank that it should not be “estopped” by its initial acquiescence in the court’s proposal, we cannot disregard its evidentiary effect. And, finally, we must give especial weight to the SEC, an impartial body experienced in these matters.

Again we do not mean that the SEC was right, or not right. But given this situation, the Council could easily have suggested a district court hearing on the issue of appellant’s continued service, the hearing to include the sort of balancing adopted by the SEC. Cf. In re Pittsburgh Rys. Co., W.D.Pa., 1948, 80 F.Supp. 14.¹⁵ A district court could have made a determination on a full record with, if desired, appellate review, and this would have solved the problem consistently with the interests of the parties and the Council’s purpose of protecting the integrity of the court system.

We remand the case to the district court for a hearing as to whether, viewed as of the present, Nolan should be re-engaged as counsel for the trustee. Since substantial time has passed since his removal, the district court should weigh the conflict of interest problem as it now stands against the beneficial — or harmful — effects of reengaging appellant at this point in the reorganization. At such hearing, if they so desire, creditors may also raise the question whether matters had reached a point where appellant because of his conduct or the appearance of a conflict of interest, or both, should have been removed for cause. Appellant has no right to recover for loss of any fees which he might have earned, regardless of how it came about that his retainer was terminated.

In No. 72-1920 the order of the district court is affirmed. In No. 72-1566 the matter is remanded to the district court for further proceedings consistent with this opinion. No statutory costs in No. 72-1920, but appellant shall recover all costs in No. 72-1566, including the cost of his entire consolidated brief and appendix, to be charged against Union Bank.

1 . Senior Judge Roszel C. Thomsen of the District of Maryland, sitting by designation.

2 . Still further facts may be found in the thorough opinion of the district court in the mandamus action, 346 F.Supp. 500.

3 . Since delay in the approval of a plan of reorganization bears on the case, we note that the trustee’s opposition to these plans was shared by the SEC, which found them infeasible and unfair. CCH Bankruptcy Law Reports ¶ 64,496.

4 . In the Matter of Imperial “400” National, Inc., 3 Cir., 1970, 432 F.2d 232.

5 . In re Imperial “400” National, Inc., 8 Cir. 1972, 456 F.2d 926.

6 . The court did note on one occasion that the “briefs contain considerable material irrelevant to the issues presented by these appeals,” 456 F.2d at 931-932, n. 15, a very modest description.

7 . We think the inaccuracy in this respect attributable to a misunderstanding by the judges of an earlier letter from counsel which we find in the record.

8 . The dissent’s suggestion that it was “altogether likely that [in the month prior to this letter] attempts were made informally to secure Judge Shaw’s compliance” is, to us, contra-indicated by this language and further language quoted from the letter in n. 13, post, and finds no support in the record’s extensive report of interchanges.

9 . See 346 F.Supp. at 507.

10 . We note that two members, as former chief judges, headed their own councils for 11 and 8 years, respectively. The panel took immediate steps to expedite the hearing of the appeal.

11 . As a small example, we note the recent case of Lipman v. Massachusetts, 1 Cir., 1973, 475 F.2d 565, which involved a state court denying a court reporter the customary opportunity to profit by selling copies of transcripts to the public.

12 . The dissent’s suggestion that Nolan might have, asked for reconsideration by the Council, we regard as unrealistic. It is true that he could have asked. In the light, however, of the detailed response, ante, to Judge Shaw’s letter protesting Nolan’s removal without a hearing, we cannot think that a further request, however put, would have been productive.

13 . We do not find that the Council was even aware of the extent that the district judge in charge of the reorganization had conferred with the creditors. In his original letter to him, the Chief Judge referred to “your actual or tacit approval,” a phrase we would think inconsistent with such knowledge. Instead, as the dissent significantly remarks, it was “aware that on two occasions creditors bad objected that the district judge had been overgenerous to the trustee and his counsel regarding fees.”

14 . Compare 11 U.S.C. § 72(c): “An attorney shall not be disqualified to act as attorney for a receiver or trustee merely by reason of his representation of a general creditor.” Section 72(c), primarily a general bankruptcy provision, applies to reorganization proceedings, but is modified in that context by section 557 and section 558. Bee Dodd, The Securities & Exchange Commission’s Reform Program for Bankruptcy Reorganizations, 38 Colum.L.Rev. 223, 230-31 (1938). Cf. 11 U.S.C. § 556.

15 . If, in the light of Chandler, it could be thought not a forbidden in personam judicial decision, the Council could have conducted a hearing itself, Cf. In re Rodebaugh, 1950, 10 F.R.D. 207. The Council did conduct a hearing in Chandler.