Randolph v. Scruggs

Background

A Memphis hardware company made a voluntary general assignment of all its property to a privately chosen assignee (the person the company picked to handle the assignment) to pay its creditors. The company’s assignee accepted and took possession, and lawyers prepared the deed and advised the assignee. Within four months creditors forced an involuntary bankruptcy, the assignment was set aside as contrary to the bankruptcy law, and a trustee took the assets. The law firm that did the work filed claims for fees: preparing the deed, advising the assignee, defending a state winding-up suit, and resisting the bankruptcy.

Reasoning

The central question was whether those fees get priority payment from the bankrupt estate. The Court held that a voluntary assignment set aside by bankruptcy gives no lien or preference under the deed. Still, services lawfully performed while the assignment stood can create a valid debt. Fees paid to the assignee can be allowed only to the extent the services actually benefited the estate; if allowed, a claimant may stand in the assignee’s shoes and be preferred to that limited degree. Fees for resisting the bankruptcy were not allowed. The Court left unresolved factual issues about how much the assignee’s services actually benefited the estate.

Real world impact

Law firms and assignees cannot automatically get priority payment for work tied to a voluntary assignment later voided by bankruptcy. They may recover only as unsecured claims, except where work clearly benefited the estate and would have entitled the assignee to allowance; fees spent opposing bankruptcy are not recoverable here. The ruling requires further factual findings to determine exact allowances.