Gross v. Irving Trust Co.
Headline: Court limits state courts’ power over receivers after bankruptcy and lets federal bankruptcy trustees control estate and compensation, making state-ordered payouts subject to federal review.
Holding: When a company is adjudged bankrupt, the federal bankruptcy court obtains exclusive control of the estate and sole authority to fix receivers’ and counsel’s compensation; state court allowances made after bankruptcy cease to be effective.
- Gives bankruptcy trustees sole authority to set receivers’ and lawyers’ fees.
- Allows federal courts to undo state-ordered payments to receivers after bankruptcy.
- Limits state courts from fixing compensation once federal bankruptcy jurisdiction attaches.
Summary
Background
A New Jersey court had appointed receivers to run Crosby Stores and later allowed payments to those receivers and their lawyers. Within days a federal bankruptcy petition was filed in New York and a federal trustee was named, the company was declared bankrupt, and the trustee sold the assets, including those the state receivers held. The federal court ordered the state receivers to turn over assets and questioned the validity of the state-approved payments.
Reasoning
The central question was whether a state court can fix or allow payments to receivers and their counsel after a bankruptcy has been declared. The Court explained that once bankruptcy is adjudicated, title to the bankrupt’s property vests in the federal trustee as of the bankruptcy petition date. The bankruptcy court thus has exclusive control of the estate and alone may decide compensation for services that benefit the estate. Because federal bankruptcy jurisdiction is paramount, the state court lost power to make such allowances after bankruptcy intervened.
Real world impact
The decision means federal trustees, not state courts, set fees and approve payments tied to the bankrupt estate once bankruptcy attaches. State-ordered allowances made after bankruptcy may be undone and must be sought through the bankruptcy court. The ruling affirmed the lower courts’ orders in this case and clarifies that receivers and their counsel must apply to the federal bankruptcy court for compensation when bankruptcy supervenes.
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